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EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CFO AND TREASURER - SJW GROUPsjw-93016xex322.htm
EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93016xex321.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CFO AND TREASURER - SJW GROUPsjw-93016xex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93016xex311.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, 2016
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    No  
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      No  
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  
 
Accelerated filer  
 
Non-accelerated filer  
 
Smaller reporting company  
 
 
 
 
(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    No  
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 21, 2016, there were 20,456,225 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,
 
2016
 
2015
 
2016
 
2015
OPERATING REVENUE
$
112,344

 
82,955

 
$
260,400

 
217,469

OPERATING EXPENSE:
 
 
 
 
 
 
 
Production Expenses:
 
 
 
 
 
 
 
Purchased water
28,681

 
22,085

 
52,863

 
47,371

Power
2,141

 
2,500

 
4,992

 
5,200

Groundwater extraction charges
10,867

 
7,920

 
25,627

 
22,053

Other production expenses
3,311

 
3,033

 
9,815

 
9,095

Total production expenses
45,000

 
35,538

 
93,297

 
83,719

Administrative and general
12,449

 
12,101

 
35,690

 
34,861

Maintenance
4,217

 
3,975

 
12,082

 
11,187

Property taxes and other non-income taxes
3,213

 
2,893

 
9,115

 
8,878

Depreciation and amortization
11,119

 
10,188

 
33,489

 
30,549

Total operating expense
75,998

 
64,695

 
183,673

 
169,194

OPERATING INCOME
36,346

 
18,260

 
76,727

 
48,275

OTHER (EXPENSE) INCOME:
 
 
 
 
 
 
 
Interest on long-term debt
(4,993
)
 
(5,200
)
 
(15,039
)
 
(15,838
)
Mortgage and other interest expense
(433
)
 
(316
)
 
(1,291
)
 
(948
)
Gain on sale of California Water Service Group stock

 

 
3,197

 

Gain on sale of real estate investments
124

 
1,886

 
124

 
1,886

Dividend income
17

 
43

 
70

 
130

Other, net
410

 
398

 
869

 
921

Income before income taxes
31,471

 
15,071

 
64,657

 
34,426

Provision for income taxes
12,512

 
5,537

 
25,545

 
12,736

NET INCOME
18,959

 
9,534

 
39,112

 
21,690

Other comprehensive income (loss), net of tax:
 
 
 
 
 
 
 
Unrealized (loss) gain on investment
(169
)
 
(112
)
 
848

 
(382
)
Reclassification adjustment for gain realized on sale of investments

 

 
(1,742
)
 

COMPREHENSIVE INCOME
$
18,790

 
9,422

 
$
38,218

 
21,308

EARNINGS PER SHARE
 
 
 
 
 
 
 
Basic
$
0.93

 
0.47

 
$
1.91

 
1.07

Diluted
$
0.92

 
0.46

 
$
1.90

 
1.06

DIVIDENDS PER SHARE
$
0.20

 
0.20

 
$
0.61

 
0.59

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
20,451,930

 
20,375,960

 
20,434,494

 
20,353,487

Diluted
20,602,410

 
20,531,855

 
20,580,728

 
20,504,701

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,
2016
 
December 31,
2015
ASSETS
 
 
 
Utility plant:
 
 
 
Land
$
17,885

 
17,853

Depreciable plant and equipment
1,535,986

 
1,438,321

Construction in progress
65,101

 
45,573

Intangible assets
23,811

 
22,675

 
1,642,783

 
1,524,422

Less accumulated depreciation and amortization
517,314

 
487,659

 
1,125,469

 
1,036,763

Real estate investments
62,127

 
74,641

Less accumulated depreciation and amortization
11,412

 
13,207

 
50,715

 
61,434

CURRENT ASSETS:
 
 
 
Cash and cash equivalents
17,663

 
5,239

Accounts receivable:
 
 
 
Customers, net of allowances for uncollectible accounts
21,429

 
16,390

Income tax
20,015

 
10,852

Other
950

 
2,192

Accrued unbilled utility revenue
32,669

 
17,417

Long-lived asset held-for-sale
9,907

 

Current regulatory assets, net
25,661

 
16,542

Other current assets
5,045

 
4,744

 
133,339

 
73,376

OTHER ASSETS:
 
 
 
Investment in California Water Service Group
3,209

 
6,030

Net regulatory assets, less current portion
133,663

 
152,021

Other
7,946

 
7,701

 
144,818

 
165,752

 
$
1,454,341

 
1,337,325








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,
2016
 
December 31,
2015
CAPITALIZATION AND LIABILITIES
 
 
 
CAPITALIZATION:
 
 
 
Shareholders' equity:
 
 
 
Common stock, $0.521 par value; authorized 36,000,000 shares; issued and outstanding 20,456,225 shares on September 30, 2016 and 20,381,949 on December 31, 2015
$
10,655

 
10,616

Additional paid-in capital
70,706

 
68,636

Retained earnings
328,829

 
302,220

Accumulated other comprehensive income
1,418

 
2,311

Total shareholders' equity
411,608

 
383,783

Long-term debt, less current portion
364,229

 
377,187

 
775,837

 
760,970

CURRENT LIABILITIES:
 
 
 
Line of credit
63,900

 
34,600

Current portion of long-term debt
11,554

 
3,491

Accrued groundwater extraction charges, purchased water and power
13,697

 
7,163

Accounts payable
21,673

 
16,196

Accrued interest
5,775

 
6,193

Accrued property taxes and other non-income taxes
3,222

 
1,622

Accrued payroll
3,889

 
4,203

Deposit, long-lived asset held-for-sale
20,000

 

Other current liabilities
7,417

 
6,155

 
151,127

 
79,623

DEFERRED INCOME TAXES
214,633

 
198,775

ADVANCES FOR CONSTRUCTION
81,027

 
76,572

CONTRIBUTIONS IN AID OF CONSTRUCTION
147,576

 
141,194

POSTRETIREMENT BENEFIT PLANS
73,068

 
70,230

OTHER NONCURRENT LIABILITIES
11,073

 
9,961

COMMITMENTS AND CONTINGENCIES

 

 
$
1,454,341

 
1,337,325








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,
 
2016
 
2015
OPERATING ACTIVITIES:
 
 
 
Net income
$
39,112

 
21,690

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
34,740

 
31,740

Deferred income taxes
16,755

 
4,705

Share-based compensation
1,316

 
1,208

        Gain on sale of real estate investments
(124
)
 
(1,886
)
        Gain on sale of California Water Service Group stock
(3,197
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and accrued unbilled utility revenue
(19,298
)
 
(9,870
)
Accounts payable and other current liabilities
(3,496
)
 
1,046

Accrued groundwater extraction charges, purchased water and power
6,534

 
5,260

Tax receivable and accrued taxes
(6,972
)
 
6,311

Postretirement benefits
2,838

 
2,526

Regulatory assets and liability related to balancing and memorandum accounts
9,239

 
12,068

Other changes, net
(1,018
)
 
(2,454
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
76,429

 
72,344

INVESTING ACTIVITIES:
 
 
 
Additions to utility plant:
 
 
 
Company-funded
(102,813
)
 
(63,126
)
Contributions in aid of construction
(5,759
)
 
(8,400
)
Additions to real estate investments
(254
)
 
(570
)
Payments for business/asset acquisition and water rights
(1,063
)
 
(991
)
Payments to retire utility plant, net of salvage
(1,418
)
 
(3,146
)
Proceeds from sale of real estate investments
124

 
1,925

Proceeds from sale of California Water Service Group stock
4,510

 

Deposit for long-lived asset held-for-sale
20,000

 

NET CASH USED IN INVESTING ACTIVITIES
(86,673
)
 
(74,308
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
53,875

 
49,400

Repayments of line of credit
(24,575
)
 
(41,400
)
Repayments of long-term borrowings
(5,143
)
 
(435
)
Debt issuance costs
(335
)
 

Dividends paid
(12,419
)
 
(11,910
)
Employee stock purchase plan proceeds
954

 
895

Tax benefits realized from restricted and deferred stock units
203

 
634

Receipts of advances and contributions in aid of construction
12,032

 
10,516

Refunds of advances for construction
(1,924
)
 
(1,864
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
22,668

 
5,836

NET CHANGE IN CASH AND CASH EQUIVALENTS
12,424

 
3,872

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
5,239

 
2,399

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
17,663

 
6,271

Cash paid during the period for:
 
 
 
Interest
$
18,324

 
18,218

Income taxes
18,072

 
3,721

Supplemental disclosure of non-cash activities:
 
 
 
Increase in accrued payables for construction costs capitalized
10,349

 
9,225

Utility property installed by developers
5,063

 
499




See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5



SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2016
(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 2015 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
In February 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-02, “Consolidation” which modifies the evaluation of whether limited partnerships and similar legal entities are variable or voting interest entities, eliminates the presumption that the general partner should consolidate a limited partnership, modifies the consolidation analysis for reporting entities that are involved in variable interest entities, particularly those that have fee arrangements and related party relationships, and provides a scope exception from consolidation guidance for reporting entities with interests in legal entities that operate as registered money market funds. ASU 2015-02 became effective for SJW Corp. in the first quarter of 2016. The adoption of ASU 2015-02 did not have a material impact on our 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.
In response to the ongoing drought in California, on November 13, 2015, Governor Edmund Brown Jr. issued Executive Order B-36-15 to bolster the state's drought response.  On November 24, 2015, the Santa Clara Valley Water District (“SCVWD”) extended their call for 30% conservation and restrictions on outdoor watering of ornamental landscapes two days a week through June 30, 2016. On February 2, 2016, the State Water Board adopted an extended and revised emergency regulation to ensure that urban water conservation continues through October 2016. On May 9, 2016, Governor Brown issued an executive order to build on temporary statewide emergency water restrictions and to establish longer term water conservation measures, including permanent monthly water use reporting, new permanent water use standards in California communities and bans on clearly wasteful practices. On May 18, 2016, the State Water Board adopted a new approach to water conservation regulation and replaced its prior percentage reduction-based water conservation standard with a new approach designed to ensure at least a three year supply of available water based on local conditions. On June 14, 2016, the SCVWD reduced its conservation target from 30% to 20% and also increased the number of outdoor watering days from two to three effective July 1, 2016 through January 31, 2017.
Effective June 15, 2015, San Jose Water Company was authorized by the California Public Utilities Commission (“CPUC”) to activate Stage 3 of Tariff Rule 14.1 which is a water shortage contingency plan with mandatory water usage reductions and drought surcharges resulting from usage above customer allocations. Tariff Rule 14.1 focuses primarily on restrictions of outdoor water use which accounts for 50% of a typical customer's water usage. On June 24, 2016, San Jose Water Company filed with the CPUC to amend its water shortage contingency plan with mandatory water usage reductions and drought surcharges to reflect the SCVWD's changes. This request was approved by the CPUC with an effective date of July 1, 2016. The drought surcharges are not recorded as revenue. Rather, they are recorded in a regulatory liability account which has been authorized by the CPUC to track lost revenues from conservation. The amount recorded in the surcharge account is being used to offset future rate increases that would otherwise be necessary to recover lost revenue due to drought conservation efforts. As of September 30, 2016, San Jose Water Company has a remaining balance of approximately $6,320 in the drought surcharge account to offset future rate increases related to drought conservation efforts. San Jose Water Company is continually working to remain in compliance with the various drought rules and regulations and is also working with local governments as well as the SCVWD to communicate consistent messages to the public about use restrictions and related matters associated with the ongoing drought.
Effective March 31, 2014, San Jose Water Company received approval from the CPUC to institute a Mandatory Conservation Revenue Adjustment Memorandum Account. This account was subsequently replaced with a Water Conservation Memorandum Account (“WCMA”). The WCMA allows San Jose Water Company to track lost revenue associated with

6


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


reduced sales due to the ongoing drought and the associated calls for water use reduction from the SCVWD. San Jose Water Company records the lost revenue captured in the WCMA regulatory accounts once the revenue recognition requirements of FASB ASU Topic 980 - “Regulated Operations,” subtopic 605-25 are met. For further discussion, please see Note 8 and Note 9.
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 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 (“ESPP”). For the three months ended September 30, 2016 and 2015, 714 and 380 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2016 and 2015, 4,801 and 1,819 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, 2016 and 2015, the amounts allocated to administrative and general expense were $416 and $400, respectively. For the nine months ended September 30, 2016 and 2015, the amounts allocated to administrative and general expense were $1,251 and $1,191, 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 FASB 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.
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, 2016, the remaining number of shares available under the Incentive Plan was 993,954, and an additional 229,972 shares were issuable under outstanding restricted stock units and deferred restricted stock units. In addition, shares are issued to employees under the company's ESPP.
Stock 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, 2016 and 2015.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Adjustments to additional paid-in capital and common stock for:
 
 
 
 
 
 
 
Compensation costs charged to income:
 
 
 
 
 
 
 
   ESPP
$
89

 
82

 
$
168

 
158

   Restricted stock and deferred restricted stock
375

 
365

 
1,148

 
1,050

Total compensation costs charged to income
$
464

 
447

 
$
1,316

 
1,208

Excess tax benefits realized from stock issuance:
 
 
 
 
 
 
 
   Restricted stock and deferred restricted stock
$
1

 

 
$
203

 
634

Total excess tax benefits realized from stock issuance
$
1

 

 
$
203

 
634

Proceeds from ESPP and similar instruments:
 
 
 
 
 
 
 
   ESPP
$
503

 
462

 
$
954

 
895

Total proceeds from the ESPP and similar instruments
$
503

 
462

 
$
954

 
895


7


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


Stock, Restricted Stock and Deferred Restricted Stock
On January 4, 2016, service based restricted stock units covering an aggregate of 17,835 shares of common stock of SJW Corp. were granted to certain officers 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 of $27.02 per unit which is based on the award grant date fair value is being recognized over the service period beginning in 2016.
On January 26, 2016, certain officers of SJW Corp. were granted performance-based restricted stock units covering an aggregate target number of SJW Corp.'s shares of common stock equal to 12,473 that will vest based on the actual attainment of specified performance goals measured for the 2016 calendar year and continued service through December 31, 2016. The number of shares issuable under the awards, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the share-based compensation expense of $29.46 per unit which is based on the award grant date fair value is being recognized assuming the performance goals will be attained. As of September 30, 2016, management believes that the performance goals will be met.
On April 27, 2016, restricted stock units covering an aggregate of 7,656 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 of $35.79 per unit which is based on the award grant date fair value is being recognized over the service period beginning in 2016.
As of September 30, 2016, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $1,277. This cost is expected to be recognized over a remaining weighted average period of 0.85 years.
Employee Stock Purchase Plan
The 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 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 ESPP.
After considering estimated employee terminations or withdrawals from the plan before the purchase date, SJW Corp.'s recorded expenses were $51 and $139 for the three and nine months ended September 30, 2016, respectively, and $38 and $120 for the three and nine months ended September 30, 2015, respectively, related to the ESPP.
The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2017 for the ESPP is approximately $74. This cost is expected to be recognized during the fourth quarter of 2016 and first quarter of 2017.

Note 3.
Real Estate Investments
The major components of real estate investments as of September 30, 2016 and December 31, 2015 are as follows: 
 
September 30,
2016
 
December 31,
2015
Land
$
17,297

 
17,297

Buildings and improvements
44,681

 
57,015

Intangibles
149

 
329

Subtotal
62,127

 
74,641

Less: accumulated depreciation and amortization
11,412

 
13,207

Total
$
50,715

 
61,434

Depreciation and amortization is computed using the straight-line method over the estimated life of the respective assets, ranging from 5 to 39 years.
In 2015, SJW Land Company was notified by the Arizona Department of Transportation (“ADOT”) that in order to achieve their goals of developing a new freeway extension, they, in conjunction with the Federal Highway Commission, would be exercising their powers of eminent domain for SJW Land Company's warehouse building located in Phoenix, Arizona. SJW Land Company reached a settlement with ADOT of $20,000 on the property value and received the payment in September

8


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


2016 which was recorded in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016 as a deposit, long-lived asset held-for-sale. Title to the property transferred to ADOT on October 13, 2016 upon the recording of the court's Final Order of Condemnation. SJW Corp. expects to record a gain, net of tax and expenses, on the property condemnation of approximately $5,800 in the fourth quarter 2016. The company has reclassified the Arizona property as held-for-sale in the accompanying Condensed Consolidated Balance Sheets as of September 30, 2016. The mortgage loan for the Arizona warehouse building was due on July 1, 2016. SJW Land Company paid off the remaining loan balance of $2,938 on June 30, 2016.
The Arizona warehouse building is included in SJW Corp.'s “Real Estate Services” reportable segment as disclosed in Note 5. Prior to reclassification of the property as held-for-sale, depreciation expense on the building was $0 and $135 for the three and nine months ended September 30, 2016. The following represents the major components of the Arizona warehouse building recorded in long-lived assets held-for-sale on SJW Corp.'s condensed consolidated balance sheets as of September 30, 2016:
 
September 30, 2016
Land
$
2,064

Buildings and improvements
10,563

Subtotal
12,627

Less: accumulated depreciation and amortization
2,720

Total
$
9,907

On August 14, 2015, San Jose Water Company sold five nonutility properties located in San Jose, California for $2,015. SJW Corp. recognized a pre-tax gain on the sale of real estate investments of $1,886, after selling expenses of $91.

Note 4.
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, 2016 and 2015 are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Service cost
$
1,244

 
1,363

 
$
3,731

 
4,089

Interest cost
1,871

 
1,711

 
5,613

 
5,134

Other cost
1,104

 
1,192

 
3,313

 
3,575

Expected return on assets
(1,894
)
 
(1,817
)
 
(5,683
)
 
(5,450
)
 
$
2,325

 
2,449

 
$
6,974

 
7,348



9


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(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, 2016 and December 31, 2015: 
 
 
 
Fair Value Measurements at September 30, 2016
 
 
 
 
 
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
 
 
$
5,530

 
$
5,530

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
4,883

 
4,859

 
24

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
38,987

 
38,987

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
6,765

 
6,765

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
5,881

 
5,881

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
4,939

 
4,939

 

 

REIT
NAREIT - Equity REIT'S
 
5,853

 

 
5,853

 

Fixed Income (b)
(b)
 
42,087

 

 
42,087

 

Total
 
 
$
114,925

 
$
66,961

 
$
47,964

 
$

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 and cash 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, 2015
 
 
 
 
 
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
 
 
$
9,500

 
$
9,500

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Vaue
 
4,067

 
4,041

 
26

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
36,010

 
36,010

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
5,886

 
5,886

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
5,188

 
5,188

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
4,804

 
4,804

 

 

REIT
NAREIT - Equity REIT'S
 
5,346

 

 
5,346

 

Fixed Income (b)
(b)
 
38,614

 

 
38,614

 

Total
 
 
$
109,415

 
$
65,429

 
$
43,986

 
$

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 and cash 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, 2016
(in thousands, except share and per share data)


In 2016, San Jose Water Company expects to make required and discretionary cash contributions of up to $8,613 to the pension plans and Social Welfare Plan. For the three and nine months ended September 30, 2016, $2,173 and $3,553, respectively, has been contributed to the pension plans and Social Welfare Plan.

Note 5.
Segment and Non-Tariffed Business Reporting
SJW Corp. is a holding company with five subsidiaries: (i) San Jose Water Company, a water utility which operates both regulated and non-tariffed 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 non-tariffed variable interest entity, Acequia Water Supply Corporation, (iv) Texas Water Alliance Limited, a non-tariffed water utility operation which has acquired permits and leases necessary to develop a water supply project in Texas, and (v) SJW Group, Inc., a Delaware corporation formed in March 2015 for the sole purpose of effectuating a change in the state of incorporation of SJW Corp. from California to Delaware. The CPUC and Public Utilities Commission of Texas (“PUCT”) issued a decision authorizing the reincorporation on May 26, 2016 and March 24, 2016, respectively. The reincorporation is expected to become effective in the fourth quarter of 2016, subject to the completion of certain legal formalities.
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, CLWSC, 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 includes the Chairman, President and Chief Executive Officer, and his senior staff. The senior staff 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 non-tariffed 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, 2016
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
108,502

 
2,056

 
1,786

 

 
108,502

 
3,842

 
112,344

Operating expense
73,179

 
1,355

 
1,108

 
356

 
73,179

 
2,819

 
75,998

Operating income (loss)
35,323

 
701

 
678

 
(356
)
 
35,323

 
1,023

 
36,346

Net income (loss)
19,216

 
330

 
239

 
(826
)
 
19,216

 
(257
)
 
18,959

Depreciation and amortization
10,678

 
116

 
325

 

 
10,678

 
441

 
11,119

Senior note, mortgage and other interest expense
4,648

 

 
216

 
562

 
4,648

 
778

 
5,426

Income tax expense (benefit) in net income
12,145

 
247

 
106

 
14

 
12,145

 
367

 
12,512

Assets
$
1,359,419

 
18,092

 
75,909

 
921

 
1,359,419

 
94,922

 
1,454,341


11


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


 
For Three Months Ended September 30, 2015
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
79,437

 
1,766

 
1,752

 

 
79,437

 
3,518

 
82,955

Operating expense
61,714

 
1,642

 
1,050

 
289

 
61,714

 
2,981

 
64,695

Operating income (loss)
17,723

 
124

 
702

 
(289
)
 
17,723

 
537

 
18,260

Net income (loss)
9,698

 
(29
)
 
236

 
(371
)
 
9,698

 
(164
)
 
9,534

Depreciation and amortization
9,684

 
112

 
392

 

 
9,684

 
504

 
10,188

Senior note, mortgage and other interest expense
4,707

 

 
255

 
554

 
4,707

 
809

 
5,516

Income tax expense (benefit) in net income
5,742

 
54

 
97

 
(356
)
 
5,742

 
(205
)
 
5,537

Assets
$
1,233,450

 
18,094

 
66,727

 
5,104

 
1,233,450

 
89,925

 
1,323,375

 
For Nine Months Ended September 30, 2016
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
250,389

 
4,802

 
5,209

 

 
250,389

 
10,011

 
260,400

Operating expense
175,967

 
3,275

 
3,161

 
1,270

 
175,967

 
7,706

 
183,673

Operating income (loss)
74,422

 
1,527

 
2,048

 
(1,270
)
 
74,422

 
2,305

 
76,727

Net income (loss)
37,810

 
649

 
670

 
(17
)
 
37,810

 
1,302

 
39,112

Depreciation and amortization
32,027

 
350

 
1,112

 

 
32,027

 
1,462

 
33,489

Senior note, mortgage and other interest expense
13,929

 

 
706

 
1,695

 
13,929

 
2,401

 
16,330

Income tax expense (benefit) in net income
24,122

 
521

 
354

 
548

 
24,122

 
1,423

 
25,545

Assets
$
1,359,419

 
18,092

 
75,909

 
921

 
1,359,419

 
94,922

 
1,454,341

 
For Nine Months Ended September 30, 2015
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Corp.
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
207,335

 
4,801

 
5,333

 

 
207,335

 
10,134

 
217,469

Operating expense
161,191

 
3,947

 
3,077

 
979

 
161,191

 
8,003

 
169,194

Operating income (loss)
46,144

 
854

 
2,256

 
(979
)
 
46,144

 
2,131

 
48,275

Net income (loss)
21,955

 
244

 
768

 
(1,277
)
 
21,955

 
(265
)
 
21,690

Depreciation and amortization
29,056

 
323

 
1,170

 

 
29,056

 
1,493

 
30,549

Senior note, mortgage and other interest expense
14,351

 

 
765

 
1,670

 
14,351

 
2,435

 
16,786

Income tax expense (benefit) in net income
13,017

 
329

 
405

 
(1,015
)
 
13,017

 
(281
)
 
12,736

Assets
$
1,233,450

 
18,094

 
66,727

 
5,104

 
1,233,450

 
89,925

 
1,323,375

 *    The “All Other” category includes the accounts of SJW Corp. on a stand-alone basis and SJW Group, Inc. For the three and nine months ended September 30, 2016 and 2015, SJW Group, Inc. had no revenue or expenses and held no assets as of September 30, 2016.


12


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


Note 6.
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.
In April 2015, the FASB issued Accounting Standards Update ASU 2015-03, “Interest — Simplifying the Presentation of Debt Issuance Costs” which became effective for SJW Corp. during the first quarter of 2016. ASU 2015-03 changes the presentation of debt issuance costs for term debt in the balance sheet by requiring the debt issuance costs to be presented as a direct deduction from the related debt liability, rather than recorded as an asset. In August 2015, ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements,” was issued to provide clarification to ASU 2015-03. The standard specifies that the SEC would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. This standard required application on a retrospective basis. Upon adoption of the standard, SJW Corp. reclassified its debt issuance costs totaling $3,561 and $3,638 which was originally included in unamortized debt issuance, broker and reacquisition costs against its long-term debt on the Consolidated Balance Sheets as of September 30, 2016 and December 31, 2015, respectively. There was no impact from adopting the new standard on SJW Corp.'s Consolidated Statements of Comprehensive Income, Changes in Shareholders' Equity, and Cash Flows for the three and nine months ended September 30, 2016 and year ended December 31, 2015.
On June 1, 2016, San Jose Water Company entered into a $125,000 credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as the lender (the “Lender”). The Credit Agreement provides an unsecured credit facility with a letter of credit sublimit of $10,000. Proceeds of borrowings under the Credit Agreement may be used to refinance existing debt, for working capital, and for general corporate purposes. The Credit Agreement has a maturity date of June 1, 2021.
The Credit Agreement contains customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. The Credit Agreement also includes certain financial covenants that require the Company to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio.
On June 1, 2016, the company entered into a fourth amendment to San Jose Water Company’s existing $85,000 credit agreement, dated as of March 1, 2012, as amended from time to time (the “WF Credit Agreement”) with Wells Fargo Bank, National Association (“Wells Fargo”) thereby reducing the maximum principal amount available under such line of credit to $3,060. Pursuant to such amendment, no further borrowing was permitted under the WF Credit Agreement and the WF Credit Agreement remained outstanding for the sole purpose of reimbursing Wells Fargo for any draws against outstanding letters of credit for the California Department of Water Resources' Safe Drinking Water State Revolving Fund (“SDWSRF”) loans and related fees until such letters of credit were replaced or terminated. All outstanding borrowings under the WF Credit Agreement were paid off as of September 30, 2016. Under both the Credit Agreement and the WF Credit Agreement total borrowings could not exceed $125,000. On June 29, 2016, San Jose Water Company paid off the SDWSRF loans' remaining balance of $1,823 which had a maturity date in 2027 and the WF Credit Agreement and letters of credit were terminated on September 27, 2016.
On June 1, 2016, SJW Corp. and SJW Land Company (collectively, the “Borrowers”), entered into a $15,000 credit agreement with the Lender (the “SJW Corp. Credit Agreement”), which provides an unsecured credit facility to the Borrowers with a letter of credit sublimit of $5,000. The SJW Corp. Credit Agreement matures on June 1, 2021. Borrowings under the SJW Corp. Credit Agreement bear interest under the same terms and conditions as those in the Credit Agreement. The SJW Corp. Credit Agreement replaced the then outstanding $15,000 credit agreement, dated March 1, 2012, as amended from time to time, between the Borrowers and Wells Fargo, which was paid off and terminated.
In addition, on June 1, 2016, SJW Corp., as guarantor, and SJWTX, Inc. (the “Borrower”), entered into a $5,000 credit agreement with the Lender (the “SJWTX Credit Agreement”), which provides an unsecured credit facility to the Borrower with a letter of credit sublimit of $1,000. The SJWTX Credit Agreement matures on June 1, 2021.

Note 7.
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, 2016, 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, 2016 approximates their carrying value as reported

13


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


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 valuation technique during the three and nine months ended September 30, 2016. 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 4.
The fair value of SJW Corp.'s long-term debt was approximately $479,521 and $500,035 as of September 30, 2016 and December 31, 2015, 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 $375,783 and $380,678 as of September 30, 2016 and December 31, 2015, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
As of September 30, 2016 and December 31, 2015, the fair value of the Company's investment in California Water Service Group was $3,209 and $6,030, respectively, and would be categorized as Level 1 of the fair value hierarchy.
 
Note 8.
Regulatory Rate Filings
Effective September 15, 2016, the Cupertino City Council authorized San Jose Water Company to implement a 8.6% general rate increase and a 2016 Interim Rate True-Up Surcharge of $0.1832 per CCF to be collected over a 12-month period from customers in the Cupertino leased water system San Jose Water Company operates. The new rates match those previously approved by the CPUC in San Jose Water Company's most recent General Rate Case Decision effective January 1, 2016.

Note 9.
Balancing and Memorandum Account Recovery Procedures
San Jose Water Company established balancing accounts 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, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, WCMA, drought surcharges, Monterey Water Revenue Adjustment Mechanism, and other approved activities or as directed by the CPUC. Balancing and memorandum accounts are recognized 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 WCMA, San Jose Water Company follows the requirements of ASC Topic 980-605-25—“Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Corp. estimates will not be collected within the 24-month period. This reserve is based on the difference between authorized usage in the last general rate case decision and an estimate of actual usage over the recovery period, offset by applicable drought surcharges. 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 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, the balances are recorded in SJW Corp.'s financial statements.
Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $5,863 and $12,624 due to lost revenues accumulated in the 2016 WCMA account for three and nine months ended September 30, 2016, respectively. These regulatory assets were offset by a regulatory liability in the amount of $5,863 and $12,624 for three and nine months ended September 30, 2016, respectively, created by Tariff Rule 14.1 drought surcharges collected during the same period as allowed for in Advice Letter 473A which was approved by the CPUC and became effective June 15, 2015. These amounts have been recorded in the 2016 WCMA row shown in the tables below.
On June 28, 2016, San Jose Water Company filed Advice Letter 492 for a surcharge of $8,767 to true-up the difference between interim rates and 2015 General Rate Case authorized rates, which is expected to be collected during a 12-month recovery period once approved. The $8,767 of revenue was recorded in the 2015 General Rate Case true-up row for the nine months ended September 30, 2016 table below. This amount includes $185 related to water supply accounts that have previously been recorded and have been deducted from the appropriate row in the nine months ended September 30, 2016 table below.

14


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 WCMA*
$
1,563

 
164

 
(1,044
)
 

 
683

 
$

 

 

 

 

2015 WCMA*
4,747

 
528

 
(1,883
)
 

 
3,392

 

 

 

 

 

2016 WCMA

 
5,863

 

 
(5,863
)
 

 

 

 

 

 

All others
1,661

 
232

 
176

 

 
2,069

 
(229
)
 
301

 
150

 

 
222

Total memorandum accounts
7,971

 
6,787

 
(2,751
)
 
(5,863
)
 
6,144

 
(229
)
 
301

 
150

 

 
222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts, net assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
2,641

 
2,420

 
452

 

 
5,513

 
1,070

 
2,153

 
(32
)
 

 
3,191

Drought surcharges
(1,716
)
 

 
(10,467
)
 
5,863

 
(6,320
)
 
(80
)
 

 
(6,333
)
 

 
(6,413
)
Pension
(520
)
 
280

 
(1,055
)
 

 
(1,295
)
 
140

 
(231
)
 
(230
)
 

 
(321
)
2012 General Rate Case true-up
27,740

 

 
(3,850
)
 

 
23,890

 
40,367

 

 
(3,813
)
 

 
36,554

2015 General Rate Case true-up
8,767

 

 
(1,204
)
 

 
7,563

 

 

 

 

 

All others
1,101

 
(106
)
 
(523
)
 

 
472

 
1,453

 
(88
)
 
(17
)
 

 
1,348

Total balancing accounts
$
38,013

 
2,594

 
(16,647
)
 
5,863

 
29,823

 
$
42,950

 
1,834

 
(10,425
)
 

 
34,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
45,984

 
9,381

 
(19,398
)
 

 
35,967

 
$
42,721

 
2,135

 
(10,275
)
 

 
34,581



15


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)


 
Nine months ended September 30, 2016
 
Nine months ended September 30, 2015
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 WCMA*
$
2,944

 
11

 
(2,272
)
 

 
683

 
$

 

 

 

 

2015 WCMA*
5,372

 
431

 
(2,411
)
 

 
3,392

 

 

 

 

 

2016 WCMA

 
12,624

 

 
(12,624
)
 

 

 

 

 

 

All others
594

 
1,298

 
177

 

 
2,069

 
(1,377
)
 
1,122

 
477

 

 
222

Total memorandum accounts
8,910

 
14,364

 
(4,506
)
 
(12,624
)

6,144

 
(1,377
)
 
1,122

 
477

 

 
222

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts, net assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
2,771

 
2,364

 
378

 

 
5,513

 
890

 
2,445

 
(144
)
 

 
3,191

Drought surcharges
(359
)
 

 
(18,585
)
 
12,624

 
(6,320
)
 

 

 
(6,413
)
 

 
(6,413
)
Pension
(552
)
 
840

 
(1,583
)
 

 
(1,295
)
 
1,412

 
(692
)
 
(1,041
)
 

 
(321
)
2012 General Rate Case true-up
33,070

 

 
(9,180
)
 

 
23,890

 
44,400

 
1,937

 
(9,783
)
 

 
36,554

2015 General Rate Case true-up

 
8,767

 
(1,204
)
 

 
7,563

 

 

 

 

 

All others
1,366

 
(332
)
 
(562
)
 

 
472

 
1,735

 
(310
)
 
(77
)
 

 
1,348

Total balancing accounts
$
36,296

 
11,639

 
(30,736
)
 
12,624


29,823

 
$
48,437

 
3,380

 
(17,458
)
 

 
34,359

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
45,206


26,003


(35,242
)



35,967

 
$
47,060

 
4,502

 
(16,981
)
 

 
34,581

* As of September 30, 2016, the reserve balance for the 2014 WCMA and 2015 WCMA was $1,267 and $1,892, respectively, which has been netted from the balances above.
As of September 30, 2016, 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 $2,949. 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.

Note 10.
Regulatory Assets and Liabilities
Regulatory assets and liabilities are comprised of the following as of September 30, 2016 and December 31, 2015:
Description
 
September 30, 2016
 
December 31, 2015
Regulatory assets:
 
 
 
 
Income tax temporary differences, net
 
$
8,184

 
8,184

Postretirement pensions and other medical benefits
 
109,168

 
109,168

Balancing and memorandum accounts, net
 
35,967

 
45,206

Other, net
 
6,005

 
6,005

Total regulatory assets, net in Consolidated Balance Sheets
 
$
159,324

 
168,563

Less: current regulatory asset, net
 
25,661

 
16,542

Total regulatory assets, net, less current portion
 
$
133,663

 
152,021



16


SJW CORP. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2016
(in thousands, except share and per share data)



Note 11.
Texas Water Alliance Limited
On February 22, 2016, SJW Corp. entered into a purchase and sale agreement with the Guadalupe-Blanco River Authority (“GBRA”), pursuant to which SJW Corp. agreed to sell all of its equity interests in its wholly-owned subsidiary Texas Water Alliance Limited to GBRA for $31,000 in cash. Pursuant to the purchase and sale agreement, (i) upon closing of the transaction, GBRA will hold back $3,000 in the payment of the total purchase price and (ii) such holdback amount, subject to reductions under certain circumstances, shall be paid to SJW Corp. four years following the closing. The purchase and sale agreement is subject to specified closing conditions, including without limitation the completion of a financing by GBRA to fund the purchase price. There is no guarantee that all of the closing conditions will be satisfied in a timely manner, or at all. If we are not able to close the sale of TWA timely, or at all, it may adversely affect our business and financial condition.

Note 12.
California Water Service Group Stock
During the quarter ended June 30, 2016, SJW Corp. sold 159,151 shares of California Water Service Group for $4,510, before fees of $20. SJW Corp. recognized a gain on the sale of the stock of approximately $3,197 and tax expense of approximately $1,303, for a net gain of $1,894. The unrealized holding gain associated with the shares sold, that was reclassified out of accumulated other comprehensive income was $1,742 and was based on the fair value of the stock as of June 30, 2016. As of September 30, 2016, SJW Corp. held 100,000 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.

Note 13.
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.


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, 2015.
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 five subsidiaries: San Jose Water Company, SJW Land Company, SJWTX, Inc., Texas Water Alliance Limited and SJW Group, Inc.
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 California Public Utilities Commission (“CPUC”) approval is obtained.
San Jose Water Company also has approximately 410 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, 2016:
 
 
 
 
 
 
 
 
% for Nine months ended
September 30, 2016
of SJW Land Company
Description
 
Location
 
Acreage
 
Square Footage
 
Revenue
 
Expense
2 Commercial buildings
 
San Jose, California
 
2
 
28,000
 
11
%
 
10
%
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
 
44
%
 
52
%
Undeveloped land
 
Knoxville, Tennessee
 
10
 
N/A
 
N/A

 
N/A

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

 
N/A

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 13,000 connections that serve approximately 39,000 people. CLWSC's service area comprises more than 243 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., has acquired permits and leases necessary to develop a water supply project in Texas. TWA obtained groundwater production and transportation permits to meet the future water needs in the CLWSC's service area and to the central Texas hill country communities and utilities adjacent to the area. In February 2016, we entered into an agreement with Guadalupe Blanco River Authority (“GBRA”), pursuant to which SJW Corp. agreed to sell all of its equity interest in TWA to GBRA for $31,000. The agreement is subject to specified closing conditions, including completion of a financing by GBRA to fund the purchase price. There is no guarantee that all of the closing conditions will be satisfied in a timely manner, or at all. If we are not able to close the sale of TWA timely, or at all, it may adversely affect our business and financial condition.
SJW Group, Inc., a Delaware corporation, was formed in March 2015 for the sole purpose of effectuating a change in the state of incorporation of SJW Corp. from California to Delaware (the “Reincorporation”). The Reincorporation requires the approval of the CPUC and Public Utilities Commission of Texas (“PUCT”). On March 24, 2016 and May 26, 2016, the PUCT and the CPUC, respectively, issued a decision authorizing the Reincorporation. We intend to cause the reincorporation to become effective in the fourth quarter of 2016, subject to the completion of certain legal formalities.

Business Strategy for Water Utility Services:
SJW Corp. focuses its business initiatives in three strategic areas:
(1)
Regional regulated water utility operations;
(2)
Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California and the PUCT in Texas; and
(3)
Out-of-region water and utility related services.
As part of our pursuit of the above three strategic areas, the Company 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, the execution of our business strategy will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management's time and resources, 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. Any future acquisition we

19



decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Corp. cannot be certain that any transaction will be successful or that it will not materially harm its operating results or financial condition.
Real Estate Services:
SJW Corp.'s real estate investment activity is conducted through SJW Land Company. SJW Land Company owns undeveloped land in the states of California and Tennessee and owns and operates a portfolio of commercial buildings in the states of California, Arizona and Tennessee. On October 13, 2016, title to the Arizona property transferred from SJW Land Company as a result of the Arizona Department of Transportation exercising their powers of eminent domain. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion on the Arizona property. 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 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:
The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2015 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2015.
Our critical accounting policies are described in Management's Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2015. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2015 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2015.

Impact of Recent Accounting Pronouncements:
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers” which supersedes most of the current revenue recognition requirements, including most industry-specific guidance. On July 9, 2015, the FASB agreed to defer by one year the mandatory effective date, but will also provide entities the option to adopt it as of the original effective date. The updated standard will become mandatory for SJW Corp. in the first quarter of 2018 and permits the use of either the retrospective or cumulative effect transition method. Management is currently evaluating the effect that the new standard will have on our consolidated financial statements and related disclosures and anticipates that the new standard will not have a material impact on our consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall” which will significantly change the recognition of changes in fair value of financial liabilities when the fair value option is elected and require equity investments to be measured at fair value with changes in fair value recognized in net income instead of through other comprehensive income. The update is effective for SJW Corp. beginning in the first quarter of the fiscal year ending December 31, 2018. Management is currently evaluating the effect that the new standard will have on our consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU affects entities that issue share-based payment awards to their employees. ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. The update will become effective for SJW Corp. in the first quarter of fiscal 2017. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.


20



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.
See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and political and regulatory activities that have occurred in response to ongoing drought conditions.
Overview
SJW Corp.'s consolidated net income for the three months ended September 30, 2016 was $18,959, an increase of $9,425, or approximately 99%, from $9,534 for the same period in 2015. SJW Corp.'s consolidated net income for the nine months ended September 30, 2016 was $39,112, an increase of $17,422, or approximately 80%, from $21,690 for the same period in 2015. The increase in net income for the three months ended September 30, 2016 was primarily due to an increase in operating revenue as a result of an increase in rates, recognition of $6,555 in revenue from the Water Conservation Memorandum Account (“WCMA”) and an increase in customer usage. The increase in net income for the nine months ended September 30, 2016 was primarily due to an increase in operating revenue as a result of an increase in rates, recognition of $13,067 in revenue from the WCMA, net recognition of $6,830 in true-up revenue resulting from the 2012 and 2015 General Rate Case decisions. In addition, a gain on the sale of 159,151 shares of California Water Service Group generated a pre-tax increase of $3,197 for the nine months ended September 30, 2016.
Operating Revenue
 
Operating Revenue by Segment
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Water Utility Services
$
110,558

 
81,203

 
$
255,191

 
212,136

Real Estate Services
1,786

 
1,752

 
5,209

 
5,333

 
$
112,344

 
82,955

 
$
260,400

 
217,469

The change in consolidated operating revenues was due to the following factors:
 
Three months ended
September 30,
2016 vs. 2015
 
Nine months ended
 September 30,
2016 vs. 2015
Increase/(decrease)
 
Increase/(decrease)
Water Utility Services:
 
 
 
 
 
 
 
Consumption changes
$
9,517

 
11
%
 
$
545

 
%
Increase in customers
225

 
%
 
504

 
%
Rate increases
12,368

 
15
%
 
20,501

 
10
%
Balancing and memorandum accounts:


 
 
 


 
 
2012 & 2015 General Rate Case true-up

 
%
 
6,830

 
3
%
WCMA
6,555

 
8
%
 
13,067