SJW (SJW) - 2021 Q4 - Annual Report

PART I Forward-Looking Statements This section contains forward-looking statements regarding SJW Group's future results and events, subject to risks and uncertainties that may cause actual results to differ materially - The report identifies several risk factors that could cause actual results to differ from forward-looking statements, including regulatory actions, changes in water demand, the impact of COVID-19, weather and climate change, economic conditions, and financing capabilities[12][13] Business SJW Group is a holding company providing regulated water and wastewater services to over 1.5 million people across California, Connecticut, Maine, and Texas, subject to extensive state-level regulation General Development of Business SJW Group operates through four wholly-owned subsidiaries providing water utility and real estate services across California, Connecticut, Maine, and Texas - SJW Group operates through four primary subsidiaries: SJWC (California), CTWS (Connecticut & Maine), CLWSC (Texas), and SJW Land Company (Real Estate)[14][15] - In December 2021, CLWSC in Texas expanded its operations by acquiring Kendall West Utility and Bandera East Utility, adding approximately 1,600 service connections[15] Regulation and Rates The company's water utility services are rate-regulated by state commissions, which approve rates to cover operating expenses and provide a fair return on equity Authorized Capital Structure and Return on Equity by State | | California | Connecticut | Texas (a) | Maine (a) | | :--- | :--- | :--- | :--- | :--- | | Authorized capital structure (debt/equity) | 47% / 53% | 47% / 53% | 37% / 63% | 54% / 46% | | Authorized return on equity | 8.90% | 9.00% | 10.88% | 9.81% | | Authorized rate base (in millions) | $958.9 | $549.4 | $43.3 | $63.3 | | Estimated rate base at year-end (in millions) | $1,023.1 | $613.6 | $95.1 | $87.6 | - In California, SJWC filed a General Rate Case application in January 2021 requesting a revenue increase of $51.6 million (13.35%) for 2022, with a settlement agreement filed in January 2022[24][25] - In Connecticut, a July 2021 rate case decision approved a $5.2 million annual revenue increase for Connecticut Water, with a 9.0% return on equity, and a subsequent petition added another $2.1 million in November 2021[36] - In Maine, a general rate increase application for the Biddeford Saco Division is pending, seeking approximately $6.9 million in additional revenue primarily to support a new $60.0 million water treatment facility expected to be in service in Q2 2022[48] Description of Business The company's primary business involves the production, treatment, and distribution of water and wastewater services, utilizing diverse water sources and facing seasonal demand - SJWC's water supply in California is a mix of purchased water (40-50%), groundwater (40-50%), and surface water (6-8% in normal years)[56] - Connecticut Water's supply is primarily from surface water (80%), while Maine Water's is also dominated by surface water (90%)[61][63] - CLWSC in Texas relies on groundwater and long-term take-or-pay contracts for purchased water from the GBRA[62] - The company's regulated operations are protected from direct competition by other investor-owned utilities, but public agencies have the power of eminent domain to condemn utility properties upon payment of just compensation[71][72][73] Human Capital Resources SJW Group focuses on attracting and retaining talent through competitive wages, benefits, and a positive work environment emphasizing safety, diversity, and inclusion Full-Time Employees by Subsidiary | Subsidiary | Full-Time Employees | | :--- | :--- | | SJWC | 362 | | Connecticut Water | 228 | | CLWSC | 84 | | Maine Water | 77 | | Total | 751 | - 226 employees at SJWC are members of unions, with collective bargaining agreements in place through December 31, 2022[83][84] - In response to the pandemic, the company implemented a universal vaccination requirement for all employees, which led to an NLRB investigation inquiry regarding bargaining practices with the union at SJWC[87] Executive Officers of the Registrant This section provides a table summarizing the names, ages, offices held, and business experience for each of the company's executive officers as of February 25, 2022 - The report lists the key executive officers, including Eric W. Thornburg as President, CEO, and Chair of the Board, and Andrew F. Walters as Chief Financial Officer and Treasurer[92] Risk Factors SJW Group faces significant risks including adverse regulatory decisions, ongoing COVID-19 impacts, water supply variability due to climate change, infrastructure failures, and cybersecurity threats - Regulatory Risks: The business is highly dependent on favorable rate-setting by regulators, where delays or insufficient rate approvals could negatively impact revenue and cash flow[97][98] - COVID-19 Pandemic Risks: The pandemic continues to pose risks, including reduced bill payments from customers, potential for new utility termination moratoriums, and operational disruptions from vaccine mandates or employee attrition[115][116][118] - Water Supply & Climate Change Risks: Changes in water supply mix, particularly a reduction in low-cost surface water due to drought, can significantly increase production costs, exacerbated by climate change[120][121][128] - Operational & Infrastructure Risks: The company faces risks from potential contamination events, failure of aging infrastructure like mains and dams, and cyber-attacks on its critical information technology systems[135][139][141] Unresolved Staff Comments There are no unresolved staff comments - None Properties This section describes the company's physical assets, including water utility infrastructure across its service areas and real estate holdings - SJWC's properties in California include approximately 2,488 miles of mains and reservoir capacity of 2.256 billion gallons[178] - CTWS's properties in Connecticut and Maine include approximately 2,317 miles of mains and reservoir capacity of 9.4 billion gallons[180] - CLWSC's properties in Texas include 726 miles of mains and 9.3 million gallons of storage capacity[182] Selected Real Estate Properties | Description | Location | Acreage | Square Footage | | :--- | :--- | :--- | :--- | | Warehouse building | Knoxville, Tennessee | 30 | 361,500 | | Commercial building | Knoxville, Tennessee | 15 | 135,000 | | Undeveloped land | San Jose, CA | 101 | N/A | Legal Proceedings The company is subject to ordinary routine litigation incidental to its business but reports no pending legal proceedings expected to have a material effect - There are no pending legal proceedings expected to have a material effect on the company[186] Mine Safety Disclosures This section is not applicable to the company - None PART II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities SJW Group's common stock trades on the NYSE under 'SJW', and its five-year performance has underperformed both the Water Utility Index and the S&P 500 Index - SJW Group's common stock is traded on the NYSE under the symbol 'SJW'[190] Five-Year Performance Comparison (Indexed to $100) | | 2016 | 2017 | 2018 | 2019 | 2020 | 2021 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | SJW Group | $100 | $116 | $103 | $134 | $134 | $144 | | Water Utility Index | $100 | $128 | $132 | $184 | $213 | $265 | | S&P 500 Index | $100 | $122 | $116 | $153 | $181 | $233 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance, highlighting a slight net income decrease in 2021 due to higher operating costs, partially offset by rate increases and property sales Results of Operations Consolidated net income for 2021 decreased by 2% to $60.5 million from $61.5 million in 2020, primarily due to increased operating expenses and an asset impairment Key Financial Metrics (in millions) | Metric | 2021 | 2020 | | :--- | :--- | :--- | | Operating Revenue | $573.7M | $564.5M | | Operating Income | $111.2M | $117.7M | | Net Income | $60.5M | $61.5M | | Diluted EPS | $2.03 | $2.14 | - The $1.0 million decrease in net income was primarily due to higher administrative and general expenses, increased depreciation, higher maintenance, and increased water production costs, partially offset by higher revenue from rate cases and gains on asset sales[233] - Revenue increase of $9.2 million was driven by $25.2 million from rate increases, offset by a $24.7 million decrease from lower water consumption[237][239] - Operating expenses increased by $15.7 million, driven by higher water production costs (+$3.3M), administrative and general expenses (+$6.6M), depreciation (+$5.1M), and a long-lived asset impairment (+$2.2M), offset by a gain on sale of nonutility property (-$7.5M)[247] Liquidity and Capital Resources SJW Group's liquidity is sourced from operations, debt, and equity financing, supporting significant capital expenditures for infrastructure renewal Cash Flow Summary (2021, in thousands) | Cash Flow Activity (2021) | Amount (in thousands) | | :--- | :--- | | Net Cash from Operations | $130,040 | | Net Cash used in Investing | ($259,995) | | Net Cash from Financing | $132,805 | - The company plans to spend approximately $222.8 million in 2022 and $1.31 billion over the next five years on capital improvements, primarily for distribution system main replacements[221][281][282] - In 2021, the company raised approximately $66.8 million from an underwritten public offering of common stock and $24.3 million from an "at-the-market" equity program[295][297] - As of December 31, 2021, the company had $260 million in available lines of credit, with $63 million outstanding[285][287] Financial Statements and Supplementary Data This section includes the audited consolidated financial statements, the independent auditor's unqualified opinion, and supplementary financial data - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 2021[313][314] - A Critical Audit Matter was identified related to the 'Impact of Rate Regulation on the Financial Statements' due to the significant management judgments required to assess the probability of recovering costs or refunding amounts through future rates[321][323] Selected Balance Sheet Data (December 31, 2021, in thousands) | Selected Balance Sheet Data (Dec 31, 2021) | Amount (in thousands) | | :--- | :--- | | Total Assets | $3,492,395 | | Total Long-Term Debt | $1,492,935 | | Total Stockholders' Equity | $1,034,519 | Controls and Procedures Management concluded that the company's disclosure controls and procedures and internal control over financial reporting were effective as of December 31, 2021 - Management concluded that the company's disclosure controls and procedures were effective as of December 31, 2021[512] - Based on an assessment using the COSO framework, management concluded that the company's internal control over financial reporting was effective as of December 31, 2021[515] PART III Part III of the report incorporates information by reference from the company's 2022 Proxy Statement, covering directors, executive compensation, security ownership, and related matters Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2022 Proxy Statement, and the company has adopted a code of ethics - Required information is incorporated by reference from the 2022 Proxy Statement[521] - SJW Group has adopted a code of ethics for its CEO, CFO, and other officers, available on its website[522] Executive Compensation Information required for this item, including details on director and executive compensation, is incorporated by reference from the 2022 Proxy Statement - Information on executive compensation is incorporated by reference from the 2022 Proxy Statement[524] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management, as well as matters related to equity compensation plans, is incorporated by reference from the 2022 Proxy Statement - Information on security ownership is incorporated by reference from the 2022 Proxy Statement[525] Certain Relationships and Related Transactions, and Director Independence Information concerning certain relationships, related party transactions, and director independence is incorporated by reference from the 2022 Proxy Statement - Information on related transactions and director independence is incorporated by reference from the 2022 Proxy Statement[526] Principal Accountant Fees and Services Details regarding the fees paid to and services provided by the principal independent accountant are incorporated by reference from the 2022 Proxy Statement - Information on principal accountant fees and services is incorporated by reference from the 2022 Proxy Statement[527] PART IV Part IV contains the list of financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K Exhibits and Financial Statement Schedules This section lists all the financial statements, schedules, and exhibits included in or incorporated by reference into the Form 10-K filing - This section provides an index of all financial statements, schedules, and exhibits filed with the report[530][531][533]