SJW GROUP MANAGEMENT DISCUSSION AND ANALYSIS OF THE FINANCIAL POSITION AND OPERATING RESULTS (Form 10-Q)
(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 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, 2020 . 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:
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 , 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 230 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 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 140,000 connections that serve a population of approximately 457,000 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. CTWS also offers Linebacker, an optional service line protection program to eligible residential customers through NEWUS inConnecticut andMaine . 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 22,000 connections that serve approximately 65,000 people. CLWSC's service area comprises more than 248 square miles in the southern region of the Texas Hill Country inBlanco ,Comal ,Hays andTravis 21 -------------------------------------------------------------------------------- counties, the growing region betweenSan Antonio andAustin, Texas . OnJuly 1, 2021 , CLWSC completed the asset purchase ofClear Water Estates Water System, LLC which added approximately 230 connections and 0.6 square miles to the service area. CLWSC 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 Accounting Standards Codification Topic 810 with CLWSC as the primary beneficiary. As a result, Acequia has been consolidated with CLWSC.SJW Land Company owns undeveloped land and operates commercial buildings inTennessee .SJW Land Company owned the following real properties during the nine months endedSeptember 30, 2021 : % for Nine months ended September 30, 2021 of SJW Land Company Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 48 % 44 % Commercial building Knoxville, Tennessee 15 135,000 52 % 56 % Undeveloped land and parking lot Knoxville, Tennessee 10 N/A N/A N/A Undeveloped land (1) San Jose, California 103 N/A N/A N/A ____________________ (1) OnOctober 29, 2021 , SJW Land sold 1.93 acres of undeveloped land located inSan Jose, California . See Note 13, "Subsequent Events" of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the transaction. As ofSeptember 30, 2021 ,Chester Realty, Inc. owns 23 acres of undeveloped land and a commercial building in theState of Connecticut . Business Strategy for Water Utility Services:SJW Group focuses its business initiatives in three strategic areas: (1)Regional regulated water utility operations; (2)Regional non-tariffed water utility related services provided in accordance with the guidelines established by theCalifornia Public Utilities Commission inCalifornia , thePublic Utilities Regulatory Authority inConnecticut , thePublic Utilities Commission of Texas inTexas , and theMaine Public Utilities Commission 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 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. 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 in theState of Connecticut .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. 22 -------------------------------------------------------------------------------- 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 2020 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, 2020 , that was filed with theSecurities and Exchange Commission onMarch 1, 2021 . 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, 2020 . There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2020 Consolidated Financial Statements included in our annual report on Form 10-K for the year endedDecember 31, 2020 . Recently Adopted Accounting Policies: See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recently adopted accounting policies for the nine months endedSeptember 30, 2021 . 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 endedSeptember 30, 2021 , was$19,068 , a decrease of$7,025 , or approximately 27%, from$26,093 for the same period in 2020.SJW Group's consolidated net income for the nine months endedSeptember 30, 2021 , was$42,459 , a decrease of$5,772 , or approximately 12%, from$48,231 for the same period in 2020. The decrease in net income for the three months endedSeptember 30, 2021 , was primarily due to an increase in production costs due to increases in average per unit costs for purchased water, groundwater extraction, energy charges, and a decrease in available surface water at SJWC. In addition, administrative and general expenses increased due to higher compensation, contracted work charges and the impact of one-time credits in 2020 that not recur in 2021. The decrease in net income for the nine months endedSeptember 30, 2021 , was primarily due to an increase in production costs due to increases in average per unit costs for purchased water, groundwater extraction, energy charges and a decrease in available surface water at SJWC, and an increase in administrative and general expenses increased primarily due to the same factors noted for the three months endedSeptember 30, 2021 , as described above. These increases were partially offset by an increase in revenue of$5,123 or 1% from an increase in cumulative water rates and net recognition of other regulatory mechanisms and certain balancing and memorandum accounts, net of a decrease in customer usage. In addition, for the nine months endedSeptember 30, 2021 ,SJW Group recorded a$3,000 pre-tax gain on sale of utility property from the release of a holdback amount byGuadalupe-Blanco River Authority ("GBRA") in connection with the sale ofTexas Water Alliance Limited ("TWA") that occurred in 2017. Coronavirus ("COVID-19") Update The outbreak of COVID-19 has had significant impact on the global economy. Financial impacts experienced bySJW Group due to the COVID-19 pandemic include higher uncollectible accounts receivables and increased costs from COVID-19 related prevention activities. The regulators in the statesSJW Group operates have approved mechanisms to either record a regulatory asset or track in a memorandum account expenses and savings related to COVID-19. SJWC and CLWSC have determined that future recovery of the amount related to COVID-19 activities are probable and have recognized the related regulatory assets. Probability criteria have not yet been met for CTWS. If a state regulator disagrees with the calculation of recorded COVID-19 account balances, we may be required to make adjustments that could adversely affect our results of operations.SJW Group continues to monitor COVID-19 developments affecting our business, employees and suppliers and will take additional precautions as management believes is necessary. See Item 1A, "Risk Factors" for further discussion. 23 --------------------------------------------------------------------------------
Operating revenue
Operating income by segment
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Water Utility Services $ 165,520 164,460 $ 429,882 424,609
Real Estate Services 1,403 1,403 4,067 4,217
$ 166,923 165,863 $ 433,949 428,826
The change in consolidated operating revenues was due to the following factors:
Three months ended Nine months ended
September 30, September 30,
2021 vs. 2020 2021 vs. 2020
Increase/(decrease) Increase/(decrease)
Water Utility Services:
Consumption changes (including unbilled utility
revenue) $ (12,850) (8) % $ (14,215) (3) %
Increase in customers 909 1 % 2,027 - %
Rate increases 7,642 5 % 14,044 3 %
Texas winter storm customer credits - - % (839) - %
Balancing and memorandum accounts 1,847 1 % 1,632 - %
Other regulatory mechanisms 3,267 2 % 2,380 1 %
Other 245 - % 244 - %
Real Estate Services - - % (150) - %
$ 1,060 1 % $ 5,123 1 %
Operating Expense
Operating Expense by Segment
Three months ended September 30, Nine months ended September 30,
2021 2020 2021 2020
Water Utility Services $ 132,071 122,046 $ 349,432 328,368
Real Estate Services 956 961 2,718 2,642
All Other 122 973 2,307 4,436
$ 133,149 123,980 $ 354,457 335,446
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The change in consolidated operating expenses was due to the following factors:
Three months ended Nine months ended
September 30, September 30,
2021 vs. 2020 2021 vs. 2020
Increase/(decrease) Increase/(decrease)
Water production expenses:
Change in surface water use $ 1,221 1 % $ 3,879 1 %
Change in usage and new customers (7,451) (6) % (5,763) (1) %
Purchased water and groundwater extraction costs, change in energy price and other production expenses, net
7,814 6 % 6,299 2 %
Balancing and memorandum accounts cost recovery 834 1 % 668 - %
Total water production expenses 2,418 2 % 5,083 2 %
Administrative and general 4,370 4 % 7,770 3 %
Balance and memorandum account cost recovery (1,186) (1) % (1,755) (1) %
Maintenance 600 - % 2,032 1 %
Balance and memorandum account cost recovery 1,219 1 % 1,219 - %
Property taxes and other non-income taxes 328 - % 427 - %
Depreciation and amortization 1,420 1 % 4,235 1 %
$ 9,169 7 % $ 19,011 6 %
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 California
Public Utilities Commission (" 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 October 1,
2021 , Valley Water's 10 reservoirs were at approximately 12% of total capacity
with 6,252 million gallons of water in storage, which is 26% of the twenty-year
average for this date. Valley Water's largest reservoir, Anderson, remains
drained in preparation for the 8-10 year Anderson Dam Seismic Retrofit Project .
As reported by Valley Water, there was zero 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 zero 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 October 1, 2021 , Valley Water reported that allocations from the
State Water Project was 5% or 1,629 million gallons. Valley Water received
conditional approval for an increase of the Central Valley Project allocation
from the original allocation of 25%. Conditional approval is based on public
health and safety needs, and increases the total allocation to 23,298 million
gallons. Valley Water reported that its Semitropic groundwater bank reserves are
at 91% of capacity or 103,931 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 September in the Santa
Clara Plain was 46% of the five-year average. The groundwater level in the Santa
Clara Plain is approximately 14 feet lower than the five-year average. According
to Valley Water, the projected total groundwater storage at the end of 2021 is
expected to fall within the Alert Stage of the Valley Water's Water Shortage
Contingency Plan.
On October 1, 2021 , SJWC's Lake Elsman contained 191 million gallons of water,
of which approximately 41 million gallons can be utilized for treatment in water
production. This Lake Elsman volume represents 18% 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. 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 third quarter was 259 million gallons, which is 14% of the five-year
average. On April 14, 2021 , SJWC took the Montevina Surface Water Treatment
Plant offline due to worsening hydrologic conditions in the local watershed. The
plant remains offline. Through the third quarter, there was no water production
at SJWC's smaller Saratoga Water Treatment Plant . The Saratoga Water Treatment
Plant was unable to be placed into service due to lack of run-off from Saratoga
Creek and remains offline.
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Nonetheless, SJWC believes that its various other water supply sources will be
sufficient to meet customer demand through the remainder of 2021.
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 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 72% of the total
dependable yield comes from wells and 28% from surface water supplies.
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
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 and West Travis Public Utility Agency
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. CLWSC has
recently updated its Drought Management Plan to better account for both climatic
conditions within its service area and increased demand due to new developments.
The updated Drought Management Plan has been approved by the Texas Commission
for Environmental Quality . CLWSC believes that by following the Drought
Management Plan water supply sources will be sufficient to meet customer demand
through the remainder of 2021.
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 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 September 30 , Increase/ % of Total Nine months ended September 30 , Increase/ % of Total
2021 2020 (decrease) Change 2021 2020 (decrease) Change
Purchased water 5,703 7,478 (1,775) (10) % 15,601 16,462 (861) (2) %
Groundwater 6,283 6,265 18 - % 16,850 16,110 740 2 %
Surface water 3,113 2,914 199 1 % 6,947 7,893 (946) (2) %
Reclaimed water 341 326 15 - % 669 605 64 - %
15,440 16,983 (1,543) (9) % 40,067 41,070 (1,003) (2) %
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 September 30, 2021 ,
and 2020 approximated 6.9% and 6.6%, 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 September 30, 2021
was approximately 14.6% as a percentage of total production. Unaccounted-for
water on an acquisition-to-date basis for the period ended September 30, 2020
was approximately 16.9%. 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.
Water Production Expenses
The change in water production expenses for the three and nine months ended
September 30, 2021 , compared to the same period in 2020, was primarily
attributable to increases in average per unit costs for purchased water,
groundwater extraction, energy charges and other production expenses, and a
decrease in available surface water for SJWC, offset by a decrease in
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customer usage. 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%.
Other Operating Expenses
Operating expenses, excluding water production expenses, increased $6,751 for
the three months ended September 30, 2021 , compared to the same period in 2020.
The increase was primarily attributable to increases of $4,370 in administrative
and general expenses primarily due to a credit to expense for the Current
Expected Credit Loss ("CECL") adoption in prior year and increases in labor,
contracted work and rate case expenses, offset by lower accounting fees. In
addition, maintenance expense increased $1,819 due to the reversal of the
Hydroturbine reserve in the prior year and depreciation and amortization expense
increased $1,420 due to increases in utility plant.
Operating expenses, excluding water production expenses, increased $13,928 for
the nine months ended September 30, 2021 , compared to the same period in 2020.
The increase was primarily attributable to increases of $7,770 in administrative
and general expenses primarily due to a credit to expense for the CECL adoption
in prior year and increases in labor, group insurance costs, rate case expenses
and contracted work, offset by lower accounting fees, $4,235 in depreciation and
amortization expense due to increases in utility plant, and $3,251 in
maintenance expenses.
Other (Expense) Income
For the three months ended September 30, 2021 , compared to the same period in
2020, the change in other (expense) income was primarily due to gain on sale of
real estate investments recorded in prior year.
For the nine months ended September 30, 2021 , compared to the same period in
2020, the change in other (expense) income was primarily due to a $3,000 pre-tax
gain on sale from the release of a holdback amount by GBRA for the sale of TWA
recorded in 2017.
Provision for Income Taxes
For the three and nine months ended September 30, 2021 , compared to the same
period in 2020, income tax expense decreased $1,829 and $4,067 , respectively.
The decrease in income tax expense was primarily due to a decrease in pre-tax
book income and flow-through tax benefits. The effective consolidated income tax
rates were 13% and 15% for the three months ended September 30, 2021 , and 2020,
respectively, and 11% and 16% for the nine months ended September 30, 2021 , and
2020, respectively. The lower effective rates for the three and nine months
ended September 30, 2021 , were primarily due to flow-through tax benefits.
On March 11, 2021 , the American Rescue Plan Act ("Act") was signed into law. SJW
Group has considered the income tax implications of the Act in its estimated tax
provision and does not believe it will materially impact the company's year-end
tax rate.
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 2 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 nine months endedSeptember 30, 2021 ,SJW Group generated cash flows from operations of approximately$100,300 , compared to$70,600 for the same period in 2020. 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$29,700 . This increase was the result of a combination of the following factors: (1) an increase in collections from accounts receivable and accrued unbilled utility revenue of$14,800 , (2) payments of amounts previously invoiced and accrued including accrued productions costs, increased by$7,000 , (3) an up-front payment of$5,000 in the prior year for renewal of theCupertino service concession agreement that did not reoccur in the current year, (4) net income adjusted for non-cash items increased by$5,400 primarily due to deferred income taxes, and (5) general working capital items increased$3,000 , offset by, (6) a decrease in net collection of taxes receivable which was$5,500 . 27 -------------------------------------------------------------------------------- As ofSeptember 30, 2021 , Water Utility Services' write-offs for uncollectible accounts represented less than 1% of its total revenue, unchanged fromSeptember 30, 2020 . In 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 then current stay-at-home orders, quarantines and similar governmental restrictions in response to the global COVID-19 pandemic. Some of the orders have been lifted and the anticipation is that the remaining orders will be lifted at the end of 2021. Once lifted, management believes that the collection rate for its accounts receivables will return to pre-pandemic levels. The financial impact of certain 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 nine months endedSeptember 30, 2021 ,SJW Group used cash flows from investing activities of approximately$182,900 , compared to$141,200 for the same period in 2020.SJW Group used approximately: (1)$169,200 of cash for company-funded capital expenditures, (2)$12,500 for developer-funded capital expenditures, and (3)$3,500 for utility plant retirements. Water Utility Services' budgeted capital expenditures for 2021, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately$238,800 . As ofSeptember 30, 2021 , approximately$169,200 or 71% of the$238,800 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 expect to incur approximately$1,400,000 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. Cash Flow from Financing Activities Net cash provided by financing activities for the nine months endedSeptember 30, 2021 , increased by approximately$16,700 from the same period in the prior year, primarily as a result of (1) an increase in net proceeds from our recent common stock equity offering of$66,800 , (2) an increase in net proceeds of$8,900 from new long-term debt, and (3)$4,600 increase in net cash receipts from advances and contributions in aid of construction, offset by (4) a decrease in net borrowings and repayments on our lines of credit of$61,600 , and (5) an increase of dividends paid to stockholders of$2,600 . 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. Long-term Financing AgreementsSJW Group's 2011 unsecured senior note of$50,000 was paid in full at maturity onJune 30, 2021 .SJW Group's remaining 2019 and 2020 unsecured senior note agreements have terms and conditions that restrictSJW Group from issuing additional funded debt if the funded consolidated debt would exceed 70% of total capitalization.SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions atSeptember 30, 2021 . 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 ofSeptember 30, 2021 , 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 28 -------------------------------------------------------------------------------- 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 atSeptember 30, 2021 . OnJune 25, 2021 , SJWC entered into a note purchase agreement with certain affiliates of New York Life Insurance (collectively the "Purchasers"), pursuant to which the company sold an aggregate principal amount of$50,000 of its 3.00% Senior Notes, Series N ("Series N Notes") to the Purchasers. The Series N Notes are unsecured obligations of SJWC and are due onJune 25, 2051 . Interest is payable semi-annually in arrears onJanuary 1st andJuly 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series N Notes are outstanding. The Series N Notes are also subject to customary events of default, the occurrence of which may result in all of the Series N Notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement. As ofSeptember 30, 2021 , SJWC was in compliance with all such covenants. OnAugust 4, 2021 , SJWC entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which the company sold an aggregate principal amount of$50,000 of its 3.00% Senior Notes, Series O ("Series O Notes"), dueDecember 1, 2051 . The Series O Notes are unsecured obligations of SJWC. Interest is payable semi-annually in arrears onJune 1st andDecember 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series O Notes are outstanding. The Series O Notes are also subject to customary events of default, the occurrence of which may result in all of the Series O Notes then outstanding becoming immediately due and payable. The closing of the note purchase agreement is expected to occur onDecember 1, 2021 . As ofSeptember 30, 2021 , SJWC was in compliance with all such covenants. 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 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 ofSeptember 30, 2021 , 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 customary affirmative and negative 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 ofSeptember 30, 2021 , 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 customary affirmative and negative 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% and an interest coverage ratio of no less than 3 to 1. As ofSeptember 30, 2021 ,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 also provide for the acceleration of the Revenue Bonds upon the occurrence of stated events of default. As ofSeptember 30, 2021 , 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 of no less than 3 to 1. As ofSeptember 30, 2021 , Connecticut Water was in compliance with all covenants under this agreement. OnAugust 4, 2021 , Connecticut Water entered into a note purchase agreement with certain affiliates ofMetropolitan Life Insurance Company , New York Life Insurance Company, theNorthwestern Mutual Life Insurance Company andPacific Life Insurance Company , pursuant to which Connecticut Water sold onAugust 4, 2021 , an aggregate principal amount of$50,000 of its 3.07% Senior Notes, Series 2021A, due 2051 (the "2021A Notes") and will sell onDecember 1, 2021 , an aggregate principal amount of$50,000 of its 3.10% Senior Notes, Series 2021B, due 2051 (the "2021B Notes" and together with the 2021A Notes, the "CWC Notes"). The closing onDecember 1, 2021 , is subject to customary closing conditions. The CWC Notes are unsecured obligations of Connecticut Water, with the 2021A Notes due onJune 1, 2051 , and the 2021B Notes due onDecember 1, 2051 . Interest on the CWC Notes is payable semi-annually in arrears onJune 1st andDecember 1st 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 CWC Notes are outstanding. The CWC Notes are also subject to customary events of default, the occurrence of which may result in all of the CWC Notes then outstanding becoming immediately due and payable. The proceeds from the sale of the CWC Notes will be used to repay outstanding short and/or long-term borrowings, to fund Connecticut Water's capital expenditures, and/or for other general corporate purposes. As ofSeptember 30, 2021 , Connecticut Water was in compliance with all covenants under this agreement. 29 -------------------------------------------------------------------------------- CLWSC's unsecured senior note agreement has terms and conditions that restrict CLWSC 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 of CLWSC'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 ofSeptember 30, 2021 ,CLWSC andSJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions. OnMay 13, 2021 , CLWSC entered into a master credit agreement and promissory note with a commercial bank under which it entered into a borrowing agreement for an aggregate principal amount not to exceed$30,000 , of which$20,000 was advanced at the closing date. The borrowing carries a fixed interest rate of 4.01% due onMarch 20, 2041 . The remaining aggregate principal amount of the promissory note is to be advanced at the discretion of CLWSC before the maturity date. The notes are unsecured obligations of CLWSC. 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, CLWSC 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. 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% and an interest coverage ratio of no less than 3 to 1, required compliance with other various financial covenants, and a provision for maturity acceleration upon the occurrence of stated events of default. As ofSeptember 30, 2021 ,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 customary affirmative and negative 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% and an interest coverage ratio of no less than 3 to 1. As ofSeptember 30, 2021 ,Maine Water was in compliance with all covenants under its master loan agreement. OnMarch 2, 2021 , 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$17,000 and a fixed interest rate of 3.89%, dueMarch 1, 2041 . 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 onMarch 18, 2021 . As ofSeptember 30, 2021 , Maine Water was in compliance with all financial, affirmative and negative covenants under this agreement. Short-term Financing Agreements As ofSeptember 30, 2021 ,SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to$260,000 , of which$5,000 was available to CLWSC under a single line of credit,$140,000 was available to SJWC under a single line of credit, and$40,000 and$75,000 , respectively, under a third and fourth line of credit was available to CTWS. AtSeptember 30, 2021 ,SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling$137,928 . The lines of credit bear interest at variable rates. OnApril 23, 2021 , the$140,000 line of credit of SJWC, which was set to mature and expire onJune 1, 2021 , was closed and replaced by a new$140,000 line of credit that will expire onDecember 31, 2023 . OnApril 23, 2021 , the$5,000 line of credit of CLWSC, which was set to mature and expired onJune 1, 2021 , was closed and replaced by a new$5,000 line of credit that will expire onDecember 31, 2023 . The$40,000 and$75,000 lines of credit for CTWS expireMay 15, 2025 andDecember 14, 2023 , respectively. During 2021, the cost of borrowing onSJW Group's short-term credit facilities has averaged 1.34%. 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 ofSeptember 30, 2021 ,SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit. 30
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Equity Financing Agreement OnMarch 8, 2021 ,SJW Group entered into an underwriting agreement withJ.P. Morgan Securities LLC , as the representative of the several underwriters named therein (the "Underwriters"), which provided for the issuance and sale bySJW Group to the Underwriters of 1,030,000 shares of our common stock, par value$0.001 per share, in an underwritten public offering (the "Offering"). The shares in the Offering were sold at a public offering price of$59.00 per share.SJW Group also granted the Underwriters an option to purchase up to 154,500 additional shares of our common stock, which was exercised in full. The Offering closed onMarch 10, 2021 , and the offering of option shares closed onMarch 16, 2021 .SJW Group received net proceeds of approximately$66,775 from the Offering and the sale of option shares, after deducting the underwriting discounts and commissions and offering expenses.SJW Group used the proceeds from the offerings to pay down a bank line of credit agreement, dated as ofJune 1, 2016 , betweenSJWC andJPMorgan Chase Bank, N.A . and for general corporate purposes, which include, among other things, financing infrastructure improvements and other capital expenditures, repayment of debt or other corporate obligations and working capital. 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 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 Ratings Service assigned the company rating forSJW Group as an A-, with a stable outlook, SJWC as an A, with a stable outlook, and Connecticut Water as an A- with a stable outlook.
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