SJW GROUP (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 inSJW Group's Annual Report on Form 10-K for the year endedDecember 31, 2019 . 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 Item 1A under "Risk Factors."
General:
SJW Group is a holding company with four wholly-owned subsidiaries:San Jose Water Company ("SJWC"),SJWNE LLC ,SJWTX, Inc. andSJW Land Company . SJWC is a public utility in the business of providing water service to approximately 231,000 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 ,Saratoga and theTown of Los Gatos , and adjacent unincorporated territories, all in the County ofSanta 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 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 unlessCalifornia Public Utilities Commission ("CPUC") approval is obtained. SJWC also has approximately 411 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 , which is a wholly-owned subsidiary ofSJW Group , is the holding company forConnecticut Water Service, Inc. ("CTWS"). CTWS became a wholly-owned subsidiary ofSJWNE LLC as part of the merger transaction betweenSJW Group and CTWS that was completed onOctober 9, 2019 . CTWS, headquartered inConnecticut , serves as a holding company for water utility companies providing water service to approximately 138,000 connections that serve a population of approximately 484,000 people in 80 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"),The Heritage Village Water Company ("HVWC"),The Avon Water Company ("Avon Water") andThe Maine Water Company ("Maine Water"). The remaining two 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. CTWS also offers Linebacker, an optional service line protection program offered by CTWS to eligible residential customers through NEWUS inConnecticut andMaine Water inMaine covering the cost of repairs for leaking or broken water service lines which provide drinking water to a customer's home. For customers who enroll in this program, CTWS will repair or replace a leaking or broken water service line and related equipment. Additionally, NEWUS offers expanded coverage to Connecticut Water customers for failure of in-home plumbing, sewer and septic drainage lines and implemented modified terms and conditions with limitations on certain coverages. 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 22 -------------------------------------------------------------------------------- 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 19,000 connections that serve approximately 55,000 people. CLWSC's service area comprises more than 247 square miles in the southern region of the Texas Hill Country inBlanco ,Comal ,Hays andTravis counties, the growing region betweenSan Antonio andAustin, Texas .SJWTX, Inc. has a 25% interest inAcequia Water Supply Corporation ("Acequia"). The water supply corporation 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. SJW Land Company owns undeveloped land and operates commercial buildings inTennessee .SJW Land Company also owns a 70% limited partnership interest in444 West Santa Clara Street , L.P. which operated aCalifornia commercial property that was sold in the second quarter of 2017. The limited partnership has been determined to be a variable interest entity within the scope ofFinancial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") Topic 810 - "Consolidation" withSJW Land Company as the primary beneficiary, and as a result, has been consolidated withSJW Land Company .SJW Land Company owned the following real properties during the six months endedJune 30, 2020 : % for Six months ended June 30, 2020 of SJW Land Company Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 46 % 40 % Commercial building Knoxville, Tennessee 15 135,000 54 % 60 % Undeveloped land and Knoxville, parking lot Tennessee 10 N/A N/A N/A Undeveloped land San Jose, California 103 N/A N/A N/A
As of
Business Strategy for Water Utility Services:
(2) Regional non-tariffed water utility related services provided in
accordance with the guidelines established by the CPUC in
(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, including the recent CTWS merger which closed onOctober 9, 2019 . 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 onSJW Group's financial position and operating results, entering markets in whichSJW Group has 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. 23 -------------------------------------------------------------------------------- Real Estate Services:SJW Group's real estate investment activity is conducted throughSJW Land Company . As noted above,SJW Land Company owns undeveloped land and operates commercial buildings inTennessee .SJW Land Company also owns a limited partnership interest in444 West Santa Clara Street , L.P. The partnership had a commercial building inSan Jose, California that was sold in the second quarter of 2017.SJW Land Company manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties.Chester Realty, Inc. owns and operates land and commercial buildings in theState of Connecticut .Chester Realty, Inc. manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties.SJW Land Company and Chester Realty, Inc.'s real estate investments diversifySJW Group'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 2019 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted inthe United States of America and included as part of our annual report on Form 10-K for the year endedDecember 31, 2019 , that was filed with theSEC onMarch 2, 2020 . 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 endedDecember 31, 2019 . There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2019 consolidated financial statements included in our annual report on Form 10-K for the year endedDecember 31, 2019 . New Accounting Pronouncements: InAugust 2018 , the FASB issued Accounting Standards Update ("ASU") 2018-14, "Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20: "Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans," which aims to improve the overall usefulness of disclosure to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. This update is effective forSJW Group's Form 10-K for the year endingDecember 31, 2020 . Retrospective adoption is required and early adoption is permitted. Management is currently evaluating the effect that the new standard will have on its defined benefit plan disclosures. Results of Operations: Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales. Coronavirus ("COVID-19") Update In 2020, the outbreak of COVID-19 has had significant impact on the global economy.SJW Group has taken precautions to protect the health and safety of employees, customers and the community while continuing to deliver safe and reliable water service as we are deemed to be an essential service provider.SJW Group's response to the COVID-19 outbreak continues to rapidly evolve and has included: (i) suspending service disconnections for non-payments pursuant to orders from certain state regulators, which will remain in effect over other existing requirements governing disconnections for specified durations with the longest extending toApril 2021 ; (ii) waiving reconnection or facilities fees for affected customers and suspending deposit requirements for affected customers who must reconnect to the systems; (iii) the temporary closure of our walk-in customer payment centers where they were provided; (iv) increasing the number of employees telecommuting; and (v) delaying some capital improvement projects at our water utilities. Although, we do not believe the COVID-19 pandemic has materially adversely affectedSJW Group's financial results and business operations for the six months endedJune 30, 2020 , the full impact of the pandemic is uncertain.SJW Group continues to monitor developments affecting our business, employees and suppliers and will take additional precautions as management believes is necessary. OverviewSJW Group's consolidated net income for the three months endedJune 30, 2020 , was$19,721 , an increase of$6,183 , or approximately 46%, from$13,538 for the same period in 2019.SJW Group's consolidated net income for the six months endedJune 30, 2020 , was$22,138 , an increase of$2,727 , or approximately 14%, from$19,411 for the same period in 2019. The increase in net income for the three and six months endedJune 30, 2020 , was primarily due to addition of net income from the 24 -------------------------------------------------------------------------------- company's newSJWNE LLC's subsidiary CTWS as a result of the merger and an increase in revenue at SJWC due to increased customer usage and higher average rates, partially offset by an increase in production expenses at SJWC due to a decrease in the use of available surface water and an increase in customer usage, an increase in interest on long-term debt due to the debt issued to acquire CTWS and issuance of SJWC's Series M Note, and an increase in depreciation expense due to assets placed in service in 2019. Operating Revenue Operating Revenue by Segment Three months ended June 30, Six months ended June 30, 2020 2019 2020 2019 Water Utility Services$ 145,765 101,596$ 260,149 177,912 Real Estate Services 1,444 1,369 2,814 2,735$ 147,209 102,965$ 262,963 180,647 The change in consolidated operating revenues was due to the following factors: Three months ended Six months ended June 30, June 30, 2020 vs. 2019 2020 vs. 2019 Increase/(decrease) Increase/(decrease) Water Utility Services: Consumption changes$ 8,386 8 %$ 14,415 8 % Increase in customers 511 1 % 936 1 % Rate increases 1,566 1 % 5,074 3 % OII customer rate credits 2,200 2 % 2,200 1 % Balancing and memorandum accounts: Water Conservation Memorandum Account ("WCMA") (1,269 ) (1 )% (129 ) - % All others (67 ) - % (505 ) - % SJWNE LLC 32,842 32 % 60,246 33 % Real Estate Services 75 - % 79 - %$ 44,244 43 %$ 82,316 46 % Operating Expense Operating Expense by Segment Three months ended June 30,
Six months ended
2020 2019 2020 2019
Water Utility Services $ 108,944 76,920 $ 206,322 138,346
Real Estate Services 850 1,008 1,681 1,899
All Other 1,345 3,066 3,463 6,023
$ 111,139 80,994 $ 211,466 146,268
25
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The change in consolidated operating expenses was due to the following factors:
Three months ended Six months ended
June 30, June 30,
2020 vs. 2019 2020 vs. 2019
Increase/(decrease) Increase/(decrease)
Water production expenses:
Change in surface water use $ 6,673 8 % $ 12,110 8 %
Change in usage and new customers 2,912 4 % 8,204 6 %
Purchased water and groundwater
extraction charge and energy price
increase 1,459 2 % 2,982 2 %
Balancing and memorandum accounts cost
recovery (1,891 ) (2 )% (3,403 ) (2 )%
SJWNE LLC 6,892 8 % 13,148 9 %
Total water production expenses 16,045 20 % 33,041 23 %
Administrative and general 4,264 5 % 13,820 9 %
Balance and memorandum account cost
recovery 100 - % (131 ) - %
Maintenance 605 1 % 2,366 2 %
Property taxes and other non-income
taxes 3,254 4 % 6,589 5 %
Depreciation and amortization 7,652 9 % 13,889 9 %
Merger related expenses (1,775 ) (2 )% (4,376 ) (3 )%
$ 30,145 37 % $ 65,198 45 %
Sources of Water Supply
SJWC's water supply consists of groundwater from wells, surface water from
watershed run-off and diversion, reclaimed water, and 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. Surface water is the least
expensive source of water. Changes and variations in quantities from each of
these sources affect the overall mix of the water supply, thereby affecting the
cost of the water supply. In addition, the water rate for purchased water and
the groundwater extraction charge may be increased by Valley Water at any time.
If an increase occurs, then SJWC would file an advice letter with the CPUC
seeking authorization to increase revenues to offset the cost increase.
On July 1, 2020 , Valley Water's 10 reservoirs were approximately 37% of total
capacity with 61,462 acre-feet of water in storage, which is 63% of the
twenty-year average for this date. As reported by the Valley Water, there was
8.82 inches of rainfall in San Jose during the current annual rainfall season
that commenced on July 1, 2019 . Rainfall at SJWC's Lake Elsman was measured at
30.26 inches during the current rainfall season. 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, 2020 , Valley Water
reported that allocations from the state and federal water project are
approximately 20% and 70%, respectively, of amounts requested in 2020. Valley
Water also reported that the managed groundwater recharge from January to June
in the Santa Clara Plain was 87% of the five-year average. The groundwater level
in the Santa Clara Plain is approximately 19 feet lower than a year ago in June
and 7 feet lower than the five-year average. According to Valley Water, the
projected total groundwater storage at the end of 2020 is expected to fall
within the normal stage of the Valley Water's Water Shortage Contingency Plan.
On July 1, 2020 , SJWC's Lake Elsman contained 2,234 acre-feet of water, of which
approximately 1,774 acre-feet can be utilized for treatment. This Lake Elsman
volume represents 55% of the five-year average which reflects the low winter
rainfall we experienced in our Santa Cruz mountains watershed. 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. SJWC will
utilize surface water and additional water from its portfolio of groundwater
supplies to supplement imported water from the Valley Water. Production from the
Montevina Surface Water Treatment Plant through the second quarter was 710
million gallons, which is 43% of the five-year average. Production at SJWC's
smaller Saratoga Water Treatment Plant through the second quarter was 111
million gallons, which is 46% of the five-year average. Saratoga Water Treatment
Plant was taken out of service during the second quarter due to lack of run-off
from Saratoga Creek and remains offline. SJWC believes that its various water
supply sources will be sufficient to meet customer demand through the remainder
of 2020.
The Connecticut water utility services' 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 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.
26
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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 Guadalupe-Blanco River Authority ("GBRA"), which expire in
2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts,
provide CLWSC with an aggregate of 6,900 acre-feet of water per year from Canyon
Lake 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 2053 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. With service area
conditions shifting to an Abnormally Dry drought condition in most of our Texas
service area, with very high usage and little rain In the forecast, CLWSC began
implementation of Stage 1 of its Drought Management Plan on July 13, 2020 . This
was done in coordination with neighboring municipalities with which it shares
water supply sources. Stage 1 limits lawn irrigation systems to twice per week
watering and signals to customers the need to pursue conservation. CLWSC
believes that, with the judicious implementation of its Drought Management Plan,
its water supply sources will be sufficient to meet customer demand through the
remainder of 2020.
Maine Water's infrastructure consists of 12 noncontiguous water systems in the
State of Maine . These systems, in total, consists of approximately 500 miles of
water main and reservoir storage capacity of 7.0 billion gallons. The 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 80% of the total dependable yield comes from surface water
supplies and 20% from wells.
The following table presents the change in sources of water supply, in million
gallons, for Water Utility Services:
Three months ended Six months ended
June 30, Increase/ % of Total June 30, Increase/ % of Total
2020 2019 (decrease) Change 2020 2019 (decrease) Change
Purchased water 5,891 5,941 (50 ) - % 9,526 9,103 423 2 %
Groundwater 5,499 2,402 3,097 30 % 9,844 4,235 5,609 33 %
Surface water 2,387 1,885 502 5 % 4,438 3,462 976 6 %
Reclaimed water 86 179 (93 ) (1 )% 172 224 (52 ) - %
13,863 10,407 3,456 34 % 23,980 17,024 6,956 41 %
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 for June 30, 2020 , and
2019 approximated 6.4% 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 an acquisition-to-date basis for the period
ending June 30, 2020 was approximately 16.7% 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 ("WICA") and Water Infrastructure Surcharge ("WISC") main replacement
programs and lost water reduction initiatives.
Water Production Expenses
The change in water production expenses for the three and six months ended June
30, 2020 , compared to the same period in 2019, was primarily attributable to the
new SJWNE LLC subsidiary operations, a decrease in available surface water for
SJWC, an increase in customer usage and higher per unit costs for purchased
water, groundwater extraction and energy charges, offset by a decrease in
cost-recovery balancing and memorandum accounts. Effective July 1, 2019 , Valley
Water increased the unit price of purchased water by approximately 6.1% and the
groundwater extraction charge by approximately 6.6%.
Other Operating Expenses
Operating expenses, excluding water production expenses, increased $14,100 for
the three months ended June 30, 2020 , compared to the same period in 2019. The
increase was primarily attributable to an increase of $14,187 due to the new
SJWNE LLC subsidiary operations, and depreciation and amortization expense due
to increases in utility plant, partially offset by a decrease in merger related
expenses due to the completion of our merger with CTWS.
Operating expenses, excluding water production expenses, increased $32,157 for
the six months ended June 30, 2020 , compared to the same period in 2019. The
increase was primarily attributable to an increase of $30,159 due to the new
SJWNE LLC subsidiary operations, and increases in administrative and general
expenses primarily due to an increase in accounting
27
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fees and contracted work, and depreciation and amortization expense due to
increases in utility plant, partially offset by a decrease in merger related
expenses due to the completion of our merger with CTWS.
Other (Expense) Income
For the three and six months ended June 30, 2020 , compared to the same periods
in 2019, the change in other (expense) income was primarily due to an increase
in interest on long-term debt as a result of the issuance of SJW Group's Series
2019A, B and C notes and SJWC's Series M note. In addition, interest income
decreased due to use of previously invested money market funds for the merger
with CTWS.
Provision for Income Taxes
For the three and six months ended June 30, 2020 , compared to the same period in
2019, income tax expense increased $18 and decreased $1,589 , respectively. The
decrease in income tax expense for the six months ended June 30, 2020 is
primarily due to the effect of flow-through tax benefits of certain CTWS tax
attributes. The effective consolidated income tax rates were 18% and 23% for
three months ended June 30, 2020 , and 2019, respectively, and 17% and 24% for
the six months ended June 30, 2020 , and 2019, respectively. The lower effective
rates for the three and six months ended June 30, 2020 , were primarily due to
flow-through tax benefits.
On March 27, 2020 , the Coronavirus Aid, Relief, and Economic Security ("CARES")
Act was signed into law. The CARES Act includes, among other items, measures
concerning income taxes. Many of the CARES Act's requirements are subject to
further clarification. SJW Group has considered the income tax implications of
the CARES Act in its estimated tax provision and does not believe it will
materially impact the company's year end tax rate.
SJW Group expects the Internal Revenue Service to issue guidance in future
periods that will determine the final disposition of the excess deferred taxes
and other impacts of the Tax Cuts and Jobs Act (H.R. 1). At this time, the
company has applied a reasonable interpretation of the Tax Act. Future
clarification of the Tax Act may change estimated amounts.
Regulation and Rates
Almost all of the operating revenue of SJW 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.
See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for
a discussion of regulatory activities that have occurred during the quarter.
Liquidity:
Cash Flow from Operating Activities During the six months endedJune 30, 2020 ,SJW Group generated cash flows from operations of approximately$32,300 , compared to$49,800 for the same period in 2019. 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, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations decreased by approximately$17,400 . This decrease was the result of a combination of the following factors: (1) decrease in collection in balancing and memorandum accounts of$20,100 , (2) a decrease in collections from accounts receivable and accrued unbilled utility revenue of$11,800 due to higher unbilled revenue balances and slower collections from customers during the COVID-19 pandemic, (3) an up-front payment of$5,000 for renewal of theCupertino service concession agreement, (4) payments of amounts previously invoiced and accrued, which increased by$4,400 , offset by (5) general working capital and net income, adjusted for non-cash items increased by$18,100 , and (6) net collection of taxes receivable which was$5,800 more than in prior year. 28 -------------------------------------------------------------------------------- As ofJune 30, 2020 , Water Utility Services' write-offs for uncollectible accounts represent less than 1% of its total revenue, unchanged fromJune 30, 2019 . InMarch 2020 , the regulated utilities commissions of the respective states we operate initiated executive orders suspending water service disconnections due to non-payment from customers in light of the current stay-at-home orders, quarantines and similar governmental restrictions in response to the global COVID-19 pandemic. Management believes that the historical collection rate for its accounts receivables will decrease during the COVID-19 pandemic and although any financial impact is currently tracked to be filed 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, 2020 ,SJW Group used cash flows in investing activities of approximately$81,100 , compared to$72,500 for the same period in 2019.SJW Group used approximately: (1)$74,100 of cash for company-funded capital expenditures, (2)$5,000 for developer-funded capital expenditures, and (3)$1,600 for utility plant retirements. Water Utility Services' budgeted capital expenditures for 2020, exclusive of capital expenditures financed by customer contributions and advances, are approximately$221,800 . As ofJune 30, 2020 , approximately$74,100 or 33% of the$221,800 has been spent. 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 expect to incur approximately$1.2 billion in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future CPUC, PURA, PUCT or MPUC 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. Cash Flow from Financing Activities Net cash provided by financing activities for the six months endedJune 30, 2020 , increased by approximately$30,200 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings on our lines of credit of$74,500 , and (2)$3,300 increase in net cash receipts from advances and contributions in aid of construction, offset by (3) a decrease in net proceeds from new long-term debt of$46,700 . 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.SJW Group's unsecured senior note agreements has terms and conditions that restrictSJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth ofSJW Group becomes less than$175,000 plus 30% of Water Utility Services cumulative net income, sinceJune 30, 2011 .SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions atJune 30, 2020 . SJWC's financing activity is designed to achieve a capital structure consistent with our CPUC authorized structure of approximately 47% debt and 53% equity. As ofJune 30, 2020 , SJWC's funded debt and equity were approximately 48% and 52%, respectively. Funding for SJWC's future capital expenditure program is expected to be provided primarily through internally-generated funds, the issuance of new long-term debt, and the issuance of equity, all of which will be consistent with regulator guidelines. SJWC's unsecured senior note agreements generally have terms and conditions that restrict SJWC from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. SJWC was not restricted from issuing future indebtedness as a result of these terms and conditions atJune 30, 2020 . SJWC's loan agreements with theCalifornia Pollution Control Financing Authority contain affirmative and negative covenants customary for loan agreements relating to revenue bonds, including, among other things, complying with certain disclosure 29 -------------------------------------------------------------------------------- obligations and covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of the projects funded by the loan proceeds and the assignment of the loan agreement. As ofJune 30, 2020 , SJWC was in compliance with all such covenants. CTWS has outstanding term loans with a commercial bank and under the master loan agreement, CTWS is required to comply with certain financial ratio and operational covenants. The most restrictive of these covenants is to maintain a consolidated (CTWS and its subsidiaries) debt to capitalization ratio of not more than 60%. As ofJune 30, 2020 , CTWS was in compliance with all covenants under the master loan agreement. Connecticut Water has outstanding term loans with a commercial bank and under its master loan agreement, Connecticut Water is required to comply with financial and operational covenants substantially identical to those found in CTWS's master loan agreement. Connecticut Water is required to maintain a debt to capitalization ratio of not more than 60%. As ofJune 30, 2020 ,Connecticut Water was in compliance with all covenants under its master loan agreement. Connecticut Water has tax exempt and taxable Water Facilities Revenue Bonds issued through Connecticut Innovations (formerly theConnecticut Development Authority ). The bond indentures and loan agreements contain customary affirmative and negative covenants and require compliance with financial and operational covenants, and also provide for the acceleration of the Revenue Bonds upon the occurrence of stated events of default. As ofJune 30, 2020 , Connecticut Water was in compliance with all covenants of the bond indentures and loan agreements. Connecticut Water's unsecured senior notes have terms and conditions that restrict Connecticut Water from issuing additional debt or paying a dividend to CTWS if such debt or distribution would trigger an event of default. The senior note agreements also require Connecticut Water to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio at each fiscal quarter end of no less than three-to-one. As ofJune 30, 2020 , Connecticut Water was in compliance with all financial ratio and operational covenants under this agreement. OnMarch 12, 2020 , Connecticut Water entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which Connecticut Water sold on the same date an aggregate principal amount of$35,000 of its 3.51% Senior Notes, dueMarch 12, 2050 . The notes are unsecured obligations ofConnecticut Water. Interest is payable semi-annually in arrears onMarch 12th andSeptember 12th of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement,Connecticut 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.SJWTX, Inc.'s unsecured senior note agreement has terms and conditions that restrictSJWTX, Inc. from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. In addition,SJW Group is a guarantor ofSJWTX, Inc.'s senior note which has terms and conditions that restrictSJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth ofSJW Group becomes less than$125,000 plus 30% of Water Utility Services cumulative net income, sinceDecember 31, 2005 . As ofJune 30, 2020 ,SJWTX, Inc. andSJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions. Maine Water has First Mortgage Bonds issued to theMaine Municipal Bond Bank through theState Safe Drinking Water Revolving Loan Fund and First Mortgage Bonds issued to One America. The associated bond indentures and loan agreements contain customary affirmative and negative covenants, including a prohibition on the issuance of indebtedness secured by assets or revenue of Maine Water where the lien is senior to the lien of the bond trustee under the above bonds except as permitted by the bond indentures and related loan and security agreements, a requirement to maintain a debt to capitalization ratio of not more than 65%, required compliance with various financial and operational covenants, and a provision for maturity acceleration upon the occurrence of stated events of default. As ofJune 30, 2020 , Maine Water was in compliance with all covenants in its bond indentures and related loan agreements. Maine Water has outstanding term loans with a commercial bank and under its master loan agreement, Maine Water is required to comply with financial and operational covenants substantially identical to those found in CTWS and Connecticut Water's master loan agreements. Maine Water is required to maintain a debt to capitalization ratio of not more than 60%. As ofJune 30, 2020 ,Maine Water was in compliance with all covenants under its master loan agreement. HVWC has a term loan with a commercial bank, due in 2034. The loan is secured by real property owned by HVWC. The loan agreement restricts HVWC's ability to incur additional debt and requires compliance with a funded debt to capitalization covenant and other operational covenants. As ofJune 30, 2020 , HVWC was in compliance with all covenants of the loan. Avon Water has a mortgage loan that is due in 2033. The loan agreement (1) generally restricts the ability of Avon Water to incur additional debt or make dividend payments other than in the ordinary course of business, and (2) requires submission of 30
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periodic financial reports as part of loan covenants. As ofJune 30, 2020 , Avon Water was in compliance with all covenants of the loan. As ofJune 30, 2020 ,SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to$310,000 , of which$5,000 was available toSJWTX, Inc. under a single line of credit,$190,000 was available to SJWC under two additional lines of credit line of credit, and$40,000 and$75,000 under a fourth and fifth, respectively, lines of credit was available to CTWS. AtJune 30, 2020 ,SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling$163,329 . The lines of credit bear interest at variable rates. OnApril 24, 2020 ,SJW Group terminated a$15,000 joint unsecured bank line of credit held bySJW Group andSJW Land Company effectiveApril 29, 2020 . OnMay 11, 2020 , SJWC amended its$125,000 unsecured line of credit to increase the lending commitment by$15,000 to$140,000 . In addition, onMay 11, 2020 , SJWC entered into an additional unsecured line of credit allowing borrowings of up to$50,000 for a six month period. The$140,000 and$50,000 lines of credit of SJWC expire onJune 1, 2021 andNovember 11, 2020 , respectively. The line of credit forSJWTX, Inc. expires onJune 1, 2021 . OnMay 29, 2020 , the CTWS entered into a Second Amendment to the CTWS's existing$15,000 credit agreement, dated as ofAugust 6, 2014 , with the CoBank, ACB ("CoBank), as amended by the First Amendment, datedOctober 28, 2015 . The Second Amendment amends the prior agreement to, among other things, increase the total commitment by$25,000 , from$15,000 to$40,000 . The$40,000 and$75,000 lines of credit for CTWS expireMay 15, 2025 andDecember 14, 2023 , respectively. During 2020, the cost of borrowing onSJW Group's short-term credit facilities has averaged 2.02%. 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 financial covenants that require the borrower to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio. As ofJune 30, 2020 ,SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit. 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 key risk, we believe that based on our 2020 activities, we will have access to the external funding sources necessary to implement our on-going capital investment programs in the future. OnOctober 16, 2019 ,Standard & Poor's Ratings Service initiated coverage onSJW Group assigning a company rating of A-, with a stable outlook and affirming its company rating of SJWC of A, with a stable outlook. In addition, onOctober 14, 2019 , S&P affirmed its ratings of CTWS and Connecticut Water of A- with a stable outlook.
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