H2O AMERICA 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts and otherwise noted) The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the condensed consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2020. 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. Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that may affect our actual results, please see our disclosures under “Forward-Looking Statements,” and elsewhere in this Form 10-Q, including Item 1A under “Risk Factors.” General: SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company (“SJWC”), SJWNE LLC, SJWTX, Inc. and SJW Land Company. SJWC is a public utility in the business of providing water service to approximately 231,000 connections that serve a population of approximately one million people in an area comprising approximately 139 square miles in the metropolitan San Jose, California area. The principal business of SJWC consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. SJWC provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, and Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. SJWC distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. SJWC also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site leases. SJWC has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained. SJWC also has approximately 234 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to SJWC’s various watershed properties. SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”). 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 139,000 connections that serve a population of approximately 486,000 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”) and The Maine Water Company (“Maine Water”). During the third quarter of 2020, 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 previously wholly owned subsidiaries of CTWS prior to 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 to eligible residential customers through NEWUS in Connecticut and Maine Water in Maine. Linebacker covers 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 18 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. SJWTX, Inc., doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately 20,000 connections that serve approximately 61,000 people. CLWSC’s service area comprises more than 247 square miles in the southern region of the Texas Hill Country in Blanco, Comal, Hays and Travis counties, the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc. SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee. SJW Land Company also owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. which operated a California commercial property that was sold in the second quarter of 2017. 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 three months ended March 31, 2021: % for Three months ended March 31, 2021 of SJW Land Company Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 47 % 44 % Commercial building Knoxville, Tennessee 15 135,000 53 % 56 % Undeveloped land and parking lot Knoxville, Tennessee 10 N/A N/A N/A Undeveloped land San Jose, California 103 N/A N/A N/A As of March 31, 2021, Chester Realty, Inc. owns 23 acres of undeveloped land and a commercial building in the State of Connecticut. Business Strategy for Water Utility Services: SJW Group focuses its business initiatives in three strategic areas: (1) Regional regulated water utility operations; (2) Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California, the Public Utilities Regulatory Authority in Connecticut (“PURA”), the Public Utilities Commission of Texas (“PUCT”) in Texas, and the Maine Public Utilities Commission (“MPUC”) in Maine; and (3) Out-of-region water and utility related services. As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets. However, we cannot be certain we will be successful in identifying and consummating any strategic business combination or acquisitions relating to such opportunities. In addition, the execution of our business strategy will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the potential for a negative impact on SJW Group’s financial position and operating results, entering markets in which SJW Group has no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, 19 reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm operating results or our financial condition. Real Estate Services: SJW Group’s real estate investment activity is conducted through SJW Land Company and Chester Realty, Inc. As noted above, SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee. SJW Land Company also owns a limited partnership interest in 444 West Santa Clara Street, L.P. The partnership had a commercial building in San Jose, California that was sold in the second quarter of 2017. SJW Land Company manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. Chester Realty, Inc. owns and operates land and commercial buildings in the State of Connecticut. Chester Realty, Inc. manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. SJW Land Company and Chester Realty, Inc.’s real estate investments diversify SJW Group’s asset base. Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2020 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2020, that was filed with the SEC on March 1, 2021. Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2020. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2020 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2020. Recently Adopted Accounting Policies: See Note 1 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of recently adopted accounting policies for the three months ended March 31, 2021. Results of Operations: Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales. Overview SJW Group’s consolidated net income for the three months ended March 31, 2021, was $2,616, an increase of $199, or approximately 8%, from $2,417 for the same period in 2020. The change in net income for the three months ended March 31, 2021, was primarily due to a decrease in revenue of $969 or 1% from a decrease in customer usage and the impact of the February ice storm in the Texas service area, partially offset by an increase in cumulative water rates authorized by our California 2019 General Rate Case and a Water Infrastructure Surcharge authorized in Maine, and customer growth in Texas. In addition, depreciation increased due to assets placed in service in 2020 and a decrease in available low cost surface water due to dry weather conditions in our California service area. The lower revenue and increased expenses were offset by income tax expense as a result of lower pre-tax income and income tax benefits relating to share-based payments awards, state tax credits and other tax benefits. 20 Coronavirus (“COVID-19”) Update The outbreak of COVID-19 has had significant impact on the global economy. Financial impacts experienced by SJW Group due to the COVID-19 pandemic include higher uncollectible accounts receivables and increased costs from COVID-19 related prevention activities. The regulators in the states SJW Group operates have approved mechanisms to either record a regulatory asset or track in a memorandum account expenses and savings related to COVID-19. SJWC and CLWSC have determined that future recovery of the account is probable and have recognized the related regulatory assets. Probability criteria has not yet been met for CTWS. If a state regulator disagrees with the calculation of recorded account balances, we may be required to make adjustments that could adversely affect our results of operations. SJW Group continues to monitor COVID-19 developments affecting our business, employees and suppliers and will take additional precautions as management believes is necessary. Operating Revenue Operating Revenue by Segment Three months ended March 31, 2021 2020 Water Utility Services $ 113,441 114,384 Real Estate Services 1,344 1,370 $ 114,785 115,754 The change in consolidated operating revenues was due to the following factors: Three months ended March 31, 2021 vs. 2020 Increase/(decrease) Water Utility Services: Consumption changes (including unbilled utility revenue) $ (2,792) (2) % Increase in customers 446 — % Rate increases 2,841 2 % Winter storm customer credits (690) (1) % Balancing and memorandum accounts (635) — % Other (113) — % Real Estate Services (26) — % $ (969) (1) % Operating Expense Operating Expense by Segment Three months ended March 31, 2021 2020 Water Utility Services $ 99,847 97,378 Real Estate Services 881 831 All Other 978 2,118 $ 101,706 100,327 21 The change in consolidated operating expenses was due to the following factors: Three months ended March 31, 2021 vs. 2020 Increase/(decrease) Water production expenses: Change in surface water use $ 735 1 % Change in usage and new customers (92) — % Purchased water and groundwater extraction charge and energy price change, net (809) (1) % Balancing and memorandum accounts cost recovery (19) — % Total water production expenses (185) — % Administrative and general (418) (1) % Balance and memorandum account cost recovery 49 — % Maintenance 179 — % Property taxes and other non-income taxes 52 — % Depreciation and amortization 2,056 2 % Merger related expenses (354) — % $ 1,379 1 % Sources of Water Supply SJWC’s water supply consists of imported water purchased from the Santa Clara Valley Water District (“Valley Water”) under the terms of a master contract with Valley Water expiring in 2051, groundwater from wells, surface water from watershed run-off and diversion, reclaimed and water. Surface water is the least expensive source of water. Changes and variations in quantities from each of these sources affect the overall mix of the water supply, thereby affecting water supply cost. In addition, the water rate for purchased water and the groundwater extraction charge may be increased by Valley Water at any time. If an increase occurs, then SJWC would file an advice letter with the CPUC seeking authorization to increase customer rates to offset the cost increase. On April 1, 2021, Valley Water’s 10 reservoirs were at approximately 17% of total capacity with 9,037 million gallons of water in storage, which is 26% of the twenty-year average for this date. Valley Water’s largest reservoir, Anderson, remains drained in preparation for the 8-10 year Anderson Dam Seismic Retrofit Project. As reported by Valley Water, there was 5.79 inches of rainfall, or 46% of average to date, in San Jose during the current annual rainfall season that commenced on July 1, 2020. Rainfall at SJWC’s Lake Elsman was measured at 21.62 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 April 1, 2021, Valley Water reported that allocations from the state and federal water project are approximately 5% and 55%, respectively, of amounts requested in 2021. Valley Water also reported that the managed groundwater recharge from January to March in the Santa Clara Plain was 96% of the five-year average. The groundwater level in the Santa Clara Plain is approximately 18 feet lower than the five-year average. According to Valley Water, the projected total groundwater storage at the end of 2021 is expected to fall within the normal stage of the Valley Water’s Water Shortage Contingency Plan. On April 1, 2021, SJWC’s Lake Elsman contained 324 million gallons of water, of which approximately 174 million gallons can be utilized for treatment in water production. This Lake Elsman volume represents 19% of the five-year average which reflects the low winter rainfall we experienced in our Santa Cruz mountains watershed. Local surface water is a less costly source of water than groundwater or purchased water and its availability significantly impacts SJWC’s results of operations. SJWC will utilize surface water and additional water from its portfolio of groundwater supplies to supplement imported water from Valley Water. Production from the Montevina Surface Water Treatment Plant through the first quarter was 224 million gallons, which is 36% of the five-year average. SJWC will be temporarily taking the Montevina Surface Water Treatment Plant offline in 2021 until hydrologic conditions in the watershed improve. During the first quarter, there was no water production at SJWC’s smaller Saratoga Water Treatment Plant. The Saratoga Water Treatment Plant was unable to be placed into service during the first quarter due to lack of run-off from Saratoga Creek and remains offline. SJWC believes that its various water supply sources will be sufficient to meet customer demand through the remainder of 2021. Connecticut Water utility services’ infrastructure consists of 65 noncontiguous water systems in the State of Connecticut. These systems, in total, consist of approximately 1,800 miles of water main and reservoir storage capacity of 2.4 billion gallons. The dependable yield from our 235 active wells and 18 surface water supplies is approximately 65 million gallons per day. Water sources vary among the individual systems, but overall approximately 72% of the total dependable yield comes from wells and 28% from surface water supplies. 22 CLWSC’s water supply consists of groundwater from wells and purchased treated and untreated raw water from local water agencies. CLWSC has long-term agreements with the Guadalupe-Blanco River Authority (“GBRA”), which expire in 2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts, provide CLWSC with an aggregate of 6,900 acre-feet of water per year from Canyon Lake at prices that may be adjusted periodically by GBRA. CLWSC also has raw water supply agreements with the Lower Colorado River Authority (“LCRA”) and West Travis Public Utility Agency (“WTPUA”) expiring in 2053 and 2046, respectively, to provide for 350 acre-feet of water per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted periodically by the agencies. Production wells located in a Comal Trinity Groundwater Conservation District, a regulated portion of the Trinity aquifer, are charged a groundwater pump tax based upon usage. CLWSC has recently updated its Drought Management Plan to better account for both climatic conditions within its service area and increased demand due to new developments. The updated Drought Management Plans has been approved by the Texas Commission for Environmental Quality. CLWSC believes that by following the Drought Management Plan water supply sources will be sufficient to meet customer demand through the remainder of 2021. Maine Water’s infrastructure consists of 12 noncontiguous water systems in the State of Maine. These systems, in total, consist of approximately 600 miles of water main and reservoir storage capacity of 7.0 billion gallons. The dependable yield from our 14 active wells and 7 surface water supplies is approximately 120 million gallons per day. Water sources vary among the individual systems, but overall approximately 90% of the total dependable yield comes from surface water supplies and 10% from wells. The following table presents the change in sources of water supply, in million gallons, for Water Utility Services: Three months ended March 31, Increase/ (decrease) % of Total Change 2021 2020 Purchased water 3,646 3,635 11 — % Groundwater 4,603 4,345 258 3 % Surface water 1,833 2,051 (218) (2) % Reclaimed water 85 86 (1) — % 10,167 10,117 50 1 % 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 March 31, 2021, and 2020 approximated 7.2% and 8.0%, respectively, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially offset by SJWC’s main replacements and lost water reduction programs. CTWS’s unaccounted-for water on a 12-month-to-date basis for March 31, 2021 was approximately 16.2% 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 months ended March 31, 2021, compared to the same period in 2020, was primarily attributable to changes in average per unit costs for purchased water, groundwater extraction and energy charges, offset by a decrease in available surface water for SJWC. 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 $1,564 for the three months ended March 31, 2021, compared to the same period in 2020. The increase was primarily attributable to an increase of $2,056 in depreciation and amortization expense due to increases in utility plant, partially offset by a decrease in administrative and general expenses. Other (Expense) Income For the three months ended March 31, 2021, compared to the same period in 2020, the change in other (expense) income was primarily due to a decrease in pension non-service cost, and an increase in income generated from the return on retirement plan assets and contracted services. Provision for Income Taxes For the three months ended March 31, 2021, compared to the same period in 2020, income tax expense decreased $1,334. The decrease in income tax expense was primarily due to lower pre-tax income, state tax credits and other income tax benefits. The 23 effective consolidated income tax rates were (52)% and 15% for the three months ended March 31, 2021, and 2020, respectively. The lower effective rate for the three months ended March 31, 2021, was primarily due to excess tax benefits relating to share-based payment awards, state tax credits and other discrete tax items. On March 11, 2021, the American Rescue Plan Act was signed into law. SJW Group is currently evaluating the impact this legislation may have on the consolidated financial results. Regulation and Rates Almost all of the operating revenue of SJW Group results from the sale of water at rates authorized by the subsidiaries’ respective state utilities commissions. The state utilities commissions set rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations. See Note 2 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of regulatory activities that have occurred during the quarter. Liquidity: Cash Flow from Operating Activities During the three months ended March 31, 2021, SJW Group generated cash flows from operations of approximately $33,400, compared to $7,900 for the same period in 2020. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, stock-based compensation, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations increased by approximately $25,400. This increase was the result of a combination of the following factors: (1) increase in net changes in the balancing and memorandum accounts of $8,400, (2) payments of amounts previously invoiced and accrued including accrued productions costs, increased by $8,300, (3) an up-front payment of $5,000 in the prior year for renewal of the Cupertino service concession agreement that did not recur in the current year, (4) an increase in collections from accounts receivable and accrued unbilled utility revenue of $2,200, and (5) general working capital and net income, adjusted for non-cash items increased $1,500. As of March 31, 2021, Water Utility Services’ write-offs for uncollectible accounts represented less than 1% of its total revenue, unchanged from March 31, 2020. In 2020, the regulated utilities commissions of the respective states we operate initiated executive orders suspending water service disconnections due to non-payment from customers in light of the then current stay-at-home orders, quarantines and similar governmental restrictions in response to the global COVID-19 pandemic. Some of the orders have been lifted and the anticipation is that the remaining orders will be lifted in 2021. Once lifted, management believes that the collection rate for its accounts receivables will increase back up to pre-pandemic levels. The financial impact of current past due accounts are being tracked for recovery through the rate-making process. There is no guarantee that such recovery will be approved by the respective state regulatory utility commissions. Cash Flow from Investing Activities During the three months ended March 31, 2021, SJW Group used cash flows in investing activities of approximately $51,900, compared to $42,500 for the same period in 2020. SJW Group used approximately: (1) $46,700 of cash for company-funded capital expenditures, (2) $4,700 for developer-funded capital expenditures, and (3) $500 for utility plant retirements. Water Utility Services’ budgeted capital expenditures for 2021, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately $238,800. As of March 31, 2021, approximately $46,700 or 20% of the $238,800 has been invested. Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, Water Utility Services expect to incur approximately $1,400,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future respective state regulatory utility commissions’ approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction. The Water Utility Services’ distribution systems were constructed during the period from the early 1900’s through today. Expenditure levels for renewal and modernization will occur as the components reach the end of their useful lives. In most 24 cases, replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services and increased regulation. Cash Flow from Financing Activities Net cash provided by financing activities for the three months ended March 31, 2021, decreased by approximately $21,100 from the same period in the prior year, primarily as a result of (1) a decrease in net borrowings and repayments on our lines of credit of $67,700, (2) a decrease in net proceeds from new long-term debt of $18,000, (3) $1,800 decrease in net cash receipts from advances and contributions in aid of construction, offset by (3) an increase in net proceeds from our recent common stock equity offering of $67,200. Sources of Capital: SJW Group’s ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings. Long-term Financing Agreements 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’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 March 31, 2021. SJWC’s financing activity is designed to achieve a capital structure consistent with our CPUC authorized structure of approximately 47% debt and 53% equity. As of March 31, 2021, SJWC’s funded debt and equity were approximately 46% and 54%, respectively. Funding for SJWC’s future capital expenditure program is expected to be provided primarily through internally-generated funds, the issuance of new long-term debt, and the issuance of equity, all of which will be consistent with regulator guidelines. SJWC’s unsecured senior note agreements generally have terms and conditions that restrict SJWC from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest 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 March 31, 2021. 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 March 31, 2021, SJWC was in compliance with all such covenants. CTWS has outstanding term loans with a commercial bank, and under the master loan agreement CTWS is required to comply with certain financial ratio and customary affirmative and negative covenants. The most restrictive of these covenants is to maintain a consolidated (CTWS and its subsidiaries) debt to capitalization ratio of not more than 60%. As of March 31, 2021, CTWS was in compliance with all covenants under the master loan agreement. Connecticut Water has outstanding term loans with a commercial bank, and under its master loan agreement Connecticut Water is required to comply with financial and customary affirmative and negative covenants substantially identical to those found in CTWS’s master loan agreement. Connecticut Water is required to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio of no less than 3 to 1. As of March 31, 2021, Connecticut Water was in compliance with all covenants under its master loan agreement. Connecticut Water has tax-exempt and taxable Water Facilities Revenue Bonds issued through Connecticut Innovations (formerly the Connecticut Development Authority). The bond indentures and loan agreements contain customary affirmative and negative covenants and also provide for the acceleration of the Revenue Bonds upon the occurrence of stated events of default. As of March 31, 2021, Connecticut Water was in compliance with all covenants of the bond indentures and loan agreements. Connecticut Water’s unsecured senior notes have terms and conditions that restrict Connecticut Water from issuing additional debt or paying a dividend to CTWS if such debt or distribution would trigger an event of default. The senior note agreements also require Connecticut Water to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio of 25 no less than 3 to 1. As of March 31, 2021, Connecticut Water was in compliance with all financial ratio and customary affirmative and negative covenants under this agreement. SJWTX, Inc.’s unsecured senior note agreement has terms and conditions that restrict SJWTX, Inc. from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. In addition, SJW Group is a guarantor of SJWTX, Inc.’s senior note which 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 $125,000 plus 30% of Water Utility Services cumulative net income, since December 31, 2005. As of March 31, 2021, 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% 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 March 31, 2021, Maine Water was in compliance with all covenants in its bond indentures and related loan agreements. Maine Water has outstanding term loans with a commercial bank and under its master loan agreement, Maine Water is required to comply with financial and customary affirmative and negative covenants substantially identical to those found in CTWS and Connecticut Water’s master loan agreements. Maine Water is required to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio of no less than 3 to 1. As of March 31, 2021, Maine Water was in compliance with all covenants under its master loan agreement. On March 2, 2021, Maine Water entered into a credit agreement with a commercial bank, pursuant to an existing master loan agreement under which the commercial bank issued Maine Water a promissory note on the same date with an aggregate principal amount of $17,000 and a fixed interest rate of 3.89%, due March 1, 2041. The notes are unsecured obligations of Maine Water. Interest is payable quarterly in arrears on the 20th day of January, April, July and October of each year. The promissory note contains customary representations and warranties. Under the promissory note, Maine Water is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. Proceeds from the borrowing were received on March 18, 2021. As of March 31, 2021, Maine Water was in compliance with all financial, affirmative and negative covenants under this agreement. Short-term Financing Agreements As of March 31, 2021, SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to $260,000, of which $5,000 was available to SJWTX, Inc. under a single line of credit, $140,000 was available to SJWC under a single line of credit, and $40,000 and $75,000 under a third and fourth, respectively, lines of credit was available to CTWS. At March 31, 2021, SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling $138,491. The lines of credit bear interest at variable rates. On April 23, 2021, the $140,000 line of credit of SJWC, which was set to mature and expire on June 1, 2021, was paid-off and replaced by a new $140,000 line of credit that will expire on December 31, 2023. On April 23, 2021, the $5,000 line of credit of SJWTX, Inc., which was set to mature and expired on June 1, 2021, was paid off and replaced by a new $5,000 line of credit that will expire on December 31, 2023. The $40,000 and $75,000 lines of credit for CTWS expire May 15, 2025 and December 14, 2023, respectively. During 2020, the cost of borrowing on SJW Group’s short-term credit facilities has averaged 1.42%. All of SJW Group’s and subsidiaries lines of credit contain customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. All of the lines of credit also include certain financial covenants that require the borrower to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio. As of March 31, 2021, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit. Equity Financing Agreement On March 8, 2021, SJW Group entered into an underwriting agreement with J.P. Morgan Securities LLC, as the representative of the several underwriters named therein (the “Underwriters”), which provided for the issuance and sale by SJW Group to the Underwriters of 1,030,000 shares of our common stock, par value $0.001 per share, in an underwritten public offering (the “Offering”). The shares in the Offering were sold at a public offering price of $59.00 per share. SJW Group also granted the Underwriters an option to purchase up to 154,500 additional shares of our common stock, which was exercised in full. The Offering closed on March 10, 2021 and the offering of option shares closed on March 16, 2021. 26 SJW Group received net proceeds of approximately $58,122 from the Offering and received additional net proceeds of approximately $8,774 from the sale of the option shares, in each case after deducting the underwriting discounts and commissions and estimated offering expenses payable by SJW Group. SJW Group used the proceeds from the offerings to pay down a bank line of credit agreement, dated as of June 1, 2016, between SJWC and JPMorgan Chase Bank, N.A. and for general corporate purposes, which include, among other things, financing infrastructure improvements and other capital expenditures, repayment of debt or other corporate obligations and working capital. The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to draw on its lines of credit, issue long-term debt, sell its equity or earn interest income. In addition, government policies, the state of the credit markets and other factors could result in increased interest rates, which would increase SJW Group’s cost of capital. While our ability to obtain financing will continue to be a key risk, we believe that based on our 2021 activities, we expect to have access to the external funding sources necessary to implement our on-going capital investment programs in the future. On October 16, 2019, Standard & Poor’s Ratings Service initiated coverage on SJW Group assigning a company rating of A-, with a stable outlook and affirming its company rating at SJWC of A, with a stable outlook. In addition, on October 14, 2019, S&P affirmed its ratings of CTWS and Connecticut Water of A- with a stable outlook.