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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2022
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-8966
SJW GROUP
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Delaware | | 77-0066628 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | | | |
110 West Taylor Street, | San Jose, | CA | | 95110 |
(Address of principal executive offices) | | (Zip Code) |
(408) 279-7800
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each class | | Trading Symbol(s) | | Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | SJW | | New York Stock Exchange LLC |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☒ Non-accelerated filer ☐
Accelerated filer ☐ Smaller reporting company ☐
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of July 25, 2022, there were 30,247,674 shares of the registrant’s Common Stock outstanding.
FORWARD-LOOKING STATEMENTS
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. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “strategy,” or “anticipates,” or the negative of those words or other comparable terminology. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.
The accuracy of such statements is subject to a number of risks, uncertainties and assumptions including, but not limited to, the following factors:
•the effect of water, utility, environmental and other governmental policies and regulations, including actions concerning rates, authorized return on equity, authorized capital structures, capital expenditures and other decisions;
•changes in demand for water and other services;
•the impact of the Coronavirus (“COVID-19”) pandemic on our business operation and financial results;
•unanticipated weather conditions and changes in seasonality including those affecting water supply and customer usage;
•climate change and the effects thereof;
•unexpected costs, charges or expenses;
•our ability to successfully evaluate investments in new business and growth initiatives;
•contamination of our water supplies and damage or failure of our water equipment and infrastructure;
•the risk of work stoppages, strikes and other labor-related actions;
•catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, hurricanes, terrorist acts, physical attacks, cyber-attacks, epidemic or other similar occurrences;
•changes in general economic, political, business and financial market conditions;
•the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings, changes in interest rates, compliance with regulatory requirements, compliance with the terms and conditions of our outstanding indebtedness and general market and economic conditions; and
•legislative and general market and economic developments.
Results for a quarter are not indicative of results for a full year due to seasonality and other factors. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described in our filings with the SEC, including our most recent reports on Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements are not guarantees of performance, and speak only as of the date made, and we undertake no obligation to update or revise any forward-looking statements except as required by law.
PART I. FINANCIAL INFORMATION
ITEM 1.FINANCIAL STATEMENTS
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
REVENUE | $ | 149,041 | | | 152,241 | | | $ | 273,343 | | | 267,026 | |
OPERATING EXPENSE: | | | | | | | |
Production Expenses: | | | | | | | |
Purchased water | 26,352 | | | 27,668 | | | 45,569 | | | 43,313 | |
Power | 3,394 | | | 3,391 | | | 6,474 | | | 6,394 | |
Groundwater extraction charges | 18,360 | | | 20,138 | | | 32,288 | | | 35,683 | |
Other production expenses | 11,596 | | | 9,831 | | | 21,719 | | | 19,233 | |
Total production expenses | 59,702 | | | 61,028 | | | 106,050 | | | 104,623 | |
Administrative and general | 23,260 | | | 21,326 | | | 47,465 | | | 42,219 | |
Maintenance | 6,891 | | | 6,587 | | | 13,586 | | | 12,852 | |
Property taxes and other non-income taxes | 7,579 | | | 7,149 | | | 15,888 | | | 14,664 | |
Depreciation and amortization | 25,207 | | | 23,512 | | | 52,813 | | | 46,950 | |
Gain on sale of nonutility properties | — | | | — | | | (5,450) | | | — | |
Total operating expense | 122,639 | | | 119,602 | | | 230,352 | | | 221,308 | |
OPERATING INCOME | 26,402 | | | 32,639 | | | 42,991 | | | 45,718 | |
OTHER (EXPENSE) INCOME: | | | | | | | |
Interest on long-term debt and other interest expense | (14,241) | | | (13,681) | | | (27,970) | | | (27,120) | |
Pension non-service cost | 941 | | | 339 | | | 1,890 | | | 665 | |
Gain on sale of Texas Water Alliance | — | | | 3,000 | | | — | | | 3,000 | |
| | | | | | | |
Other, net | 824 | | | 1,784 | | | 1,819 | | | 3,538 | |
Income before income taxes | 13,926 | | | 24,081 | | | 18,730 | | | 25,801 | |
Provision for income taxes | 2,368 | | | 3,306 | | | 3,435 | | | 2,410 | |
NET INCOME | 11,558 | | | 20,775 | | | 15,295 | | | 23,391 | |
Other comprehensive (loss) income, net | (248) | | | 107 | | | (429) | | | 145 | |
COMPREHENSIVE INCOME | $ | 11,310 | | | 20,882 | | | $ | 14,866 | | | 23,536 | |
EARNINGS PER SHARE | | | | | | | |
Basic | $ | 0.38 | | | 0.70 | | | $ | 0.51 | | | 0.80 | |
Diluted | $ | 0.38 | | | 0.69 | | | $ | 0.50 | | | 0.79 | |
DIVIDENDS PER SHARE | $ | 0.36 | | | 0.34 | | | $ | 0.72 | | | 0.68 | |
WEIGHTED AVERAGE SHARES OUTSTANDING | | | | | | | |
Basic | 30,244,511 | | | 29,799,499 | | | 30,234,381 | | | 29,333,776 | |
Diluted | 30,346,040 | | | 29,924,191 | | | 30,341,065 | | | 29,459,782 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
ASSETS | | | |
Utility plant: | | | |
Land | $ | 39,900 | | | 39,004 | |
Depreciable plant and equipment | 3,468,240 | | | 3,381,908 | |
Construction in progress | 192,580 | | | 176,427 | |
Intangible assets | 36,220 | | | 36,276 | |
| 3,736,940 | | | 3,633,615 | |
Less accumulated depreciation and amortization | 1,183,159 | | | 1,136,116 | |
| 2,553,781 | | | 2,497,499 | |
Real estate investments and nonutility properties | 58,234 | | | 57,632 | |
Less accumulated depreciation and amortization | 16,553 | | | 15,951 | |
| 41,681 | | | 41,681 | |
CURRENT ASSETS: | | | |
Cash and cash equivalents: | | | |
Cash | 12,049 | | | 10,908 | |
Restricted cash | 602 | | | 1,211 | |
Accounts receivable: | | | |
Customers, net of allowances for uncollectible accounts of $5,222 and $4,600 on June 30, 2022 and December 31, 2021, respectively | 58,815 | | | 53,699 | |
Income tax | — | | | 2,308 | |
Other | 4,079 | | | 4,735 | |
Accrued unbilled utility revenue | 47,824 | | | 44,026 | |
Prepaid expenses | 8,106 | | | 9,667 | |
Current regulatory assets, net | 2,841 | | | 2,629 | |
Other current assets | 4,476 | | | 4,902 | |
| 138,792 | | | 134,085 | |
OTHER ASSETS: | | | |
Net regulatory assets, less current portion | 139,312 | | | 151,992 | |
Investments | 15,011 | | | 15,784 | |
Goodwill | 640,311 | | | 640,471 | |
Other | 12,159 | | | 10,883 | |
| 806,793 | | | 819,130 | |
| $ | 3,541,047 | | | 3,492,395 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
CAPITALIZATION AND LIABILITIES | | | |
CAPITALIZATION: | | | |
Stockholders’ equity: | | | |
Common stock, $0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 30,247,674 on June 30, 2022 and 30,181,348 on December 31, 2021 | $ | 30 | | | 30 | |
Additional paid-in capital | 608,666 | | | 606,392 | |
Retained earnings | 421,741 | | | 428,260 | |
Accumulated other comprehensive income | (592) | | | (163) | |
Total stockholders’ equity | 1,029,845 | | | 1,034,519 | |
Long-term debt, less current portion | 1,455,709 | | | 1,492,935 | |
| 2,485,554 | | | 2,527,454 | |
CURRENT LIABILITIES: | | | |
Line of credit | 141,336 | | | 62,996 | |
Current portion of long-term debt | 38,966 | | | 39,106 | |
Accrued groundwater extraction charges, purchased water and power | 24,798 | | | 17,200 | |
Accounts payable | 26,580 | | | 30,391 | |
Accrued interest | 14,615 | | | 14,174 | |
| | | |
Accrued payroll | 9,814 | | | 11,583 | |
Income tax payable | 1,087 | | | — | |
Other current liabilities | 20,633 | | | 27,821 | |
| 277,829 | | | 203,271 | |
DEFERRED INCOME TAXES | 203,561 | | | 200,451 | |
ADVANCES FOR CONSTRUCTION | 138,430 | | | 130,693 | |
CONTRIBUTIONS IN AID OF CONSTRUCTION | 319,564 | | | 316,479 | |
POSTRETIREMENT BENEFIT PLANS | 92,060 | | | 89,998 | |
| | | |
OTHER NONCURRENT LIABILITIES | 24,049 | | | 24,049 | |
COMMITMENTS AND CONTINGENCIES | | | |
| $ | 3,541,047 | | | 3,492,395 | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | | | Total Stockholders’ Equity |
Number of Shares | | Amount | |
BALANCES, December 31, 2021 | 30,181,348 | | | $ | 30 | | | $ | 606,392 | | | $ | 428,260 | | | $ | (163) | | | | | $ | 1,034,519 | |
Net income | — | | | — | | | — | | | 3,737 | | | — | | | | | 3,737 | |
Unrealized loss on investment, net of tax benefit of $67 | — | | | — | | | — | | | — | | | (181) | | | | | (181) | |
Stock-based compensation | — | | | — | | | 1,552 | | | (20) | | | — | | | | | 1,532 | |
Issuance of restricted and deferred stock units | 37,879 | | | — | | | (1,269) | | | — | | | — | | | | | (1,269) | |
Employee stock purchase plan | 17,918 | | | — | | | 1,049 | | | — | | | — | | | | | 1,049 | |
Common stock issuance costs | — | | | — | | | (87) | | | — | | | — | | | | | (87) | |
Dividends paid ($0.36 per share) | — | | | — | | | — | | | (10,882) | | | — | | | | | (10,882) | |
BALANCES, March 31, 2022 | 30,237,145 | | | 30 | | | 607,637 | | | 421,095 | | | (344) | | | | | 1,028,418 | |
Net income | — | | | — | | | — | | | 11,558 | | | — | | | | | 11,558 | |
Unrealized gain on investment, net of tax of $— | — | | | — | | | — | | | — | | | (248) | | | | | (248) | |
Stock-based compensation | — | | | — | | | 1,041 | | | (23) | | | | | | | 1,018 | |
Issuance of restricted and deferred stock units | 10,529 | | | — | | | (6) | | | — | | | — | | | | | (6) | |
Common stock issuance, net of costs | — | | | — | | | (6) | | | — | | | — | | | | | (6) | |
Dividends paid ($0.36 per share) | — | | | — | | | — | | | (10,889) | | | — | | | | | (10,889) | |
BALANCES, June 30, 2022 | 30,247,674 | | | $ | 30 | | | $ | 608,666 | | | $ | 421,741 | | | $ | (592) | | | | | $ | 1,029,845 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(UNAUDITED)
(in thousands, except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Accumulated Other Comprehensive Income | | | | Total Stockholders’ Equity |
Number of Shares | | Amount | |
BALANCES, December 31, 2020 | 28,556,605 | | | $ | 29 | | | $ | 510,158 | | | $ | 408,037 | | | $ | (1,064) | | | | | $ | 917,160 | |
Net income | — | | | — | | | — | | | 2,616 | | | — | | | | | 2,616 | |
Unrealized income on investment, net of taxes of $14 | — | | | — | | | — | | | — | | | 38 | | | | | 38 | |
Stock-based compensation | — | | | — | | | 1,280 | | | (32) | | | — | | | | | 1,248 | |
Issuance of restricted and deferred stock units | 30,547 | | | — | | | (964) | | | — | | | — | | | | | (964) | |
Employee stock purchase plan | 18,235 | | | — | | | 1,026 | | | — | | | — | | | | | 1,026 | |
Common stock issuance, net of costs | 1,184,500 | | | 1 | | | 66,895 | | | — | | | — | | | | | 66,896 | |
Dividends paid ($0.34 per share) | — | | | — | | | — | | | (9,724) | | | — | | | | | (9,724) | |
BALANCES, March 31, 2021 | 29,789,887 | | | 30 | | | 578,395 | | | 400,897 | | | (1,026) | | | | | 978,296 | |
Net income | — | | | — | | | — | | | 20,775 | | | — | | | | | 20,775 | |
Unrealized gain on investment, net of tax of $39 | — | | | — | | | — | | | — | | | 107 | | | | | 107 | |
Stock-based compensation | — | | | — | | | 791 | | | (28) | | | — | | | | | 763 | |
Issuance of restricted and deferred stock units | 15,040 | | | — | | | (9) | | | — | | | — | | | | | (9) | |
Common stock issuance, net of costs | — | | | — | | | (120) | | | — | | | — | | | | | (120) | |
Dividends paid ($0.34 per share) | — | | | — | | | — | | | (10,133) | | | — | | | | | (10,133) | |
BALANCES, June 30, 2021 | 29,804,927 | | | $ | 30 | | | $ | 579,057 | | | $ | 411,511 | | | $ | (919) | | | | | $ | 989,679 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
| | | | | | | | | | | |
| Six months ended June 30, |
| 2022 | | 2021 |
OPERATING ACTIVITIES: | | | |
Net income | $ | 15,295 | | | 23,391 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 53,830 | | | 48,406 | |
Deferred income taxes | 2,239 | | | 903 | |
Stock-based compensation | 2,593 | | | 2,071 | |
Allowance for equity funds used during construction | (1,084) | | | (916) | |
| | | |
Gain on sale of nonutility properties and Texas Water Alliance | (5,450) | | | (3,000) | |
Changes in operating assets and liabilities: | | | |
Accounts receivable and accrued unbilled utility revenue | (8,487) | | | (7,812) | |
Accounts payable and other current liabilities | (1,158) | | | 553 | |
Accrued groundwater extraction charges, purchased water and power | 7,598 | | | 7,106 | |
Tax receivable and payable, and other accrued taxes | (22) | | | 2,647 | |
Postretirement benefits | 459 | | | 1,955 | |
Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits | 17,284 | | | (8,231) | |
| | | |
Other changes, net | 501 | | | 23 | |
NET CASH PROVIDED BY OPERATING ACTIVITIES | 83,598 | | | 67,096 | |
INVESTING ACTIVITIES: | | | |
Additions to utility plant: | | | |
Company-funded | (101,611) | | | (100,057) | |
Contributions in aid of construction | (13,332) | | | (7,357) | |
Additions to real estate investments | (546) | | | (230) | |
Payments to retire utility plant, net of salvage | (1,836) | | | (909) | |
Proceeds from sale of nonutility properties and Texas Water Alliance | 227 | | | 3,000 | |
Payments for business acquisitions | (33) | | | (1,452) | |
NET CASH USED IN INVESTING ACTIVITIES | (117,131) | | | (107,005) | |
FINANCING ACTIVITIES: | | | |
Borrowings on line of credit | 88,664 | | | 45,669 | |
Repayments on line of credit | (10,324) | | | (82,222) | |
Long-term borrowings | 15,000 | | | 87,000 | |
Repayments of long-term borrowings | (51,612) | | | (51,617) | |
Issuance of common stock, net of issuance costs | — | | | 66,775 | |
Debt issuance costs | — | | | (296) | |
Dividends paid | (21,771) | | | (19,857) | |
Receipts of advances and contributions in aid of construction | 15,769 | | | 14,673 | |
Refunds of advances for construction | (1,345) | | | (1,363) | |
Other changes, net | (316) | | | (21) | |
NET CASH PROVIDED BY FINANCING ACTIVITIES | 34,065 | | | 58,741 | |
NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH | 532 | | | 18,832 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD | 12,119 | | | 9,269 | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD | 12,651 | | | 28,101 | |
LESS RESTRICTED CASH, END OF PERIOD | 602 | | | 2,659 | |
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 12,049 | | | 25,442 | |
| | | |
Cash paid during the period for: | | | |
Interest | $ | 30,189 | | | 29,266 | |
Income taxes | 458 | | | 1,020 | |
Supplemental disclosure of non-cash activities: | | | |
Accrued payables for additions to utility plant | $ | 18,502 | | | 29,123 | |
Utility property installed by developers | 1,066 | | | 1,230 | |
| | | |
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2022
(in thousands, except share and per share data)
Note 1.General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.
The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission. The Notes to Consolidated Financial Statements in SJW Group’s 2021 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
SJW Group is a holding company with five wholly-owned subsidiaries: San Jose Water Company (“SJWC”), SJWNE LLC, SJWTX, Inc., SJW Land Company, and SJWTX Holdings, Inc. SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”) whose wholly-subsidiaries are The Connecticut Water Company (“Connecticut Water”), The Maine Water Company (“Maine Water”), New England Water Utility Services, Inc. (“NEWUS”), and Chester Realty, Inc. SJWC, Connecticut Water, SJWTX, Inc. doing business as Canyon Lake Water Service Company (“CLWSC”), Maine Water and NEWUS are referred to as “Water Utility Services.” SJW Land Company and Chester Realty, Inc. are collectively referred to as “Real Estate Services.”
Revenue
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased precipitation curtail water usage resulting in lower sales.
The major streams of revenue for SJW Group are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Revenue from contracts with customers | $ | 148,657 | | | 147,204 | | | $ | 270,434 | | | 259,442 | |
Alternative revenue programs, net | (2,982) | | | 2,656 | | | (4,909) | | | 2,768 | |
Other balancing and memorandum accounts, net | 2,432 | | | 1,477 | | | 4,862 | | | 2,998 | |
Other regulatory mechanisms, net | (432) | | | (416) | | | 234 | | | (846) | |
Rental income | 1,366 | | | 1,320 | | | 2,722 | | | 2,664 | |
| $ | 149,041 | | | 152,241 | | | $ | 273,343 | | | 267,026 | |
Real Estate Investments and Nonutility Properties
The major components of real estate investments and nonutility properties as of June 30, 2022, and December 31, 2021, are as follows:
| | | | | | | | | | | |
| June 30, 2022 | | December 31, 2021 |
Land | $ | 12,900 | | | 12,615 | |
Buildings and improvements | 45,334 | | | 45,017 | |
| | | |
Subtotal | 58,234 | | | 57,632 | |
Less: accumulated depreciation and amortization | 16,553 | | | 15,951 | |
Total | $ | 41,681 | | | 41,681 | |
On October 29, 2021, SJWC sold two nonutility properties located in San Jose, California for $13,150. SJW Group recognized a pre-tax gain on the sale of nonutility properties of $7,230, after selling expenses of $277 for one of the properties sold, and a gain of $5,442, after selling expenses of $178, was deferred on the other nonutility property pending California Public Utilities
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2022
(in thousands, except share and per share data)
Commission (“CPUC”) review for the year ended December 31, 2021. On February 15, 2022, the CPUC review was completed and $5,442 was recognized as gain on sale of the second nonutility property.
A former wholly owned subsidiary of SJW Group, Texas Water Alliance Limited, was sold to Guadalupe-Blanco River Authority (“GBRA”) in 2017. The sales agreement with GBRA included a holdback amount of $3,000 to be paid to SJW Group on June 30, 2021, subject to reduction under certain conditions. SJW Group received the holdback amount without reduction from the GBRA on June 29, 2021 and recognized a pre-tax gain on sale of $3,000.
Fair Value Measurement
The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of June 30, 2022, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of June 30, 2022, approximates their carrying value as reported on the condensed consolidated balance sheets. The estimated fair value of such financial instruments were determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation techniques during the three and six months ended June 30, 2022. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1.
The fair value of SJW Group’s long-term debt was approximately $1,348,114 and $1,651,825 as of June 30, 2022, and December 31, 2021, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of long-term debt was $1,494,675 and $1,532,041 as of June 30, 2022, and December 31, 2021, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
CTWS additional retirement benefits under the supplemental executive retirement plans and retirement contracts are funded by investment assets held by a Rabbi Trust. The fair value of the money market funds, mutual funds and fixed income investments in the Rabbi Trust was $3,117 and $3,797 as of June 30, 2022, and December 31, 2021, respectively, and are categorized as Level 1 in the fair value hierarchy.
Earnings per Share
Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”), shares potentially issuable under the performance stock plans assumed through the business combination with CTWS, and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended June 30, 2022 and 2021, 4,964 and 4,304 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the six months ended June 30, 2022 and 2021, 15,824 and 12,883 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2022
(in thousands, except share and per share data)
Note 2.Regulatory Matters
Regulatory assets, net are comprised of the following as of June 30, 2022, and December 31, 2021:
| | | | | | | | | | | | | | |
| | June 30, 2022 | | December 31, 2021 |
Regulatory assets: | | | | |
Income tax temporary differences, net | | $ | 25,946 | | | 22,420 | |
Postretirement pensions and other postretirement benefits | | 64,022 | | | 62,197 | |
Business combinations debt premium, net | | 18,667 | | | 19,937 | |
Balancing and memorandum accounts, net | | 24,772 | | | 38,334 | |
Water Rate Adjustment | | (1,176) | | | 2,588 | |
Other, net | | 9,922 | | | 9,145 | |
Total regulatory assets, net in Condensed Consolidated Balance Sheets | | 142,153 | | | 154,621 | |
Less: current regulatory assets, net | | 2,841 | | | 2,629 | |
Total regulatory assets, net, less current portion | | $ | 139,312 | | | 151,992 | |
| | | | |
| | | | |
| | | | |
| | | | |
As of June 30, 2022, and December 31, 2021, SJW Group’s regulatory assets, net not earning a return primarily included postretirement pensions and other medical benefits unfunded amount, and business combination debt premiums, net. The total amount of regulatory assets, net not earning a return at June 30, 2022, and December 31, 2021, either by interest on the regulatory asset/liability or as a component of rate base at the allowed rate of return was $85,798 and $84,887, respectively.
Balancing and Memorandum Accounts
SJWC has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and revenue authorized by the CPUC to offset those expense changes. SJWC also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC. The Monterey Water Revenue Adjustment Mechanism (“MWRAM”) tracks the difference between the revenue received for actual metered sales through the tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a uniform rate would have been in effect. The Water Conservation Memorandum Account (“WCMA”) allows SJWC to track lost revenue, net of related water costs, associated with reduced sales due to water conservation and associated calls for water use reductions. SJWC records the lost revenue captured in the WCMA balancing accounts. Drought surcharges collected will be used to offset the revenue losses tracked in the WCMA.
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2022
(in thousands, except share and per share data)
Balancing and memorandum accounts recorded to regulatory assets, net for the three and six months ended June 30, 2022, and 2021 as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, 2022 | | Three months ended June 30, 2021 |
Beginning Balance | | Regulatory Asset Increase (Decrease) | | Refunds (Collections) Adjustments | | | | Ending Balance | | Beginning Balance | | Regulatory Asset Increase (Decrease) | | Refunds (Collections) Adjustments | | | | Ending Balance |
Revenue accounts: | | | | | | | | | | | | | | | | | | | |
MWRAM | $ | 19,060 | | | 2,036 | | | — | | | | | 21,096 | | | $ | 13,853 | | | 1,424 | | | 1 | | | | | 15,278 | |
WCMA | (3,061) | | | (1,000) | | | (10,900) | | | | | (14,961) | | | 666 | | | — | | | 2 | | | | | 668 | |
Cost of capital memorandum account | (1,564) | | | (4) | | | — | | | | | (1,568) | | | (1,561) | | | (1) | | | — | | | | | (1,562) | |
All others | (73) | | | 490 | | | — | | | | | 417 | | | (1,313) | | | 147 | | | 2 | | | | | (1,164) | |
Total revenue accounts | $ | 14,362 | | | 1,522 | | | (10,900) | | | | | 4,984 | | | $ | 11,645 | | | 1,570 | | | 5 | | | | | 13,220 | |
Cost-recovery accounts: | | | | | | | | | | | | | | | | | | | |
Water supply costs | 10,789 | | | 322 | | | — | | | | | 11,111 | | | 8,910 | | | 984 | | | 1 | | | | | 9,895 | |
Pension | 5,006 | | | 63 | | | — | | | | | 5,069 | | | 3,844 | | | 366 | | | — | | | | | 4,210 | |
Hydro Generation Research, Development and Demonstration Memorandum Account (“PRVMA”) | 632 | | | 1 | | | (90) | | | | | 543 | | | 1,027 | | | — | | | (99) | | | | | 928 | |
COVID-19 Catastrophic Event Memorandum Account (“CEMA”) | 2,438 | | | 148 | | | — | | | | | 2,586 | | | 2,266 | | | 352 | | | — | | | | | 2,618 | |
All others | 573 | | | (94) | | | — | | | | | 479 | | | 445 | | | 1 | | | — | | | | | 446 | |
Total cost-recovery accounts | $ | 19,438 | | | 440 | | | (90) | | | | | 19,788 | | | $ | 16,492 | | | 1,703 | | | (98) | | | | | 18,097 | |
| | | | | | | | | | | | | | | | | | | |
Total | $ | 33,800 | | | 1,962 | | | (10,990) | | | | | 24,772 | | | $ | 28,137 | | | 3,273 | | | (93) | | | | | 31,317 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Six months ended June 30, 2022 | | Six months ended June 30, 2021 |
Beginning Balance | | Regulatory Asset Increase (Decrease) | | Refunds (Collections) Adjustments | | | | Ending Balance | | Beginning Balance | | Regulatory Asset Increase (Decrease) | | Refunds (Collections) Adjustments | | | | Ending Balance |
Revenue accounts: | | | | | | | | | | | | | | | | | | | |
MWRAM | $ | 16,866 | | | 4,229 | | | 1 | | | | | 21,096 | | | $ | 12,077 | | | 3,200 | | | 1 | | | | | 15,278 | |
WCMA | 3,534 | | | (1,100) | | | (17,395) | | | | | (14,961) | | | 666 | | | — | | | 2 | | | | | 668 | |
Cost of capital memorandum account | (1,563) | | | (5) | | | — | | | | | (1,568) | | | (1,561) | | | (1) | | | — | | | | | (1,562) | |
All others | (386) | | | 802 | | | 1 | | | | | 417 | | | (1,139) | | | (28) | | | 3 | | | | | (1,164) | |
Total revenue accounts | $ | 18,451 | | | 3,926 | | | (17,393) | | | | | 4,984 | | | $ | 10,043 | | | 3,171 | | | 6 | | | | | 13,220 | |
Cost-recovery accounts: | | | | | | | | | | | | | | | | | | | |
Water supply costs | 10,545 | | | 566 | | | — | | | | | 11,111 | | | 8,123 | | | 1,771 | | | 1 | | | | | 9,895 | |
Pension | 4,941 | | | 128 | | | — | | | | | 5,069 | | | 3,478 | | | 732 | | | — | | | | | 4,210 | |
PRVMA | 707 | | | 2 | | | (166) | | | | | 543 | | | 1,108 | | | — | | | (180) | | | | | 928 | |
CEMA | 3,245 | | | (659) | | | — | | | | | 2,586 | | | 2,266 | | | 352 | | | — | | | | | 2,618 | |
All others | 445 | | | 34 | | | — | | | | | 479 | | | 445 | | | 1 | | | — | | | | | 446 | |
Total cost-recovery accounts | $ | 19,883 | | | 71 | | | (166) | | | | | 19,788 | | | $ | 15,420 | | | 2,856 | | | (179) | | | | | 18,097 | |
| | | | | | | | | | | | | | | | | | | |
Total | $ | 38,334 | | | 3,997 | | | (17,559) | | | | | 24,772 | | | $ | 25,463 | | | 6,027 | | | (173) | | | | | 31,317 | |
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2022
(in thousands, except share and per share data)
All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in SJWC’s next general rate case or at the time an individual account balance reaches a threshold of 2% of authorized revenue, whichever occurs first.
Note 3.Bank Borrowings and Long-Term Liabilities
SJW Group’s contractual obligations and commitments include senior notes, bank term loans, revenue bonds, state revolving fund loans and other obligations. Water Utility Services had received advance deposit payments from its customers on certain construction projects. The refunds of the advance deposit payments constitute an obligation of the respective entities.
On April 6, 2022, 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 $15,000 and a fixed interest rate of 4.54%, due May 31, 2042. 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 May 13, 2022.
On June 28, 2022, Connecticut Water entered into a note purchase agreement with certain affiliates of New York Life Insurance Company, pursuant to which Connecticut Water sold an aggregate principal amount of $25,000 of its 4.71% Senior Notes, Series 2022, due 2052. The closing of the note purchase agreement is expected to occur on December 15, 2022, and is subject to customary closing conditions and regulatory approval. The Series 2022 Notes are unsecured obligations of Connecticut Water. Interest is payable semi-annually in arrears on June 15th and December 15th of each year. The note purchase agreement contains customary representations and warranties. Connecticut Water has agreed to customary affirmative and negative covenants for as long as the Series 2022 Notes are outstanding. The Series 2022 Notes are also subject to customary events of default, the occurrence of which may result in all of the Series 2022 Notes then outstanding becoming immediately due and payable.
Note 4.Income Taxes
For the three and six months ended June 30, 2022, income tax expense was $2,368 and $3,435, respectively. Income tax expense for the three and six months ended June 30, 2021, was $3,306 and $2,410, respectively. The effective consolidated income tax rates were 17% and 14% for the three months ended June 30, 2022 and 2021, respectively, and 18% and 9% for the six months ended June 30, 2022, and 2021, respectively. The higher effective tax rate for the three and six months ended June 30, 2022, was primarily due to discrete tax expense items.
SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $8,221 and $7,961 as of June 30, 2022, and December 31, 2021, respectively. SJW Group does not expect its unrecognized tax benefits to change significantly within the next 12 months.
Note 5.Commitments and Contingencies
SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows.
Note 6.Benefit Plans
SJW Group maintains noncontributory defined benefit pension plans for its eligible employees. SJWC and CTWS employees hired before March 31, 2008, and January 1, 2009, respectively, are entitled to benefits under the pension plans based on the employee’s years of service and compensation. For SJWC employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based upon compensation credits and interest credits for each employee. Certain CTWS employees hired before March 1, 2012, and covered by a plan merged into the CTWS plan in 2013 are also entitled to benefits based on the employee’s years of service and compensation. CTWS employees hired on or after January 1, 2009, are entitled to
SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
June 30, 2022
(in thousands, except share and per share data)
an additional 1.5% of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans.
In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009, for CTWS are eligible to receive additional retirement benefits under supplemental executive retirement plans and retirement contracts. SJWC’s senior management hired on or after March 31, 2008, are eligible to receive additional retirement benefits under SJWC’s Cash Balance Executive Supplemental Retirement Plan. The supplemental retirement plans and Cash Balance Executive Supplemental Retirement Plan are non-qualified plans in which only senior management and other designated members of management may participate. SJW Group also provides health care and life insurance benefits for retired employees under employer-sponsored postretirement benefits that are not pension plans.
The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and six months ended June 30, 2022, and 2021 are as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Service cost | $ | 2,652 | | | 2,688 | | | $ | 5,304 | | | 5,423 | |
Interest cost | 2,861 | | | |