What changed in this filing

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Item 2. Management’s Discussion and Analysis

2020-11-06 compared with 2020-08-10 · 123 added, 111 removed, 224 unchanged (51% of the section changed)

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(Dollar amounts in thousands, except per share amounts and otherwise noted)

The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2019 .

The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the condensed consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2019 .

This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group.

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The majority of the properties are located in the hillside areas adjacent to SJWC’s various watershed properties.

SJWNE LLC, which is a wholly-owned subsidiary of SJW Group, is the holding company for Connecticut Water Service, Inc.

SJWNE LLC is the holding company for Connecticut Water Service, Inc.

CTWS became a wholly-owned subsidiary of SJWNE LLC as part of the merger transaction between SJW Group and CTWS that was completed on October 9, 2019.

CTWS, headquartered in Connecticut, serves as a holding company for water utility companies providing water service to approximately 136,000 connections that serve a population of approximately 477,000 people in 81 municipalities throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut.

The subsidiaries held by CTWS that provide utility water services are The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”) and The Maine Water Company (“Maine Water”).

The remaining two subsidiaries are Chester Realty, Inc., a real estate company in Connecticut, and New England Water Utility Services, Inc.

The subsidiaries held by CTWS that provide utility water services are The Connecticut Water Company (“Connecticut Water”) and The Maine Water Company (“Maine Water”).

During third quarter, Connecticut Water completed the merger of The Heritage Village Water Company (“HVWC”) and The Avon Water Company (“Avon Water”) with and into Connecticut Water, with Connecticut Water as the surviving entity.

HVWC and Avon Water were wholly owned subsidiaries of CTWS prior to the merger into Connecticut Water.

The purpose of the merger was to streamline borrowings, regulatory filings and internal administrative tasks associated with maintaining and operating separate corporate entities.

The remaining two CTWS subsidiaries are Chester Realty, Inc., a real estate company in Connecticut, and New England Water Utility Services, Inc.

(“NEWUS”), which provides contract water and sewer operations and other water related services.

CTWS also offers Linebacker, an optional service line protection program offered by CTWS to eligible residential customers through NEWUS in Connecticut and Maine Water in Maine covering the cost of repairs for leaking or broken water service lines which provide drinking water to a customer’s home.

CTWS also offers Linebacker, an optional service line protection program to eligible residential customers through NEWUS in Connecticut and Maine Water in Maine covering the cost of repairs for leaking or broken water service lines which provide drinking water to a customer’s home.

For customers who enroll in this program, CTWS will repair or replace a leaking or broken water service line and related equipment.

Additionally, NEWUS offers expanded coverage to Connecticut Water customers for failure of in-home plumbing, sewer and septic drainage lines and implemented modified terms and conditions with limitations on certain coverages.

facilities and equipment used for the collection, purification, storage and distribution of water throughout Connecticut and Maine.

Additionally, NEWUS offers expanded coverage to Connecticut Water

customers for failure of in-home plumbing, sewer and septic drainage lines and implemented modified terms and conditions with limitations on certain coverages.

The properties of CTWS’s subsidiaries consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, water treatment plants, pumping plants, transmission and distribution mains and other facilities and equipment used for the collection, purification, storage and distribution of water throughout Connecticut and Maine.

In certain cases, Connecticut Water and Maine Water are or may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities.

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The limited partnership has been determined to be a variable interest entity within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 - “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, has been consolidated with SJW Land Company.

SJW Land Company owned the following real properties during the six months ended June 30, 2020 :

% for Six months ended

June 30, 2020

SJW Land Company owned the following real properties during the nine months ended September 30, 2020 :

% for Nine months ended

September 30, 2020

of SJW Land Company

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San Jose, California

As of June 30, 2020 , Chester Realty, Inc.

owns less than 100 acres of property in the State of Connecticut.

As of September 30, 2020 , Chester Realty, Inc.

owns less than 100 acres of undeveloped land in the State of Connecticut.

Business Strategy for Water Utility Services:

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Out-of-region water and utility related services.

As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets, including the recent CTWS merger which closed on October 9, 2019.

As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets, including the CTWS merger which closed on October 9, 2019.

However, we cannot be certain we will be successful in identifying and consummating any strategic business combination or acquisitions relating to such opportunities.

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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.

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 through SJW Land Company.

SJW Group’s real estate investment activity is conducted through SJW Land Company and Chester Realty, Inc.

As noted above, SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee.

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Our significant accounting policies are described in our notes to the 2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2019 .

New Accounting Pronouncements:

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20:

“Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which aims to improve the overall usefulness of disclosure to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures.

This update is effective for SJW Group’s Form 10-K for the year ending December 31, 2020.

Retrospective adoption is required and early adoption is permitted.

Management is currently evaluating the effect that the new standard will have on its defined benefit plan disclosures.

Recently Adopted Accounting Policies and New Accounting Pronouncements:

See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recently adopted accounting policies and new accounting pronouncements for the nine months ended September 30, 2020 .

Results of Operations:

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SJW Group has taken precautions to protect the health and safety of employees, customers and the community while continuing to deliver safe and reliable water service as we are deemed to be an essential service provider.

SJW Group’s response to the COVID-19 outbreak continues to rapidly evolve and has included:

(i) suspending service disconnections for non-payments pursuant to orders from certain state regulators, which will remain in effect over other existing requirements governing disconnections for specified durations with the longest extending to April 2021;

SJW Group’s response to the COVID-19 outbreak continues to evolve and has included:

(i) suspending service disconnections for non-payments pursuant to orders from certain state regulators, which will remain for specified durations with the longest extending to April 2021;

(ii) waiving reconnection or facilities fees for affected customers and suspending deposit requirements for affected customers who must reconnect to the systems;

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and (v) delaying some capital improvement projects at our water utilities.

Although, we do not believe the COVID-19 pandemic has materially adversely affected SJW Group’s financial results and business operations for the six months ended June 30, 2020 , the full impact of the pandemic is uncertain.

Although, we do not believe the COVID-19 pandemic has materially adversely affected SJW Group’s financial results and business operations for the nine months ended September 30, 2020 , the full impact of the pandemic is uncertain.

SJW Group continues to monitor developments affecting our business, employees and suppliers and will take additional precautions as management believes is necessary.

SJW Group’s consolidated net income for the three months ended June 30, 2020 , was $19,721 , an increase of $6,183, or approximately 46%, from $13,538 for the same period in 2019.

SJW Group’s consolidated net income for the six months ended June 30, 2020 , was $22,138 , an increase of $2,727, or approximately 14%, from $19,411 for the same period in 2019.

The increase in net income for the three and six months ended June 30, 2020 , was primarily due to addition of net income from the

company’s new SJWNE LLC’s subsidiary CTWS as a result of the merger and an increase in revenue at SJWC due to increased customer usage and higher average rates, partially offset by an increase in production expenses at SJWC due to a decrease in the use of available surface water and an increase in customer usage, an increase in interest on long-term debt due to the debt issued to acquire CTWS and issuance of SJWC’s Series M Note, and an increase in depreciation expense due to assets placed in service in 2019.

Please see other risks related to COVID-19 under Item 1A, “Risk Factors.”

SJW Group’s consolidated net income for the three months ended September 30, 2020 , was $26,093 , an increase of $16,615, or approximately 175%, from $9,478 for the same period in 2019.

SJW Group’s consolidated net income for the nine months ended September 30, 2020 , was $48,231 , an increase of $19,342, or approximately 67%, from $28,889 for the same period in 2019.

The increase in net income for the three and nine months ended September 30, 2020 , was primarily due to addition of

net income from CTWS as a result of the merger and an increase in revenue at SJWC due to increased customer usage, and cumulative water rate increases, partially offset by the net recognition of certain balancing and memorandum accounts.

In addition, a reserve for the 2018 and 2019 Water Conservation Memorandum Account balances was recorded in prior year as we determined we no longer met the requirements for revenue recognition.

The net increases in revenue was partially offset by an increase in production expenses at SJWC due to a decrease in the use of available surface water supplies, an increase in customer usage, an increase in per unit costs for purchased water, groundwater extraction and energy charges, an increase in interest on long-term debt due to the debt issued to acquire SJWNE LLC, issuance of SJWC’s Series M Note and Connecticut Water’s Senior Note, and an increase in depreciation expense due to assets placed in service in 2019.

Operating Revenue

Operating Revenue by Segment

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

Water Utility Services

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Three months ended

Six months ended

September 30,

Nine months ended

September 30,

Increase/(decrease)

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Operating Expense by Segment

Three months ended June 30,

Six months ended June 30,

Three months ended September 30,

Nine months ended September 30,

Water Utility Services

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Three months ended

Six months ended

September 30,

Nine months ended

September 30,

Increase/(decrease)

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If an increase occurs, then SJWC would file an advice letter with the CPUC seeking authorization to increase revenues to offset the cost increase.

On July 1, 2020 , Valley Water’s 10 reservoirs were approximately 37% of total capacity with 61,462 acre-feet of water in storage, which is 63% of the twenty-year average for this date.

As reported by the Valley Water, there was 8.82 inches of rainfall in San Jose during the current annual rainfall season that commenced on July 1, 2019.

Rainfall at SJWC’s Lake Elsman was measured at 30.26 inches during the current rainfall season.

On October 1, 2020 , Valley Water’s 10 reservoirs were approximately 25% of total capacity with 13,679 million gallons of water in storage, which is 55% of the twenty-year average for this date.

Valley Water continues to drain their largest reservoir, Anderson, in preparation for the 8-10 year Anderson Dam Seismic Retrofit Project.

As reported by the Valley Water, there has been no rainfall in San Jose during the current annual rainfall season that commenced on July 1, 2020.

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 July 1, 2020 , Valley Water reported that allocations from the state and federal water project are approximately 20% and 70%, respectively, of amounts requested in 2020 .

Valley Water also reported that the managed groundwater recharge from January to June in the Santa Clara Plain was 87% of the five-year average.

The groundwater level in the Santa Clara Plain is approximately 19 feet lower than a year ago in June and 7 feet lower than the five-year average.

As of October 1, 2020 , Valley Water reported that allocations from the state and federal water project are approximately 20% and 70%, respectively, of amounts requested in 2020 .

Valley Water also reported that the managed groundwater recharge from January to September in the Santa Clara Plain was 81% of the five-year average.

The groundwater level in the Santa Clara Plain is approximately 21 feet lower than a year ago in September and 14 feet lower than the five-year average.

According to Valley Water, the projected total groundwater storage at the end of 2020 is expected to fall within the normal stage of the Valley Water’s Water Shortage Contingency Plan.

On July 1, 2020 , SJWC’s Lake Elsman contained 2,234 acre-feet of water, of which approximately 1,774 acre-feet can be utilized for treatment.

On October 1, 2020 , SJWC’s Lake Elsman contained 438 million gallons of water, of which approximately 288 million gallons can be utilized for treatment in water production.

This Lake Elsman volume represents 44% of the five-year average which reflects the low winter rainfall we experienced in our Santa Cruz mountains watershed.

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SJWC will utilize surface water and additional water from its portfolio of groundwater supplies to supplement imported water from the Valley Water.

Production from the Montevina Surface Water Treatment Plant through the second quarter was 710 million gallons, which is 43% of the five-year average.

Production at SJWC’s smaller Saratoga Water Treatment Plant through the second quarter was 111 million gallons, which is 46% of the five-year average.

Production from the Montevina Surface Water Treatment Plant through the third quarter was 968 million gallons, which is 48% of the five-year average.

Production at SJWC’s smaller Saratoga Water Treatment Plant through the third quarter was 111 million gallons, which is 41% of the five-year average.

Saratoga Water Treatment Plant was taken out of service during the second quarter due to lack of run-off from Saratoga Creek and remains offline.

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Production wells located in a Comal Trinity Groundwater Conservation District, a regulated portion of the Trinity aquifer, are charged a groundwater pump tax based upon usage.

With service area conditions shifting to an Abnormally Dry drought condition in most of our Texas service area, with very high usage and little rain In the forecast, CLWSC began implementation of Stage 1 of its Drought Management Plan on July 13, 2020.

CLWSC implemented Stage 1 of its Drought Management Plan on July 13, 2020 as service area conditions shifted to an Abnormally Dry state, precipitation was sparse and demand surged.

This was done in coordination with neighboring municipalities with which it shares water supply sources.

Stage 1 limits lawn irrigation systems to twice per week watering and signals to customers the need to pursue conservation.

On October 9, 2020, CLWSC exited Stage 1 as temperatures cooled and September saw some significant rain events.

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 development.

These updates have received preliminary approval by the Texas Commission for Environmental Quality.

CLWSC believes that, with the judicious implementation of its Drought Management Plan, its water supply sources will be sufficient to meet customer demand through the remainder of 2020.

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The following table presents the change in sources of water supply, in million gallons, for Water Utility Services:

Three months ended June 30,

Three months ended September 30,

% of Total Change

Six months ended June 30,

Nine months ended September 30,

% of Total Change

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The changes in the source of supply mix were consistent with the changes in the water production expenses.

SJWC’s unaccounted-for water on a 12-month-to-date basis for June 30, 2020 , and 2019 approximated 6.4% and 7.1%, respectively, as a percentage of total production.

SJWC’s unaccounted-for water on a 12-month-to-date basis for September 30, 2020 , and 2019 approximated 6.6% and 7.7%, respectively, as a percentage of total production.

The unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially offset by SJWC’s main replacements and lost water reduction programs.

CTWS’s unaccounted-for water on an acquisition-to-date basis for the period ending June 30, 2020 was approximately 16.7% as a percentage of total production.

CTWS’s unaccounted-for water on an acquisition-to-date basis for the period ending September 30, 2020 was approximately 16.9% as a percentage of total production.

The unaccounted-for water estimate is based on the results of past experience and the impact of flows through CTWS’s systems, unadjusted for any required system flushing, partially offset by Water Infrastructure Conservation Adjustment (“WICA”) and Water Infrastructure Surcharge (“WISC”) main replacement programs and lost water reduction initiatives.

Water Production Expenses

The change in water production expenses for the three and six months ended June 30, 2020 , compared to the same period in 2019 , was primarily attributable to the new SJWNE LLC subsidiary operations, a decrease in available surface water for SJWC, an increase in customer usage and higher per unit costs for purchased water, groundwater extraction and energy charges, offset by a decrease in cost-recovery balancing and memorandum accounts.

Effective July 1, 2019, Valley Water increased the unit price of purchased water by approximately 6.1% and the groundwater extraction charge by approximately 6.6%.

The change in water production expenses for the three and nine months ended September 30, 2020 , compared to the same period in 2019 , was primarily attributable to the new SJWNE LLC subsidiary operations, a decrease in available surface water for SJWC, an increase in customer usage and changes in per unit costs for purchased water, groundwater extraction and energy charges, offset by a decrease in cost-recovery balancing and memorandum accounts.

Valley Water did not increase the unit price of purchased water and groundwater extraction fees for their fiscal year beginning July 1, 2020.

Other Operating Expenses

Operating expenses, excluding water production expenses, increased $14,100 for the three months ended June 30, 2020 , compared to the same period in 2019 .

The increase was primarily attributable to an increase of $14,187 due to the new SJWNE LLC subsidiary operations, and depreciation and amortization expense due to increases in utility plant, partially offset by a decrease in merger related expenses due to the completion of our merger with CTWS.

Operating expenses, excluding water production expenses, increased $32,157 for the six months ended June 30, 2020 , compared to the same period in 2019 .

The increase was primarily attributable to an increase of $30,159 due to the new SJWNE LLC subsidiary operations, and increases in administrative and general expenses primarily due to an increase in accounting

fees and contracted work, and depreciation and amortization expense due to increases in utility plant, partially offset by a decrease in merger related expenses due to the completion of our merger with CTWS.

Operating expenses, excluding water production expenses, increased $13,734 for the three months ended September 30, 2020 , compared to the same period in 2019 .

The increase was primarily attributable to an increase of $17,437 due to the new SJWNE LLC subsidiary operations, and an increase in depreciation and amortization expense due to increases in utility plant, partially offset by a decrease in merger related expenses due to the completion of our merger with CTWS and a decrease in integration costs that were recognized as administrative and general expenses.

Operating expenses, excluding water production expenses, increased $45,891 for the nine months ended September 30, 2020 , compared to the same period in 2019 .

The increase was primarily attributable to an increase of $47,596 due to the new SJWNE LLC subsidiary operations, and an increase in depreciation and amortization expense due to increases in utility plant, partially offset by a decrease in merger related expenses due to the completion of our merger with CTWS.

Other (Expense) Income

For the three and six months ended June 30, 2020 , compared to the same periods in 2019 , the change in other (expense) income was primarily due to an increase in interest on long-term debt as a result of the issuance of SJW Group’s Series 2019A, B and C notes and SJWC’s Series M note.

For the three and nine months ended September 30, 2020 , compared to the same periods in 2019 , the change in other (expense) income was primarily due to an increase in interest expense on long-term debt as a result of the issuance of SJW Group’s Series 2019A, B and C notes and SJWC’s Series M note.

In addition, interest income decreased due to use of previously invested money market funds for the merger with CTWS.

Provision for Income Taxes

For the three and six months ended June 30, 2020 , compared to the same period in 2019 , income tax expense increased $18 and decreased $1,589, respectively.

The decrease in income tax expense for the six months ended June 30, 2020 is primarily due to the effect of flow-through tax benefits of certain CTWS tax attributes.

The effective consolidated income tax rates were 18% and 23% for three months ended June 30, 2020 , and 2019 , respectively, and 17% and 24% for the six months ended June 30, 2020 , and 2019 , respectively.

The lower effective rates for the three and six months ended June 30, 2020 , were primarily due to flow-through tax benefits.

For the three and nine months ended September 30, 2020 , compared to the same period in 2019 , income tax expense increased $2,013 and $424, respectively.

The increase in income tax expense was primarily due to a higher pre-tax income which was offset by the increase in flow-through tax benefits.

The effective consolidated income tax rates were 15% and 21% for the three months ended September 30, 2020 , and 2019 , respectively, and 16% and 23% for the nine months ended September 30, 2020 , and 2019 , respectively.

The lower effective rates for the three and nine months ended September 30, 2020 , were primarily due to flow-through tax benefits.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (“CARES”) Act was signed into law.

The CARES Act includes, among other items, measures concerning income taxes.

Many of the CARES Act’s requirements are subject to further clarification.

SJW Group has considered the income tax implications of the CARES Act in its estimated tax provision and does not believe it will materially impact the company’s year-end tax rate.

SJW Group expects the Internal Revenue Service to issue guidance in future periods that will determine the final disposition of the excess deferred taxes and other impacts of the Tax Cuts and Jobs Act (H.R.

At this time, the company has applied a reasonable interpretation of the Tax Act.

Future clarification of the Tax Act may change estimated amounts.

Regulation and Rates

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Cash Flow from Operating Activities

During the six months ended June 30, 2020 , SJW Group generated cash flows from operations of approximately $32,300 , compared to $49,800 for the same period in 2019 .

Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, gains or losses on the sale of assets, and changes in working capital items.

During the nine months ended September 30, 2020 , SJW Group generated cash flows from operations of approximately $70,600 , compared to $91,300 for the same period in 2019 .

Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, stock-based compensation, gains or losses on the sale of assets, and changes in working capital items.

Cash flow from operations decreased by approximately $20,700.

This decrease was the result of a combination of the following factors:

(1) decrease in collection in balancing and memorandum accounts of $20,100, (2) a decrease in collections from accounts receivable and accrued unbilled utility revenue of $11,800 due to higher unbilled revenue balances and slower collections from customers during the COVID-19 pandemic, (3) an up-front payment of $5,000 for renewal of the Cupertino service concession agreement, (4) payments of amounts previously invoiced and accrued, which increased by $4,400, offset by (5) general working capital and net income, adjusted for non-cash items increased by $18,100, and (6) net collection of taxes receivable which was $5,800 more than in prior year.

As of June 30, 2020 , Water Utility Services’ write-offs for uncollectible accounts represent less than 1% of its total revenue, unchanged from June 30, 2019 .

(1) decrease in collection in balancing and memorandum accounts of $36,900, (2) a decrease in collections from accounts receivable and accrued unbilled utility revenue of $13,900 due to higher unbilled revenue balances and higher accounts receivable balances from the merger with SJWNE and slower collections from customers during the COVID-19 pandemic, (3) payments of amounts previously invoiced and accrued, which increased by $6,700, and (4) an up-front payment of $5,000 for renewal of the Cupertino service concession agreement, offset by (5) general working capital and net income, adjusted for non-cash items which increased by $39,500, and (6) an increase of payments for accrued interest by $2,300 as result of new debt acquired in 2019 and 2020.

As of September 30, 2020 , Water Utility Services’ write-offs for uncollectible accounts represented less than 1% of its total revenue, unchanged from September 30, 2019 .

In March 2020, the regulated utilities commissions of the respective states we operate initiated executive orders suspending water service disconnections due to non-payment from customers in light of the current stay-at-home orders, quarantines and similar governmental restrictions in response to the global COVID-19 pandemic.

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Cash Flow from Investing Activities

During the six months ended June 30, 2020 , SJW Group used cash flows in investing activities of approximately $81,100 , compared to $72,500 for the same period in 2019 .

During the nine months ended September 30, 2020 , SJW Group used cash flows in investing activities of approximately $141,200 , compared to $114,800 for the same period in 2019 .

SJW Group used approximately:

(1) $74,100 of cash for company-funded capital expenditures, (2) $5,000 for developer-funded capital expenditures, and (3) $1,600 for utility plant retirements.

(1) $130,400 of cash for

company-funded capital expenditures, (2) $9,600 for developer-funded capital expenditures, and (3) $1,900 for utility plant retirements.

Water Utility Services’ budgeted capital expenditures for 2020 , exclusive of capital expenditures financed by customer contributions and advances, are approximately $221,800 .

As of June 30, 2020 , approximately $74,100 or 33% of the $221,800 has been spent.

As of September 30, 2020 , approximately $130,400 or 59% of the $221,800 has been spent.

Certain capital improvement projects for Water Utility Services have been delayed due to COVID-19 pandemic in 2020 compared to normal activities prior to the pandemic.

As a result, we currently expect to add between $195,000 and $200,000 in capital expenditures in 2020.

Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations.

Over the next five years, Water Utility Services expect to incur approximately $1.2 billion in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems.

Over the next five years, Water Utility Services expect to incur approximately $1,200,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems.

A significant portion of this amount is subject to future CPUC, PURA, PUCT or MPUC approval.

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Cash Flow from Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2020 , increased by approximately $30,200 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings on our lines of credit of $74,500, and (2) $3,300 increase in net cash receipts from advances and contributions in aid of construction, offset by (3) a decrease in net proceeds from new long-term debt of $46,700.

Net cash provided by financing activities for the nine months ended September 30, 2020 , increased by approximately $45,400 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings on our lines of credit of $46,600, and (2) $5,900 increase in net cash receipts from advances and contributions in aid of construction, offset by (3) a decrease in net proceeds from new long-term debt of $4,600, and (4) $1,800 in dividends to shareholders.

Sources of Capital:

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The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings.

SJW Group’s unsecured senior note agreements has terms and conditions that restrict SJW Group from issuing additional funded debt if:

SJW Group’s 2011 unsecured senior note agreement has terms and conditions that restrict SJW 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 of SJW Group becomes less than $175,000 plus 30% of Water Utility Services cumulative net income, since June 30, 2011.

SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions at June 30, 2020 .

SJWC’s financing activity is designed to achieve a capital structure consistent with our CPUC authorized s tructure of approximately 47% debt and 53% equity.

As of June 30, 2020 , SJWC’s funded debt and equity were approximately 48% and 52%, respectively.

SJW Group’s 2019 and 2020 unsecured senior note agreements have terms and conditions that restrict SJW 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 at September 30, 2020 .

On August 11, 2020, SJW Group entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which SJW Group sold an aggregate principal amount of $50,000 of its 2.47% Senior Notes, Series 2020, due August 1, 2030.

The notes are unsecured obligations of the Company.

Interest is payable semi-annually in arrears on February 1st and August 1st of each year.

The note purchase agreement contains customary representations and warranties.

Under the note purchase agreement, SJW Group 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.

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 of September 30, 2020 , SJWC’s funded debt and equity were approximately 47% and 53%, 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.

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(1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges.

SJWC was not restricted from issuing future indebtedness as a result of these terms and conditions at June 30, 2020 .

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 of June 30, 2020 , SJWC was in compliance with all such covenants.

CTWS has outstanding term loans with a commercial bank and under the master loan agreement, CTWS is required to comply with certain financial ratio and operational covenants.

SJWC was not restricted from issuing future indebtedness as a result of these terms and conditions at September 30, 2020 .

SJWC’s loan agreements with the California 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 of September 30, 2020 , SJWC was in compliance with all such covenants.

CTWS has outstanding term loans with a commercial bank and under the master loan agreement, CTWS is required to comply with certain financial ratio and 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 of June 30, 2020 , CTWS was in compliance with all covenants under the master loan agreement.

Connecticut Water has outstanding term loans with a commercial bank and under its master loan agreement, Connecticut Water is required to comply with financial and operational covenants substantially identical to those found in CTWS’s master loan agreement.

Connecticut Water is required to maintain a debt to capitalization ratio of not more than 60%.

As of June 30, 2020 , Connecticut Water was in compliance with all covenants under its master loan agreement.

As of September 30, 2020 , CTWS was in compliance with all covenants under the master loan agreement.

Connecticut Water has outstanding term loans with a commercial bank and under its master loan agreement, Connecticut Water is required to comply with financial and 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 of September 30, 2020 , Connecticut Water was in compliance with all covenants under its master loan agreement.

Connecticut Water has tax-exempt and taxable Water Facilities Revenue Bonds issued through Connecticut Innovations (formerly the Connecticut Development Authority).

The bond indentures and loan agreements contain customary affirmative and negative covenants and require compliance with financial and operational covenants, and also provide for the acceleration of the Revenue Bonds upon the occurrence of stated events of default.

As of June 30, 2020 , Connecticut Water was in compliance with all covenants of the bond indentures and loan agreements.

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 of September 30, 2020 , Connecticut Water was in compliance with all covenants of the bond indentures and loan agreements.

Connecticut Water’s unsecured senior notes have terms and conditions that restrict Connecticut Water from issuing additional debt or paying a dividend to CTWS if such debt or distribution would trigger an event of default.

The senior note agreements also require Connecticut Water to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio at each fiscal quarter end of no less than three-to-one.

As of June 30, 2020 , Connecticut Water was in compliance with all financial ratio and operational covenants under this agreement.

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 of September 30, 2020 , Connecticut Water was in compliance with all financial ratio and customary affirmative and negative covenants under this agreement.

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.

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(1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $125,000 plus 30% of Water Utility Services cumulative net income, since December 31, 2005.

As of June 30, 2020 , SJWTX, Inc.

As of September 30, 2020 , SJWTX, Inc.

and SJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions.

Maine Water has First Mortgage Bonds issued to the Maine Municipal Bond Bank through the State Safe Drinking Water Revolving Loan Fund and First Mortgage Bonds issued to One America.

The associated bond indentures and loan agreements contain customary affirmative and negative covenants, including a prohibition on the issuance of indebtedness secured by assets or revenue of Maine Water where the lien is senior to the lien of the bond trustee under the above bonds except as permitted by the bond indentures and related loan and security agreements, a requirement to maintain a debt to capitalization ratio of not more than 65%, required compliance with various financial and operational covenants, and a provision for maturity acceleration upon the occurrence of stated events of default.

As of June 30, 2020 , Maine Water was in compliance with all covenants in its bond indentures and related loan agreements.

Maine Water has outstanding term loans with a commercial bank and under its master loan agreement, Maine Water is required to comply with financial and operational covenants substantially identical to those found in CTWS and Connecticut Water’s master loan agreements.

Maine Water is required to maintain a debt to capitalization ratio of not more than 60%.

As of June 30, 2020 , Maine Water was in compliance with all covenants under its master loan agreement.

HVWC has a term loan with a commercial bank, due in 2034.

The loan is secured by real property owned by HVWC.

The loan agreement restricts HVWC’s ability to incur additional debt and requires compliance with a funded debt to capitalization covenant and other operational covenants.

As of June 30, 2020 , HVWC was in compliance with all covenants of the loan.

Avon Water has a mortgage loan that is due in 2033.

The loan agreement (1) generally restricts the ability of Avon Water to incur additional debt or make dividend payments other than in the ordinary course of business, and (2) requires submission of

periodic financial reports as part of loan covenants.

As of June 30, 2020 , Avon Water was in compliance with all covenants of the loan.

As of June 30, 2020 , SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to $310,000 , of which $5,000 was available to SJWTX, Inc.

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 of September 30, 2020 , Maine Water was in compliance with all covenants in its bond indentures and related loan agreements.

Maine Water has outstanding term loans with a commercial bank and under its master loan agreement, Maine Water is required to comply with financial and 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 of September 30, 2020 , Maine Water was in compliance with all covenants under its master loan agreement.

HVWC had a term loan with a commercial bank, due in 2034.

The loan was secured by real property owned by HVWC.

The note was paid in full on September 24, 2020.

Avon Water had a mortgage loan that was due in 2033.

The note was paid in full on September 24, 2020.

As of September 30, 2020 , SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to $310,000 , of which $5,000 was available to SJWTX, Inc.

under a single line of credit, $190,000 was available to SJWC under two additional lines of credit line of credit, and $40,000 and $75,000 under a fourth and fifth, respectively, lines of credit was available to CTWS.

At June 30, 2020 , SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling $163,329 .

At September 30, 2020 , SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling $184,197 .

The lines of credit bear interest at variable rates.

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On May 11, 2020, SJWC amended its $125,000 unsecured line of credit to increase the lending commitment by $15,000 to $140,000.

In addition, on May 11, 2020, SJWC entered into an additional unsecured line of credit allowing borrowings of up to $50,000 for a six month period.

In addition, on May 11, 2020, SJWC entered into an additional unsecured line of credit allowing borrowings of up to $50,000 for a six month period which has a zero balance as of September 30, 2020 .

The $140,000 and $50,000 lines of credit of SJWC expire on June 1, 2021 and November 11, 2020, respectively.

SJWC does not intend to renew the $50,000 line of credit at maturity.

The line of credit for SJWTX, Inc.

expires on June 1, 2021.

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.

On May 29, 2020, CTWS entered into a Second Amendment to the CTWS’s existing $15,000 credit agreement, dated as of August 6, 2014, with 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 .

3 unchanged sentences

All of the lines of credit also include certain financial covenants that require the borrower to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio.

As of June 30, 2020 , SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.

As of September 30, 2020 , SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.

The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to draw on its lines of credit, issue long-term debt, sell its equity or earn interest income.

4 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis