HTO

SJW Corp. 10-Q Summary: Quarter Ended September 30, 2006

Business Context and Reporting Period

This filing covers the quarterly period ended September 30, 2006, for SJW Corp., a holding company operating primarily through its subsidiary, San Jose Water Company (a regulated utility in California), and SJW Land Company (real estate investments). The company also operates Crystal Choice Water Service LLC and, following a May 2006 acquisition, Canyon Lake Water Service Company (CLWSC) in Texas. Water sales are seasonal, with higher demand in summer months.

Key Financial Metrics

Margins: Operating margin for the nine months ended September 30, 2006, was approximately 17.1% ($24.8M / $144.7M). The effective income tax rate approximated 41%.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 8% ($4.7M) for the quarter and 6% ($8.2M) for the nine months compared to 2005. Growth was driven by consumption changes, new customers (including the CLWSC acquisition), and rate increases.
• Net Income Decline (Quarterly): Net income decreased 4% ($0.4M) to $8.9M for the quarter. This decline is primarily attributed to the absence of a $1.1M net gain on the sale of nonutility property recorded in the third quarter of 2005.
• Net Income Increase (Year-to-Date): Net income increased 11% ($1.9M) to $19.5M for the nine months, reflecting operational growth and the inclusion of CLWSC results.
• Expense Increases: Operating expenses rose 7% for the quarter and 6% for the nine months. Increases were driven by higher water production costs (ground water extraction and purchased water prices), depreciation, and administrative costs associated with the new Texas subsidiary.
• Acquisition Impact: The acquisition of Canyon Lake Water Supply Corporation on May 31, 2006, contributed approximately $1.5M to new customer revenue in the third quarter.

Outlook, Risks, and Management Commentary

• Capital Expenditures: Budgeted capital expenditures for 2006 are $45.95M, with approximately $38.65M incurred year-to-date. The company expects to incur approximately $187M over the next five years for system renewal and modernization.
• Regulatory Affairs: San Jose Water Company filed a General Rate Case application in February 2006 requesting rate increases totaling $26.1M over three years (2007-2009). A decision is expected in late 2006. CLWSC is subject to a two-year rate freeze until October 2007 and will file its first rate case in 2007.
• Liquidity and Financing: The company maintains a 50/50 debt-to-equity capital structure target. It has $35M in available lines of credit, with $7M unused as of September 30, 2006. Management intends to issue senior notes in the fourth quarter of 2006 to finance capital programs and repay the line of credit.
• Risks: Key risks include the timing and outcome of regulatory rate cases, the availability and cost of water supplies (surface vs. ground water mix), and the impact of weather conditions on demand. The company is also evaluating the impact of new accounting standards (FASB 158) on pension liabilities.
• Dividends: A quarterly dividend of $0.14125 per share was declared on October 26, 2006, payable December 1, 2006.

Investor Verification Checklist

• Regulatory Approval: Verify the outcome of the San Jose Water Company General Rate Case expected in late 2006, as it impacts future revenue recovery.
• Acquisition Integration: Monitor the integration and initial rate case filing for Canyon Lake Water Service Company (CLWSC) in 2007.
• Debt Refinancing: Confirm the issuance of senior notes in Q4 2006 to replace the $28M line of credit draw.
• Water Supply Mix: Track the ratio of surface water to purchased/ground water usage, as this significantly affects operating costs.
• Real Estate Sale: Monitor the status of the $25M property sale agreement with Adobe Systems Incorporated, which is subject to closing contingencies.