H2O AMERICA 10-Q

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 March 31, 2021 2020 REVENUE $ 114,785 115,754 OPERATING EXPENSE: Production Expenses: Purchased water 15,645 15,934 Power 3,003 2,725 Groundwater extraction charges 15,545 15,028 Other production expenses 9,402 10,093 Total production expenses 43,595 43,780 Administrative and general 20,893 21,262 Maintenance 6,265 6,086 Property taxes and other non-income taxes 7,515 7,463 Depreciation and amortization 23,438 21,382 Merger related expenses — 354 Total operating expense 101,706 100,327 OPERATING INCOME 13,079 15,427 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 13,439 ) ( 13,284 ) Pension non-service cost 326 ( 45 ) Other, net 1,754 757 Income before income taxes 1,720 2,855 (Benefit) provision for income taxes ( 896 ) 438 NET INCOME 2,616 2,417 Other comprehensive income (loss), net 38 ( 135 ) COMPREHENSIVE INCOME $ 2,654 2,282 EARNINGS PER SHARE Basic $ 0.09 0.08 Diluted $ 0.09 0.08 DIVIDENDS PER SHARE $ 0.34 0.32 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 28,862,882 28,489,357 Diluted 28,990,203 28,674,221 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) March 31, 2021 December 31, 2020 ASSETS Utility plant: Land $ 38,339 36,845 Depreciable plant and equipment 3,223,736 3,198,060 Construction in progress 126,678 109,976 Intangible assets 35,167 35,167 3,423,920 3,380,048 Less accumulated depreciation and amortization 1,068,852 1,045,136 2,355,068 2,334,912 Real estate investments 58,280 58,129 Less accumulated depreciation and amortization 15,072 14,783 43,208 43,346 CURRENT ASSETS: Cash and cash equivalents: Cash 11,406 5,269 Restricted cash 3,104 4,000 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 3,614 and $ 3,891 on March 31, 2021 and December 31, 2020, respectively 45,583 46,832 Income tax 4,671 7,041 Other 5,455 4,269 Accrued unbilled utility revenue 37,288 44,950 Prepaid expenses 10,634 8,097 Current regulatory assets, net 226 1,748 Other current assets 5,100 5,125 123,467 127,331 OTHER ASSETS: Net regulatory assets, less current portion 161,392 156,482 Investments 15,161 14,367 Goodwill 628,144 628,144 Other 5,702 6,883 810,399 805,876 $ 3,332,142 3,311,465 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) March 31, 2021 December 31, 2020 CAPITALIZATION AND LIABILITIES CAPITALIZATION: Stockholders’ equity: Common stock, $ 0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 29,789,887 on March 31, 2021 and 28,556,605 on December 31, 2020 $ 30 29 Additional paid-in capital 578,395 510,158 Retained earnings 400,897 408,037 Accumulated other comprehensive income ( 1,026 ) ( 1,064 ) Total stockholders’ equity 978,296 917,160 Long-term debt, less current portion 1,303,028 1,287,580 2,281,324 2,204,740 CURRENT LIABILITIES: Line of credit 121,509 175,094 Current portion of long-term debt 76,285 76,241 Accrued groundwater extraction charges, purchased water and power 18,144 19,184 Accounts payable 25,636 34,200 Accrued interest 17,102 12,861 Accrued payroll 11,911 14,012 Other current liabilities 19,148 19,203 289,735 350,795 DEFERRED INCOME TAXES 189,531 191,415 ADVANCES FOR CONSTRUCTION 125,967 125,027 CONTRIBUTIONS IN AID OF CONSTRUCTION 297,390 296,105 POSTRETIREMENT BENEFIT PLANS 124,265 121,597 OTHER NONCURRENT LIABILITIES 23,930 21,786 COMMITMENTS AND CONTINGENCIES — — $ 3,332,142 3,311,465 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 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 gain on investment, net of tax benefit of $ 14 — — — — 38 38 Share-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 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Income Total Stockholders’ Equity Number of Shares Amount BALANCES, December 31, 2019 28,456,508 $ 28 $ 506,639 $ 383,191 $ 126 $ 889,984 Net income — — — 2,417 — 2,417 Unrealized loss on investment, net of tax benefit of $ 50 — — — — ( 135 ) ( 135 ) Share-based compensation — — 251 ( 43 ) — 208 Issuance of restricted and deferred stock units 25,781 — ( 785 ) — — ( 785 ) Employee stock purchase plan 15,552 — 970 — — 970 Dividends paid ($ 0.32 per share) — — — ( 9,118 ) — ( 9,118 ) BALANCES, March 31, 2020 28,497,841 28 507,075 376,447 ( 9 ) 883,541 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three months ended March 31, 2021 2020 OPERATING ACTIVITIES: Net income $ 2,616 2,417 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 23,931 22,482 Deferred income taxes ( 762 ) ( 344 ) Stock-based compensation 1,280 251 Allowance for equity funds used during construction ( 402 ) — Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue 7,725 5,498 Accounts payable and other current liabilities ( 3,719 ) ( 8,755 ) Accrued groundwater extraction charges, purchased water and power ( 1,040 ) ( 4,292 ) Tax receivable and payable, and other accrued taxes 3,333 1,875 Postretirement benefits 1,649 2,445 Regulatory assets and liabilities related to balancing and memorandum accounts ( 1,750 ) ( 10,158 ) Up-front service concession payment — ( 5,000 ) Other changes, net 515 1,510 NET CASH PROVIDED BY OPERATING ACTIVITIES 33,376 7,929 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 46,674 ) ( 38,314 ) Contributions in aid of construction ( 4,653 ) ( 3,629 ) Additions to real estate investments ( 152 ) ( 255 ) Payments to retire utility plant, net of salvage ( 461 ) ( 271 ) NET CASH USED IN INVESTING ACTIVITIES ( 51,940 ) ( 42,469 ) FINANCING ACTIVITIES: Borrowings on line of credit 28,637 47,424 Repayments on line of credit ( 82,222 ) ( 33,231 ) Long-term borrowings 17,000 35,000 Repayments of long-term borrowings ( 1,159 ) ( 1,171 ) Issuance of common stock, net of issuance costs 67,249 — Dividends paid ( 9,724 ) ( 9,118 ) Receipts of advances and contributions in aid of construction 4,687 6,416 Refunds of advances for construction ( 583 ) ( 557 ) Other changes, net ( 80 ) 106 NET CASH PROVIDED BY FINANCING ACTIVITIES 23,805 44,869 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 5,241 10,329 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 9,269 17,944 CASH, CASH EQUIVALENTS AND RESTRICTED CASH , END OF PERIOD 14,510 28,273 LESS RESTRICTED CASH, END OF PERIOD 3,104 — CASH AND CASH EQUIVALENTS, END OF PERIOD $ 11,406 28,273 Cash paid during the period for: Interest $ 9,516 9,373 Income taxes 158 ( 50 ) Supplemental disclosure of non-cash activities: Change in accrued payables for construction costs capitalized $ ( 6,601 ) ( 2,601 ) Utility property installed by developers 202 3,076 Accrued additional common stock issuance costs 353 — See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2021 (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 (“GAAP”) 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 “SEC”). The Notes to Consolidated Financial Statements in SJW Group’s 2020 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements. Recently Adopted Accounting Principles In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740, “Income Taxes”, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. ASU 2019-12 was effective for SJW Group in the first quarter of fiscal 2021. The adoption of ASU 2019-12 did not have a material impact on the consolidated financial statements. Impacts of Coronavirus (“COVID-19”) The outbreak of COVID-19 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. San Jose Water Company (“SJWC”) and SJWTX, Inc. doing business as Canyon Lake Water Company (“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 Connecticut Water Service, Inc. (“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. 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 March 31, 2021 2020 Revenue from contracts with customers $ 112,238 105,136 Alternative revenue programs, net 112 504 Other balancing and memorandum accounts revenue, net 1,091 8,744 Rental income 1,344 1,370 $ 114,785 115,754 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 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) combination with CTWS, and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended March 31, 2021 and 2020, 8,579 and 17,573 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. Utility Plant Depreciation A portion of depreciation expense is allocated to administrative and general expense. For the three months ended March 31, 2021, and 2020, the amounts allocated to administrative and general expense were $ 493 and $ 1,098 , respectively. Real Estate Investments The major components of real estate investments as of March 31, 2021, and December 31, 2020, are as follows: March 31, 2021 December 31, 2020 Land $ 14,168 14,168 Buildings and improvements 44,112 43,961 Subtotal 58,280 58,129 Less: accumulated depreciation and amortization 15,072 14,783 Total $ 43,208 43,346 Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years. Substantially all of the real estate investments relate to assets that are currently subject to operating leases. Note 2. Regulatory Rate Filings California Regulatory Affairs On March 17, 2020, the California Public Utilities Commission (“CPUC”) ordered its regulated water utilities to halt customer disconnection activities in connection with the COVID-19 pandemic. On April 2, 2020, California Governor Gavin Newsom issued Executive Order N-42-20 suspending customer disconnection activities until further notice. On April 16, 2020, the CPUC issued Resolution M-4842 directing utilities to implement emergency customer protections to assist customers such as waiving reconnection deposits, offering payment arrangements, and suspending disconnections for nonpayment. This resolution was effective for up to one year, or April 15, 2021, with the option to extend. On February 11, 2021, the CPUC approved Resolution M-4849 extending customer protections required in Resolution M-4842 through June 30, 2021. The resolution also requires water utilities to develop a transition plan regarding shutoffs and terminations with customers once the moratorium ends. On April 1, 2021, SJWC filed Advice Letter 560 which includes such plan. SJWC filed Advice Letter 556 on November 16, 2020, with the CPUC requesting authorization to increase its revenue requirement by 11,750 or 3.04 % in 2021 for the final escalation year authorized in our 2018 General Rate Case Decision 18-011-025 which established rates for 2019, 2020, and 2021. This advice letter was approved on December 17, 2020, and new rates became effective January 1, 2021. On January 4, 2021, SJWC filed General Rate Case Application No. 21-01-003 requesting authority for an increase of revenue of $ 51,585 or 13.35 % in 2022, $ 16,932 or 3.88 % in 2023, and $ 19,195 or 4.24 % in 2024. The application also includes requests to recover $ 18,499 from balancing and memorandum accounts, authorization for a $ 435,000 capital budget, further alignment between actual and authorized usage, and a shift to greater revenue collection in the service charge. The application will undergo a year-long review process and new rates, if approved, are expected to be effective in the first quarter of 2022. On January 5, 2021, SJWC, along with three other California water utilities, filed a joint request for an additional one-year deferment on its Cost of Capital filing which would otherwise be due on May 1, 2021. Postponing the filing an additional year would have alleviated administrative processing costs on the utilities as well as the CPUC staff, and provided relief for both CPUC and utility resources already strained by numerous other proceedings and COVID-19. The request was conditioned on no changes being made as a result of the current Water Cost of Capital Mechanism in place during the one-year deferment. The request was denied on February 22, 2021. SJWC expects to file its Cost of Capital application on May 3, 2021, as required by the CPUC. 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) Connecticut Regulatory Affairs On October 28, 2020, The Connecticut Water Company (“Connecticut Water”) filed a Water Infrastructure Conservation Adjustment (“WICA”) application representing an additional 1.11 % surcharge or approximately $ 956 increase in revenues, for a cumulative WICA surcharge of 6.94 %. The Public Utilities Regulatory Authority of Connecticut (“PURA”) approved the requested increase with an April 1, 2021 effective date. Additionally, on February 1, 2021, Connecticut Water filed its annual WICA reconciliation which called for a 0.09 % increase of the WICA surcharge. On March 3, 2021, PURA approved the reconciliation, resulting in a net cumulative 7.03 % surcharge for Connecticut Water which became effective on customers’ bills on April 1, 2021. As of March 31, 2021, WICA surcharges for Connecticut Water and its Avon Water division were 5.75 % and 9.31 %, respectively. The Heritage Village Water (“HVWC”) division does not have an approved WICA surcharge. On January 15, 2021, Connecticut Water filed an application with PURA to amend rates for its customers, including the divisions of Avon Water and HVWC. The filing requests an increase of $ 20,206 in annual revenues that includes more than $ 265,514 in completed infrastructure investments that are not currently in approved rates and surcharges. The filing proposes a new rate that would provide a 15 % reduction in water bills for income-eligible customers, which would be the first low-income rate for a Connecticut water utility, if approved. The filing also includes a tiered block rate structure for residential water customers to promote water conservation. The proposed increase will be applied across the company but may differ by rate divisions, meter size and between customer rate categories. The application also reflects the costs of operating and maintaining the utility, including expenditures on power and treatment additives that have increased since the company’s last general rate case decision in 2010. PURA has 200 days from the filing date to review the application, and the approved rates will go into effect soon thereafter. Connecticut Water expects to receive a decision in the third quarter of 2021. Long-term debt issuances for Connecticut Water require regulatory authorization which is typically obtained for a specified amount of debt to be issued during a specified period of time. On March 16, 2021, Connecticut Water filed for PURA approval for the issuance of up to $ 100,000 of long-term borrowings in 2021. Connecticut Water anticipates to use the proceeds to pay down line of credit borrowings and payoff maturing debt, as well as general working capital needs. Connecticut Water expects to receive a decision from PURA within 60 days of its filing. Texas Regulatory Affairs On January 29, 2021, CLWSC submitted its Water Pass-Through Charge (“WPC”) true-up report for the Canyon Lake area water systems’ 2020 purchased water costs. The WPC is the annual filing to change the monthly per thousand gallons charge for changes in purchased water costs since the last annual true-up report. The 2020 WPC true-up report resulted in a reduction of the WPC usage rate from $ 0.95 dollars to $ 0.7 dollars per thousand gallons which became effective on March 1, 2021. The Deer Creek Ranch water system has a separate WPC. A WPC filing for Deer Creek Ranch is required only when there is a change in purchased water costs. The WPC true-up report for this system was submitted December 1, 2020, which resulted in a decrease in the usage charge from $ 2.02 to $ 1.84 dollars per thousand gallons, and an increase in the monthly base charge of $ 0.51 dollars per residential account. The Deer Creek Ranch WPC rate changes became effective February 25, 2021. A disaster declaration was declared on February 12, 2021 by the Public Utilities Commission of Texas (“PUCT”) because of severe winter weather. The PUCT issued orders under Docket No. 51812-6 which prohibited disconnections for non-payment, suspended the rules for late fees and interest, and allowed for estimated billing for the duration of the disaster declaration. On March 5, 2021, the PUCT reinstituted the utilities’ ability to resume charging late fees. Maine Regulatory Affairs On June 17, 2020, the Main Public Utilities Commission (“MPUC”) approved a general rate increase for Skowhegan Division customers allowing $ 198 in additional revenue. Per the MPUC decision, the increase will be implemented in two steps: an initial 9.80 % rate increase effective June 15, 2020, and a 3.51 % rate increase effective July 1, 2021. The combined rate increase is 13.31 %. On November 23, 2020, The Maine Water Company (“Maine Water”) filed Water Infrastructure Surcharge (“WISC”) applications with the MPUC in five divisions requesting an increase between 1.1 % and 5 %, representing approximately $ 304 in additional revenues. The WISC applications were approved on December 15, 2020 and December 22, 2020 and the surcharges became effective January 1, 2021. On March 10, 2021, Maine Water filed a general rate increase application for the Biddeford Saco Division seeking approximately $ 6,659 , or 77.5 %, in additional revenue. The application has proposed a multi-year rate plan that is designed to 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) ease the transition to higher water bills over the period from July 2021 to July, 2023 . The primary driver for the increase in rates is the support for a new drinking water treatment facility on the Saco River, a $ 60,000 project to replace the existing facility that is expected to be in service in the second quarter of 2022, and a decision on the requested revenue increase is expected in the second quarter of 2022, in alignment with the completion of the new water treatment facility. Note 3. Regulatory Assets, Net Regulatory assets, net are comprised of the following as of March 31, 2021, and December 31, 2020: March 31, 2021 December 31, 2020 Regulatory assets: Income tax temporary differences, net $ 7,345 6,230 Postretirement pensions and other medical benefits 96,682 95,559 Business combinations debt premium, net 21,843 22,479 Balancing and memorandum accounts, net 28,137 25,463 Water Rate Adjustment (“WRA”) 174 323 Other, net 7,437 8,176 Total regulatory assets, net in Consolidated Balance Sheets 161,618 158,230 Less: current regulatory asset, net 226 1,748 Total regulatory assets, net, less current portion $ 161,392 156,482 At March 31, 2021 and December 31, 2020, SJW Group’s regulatory assets, net not earning a return primarily included the postretirement pensions and other medical benefits unfunded amount, and business combinations debt premium, net. The total amount of regulatory assets, net not earning a return at March 31, 2021 and December 31, 2020, either by interest on the regulatory asset/liability or as a component of rate base at the allowed rate of return was $ 119,745 and $ 119,236 , respectively. Note 4. 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 the 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 (“WRAM”) 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. Balancing and memorandum accounts are recognized by SJWC when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the Water Conservation Memorandum Account (“WCMA”) and Water Revenue Adjustment (“WRA”), SJWC and CTWS follow the requirements of ASC Topic 980-605-25—“Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, SJWC considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980-340-25—“Other Assets and Deferred Costs” recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s condensed consolidated financial statements. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) Three months ended March 31, 2021 Three months ended March 31, 2020 Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Revenue accounts: Monterey WRAM $ 12,077 1,776 — 13,853 $ 7,015 1,970 ( 27 ) 8,958 2014-2017 WCMA 666 — — 666 708 — ( 43 ) 665 2012 General Rate Case true-up 752 — 1 753 752 — — 752 Cost of capital memorandum account ( 1,561 ) — — ( 1,561 ) ( 1,553 ) ( 5 ) — ( 1,558 ) Tax memorandum account 333 — — 333 ( 6,643 ) ( 3 ) 6,978 332 All others ( 2,224 ) ( 175 ) — ( 2,399 ) ( 2,219 ) ( 205 ) ( 67 ) ( 2,491 ) Total revenue accounts $ 10,043 1,601 1 11,645 $ ( 1,940 ) 1,757 6,841 6,658 Cost-recovery accounts: Water supply costs 8,123 787 — 8,910 4,328 767 ( 34 ) 5,061 Pension 3,478 366 — 3,844 2,449 415 22 2,886 Hydro Generation Research, Development and Demonstration Memorandum Account (“PRVMA”) 1,108 — ( 81 ) 1,027 — — — — COVID-19 Catastrophic Event Memorandum Account (“CEMA”) 2,266 — — 2,266 — — — — All others 445 — — 445 446 1 ( 4 ) 443 Total cost-recovery accounts $ 15,420 1,153 ( 81 ) 16,492 $ 7,223 1,183 ( 16 ) 8,390 Total $ 25,463 2,754 ( 80 ) 28,137 $ 5,283 2,940 6,825 15,048 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 5. Capitalization 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 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 common stock, which was exercised in full. The Offering closed on March 11, 2021 and the offering of option shares closed on March 16, 2021. 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. 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) Note 6. Equity Plans SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on the estimated fair value of stock-based payment awards. The Incentive Plan allows SJW Group to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Group. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance shares, or other share-based awards. As of March 31, 2021, 187,170 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units and an additional 688,365 shares are available for award issuances under the Incentive Plan. In addition, shares are issued to employees under the company’s ESPP. In connection with the merger with Connecticut Water Service, Inc. (“CTWS”) on October 9, 2019, SJW Group assumed outstanding awards of restricted stock units and deferred share units under the following stock plans: CTWS 2014 Performance Stock Program, CTWS 2004 Performance Stock Program and CTWS 1994 Performance Stock Program (collectively, the “CTWS Plans”). As of March 31, 2021, approximately 55,761 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units under the CTWS Plans. Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income and proceeds from the exercise of any restricted stock and similar instruments that are recorded to additional paid-in capital and common stock, by award type, are presented below for the three months ended March 31, 2021, and 2020. Three months ended March 31, 2021 2020 Adjustments to additional paid-in capital and common stock for: Compensation costs charged to income: ESPP $ 181 171 Restricted stock and deferred restricted stock 1,099 80 Total compensation costs charged to income $ 1,280 251 ESPP proceeds $ 1,026 970 Restricted Stock and Deferred Restricted Stock For the three months ended March 31, 2021, and 2020, SJW Group granted under the Incentive Plan 33,701 and 28,367 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 64.22 and $ 65.89 , respectively, per unit. Performance-based and market-based restricted stock awards granted for the three months ended March 31, 2021, and 2020 were 29,459 and 24,581 target units, respectively, with a weighted-average grant date fair value of $ 66.35 and $ 73.85 , respectively, per unit. Based upon actual attainment relative to the target performance metric, the number of shares issuable can range between 0 % to 150 % of the target number of shares for performance-based restricted stock awards, or between 0 % and 200 % of the target number of shares for market-based restricted stock awards. As of March 31, 2021, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $ 7,203 . This cost is expected to be recognized over a weighted-average period of 2.20 years. Employee Stock Purchase Plan The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85 % of the fair value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10 % of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock have been reserved for issuance under the ESPP. 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) SJW Group’s recorded expenses were $ 88 and $ 86 for the three months ended March 31, 2021 and 2020, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends July 30, 2021, for the ESPP is approximately $ 123 . This cost is expected to be recognized during the second and third quarters of 2021. Note 7. Long-Term Liabilities and Bank Borrowings SJW Group’s contractual obligations and commitments include senior notes, bank term loans, revenue bonds, state revolving fund loans, mortgages, and other obligations. Water Utility Services have received advance deposit payments from its customers on certain construction projects and the refunds of the advance deposit payments constitute an obligation of the respective subsidiaries. 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. Note 8. Benefit Plans SJW Group maintains noncontributory defined benefit pension plans for its eligible employees. San Jose Water Company (“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 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 other than pension plans. The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three months ended March 31, 2021, and 2020 are as follows: Three months ended March 31, 2021 2020 Service cost $ 2,735 2,443 Interest cost 2,580 2,904 Expected return on assets ( 4,752 ) ( 4,120 ) Unrecognized actuarial loss 1,780 758 Amortization of prior service cost 12 741 Total $ 2,355 2,726 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) In 2021, SJW Group expects to make required and discretionary cash contributions of up to $ 9,043 to the pension plans and Social Welfare Plan. For the three months ended March 31, 2021, SJW Group has made no contributions to such plans. Note 9. Income Taxes For the three months ended March 31, 2021, income tax benefit was $ 896 . Income tax expense for the three months ended March 31, 2020, was $ 438 . The effective consolidated income tax rates were ( 52 )% and 15 % for the three months ended March 31, 2021, and 2020, respectively. The lower effective rates for the three months ended March 31, 2021, were primarily due to excess tax benefits relating to share-based payment awards, state tax credits and other discrete tax items. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties of approximately $ 6,511 and $ 6,468 as of March 31, 2021 and December 31, 2020, respectively. SJW Group does not expect its unrecognized tax benefits to change significantly within the next 12 months. 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. Note 10. Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of March 31, 2021, 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 March 31, 2021, approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of such financial instruments are 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 months ended March 31, 2021. 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 $ 1,486,355 and $ 1,570,727 as of March 31, 2021, and December 31, 2020, 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 $ 1,379,313 and $ 1,363,821 as of March 31, 2021, and December 31, 2020, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy. The following tables summarize the fair values of the Rabbi Trust investment assets to fund CTWS’s additional retirement benefits under the supplemental executive retirement plans and retirement contracts by major categories as of March 31, 2021, and December 31, 2020: Fair Value Measurements at March 31, 2021 Asset Category Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds $ 145 145 — — Mutual funds 2,034 2,034 — — Fixed income 830 830 — — Total $ 3,009 3,009 — — 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) Fair Value Measurements at December 31, 2020 Asset Category Total Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Money market funds $ 83 83 — — Mutual funds 2,101 2,101 — — Fixed income 830 830 — — Total $ 3,014 3,014 — — Note 11. Segment and Non-Tariffed Business Reporting SJW Group is a holding company with four subsidiaries: (i) SJWC, a water utility operation with both regulated and non-tariffed businesses, (ii) CLWSC, a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated commercial building rentals, and (iv) SJWNE LLC a holding company for CTWS and its subsidiaries, Connecticut Water, Maine Water, New England Water Utility Services, Inc. (“NEWUS”) and Chester Realty, Inc. In accordance with FASB ASC Topic 280 - “Segment Reporting,” SJW Group’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Group’s chief operating decision maker includes the Chairman, President and Chief Executive Officer, and his executive staff. The first segment is providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, SJWC, Connecticut Water, CLWSC, Maine Water, and NEWUS together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company and Chester Realty, Inc., referred to as “Real Estate Services.” The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, such as goodwill, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category. For Three Months Ended March 31, 2021 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 111,396 2,045 1,344 — 111,396 3,389 114,785 Operating expense 98,478 1,369 881 978 98,478 3,228 101,706 Operating income (loss) 12,918 676 463 ( 978 ) 12,918 161 13,079 Net income (loss) 5,699 722 323 ( 4,128 ) 5,699 ( 3,083 ) 2,616 Depreciation and amortization 22,817 109 289 223 22,817 621 23,438 Interest on long-term debt and other interest expense 8,171 — — 5,268 8,171 5,268 13,439 (Benefit) provision for income taxes ( 116 ) 182 109 ( 1,071 ) ( 116 ) ( 780 ) ( 896 ) Assets $ 3,218,536 7,625 44,763 61,218 3,218,536 113,606 3,332,142 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2021 (in thousands, except share and per share data) For Three Months Ended March 31, 2020 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 111,367 3,017 1,370 — 111,367 4,387 115,754 Operating expense 96,017 1,361 831 2,118 96,017 4,310 100,327 Operating income (loss) 15,350 1,656 539 ( 2,118 ) 15,350 77 15,427 Net income (loss) 5,828 1,470 388 ( 5,269 ) 5,828 ( 3,411 ) 2,417 Depreciation and amortization 20,749 108 302 223 20,749 633 21,382 Interest on long-term debt and other interest expense 8,174 — — 5,110 8,174 5,110 13,284 Provision (benefit) for income taxes 1,202 470 132 ( 1,366 ) 1,202 ( 764 ) 438 Assets $ 3,054,474 9,170 46,436 64,218 3,054,474 119,824 3,174,298 ____________________ (1) The “All Other” category for the three months ended March 31, 2021 and March 31, 2020, includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. (2) As of March 31, 2021 and December 31, 2021, the Company has performed an allocation of goodwill associated with the acquisition of CTWS to two reporting units, Connecticut and Maine, which are both aggregated within the Regulated Water Utility Services reportable segment. Note 12. Subsequent Events On April 23, 2021, SJWC paid off its existing $ 140,000 line of credit agreement which was set to mature on June 1, 2021, and entered into a new $ 140,000 credit agreement (“SJWC Credit Agreement”) with JPMorgan Chase Bank, N.A., as the lender (the “Lender”). The SJWC Credit Agreement provides an unsecured credit facility with a letter of credit sublimit of $ 15,000 . Proceeds of borrowings under the SJWC Credit Agreement may be used to refinance existing debt, for working capital, and for general corporate purposes. The new SJWC Credit Agreement has a maturity date of December 31, 2023. The SJWC Credit Agreement contains customary representations, warranties and events of default, as well as a restrictive covenants customary for facilities of this type. The SJWC Credit Agreement also includes certain financial covenants that requires the Company to maintain a maximum funded debt to capitalization ratio. Also on April 23, 2021, SJW Group, as guarantor, and SJWTX paid off its existing $ 5,000 line of credit agreement which was set to mature on June 1, 2021, and entered into a new $ 5,000 credit agreement (“SJWTX Credit Agreement”) with the Lender. The SJWTX Credit Agreement provides an unsecured credit facility with a letter of credit sublimit of $ 1,000 . The new SJWTX Credit Agreement has a maturity date of December 31, 2023. Note 13. Legal Proceedings 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. 17