SJW GROUP 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 condensed consolidated financial statements and notes thereto and the related "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained inSJW Group's Annual Report on Form 10-K for the year endedDecember 31, 2021 . This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results ofSJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections aboutSJW Group and its subsidiaries and the industries in whichSJW Group and its subsidiaries operate and the beliefs and assumptions of the management ofSJW Group . Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that may affect our actual results, please see our disclosures under "Forward-Looking Statements," and elsewhere in this Form 10-Q, including Part II, Item 1A under "Risk Factors." General:
SJWC is a public utility in the business of providing water service to approximately 232,000 connections that serve a population of approximately one million people in an area comprising approximately 139 square miles in the metropolitanSan Jose, California area. The principal business of SJWC consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. SJWC provides water service to customers in portions of the cities ofSan Jose andCupertino and in the cities ofCampbell ,Monte Sereno , andSaratoga and theTown of Los Gatos , and adjacent unincorporated territories, all in theCounty of Santa Clara in theState of California . SJWC distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. SJWC also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site leases. SJWC 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 serve its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unlessCalifornia Public Utilities Commission ("CPUC") approval is obtained.
SJWC also has approximately 234 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 SJWC's various watershed properties.
SJWNE LLC is the holding company forConnecticut Water Service, Inc. ("CTWS"). CTWS, headquartered inConnecticut , serves as a holding company for water utility companies providing water service to approximately 141,000 connections that serve a population of approximately 459,000 people in 81 municipalities throughoutConnecticut andMaine and more than 3,000 wastewater connections inSouthbury, Connecticut . The subsidiaries held by CTWS that provide utility water services are TheConnecticut Water Company ("Connecticut Water") andThe Maine Water Company ("Maine Water"). The remaining two CTWS subsidiaries areChester Realty, Inc. , a real estate company inConnecticut , andNew England Water Utility Services, Inc. ("NEWUS"), which provides contract water and sewer operations and other water related services. The properties of CTWS's subsidiaries consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, water treatment plants, pumping plants, transmission and distribution mains and other facilities and equipment used for the collection, purification, storage and distribution of water throughoutConnecticut andMaine . In certain cases, Connecticut Water and Maine Water are or may be a party` to limited contractual arrangements for the provision of water supply from neighboring utilities.SJWTX, Inc. , doing business asCanyon Lake Water Service Company ("CLWSC"), is a public utility in the business of providing water service to approximately 24,000 connections that serve approximately 73,000 people. CLWSC's service area comprises more than 267 square miles inBandera ,Blanco ,Comal ,Hays , Kendall,Medina andTravis County in the growing region betweenSan Antonio andAustin, Texas .SJWTX, Inc. holds a 25% equity interest inAcequia Water Supply Corporation . Acequia has been determined to be a variable interest entity within the scope of ASC Topic 810 withSJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated withSJWTX, Inc. SJWTX, Inc is undergoing a corporate reorganization to separate regulated operations from non-tariffed activities. InNovember 2021 ,SJWTX Holdings , 18 -------------------------------------------------------------------------------- Inc. ("SJWTX Holdings ") andTexas Water Operation Services LLC ("TWOS") were formed for the purpose of effecting a corporate reorganization of our water services organization inTexas . TWOS was created for non-tariffed operations and is wholly-owned bySJWTX Holdings .SJWTX Holdings is a wholly-owned subsidiary ofSJW Group , incorporated to hold the investments inSJWTX, Inc. and TWOS. In addition,SJWTX Holdings intends to create a new subsidiary to hold future wholesale water supply assets prior to the end of 2022.SJW Land Company andChester Realty, Inc. own undeveloped land and operate commercial buildings inTennessee ,California andConnecticut .SJW Land Company andChester Realty, Inc. owned the following real properties during the six months endedJune 30, 2022 : % for Six months ended June 30, 2022 of SJW Land Company Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 52 % 42 % Commercial building Knoxville, Tennessee 15 135,000 47 % 57 % Undeveloped land and parking lot Knoxville, Tennessee 10 N/A N/A N/A Undeveloped land San Jose, California 101 N/A N/A N/A Commercial building Clinton, CT 22 9,000 1 % 1 % Commercial building Guilford, CT 1 1,300 - % - %
Business Strategy for Water Utility Services:
(1)Regional regulated water utility operations;
(2)Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC inCalifornia , thePublic Utilities Regulatory Authority ("PURA") inConnecticut , thePublic Utilities Commission of Texas ("PUCT") inTexas , and theMaine Public Utilities Commission ("MPUC") inMaine ; and
(3)Out-of-region water and utility related services.
As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets. However, we cannot be certain we will be successful in identifying and consummating any strategic business combination or 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 our financial position and operating results, entering markets in which we have no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic combination or acquisition we 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 Group cannot be certain that any transaction will be successful or that it will not materially harm operating results or our financial condition.
Real Estate Services:
SJW Group's real estate investment activity is conducted throughSJW Land Company andChester Realty, Inc. As noted above,SJW Land Company owns undeveloped land and operates commercial buildings inTennessee .Chester Realty, Inc. owns and operates land and commercial buildings inConnecticut .SJW Land Company andChester Realty, Inc. manage income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties.
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 2021 consolidated
financial statements and accompanying notes that were prepared in accordance
with
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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, 2021 , that was filed with the Securities and Exchange Commission on
February 28, 2022 .
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, 2021 . Our significant
accounting policies are described in our notes to the 2021 Consolidated
Financial Statements included in our annual report on Form 10-K for the year
ended December 31, 2021 . There have been no changes to our critical or
significant accounting policies during the three months ended June 30, 2022 .
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. OverviewSJW Group's consolidated net income for the three months endedJune 30, 2022 , was$11,558 , a decrease of$9,217 , or approximately 44%, from$20,775 for the same period in 2021. Consolidated net income includes a one-time impact of$441 related to SJWC's Order Instituting Investigation settlement expenses.SJW Group's consolidated net income for the six months endedJune 30, 2022 , was$15,295 , a decrease of$8,096 , or approximately 35%, from$23,391 for the same period in 2021. Consolidated net income in 2022 includes a gain on the sale of nonutility property of$4,450 , offset by the one-time impacts of$1,960 related to depreciation on certainCupertino concession assets and$1,709 related to SJWC's Order Instituting Investigation settlement expenses and certain true-ups of deferred taxes and acquisition related tax expenses.
Operating Revenue
Operating Revenue by Segment
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Water Utility Services $ 147,675 150,921 $ 270,621 264,362
Real Estate Services 1,366 1,320 2,722 2,664
$ 149,041 152,241 $ 273,343 267,026
The change in consolidated operating revenues was due to the following factors:
Three months ended Six months ended
June 30, June 30,
2022 vs. 2021 2022 vs. 2021
Increase/(decrease) Increase/(decrease)
Water Utility Services:
Consumption changes (including unbilled utility
revenue) $ (6,631) (4) % $ (4,829) (2) %
Increase in customers 417 - % 2,881 1 %
Rate increases 7,524 5 % 12,687 5 %
Balancing and memorandum accounts (48) - % 755 - %
Other regulatory mechanisms (4,672) (3) % (5,498) (2) %
Other 164 - % 264 - %
Real Estate Services 46 - % 57 - %
$ (3,200) (2) % $ 6,317 2 %
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Operating Expense
Operating Expense by Segment
Three months ended June 30, Six months ended June 30,
2022 2021 2022 2021
Water Utility Services $ 121,227 117,514 $ 226,657 217,361
Real Estate Services 915 881 1,824 1,762
All Other 497 1,207 1,871 2,185
$ 122,639 119,602 $ 230,352 221,308
The change in consolidated operating expenses was due to the following factors:
Three months ended Six months ended
June 30, June 30,
2022 vs. 2021 2022 vs. 2021
Increase/(decrease) Increase/(decrease)
Water production expenses:
Change in surface water use $ (1,805) (2) % $ (3,651) (2) %
Change in usage and new customers (6,913) (6) % (7,224) (3) %
Purchased water and groundwater extraction charge, energy price change and other production expenses, net
6,636 6 % 11,131 5 %
Balancing and memorandum accounts cost recovery 756 1 % 1,170 - %
Total water production expenses (1,326) (1) % 1,426 - %
Administrative and general 1,427 1 % 3,632 2 %
Balance and memorandum account cost recovery 507 1 % 1,615 1 %
Maintenance 304 - % 734 - %
Property taxes and other non-income taxes 430 - % 1,224 - %
Depreciation and amortization 1,695 1 % 5,863 3 %
Gain on sale of nonutility properties - - % (5,450) (2) %
$ 3,037 2 % $ 9,044 4 %
Sources of Water Supply
SJWC's water supply consists of imported water purchased from the Santa Clara
Valley Water District ("Valley Water") under the terms of a master contract with
Valley Water expiring in 2051, groundwater from wells, surface water from
watershed run-off and diversion, and reclaimed water. 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
water supply cost. In addition, the water rate for purchased water and the
groundwater extraction charge may be increased by Valley Water at any time. If
an increase occurs, then SJWC would file an advice letter with the CPUC seeking
authorization to increase customer rates to offset the cost increase.
We are currently experiencing a severe drought in California that is expected to
have a significant impact on the sources of our water supply. On July 1, 2022 ,
Valley Water's 10 reservoirs were at approximately 22% of total capacity with
11,822 million gallons of water in storage, which is 40% of the twenty-year
average for this date. Valley Water's largest reservoir, Anderson, remains
drained for a dam seismic retrofit project. As reported by Valley Water, there
was 8.35 inches of rainfall in San Jose during the current annual rainfall
season that commenced on July 1, 2021 . Rainfall at SJWC's Lake Elsman was
measured at 37.50 inches during the current rainfall season compared to the
five-year average of 47.17 inches. Under normal hydrologic conditions, state and
federal water allocations represent approximately 40% of the Valley Water's
total annual water supply. As of July 1, 2022 , Valley Water reported that
allocations from the State Water Project was 5% or 1,629 million gallons and an
additional allocation of human health and safety water has been secured. The
U.S. Bureau of Reclamation allocation remains at public health and safety water
only. Valley Water reported that its Semitropic groundwater bank reserves are at
80% of capacity or 91,747 million gallons, which can be used to perform water
transfers with other state water contractors. Valley Water also reported that
the managed groundwater recharge from January to June in the Santa Clara Plain
was 84% of the five-year average. The groundwater level in the Santa Clara Plain
is approximately 10 feet higher than June 2021 . According to Valley Water, the
projected total groundwater storage at the end of 2022 is expected to fall
within the Alert Stage of Valley Water's Water Shortage Contingency Plan.
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On July 1, 2022 , SJWC's Lake Elsman contained 1,099 million gallons of water, of
which approximately 949 million gallons can be released for treatment in water
production and maintaining downstream bypass flow regulatory requirements. This
Lake Elsman volume represents 91% of the five-year average. Local surface water
is a less costly source of water than groundwater or purchased water and its
availability significantly impacts SJWC's results of operations. Typically, SJWC
will utilize surface water and additional water from its portfolio of
groundwater supplies to supplement imported water from Valley Water. Production
from the Montevina Surface Water Treatment Plant through the second quarter was
996 million gallons, which is 88% of the five-year average. Through the second
quarter of 2022, there was 43 million gallons of water production at SJWC's
smaller Saratoga Water Treatment Plant . The Saratoga Water Treatment Plant is
out of service due to lack of run-off from Saratoga Creek and remains offline.
Nonetheless, SJWC believes that its various other water supply sources will be
sufficient to meet customer demand through the remainder of 2022.
On June 9, 2021 , Valley Water declared a water shortage emergency and asked its
retailers to reduce consumption by 15% based on 2019 usage. In response to
Valley Water's declaration of drought emergency and call for conservation, SJWC
filed with the CPUC to activate Stage 3 of its Rule 14.1 Water Shortage
Contingency Plan. Like the most recent drought, the current restrictions center
on outdoor water usage which typically accounts for half of a residential
customer's consumption. The restrictions include limits on watering days and
times, use of potable water for washing structures and other non-porous surfaces
except to protect public health and safety, and no outdoor watering during and
up to 48 hours after measurable rainfall.
Connecticut Water's infrastructure consists of 65 noncontiguous water systems in
the State of Connecticut . These systems, in total, consist of approximately
1,800 miles of water main and reservoir storage capacity of 2.4 billion
gallons. The safe, dependable yield from our 235 active wells and 18 surface
water supplies is approximately 65 million gallons per day. Water sources vary
among the individual systems, but overall approximately 80% of the total
dependable yield comes from surface water supplies and 20% from wells.
CLWSC's water supply consists of groundwater from wells and purchased treated
and untreated raw water from local water agencies. 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
7,650 acre-feet of water per year from Canyon Lake at prices that may be
adjusted periodically by GBRA. CLWSC also has raw water supply agreements with
the Lower Colorado River Authority ("LCRA") and West Travis Public Utility
Agency ("WTPUA") expiring in 2059 and 2046, respectively, to provide for 350
acre-feet of water per year from Lake Austin and the Colorado River,
respectively, at prices that may be adjusted periodically by the agencies.
Production wells located in a Comal Trinity Groundwater Conservation District , a
regulated portion of the Trinity aquifer, are charged a groundwater pump tax
based upon usage.
Maine Water's infrastructure consists of 12 noncontiguous water systems in the
State of Maine . These systems, in total, consist of approximately 600 miles of
water main and reservoir storage capacity of 7.0 billion gallons. The safe,
dependable yield from our 14 active wells and 7 surface water supplies is
approximately 120 million gallons per day. Water sources vary among the
individual systems, but overall approximately 90% of the total dependable yield
comes from surface water supplies and 10% from wells.
The following table presents the change in sources of water supply, in million gallons, for Water Utility Services:
Three months ended June 30 , Increase/ % of Total Six months ended June 30 , Increase/ % of Total
2022 2021 (decrease) Change 2022 2021 (decrease) Change
Purchased water 5,274 5,885 (611) (4) % 9,038 9,257 (219) (1) %
Groundwater 5,062 5,964 (902) (6) % 8,920 10,567 (1,647) (7) %
Surface water 2,720 2,368 352 2 % 5,287 4,475 812 3 %
Reclaimed water 247 243 4 - % 372 328 44 - %
13,303 14,460 (1,157) (8) % 23,617 24,627 (1,010) (5) %
The changes in the source of supply mix were consistent with the changes in the water production expenses.
SJWC's unaccounted-for water on a 12-month-to-date basis forJune 30, 2022 , and 2021 approximated 7.5% and 7.1%, respectively, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially offset by SJWC's main replacements and lost water reduction programs. CTWS's unaccounted-for water on a 12-month-to-date basis forJune 30, 2022 , and 2021 was approximately 13.5% and 15.7%, respectively, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through CTWS's systems, unadjusted for any required system flushing, partially offset by Water Infrastructure Conservation Adjustment and Water Infrastructure Surcharge main replacement programs and lost water reduction initiatives. 22 --------------------------------------------------------------------------------
Water Production Expenses
The change in water production expenses for the three and six months endedJune 30, 2022 , compared to the same period in 2021, was primarily attributable to increases in average per unit costs for purchased water, groundwater extraction, energy charges and other production expenses, offset by a decrease in customer usage and an increase in available surface water for SJWC. EffectiveJuly 1, 2021 , Valley Water increased the unit price of purchased water by approximately 9.5% and the groundwater extraction charge by approximately 9.1%. SJWC was notified by Valley Water that the unit price of purchased water and groundwater extraction charges was increased 13.9% and 15%, respectively, effectiveJuly 1, 2022 . Other Operating Expenses Operating expenses, excluding water production expenses, increased$4,363 for the three months endedJune 30, 2022 , compared to the same period in 2021. The increase was primarily attributable to increases of$1,934 in administrative and general expenses primarily due to increases in labor and group insurance costs, and an increase of$1,695 in depreciation and amortization due to increases in utility plant. Operating expenses, excluding water production expenses, increased$7,618 for the six months endedJune 30, 2022 , compared to the same period in 2021. The increase was primarily attributable to increases of$5,863 in depreciation and amortization due to increases in utility plant and a true up related toCupertino assets to adjust the useful lives over the concession term, and an increase of$5,247 in administrative and general expenses primarily due to increases in labor and group insurance costs, partially offset by$5,450 from the gain on sale of vacant land located inCalifornia and nonutility property inTexas . Other (Expense) Income For the three and six months endedJune 30, 2022 , compared to the same period in 2021, the change in other (expense) income was primarily due to the$3,000 pre-tax gain on sale from the release of a holdback amount by GBRA for the sale of TWA, an increase in interest on long term debt and a decrease on the return from retirement plan assets, partially offset by income generated from pension non service cost. Provision for Income Taxes For the three and six months endedJune 30, 2022 , compared to the same period in 2021, income tax expense decreased$938 and increased by$1,025 , respectively. The decrease in income tax expense for the three months endedJune 30, 2022 was primarily due to a decrease in pre-tax book income while the increase in income tax expense for the six months endedJune 30, 2022 was primarily due to discrete tax expense items. The effective consolidated income tax rates were 17% and 14% for the three months endedJune 30, 2022 , and 2021, respectively, and 18% and 9% for the six months endedJune 30, 2022 , and 2021, respectively. The higher effective rate for the three and six months endedJune 30, 2022 , was also primarily due to discrete tax expense items.
Regulation and Rates
Almost all of the operating revenue ofSJW Group results from the sale of water at rates authorized by the subsidiaries' respective state utilities commissions. The state utilities commissions set rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations.
Please also see Note 2 of "Notes to Condensed Consolidated Financial Statements."
California Regulatory Affairs
OnJanuary 4, 2021 , SJWC filed General Rate Case Application No. 21-01-003 requesting authority for an increase of revenue of$51,585 or 13.35% in 2022,$16,932 or 3.88% in 2023, and$19,195 or 4.24% in 2024. The application also includes requests to recover$18,499 from balancing and memorandum accounts, authorization for a$435,000 capital budget, further alignment between actual and authorized usage, and a shift to greater revenue collection in the service charge. Review of the application is currently underway by the CPUC and new rates, if approved, are expected to be effective in the fourth quarter of 2022. Due to the processing delay, SJWC filed Advice Letter No. 573 onDecember 30, 2021 , to request interim rates effectiveJanuary 1, 2022 , which will allow SJWC to retroactively apply the final decision toJanuary 1, 2022 . Interim rates were requested to equal the present rates in effect to avoid customer confusion and short-term bill changes. This advice letter was approved with an effective date ofJanuary 1, 2022 . SJWC and the Public Advocates Office filed an amended settlement agreement resolving all issues in the proceeding onFebruary 4, 2022 , which will be considered by the CPUC for adoption. The settlement provides a revenue increase of$54,131 over the three-year period with an increase of$25,074 in 2022. The settlement recognizes the need for continued investments in the water system to deliver safe and reliable water service, providing authorization of a three-year$350,000 capital budget. Additionally, it further aligns authorized and actual consumption, particularly for business customers, addresses the water supply mix variability, and provides greater revenue 23 --------------------------------------------------------------------------------
recovery in the fixed charge. The settlement also approves the recovery of
OnMay 3, 2021 , SJWC filed Application No. 21-05-004 requesting authority to adjust its cost of capital for the period fromJanuary 1, 2022 throughDecember 31, 2024 . The request seeks a revenue increase of$6,418 or 1.61% in 2022. The application also proposes a rate of return of 8.11%, an increase from the current rate of 7.64%, a decrease in the average cost of debt rate from 6.20% to 5.48%, and a return of equity of 10.30%, an increase from the current rate of 8.90%. In addition, the request seeks to adjust SJWC's currently authorized capital structure of approximately 47% debt and 53% equity to approximately 45% debt and 55% equity. If approved, new rates are expected to be effective in the third quarter of 2022. OnDecember 6, 2019 , SJWC filed Application No. 19-12-002 to deploy Advanced Metering Infrastructure ("AMI") throughout its service area. OnAugust 5, 2021 , an all-party settlement agreement was submitted to the CPUC for adoption that would authorize the deployment of AMI outside of the capital budget requested in the 2021 GRC. A final decision approving the settlement agreement was issued onJune 10, 2022 . OnMay 3, 2022 , SJWC filed Advice Letter 575 to increase revenue requirement by$232 or 0.06% for utility plant improvements to the Franciscan Station Pumps. This advice letter was approved onJune 10, 2022 with an effective date ofJuly 1, 2022 . SJWC filed Advice Letter No. 577 onMay 24, 2022 to increase revenue requirement by$24,331 or 5.9% to offset the increases to purchased potable water charges, the groundwater extraction fee, and purchased recycled water charges from its water wholesalers effectiveJuly 1, 2022 . Advice Letter No. 577 was approved onJune 30, 2022 .
Connecticut Regulatory Affairs
OnOctober 26, 2021 , Connecticut Water filed for a Water Infrastructure Conservation Adjustment ("WICA") increase of approximately$21,746 in completed projects. Many of the projects were those that were not considered by PURA in the rate case because of the deadline in the proceeding for pro forma capital additions. OnDecember 22, 2021 , PURA approved a WICA surcharge of 2.44% to be added to bills of all Connecticut Water customers, including those of the former The Avon Water Company andThe Heritage Village Water Company , effectiveJanuary 1, 2022 which is expected to generate approximately$2,581 in additional revenue. OnFebruary 14, 2022 Connecticut Water filed its 2021 WICA reconciliation with PURA. The reconciliation, approved by PURA onMarch 16, 2022 and effective for 12 months beginningApril 1, 2022 , replaced the expiring 2020 reconciliation surcharge of 0.07% with a credit of (0.02)%. As a result, the net WICA surcharge, effectiveApril 1, 2022 was 2.35%. OnFebruary 28, 2022 Connecticut Water filed its 2021 Water Rate Adjustment mechanism ("WRA"). The mechanism reconciles 2021 revenues as authorized in the Company's most recent rate cases. The 2021 WRA, as approved by PURA onMarch 30, 2022 and effective for 12 months beginning onApril 1, 2022 imposed a 2.85% surcharge on customer bills to collect the 2021 revenue shortfall. OnApril 26, 2022 , Connecticut Water filed for a WICA increase of$9,779 in completed projects. PURA approved the Company's application onJune 22, 2022 . The cumulative WICA charge as ofJuly 1, 2022 is 3.26%, collecting$3,448 on an annual basis. OnJune 17, 2022 , Connecticut Water submitted an application to PURA for the approval to issue unsecured notes in the amount of$25,000 . The notes carry an interest rate of 4.71% and the closing is expected to occur onDecember 15, 2022 . A decision is expected from PURA in August.
Texas Regulatory Affairs
CLWSC filed its annual Water Pass Through Charge ("WPC") true-up report on
January 31, 2022 with the PUCT under Docket No. 53173. The PUCT modified the WPC
formula which resulted in a new usage rate increasing from $0.70 to $0.90
dollars per thousand gallons. The new usage rate was effective March 1, 2022 .
The true-up report was approved by the PUCT on May 10, 2022 and CLWSC received
approval of the new tariff on May 24, 2022 .
CLWSC filed its annual WPC true-up report for its Kendall West system on June
29, 2022 with the PUCT under Docket No. 53751. CLWSC requested an increase from
$2.39 to $3.69 per thousand gallons for the WPC. Subsequent to this filing, the
increase requested was revised to $2.56 per thousand gallons on July 15, 2022 .
Maine Regulatory Affairs
The rates approved in the Biddeford Saco division by theApril 5, 2022 stipulated agreement, which authorized a rate increase of$6,313 , or 72.5% went into effect onJuly 1, 2022 .The Saco River Drinking Water Resource Center began supplying the water distribution system onJune 16, 2022 . 24 -------------------------------------------------------------------------------- OnFebruary 28, 2022 , Maine Water filed requests for general rate increases in theCamden -Rockland ,Freeport ,Millinocket and Oakland Divisions. The four filings collectively request$532 in new revenue and seek to reset the WISC in all four divisions. Individually, the Camden Rockland Division request is$225 , or 3.4%; theFreeport request is$51 , or 6.1%; theMillinocket request is$184 , or 14.5%; and theOakland request is$72 , or 9.9%. The four cases, while docketed separately, are proceeding through the adjudication process together. Decisions by the Commission in these filings are expected in the third quarter of 2022.
On
Liquidity:
Cash Flow from Operating Activities
During the six months endedJune 30, 2022 ,SJW Group generated cash flows from operations of approximately$83,600 , compared to$67,100 for the same period in 2021. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, stock-based compensation, allowance for equity funds used during construction, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations increased by approximately$16,500 . This increase was the result of a combination of the following factors: (1) an increase of$25,500 in regulatory assets primarily due to the recognition of balancing and memorandum accounts, offset by (2) general working capital and net income, adjusted for non-cash items, decreased by$5,100 , (3) an increase of a net payable of taxes payable which was$2,700 more than in prior year, and (4) payments of amounts previously invoiced and accrued including accrued production costs, decreased by$1,200 . As ofJune 30, 2022 , Water Utility Services' write-offs for uncollectible accounts represented less than 1% of its total revenue, unchanged fromJune 30, 2021 . As ofFebruary 1, 2022 , the remaining state executive order suspending water service disconnections due to non-payment by customers expired inCalifornia . There is no guarantee that the respective state regulators will not reinstate such orders. Management believes that the collection rate for its accounts receivables will gradually return to pre-pandemic levels now that service disconnections are allowable once again to mitigate payment delinquencies. OnFebruary 3, 2022 , SJWC received$9,757 through the State of California Water and Wastewater Arrearages Payment Program to relieve outstanding payment delinquencies for customers accounts greater that 60-days past due as ofJune 30, 2021 . Bill credits were applied to customer accounts that remained outstanding and the excess of$3,272 was returned to theState of California . The financial impact of certain remaining past due accounts are being recorded for future recovery through the rate-making process. There is no guarantee that such recovery will be approved by the respective state regulatory utility commissions.
Cash Flow from Investing Activities
During the six months endedJune 30, 2022 ,SJW Group used cash flows from investing activities of approximately$117,100 , compared to$107,000 for the same period in 2021.SJW Group used approximately: (1)$101,600 of cash for company-funded capital expenditures, (2)$13,300 for developer-funded capital expenditures, and (3)$1,800 for utility plant retirements. Water Utility Services' budgeted capital expenditures for 2022, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately$223,000 . As ofJune 30, 2022 , approximately$101,600 or 46% of the$223,000 has been invested. Water Utility Services' capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, Water Utility Services expects to incur approximately$1,300,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future respective state regulatory utility commissions' approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction. The Water Utility Services' distribution systems were constructed during the period from the early 1900's through today. Expenditure levels for renewal and modernization will occur as the components reach the end of their useful lives. In most cases, replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services and increased regulation. 25 --------------------------------------------------------------------------------
Cash Flow from Financing Activities
Net cash provided by financing activities for the six months endedJune 30, 2022 , decreased by approximately$24,700 from the same period in the prior year, primarily as a result of (1) a decrease in net proceeds from our common stock equity offering in prior year of$66,800 , (2) a decrease in net proceeds of$72,000 from new long-term debt, (3) an increase of dividends paid to stockholders of$1,900 , offset by (4) an increase in net borrowings and repayments on our lines of credit of$114,900 , and (5)$1,100 increase in net cash receipts from advances and contributions in aid of construction.
Sources of Capital:
SJW Group's ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings.
Short-term Financing Agreements
Maturity Date Line Limit Amounts Outstanding Unused Portion
SJWC credit agreement (a) December 31, 2023 $ 140,000 66,000 74,000
CTWS credit agreement December 14, 2023 75,000 33,836 41,164
CTWS credit agreement May 15, 2025 40,000 40,000 -
SJWTX, Inc. credit agreement (b) December 31, 2023 5,000 1,500 3,500
$ 260,000 141,336 118,664
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(a)Credit agreement also provides for a letter of credit sublimit of
During the first half of 2022, cost of borrowing on the lines of credit averaged 1.44% compared to 1.39% in the same period in 2021.
All ofSJW Group's and subsidiaries lines of credit contain 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. All of the lines of credit also include certain customary financial covenants such as a funded debt to capitalization ratio and a minimum interest coverage ratio. As ofJune 30, 2022 ,SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.
Long-term Financing Agreements
SJW Group and its subsidiaries long-term debt activities are for purposes of refinancing short-term borrowings, long-term capital expenditure financing and working capital, and refinancing of maturing long-term debt. OnApril 6, 2022 , Maine Water entered into a credit agreement with a commercial bank, pursuant to an existing master loan agreement under which the commercial bank issued Maine Water a promissory note on the same date with an aggregate principal amount of$15,000 and a fixed interest rate of 4.54%, dueMay 31, 2042 . The notes are unsecured obligations of Maine Water. Interest is payable quarterly in arrears on the 20th day of January, April, July and October of each year. The promissory note contains customary representations and warranties. Under the promissory note, Maine Water is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. Proceeds from the borrowing were received onMay 13, 2022 . OnJune 28, 2022 , Connecticut Water entered into a note purchase agreement with certain affiliates of New York Life Insurance Company, pursuant to which Connecticut Water sold an aggregate principal amount of$25,000 of its 4.71% Senior Notes, Series 2022, due 2052. The closing of the note purchase agreement is expected to occur onDecember 15, 2022 , and is subject to customary closing conditions and regulatory approval. The Series 2022 Notes are unsecured obligations of Connecticut Water. Interest is payable semi-annually in arrears onJune 15th andDecember 15th of each year. The note purchase agreement contains customary representations and warranties. Connecticut Water has agreed to customary affirmative and negative covenants for as long as the Series 2022 Notes are outstanding. The Series 2022 Notes are also subject to customary 26 --------------------------------------------------------------------------------
events of default, the occurrence of which may result in all of the Series 2022 Notes then outstanding becoming immediately due and payable.
OnJuly 14, 2022 , SJWC entered into a note purchase agreement with certain affiliates of New York Life Insurance,Metropolitan Life Insurance ,Northwestern Mutual Life Insurance , andJohn Hancock Life Insurance (collectively the "Purchasers"), pursuant to which the company will sell an aggregate principal amount of$70,000 of its 4.85% Senior Notes, Series P ("Series P Notes") to the Purchasers. The Series P Notes are unsecured obligations of SJWC and are due onFebruary 1, 2053 . Interest is payable semi-annually in arrears onFebruary 1st andAugust 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series P Notes are outstanding. The Series P Notes are also subject to customary events of default. The closing is expected to occur inJanuary 2023 upon satisfaction of customary closing conditions. The debt and credit agreements ofSJW Group and its subsidiaries contain various financial and other covenants. Non-compliance with these covenants could result in accelerated due dates and termination of the agreements. In addition, the credit agreements contain customary representations and warranties and are subject to customary events of default, which may result in the outstanding debt becoming immediately due and payable. As ofJune 30, 2022 ,SJW Group and its subsidiaries were in compliance with all covenants related to its long-term debt agreements. Equity Financing Arrangements OnNovember 17, 2021 ,SJW Group entered into an equity distribution agreement (the "Equity Distribution Agreement") withJ.P. Morgan Securities LLC ,Janney Montgomery Scott LLC ,RBC Capital Markets, LLC andWells Fargo Securities, LLC (each a "Sales Agent" and, collectively, the "Sales Agents"), pursuant to which the company may offer and sell shares of its common stock,$0.001 par value per share (the "Shares"), from time to time in "at-the-market" offerings, having an aggregate gross sales price of up to$100,000 . Pursuant to the Equity Distribution Agreement, the Shares may be offered and sold through the Sales Agents in transactions that are deemed to be "at-the-market" offerings as defined in Rule 415 under the Securities Act of 1933, as amended, including sales by means of ordinary brokers' transactions on theNew York Stock Exchange or otherwise at market prices prevailing at the time of sale, at prices related to the prevailing market prices or at negotiated prices, in block transactions, or as otherwise agreed upon by the company and the Sales Agents. Proceeds from the sale of the shares under the Equity Distribution Agreement can be used in the financing of acquisitions, infrastructure improvements and other capital expenditures, repayment of debt or other corporate obligations, and working capital over the term of the Equity Distribution Agreement as such needs arise. As ofJune 30, 2022 ,SJW Group has$75,000 remaining on the Equity Distribution agreement. No shares were sold in the first and second quarters of 2022.
Credit Rating
The condition of the capital and credit markets or the strength of financial institutions could impactSJW Group's ability to draw on its lines of credit, issue long-term debt, sell its equity or earn interest income. In addition, government policies, the state of the credit markets and other factors could result in increased interest rates, which would increaseSJW Group's cost of capital. While our ability to obtain financing will continue to be a risk, we believe that based on our 2022 and 2021 activities, we will have access to the external funding sources necessary to implement our on-going capital investment programs in the future. The currentStandard & Poor's Rating Service assigned company rating forSJW Group is an A-, with a stable outlook, for SJWC is an A, with a stable outlook, for CTWS is an A- with a stable outlook, and for Connecticut Water is an A- with a stable outlook.
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