Item 1. Financial Statements
ITEM 1.
FINANCIAL STATEMENTS
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
Three months ended June 30,
Six months ended June 30,
2020
2019
2020
2019
REVENUE
$
147,209
102,965
$
262,963
180,647
OPERATING EXPENSE:
Production Expenses:
Purchased water
25,889
26,381
41,823
40,043
Power
3,426
1,493
6,151
2,653
Groundwater extraction charges
18,583
9,100
33,611
15,963
Other production expenses
10,280
5,159
20,373
10,258
Total production expenses
58,178
42,133
101,958
68,917
Administrative and general
17,772
13,408
39,388
25,699
Maintenance
5,334
4,729
11,420
9,054
Property taxes and other non-income taxes
7,102
3,848
14,565
7,976
Depreciation and amortization
22,753
15,101
44,135
30,246
Merger related expenses
—
1,775
—
4,376
Total operating expense
111,139
80,994
211,466
146,268
OPERATING INCOME
36,070
21,971
51,497
34,379
OTHER (EXPENSE) INCOME:
Interest on long-term debt and other interest expense
( 13,180
)
( 6,714
)
( 26,464
)
( 12,505
)
Pension non-service cost
( 7
)
( 907
)
( 52
)
( 1,828
)
Interest income on money market fund
—
2,342
—
4,174
Gain on sale of real estate investments
—
745
—
745
Other, net
1,048
517
1,805
907
Income before income taxes
23,931
17,954
26,786
25,872
Provision for income taxes
4,210
4,192
4,648
6,237
NET INCOME BEFORE NONCONTROLLING INTEREST
19,721
13,762
22,138
19,635
Less net income attributable to the noncontrolling interest
—
224
—
224
SJW GROUP NET INCOME
19,721
13,538
22,138
19,411
Other comprehensive income (loss), net
10
—
( 125
)
—
SJW GROUP COMPREHENSIVE INCOME
$
19,731
13,538
$
22,013
19,411
SJW GROUP EARNINGS PER SHARE
Basic
$
0.69
0.48
$
0.78
0.68
Diluted
$
0.69
0.47
$
0.77
0.68
DIVIDENDS PER SHARE
$
0.32
0.30
$
0.64
0.60
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic
28,507,940
28,440,221
28,498,649
28,431,764
Diluted
28,683,208
28,526,022
28,678,715
28,516,927
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
3
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
June 30,
2020
December 31,
2019
ASSETS
Utility plant:
Land
$
34,929
34,395
Depreciable plant and equipment
3,031,451
2,988,454
Construction in progress
144,429
112,232
Intangible assets
32,826
33,424
3,243,635
3,168,505
Less accumulated depreciation and amortization
1,004,776
962,019
2,238,859
2,206,486
Real estate investments
58,023
57,699
Less accumulated depreciation and amortization
14,197
13,597
43,826
44,102
CURRENT ASSETS:
Cash and cash equivalents:
Cash
23,317
12,944
Restricted cash
—
5,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts
44,880
36,305
Income tax
2,783
8,837
Other
2,043
2,833
Accrued unbilled utility revenue
55,398
40,102
Current regulatory assets, net
5,691
6,472
Other current assets
11,431
9,553
145,543
122,046
OTHER ASSETS:
Net regulatory assets, less current portion
132,539
113,945
Investments
13,493
12,928
Goodwill
628,343
628,287
Other
7,374
4,676
781,749
759,836
$
3,209,977
3,132,470
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
4
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
June 30,
2020
December 31,
2019
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Stockholders’ equity:
Common stock, $0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 28,516,705 on June 30, 2020 and 28,456,508 on December 31, 2019
$
29
28
Additional paid-in capital
508,098
506,639
Retained earnings
387,003
383,191
Accumulated other comprehensive income
1
126
Total stockholders’ equity
895,131
889,984
Long-term debt, less current portion
1,315,979
1,283,597
2,211,110
2,173,581
CURRENT LIABILITIES:
Line of credit
146,671
117,209
Current portion of long-term debt
22,354
22,272
Accrued groundwater extraction charges, purchased water and power
26,614
17,211
Accounts payable
24,295
34,886
Accrued interest
12,390
13,140
Accrued payroll
12,064
11,570
Other current liabilities
13,578
18,279
257,966
234,567
DEFERRED INCOME TAXES
195,116
195,598
ADVANCES FOR CONSTRUCTION
120,808
112,339
CONTRIBUTIONS IN AID OF CONSTRUCTION
288,317
286,035
POSTRETIREMENT BENEFIT PLANS
113,983
108,044
OTHER NONCURRENT LIABILITIES
22,677
22,306
COMMITMENTS AND CONTINGENCIES
—
—
$
3,209,977
3,132,470
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
5
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Noncontrolling Interest
Total
Stockholders’
Equity
Number of
Shares
Amount
BALANCES, December 31, 2019
28,456,508
$
28
$
506,639
$
383,191
$
126
$
—
$
889,984
Net income
—
—
—
2,417
—
—
2,417
Unrealized loss on investment, net of tax benefit of $50
—
—
—
—
( 135
)
—
( 135
)
Share-based compensation
—
—
251
( 43
)
—
—
208
Issuance of restricted and deferred stock units
25,781
—
( 785
)
—
—
—
( 785
)
Employee stock purchase plan
15,552
—
970
—
—
—
970
Dividends paid ($0.32 per share)
—
—
—
( 9,118
)
—
—
( 9,118
)
BALANCES, March 31, 2020
28,497,841
28
507,075
376,447
( 9
)
—
883,541
Net income
—
—
—
19,721
—
—
19,721
Unrealized gain on investment, net of tax of $4
—
—
—
—
10
—
10
Share-based compensation
—
—
1,009
( 43
)
—
—
966
Issuance of restricted and deferred stock units
18,864
1
14
—
—
—
15
Dividends paid ($0.32 per share)
—
—
—
( 9,122
)
—
—
( 9,122
)
BALANCES, June 30, 2020
28,516,705
$
29
$
508,098
$
387,003
$
1
$
—
$
895,131
Common Stock
Additional
Paid-in
Capital
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Noncontrolling Interest
Total
Stockholders’
Equity
Number of
Shares
Amount
BALANCES, December 31, 2018
28,404,316
$
28
$
495,366
$
393,918
$
—
$
—
$
889,312
Net income
—
—
—
5,873
—
—
5,873
Cumulative effect of change in accounting principle, net of tax effect of $33
—
—
—
97
—
—
97
Share-based compensation
—
—
886
( 16
)
—
—
870
Issuance of restricted and deferred stock units
14,312
—
( 132
)
—
—
—
( 132
)
Employee stock purchase plan
15,932
—
811
—
—
—
811
Common stock issuance cost
—
—
( 10
)
—
—
—
( 10
)
Dividends paid ($0.30 per share)
—
—
—
( 8,528
)
—
—
( 8,528
)
BALANCES, March 31, 2019
28,434,560
28
496,921
391,344
—
—
888,293
Net income before noncontrolling interest
—
—
—
13,538
—
224
13,762
Distribution to noncontrolling interest
—
—
—
—
—
( 224
)
( 224
)
Share-based compensation
—
—
718
( 16
)
—
—
702
Issuance of restricted and deferred stock units
7,579
—
( 6
)
—
—
—
( 6
)
Dividends paid ($0.30 per share)
—
—
—
( 8,532
)
—
—
( 8,532
)
BALANCES, June 30, 2019
28,442,139
$
28
$
497,633
$
396,334
$
—
$
—
$
893,995
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
6
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
Six months ended June 30,
2020
2019
OPERATING ACTIVITIES:
Net income
$
22,138
19,635
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
45,608
31,576
Deferred income taxes
( 977
)
( 2,939
)
Stock-based compensation
1,260
1,604
Gain on sale of real estate investments
—
( 745
)
Changes in operating assets and liabilities:
Accounts receivable and accrued unbilled utility revenue
( 23,081
)
( 11,275
)
Accounts payable and other current liabilities
( 9,012
)
830
Accrued groundwater extraction charges, purchased water and power
9,403
3,931
Tax payable and receivable, and other accrued taxes
5,734
( 41
)
Postretirement benefits
4,295
1,942
Regulatory assets and liabilities related to balancing and memorandum accounts
( 13,903
)
6,237
Up-front service concession payment
( 5,000
)
—
Other noncurrent assets and noncurrent liabilities
( 2,881
)
( 2,194
)
Other changes, net
( 1,244
)
1,196
NET CASH PROVIDED BY OPERATING ACTIVITIES
32,340
49,757
INVESTING ACTIVITIES:
Additions to utility plant:
Company-funded
( 74,081
)
( 62,330
)
Contributions in aid of construction
( 5,044
)
( 7,800
)
Additions to real estate investments
( 324
)
( 137
)
Payments to retire utility plant, net of salvage
( 1,649
)
( 3,009
)
Proceeds from sale of real estate investments
—
745
NET CASH USED IN INVESTING ACTIVITIES
( 81,098
)
( 72,531
)
FINANCING ACTIVITIES:
Borrowings on line of credit
89,196
66,000
Repayments on line of credit
( 59,734
)
( 111,000
)
Long-term borrowings
35,000
80,000
Repayments of long-term borrowings
( 1,706
)
—
Debt issuance and broker fee costs
( 214
)
( 847
)
Dividends paid
( 18,240
)
( 17,060
)
Receipts of advances and contributions in aid of construction
11,064
7,836
Refunds of advances for construction
( 1,326
)
( 1,390
)
Other changes, net
91
362
NET CASH PROVIDED BY FINANCING ACTIVITIES
54,131
23,901
NET CHANGE IN CASH AND CASH EQUIVALENTS
5,373
1,127
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
17,944
420,722
CASH AND CASH EQUIVALENTS, END OF PERIOD
$
23,317
421,849
Cash paid during the period for:
Interest
$
30,030
13,332
Income taxes
5
9,581
Supplemental disclosure of non-cash activities:
Change in accrued payables for construction costs capitalized
( 4,166
)
2,348
Utility property installed by developers
3,154
( 109
)
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
7
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2020
(in thousands, except share and per share data)
Note 1.
General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.
The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). The Notes to Consolidated Financial Statements in SJW Group’s 2019 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments,” and subsequent amendments. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. ASU 2016-13 was effective for SJW Group in the first quarter of fiscal 2020. The adoption of ASU 2016-13 did not have a material impact on the consolidated financial statements.
Revenue
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 precipitation curtail water usage and sales.
The major streams of revenue for SJW Group are as follows:
Three months ended June 30,
Six months ended June 30,
2020
2019
2020
2019
Revenue from contracts with customers
$
142,163
104,299
$
247,299
183,227
Alternative revenue programs, net
3,049
( 327
)
3,553
( 2,306
)
Other balancing and memorandum accounts revenue, net
553
( 2,376
)
9,297
( 3,009
)
Rental income
1,444
1,369
2,814
2,735
$
147,209
102,965
$
262,963
180,647
Earnings per Share
Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”), shares potentially issuable under the performance stock plans assumed through the business combination with Connecticut Water Service, Inc. (“CTWS”), and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended June 30, 2020 and 2019 , 9,397 and 2,217 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the six months ended June 30, 2020 and 2019 , 19,191 and 9,634 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.
Utility Plant Depreciation
A portion of depreciation expense is allocated to administrative and general expense. For the three months ended June 30, 2020 and 2019 , the amounts allocated to administrative and general expense were $ 370 and $ 673 , respectively. For the six months ended June 30, 2020 , and 2019 , the amounts allocated to administrative and general expense were $ 1,469 and $ 1,330 , respectively.
8
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
Note 2.
Equity Plans
SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on the estimated fair value of stock-based payment awards.
The Incentive Plan allows SJW Group to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Group. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance shares, or other share-based awards. As of June 30, 2020 , 179,913 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units and an additional 745,492 shares are available for award issuances under the Incentive Plan. In addition, shares are issued to employees under the company’s ESPP.
In connection with the merger with CTWS on October 9, 2019, SJW Group assumed outstanding awards of restricted stock units and deferred share units under the following stock plans: CTWS 2014 Performance Stock Program, CTWS 2004 Performance Stock Program and CTWS 1994 Performance Stock Program (collectively, the “CTWS Plan”). As of June 30, 2020 , approximately 101,711 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units under the CTWS Plan.
Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income and proceeds from the exercise of any restricted stock and similar instruments that are recorded to additional paid-in capital and common stock, by award type, are presented below for the three and six months ended June 30, 2020 , and 2019 .
Three months ended June 30,
Six months ended June 30,
2020
2019
2020
2019
Adjustments to additional paid-in capital and common stock for:
Compensation costs charged to income:
ESPP
$
—
—
$
171
143
Restricted stock and deferred restricted stock
1,009
718
1,089
1,461
Total compensation costs charged to income
$
1,009
718
$
1,260
1,604
ESPP proceeds
$
—
—
$
970
811
Stock, Restricted Stock and Deferred Restricted Stock
For the three months ended June 30, 2020 , and 2019 , SJW Group granted under the Incentive Plan 14,346 and 9,114 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 60.17 and $ 51.69 , respectively, per unit.
For the six months ended June 30, 2020 , and 2019 , SJW Group granted under the Incentive Plan 42,713 and 26,565 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 63.97 and $ 51.42 , respectively, per unit.
Performance-based and market-based restricted stock awards granted for the three months ended June 30, 2020 , and 2019 were 138 and 0 target units, respectively, with a weighted-average grant date fair value of $ 66.99 and $ 0 respectively, per unit.
Performance-based and market-based restricted stock awards granted for the six months ended June 30, 2020 , and 2019 were 24,719 and 30,401 target units, respectively, with a weighted-average grant date fair value of $ 72.01 and $ 60.46 , respectively, per unit. Based upon actual attainment relative to the target performance metric, the number of shares issuable can range between 0 % to 150 % of the target number of shares for performance-based restricted stock awards, or between 0 % and 200 % of the target number of shares for market-based restricted stock awards.
As of June 30, 2020 , the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $ 6,050 . This cost is expected to be recognized over a weighted-average period of 2.03 years.
9
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85 % of the fair value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10 % of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock have been reserved for issuance under the ESPP.
SJW Group’s recorded expenses were $ 74 and $ 160 for the three and six months ended June 30, 2020 , respectively, and $ 65 and $ 141 for the three and six months ended June 30, 2019 , respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends July 31, 2020 , for the ESPP is approximately $ 25 . This cost is expected to be recognized during the third quarter of 2020.
Note 3.
Real Estate Investments
The major components of real estate investments as of June 30, 2020 , and December 31, 2019 , are as follows:
June 30,
2020
December 31,
2019
Land
$
14,168
14,168
Buildings and improvements
43,855
43,531
Subtotal
58,023
57,699
Less: accumulated depreciation and amortization
14,197
13,597
Total
$
43,826
44,102
Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years . Substantially all of the real estate investments relate to assets that are currently subject to operating leases.
On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interest in the commercial building and land the partnership owned and operated. In connection with this sale, the partnership was required to deposit $750 into an escrow account for estimated repairs to the creek next to the land the partnership sold. On April 22, 2019, all creek repairs were completed and a reimbursement of $ 745 was provided to the partnership. SJW Land Company holds a 70% limited partner interest in 444 West Santa Clara Street, L.P. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on the creek reimbursement of $521 and $224 , respectively, on the transaction.
Note 4.
Defined Benefit Plan
SJW Group maintains noncontributory defined benefit pension plans for its eligible employees. San Jose Water Company (“SJWC”) and CTWS employees hired before March 31, 2008, and January 1, 2009, respectively, are entitled to benefits under the pension plans based on the employee’s years of service and compensation. Certain employees hired before March 1, 2012, and covered by a plan merged into the CTWS plan in 2013 are also entitled to benefits based on the employee’s years of service and compensation. For SJWC employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based upon compensation credits and interest credits for each employee. CTWS employees hired on or after January 1, 2009, are entitled to an additional 1.5% of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans.
In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009, for CTWS are eligible to receive additional retirement benefits under supplemental executive retirement plans and retirement contracts. SJWC’s senior management hired on or after March 31, 2008, are eligible to receive additional retirement benefits under SJWC’s Cash Balance Executive Supplemental Retirement Plan. The supplemental retirement plans and Cash Balance Executive Supplemental Retirement Plan are non-qualified plans in which only senior management and other designated members of management may participate. SJW Group also provides health care and life insurance benefits for retired employees under employer-sponsored postretirement benefits other than pension plans.
10
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and six months ended June 30, 2020 , and 2019 are as follows:
Three months ended June 30,
Six months ended June 30,
2020
2019
2020
2019
Service cost
$
2,337
1,479
$
4,780
2,958
Interest cost
2,816
2,113
5,720
4,225
Other cost
( 4,183
)
1,117
( 8,303
)
2,235
Expected return on assets
1,169
( 2,310
)
2,668
( 4,619
)
$
2,139
2,399
$
4,865
4,799
The following tables summarize the fair values of plan assets by major categories as of June 30, 2020 , and December 31, 2019 :
Fair Value Measurements at June 30, 2020
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Observable
Inputs
Significant
Unobservable
Inputs
Asset Category
Total
(Level 1)
(Level 2)
(Level 3)
Cash and cash equivalents
$
6,237
6,237
—
—
Equity securities (a)
146,407
142,839
3,568
—
Fixed income (b)
85,941
31,165
54,776
—
Total
$
238,585
180,241
58,344
—
______________________________________
(a)
Actively managed portfolio of equity securities with the goal to exceed the benchmark performance
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the benchmark performance
Fair Value Measurements at December 31, 2019
Quoted
Prices in
Active
Markets for
Identical
Assets
Significant
Observable
Inputs
Significant
Unobservable
Inputs
Asset Category
Total
(Level 1)
(Level 2)
(Level 3)
Cash and cash equivalents
$
11,801
11,801
—
—
Equity securities (a)
157,050
149,265
7,785
—
Fixed income (b)
91,896
31,686
60,210
—
Total
$
260,747
192,752
67,995
—
______________________________________
(a)
Actively managed portfolio of equity securities with the goal to exceed the benchmark performance
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the benchmark performance
In 2020 , SJW Group expects to make required and discretionary cash contributions of up to $ 8,594 to the pension plans and Social Welfare Plan. For the three and six months ended June 30, 2020 , SJW Group has made no contributions to such plans.
Note 5.
Segment and Non-Tariffed Business Reporting
SJW Group is a holding company with four subsidiaries: (i) SJWC, a water utility operation with both regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated commercial building rentals, and (iv) as of October 9, 2019, SJWNE LLC a holding company for CTWS and its
11
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
subsidiaries, The Connecticut Water Company (“Connecticut Water”), The Maine Water Company (“Maine Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”), New England Water Utility Services, Inc. (“NEWUS”) and Chester Realty, Inc. In accordance with FASB ASC Topic 280 - “Segment Reporting,” The chief operating decision maker of SJW Group has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, SJWC, Connecticut Water, CLWSC, Maine Water, HVWC, Avon Water, and NEWUS together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company and Chester Realty, Inc., referred to as “Real Estate Services.”
SJW Group’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Group’s chief operating decision maker includes the Chairman, President and Chief Executive Officer, and his executive staff.
The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, such as goodwill, and revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category.
For Three Months Ended June 30, 2020
Water Utility Services
Real Estate Services
All Other*
SJW Group
Regulated
Non-tariffed
Non-tariffed
Non-tariffed
Regulated
Non-tariffed
Total
Operating revenue
$
143,072
2,693
1,444
—
143,072
4,137
147,209
Operating expense
107,185
1,759
850
1,345
107,185
3,954
111,139
Operating income (loss)
35,887
934
594
( 1,345
)
35,887
183
36,070
Net income (loss)
22,236
881
443
( 3,839
)
22,236
( 2,515
)
19,721
Depreciation and amortization
22,123
108
298
224
22,123
630
22,753
Senior note and other interest expense
8,289
—
—
4,891
8,289
4,891
13,180
Income tax expense (benefit) in net income
5,449
260
124
( 1,623
)
5,449
( 1,239
)
4,210
Assets
$
3,079,118
9,913
44,889
76,057
3,079,118
130,859
3,209,977
For Three Months Ended June 30, 2019
Water Utility Services
Real Estate Services
All Other*
SJW Group
Regulated
Non-tariffed
Non-tariffed
Non-tariffed
Regulated
Non-tariffed
Total
Operating revenue
$
99,773
1,823
1,369
—
99,773
3,192
102,965
Operating expense
75,564
1,356
1,008
3,066
75,564
5,430
80,994
Operating income (loss)
24,209
467
361
( 3,066
)
24,209
( 2,238
)
21,971
Net income (loss)
13,662
336
662
( 1,122
)
13,662
( 124
)
13,538
Depreciation and amortization
14,698
105
298
—
14,698
403
15,101
Senior note, mortgage and other interest expense
6,170
—
—
544
6,170
544
6,714
Income tax expense (benefit) in net income
4,154
130
220
( 312
)
4,154
38
4,192
Assets
$
1,537,404
6,149
46,510
413,587
1,537,404
466,246
2,003,650
12
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
For Six Months Ended June 30, 2020
Water Utility Services
Real Estate Services
All Other*
SJW Group
Regulated
Non-tariffed
Non-tariffed
Non-tariffed
Regulated
Non-tariffed
Total
Operating revenue
$
254,439
5,710
2,814
—
254,439
8,524
262,963
Operating expense
203,202
3,120
1,681
3,463
203,202
8,264
211,466
Operating income (loss)
51,237
2,590
1,133
( 3,463
)
51,237
260
51,497
Net income (loss)
28,064
2,351
831
( 9,108
)
28,064
( 5,926
)
22,138
Depreciation and amortization
42,872
216
600
447
42,872
1,263
44,135
Senior note and other interest expense
16,463
—
—
10,001
16,463
10,001
26,464
Income tax expense (benefit) in net income
6,651
730
256
( 2,989
)
6,651
( 2,003
)
4,648
Assets
$
3,079,118
9,913
44,889
76,057
3,079,118
130,859
3,209,977
For Six Months Ended June 30, 2019
Water Utility Services
Real Estate Services
All Other*
SJW Group
Regulated
Non-tariffed
Non-tariffed
Non-tariffed
Regulated
Non-tariffed
Total
Operating revenue
$
174,920
2,992
2,735
—
174,920
5,727
180,647
Operating expense
136,149
2,197
1,899
6,023
136,149
10,119
146,268
Operating income (loss)
38,771
795
836
( 6,023
)
38,771
( 4,392
)
34,379
Net income (loss)
19,762
572
980
( 1,903
)
19,762
( 351
)
19,411
Depreciation and amortization
29,447
202
597
—
29,447
799
30,246
Senior note and other interest expense
11,390
—
—
1,115
11,390
1,115
12,505
Income tax expense (benefit) in net income
6,230
222
350
( 565
)
6,230
7
6,237
Assets
$
1,537,404
6,149
46,510
413,587
1,537,404
466,246
2,003,650
* The “All Other” category for the six months ended June 30, 2020 , includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. For the three months ended June 30, 2019 , the “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the three months ended June 30, 2019 , Hydro Sub, Inc. had no recorded revenue or expenses and as of June 30, 2019 held no assets and incurred no liabilities. Hydro Sub. Inc. was a subsidiary created solely to facilitate the merger with CTWS and was dissolved following the completion of merger in October 2019.
Note 6.
Long-Term Liabilities and Bank Borrowings
SJW Group’s contractual obligations and commitments include senior notes, bank term loans, revenue bonds, state revolving fund loans, mortgages, and other obligations. Water Utility Services have received advance deposit payments from its customers on certain construction projects and the refunds of the advance deposit payments constitute an obligation of the respective subsidiaries.
Lines of Credit
On April 24, 2020, SJW Group and SJW Land Company entered into a Termination and Payoff agreement with JPMorgan Chase Bank, N.A. as the lender (the “Lender”) to terminate the SJW Group and SJW Land Company $ 15,000 credit agreement, effective as of April 29, 2020.
On May 11, 2020, the SJWC entered into a Second Amendment (the “Second Amendment”) to SJWC’s existing $ 125,000 credit agreement, dated as of June 1, 2016, with the Lender, as amended by the First Amendment, dated January 12, 2018, (collectively, the “Existing SJWC Credit Agreement”), with the Lender. The Second Amendment amends the existing SJWC Credit Agreement to, among other things, increase the total commitment by $ 15,000 , from $ 125,000 to $ 140,000 .
Also on May 11, 2020, SJWC entered into a $ 50,000 credit agreement (the “New SJWC Credit Agreement”) with the Lender. Proceeds of borrowings under the New SJWC Credit Agreement may be used to refinance existing debt, for working capital, and for general corporate purposes. The New SJWC Credit Agreement has a maturity date of November 11, 2020.
13
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
Borrowings under the New SJWC Credit Agreement bear interest at either the Alternate Base Rate (“ABR”) or the LIBOR (as defined in the New SJWC Credit Agreement) rate. ABR borrowings (which are borrowings bearing interest at a rate determined by reference to the ABR) will bear interest at a rate per annum equal to (i) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5 % , and (c) the adjusted LIBOR rate for a one-month interest period on such day plus 1 % plus (ii) the Applicable Rate (as defined in the New SJWC Credit Agreement), which is determined based on a pricing grid that is dependent upon the credit rating of SJWC as determined by either S&P or Moody’s. Eurodollar borrowings under the New SJWC Credit Agreement will bear interest at a rate per annum equal to (i) the adjusted LIBOR rate for the interest period in effect plus (ii) the Applicable Rate.
The New SJWC Credit Agreement contains 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. The New SJWC Credit Agreement also includes certain financial covenants that require SJWC to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio and to limit SJWC’s maximum consolidated cash balance.
On May 29, 2020, the CTWS entered into a Second Amendment to the CTWS’s existing $ 15,000 credit agreement, dated as of August 6, 2014, with the CoBank, ACB (“CoBank), as amended by the First Amendment, dated October 28, 2015. The Second Amendment amends the prior agreement to, among other things, increase the total commitment by $ 25,000 , from $ 15,000 to $ 40,000 and extended the maturity date to May 15, 2025.
Long-Term Debt
On March 12, 2020, Connecticut Water entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which Connecticut Water sold on the same date an aggregate principal amount of $ 35,000 of its 3.51 % Senior Notes, due March 12, 2050. The notes are unsecured obligations of Connecticut Water. Interest is payable semi-annually in arrears on March 12th and September 12th of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, Connecticut Water is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. The 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 note purchase agreement also requires Connecticut Water to maintain a debt to capitalization ratio of not more than 60 % and an interest coverage ratio at each fiscal quarter end of no less than three-to-one. As of June 30, 2020 , Connecticut Water was in compliance with all financial ratio and operational covenants under this note purchase agreement.
On December 19, 2019, Maine Water issued $ 5,000 of Series S First Mortgage Bonds to the Maine Municipal Bond Bank through the State Safe Drinking Water Revolving Loan Fund. The Series S bonds mature on October 1, 2039, and carry 1 % interest. The Series S First Mortgage Bond covenants are the same as all other First Mortgage Bonds. The proceeds were held as restricted cash by a trustee to be used for pre-approved projects primarily related to preliminary engineering and design work of a water treatment plant in Maine Water’s Biddeford and Saco division. Proceeds were held by a trustee for the bond and until conditions were met. On February 3, 2020, and March 11, 2020, the trustee released proceeds of $ 4,114 and $ 886 , respectively, from the bond. The associated bond indentures and loan agreements contain customary affirmative and negative covenants, including a prohibition on the issuance of indebtedness secured by assets or revenue of Maine Water where the lien is senior to the lien of the bond trustee under the above bonds except as permitted by the bond indentures and related loan and security agreements, a requirement to maintain a debt to capitalization ratio of not more than 65 % , required compliance with various financial and operational covenants, and a provision for maturity acceleration upon the occurrence of stated events of default.
Note 7.
Fair Value Measurement
The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of June 30, 2020 , but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of June 30, 2020 , approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of such financial instruments are determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation techniques during the three and six months ended June 30, 2020 . The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy,
14
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of pension plan assets is discussed in Note 4.
SJW Group has investments in company owned life insurance which are valued at cash surrender value of the policies as reported by the insurer. These contracts are based principally on a referenced pool of investment funds that actively redeem shares, are observable and measurable, and are presented in “Investments” on SJW Group’s consolidated balance sheets. As of June 30, 2020 , the value of the company owned life insurance was $ 7,282 of which $ 3,739 was related to assets to fund CTWS’s supplemental retirement plan agreements. As of December 31, 2019 , the value of the company owned life insurance was $ 7,086 of which $ 3,829 was related to assets to fund CTWS’s supplemental retirement plan agreements. In addition to life insurance contracts, CTWS’s supplemental retirement plan agreements are also funded with a Rabbi Trust.
The following tables summarize the fair values of the Rabbi Trust investment assets to fund CTWS’s additional retirement benefits under the supplemental executive retirement plans and retirement contracts by major categories as of June 30, 2020 , and December 31, 2019 :
Fair Value Measurements at June 30, 2020
Asset Category
Total
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Money market funds
$
146
146
—
—
Mutual funds
801
801
—
—
Fixed income
2,017
2,017
—
—
Total
$
2,964
2,964
—
—
Fair Value Measurements at December 31, 2019
Asset Category
Total
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Money market funds
$
20
20
—
—
Mutual funds
834
834
—
—
Fixed income
2,329
2,329
—
—
Total
$
3,183
3,183
—
—
The fair value of SJW Group’s long-term debt was approximately $ 1,516,139 and $ 1,396,205 as of June 30, 2020 , and December 31, 2019 , respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of the long-term debt was $ 1,338,333 and $ 1,305,869 as of June 30, 2020 , and December 31, 2019 , respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
Note 8.
Regulatory Rate Filings
California Regulatory Affairs
On July 20, 2018, the California Public Utilities Commission (“CPUC”) issued an Order Instituting Investigation (“OII”) No. 18-07-007 concerning SJW Group’s then proposed merger with CTWS. A Scoping Memorandum was issued on September 7, 2018, which identified the issues to be considered in the proceeding as to whether the proposed merger is subject to CPUC approval and to evaluate the merger’s likely impacts within California. On September 14, 2018, SJW Group and SJWC submitted joint comments in response to the issues identified in accordance with the Scoping Memorandum’s adopted schedule, and reply comments were submitted on October 19, 2018. A Public Participation Hearing was held on January 31, 2019. On
15
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
March 4, 2019, the CPUC suspended this proceeding due to SJW Group’s announcement of its intention to file a new merger approval application with the Connecticut Public Utilities Regulatory Authority (“PURA”). On April 3, 2019, SJW Group and CTWS jointly filed a new merger application with PURA. After securing the required approvals from both PURA and the Maine Public Utilities Commission (“MPUC”), SJW Group announced the close of the merger on October 9, 2019, and notified the CPUC accordingly. As of June 30, 2020, the OII is still pending with the CPUC.
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which SJWC was named as Respondent. The OII was to determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate service charges when increases occurred during a billing period, and whether the company double-billed service charges during one billing period when allegedly switching from billing such charges in advance to billing in arrears. The OII resulted from a report by the CPUC’s Consumer Protection and Enforcement Division (“CPED”), dated August 16, 2018, recommending an investigation into SJWC’s billing practice. CPED calculated a refund obligation of approximately $ 2,061 for the years 2014 to 2016 that had been the subject of SJWC’s Advice Letter No. 510. CPED calculated a further refund obligation of approximately $ 1,990 for the years 1987 to 2013. CPED also asserted that the company double-billed its customers during a billing period when it allegedly converted from billing in advance to billing in arrears, assumed that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $ 4,935 . The OII notes these estimates and identifies the proper refund amount as an issue in the proceeding. The OII also identifies the CPUC’s authority to consider imposing penalties on SJWC in amounts ranging from $ 0.5 to $ 50 per offense, per day. On July 24, 2019, SJWC and CPED jointly filed a motion for CPUC approval of a Settlement Agreement (“Agreement”) over SJWC’s past customer billing practices. The Agreement requires the company to pay approximately $ 2,100 in customer credits, consisting of $ 1,757 for refunds during the period from 1987 to 2011 and an additional $ 350 in customer credits to low income water customers, and invest $ 5,000 in utility plant that is not allowed an investment return or rate recovery. The Agreement was subject to final approval by the CPUC. A CPUC Presiding Officer’s Decision approved the Agreement in December 2019, but an appeal was filed in January 2020 by a group of SJWC customers. A final CPUC decision approving the Agreement and dismissing the appeal was approved on February 27, 2020, and concluded this proceeding. Advice Letter No. 545 was filed on March 13, 2020, requesting authorization to provide refunds to customers. For a typical residential customer with a 3/4-inch meter, the one-time refund will be $ 5.52 dollars . This advice letter was approved effective April 12, 2020, and SJWC completed issuing refunds in mid-June 2020.
On June 19, 2019, the CPUC issued its final decision resolving the remaining issues in SJWC’s general rate case for 2019. Decision 19-06-010 denied the establishment of a WRAM/SRM and authorized the recovery of the Hydro Generation Research, Development and Demonstration Memorandum Account balance as of September 30, 2016. SJWC filed Advice Letter No. 534 on August 1, 2019, to recover the $ 1,243 balance as of September 30, 2017, via a surcharge over a three-year period. The CPUC rejected the advice letter on October 10, 2019, citing an error in the name of the memorandum account and recommended a correction and a new filing for recovery. SJWC filed to correct the record and received the CPUC’s decision on April 10, 2020. Advice Letter 548 was filed on April 24, 2020, requesting recovery of $ 1,224 via a 36-month surcharge. The adjustment in the memorandum account balance reflected project costs incurred after September 30, 2016, which are not allowable per Decision 19-06-010. This request is pending before the CPUC.
SJWC filed Advice Letter No. 537 with the CPUC requesting authorization to refund the balance in its 2018 Tax Accounting Memorandum Account as required by the general rate case decision on October 18, 2019. On December 3, 2019, Advice Letter 537-A was filed to refund the balance via a one-time surcredit. For a typical residential customer with a 3/4-inch meter, the one-time refund will be $ 20.84 dollars per customer. This advice letter was approved effective January 21, 2020, and refunds to customers began on January 27, 2020.
SJWC filed Advice Letter No. 541 on November 20, 2019, with the CPUC requesting authorization to increase its revenue requirement by $ 8,600 or 2.28 % in 2020 for the first escalation year authorized in our 2018 General Rate Case Decision 18-011-025 which established rates for 2019, 2020, and 2021. This advice letter was approved on December 26, 2019, and new rates became effective January 1, 2020.
On December 6, 2019, SJWC filed Application No. 19-12-002 with the CPUC requesting approval for cost recovery to deploy Advanced Metering Infrastructure throughout its service area. The application seeks revenue increases of $ 2,315 or 0.61 % in 2021, $ 3,960 or 1.04 % in 2022, $ 2,510 or 0.65 % in 2023, and $ 341 or 0.09 % in 2024 based on current rates in effect. A decision from the CPUC is anticipated in the fourth quarter of 2020.
On January 22, 2020, SJWC, along with three other California water utilities, filed a joint request for a one-year deferment on the Cost of Capital filings which would otherwise be due on May 1, 2020. Postponing the filing one year would alleviate administrative processing costs on the utilities as well as the CPUC staff, and provide relief for both CPUC and utility resources
16
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
already strained by numerous other proceedings. The request was conditioned on no changes to the current Water Cost of Capital Mechanism in place during the one-year deferment. On March 11, 2020, the CPUC approved the request.
On March 19, 2020, SJWC filed Advice Letter 546 to extend customer protections listed in the company’s Disaster Relief Customer Protections and Outreach Plan as required by the CPUC in response to the COVID-19 pandemic. The filing also activated SJWC’s Catastrophic Event Memorandum Account (“CEMA”) to track costs related to SJWC’s response which includes labor and materials, anticipated increase in bad debt from the suspension of shutoffs for non-payment, waived deposits and reconnection fees, and divergence from actual versus authorized usage. The customer protections and CEMA were approved effective March 4, 2020. SJWC anticipates requesting recovery of the COVID-19 pandemic response costs in a future general rate case or other filings.
Connecticut Regulatory Affairs
As of June 30, 2020, Water Infrastructure Conservation Adjustment (“WICA”) surcharges for Connecticut Water and Avon Water were 5.75 % and 9.31 % , respectively. HVWC does not currently have an approved WICA surcharge. On January 28, 2020, Connecticut Water filed a WICA application representing an additional 2.6 % surcharge, for a cumulative WICA surcharge of 5.84 % . Additionally, on February 7, 2020, Connecticut Water filed its annual WICA reconciliation which called for a 0.09 % reduction of the WICA surcharge. On March 25, 2020, PURA approved a net cumulative 5.75 % surcharge for Connecticut Water which became effective on customers’ bills on April 1, 2020.
On March 3, 2020, Connecticut Water filed an application, Docket No. 20-03-04, with PURA to merge Avon Water and HVWC with and into Connecticut Water. The application is to streamline borrowings, regulatory filings and internal administrative tasks associated with maintaining separate corporate entities. The company has responded to several interrogatories and has attended a hearing on the merger application. Connecticut Water anticipates a final decision on the proceeding in the third quarter of 2020.
On March 12, 2020, PURA issued Docket No. 20-03-15 to establish a State of Emergency Utility Shut-off Moratorium for the COVID-19 pandemic. The moratorium ordered regulated utility companies to refrain from terminating utility service to residential customers, except for safety reasons until August 1, 2020, or until such other time as determined by the PURA. In the same docket, PURA further directed the public service companies to maintain a detailed record of costs incurred and revenues lost as a result of implementing its orders in the docket and may establish a regulatory asset to track incurred costs. Approval for recovery of additional costs incurred and/or revenues lost relating to the COVID-19 pandemic would be considered for recovery in the Connecticut Water’s next general rate case proceeding.
Texas Regulatory Affairs
As required, CLWSC submitted on January 27, 2020, its Water Pass-Through Charge (“WPC”) true-up report for the Canyon Lake area systems 2019 purchased water costs. The WPC is the annual filing to change the component of CLWSC’s water rates for changes in purchased water costs since the last annual true-up report. The changes in the purchased water costs for the Deer Creek Ranch water system resulted in a decrease in the usage charge from $ 2.19 dollars to $ 2.02 dollars per thousand gallons, and an increase in the monthly base charge of $ 3.04 dollars per residential account. The Deer Creek Ranch rate changes became effective October 1, 2019. The 2019 WPC true-up report for the water systems located in the Canyon Lake area resulted in a reduction of the WPC usage rate from $ 1.05 dollars to $ 0.95 dollars per thousand gallons which became effective on February 1, 2020. The WPC filings for Deer Creek Ranch and the Canyon Lake area were approved by the Public Utilities Commission of Texas (“PUCT”) and a new tariff with the WPC rates was issued in May 2020.
In connection with the disaster declaration in Texas, the PUCT issued Order No. 50664-106 to mitigate the impact of the COVID-19 pandemic on residential water utility customers. CLWSC responded to these orders by stopping disconnections for nonpayment of utility bills, and not charging fees for late payment. The PUCT allowed this order to expire on June 13, 2020. The PUCT also issued Accounting Orders under No. 50664-108, which instructs utilities to record the incremental costs and lost revenues from the COVID-19 pandemic in a regulatory tracking account for recovery in future rates. These amounts will be considered by the PUCT for recovery in each utility’s next rate application.
Maine Regulatory Affairs
On December 20, 2019, Maine Water filed for a general a rate increase for their Skowhegan Division seeking approximately $ 221 , or 14.7 % , in additional revenue with the MPUC. On June 17, 2020, the MPUC approved a general rate increase for Skowhegan Division customers allowing $ 198 in additional revenue. Per the MPUC decision, the increase will be implemented
17
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
in two steps: an initial 9.80 % rate increase effective June 15, 2020, and a 3.51 % rate increase effective July 1, 2021. The combined rate increase is 13.31 % .
On January 20, 2020, Maine Water filed Water Infrastructure Surcharge (“WISC”) applications with the MPUC in four divisions requesting an increase between 1.76 % and 3.00 % , representing approximately $ 371 in additional revenues. The WISC applications were approved on February 26, 2020, and the surcharges became effective March 1, 2020.
On March 16, 2020, MPUC issued an emergency moratorium on utility disconnection activities in connection to the COVID-19 pandemic. The moratorium directed public utility companies not to engage in any disconnection activities including disconnection notices for all classes of customers until further notice from MPUC. Maine Water is tracking COVID-19 related costs for potential future recovery in rates charged to customers.
Note 9.
Balancing and Memorandum Accounts
SJWC has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. SJWC also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC. The Monterey Water Revenue Adjustment Mechanism (“WRAM”) tracks the difference between the revenue received for actual metered sales through the tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a uniform rate would have been in effect.
Balancing and memorandum accounts are recognized by SJWC when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the Water Conservation Memorandum Account (“WCMA”) and Water Revenue Adjustment (“WRA”), SJWC and CTWS follow the requirements of ASC Topic 980-605-25—“Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period.
In assessing the probability criteria for balancing and memorandum accounts between general rate cases, SJWC considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s consolidated financial statements.
On December 19, 2019, the CPUC denied the recovery of the 2018 WCMA in Advice Letter No. 532 and no longer approved the tracking of WCMA balances. Due to the decision, SJWC believes WCMA tracking no longer meets the probability criteria under ASC Topic 980-605-25. For the three and six months ended June 30, 2019 , SJWC recognized regulatory assets of $ 1,320 and $ 568 , respectively, due to lost revenues accumulated in the 2019 WCMA account net of a reserve of $ 11 for the estimated amount that will not be collected within the 24-month period, as required by the guidance. 2018 WCMA activity for the three and six months ended June 30, 2019 , represents interest and reserve activity on the accumulated balance. For the three and six months ended June 30, 2019 , a reserve of $94 and $ 174 , respectively, was recorded. The amounts have been reflected in the 2018 WCMA and 2019 WCMA balances shown in the table below.
18
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
Three months ended June 30, 2020
Three months ended June 30, 2019
Beginning Balance
Regulatory Asset Increase (Decrease)
Refunds (Collections) Adjustments
Ending Balance
Beginning Balance
Regulatory Asset Increase (Decrease)
Refunds (Collections) Adjustments
Ending Balance
Revenue accounts:
Monterey WRAM
$
8,958
1,591
—
10,549
$
7,878
2,109
( 1,001
)
8,986
2014-2017 WCMA
665
—
—
665
6,912
—
( 1,597
)
5,315
2018 WCMA
—
—
—
—
8,997
( 39
)
—
8,958
2019 WCMA
—
—
—
—
( 752
)
1,309
—
557
2012 General Rate Case true-up
752
—
—
752
10,152
—
( 2,421
)
7,731
Cost of capital memorandum account
( 1,558
)
( 2
)
—
( 1,560
)
( 1,532
)
( 8
)
—
( 1,540
)
Tax memorandum account
332
—
—
332
( 6,545
)
( 40
)
—
( 6,585
)
All others
( 2,491
)
40
—
( 2,451
)
( 1,629
)
( 78
)
( 87
)
( 1,794
)
Total revenue accounts
$
6,658
1,629
—
8,287
$
23,481
3,253
( 5,106
)
21,628
Cost-recovery accounts:
Water supply costs
5,061
838
—
5,899
8,217
( 1,058
)
( 1,247
)
5,912
Pension
2,886
99
—
2,985
( 1,237
)
199
805
( 233
)
All others
443
1
—
444
1,015
3
( 148
)
870
Total cost-recovery accounts
$
8,390
938
—
9,328
$
7,995
( 856
)
( 590
)
6,549
Total
$
15,048
2,567
—
17,615
$
31,476
2,397
( 5,696
)
28,177
Six months ended June 30, 2020
Six months ended June 30, 2019
Beginning Balance
Regulatory Asset Increase (Decrease)
Refunds (Collections) Adjustments
Ending Balance
Beginning Balance
Regulatory Asset Increase (Decrease)
Refunds (Collections) Adjustments
Ending Balance
Revenue accounts:
Monterey WRAM
$
7,015
3,561
( 27
)
10,549
$
6,847
3,666
( 1,527
)
8,986
2014-2017 WCMA
708
—
( 43
)
665
7,750
—
( 2,435
)
5,315
2018 WCMA
—
—
—
—
9,386
( 428
)
—
8,958
2019 WCMA
—
—
—
—
—
557
—
557
2012 General Rate Case true-up
752
—
—
752
11,328
96
( 3,693
)
7,731
Cost of capital memorandum account
( 1,553
)
( 7
)
—
( 1,560
)
( 1,523
)
( 17
)
—
( 1,540
)
Tax memorandum account
( 6,643
)
( 3
)
6,978
332
( 6,504
)
( 81
)
—
( 6,585
)
All others
( 2,219
)
( 165
)
( 67
)
( 2,451
)
( 1,735
)
72
( 131
)
( 1,794
)
Total revenue accounts
$
( 1,940
)
3,386
6,841
8,287
$
25,549
3,865
( 7,786
)
21,628
Cost-recovery accounts:
Water supply costs
4,328
1,605
( 34
)
5,899
9,617
( 1,803
)
( 1,902
)
5,912
Pension
2,449
514
22
2,985
( 1,843
)
383
1,227
( 233
)
All others
446
2
( 4
)
444
1,090
6
( 226
)
870
Total cost-recovery accounts
$
7,223
2,121
( 16
)
9,328
$
8,864
( 1,414
)
( 901
)
6,549
Total
$
5,283
5,507
6,825
17,615
$
34,413
2,451
( 8,687
)
28,177
As of June 30, 2020 , the total balance in SJWC’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $ 1,759 . All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in SJWC’s next
19
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
general rate case or at the time an individual account balance reaches a threshold of 2 % of authorized revenue, whichever occurs first.
Note 10.
Regulatory Assets
Regulatory assets are comprised of the following as of June 30, 2020 , and December 31, 2019 :
June 30, 2020
December 31, 2019
Regulatory assets:
Income tax temporary differences, net
$
6,500
2,433
Postretirement pensions and other medical benefits
76,439
73,525
Business combinations debt premium, net
23,749
25,020
Balancing and memorandum accounts, net
17,615
5,283
WRA
7,466
9,108
Other, net
6,461
5,048
Total regulatory assets, net in Consolidated Balance Sheets
138,230
120,417
Less: current regulatory asset, net
5,691
6,472
Total regulatory assets, net, less current portion
$
132,539
113,945
Note 11.
Business Combination
On October 9, 2019, SJW Group completed its previously announced acquisition of CTWS pursuant to the terms of the Second Amended and Restated Agreement and Plan of Merger, dated as of August 5, 2018, by and among SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group, and CTWS. CTWS provides water service to approximately 138,000 connections that serve a population of approximately 480,000 people in 80 municipalities throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut. In addition, CTWS has a real estate company in Connecticut which provides property management services.
SJW Group acquired all of the outstanding stock of CTWS for $ 70.00 per share in cash (without interest and less any applicable withholding taxes). The total cash purchase price was approximately $ 838,476 , less cash received of $ 3,011 , and approximately $ 6,384 related to outstanding awards of restricted stock units and deferred share units assumed in connection with the merger. SJW Group financed the acquisition with net proceeds from its December 2018 sale of 7,762,000 shares of common stock of approximately $ 411,077 , and the October 2019 issuance of $ 427,398 in new fixed rate term loans. SJW Group raised an additional $ 18,463 in the debt financing to partially finance transaction costs incurred in connection with the CTWS acquisition. Along with the acquisition debt financing, SJW Group raised $ 60,000 of new proceeds used to partially refinance certain CTWS short-term borrowings on its existing lines of credit after the CTWS acquisition closed.
Management estimated the preliminary fair values of net tangible and intangible assets acquired and the excess of the consideration transferred over the aggregate of such fair values was recorded as goodwill. The preliminary value of the acquired deferred tax assets and deferred tax liabilities are based on a preliminary analysis, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). In addition, management is still gathering information necessary to complete the recognition and measurement of the opening balance sheet.
20
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2020
(in thousands, except share and per share data)
The following table summarizes the estimated preliminary fair value of assets acquired and liabilities assumed as of June 30, 2020 .
Fair Value
Assets acquired:
Utility plant, net
$
750,703
Nonutility plant
848
Current assets
42,673
Investments
12,489
Regulatory assets and deferred charges, less current portion
83,132
Other intangible assets
17,181
Other assets
2,592
Goodwill
626,548
Total assets acquired
1,536,166
Liabilities assumed:
Long-term debt
281,009
Current liabilities, including maturities of long-term debt
125,797
Deferred income taxes
107,789
Postretirement benefit plans
31,789
Contributions in aid of construction and construction advances
137,327
Other long-term liabilities
10,607
Total liabilities assumed
694,318
Assumed equity
$
841,848
Other intangible assets primarily consists of customer relationships.
The goodwill balance is primarily attributable to assembled workforce and diversification of markets both from a geographic and regulatory perspective. We do not expect the goodwill recognized in connection with the transaction will be deductible for income tax purposes.
Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying amount. SJW Group first performs a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. In assessing the qualitative factors, SJW Group considers the impact of these key factors: change in industry and competitive environment, financial performance, macroeconomic conditions, and other relevant Company-specific events. If SJW Group determines that as a result of the qualitative assessment it is more likely than not (> 50% likelihood) that the fair value is less than carrying amount, then a quantitative test is performed.
Note 12.
Legal Proceedings
SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows.
21
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.