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 in
SJW Group'sAnnual Report on Form 10-K for the year ended December 31, 2021. This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Groupand its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Groupand its subsidiaries and the industries in which SJW Groupand its subsidiaries operate and the beliefs and assumptions of the management of SJW 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 metropolitan
San Jose, Californiaarea. 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 of San Joseand Cupertinoand in the cities of Campbell, Monte Sereno, and Saratogaand the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clarain the State 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 unless California Public Utilities Commission("CPUC") approval is obtained.
SJWC also owns approximately 234 acres of non-utility property which has been identified as no longer in use and useful for providing utility services. The majority of the properties are located in the hillside areas adjacent to the various properties within the SJWC watershed.
SJWNE LLCis the holding company for Connecticut Water Service, Inc.("CTWS"). CTWS, headquartered in Connecticut, 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 throughout Connecticutand Maineand more than 3,000 wastewater connections in Southbury, Connecticut. The subsidiaries held by CTWS that provide utility water services are The Connecticut Water Company("Connecticut Water") and The Maine Water Company("Maine Water"). The remaining two CTWS subsidiaries are Chester Realty, Inc., a real estate company in Connecticut, and New 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 throughout Connecticutand Maine. 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 as Canyon 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 in Bandera, Blanco, Comal, Hays, Kendall, Medinaand Travis Countyin the growing region between San Antonioand Austin, Texas. SJWTX, Inc.holds a 25% equity interest in Acequia Water Supply Corporation. Acequia has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc.as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc. SJWTX, Incis undergoing a corporate reorganization to separate regulated operations from non-tariffed activities. In November 2021, SJWTX Holdings, 18 -------------------------------------------------------------------------------- Inc. (" SJWTX Holdings") and Texas Water Operation Services LLC("TWOS") were formed for the purpose of effecting a corporate reorganization of our water services organization in Texas. TWOS was created for non-tariffed operations and is wholly-owned by SJWTX Holdings. SJWTX Holdingsis a wholly-owned subsidiary of SJW Group, incorporated to hold the investments in SJWTX, Inc.and TWOS. In addition, SJWTX Holdingsintends to create a new subsidiary to hold future wholesale water supply assets prior to the end of 2022. SJW Land Companyand Chester Realty, Inc.own undeveloped land and operate commercial buildings in Tennessee, Californiaand Connecticut. SJW Land Companyand Chester Realty, Inc.owned the following real properties during the six months ended June 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 utilities:
(1) Regional operations of regulated water utilities;
(2)Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in
California, the Public Utilities Regulatory Authority("PURA") in Connecticut, the Public Utilities Commission of Texas("PUCT") in Texas, and the Maine Public Utilities Commission("MPUC") in Maine; and
(3) Services related to water and utilities outside the region.
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 Groupcannot 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'sreal estate investment activity is conducted through SJW Land Companyand Chester Realty, Inc.As noted above, SJW Land Companyowns undeveloped land and operates commercial buildings in Tennessee. Chester Realty, Inc.owns and operates land and commercial buildings in Connecticut. SJW Land Companyand Chester 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 19 -------------------------------------------------------------------------------- accounting principles generally accepted in
the United States of Americaand 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 Commissionon 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. Overview
SJW Group'sconsolidated net income for the three months ended June 30, 2022, was $11,558, a decrease of $9,217, or approximately 44%, from $20,775for the same period in 2021. Consolidated net income includes a one-time impact of $441related to SJWC's Order Instituting Investigation settlement expenses. SJW Group'sconsolidated net income for the six months ended June 30, 2022, was $15,295, a decrease of $8,096, or approximately 35%, from $23,391for 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 $1,960related to depreciation on certain Cupertinoconcession assets and $1,709related to SJWC's Order Instituting Investigation settlement expenses and certain true-ups of deferred taxes and acquisition related tax expenses.
Revenue by segment
Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Water Utility Services
$ 147,675150,921 $ 270,621264,362 Real Estate Services 1,366 1,320 2,722 2,664 $ 149,041152,241 $ 273,343267,026 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 % 20
Operating expenses by segment
Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Water Utility Services
$ 121,227117,514 $ 226,657217,361 Real Estate Services 915 881 1,824 1,762 All Other 497 1,207 1,871 2,185 $ 122,639119,602 $ 230,352221,308 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) %
Fee for abstraction of purchased water and groundwater, variation in the price of energy 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 Californiathat 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 Joseduring the current annual rainfall season that commenced on July 1, 2021. Rainfall at SJWC's Lake Elsmanwas 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 Projectwas 5% or 1,629 million gallons and an additional allocation of human health and safety water has been secured. The U.S. Bureau of Reclamationallocation 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 Plainwas 84% of the five-year average. The groundwater level in the Santa Clara Plainis 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. 21 -------------------------------------------------------------------------------- On July 1, 2022, SJWC's Lake Elsmancontained 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 Elsmanvolume 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 Plantthrough 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 Plantis out of service due to lack of run-off from Saratoga Creekand 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 Austinand 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 shows the evolution of water supply sources, in millions of 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) %
Changes in the mix of supply sources have been consistent with changes in water production expenditures.
SJWC's unaccounted-for water on a 12-month-to-date basis for
June 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 for June 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 ended
June 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. Effective July 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, effective July 1, 2022. Other Operating Expenses Operating expenses, excluding water production expenses, increased $4,363for the three months ended June 30, 2022, compared to the same period in 2021. The increase was primarily attributable to increases of $1,934in administrative and general expenses primarily due to increases in labor and group insurance costs, and an increase of $1,695in depreciation and amortization due to increases in utility plant. Operating expenses, excluding water production expenses, increased $7,618for the six months ended June 30, 2022, compared to the same period in 2021. The increase was primarily attributable to increases of $5,863in depreciation and amortization due to increases in utility plant and a true up related to Cupertinoassets to adjust the useful lives over the concession term, and an increase of $5,247in administrative and general expenses primarily due to increases in labor and group insurance costs, partially offset by $5,450from the gain on sale of vacant land located in Californiaand nonutility property in Texas. Other (Expense) Income For the three and six months ended June 30, 2022, compared to the same period in 2021, the change in other (expense) income was primarily due to the $3,000pre-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 ended June 30, 2022, compared to the same period in 2021, income tax expense decreased $938and increased by $1,025, respectively. The decrease in income tax expense for the three months ended June 30, 2022was primarily due to a decrease in pre-tax book income while the increase in income tax expense for the six months ended June 30, 2022was primarily due to discrete tax expense items. The effective consolidated income tax rates were 17% and 14% for the three months ended June 30, 2022, and 2021, respectively, and 18% and 9% for the six months ended June 30, 2022, and 2021, respectively. The higher effective rate for the three and six months ended June 30, 2022, was also primarily due to discrete tax expense items.
Regulations and Tariffs
Almost all of the operating revenue of
SJW Groupresults 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 refer to Note 2 of the “Notes to the Condensed Consolidated Financial Statements”.
California Regulatory Affairs
January 4, 2021, SJWC filed General Rate Case Application No. 21-01-003 requesting authority for an increase of revenue of $51,585or 13.35% in 2022, $16,932or 3.88% in 2023, and $19,195or 4.24% in 2024. The application also includes requests to recover $18,499from balancing and memorandum accounts, authorization for a $435,000capital 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 on December 30, 2021, to request interim rates effective January 1, 2022, which will allow SJWC to retroactively apply the final decision to January 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 of January 1, 2022. SJWC and the Public Advocates Office filed an amended settlement agreement resolving all issues in the proceeding on February 4, 2022, which will be considered by the CPUC for adoption. The settlement provides a revenue increase of $54,131over the three-year period with an increase of $25,074in 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 $350,000capital 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 load. The settlement also approves the recovery of
May 3, 2021, SJWC filed Application No. 21-05-004 requesting authority to adjust its cost of capital for the period from January 1, 2022through December 31, 2024. The request seeks a revenue increase of $6,418or 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. On December 6, 2019, SJWC filed Application No. 19-12-002 to deploy Advanced Metering Infrastructure ("AMI") throughout its service area. On August 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 on June 10, 2022. On May 3, 2022, SJWC filed Advice Letter 575 to increase revenue requirement by $232or 0.06% for utility plant improvements to the Franciscan Station Pumps. This advice letter was approved on June 10, 2022with an effective date of July 1, 2022. SJWC filed Advice Letter No. 577 on May 24, 2022to increase revenue requirement by $24,331or 5.9% to offset the increases to purchased potable water charges, the groundwater extraction fee, and purchased recycled water charges from its water wholesalers effective July 1, 2022. Advice Letter No. 577 was approved on June 30, 2022.
Connecticut Regulatory Affairs
October 26, 2021, Connecticut Water filed for a Water Infrastructure Conservation Adjustment ("WICA") increase of approximately $21,746in 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. On December 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 and The Heritage Village Water Company, effective January 1, 2022which is expected to generate approximately $2,581in additional revenue. On February 14, 2022Connecticut Water filed its 2021 WICA reconciliation with PURA. The reconciliation, approved by PURA on March 16, 2022and effective for 12 months beginning April 1, 2022, replaced the expiring 2020 reconciliation surcharge of 0.07% with a credit of (0.02)%. As a result, the net WICA surcharge, effective April 1, 2022was 2.35%. On February 28, 2022Connecticut 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 on March 30, 2022and effective for 12 months beginning on April 1, 2022imposed a 2.85% surcharge on customer bills to collect the 2021 revenue shortfall. On April 26, 2022, Connecticut Water filed for a WICA increase of $9,779in completed projects. PURA approved the Company's application on June 22, 2022. The cumulative WICA charge as of July 1, 2022is 3.26%, collecting $3,448on an annual basis. On June 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 on December 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, 2022with the PUCT under Docket No. 53173. The PUCT modified the WPC formula which resulted in a new usage rate increasing from $0.70to $0.90 dollarsper thousand gallons. The new usage rate was effective March 1, 2022. The true-up report was approved by the PUCT on May 10, 2022and CLWSC received approval of the new tariff on May 24, 2022. CLWSC filed its annual WPC true-up report for its Kendall Westsystem on June 29, 2022with the PUCT under Docket No. 53751. CLWSC requested an increase from $2.39to $3.69per thousand gallons for the WPC. Subsequent to this filing, the increase requested was revised to $2.56per thousand gallons on July 15, 2022.
Maine Regulatory Affairs
The rates approved in the Biddeford Saco division by the
April 5, 2022stipulated agreement, which authorized a rate increase of $6,313, or 72.5% went into effect on July 1, 2022. The Saco River Drinking Water Resource Centerbegan supplying the water distribution system on June 16, 2022. 24 -------------------------------------------------------------------------------- On February 28, 2022, Maine Water filed requests for general rate increases in the Camden- Rockland, Freeport, Millinocketand Oakland Divisions. The four filings collectively request $532in new revenue and seek to reset the WISC in all four divisions. Individually, the Camden Rockland Division request is $225, or 3.4%; the Freeportrequest is $51, or 6.1%; the Millinocketrequest is $184, or 14.5%; and the Oaklandrequest 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.
Cash flow from operating activities
During the six months ended
June 30, 2022, SJW Groupgenerated cash flows from operations of approximately $83,600, compared to $67,100for 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 $25,500in 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 $2,700more than in prior year, and (4) payments of amounts previously invoiced and accrued including accrued production costs, decreased by $1,200. As of June 30, 2022, Water Utility Services' write-offs for uncollectible accounts represented less than 1% of its total revenue, unchanged from June 30, 2021. As of February 1, 2022, the remaining state executive order suspending water service disconnections due to non-payment by customers expired in California. 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. On February 3, 2022, SJWC received $9,757through 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 of June 30, 2021. Bill credits were applied to customer accounts that remained outstanding and the excess of $3,272was returned to the State 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 ended
June 30, 2022, SJW Groupused cash flows from investing activities of approximately $117,100, compared to $107,000for the same period in 2021. SJW Groupused approximately: (1) $101,600of cash for company-funded capital expenditures, (2) $13,300for developer-funded capital expenditures, and (3) $1,800for 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 of June 30, 2022, approximately $101,600or 46% of the $223,000has 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 $1,300,000in 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 ended
June 30, 2022, decreased by approximately $24,700from 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 $72,000from 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) $1,100increase in net cash receipts from advances and contributions in aid of construction.
Sources of capital:
SJW Group'sability 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
$ 140,00066,000 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 $ 260,000141,336 118,664
(a) The credit agreement also provides for a letter of credit sub-limit of
During the first half of 2022, the cost of borrowing on credit lines averaged 1.44% compared to 1.39% in the same period of 2021.
SJW Group'sand 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 of June 30, 2022, SJW Groupand its subsidiaries were in compliance with all covenants on their lines of credit.
Long-term financing agreements
SJW Groupand 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. On April 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 $15,000and a fixed interest rate of 4.54%, due May 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 on May 13, 2022. On June 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 $25,000of its 4.71% Senior Notes, Series 2022, due 2052. The closing of the note purchase agreement is expected to occur on December 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 on June 15thand December 15thof 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 --------------------------------------------------------------------------------
event of default, the occurrence of which may cause all Series 2022 Notes then outstanding to become immediately due and payable.
July 14, 2022, SJWC entered into a note purchase agreement with certain affiliates of New York Life Insurance, Metropolitan Life Insurance, Northwestern Mutual Life Insurance, and John Hancock Life Insurance(collectively the "Purchasers"), pursuant to which the company will sell an aggregate principal amount of $70,000of 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 on February 1, 2053. Interest is payable semi-annually in arrears on February 1stand August 1stof 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 in January 2023upon satisfaction of customary closing conditions. The debt and credit agreements of SJW Groupand 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 of June 30, 2022, SJW Groupand its subsidiaries were in compliance with all covenants related to its long-term debt agreements. Equity Financing Arrangements On November 17, 2021, SJW Groupentered into an equity distribution agreement (the "Equity Distribution Agreement") with J.P. Morgan Securities LLC, Janney Montgomery Scott LLC, RBC Capital Markets, LLCand Wells 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, $0.001par 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 the New York Stock Exchangeor 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 of June 30, 2022, SJW Grouphas $75,000remaining on the Equity Distribution agreement. No shares were sold in the first and second quarters of 2022.
The condition of the capital and credit markets or the strength of financial institutions could impact
SJW Group'sability 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 increase SJW Group'scost 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 current Standard & Poor's Rating Serviceassigned company rating for SJW Groupis 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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