HTO

SJW Corp. 10-Q Summary: Quarter Ended September 30, 2005

Business Context and Reporting Period

This Form 10-Q covers the quarterly period ended September 30, 2005, for SJW Corp., a holding company primarily operating through its subsidiary, San Jose Water Company (SJWC). SJWC is a regulated public utility serving approximately one million people in the San Jose metropolitan area. The company also engages in nonregulated water services, real estate development through SJW Land Company, and water conditioning equipment sales via Crystal Choice Water Service LLC. The company operates in a seasonal environment where revenue is typically higher in summer months.

Key Financial Metrics

Note: All figures in thousands except per share data.

Material Changes vs. Prior Period

• Revenue Growth: Operating revenue increased 12% ($6.2M) for the quarter and 6% ($7.6M) for the nine-month period compared to 2004. This was driven primarily by rate increases ($6.3M for the quarter) and new customer additions, partially offset by decreased water consumption due to favorable rainfall conditions.
• Profitability Surge: Net income for the quarter rose 67% to $9.2M, and for the nine-month period rose 46% to $17.6M. A significant contributor was a one-time gain of $1.1M (net of tax) from the sale of nonutility property in September 2005.
• Expense Management: Water production costs decreased due to a shift toward less expensive surface water and reduced groundwater pumping. However, administrative and general expenses increased by $849,000 for the quarter, driven by higher employee benefits and professional services.
• Cash Flow: Net cash provided by operating activities for the nine months ended September 30, 2005, was $27.97M, a decrease from $34.16M in the prior year, largely due to changes in working capital accounts.

Guidance, Outlook, and Risks

• Acquisition Activity: On October 4, 2005, a subsidiary (SJWTX Water) entered an agreement to purchase Canyon Lake Water Supply Corporation in Texas. The deal involves approximately $3.2M in cash and the assumption of roughly $20M in debt. Closing is contingent on member votes and regulatory approvals expected in late 2005 or 2006.
• Capital Expenditures: The company budgeted $33.8M for capital expenditures in 2005, with $21.9M spent as of September 30. Long-term projections estimate $187M in capital needs over the next five years for infrastructure replacement.
• Regulatory Environment: Rates are set by the California Public Utilities Commission (CPUC). Recent rate increases effective in 2005 and 2006 are expected to support revenue. The company is tracking balancing accounts for under/over-collections of purchased water and pump taxes.
• Risks: Key risks include water supply availability (though current reservoir levels are high), energy cost volatility, regulatory delays in rate recovery, and the execution risks associated with the Texas acquisition.

Investor Verification Checklist

• One-Time Gains: Verify the impact of the $1.1M gain on nonutility property sales on net income to assess core operating performance.
• Acquisition Terms: Monitor the status of the Canyon Lake Water Supply Corporation acquisition, specifically the $20M debt assumption and regulatory approval timeline.
• Water Supply Mix: Confirm the sustainability of the shift to surface water, which lowered production costs, versus the risk of drought requiring expensive groundwater or purchased water.
• Capital Structure: Review the funded debt ratio (46.2% as of Sep 30, 2005) against the regulatory guideline of 50% debt/50% equity.
• Dividend Policy: Note the declared quarterly dividend of $0.2675 per share, payable December 1, 2005.