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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93014xex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CFO AND TREASURER - SJW GROUPsjw-93014xex312.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CFO AND TREASURER - SJW GROUPsjw-93014xex322.htm
EXCEL - IDEA: XBRL DOCUMENT - SJW GROUPFinancial_Report.xls
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93014xex311.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
___________________________________________ 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
Commission file number 1-8966
SJW Corp.
(Exact name of registrant as specified in its charter)
 
California
 
77-0066628
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
110 West Taylor Street, San Jose, CA
 
95110
(Address of principal executive offices)
 
(Zip Code)
408-279-7800
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (check one)
 
Large accelerated filer  o
 
Accelerated filer  x
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o    No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 24, 2014, there were 20,238,134 shares of the registrant's Common Stock outstanding.
 




PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

SJW Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
OPERATING REVENUE
$
125,430

 
85,238

 
$
250,382

 
209,607

OPERATING EXPENSE:
 
 
 
 
 
 
 
Production Expenses:
 
 
 
 
 
 
 
Purchased water
15,616

 
21,092

 
37,288

 
49,525

Power
3,453

 
3,074

 
7,565

 
5,736

Groundwater extraction charges
17,286

 
13,142

 
42,250

 
27,257

Other production expenses
3,073

 
3,080

 
8,936

 
8,675

Total production expenses
39,428

 
40,388

 
96,039

 
91,193

Administrative and general
10,574

 
10,706

 
29,534

 
32,285

Maintenance
3,975

 
3,325

 
10,822

 
9,958

Property taxes and other non-income taxes
2,872

 
2,686

 
8,251

 
7,769

Depreciation and amortization
9,467

 
8,787

 
28,447

 
26,346

Total operating expense
66,316

 
65,892

 
173,093

 
167,551

OPERATING INCOME
59,114

 
19,346

 
77,289

 
42,056

OTHER (EXPENSE) INCOME:
 
 
 
 
 
 
 
Interest on long-term debt
(5,050
)
 
(4,722
)
 
(14,145
)
 
(14,045
)
Mortgage and other interest expense
(347
)
 
(287
)
 
(1,076
)
 
(942
)
Gain on sale of California Water Service Group stock

 

 
2,017

 

Gain on sale of real estate investment
281

 

 
554

 
1,063

Dividend income
42

 
62

 
147

 
185

Other, net
57

 
354

 
716

 
1,314

Income before income taxes
54,097

 
14,753

 
65,502

 
29,631

Provision for income taxes
15,731

 
5,803

 
19,384

 
11,924

NET INCOME
38,366

 
8,950

 
46,118

 
17,707

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized income (loss) on investment
(271
)
 
185

 
(32
)
 
450

Reclassification adjustment for gain realized on sale of investments

 

 
(1,171
)
 

COMPREHENSIVE INCOME
$
38,095

 
9,135

 
$
44,915

 
18,157

EARNINGS PER SHARE
 
 
 
 
 
 
 
Basic
$
1.90

 
0.44

 
$
2.28

 
0.90

Diluted
$
1.88

 
0.44

 
$
2.26

 
0.89

DIVIDENDS PER SHARE
$
0.19

 
0.18

 
$
0.56

 
0.55

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
20,231,426

 
20,151,729

 
20,213,676

 
19,643,290

Diluted
20,424,140

 
20,346,817

 
20,402,605

 
19,839,426

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2



SJW Corp. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2014
 
December 31,
2013
ASSETS
 
 
 
Utility plant:
 
 
 
Land
$
10,867

 
10,418

Depreciable plant and equipment
1,327,949

 
1,254,586

Construction in progress
34,319

 
30,846

Intangible assets
19,149

 
18,341

 
1,392,284

 
1,314,191

Less accumulated depreciation and amortization
442,429

 
415,453

 
949,855

 
898,738

Real estate investments
73,790

 
78,477

Less accumulated depreciation and amortization
11,201

 
10,658

 
62,589

 
67,819

CURRENT ASSETS:
 
 
 
Cash and cash equivalents
5,599

 
2,299

Accounts receivable:
 
 
 
Customers, net of allowances for uncollectible accounts
18,077

 
14,496

Income tax
1,981

 
1,661

Other
719

 
476

Accrued unbilled utility revenue
22,593

 
17,556

Materials and supplies
1,138

 
1,045

Prepaid expenses
3,113

 
2,119

Current regulatory assets, net
17,308

 

 
70,528

 
39,652

OTHER ASSETS:
 
 
 
Investment in California Water Service Group
5,815

 
8,885

Unamortized debt issuance, broker and reacquisition costs
5,343

 
5,176

Net regulatory assets, less current portion
109,537

 
83,543

Other
6,437

 
6,173

 
127,132

 
103,777

 
$
1,210,104

 
1,109,986







See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3



SJW Corp. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2014
 
December 31,
2013
CAPITALIZATION AND LIABILITIES
 
 
 
CAPITALIZATION:
 
 
 
Shareholders' equity:
 
 
 
Common stock, $0.521 par value; authorized 36,000,000 shares; issued and outstanding 20,237,660 shares on September 30, 2014 and 20,169,211 on December 31, 2013
$
10,541

 
10,505

Additional paid-in capital
64,919

 
63,017

Retained earnings
278,918

 
244,266

Accumulated other comprehensive income
2,184

 
3,387

Total shareholders' equity
356,562

 
321,175

Long-term debt, less current portion
384,514

 
334,997

 
741,076

 
656,172

CURRENT LIABILITIES:
 
 
 
Line of credit
8,200

 
22,400

Current portion of long-term debt
624

 
554

Accrued groundwater extraction charges and purchased water
10,394

 
7,116

Purchased power
1,247

 
665

Accounts payable
12,311

 
12,587

Accrued interest
5,914

 
5,369

Accrued property taxes and other non-income taxes
3,123

 
1,618

Accrued payroll
3,822

 
3,198

Other current liabilities
6,118

 
5,688

 
51,753

 
59,195

DEFERRED INCOME TAXES
157,820

 
140,736

UNAMORTIZED INVESTMENT TAX CREDITS
1,330

 
1,375

ADVANCES FOR CONSTRUCTION
71,830

 
70,043

CONTRIBUTIONS IN AID OF CONSTRUCTION
135,080

 
132,260

DEFERRED REVENUE
1,346

 
1,213

POSTRETIREMENT BENEFIT PLANS
44,329

 
43,496

OTHER NONCURRENT LIABILITIES
5,540

 
5,496

COMMITMENTS AND CONTINGENCIES

 

 
$
1,210,104

 
1,109,986






See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.


4



SJW Corp. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Nine months ended September 30,
 
2014
 
2013
OPERATING ACTIVITIES:
 
 
 
Net income
$
46,118

 
17,707

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
29,635

 
27,510

Deferred income taxes
18,488

 
10,211

Share-based compensation
774

 
786

        Gain on sale of real estate investment
(554
)
 
(1,063
)
        Gain on sale of California Water Service Group stock
(2,017
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and accrued unbilled utility revenue
(8,638
)
 
(13,067
)
Accounts payable, purchased power and other current liabilities
1,047

 
(1,948
)
Accrued groundwater extraction charges and purchased water
3,278

 
6,109

Tax receivable and accrued taxes
1,428

 
2,517

Postretirement benefits
833

 
4,312

Regulatory asset related to balancing and memorandum accounts
(43,331
)
 
(3,536
)
Other changes, net
(1,160
)
 
(2,326
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
45,901

 
47,212

INVESTING ACTIVITIES:
 
 
 
Additions to utility plant:
 
 
 
Company-funded
(70,255
)
 
(59,503
)
Contributions in aid of construction
(7,311
)
 
(8,280
)
Additions to real estate investments
(9
)
 
(4,177
)
Payments for business/asset acquisition and water rights
(1,584
)
 
(1,587
)
Cost to retire utility plant, net of salvage
(874
)
 
(1,814
)
Proceeds from sale of real estate investment
4,572

 
8,831

Proceeds from sale of California Water Service Group stock
3,056

 

NET CASH USED IN INVESTING ACTIVITIES
(72,405
)
 
(66,530
)
FINANCING ACTIVITIES:
 
 
 
Borrowings from line of credit
51,200

 
25,200

Repayments of line of credit
(65,400
)
 
(33,500
)
Long-term borrowings
50,000

 

Repayments of long-term borrowings
(413
)
 
(5,258
)
Dividends paid
(11,373
)
 
(10,764
)
Issuance of common stock, net of issuance costs

 
35,894

Exercise of stock options and similar instruments
917

 
878

Tax benefits realized from share options exercised
306

 
27

Receipts of advances and contributions in aid of construction
6,601

 
9,233

Refunds of advances for construction
(2,034
)
 
(1,695
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
29,804

 
20,015

NET CHANGE IN CASH AND CASH EQUIVALENTS
3,300

 
697

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
2,299

 
2,522

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
5,599

 
3,219

Cash paid during the period for:
 
 
 
Interest
$
15,651

 
15,478

Income taxes
1,930

 
2,185

Supplemental disclosure of non-cash activities:
 
 
 
(Decrease) increase in accrued payables for construction costs capitalized
(296
)
 
4,141

Utility property installed by developers
3,242

 
190

Increase in real estate investments due to accrued tenant improvements

 
379

Accrued intangible assets and other charges related to water supply project in Texas

 
2,209


See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5



SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2014
(in thousands, except share and per share data)

Note 1.
General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.
The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). The Notes to Consolidated Financial Statements in SJW Corp.'s 2013 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales. Our service area in California is in the midst of a record drought. In response to this, on January 17, 2014, Governor Edmund G. Brown Jr. proclaimed a State of Emergency and directed state officials to take necessary actions to prepare for drought conditions.
The Santa Clara Valley Water District (“SCVWD”), San Jose Water Company's water wholesaler, has set a target of a 20% reduction for water use in 2014 in accordance with its adopted water shortage contingency plan and recommended that its retail water and municipal customers implement mandatory measures to meet the target. Effective March 31, 2014, San Jose Water Company received approval from the California Public Utilities Commission (“CPUC”) for a Mandatory Conservation Revenue Adjustment Memorandum Account (“MCRAMA”) to track any revenue shortfall and a Mandatory Conservation Memorandum Account (“MCMA”) to track operational and administrative costs associated with implementation of the 20% conservation goal. San Jose Water Company will record the impact of the MCRAMA and MCMA regulatory accounts once probability of recovery can be determined and collection can be assured within 24 months after the end of the fiscal year in which the revenue is recorded. For further discussion, please see Note 9.
On August 14, 2014, the CPUC issued a decision on San Jose Water Company's General Rate Case filing for the years 2013-2015. The decision authorized an increase of revenue for 2013 and 2014 and provided authorization to file to increase rates for 2015 in November 2014. San Jose Water Company was also authorized to file for a surcharge to true-up the difference between interim rates and authorized rates. On September 29, 2014, the CPUC approved a surcharge of $46,700 to true-up the difference between interim rates and authorized rates as well as one-time refunds of $200. For further discussion, please see Notes 9 and 10.
Basic earnings per share is calculated using income available to common shareholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common shareholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with stock options, deferred restricted common stock awards under SJW Corp.'s Long-Term Incentive Plan (as amended, the “Incentive Plan”) and shares potentially issuable under the 2014 Employee Stock Purchase Plan (“2014 ESPP”). For the three months ended September 30, 2014 and 2013, 180 and 452 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2014 and 2013, 1,309 and 1,597 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.
A portion of depreciation expense is allocated to administrative and general expense. For the three months ended September 30, 2014 and 2013, the amounts allocated to administrative and general expense were $396 and $385, respectively. For the nine months ended September 30, 2014 and 2013, the amounts allocated to administrative and general expense were $1,188 and $1,164, respectively.

Note 2.
Equity Plans
SJW Corp. accounts for share-based compensation based on the grant date fair value of the awards issued to employees in accordance with Financial Accounting Standards Board (FASB) Accounting Standard Codification (ASC) Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on the estimated fair value for all share-based payment awards.

6


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


The Incentive Plan allows SJW Corp. to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Corp. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance shares, or other share-based awards. As of September 30, 2014, the remaining shares available for issuance under the Incentive Plan were 1,073,817, and 346,296 shares were issuable upon the exercise of outstanding options, restricted stock units, and deferred restricted stock units. In addition, shares are issued to employees under the ESPP. SJW Corp. also had a Dividend Reinvestment and Stock Purchase Plan (“DRSPP”) which allowed eligible participants to buy shares and reinvest cash dividends in SJW Corp. common stock. The DRSPP was terminated effective as of April 14, 2014.
The compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income, proceeds from the exercise of stock options and similar instruments, and the tax benefit realized from stock options and similar instruments exercised, that were recorded to additional paid-in capital and common stock, by award type, are presented below for the three and nine months ended September 30, 2014 and 2013.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Adjustments to additional paid-in capital and common stock for:
 
 
 
 
 
 
 
Compensation costs charged to income:
 
 
 
 
 
 
 
   ESPP
$
76

 
70

 
$
148

 
128

   Restricted stock and deferred restricted stock
247

 
127

 
626

 
658

Total compensation costs charged to income
$
323

 
197

 
$
774

 
786

Excess tax benefits realized from share options exercised and stock issuance:
 
 
 
 
 
 
 
   Stock options
$

 
27

 
$
59

 
27

   Restricted stock and deferred restricted stock
(3
)
 
(95
)
 
247

 

Total excess tax benefits realized from share options exercised and stock issuance
$
(3
)
 
(68
)
 
$
306

 
27

Proceeds from the exercise of stock options and similar instruments:
 
 
 
 
 
 
 
   Stock options
$

 
96

 
$
44

 
96

   DRSPP

 
21

 
34

 
59

   ESPP
433

 
395

 
839

 
723

Total proceeds from the exercise of stock options and similar instruments
$
433

 
512

 
$
917

 
878

Stock, Restricted Stock and Deferred Restricted Stock
On January 2, 2014, restricted stock units covering an aggregate of 21,790 shares of common stock of SJW Corp. were granted to certain executives of SJW Corp. and its subsidiaries. The units vest in three equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense based on a grant date fair value of $26.80 per unit is being recognized over the service period beginning in 2014.
On January 31, 2014, restricted stock units covering an aggregate of 3,845 shares of common stock of SJW Corp. were granted to an executive of SJW Corp. and its subsidiaries. The units vest in three equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense based on a grant date fair value of $26.39 per unit is being recognized over the service period beginning in 2014.
On April 30, 2014, restricted stock units covering an aggregate of 9,002 shares of common stock of SJW Corp. were granted to the non-employee board members of SJW Corp. The units vest upon continuous board service through the day immediately preceding the date of the next annual shareholder meeting with no dividend equivalent rights. Share-based compensation expense based on grant date fair value of $26.48 per unit is being recognized over the service period beginning in 2014.
On August 4, 2014, a total of 36,988 restricted stock units were granted to a key employee of SJW Corp. which includes performance-based restricted stock units covering a target number of shares of SJW Corp.'s common stock equal to 19,917 that will convert, if earned, between August 4, 2014 and December 31, 2017, based on the terms of the award. The number of shares issuable under the award, ranging between 0% and 200% of the target number of shares, is based on the level of actual attainment of specified performance goals. These units do not include dividend equivalent rights. The fair value of the

7


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


performance-based restricted awards was estimated using the fair value of SJW Corp.'s common stock with the effect of market condition and no dividend yield on the date of grant, and assumes the performance goals will be attained. Share-based compensation expense is recognized at $26.81 per unit. If such goals are not met and requisite service is not rendered, no compensation cost will be recognized and any recognized compensation cost will be reversed. The remainder of restricted stock units granted, 17,071 units, will vest in three equal successive installments upon completion of each year of service, beginning from January 1, 2015, with no dividend equivalent rights. Share-based compensation expense based on a grant date fair value of $24.14 per unit is being recognized over the service period beginning in 2015.
As of September 30, 2014, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $1,863. This cost is expected to be recognized over a remaining weighted-average period of 1.58 years.
Employee Stock Purchase Plan
The 2014 ESPP allows eligible employees to purchase shares of SJW Corp.'s common stock at 85% of the fair value of shares on the purchase date. Under the 2014 ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock have been reserved for issuance under the 2014 ESPP.
After considering estimated employee terminations or withdrawals from the plan before the purchase date, SJW Corp.'s recorded expenses were $37 and $112 for the three and nine months ended September 30, 2014, respectively, and $34 and $102 for the three and nine months ended September 30, 2013, respectively, related to the 2014 ESPP.
The total unrecognized compensation costs related to the semi-annual offering period that ends January 30, 2015 for the 2014 ESPP is approximately $48. This cost is expected to be recognized during the fourth quarter of 2014 and first quarter of 2015.
Dividend Reinvestment and Stock Purchase Plan
SJW Corp. adopted the DRSPP effective April 19, 2011. The DRSPP offered shareholders the ability to reinvest cash dividends in SJW Corp. common stock and also purchase additional shares of SJW Corp. common stock. A total of 3,000,000 shares of common stock were reserved for issuance under the DRSPP. For the three and nine months ended September 30, 2014, 0 and 1,151 shares, respectively, were issued under the DRSPP. For the three and nine months ended September 30, 2013, 829 and 2,273 shares, respectively, have been issued under the DRSPP.
SJW Corp. terminated the DRSPP effective as of April 14, 2014. On April 16, 2014, SJW Corp. filed a Post-Effective Amendment No. 1 to the registration statement on Form S-3 (file no. 333-172048) with the SEC to deregister the 2,993,744 remaining shares of SJW Corp.'s common stock that were available for issuance under the DRSPP at the time of its termination.

Note 3.
Real Estate Investments
The major components of real estate investments as of September 30, 2014 and December 31, 2013 are as follows: 
 
September 30,
2014
 
December 31,
2013
Land
$
17,297

 
18,892

Buildings and improvements
56,164

 
59,256

Intangibles
329

 
329

Subtotal
73,790

 
78,477

Less: accumulated depreciation and amortization
11,201

 
10,658

Total
$
62,589

 
67,819

Depreciation and amortization is computed using the straight-line method over the estimated life of the respective assets, ranging from 5 to 39 years.
On August 1, 2014, San Jose Water Company sold a nonutility property located in San Jose, California for $300. SJW Corp. recognized a pre-tax gain on the sale of real estate investment of $281, after selling expense of $10.
On June 30, 2014, SJW Land Company sold its retail building located in El Paso, Texas for $4,450. SJW Corp. recognized a pre-tax gain on the sale of real estate investment of $273, after selling expenses of $169.

8


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


On February 1, 2013, SJW Land Company sold its warehouse building located in Windsor, Connecticut for $9,200. SJW Corp. recognized a pre-tax gain on the sale of real estate investment of $1,063, after selling expenses of $369.
 
Note 4.
Income Taxes
SJW Corp. accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Measurement of the deferred tax assets and liabilities is at enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period that includes the enactment date.
In the second quarter of 2014, SJW Corp. recorded $880 in State of California enterprise zone sales and use taxes credits related to tax years 2008 through 2012.
On September 13, 2013, the Department of Treasury and the Internal Revenue Service issued final tangible property regulations under provisions that generally are intended to simplify, clarify and make more administrable the 2011 temporary and proposed tangible property regulations. These regulations broadly apply to amounts to acquire, produce or improve tangible property, as well as dispositions of such property and provide criteria for determining whether such amounts can be deducted or should be capitalized as part of the asset. The final regulations generally are effective for tax years beginning on or after January 1, 2014. During the third quarter of 2014, management completed its evaluation of the capitalization elections under the new regulations in order to establish its method of complying with the new regulations and record the impact in the consolidated financial statements. To comply with the new regulations, SJW Corp. will apply the accounting method change in its 2014 tax returns for the expensing of certain utility asset improvement costs for tax purposes as of December 31, 2013 that were previously being capitalized for book and tax purposes. As of September 30, 2014, the estimated 2014 federal and state repairs and maintenance deduction under the new methodology was $19,395, resulting in an estimated $5,091 Federal deferred tax liability and a state income tax benefit of $853. During the third quarter of 2014, SJW Corp. also completed a detailed analysis of the repairs and maintenance deduction related to 2013 and prior years, and recorded the estimated federal and state impact in the consolidated financial statements as of September 30, 2014. SJW Corp.'s Internal Revenue Code (“IRC”) §481(a) adjustment for Federal purposes was estimated to be $41,171 and resulted in a $14,410 deferred tax liability as of September 30, 2014. SJW Corp.'s IRC §481(a) adjustment for state purposes was estimated to be $83,524 and resulted in a $4,799 reduction to state income tax expense for the three and nine months ended September 30, 2014.

Note 5.
Defined Benefit Plan
San Jose Water Company sponsors a noncontributory defined benefit pension plan for its eligible employees. Employees hired before March 31, 2008 are entitled to receive retirement benefits using a formula based on the employee's three highest years of compensation (whether or not consecutive). For employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based on compensation credits and interest credits for each employee. Officers hired before March 31, 2008 are eligible to receive additional retirement benefits under the Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008 are eligible to receive additional retirement benefits under the Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management may participate. San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan. The components of net periodic benefit costs for San Jose Water Company's pension plan, its Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and Social Welfare Plan for the three and nine months ended September 30, 2014 and 2013 are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Service cost
$
1,056

 
1,239

 
$
3,167

 
3,717

Interest cost
1,651

 
1,475

 
4,954

 
4,425

Other cost
627

 
1,208

 
1,883

 
3,624

Expected return on assets
(1,670
)
 
(1,380
)
 
(5,011
)
 
(4,140
)
 
$
1,664

 
2,542

 
$
4,993

 
7,626


9


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


The following tables summarize the fair values of plan assets by major categories as of September 30, 2014 and December 31, 2013: 
 
 
 
Fair Value Measurements at September 30, 2014
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
 
$
7,261

 
$
7,261

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
2,402

 
2,378

 
24

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
35,541

 
35,541

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
5,731

 
5,731

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
3,010

 
3,010

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
4,832

 
4,832

 

 

REIT
NAREIT - Equity REIT'S
 
4,480

 

 
4,480

 

Fixed Income (b)
(b)
 
35,747

 

 
35,747

 

Total
 
 
$
99,004

 
$
58,753

 
$
40,251

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.
 
 
 
Fair Value Measurements at December 31, 2013
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
 
$
9,127

 
$
9,127

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Vaue
 
283

 
266

 
17

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
32,286

 
32,286

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
5,551

 
5,551

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
3,236

 
3,236

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
5,066

 
5,066

 

 

REIT
NAREIT - Equity REIT'S
 
3,913

 

 
3,913

 

Fixed Income (b)
(b)
 
35,891

 

 
35,891

 

Total
 
 
$
95,353

 
$
55,532

 
$
39,821

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.

10


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


In 2014, San Jose Water Company expects to make required and discretionary cash contributions of up to $5,946 to the pension plans and Social Welfare Plan. For the three and nine months ended September 30, 2014, $1,819 and $3,638, respectively, has been contributed to the pension plans and Social Welfare Plan.

Note 6.
Segment and Nonregulated Business Reporting
SJW Corp. is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility which operates both regulated and nonregulated businesses, (ii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operate commercial building rentals, (iii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated nonregulated variable interest entity, Acequia Water Supply Corporation, and (iv) Texas Water Alliance Limited, a nonregulated water utility operation which is undertaking activities that are necessary to develop a water supply project in Texas. In accordance with FASB ASC Topic 280 – “Segment Reporting,” SJW Corp. has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Corp.'s subsidiaries, San Jose Water Company, Canyon Lake Water Service Company, and Texas Water Alliance Limited, together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company, referred to as “Real Estate Services.”
SJW Corp.'s reportable segments have been determined based on information used by the chief operating decision maker. SJW Corp.'s chief operating decision maker is its Chairman, President and Chief Executive Officer (“CEO”). The CEO reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiaries.
The tables below set forth information relating to SJW Corp.'s reportable segments and distribution of regulated and nonregulated business activities within the reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Corp. not included in the reportable segments is included in the “All Other” category.
 
For Three Months Ended September 30, 2014
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non
regulated
 
Non
regulated
 
Non
regulated
 
Regulated
 
Non
regulated
 
Total
Operating revenue
$
121,921

 
1,739

 
1,770

 

 
121,921

 
3,509

 
125,430

Operating expense
63,518

 
1,508

 
1,041

 
249

 
63,518

 
2,798

 
66,316

Operating income (loss)
58,403

 
231

 
729

 
(249
)
 
58,403

 
711

 
59,114

Net income (loss)
37,907

 
68

 
795

 
(404
)
 
37,907

 
459

 
38,366

Depreciation and amortization
8,984

 
89

 
394

 

 
8,984

 
483

 
9,467

Senior note, mortgage and other interest expense
4,573

 

 
262

 
562

 
4,573

 
824

 
5,397

Income tax expense (benefit) in net income
16,394

 
73

 
(441
)
 
(295
)
 
16,394

 
(663
)
 
15,731

Assets
$
1,121,925

 
17,606

 
66,457

 
4,116

 
1,121,925

 
88,179

 
1,210,104


11


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


 
For Three Months Ended September 30, 2013
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non
regulated
 
Non
regulated
 
Non
regulated
 
Regulated
 
Non
regulated
 
Total
Operating revenue
$
81,894

 
1,859

 
1,485

 

 
81,894

 
3,344

 
85,238

Operating expense
63,260

 
1,538

 
820

 
274

 
63,260

 
2,632

 
65,892

Operating income (loss)
18,634

 
321

 
665

 
(274
)
 
18,634

 
712

 
19,346

Net income (loss)
9,114

 
109

 
132

 
(405
)
 
9,114

 
(164
)
 
8,950

Depreciation and amortization
8,293

 
90

 
404

 

 
8,293

 
494

 
8,787

Senior note, mortgage and other interest expense
4,197

 

 
268

 
544

 
4,197

 
812

 
5,009

Income tax expense (benefit) in net income
5,840

 
135

 
132

 
(304
)
 
5,840

 
(37
)
 
5,803

Assets
$
1,053,710

 
16,443

 
71,176

 
8,511

 
1,053,710

 
96,130

 
1,149,840

 
For Nine Months Ended September 30, 2014
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non
regulated
 
Non
regulated
 
Non
regulated
 
Regulated
 
Non
regulated
 
Total
Operating revenue
$
240,514

 
4,520

 
5,348

 

 
240,514

 
9,868

 
250,382

Operating expense
165,623

 
3,596

 
3,118

 
756

 
165,623

 
7,470

 
173,093

Operating income (loss)
74,891

 
924

 
2,230

 
(756
)
 
74,891

 
2,398

 
77,289

Net income (loss)
44,401

 
351

 
1,379

 
(13
)
 
44,401

 
1,717

 
46,118

Depreciation and amortization
26,950

 
269

 
1,228

 

 
26,950

 
1,497

 
28,447

Senior note, mortgage and other interest expense
12,793

 

 
761

 
1,667

 
12,793

 
2,428

 
15,221

Income tax expense (benefit) in net income
19,154

 
314

 
(15
)
 
(69
)
 
19,154

 
230

 
19,384

Assets
$
1,121,925

 
17,606

 
66,457

 
4,116

 
1,121,925

 
88,179

 
1,210,104

 
For Nine Months Ended September 30, 2013
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non
regulated
 
Non
regulated
 
Non
regulated
 
Regulated
 
Non
regulated
 
Total
Operating revenue
$
201,149

 
4,524

 
3,934

 

 
201,149

 
8,458

 
209,607

Operating expense
159,845

 
4,573

 
2,378

 
755

 
159,845

 
7,706

 
167,551

Operating income (loss)
41,304

 
(49
)
 
1,556

 
(755
)
 
41,304

 
752

 
42,056

Net income (loss)
18,400

 
(291
)
 
801

 
(1,203
)
 
18,400

 
(693
)
 
17,707

Depreciation and amortization
24,879

 
270

 
1,197

 

 
24,879

 
1,467

 
26,346

Senior note, mortgage and other interest expense
12,495

 

 
853

 
1,639

 
12,495

 
2,492

 
14,987

Income tax expense (benefit) in net income
12,141

 
48

 
639

 
(904
)
 
12,141

 
(217
)
 
11,924

Assets
$
1,053,710

 
16,443

 
71,176

 
8,511

 
1,053,710

 
96,130

 
1,149,840

 *    The “All Other” category includes the accounts of SJW Corp. on a stand-alone basis.

Note 7.
Long-Term Liabilities and Bank Borrowings
SJW Corp.'s contractual obligations and commitments include senior notes, mortgages and other obligations. San Jose Water Company, a subsidiary of SJW Corp., has received advance deposit payments from its customers on certain construction projects. Refunds of the advance deposit payments constitute an obligation of San Jose Water Company solely.

12


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


On January 24, 2014, San Jose Water Company entered into a note agreement with John Hancock Life Insurance Company (U.S.A.) and its affiliate (the “Purchaser”), pursuant to which San Jose Water Company agreed to sell an aggregate principal amount of $50,000 of its 5.14% senior note, Series L to the Purchaser. The senior note is an unsecured obligation of San Jose Water Company, due on the date that is the 30th anniversary of the issuance of the senior note. Interest is payable semi-annually in arrears on March 1 and September 1 of each year, commencing March 1, 2015. The transaction closed on August 7, 2014.
On June 23, 2014, San Jose Water Company, SJW Corp., SJW Land Company and Wells Fargo Bank, National Association (“Wells Fargo”) amended their respective credit agreements dated as of March 1, 2012, to extend the maturity date to September 1, 2016. In addition, San Jose Water Company and Wells Fargo increased the maximum principal amount available for borrowing from $75,000 to $85,000.
On August 1, 2014, San Jose Water Company, SJW Corp., SJW Land Company and Wells Fargo amended their respective credit agreements dated as of March 1, 2012, to modify the period during which the borrower is required to maintain a zero balance under the credit agreement for 30 consecutive days.

Note 8.
Fair Value Measurement
The following instruments are not measured at fair value on the SJW Corp.'s condensed consolidated balance sheets as of September 30, 2014, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of September 30, 2014 approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of such financial instruments are determined using the income approach based on the present value of estimated future cash flows. There have been no changes in our valuation technique during the three months ended September 30, 2014. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of pension plan assets is discussed in Note 5.
The fair value of SJW Corp.'s long-term debt was approximately $469,092 and $395,684 as of September 30, 2014 and December 31, 2013, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of the long-term debt was $385,138 and $335,551 as of September 30, 2014 and December 31, 2013, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.

13


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


The following table summarizes the fair value of the SJW Corps.'s investment in California Water Service Group as of September 30, 2014 and December 31, 2013: 
 
Fair Value Measurements at September 30, 2014
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment in California Water Service Group
$
5,815

 
5,815

 

 

 
 
 
 
 
 
 
 
 
Fair Value Measurements at December 31, 2013
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
 
 
 
 
 
 
 
 
Assets:
 
 
 
 
 
 
 
Investment in California Water Service Group
$
8,885

 
8,885

 

 

 
Note 9.
Regulatory Rate Filings
On February 28, 2014, San Jose Water Company submitted Advice Letter No. 456. In this advice letter, San Jose Water Company notified the CPUC that San Jose Water Company was implementing conservation Tariff Rule 14.1. The CPUC's Rule 14.1 provides voluntary conservation measures for customers, focusing primarily on outdoor water use which accounts for 50% of a typical customer's water usage. In addition, San Jose Water Company requested the implementation of a MCMA to track all operational and administrative costs associated with the implementation of Rule 14.1 and implementation of a MCRAMA to track any revenue shortfall associated with the implementation of the 20% conservation goal. The advice letter was approved on March 21, 2014 and the Rule 14.1 voluntary conservation measures, the MCMA, and MCRAMA all went into effect on March 31, 2014. San Jose Water Company will record the impact of the MCRAMA and MCMA regulatory accounts once probability of recovery can be determined and collection can be assured within 24 months of the year-end the revenue is recorded.
On August 14, 2014, the CPUC issued Decision No. 14-08-006 in San Jose Water Company's General Rate Case filing for the years 2013-2015. This Decision resolved all issues in San Jose Water Company's General Rate Case and closed the proceeding. The Decision authorized an increase of revenue of $22,102, or 9.81%, for 2013 and $13,274, or 5.21% for 2014, and provides San Jose Water Company authorization to file to increase rates for 2015 in November 2014. Additionally, due to the nearly 20 month delay in receiving the Decision, San Jose Water Company was authorized to file for a surcharge to true-up the difference between interim rates (i.e. rates that were actually in effect since January 1, 2013) and authorized rates (i.e. rates that should have been effect since January 1, 2013). The Company filed for this surcharge on August 29, 2014 with Advice Letter No. 465, requesting the CPUC to implement a surcharge to recover balances in San Jose Water Company's 2013 General Rate Case Interim Rates Memorandum Account. In this filing, San Jose Water Company sought to recover $46,700 of revenue which was not collected over the period of January 1, 2013 through August 14, 2014 due to the delayed decision in San Jose Water Company's General Rate Case Application. The retroactive adjustment reflects the impact of actual usage compared to what was authorized in the Decision for 2013 and the combined impact of 2013 and 2014 rate increases for 2014. This recovery was authorized in Decision No. 14-08-006. San Jose Water Company intends to recover the uncollected revenue over a three-year period via a $0.2888 per CCF surcharge applied to all customer usage as authorized in the 2012 General Rate Case. This surcharge was approved by the CPUC effective September 29, 2014.
On October 3, 2013, CLWSC filed a rate case with the Texas Commission on Environmental Quality (“TCEQ”). The filing contained a request for an average system-wide rate increase of 23.1%, or $2,400. With the exception of customers served

14


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


within the City of Bulverde, the new rates became effective on December 2, 2013. Subsequently, effective March 1, 2014, a rate settlement agreement was reached with the City of Bulverde with rate increases being phased-in over a 28-month period. Prior to approval by the TCEQ, the new rates are subject to adjustment and refund for customers outside the City of Bulverde. A preliminary hearing in the matter for customers outside the City of Bulverde was completed on July 22, 2014. A settlement proposal was submitted for the commission's consideration on November 3, 2014, and a decision is expected in the fourth quarter of 2014. CLWSC has recognized the average 23.1% increase in accordance with ASC Topic 980 which provides guidance when a regulated entity is permitted to bill requested rate increases before the regulator has ruled on the request. If information becomes available that indicates it is probable that any of the average 23.1% rate increase will need to be refunded and the amount of refund can be reasonably estimated, a loss contingency shall be accrued. CLWSC has determined at this time that it is not probable that any of the rate increase will need to be refunded. Management does not anticipate that the final TCEQ decision will materially affect SJW Corp.'s financial position, results of operations or cash flows.

Note 10.
Balancing and Memorandum Account Recovery Procedures
For California, the CPUC has established a balancing account mechanism for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, cost of capital, any revenue requirement impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and other approved activities or as directed by the CPUC.
Balancing and memorandum accounts are recognized in revenue by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the MCRAMA, collection of the account balance must occur within 24 months of the end of the year the revenue is recorded. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy FASB ASC Topic 980 - “Regulated Operations,” subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support for balance recognition, the balances are recorded in SJW Corp.'s financial statements.
San Jose Water Company met the recognition requirements for certain of its balancing and memorandum accounts and certain amounts subject to balancing and memorandum accounts and increased revenue and regulatory assets as follows:
 
Three months ended September 30, 2014
 
Three months ended September 30, 2013
Beginning Balance
 
Revenue Increase(Reduction)
 
Refunds (Collections)
 
Ending Balance
 
Beginning Balance
 
Revenue Increase(Reduction)
 
Refunds (Collections)
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts
$
(1,511
)
 
(154
)
 
23

 
(1,642
)
 
$
(1,558
)
 
(279
)
 

 
(1,837
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
(1,221
)
 
2,477

 
(17
)
 
1,239

 
(1,833
)
 
679

 

 
(1,154
)
Pension
9,672

 
(6,625
)
 
(123
)
 
2,924

 
8,307

 
825

 

 
9,132

2012 General Rate Case true-up

 
46,456

 

 
46,456

 

 

 

 

All others
1,858

 
(81
)
 
(9
)
 
1,768

 
1,314

 
536

 

 
1,850

Total balancing accounts
$
10,309

 
42,227

 
(149
)
 
52,387

 
$
7,788

 
2,040

 

 
9,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
8,798

 
42,073

 
(126
)
 
50,745

 
$
6,230

 
1,761

 

 
7,991


15


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


 
Nine months ended September 30, 2014
 
Nine months ended September 30, 2013
Beginning Balance
 
Revenue Increase(Reduction)
 
Refunds (Collections)
 
Ending Balance
 
Beginning Balance
 
Revenue Increase(Reduction)
 
Refunds (Collections)
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts
$
(1,895
)
 
230

 
23

 
(1,642
)
 
$
(1,887
)
 
928

 
(878
)
 
(1,837
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
(2,378
)
 
3,634

 
(17
)
 
1,239

 
(1,590
)
 
436

 

 
(1,154
)
Pension
9,734

 
(6,687
)
 
(123
)
 
2,924

 
6,657

 
2,475

 

 
9,132

2012 General Rate Case true-up

 
46,456

 

 
46,456

 

 

 

 

All others
2,229

 
(452
)
 
(9
)
 
1,768

 
369

 
1,481

 

 
1,850

Total balancing accounts
$
9,585

 
42,951

 
(149
)
 
52,387

 
$
5,436

 
4,392

 

 
9,828

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
7,690

 
43,181

 
(126
)
 
50,745

 
$
3,549

 
5,320

 
(878
)
 
7,991

On September 29, 2014, the CPUC approved a surcharge to true-up the difference between interim rates and authorized rates of $46,700 to be recovered over a three-year period as well as one-time refunds of $200 as authorized in the 2012 General Rate Case. The net amount of $46,500 has been recorded in the 2012 General Rate Case true-up row in the table above. This amount includes $2,800 related to water supply and pension balancing accounts that have previously been recorded and have been deducted from the appropriate row in the table above.
As of September 30, 2014, the total balance in San Jose Water Company's balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $3,721, of which 87% relates to the MCMA and MCRAMA. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company's next general rate case or at the time an individual account reaches a threshold of 2% of authorized revenue, whichever occurs first.


16


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SEPTEMBER 30, 2014
(in thousands, except share and per share data)


Note 11.
Regulatory Assets and Liabilities
Regulatory assets and liabilities are comprised of the following as of September 30, 2014 and December 31, 2013:
Description
 
September 30, 2014
 
December 31, 2013
Regulatory assets:
 
 
 
 
Income tax temporary differences, net
 
$
8,220

 
8,220

Postretirement pensions and other medical benefits
 
62,949

 
62,949

2012 General Rate Case true-up
 
46,456

 

Pension balancing account
 
2,924

 
9,734

Water rate assistance program balancing account
 
2,189

 
2,590

Water supply balancing accounts
 
1,239

 

Other
 
5,134

 
4,725

Total regulatory assets
 
$
129,111

 
88,218

Regulatory liabilities:
 
 
 
 
Cost of capital memorandum account
 
$
2,266

 
2,297

Water supply balancing accounts
 

 
2,378

Total regulatory liabilities
 
$
2,266

 
4,675

Total regulatory assets, net in Consolidated Balance Sheets
 
$
126,845

 
83,543

Less: current regulatory asset, net
 
17,308

 

Total regulatory assets, net, less current portion
 
$
109,537

 
83,543


Note 12.
Legal Proceedings
SJW Corp. is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Corp. or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Corp.'s business, financial position, results of operations or cash flows.

Note 13.
Sale of California Water Service Group Stock
On June 30, 2014, SJW Corp. sold 125,969 shares of California Water Service Group for $3,056, before fees of $10. SJW Corp. recognized a gain on the sale of the stock of approximately $2,017, tax expense of approximately $822, for a net gain of $1,195. The unrealized holding gain associated with the shares sold, that was reclassified out of accumulated other comprehensive income was $1,171 and was based on the fair value of the stock as of March 31, 2014. As of September 30, 2014, SJW Corp. held 259,151 shares of California Water Service Group. The company classifies its investment in California Water Service Group as available for sale. The stock is carried at the quoted market price with the changes in unrealized gain or loss reported, net of tax, as a component of other comprehensive income.


17



ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts and otherwise noted)
The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and the related “Management's Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Corp.'s Annual Report on Form 10-K for the year ended December 31, 2013.
This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Corp. and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Corp. and its subsidiaries and the industries in which SJW Corp. and its subsidiaries operate and the beliefs and assumptions of the management of SJW Corp. Such forward-looking statements are identified by words including “expect,” “estimate,” “anticipate,” “intends,” “seeks,” “plans,” “projects,” “may,” “should,” “will,” and variation of such words, and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the SEC under the item entitled “Risk Factors,” and in other reports SJW Corp. files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Corp. undertakes no obligation to update or revise the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:
SJW Corp. is a holding company with four subsidiaries: San Jose Water Company, SJW Land Company, SJWTX, Inc., and Texas Water Alliance Limited.
San Jose Water Company, a wholly owned subsidiary of SJW Corp., is a public utility in the business of providing water service to approximately 229,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.
The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements and antenna leases.
San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless CPUC approval is obtained.
San Jose Water Company also has approximately 700 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to San Jose Water Company's various watershed properties.

18



SJW Land Company, a wholly owned subsidiary of SJW Corp., owned the following real properties during the year-to-date period ended September 30, 2014:
 
 
 
 
 
 
 
 
% for Nine Months Ended
September 30, 2014
of SJW Land Company
Description
 
Location
 
Acreage
 
Square Footage
 
Revenue
 
Expense
2 Commercial buildings
 
San Jose, California
 
2
 
28,000
 
10
%
 
10
%
Retail building *
 
El Paso, Texas
 
2
 
14,000
 
3
%
 
1
%
Warehouse building
 
Phoenix, Arizona
 
11
 
176,000
 
12
%
 
9
%
Warehouse building
 
Knoxville, Tennessee
 
30
 
361,500
 
33
%
 
29
%
Commercial building
 
Knoxville, Tennessee
 
15
 
135,000
 
42
%
 
51
%
Undeveloped land
 
Knoxville, Tennessee
 
10
 
N/A
 
N/A

 
N/A

Undeveloped land
 
San Jose, California
 
5
 
N/A
 
N/A

 
N/A

*
On June 30, 2014, SJW Land Company closed the sale of its Texas retail building. Revenue and expense amounts are through the sale closing date. Expense amount excludes the gain on sale of property.
SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. One of the California properties is owned by such partnership. The limited partnership has been determined to be a variable interest entity within the scope of FASB ASC Topic 810 – “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, it has been consolidated with SJW Land Company.
SJWTX, Inc., a wholly owned subsidiary of SJW Corp., doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately 12,000 connections that serve approximately 36,000 people. CLWSC's service area comprises more than 240 square miles in western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.
Texas Water Alliance Limited (“TWA”), a wholly owned subsidiary of SJW Corp., is undertaking activities that are necessary to develop a water supply project in Texas. In connection with the project, TWA applied for groundwater production and transportation permits to meet the future water needs in the Canyon Lake Water Service Company's service area and to the central Texas hill country communities and utilities adjacent to this area. In January 2013, TWA's permits were approved by the groundwater district in Gonzales County. The permits were subsequently received in March 2013.

Business Strategy for Water Utility Services:
SJW Corp. focuses its business initiatives in three strategic areas:
(1)
Regional regulated water utility operations;
(2)
Regional nonregulated water utility related services provided in accordance with the guidelines established by the CPUC in California and the TCEQ in Texas;
(3)
Out-of-region water and utility related services.
As part of its pursuit of the above three strategic areas, SJW Corp. considers from time to time opportunities to acquire businesses and assets. However, SJW Corp. cannot be certain it will be successful in identifying and consummating any strategic business acquisitions relating to such opportunities. In addition, any transaction will involve numerous risks, including the possibility of incurring more costs than benefits derived from the acquisition, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management's attention from day-to-day operations of the business, the potential for a negative impact on SJW Corp.'s financial position and operating results, entering markets in which SJW Corp. has no or limited direct prior experience and the potential loss of key employees of any acquired company. SJW Corp. cannot be certain that any transaction will be successful or that it will not materially harm its operating results or financial condition.

19



Real Estate Services:
SJW Corp.'s real estate investment activity is conducted through SJW Land Company. SJW Land Company owns undeveloped land and owns and operates a portfolio of commercial buildings in the states of California, Arizona and Tennessee. SJW Land Company also owns a limited partnership interest in 444 West Santa Clara Street, L.P. The partnership owns a commercial building in San Jose, California. SJW Land Company manages its acquired income producing and other properties until such time a determination is made to reinvest proceeds from sale of such properties. SJW Land Company's real estate investments diversify SJW Corp.'s asset base.

Critical Accounting Policies:
SJW Corp. has identified the accounting policies delineated below as the policies critical to its business operations and the understanding of the results of operations. The preparation of consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and revenues and expenses during the reporting period. SJW Corp. bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. SJW Corp.'s critical accounting policies are as follows:
Revenue Recognition
SJW Corp. recognizes its regulated and nonregulated revenue when services have been rendered, in accordance with FASB ASC Topic 605 – “Revenue Recognition.”

Metered revenue of Water Utility Services includes billing to customers based on meter readings plus an estimate of water used between the customers' last meter reading and the end of the accounting period. Water Utility Services read the majority of its customers' meters on a bi-monthly basis and records its revenue based on its meter reading results. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. Actual results could differ from those estimates, which may result in an adjustment to operating revenue in the period which the revision to Water Utility Services' estimates is determined. San Jose Water Company also recognizes balancing and memorandum accounts in its revenue when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process.
Revenues also include a surcharge collected from regulated customers that is paid to the CPUC. This surcharge is recorded both in operating revenues and administrative and general expenses. For the three months ended September 30, 2014 and 2013, the surcharge was $1,136 and $1,132, respectively. For the nine months ended September 30, 2014 and 2013, the surcharge was $2,752 and $2,764, respectively.
SJW Corp. recognizes its nonregulated revenue based on the nature of the nonregulated business activities. Revenue from San Jose Water Company's nonregulated utility operations, maintenance agreements or antenna leases are recognized when services have been rendered. Revenue from SJW Land Company properties is generally recognized ratably over the term of the leases.
Balancing and Memorandum Accounts
The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. Pursuant to Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for expense items for which revenue offsets have been authorized.
Balancing accounts are currently being maintained for the following items: purchased water, purchased power, groundwater extraction charges, and pensions. The amount in the water production balancing accounts varies with the seasonality of the water utility business such that, during the summer months when the demand for water is at its peak, the accounts tend to reflect an under-collection, while during the winter months when demand for water is relatively lower, the accounts tend to reflect an over-collection. The pension balancing account is intended to capture the difference between actual pension expense and the amount approved in rates by the CPUC.
San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, cost of capital, any revenue requirement impact of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010, and other approved activities or as directed by the CPUC.
Balancing and memorandum accounts are recognized in revenue by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the MCRAMA, collection of the account balance must occur within 24 months of the end of the year the revenue is recorded. In assessing the probability criteria for balancing and memorandum accounts between rate cases, SJW Corp. considers evidence that may exist prior to CPUC authorization that

20



would satisfy ASC Topic 980, subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support for balance recognition, the balances are recorded in the SJW Corp.'s financial statements.
It is typical for the CPUC to incorporate any over-collected and/or under-collected balances in balancing or memorandum accounts into customer rates at the time rate decisions are made as part of San Jose Water Company's general rate case proceedings by assessing temporary surcredits and/or surcharges. In the case where San Jose Water Company's balancing or memorandum-type accounts that have been authorized by the CPUC reach certain thresholds or have termination dates, San Jose Water Company can request the CPUC to recognize the amounts in customer rates prior to the next regular general rate case proceeding by filing an advice letter.
Recognition of Regulatory Assets and Liabilities
Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by ASC Topic 980. In accordance with ASC Topic 980, Water Utility Services, to the extent applicable, records deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recognized in the ratemaking process in a period different from when the costs and credits are incurred. Accounting for such costs and credits is based on management's judgment and prior historical ratemaking practices, and it occurs when management determines that it is probable that these costs and credits will be recognized in the future revenue of Water Utility Services through the ratemaking process. The regulatory assets and liabilities recorded by Water Utility Services, in particular, San Jose Water Company, primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting purposes, balancing and memorandum accounts, postretirement pension benefits, medical costs, accrued benefits for vacation and asset retirement obligations that have not been passed through in rates. San Jose Water Company adjusts the related asset and liabilities for these items through its regulatory asset and liability accounts at year-end, except for certain postretirement benefit costs and balancing and memorandum accounts which are adjusted monthly. The disallowance of any asset in future ratemaking, including deferred regulatory assets, would require San Jose Water Company to immediately recognize the impact of the costs for financial reporting purposes. No disallowances were recognized during the year-to-date period ended September 30, 2014 or during the year ended December 31, 2013.
Pension Plan Accounting
San Jose Water Company offers a Pension Plan, Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and certain postretirement benefits other than pensions to employees retiring with a minimum level of service. Accounting for pensions and other postretirement benefits requires assumptions about the discount rate applied to expected benefit obligations, expected return on plan assets, the rate of future compensation increases expected to be received by the employees, mortality, turnover, and medical costs. Plan assets are marked to market at each reporting date.
Income Taxes
SJW Corp. estimates its federal and state income taxes as part of the process of preparing consolidated financial statements. The process involves estimating the actual current tax exposure together with assessing temporary differences resulting from different treatment of items for tax and accounting purposes, including the evaluation of the treatment acceptable in the water utility industry and regulatory environment. These differences result in deferred tax assets and liabilities, which are included on the balance sheet. If actual results, due to changes in the regulatory treatment, or significant changes in tax-related estimates or assumptions or changes in law, differ materially from these estimates, the provision for income taxes will be materially impacted.

Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standards Update 2014-09 which supersedes most of the current revenue recognition requirements, including most industry-specific guidance. The updated standard will become effective for us in the first quarter of fiscal 2017 and permits the use of either the retrospective or cumulative effect transition method. Early adoption is not permitted. Management is currently evaluating the effect that the new standard will have on our consolidated financial statements and related disclosures.

Results of Operations:
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales. Our service area in California is in the midst of a record

21



drought. In response to this, Governor Edmund G. Brown Jr. proclaimed a State of Emergency and directed state officials to take necessary actions to prepare for drought conditions. The SCVWD, our water wholesaler, has set a target of a 20% reduction for water use in 2014 in accordance with its adopted water shortage contingency plan and recommended that its retail water and municipal customers implement mandatory measures to meet the target. Effective March 31, 2014, San Jose Water Company received approval from the CPUC for a Mandatory Conservation Revenue Adjustment Memorandum Account to track any revenue shortfall and a Mandatory Conservation Memorandum Account to track operational and administrative costs associated with the implementation of the 20% conservation goal.
Overview
SJW Corp.'s consolidated net income for the three months ended September 30, 2014 was $38,366, an increase of $29,416 or approximately 329%, from $8,950 for the same period in 2013. SJW Corp.'s consolidated net income for the nine months ended September 30, 2014 was $46,118, an increase of $28,411 or approximately 160%, from $17,707 for the same period in 2013. The increase in net income was primarily due to the recognition of $46,456 true-up revenue resulting from the general rate case decision. On September 29, 2014, the CPUC approved a surcharge to true-up the difference between interim rates and authorized rates of $46,700 as well as one-time refunds of $200. Collection of the surcharge is authorized to occur over a three-year period which commenced on October 2, 2014.
Operating Revenue
 
 
Operating Revenue by Segment
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Water Utility Services
$
123,660

 
83,753

 
$
245,034

 
205,673

Real Estate Services
1,770

 
1,485

 
5,348

 
3,934

 
$
125,430

 
85,238

 
$
250,382

 
209,607

The change in consolidated operating revenues was due to the following factors:
 
Three months ended
September 30,
2014 vs. 2013
Nine months ended
September 30,
2014 vs. 2013
Increase/(decrease)
Increase/(decrease)
Water Utility Services:
 
 
 
 
 
 
Consumption changes
$
(5,918
)
 
(7
)%
$
(10,669
)
 
(5
)%
New customers increase
520

 
 %
1,290

 
 %
Rate increases
5,117

 
6
 %
10,062

 
5
 %
Balancing and memorandum accounts
(6,269
)
 
(7
)%
(8,721
)
 
(4
)%
2012 General Rate Case true-up
46,456

 
55
 %
46,456

 
22
 %
Texas general rate case refund

 
 %
943

 
 %
Real Estate Services
286

 
 %
1,414

 
1
 %
 
$
40,192

 
47
 %
$
40,775

 
19
 %
Operating Expense
 
Operating Expense by Segment
Three months ended September 30,
 
Nine months ended September 30,
 
2014
 
2013
 
2014
 
2013
Water Utility Services
$
65,026

 
64,798

 
$
169,219

 
164,418

Real Estate Services
1,041

 
820

 
3,118

 
2,378

All Other
249

 
274

 
756

 
755

 
$
66,316

 
65,892

 
$
173,093

 
167,551


22



The change in consolidated operating expenses was due to the following factors:
 
Three months ended
September 30,
2014 vs. 2013
Nine months ended
September 30,
2013 vs. 2012
Increase/(decrease)
Increase/(decrease)
Water production expenses:
 
 
 
 
 
 
Change in surface water use
$
1,084

 
2
 %
$
4,526

 
3
 %
Change in usage and new customers
(4,376
)
 
(7
)%
(6,298
)
 
(4
)%
Purchased water and groundwater extraction charge and energy price increase
2,332

 
4
 %
6,618

 
4
 %
Total water production expenses
(960
)
 
(1
)%
4,846

 
3
 %
Administrative and general
(132
)
 
 %
(2,751
)
 
(2
)%
Maintenance
650

 
1
 %
864

 
1
 %
Property taxes and other non-income taxes
186

 
 %
482

 
 %
Depreciation and amortization
680

 
1
 %
2,101

 
1
 %
 
$
424

 
1
 %
$
5,542

 
3
 %
Sources of Water Supply
San Jose Water Company's water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from the SCVWD under the terms of a master contract with SCVWD expiring in 2051. Surface water is the least expensive source of water. Changes and variations in quantities from each of these sources affect the overall mix of the water supply, thereby affecting the cost of the water supply. In addition, the water rate for purchased water and the groundwater extraction charge may be increased by the SCVWD at any time. If an increase occurs, then San Jose Water Company would file an advice letter with the CPUC seeking authorization to increase revenues to offset the cost increase.
CLWSC's water supply consists of groundwater from wells and purchased raw water from the Guadalupe-Blanco River Authority (“GBRA”). CLWSC has long-term agreements with the GBRA, which expire in 2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts, provide CLWSC with an aggregate of 6,900 acre-feet of water per year from Canyon Lake and other sources at prices that may be adjusted periodically by GBRA. 
The following table presents the change in sources of water supply, in million gallons, for Water Utility Services:
 
Three months ended September 30,
 
Increase/
(decrease)
 
% Change
 
Nine months ended September 30,
 
Increase/
(decrease)