HTO

SJW Corp. 10-Q Summary: Period Ended June 30, 2009

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended June 30, 2009, for SJW Corp., a holding company operating primarily through its subsidiary, San Jose Water Company (a regulated water utility in California), and Canyon Lake Water Service Company (Texas). The company also operates a real estate investment segment (SJW Land Company) and holds a 5% equity stake in California Water Service Group. The filing notes that water sales are seasonal, with higher demand in summer months.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Decline: Operating revenue decreased 3% year-over-year for the quarter ($58.2M vs. $60.1M) and 3% for the six-month period ($98.2M vs. $101.3M). This was driven primarily by an 8% decrease in water consumption due to weather conditions and conservation, partially offset by rate increases.
• Profitability Drop: Net income fell 30% for the quarter ($4.4M vs. $6.3M) and 50% for the six-month period ($4.5M vs. $9.0M). The decline is attributed to lower operating income and increased nonwater production costs.
• Expense Increases: Nonwater production costs rose 5% in the quarter and 7% year-to-date. Key drivers included increased administrative and general expenses (pension costs, salaries), higher property taxes on Tennessee real estate properties (following a tenant bankruptcy), and legal fees related to the Bulverde, Texas acquisition.
• Real Estate Impact: Real Estate Services revenue dropped significantly due to a major tenant in Knoxville, Tennessee, filing for Chapter 11 bankruptcy and vacating 494,000 square feet of space in May 2009.

Guidance, Outlook, and Risks

• Capital Expenditures: Budgeted capital expenditures for 2009 are $71.4 million, with approximately $28 million allocated for main replacements. Five-year projected capital needs are approximately $386.9 million.
• Regulatory Proceedings: San Jose Water Company filed a general rate case in January 2009 seeking an 18.4% increase for 2010, with a decision expected in late 2009. Canyon Lake Water Service Company filed for a 14% rate increase in Texas, with a final resolution expected by year-end 2009.
• Water Supply Risks: The company faces potential supply reductions from the State Water Project and Central Valley Project due to environmental regulations (Delta smelt BiOp). While the company believes current supplies are sufficient for 2009, reliance on more expensive groundwater could increase costs if imported water is restricted.
• Debt Issuance: In 2009, the company issued $10 million in Series J Senior Notes (6.54%) and $20 million in Series K Senior Notes (6.75%) to repay short-term borrowings. The company maintains a 50/50 debt-to-equity capital structure target.
• Comprehensive Loss: Comprehensive income was negative for the six-month period ($-1.7M) due to unrealized losses on the investment in California Water Service Group.

Investor Verification Checklist

• Rate Case Outcomes: Verify the final approval status and effective dates of the 2010 rate increase for San Jose Water Company and the 2009 rate increase for Canyon Lake Water Service Company.
• Tennessee Real Estate Re-leasing: Monitor the timeline and success of re-leasing the 494,000 sq. ft. Knoxville properties vacated by the bankrupt tenant to assess the impact on future Real Estate Services revenue.
• Water Supply Mix Costs: Track the actual mix of water sources (surface vs. groundwater vs. purchased) to determine if higher energy and extraction costs will persist if drought conditions worsen.
• Pension Plan Funding: Review the impact of market fluctuations on the pension plan's funded status and potential increases in required cash contributions.
• Acquisition Integration: Confirm the operational integration and financial impact of the Bulverde, Texas water system acquisition completed in February 2009.