What changed in this filing

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Item 1A. Risk Factors

2021-03-01 compared with 2020-03-02 · 253 added, 240 removed, 152 unchanged (76% of the section changed)

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Investors should also refer to the other information set forth in this Annual Report on Form 10-K, including the consolidated financial statements and the notes thereto.

Risks Related to Our Business

Risks Relating To Regulatory and Legal Matters

Our business is regulated and may be adversely affected by changes to the regulatory environment.

Our Water Utility Services are regulated public utilities.

The operating revenue of SJWC, Connecticut Water, CLWSC, Maine Water, Avon Water and HVWC is generated primarily from the sale of water at rates authorized by t he Regulators.

The operating revenue of SJWC, Connecticut Water, CLWSC and Maine Water is generated primarily from the sale of water at rates authorized by t he Regulators.

The Regulators set rates that are intended to provide revenues sufficient to recover normal operating expenses, provide funds for replacement of water infrastructure and produce a fair and reasonable return on stockholder common equity.

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To the extent our authorized rates may be too low, revenues may be insufficient to cover Water Utility Services’ operating expenses, capital requirements and SJW Group’s historical dividend rate.

In addition, delays in approving rate increases may negatively affect our operating results and our operating cash flows.

In addition, delays in approving rate increases may negatively affect our operating results and operating cash flows.

In addition, policies and regulations promulgated by the regulators govern the recovery of capital expenditures, the treatment of gains from the sale of real utility property, the offset of production and operating costs, the recovery of the cost of debt, the optimal equity structure, and the financial and operational flexibility to engage in non-tariffed operations.

If the regulators implement policies and regulations that will not allow SJWC, Connecticut Water, CLWSC, Maine Water, Avon Water and HVWC to accomplish some or all of the items listed above, Water Utility Services’ future operating results may be adversely affected.

If the regulators implement policies and regulations that will not allow SJWC, Connecticut Water, CLWSC and Maine Water to accomplish some or all of the items listed above, Water Utility Services’ future operating results may be adversely affected.

Further, from time to time, the commissioners at the Regulators may change.

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If the CPUC disagrees with our calculation of SJWC’s memorandum and balancing accounts, we may be required to make adjustments that could adversely affect our results of operations.

Under a 2007 Connecticut law, PURA authorizes regulated water companies to use a rate adjustment mechanism, known as WICA, for eligible projects completed and in service for the benefit of the customers.

During 2013, the Maine legislature enacted a law that allows Maine Water for expedited recovery of investments in water systems infrastructure replacement, both treatment and distribution, through WISC, similar to WICA in Connecticut.

Under a 2007 Connecticut law, PURA authorizes regulated

water companies to use a rate adjustment mechanism, known as WICA, for eligible projects completed and in service for the benefit of the customers.

Maine legislature enacted a law that allows Maine Water expedited recovery of investments in water systems infrastructure replacement, both treatment and distribution, through WISC, similar to WICA in Connecticut.

Maine Water began to use the WISC during 2014.

There is no guarantee that these regulatory authorities will approve our applications to recover all or a portion of our capital expenditure or infrastructure investment through such rate adjustment mechanisms, and their failure to do so will adversely affect our financial conditions and results of operations.

Recovery of regulatory assets is subject to adjustment by the regulatory agencies and could impact the operating results of Water Utility Services.

Recovery of regulatory assets is subject to adjustment by regulatory agencies and could impact the operating results of Water Utility Services.

Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as permitted by FASB ASC Topic 980—“Regulated Operations.” In accordance with ASC Topic 980, Water Utility Services record deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits will be recovered in the ratemaking process in a period different from when the costs and credits were incurred.

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If the assessment of the probability of recovery in the ratemaking process is incorrect and the applicable ratemaking body determines that a deferred cost is not recoverable through future rate increases, the regulatory assets or liabilities would need to be adjusted, which could have an adverse effect on our results of operations and financial condition.

Streamflow Regulations in New England could potentially impact our ability to serve our customers.

In December 2011, regulations concerning the flow of water in Connecticut’s rivers and streams were adopted.

As promulgated, the regulations require that certain downstream releases be made from seven of Connecticut Water’s eighteen active reservoirs no later than ten years following the adoption of stream classifications by the Department of Energy and Environmental Protection (“DEEP”).

Currently, downstream releases are made at two locations.

No groundwater supply wells are affected by the regulations.

DEEP has finalized stream classifications in all areas of Connecticut where Connecticut Water maintains and operates sources of supply.

The Company remains engaged in the process in order to minimize impact to our available water supply.

Although modified from prior versions, the regulations still have the potential to lower our safe yield, raise our capital and operating expenses and adversely affect our revenues and earnings.

Although costs associated with the regulations may be recovered in the form of higher rates and Connecticut law allows for a WICA surcharge to recover capital improvement costs necessary to achieve compliance with the regulations, there can be no assurance PURA would approve rate increases to enable us to recover all such costs and surcharges.

Maine also has regulations that govern the flow of water in rivers and streams and also govern lake levels on great ponds.

Code of Maine Rules Chapter 587 (“Chapter 587”) regulates any activity that alters the flow or level of classified state waters after August 2007.

Maine Water operates five water systems that use surface waters governed by Chapter 587.

Maine Water has operated in full compliance with the chapter since its effective date and fully expects continued compliance.

For public water systems, Chapter 587 allows the Maine Department of Environmental Protection (“MDEP”) to impose site specific conditions in locations where Maine’s water quality classifications are not being met.

Any conditions proposed on a water withdrawal by a public water system must consider the provisions of any legislative charter, the watershed protection benefits provided by the utility and the financial viability of the utility.

Further, any conditions imposed must be accommodated by the existing MPUC approved rate schedule for the utility and may not, in and of themselves, cause a utility to request a rate increase from their customers.

To date, the MDEP has not imposed any withdrawal conditions on any public water system in Maine.

Water Utility Services is subject to litigation risks concerning water quality and contamination.

Although Water Utility Services is not a party to any environmental and product-related lawsuits, there is no guarantee that such lawsuits will not occur in the future.

Any environmental or product-related lawsuit, may require us to incur significant legal costs and we may not be able to recover the legal costs from ratepayers or other third parties.

Although Water Utility Services has liability insurance coverage for bodily injury and property damage, pollution liability is excluded from this coverage and our excess liability coverage.

Pollution liability coverage is in place for the majority of the SJW Group locations and operations, but is subject to exclusions and limitations.

In addition, any complaints or lawsuits against us based on water quality and contamination may receive negative publicity that can damage our reputation and adversely affect our business and trading price of our common stock.

Water Utility Services is subject to possible litigation or regulatory enforcement action concerning water discharges to Waters of the United States (“WOTUS”).

Regulatory actions and fines related to discharges of water to WOTUS against other water utilities have increased in frequency in recent years.

If Water Utility Services is subject to a litigation or regulatory enforcement action, it might incur significant

costs in fines and restoration efforts, and it is uncertain whether Water Utility Services would be able to recover some or all of such costs from ratepayers or other third parties.

In addition, any litigation or regulatory enforcement action against us regarding a water discharge and/or resulting environmental impact may receive negative publicity that can damage our reputation and adversely affect our business and the trading price of our common stock.

New or more stringent environmental regulations could increase Water Utility Services’ operating costs and affect its business.

Water Utility Services are subject to water quality and pollution control regulations issued by the EPA and environmental laws and regulations administered by the respective states and local regulatory agencies.

New or more stringent environmental and water quality regulations could increase Water Utility Services’ water quality compliance costs, hamper Water Utility Services’ available water supplies, and increase future capital expenditures.

Under the federal Safe Drinking Water Act, Water Utility Services is subject to regulation by the EPA relating to the quality of water it sells and treatment techniques it uses to make the water potable.

The EPA promulgates, from time to time, nationally applicable standards, including maximum contaminant levels for drinking water.

Additional or more stringent requirements may be adopted by each state.

There can be no assurance that Water Utility Services will be able to continue to comply with all water quality requirements.

Water Utility Services has implemented monitoring activities and installed specific water treatment improvements in order to comply with existing maximum contaminant levels and plan for compliance with future drinking water regulations.

However, the EPA and the respective state agencies have continuing authority to issue additional regulations under the Safe Drinking Water Act.

New or more stringent environmental standards could be imposed that will raise Water Utility Services’ operating costs and capital expenditures, including requirements for increased monitoring, additional treatment of underground water supplies, fluoridation of all supplies, more stringent performance standards for treatment plants, additional procedures to further reduce levels of disinfection by-products, and more comprehensive measures to monitor, reduce or eliminate known or newly identified contaminants such as polyfluoroalkyl substances.

There are currently limited regulatory mechanisms and procedures available to us for the recovery of such costs and there can be no assurance that such costs will be fully recovered and failure to do so may adversely affect our operating results.

We may be at risk for litigation under the principle of inverse condemnation for activities in the normal course of business which have a damaging effect on private property.

Under the California legal doctrine of inverse condemnation, a public utility taking or damaging private property can be responsible to the property owners for compensation, even when damage occurs through no fault or negligence of the utility company and regardless of whether the damage could be foreseen.

Based upon existing California case law, SJWC could be sued under the doctrine of inverse condemnation and held liable if its facilities, operations or property, such as mains, fire hydrants, power lines and other equipment, or wildfires in our Santa Cruz mountain watershed result in damage to private property.

A court finding of inverse condemnation does not obligate the CPUC to allow SJWC to recover damage awards or pass on costs to ratepayers.

SJWC ’ s liquidity, earnings, and operations may be adversely affected if we are unable to recover the costs of paying claims for damages caused by the operation and maintenance of our property from customers or through insurance.

Our water utility property and systems are subject to condemnation and other proceedings through eminent domain.

State laws in jurisdictions where we operate, including California, Connecticut, Texas and Maine, allow municipalities, water districts and other public agencies to own and operate water systems.

These agencies are empowered to condemn water systems or real property owned by privately owned public utilities in certain circumstances and in compliance with state and federal laws.

In general, if a public agency exercises its eminent domain power to take possession of private property, the government is required to pay just compensation to owners of such property.

In the event of eminent domain or condemnation proceedings against our water utility property or systems, we may incur substantial attorney’s fees, consultant and expert fees and other costs in considering a challenge to such proceeding and/or its valuation for just compensation, as well as fees and costs in any subsequent litigation if necessary.

If the public agency prevailed and acquired our utility property, we would no longer have access to the condemned property or water system, neither would we be entitled to any portion of revenue generated from the use of such asset going forward.

Furthermore, if public agencies succeed in acquiring our assets, there is a risk that we will not receive adequate compensation for the assets taken or be able to recover all charges associated with the condemnation of such assets, which may adversely affect our business operations and financial conditions.

Risks Relating To Business Operations

Our business, financial condition, and results of operations have been and will continue to be negatively impacted by the Coronavirus (“COVID-19”) pandemic.

We are subject to risks related to the global pandemic associated with COVID-19.

Numerous governmental jurisdictions, including the States of California, Connecticut, Maine and Texas where we maintain our water utility operations, have imposed “shelter-in-place” orders, quarantines, executive orders and similar governmental orders and restrictions for their residents to control the spread of COVID-19.

Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our suppliers, employees and customers, among others.

While state governments have permitted some reopening of businesses and approved gradual easing of various restrictions, the pandemic continues to have a significant and negative impact on all aspects of economic activities in the U.S., and some state governments have reversed or suspended their reopening plans in response to surges of COVID-19 cases in their states, including California.

In California, Governor Gavin Newsom signed an executive order suspending water service disconnections due to non-payment by customers retroactive to March 4, 2020 and until further notice.

On February 11, 2021, the CPUC approved Resolution M-4849 extending customer protections (i.e.

shutoffs and collections) required in Resolution M-4842 through June 30, 2021.

The resolution also requires water utilities to develop a transition plan regarding shutoffs and terminations with customers once the moratorium ends.

In Connecticut, the March 12, 2020, PURA moratorium ruling to halt shutoff for nonpayment expired on October 1, 2020.

In Maine, MPUC lifted the moratorium on utility disconnections effective November 1, 2020.

PUCT in Texas had ordered on March 13, 2020 public utilities to suspend water service disconnections and late fees charged to customers which expired on June 13, 2020, but there is no guarantee that PUCT will not reinstate or impose similar orders in the future.

The federal government may also take actions to impose a nation-wide utility termination moratorium through executive orders.

These and other events associated with the COVID-19 pandemic have reduced the incentive and ability of our residential and commercial customers to pay their water services bills on time, if at all, which could negatively impact our result of operations.

Furthermore, a significant portion of our revenue is derived from water usage by commercial customers.

As many of these customers have suspended, altered or terminated their business operations to comply with government orders, their water usage may decline significantly or cease, which could adversely affect our revenue.

While some states and counties, including Santa Clara county where our headquarters is located, have previously announced a schedule to allow more businesses to reopen, recent increases in COVID-19 cases and hospitalization rates in California and elsewhere have prompted reinstatement of restrictions and lockdown.

Furthermore, even if these restrictions are eased or lifted, some of our commercial customers may decide not to open fully or at all due to their ongoing concerns with safety at the workplace.

Connecticut Water has an approved regulatory mechanism for a water revenue adjustment that provides for recovery of the companies’ authorized annual revenues through a customer surcharge or credit that mitigates the impact of reduced usage but will not cover losses for non-payment or bad debt.

While we expect to recover some of the revenue loss and costs through the rate-making processes, there is no guarantee that such recovery will be approved by the regulated utility authorities in a timely manner, or at all.

In addition to loss of revenue, we are subject to the following risks resulting from the COVID-19 pandemic and related events:

• we may encounter difficulties and disruptions in communication and coordination among our employees, partners, customers and others, which may reduce our productivity and interfere with our normal operations;

• our planned infrastructure improvement projects were temporarily interrupted by COVID-19 government orders, restrictions and supply shortages.

This may negatively impact our ability to maintain our infrastructure and provide reliable services to customers.

In addition, our expenditures on capital improvements has been reduced, which may in turn impact rate decisions by the Regulators.

• widespread COVID-19 disease could impact the health of our employees and management team, which may disrupt our business operations;

• a recession, stock market correction, or debt market disruptions resulting from the spread of COVID-19 could materially affect our business, our results of operations, our cash flow, and the value of our common stock, which may make it more difficult for us to access capital in equity and debt markets.

• the financial impact of the COVID-19 pandemic may require us to reassess the goodwill recorded by SJW Group following the completion of our merger with CTWS in October 2019, and such reassessment may result in a future significant or material impairment of our goodwill asset;

The ultimate impact of the COVID-19 pandemic continues to be uncertain and subject to change.

We cannot predict when this pandemic will end and when and to what extent various government orders and restrictions will be imposed, modified, eased or

lifted, and any extension or prolonged implementation of these measures will further adversely affect our business and financial results.

Even after such orders and restrictions are eased or lifted, the severe economic impact on the jurisdictions and areas in which we operate may last for an extended period of time and continue to adversely affect our business and financial conditions, and there is no guarantee that we will be able to quickly return to our normal operations.

Changes in water supply, water supply costs or the mix of water supply could adversely affect the operating results and business of Water Utility Services.

SJWC’s supply of water primarily relies upon three main sources:

treated water purchased from Valley Water, surface water from its Santa Cruz Mountains watershed, and pumped underground water.

treated water purchased from Valley Water, surface water from its watershed in the Santa Cruz Mountains, and water pumped from underground.

Changes and variations in quantities from each of these three sources including changes due to production assets being taken off-line for renovation or non-compliance with regulations affect the overall mix of the water supply, thereby affecting the cost of the water supply.

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If SJWC has difficulties obtaining a high quality water supply from Valley Water due to availability, environmental, legal or regulatory actions or other restrictions (see also Part I, Item 1, “Water Supply”), it may not be able to fully satisfy customer demand in its service area and its operating results and business may be adversely affected.

Additionally, the availability of water from SJWC’s Santa Cruz Mountain watershed depends on the weather and fluctuates with each season.

Additionally, the availability of water from SJWC’s Santa Cruz Mountains watershed depends on the weather and fluctuates with each season.

In a normal year, surface water supply provides 6% to 8% of the total water supply of the system.

In a season with little rainfall, such as the record drought conditions in 2015 and most of 2016, water supply from surface water sources may be low, thereby causing SJWC to increase the amount of water purchased from outside sources at a higher cost than surface water, thus increasing water production expenses.

In a season with little rainfall, such as the record drought conditions in California in 2015 and most of 2016 water supply from surface water sources may be low, thereby causing SJWC to increase the amount of water purchased from outside sources at a higher cost than surface water, thus increasing water production expenses.

When drought conditions occur, we may be required to rely more heavily on purchased water than surface water, which would increase our costs and adversely affect our results of operations.

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This supply is supplemented by groundwater pumped from wells.

the contract provides a committed long-term water supply for future demand, CLWSC customers currently do not use the volume of water allowed under the contracts which increases the cost of water for existing customers, and there is no assurance that future demands up to the committed supply volume will occur.

CLWSC has a small secondary water supply specific to a distinct system located in Hays and Travis counties.

This supply of 250 acre-feet is also a long-term take or pay contract.

While the contracts provides a committed long-term water supply for future demand, CLWSC customers currently do not use the volume of water allowed under the contracts which increases the cost of water for existing customers, and there is no assurance that future demands up to the committed supply volume will occur.

Texas faces long-term water supply constraints similar to California as described above and while current water supply exceeds demand, CLWSC may not be able to obtain adequate water supply to meet customer demand or may be required to procure more costly water from other sources.

(See also Part I, Item 1, “Water Supply”).

The Connecticut regulated operations derive their rights and franchises to operate from state laws that are subject to alteration, amendment or repeal.

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None of the Connecticut regulated operations were parties in the recent merger between the parent companies CTWS and SJW Group and no conditions were imposed that would adversely impact those rights and franchises.

The companies further rely on environmental permits or registrations authorizing the use of water supplies in Connecticut, and those were not altered as a result of the merger with SJW Group.

There is the possibility that the state could revoke our franchises and allow a governmental entity to take over some or all of our systems or could modify laws related to water supply use.

From time to time such legislation has been contemplated.

The Connecticut regulated operations do not face long-term water supply constraints, however, in times of persistent dry weather and continued drought conditions, Connecticut Water has requested that customers voluntarily reduce water usage.

The companies further rely on environmental permits or registrations authorizing the use of water supplies in Connecticut, and those

were not altered as a result of the merger with SJW Group.

There is a possibility that the state could revoke our franchises and allow a governmental entity to take over some or all of our systems or could modify laws related to water supply use.

From time to time such legislation has been contemplated in the past.

The Connecticut regulated operations do not face long-term water supply constraints, but in times of persistent dry weather and continued drought conditions, Connecticut Water has requested that customers voluntarily reduce water usage, which may negatively affect its results of operations.

Maine Water Company relies on legislatively granted water rights in order to serve customers.

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The legislation incorporating these predecessor water companies did not address whether chartered rights may be transferred to another entity without special legislative action.

The Maine Business Corporation Act generally provides that property and contract rights of a merged corporation are vested in the survivor corporation without reversion or impairment.

The Maine Business Corporation Act generally provides that property and contract rights of a merged corporation are vested in the surviving corporation without reversion or impairment.

In the MPUC proceedings that approved the mergers of these Maine Water predecessor companies, the survivorship of water rights was not contested and Maine Water has not sought specific legislation to reaffirm the transfer of chartered rights granted to predecessor water companies.

Maine Water does not face long-term water supply constraints.

(See also Part I, Item 1, “Water Supply”).

Climate change may also impact water supply.

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In addition, in time of drought, water conservation may become a regulatory requirement that impacts the water usage of our customers.

For example, in response to the severe drought in California in 2015 and 2016, Valley Water extended their call for 30% conservation and restrictions on outdoor watering of ornamental landscapes two days a week through June 30, 2016.

Following the improvement of drought condition in late 2016 and 2017, Valley Water reduced its conservation target from 30% to 20% and also increased the number of outdoor watering days from two days to three days effective July 1, 2016 through January 31, 2017.

On January 24, 2017, Valley Water maintained their call for 20% conservation and restrictions on outdoor watering for ornamental landscapes to no more than three days a week, effective February 1, 2017.

On June 13, 2017, Valley Water adopted Resolution 17-43 to encourage making water conservation a way of life in California through recommendations on watering schedules and a call for customers to achieve a 20% reduction in water use as compared to 2013.

While the drought has ended Valley Water has maintained a conservation target at 20%.

(See also Part I, Item 1, “Water Supply”).

For example, in response to the continuing severe drought conditions in 2016 and 2017 in California, Valley Water adopted Resolution 17-43 to encourage making water conservation a way of life in California through recommendations on watering schedules and a call for customers to achieve a 20% reduction in water use as compared to 2013.

The implementation of mandatory conservation measures has resulted and is expected to result in lower water usage by our customers which may adversely affect our results of operation.

If the current conservation measures continue, or if new measures are imposed in response to drought conditions in the future, we may experience fluctuations in the timing of or a reduction in customer revenue.

Furthermore, while the CPUC previously approved a WCMA which allows companies to

recover revenue reductions due to water conservation activities and certain conservation related costs, collection of such memorandum accounts are subject to a review and approval process by CPUC, which can be lengthy, and there is no assurance that we will be able to recover in a timely manner all or some of the revenue and costs recorded in the memorandum accounts.

If drought conditions ease and the State Water Board and Valley Water no longer mandate water conservation, the Company may no longer be allowed to recover revenue lost due to continued conservation activities under the WCMA account and would therefore be exposed to differences between actual and authorized usage.

Furthermore, the CPUC may approve memorandum accounts, such as a Water Conservation Memorandum Account (“WCMA”), to allow companies to recover revenue reductions due to water conservation activities and certain conservation related costs.

However, collection of such memorandum accounts are subject to a review and approval process by CPUC, which can be lengthy, and there is no assurance that we will be able to recover in a timely manner all or some of the revenue and costs recorded in the memorandum accounts.

When drought conditions ease and the State Water Board and Valley Water no longer mandate water conservation, the Company may no longer be allowed to recover revenue lost due to continued conservation activities under the WCMA account and would therefore be exposed to differences between actual and authorized usage.

This could result in lower revenues.

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532 to recover the 2018 balances of WCMA and was ordered to remove the WCMA accounts.

As a result of the decision, during the year ended December 31, 2019, SJWC wrote off a total balance of $9.4 million recorded in the 2018 WCMA and $0.6 million recorded in the 2019 WCMA memorandum accounts.

As a result of this decision, during the year ended December 31, 2019, SJWC wrote off a total balance of $9.4 million recorded in the 2018 WCMA and $0.6 million recorded in the 2019 WCMA memorandum accounts.

(See also Note 1, “Summary of Accounting Principles” in the consolidated financial statements).

Similar to SJWC, Connecticut Water, Avon Water, HVWC and Maine Water have also been impacted by increased water conservation, as well as the use of more efficient household fixtures and appliances among residential users.

Similar to SJWC, Connecticut Water and Maine Water have also been impacted by increased water conservation, as well as the use of more efficient household fixtures and appliances among residential users.

There has been a trend of declining per customer residential water usage in Connecticut and Maine over the last several years.

CTWS’s regulated businesses at Maine Water and at Avon Water are heavily dependent on revenue generated from rates it charges to its residential customers for the volume of water they use.

The rates Connecticut Water, Avon Water, HVWC and Maine Water charge for its water is regulated by PURA in Connecticut and MPUC in Maine, and CTWS’s water services subsidiaries may not unilaterally adjust their rates to reflect changes in demand.

A declining volume of residential water usage may have a negative impact on our operating revenues in the future if regulators do not reflect usage declines in the rate setting design process.

Although the legislatures in Maine and Connecticut have provided enabling legislation for water utilities to implement revenue adjustment mechanisms to allow for recovery of authorized rates where conservation has occurred and consumption has declined and such a mechanism has been approved by PURA for Connecticut Water and Heritage Village Water, this mechanism has yet to be implemented at Avon Water and Maine Water.