SJW Corporation

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SJW Corporation

374 West Santa Clara Street
San Jose, California 95196
U.S.A.
Telephone: (408) 279-7800
Fax: (408) 279-7934
Web site: http://www.sjwater.com

Public Company
Incorporated: 1866 as San Jose Water Company
Employees: 301
Sales: $149.7 million
Stock Exchanges: American
Ticker Symbol: SJW
NAIC: 221310 Water Supply and Irrigation Systems

SJW Corporation, based in San Jose, California, is a holding company for three subsidiaries. The primary business is the San Jose Water Company, a public utility serving the metropolitan San Jose area, comprised of 138 square miles and home to about 1 million people. SJW Land Company primarily owns and operates parking facilities located close to the water company's headquarters, in addition to owning some commercial buildings and undeveloped land in San Jose as well as parcels in Florida and Connecticut. The third SJW subsidiary is 75-percent owned Crystal Choice Water Service, which provides water softening and purification systems to residential customers. SJW also owns 1.1 million shares of California Water Service Group, a San Jose-based water company serving customers in California, New Mexico, and Hawaii. SJW is a public company trading on the American Stock Exchange.

Mid-19th Century Origins

Because of plentiful supplies of water, the San Jose area of the Santa Clara Valley was well populated by Native Americans even before the Spanish established a settlement there in the 1770s. The Spanish built a network of acequias, essentially open ditches of flowing water, which served the growing population until the mid-1800s. However, the water supply was subject to floods and droughts and proved a ready place for mosquitoes to breed and spread cholera and typhoid. In 1854, the first artesian well was dug in San Jose, providing a safe supply of potable water. A local foundry owner named Donald McKenzie recognized that the delivery of water offered a business opportunity. He build two water tanks at the San Jose Foundry, and in February 1865 acquired the rights to provide water to the residents of San Jose and Santa Clara, 400 people in all, and agreed to also provide water for fire protection. With partners John Bonner and Anthony Chabot, he then incorporated the San Jose Water Company in November 1866 to operate the 25-year franchise. With $100,000 in capital, the company quickly installed water mains, prompting instant demand for service. The demand was so strong that it soon became apparent that artesian wells, because they were subject to effects of dry weather, were not a reliable enough water source to support expansion of the company. The company now looked to the Santa Cruz Mountains, which offered a potentially vast supply of water if rainfall could be trapped and stored in reservoirs.

In December 1868, San Jose Water was reincorporated and its capital stock increased to $300,000, the extra funds needed to build the company's first reservoirs. The effort was overseen by Nathaniel Mason, McKenzie's replacement as company president, in 1869. The Seven-Mile Reservoir was completed in 1870, followed a year later by the Three-Mile Reservoir. Also in 1871, the Tisdale Reservoir, named for local banker William Tisdale opened. It was a joint venture with the Los Gatos Manufacturing Company, a flour mill that relied on water power and had already built dams and reservoirs for its own purposes. The two companies worked closely together until 1886, at which point Los Gatos Manufacturing became a competitor by purchasing the Los Gatos Water Company. In 1890, San Jose Water resolved the conflict by acquiring Los Gatos Manufacturing, in the process adding Los Gatos water customers.

In 1874, Edward Williams became company president, a post he held until the end of the century, except for a two-year stint, 1894 to 1896, when banker Tisdale held the job. During William's tenure, San Jose Water expanded steadily. In the 1870s, the company opened a pair of reservoirs, Lake McKenzie and Lake Kittredge, followed by Lake Cozzens in 1882. Lake Williams Reservoir opened in 1895 under Tisdale's watch. Also in 1895, the company lost the Santa Clara business when that community elected to build a municipal water works. When Williams returned as president, the company made up for the loss in 1899 by acquiring Mountain Springs Water Company.

Steady Expansion through the 1970s

Williams' successor, George W. Cozzens, continued a policy of buying land along the key Los Gatos Creek, but he soon faced a major challenge involving another area stream known as Coyote Creek. Water from this and other streams fed a plentiful artesian belt around San Jose, and starting in 1903 San Jose Water began digging wells to tap into for additional water supplies to meet its growing need. However, another enterprise, the Bay Cities Water Company, saw an opportunity to siphon off 80 million gallons a day for sale to San Francisco and Oakland, and thus bought 1500 acres of land in the Coyote watershed. San Jose Water and valley ranchers vigorously opposed the idea, leading to a two-year court fight that they ultimately won in 1905.

Due to poor health, Cozzens resigned in 1907, replaced by George McKee, during whose five-year term San Jose Water beefed up its infrastructure, adding nine wells and pumping stations. Joseph Ryland took over as president in 1912, a post he held until 1928. During his tenure, the company's 50-year charter of incorporation expired in 1916, leading to the creation of San Jose Water Works, which took over all the franchises controlled by San Jose Water. Also during Ryland's 16 years, the company picked up additional water rights along Los Gatos Creek from Pacific Gas and Electric Company and in 1919 acquired Cottage Grove Water Works and Cherryhurst Water Company. In 1928, Ryland added another 300 customers through the purchase of Willow Glen Water Works. By the time Ryland was succeeded as president by Seymour Kittredge in 1928, San Jose Water was serving 23,000 customers.

During Kettredge's nine-year term, San Jose Water experienced a number of noteworthy changes, as did the water industry as a whole due to an acquisition spree of eastern utility holding companies, which bought up water companies and other utilities during the late 1920s. In 1929, General Water Works and Electric Company bought a controlling interest in San Jose Water for $5.1 million, but management remained unchanged and the company carried on as before. A major effort during this period was the replacement of a wooden flume, more than 50 years old, that connected Los Gatos Creek to Jones Dam. The new metal flume constructed by the company would now be able to direct some ten million gallons of water a day to its distribution system. During the 1930s, San Jose Water continued its land purchases. The most notable deal was the 1936 purchase of the entire town of Wrights, located in the Santa Cruz mountains.

In 1937, San Jose Water hired a new president, Ralph Elsman, who was to hold the job longer than any person in company history, serving 31 years until 1968. He also became president and general manager of California Water Service Company, a General Water subsidiary that in 1940 moved its offices to the newly enlarged building that housed San Jose Water's headquarters, although it remained independently operated. Early in Elsman's tenure, a bid to place San Jose Water under municipal ownership was defeated by a public vote and the company remained commercially owned. After World War II, Elsman left his mark on the company in a number of ways. After San Jose Water gained its independence from General Water in 1945, Elsman placed it on a more secure financial footing by reorganizing the company and taking it public. During his three decades at the top, he also oversaw the spending of $60 million in capital improvements and an increase in the amount of surface water the company could store by two billion gallons. This expansion of the utility plant was made all the more necessary by tremendous economic growth in the Santa Clara Valley. Much of that additional storage capacity came from the Austrian Dam, built in 1951. Demand for water grew so strong that despite the addition of new wells and hundreds of miles of new mains installed, San Jose Water was unable to keep pace. In the mid-1960s, the company began drawing on water imported to the valley to supplement supplies. Before leaving the company, Elsman saw computers become involved in the running of the utility. In 1965, a computerized operations system was installed to monitor water levels and make optimum use of pumps.

In 1968, Nathaniel Kendall, the company's chief engineer who had been responsible for the construction of the Austrian Dam, succeed Elsman as president of San Jose Water. During his six-year stint, there was renewed interest from the city of San Jose to acquire the company, but nothing came out of the many talks the parties held on the subject. Kendall's replacement, J.W. Weinhardt, took over in 1974 and saw San Jose Water through the rest of the century in a career with the company that lasted nearly 40 years. His first contact with San Jose Water came in 1959 when he worked as an accountant for Peat Marwick Mitchell and conducted an audit of the utility. In 1963, he was recruited by San Jose Water to become chief controller. He accepted the job and worked his way up through the ranks over the next decade.

Company Perspectives:

We serve 1 million people with high quality, life sustaining water, with an emphasis on customer service.

Changes and Growth through the Mid-1990s

During Weinhardt's tenure, San Jose Water's distribution system was put to the test by a drought that lasted from 1976 to 1977. Although the company was able to meet demand, it instituted a water conservation program, distributing kits to customers that included showerhead flow restrictors, toilet displacement bottles, and dye tablets to detect leaks. The program showed immediate results, as water usage decreased by 23 percent from 1976 to 1977. During this period, the company also improved its customer service capabilities by installing an online computer information system in 1977 that replaced manual ledgers and provided customer service representatives with up-to-the-moment billing information on a computer screen. Because San Jose Water's infrastructure was aging, with a large number of mains over 100 years old and too small to keep up with contemporary demands, Weinhardt devoted much of his attention to upgrading the distribution system. He also expanded the company through acquisition. In 1980, the 5,300 customers of the Campbell Water Company were added to the 190,000 customers San Jose Water already served.

In 1983, the company changes its name from San Jose Water Works to San Jose Water Company. Two years later, in February 1985, the company's shareholders agreed to create a holding company called SJW Corporation to provide the company with greater flexibility to engage in non-utility business. In July 1985, SJW acquired San Jose Water in a stock exchange, with the stock of the holding company now trading on the American Stock Exchange in place of San Jose Water. Then, in October, SJW created SJW Land Company, which subsequently acquired real estate assets from San Jose Water. About one-third of SJW was owned by Roscoe Moss Company, a Los Angeles water drilling company that had been slowly buying up the stock since 1978. Roscoe Moss and his brother George Moss each sat on the SJW board and were open about their desire to one day gain majority control of SJW. Far from a hostile takeover, the effort was friendly and leisurely paced. Finally, in 1992, Roscoe Moss and SJW merged, and in the process SJW added the business of Western Precision Inc., a Sunnyvale, California, metal machining company. SJW held onto the company until 1995 when Western Precision's management team bought the business for $2 million. Through the merger, SJW also picked up a 9.7 percent stake in California Water Services.

Surviving in the Late 1990s and Beyond

In 1997, San Jose Water took over the operation of the City of Cupertino's water system under the terms of a 25-year lease. By the end of decade, the company served more than 970,000 customers. It was at this point that SJW's management hired Morgan Dean Witter to explore strategic options, including the sale of the company, which had an estimated market value of approximately $265 million. However, it was likely to command a much higher price in light of consolidation taking place in the water industry, spurred by the buying sprees of French companies Vivendi and Suez Lyonnaise, which had emerged as international giants in recent years. In less than a month, SJW agreed to a $390 million offer, plus the assumption of $90 million in debt, from New Jersey-based American Water Works, one of America's largest investor-owned water utilities. Already in 1999, it had completed 16 acquisitions, but gaining approval from the California Public Utilities Commission for the SJW deal proved problematic. Regulators continually postponed the date for making a final decision on the application. In February 2001, frustrated that the deadline had now been pushed back to September 2001 (almost two years after a tentative agreement had been struck), American Water Works walked away from the deal, fearful that in September the decision would once again be kicked down the road. As a result of the commission's lack of action, the suitors that had once lined up to bid for SJW shied away. In the meantime, Weinhardt stepped down as chief executive in 1999, replaced by W. Richard Roth, although he remained as chairman.

Another deal that went awry was San Jose Water's attempt in 2002 to take over the operation of San Jose's municipal water system, which served the 20 percent of area residents not covered by San Jose Water. The matter became a contentious political issue, but despite intense lobbying by San Jose Water the plan never came to fruition. During the early 2000s, SJW enjoyed success on other fronts, however. In 2001, after a year of test marketing, it launched Crystal Choice Water Service LLC, a 75 percent majority-owned joint venture with Kinetico Incorporated. It offered San Jose Water customer's a chance to rent or purchase Kinetico's total home water treatment system, which combined in a single unit chlorine removal, water softening, and a reverse osmosis process to produce drinking water. San Jose Land also began to develop property near the HP Pavilion in downtown San Jose.

In May 2002, Weinhardt retired as chairman and was succeeded by Drew Gibson, a director since 1986. Weinhardt's departure marked the end of an era for San Jose water and its parent SJW, as his tenure spanned almost a third of the company's history. Although SJW was a relatively small company, generating revenues of close to $150 million and net income of $18.7 million in 2003, there was every reason to expect it to continue on as a profitable concern for years to come.

Principal Subsidiaries

San Jose Water Company; SJW Land Company; Crystal Choice Water Service LLC (75%).

Principal Competitors

American States Water Company; American Water Works Company, Inc.; Southwest Water Company.

Key Dates:

1866:: San Jose Water Company is formed to serve Santa Clara and San Jose.
1895:: Santa Clara builds a municipal water system.
1913:: The company is reorganized as San Jose Water Works.
1929:: General Water Works and Electric Company acquires the company.
1937:: Ralph Elsman begins a 31-year-tenure as president.
1951:: Austrian Dam is built.
1974:: J.W. Weinhardt is named president.
1985:: Holding company JSW Corporation and subsidiary SJW Land Company are formed.
2001:: Crystal Choice Water Service is launched.
2002:: Weinhardt retires.