HTO

SJW Corp. 2009 Annual Report (10-K) Summary

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended December 31, 2009, for SJW Corp., a holding company operating primarily through its regulated water utility subsidiaries: San Jose Water Company (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 business is heavily regulated by the California Public Utilities Commission (CPUC) and the Texas Commission on Environmental Quality (TCEQ).

Key Financial Metrics

Note: The filing text does not explicitly state a consolidated profit margin percentage; however, Net Income represented approximately 7.0% of Operating Revenue in 2009.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated operating revenue decreased by 2% ($4.3 million) compared to 2008. This was driven by a $1.5 million decrease in Water Utility Services revenue (due to a $12.8 million drop in consumption partially offset by $10.7 million in rate increases) and a significant $2.7 million drop in Real Estate Services revenue.
• Real Estate Impact: The Real Estate Services segment suffered a major revenue loss after a major tenant in Knoxville, Tennessee, filed for Chapter 11 bankruptcy and liquidated operations, vacating 481,000 square feet of leased space.
• Net Income Drop: Net income fell 29% ($6.3 million) to $15.2 million. This decline was attributed to lower revenues and a $3.2 million increase in pension and retirement expenses caused by the decline in the market value of pension plan assets.
• Debt Issuance: To manage liquidity and refinance short-term borrowings, the company issued $30 million in new senior notes during 2009 ($10 million Series J and $20 million Series K).

Guidance, Outlook, and Risks

• Rate Increases: The CPUC approved a general rate increase for San Jose Water Company effective January 1, 2010, designed to increase revenue by approximately 9.24% ($18.6 million). Subsequent increases are projected for 2011 and 2012 based on consumer price indices.
• Capital Expenditures: The company plans to spend approximately $91.5 million on capital expenditures in 2010, with 74% allocated to distribution system main replacements.
• Water Supply Risks: The company faces ongoing risks related to California drought conditions and potential reductions in state/federal water deliveries due to environmental regulations (Delta smelt). However, management believes current supply sources are sufficient for 2010.
• Real Estate Outlook: Management is actively seeking new tenants for the vacated Knoxville properties. A subsequent event noted a new lease agreement for 85,000 square feet in February 2010.
• Dividend Policy: The company has paid dividends for 265 consecutive quarters. In 2009, dividends represented 80% of net income, a higher payout ratio than the historical 50-60% range, though management does not guarantee this trend will continue.

Investor Verification Checklist

• Real Estate Recovery: Verify the status of leasing the remaining vacant space in the Knoxville, Tennessee properties following the tenant bankruptcy.
• Pension Fund Performance: Monitor the recovery of the pension plan assets, as market losses in 2008 significantly increased 2009 expenses; further volatility could impact future earnings.
• Water Supply Constraints: Track California state water delivery allocations and the impact of the Delta smelt Biological Opinion on purchased water costs and availability.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the funded debt ratio (currently 50% of capitalization) and interest coverage ratios.
• Regulatory Lag: Assess the timing of the next general rate case filings to ensure rate increases keep pace with inflation and capital requirements.