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 September 30, Nine months ended September 30, 2021 2020 2021 2020 REVENUE $ 166,923 165,863 $ 433,949 428,826 OPERATING EXPENSE: Production Expenses: Purchased water 33,121 35,130 76,434 76,953 Power 4,179 3,994 10,573 10,145 Groundwater extraction charges 23,736 20,471 59,419 54,082 Other production expenses 11,069 10,092 30,302 30,465 Total production expenses 72,105 69,687 176,728 171,645 Administrative and general 22,713 19,529 64,932 58,917 Maintenance 6,369 4,550 19,221 15,970 Property taxes and other non-income taxes 8,125 7,797 22,789 22,362 Depreciation and amortization 23,837 22,417 70,787 66,552 Total operating expense 133,149 123,980 354,457 335,446 OPERATING INCOME 33,774 41,883 79,492 93,380 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 13,535 ) ( 13,174 ) ( 40,655 ) ( 39,638 ) Pension non-service cost 334 ( 218 ) 999 ( 270 ) Gain on sale of Texas Water Alliance — — 3,000 — Gain on sale of real estate investments — 1,050 — 1,050 Other, net 1,244 1,130 4,782 2,935 Income before income taxes 21,817 30,671 47,618 57,457 Provision for income taxes 2,749 4,578 5,159 9,226 NET INCOME 19,068 26,093 42,459 48,231 Other comprehensive (loss) income, net ( 12 ) 76 133 ( 49 ) COMPREHENSIVE INCOME $ 19,056 26,169 $ 42,592 48,182 EARNINGS PER SHARE Basic $ 0.64 0.91 $ 1.44 1.69 Diluted $ 0.64 0.91 $ 1.43 1.68 DIVIDENDS PER SHARE $ 0.34 0.32 $ 1.02 0.96 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 29,816,736 28,533,907 29,496,533 28,510,489 Diluted 29,952,477 28,703,343 29,625,784 28,687,012 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) September 30, 2021 December 31, 2020 ASSETS Utility plant: Land $ 38,885 36,845 Depreciable plant and equipment 3,318,451 3,198,060 Construction in progress 163,262 109,976 Intangible assets 37,347 35,167 3,557,945 3,380,048 Less accumulated depreciation and amortization 1,114,123 1,045,136 2,443,822 2,334,912 Real estate investments 58,765 58,129 Less accumulated depreciation and amortization 15,655 14,783 43,110 43,346 CURRENT ASSETS: Cash and cash equivalents: Cash 14,019 5,269 Restricted cash 2,202 4,000 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 4,272 and $ 3,891 on September 30, 2021 and December 31, 2020, respectively 58,725 46,832 Income tax 2,148 7,041 Other 4,342 4,269 Accrued unbilled utility revenue 52,631 44,950 Prepaid expenses 13,048 8,097 Current regulatory assets, net 3,249 1,748 Other current assets 5,149 5,125 155,513 127,331 OTHER ASSETS: Net regulatory assets, less current portion 178,861 156,482 Investments 15,289 14,367 Goodwill 628,144 628,144 Other 5,002 6,883 827,296 805,876 $ 3,469,741 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) September 30, 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 29,822,182 on September 30, 2021 and 28,556,605 on December 31, 2020 $ 30 29 Additional paid-in capital 581,201 510,158 Retained earnings 420,411 408,037 Accumulated other comprehensive income ( 931 ) ( 1,064 ) Total stockholders’ equity 1,000,711 917,160 Long-term debt, less current portion 1,420,032 1,287,580 2,420,743 2,204,740 CURRENT LIABILITIES: Line of credit 122,072 175,094 Current portion of long-term debt 26,288 76,241 Accrued groundwater extraction charges, purchased water and power 29,030 19,184 Accounts payable 37,410 34,200 Accrued interest 17,642 12,861 Accrued payroll 13,231 14,012 Other current liabilities 21,612 19,203 267,285 350,795 DEFERRED INCOME TAXES 193,366 191,415 ADVANCES FOR CONSTRUCTION 132,228 125,027 CONTRIBUTIONS IN AID OF CONSTRUCTION 305,487 296,105 POSTRETIREMENT BENEFIT PLANS 125,005 121,597 OTHER NONCURRENT LIABILITIES 25,627 21,786 COMMITMENTS AND CONTINGENCIES (See Note 12) $ 3,469,741 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 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 Net income — — — 19,068 — 19,068 Unrealized loss on investment, net of tax benefit of $ 4 — — — — ( 12 ) ( 12 ) Stock-based compensation — — 1,130 ( 29 ) — 1,101 Issuance of restricted and deferred stock units 186 — 14 — — 14 Employee stock purchase plan 17,069 — 1,000 — — 1,000 Dividends paid ($ 0.34 per share) — — — ( 10,139 ) — ( 10,139 ) BALANCES, September 30, 2021 29,822,182 $ 30 $ 581,201 $ 420,411 $ ( 931 ) $ 1,000,711 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 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, 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 ) Stock-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 Net income — — — 19,721 — 19,721 Unrealized gain on investment, net of tax of $ 4 — — — — 10 10 Stock-based compensation — — 1,009 ( 43 ) — 966 Issuance of restricted and deferred stock units 18,864 1 14 — — 15 Dividends paid ($ 0.32 per share) — — — ( 9,122 ) — ( 9,122 ) BALANCES, June 30, 2020 28,516,705 29 508,098 387,003 1 895,131 Net income — — — 26,093 — 26,093 Unrealized gain on investment, net of tax of $ 28 — — — — 77 77 Stock-based compensation — — 1,058 ( 42 ) — 1,016 Issuance of restricted and deferred stock units 19,274 — ( 985 ) — — ( 985 ) Employee stock purchase plan 16,198 — 860 — — 860 Dividends paid ($ 0.32 per share) — — — ( 9,131 ) — ( 9,131 ) BALANCES, September 30, 2020 28,552,177 $ 29 $ 509,031 $ 403,923 $ 78 $ 913,061 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine months ended September 30, 2021 2020 OPERATING ACTIVITIES: Net income $ 42,459 48,231 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 71,912 68,683 Deferred income taxes 4,140 ( 6,358 ) Stock-based compensation 3,201 2,318 Allowance for equity funds used during construction ( 1,490 ) — Gain on sale of Texas Water Alliance and real estate investments ( 3,000 ) ( 1,050 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 19,647 ) ( 34,491 ) Accounts payable and other current liabilities 3,697 ( 3,877 ) Accrued groundwater extraction charges, purchased water and power 9,846 10,396 Tax receivable and payable, and other accrued taxes 832 6,459 Postretirement benefits 265 408 Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits ( 12,418 ) ( 14,086 ) Up-front service concession payment — ( 5,000 ) Other changes, net 458 ( 1,018 ) NET CASH PROVIDED BY OPERATING ACTIVITIES 100,255 70,615 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 169,238 ) ( 130,426 ) Contributions in aid of construction ( 12,520 ) ( 9,584 ) Additions to real estate investments ( 606 ) ( 391 ) Payments to retire utility plant, net of salvage ( 3,535 ) ( 1,877 ) Proceeds from sale of Texas Water Alliance and real estate investments 3,000 1,068 NET CASH USED IN INVESTING ACTIVITIES ( 182,899 ) ( 141,210 ) FINANCING ACTIVITIES: Borrowings on line of credit 67,099 226,884 Repayments on line of credit ( 120,120 ) ( 218,290 ) Long-term borrowings 137,000 85,000 Repayments of long-term borrowings ( 52,700 ) ( 9,589 ) Issuance of common stock, net of issuance costs 66,775 — Debt issuance costs ( 843 ) ( 646 ) Dividends paid ( 29,996 ) ( 27,371 ) Receipts of advances and contributions in aid of construction 23,585 19,059 Refunds of advances for construction ( 2,179 ) ( 2,121 ) Other changes, net 975 ( 64 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 89,596 72,862 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 6,952 2,267 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 9,269 17,944 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD 16,221 20,211 LESS RESTRICTED CASH, END OF PERIOD 2,202 — CASH AND CASH EQUIVALENTS, END OF PERIOD $ 14,019 20,211 Cash paid during the period for: Interest $ 39,533 40,409 Income taxes 7,643 7,024 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 26,628 21,857 Change in accrued payables for construction costs capitalized ( 209 ) 1,997 Utility property installed by developers 1,527 5,051 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 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 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 Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. 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 September 30, Nine months ended September 30, 2021 2020 2021 2020 Revenue from contracts with customers $ 163,103 167,045 $ 422,545 414,344 Alternative revenue programs, net 2,216 1,324 4,984 4,877 Other balancing and memorandum accounts, net 639 1,532 3,637 11,743 Other regulatory mechanisms, net ( 438 ) ( 5,441 ) ( 1,284 ) ( 6,355 ) Rental income 1,403 1,403 4,067 4,217 $ 166,923 165,863 $ 433,949 428,826 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 Connecticut Water Service, Inc. (“CTWS”), and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended September 30, 2021 and 2020, 1,558 and 1,029 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2021 and 2020, 14,441 and 20,220 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) Real Estate Investments The major components of real estate investments as of September 30, 2021, and December 31, 2020, are as follows: September 30, 2021 December 31, 2020 Land $ 14,168 14,168 Buildings and improvements 44,597 43,961 Subtotal 58,765 58,129 Less: accumulated depreciation and amortization 15,655 14,783 Total $ 43,110 43,346 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 . On September 28, 2020, San Jose Water Company sold six nonutility properties located in Los Gatos, California for $ 1,075 . SJW Group recognized a pre-tax gain on the sale of real estate investments of $ 1,048 , net of selling expenses of $ 22 . 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, San Jose Water Company (“SJWC”) filed Advice Letter 560 which includes such plan and the filing was approved on June 16, 2021. On June 11, 2021, Governor Newsom issued Executive Order N-08-21 which ends the suspension on customer disconnection activities on September 30, 2021. On June 16, 2021, the CPUC directed its regulated water utilities to extend the suspension on customer disconnection activities through September 30, 2021, in response to the Governor’s order. On June 23, 2021, SJWC filed Advice Letter 565 to extend Resolution M-4849’s emergency customer protections through September 30, 2021. This advice letter was approved on July 1, 2021. On September 23, 2021, Governor Newsom approved Senate Bill 155, which included a provision extending the water shutoff moratorium through December 31, 2021. 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 by the second quarter of 2022. SJWC will file for interim rates to be effective on January 1, 2022. On May 3, 2021, SJWC filed Application No. 21-05-004 requesting authority to adjust its cost of capital for the period from January 1, 2022 through December 31, 2024. The request seeks a revenue increase of $ 6,418 or 1.61 % in 2022. The application also proposes a rate of return of 8.11 % from the current rate of 7.64 %, a decrease in the average cost of debt rate from 6.20 % to 5.48 %, and a return of equity of 10.30 % from the current rate of 8.90 %. In addition, the request seeks to adjust 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) SJWC’s currently authorized capital structure of approximately 47 % debt and 53 % equity to approximately 45 % debt and 55 % equity. If approved, rates are expected to be effective in the second quarter of 2022. On May 27, 2021, SJWC filed Advice Letter No. 561/561A with the CPUC requesting authorization to increase revenue by $ 17,262 or 4.34 % to recover the increases to purchased potable water charges, the groundwater extraction fee, and purchased recycled water charges implemented by Santa Clara Valley Water District (“Valley Water”) and South Bay Water Recycling. This advice letter was approved with an effective date of July 1, 2021. On June 9, 2021, Valley Water declared a water shortage emergency and asked its retailers to reduce consumption by 15% based on 2019’s volume. On June 18, 2021, SJWC filed Advice Letter 563 with the CPUC to activate Stage 3 of its Rule 14.1, Water Shortage Contingency Plan, in response to Valley Water’s declaration of drought emergency and call for 15% mandatory conservation. Advice Letter 564 was also filed on June 9, 2021, to establish a Water Conservation Memorandum Account to track the revenue impact of authorized vs actual water consumption and the incremental expenses required to implement our mandatory water conservation plan. Similar memorandum accounts were authorized during the previous drought. Advice Letters 564 and 563 were approved with the effective dates of July 20, 2021, and August 5, 2021, respectively. On August 5, 2021, SJWC filed Advice Letter 567 with the CPUC requesting authorization to update its Drought Allocations and Drought Surcharges program contained within its Schedule 14.1. This filing updates the program developed during the drought of 2014-2017. Advice Letter 567 was approved with an effective date of September 6, 2021. This approval does not authorize its activation. SJWC will submit another filing with the commission to activate the program should water supply conditions dictate or if it is required to do so by the CPUC and/or the State of California. On October 15, 2021, SJWC filed Advice Letter 569 with the CPUC requesting authorization to activate Schedule 14.1 effective November 15, 2021, as approved in Advice Letter 567. If approved, drought surcharges collected will be used to offset the revenue losses tracked in the Water Conservation Memorandum Account authorized in Advice Letter 564. This filing is pending before the CPUC. 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. The WICA surcharge was reset to zero as part of the July 28, 2021, rate case decision. On October 26, 2021, Connecticut Water filed for a WICA increase for approximately $ 21,746 in completed projects. Many of the projects were those that were not considered by PURA in the rate case because of the deadline in the proceeding for pro forma capital additions. If approved as submitted, Connecticut Water expects a WICA surcharge of 2.49 % to be added to customer bills in January 2022 which is expected to generate approximately $ 2,581 in additional revenue. Prior to being reset to zero concurrent with the new rates from the Connecticut Water rate proceeding effective July 28, 2021, WICA surcharges for Connecticut Water and its Avon Water division were 7.03 % and 8.51 %, respectively. The Heritage Village Water division did not have an approved WICA surcharge, but Connecticut Water is authorized in its July 28, 2021, rate case decision to include Heritage Village Water division in the WICA program in the future. On January 15, 2021, Connecticut Water filed an application with PURA to amend rates for its customers, including the divisions of Avon Water and Heritage Village Water. 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. On July 28, 2021, Connecticut Water received the final decision approving an increase of $ 5,208 in annual revenues, a return on equity of 9.0 %, with new rates effective July 28, 2021. The final decision also approved a low-income rate, tiered block rate structure for residential water customers and the cost of debt and equity percentage as requested. The final decision did not include all of the requested proforma plant in service due to the timing of its completion. However, no plant was disallowed. Connecticut Water will seek recovery for the projects in the future, including a portion of plant which is eligible for recovery through WICA. In addition, the final decision reset WICA, which was approaching its statutory caps to zero . On August 11, 2021, Connecticut Water filed a petition for reconsideration with PURA to consider matters specific to excess deferred income taxes contained in the July 28, 2021, decision. The proposed increased revenues associated with the petition is $ 2,229 . On October 25, 2021, PURA issued a draft decision approving $ 1,752 of Connecticut Water’s request. A final decision on the matter is expected on November 10, 2021. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) 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 received approval of the financings from PURA on June 9, 2021. Texas Regulatory Affairs On January 29, 2021, SJWTX, Inc., doing business as Canyon Lake Water Service Company (“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 $ 0.70 dollars per thousand gallons which became effective on March 1, 2021. On August 18, 2021, the GBRA announced a 13 % increase for treated water effective September 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 last 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 issued 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, and on June 15, 2021, removed the prohibition on disconnections for non-payment. The Texas Legislature passed Senate Bill 3 on August 6, 2021. Under this bill, utilities are obligated to report to the PUCT steps they are taking to mitigate for the type of long-term power outages experienced during the February 2021 storm. CLWSC expects to incur capital expenditures related to meeting these new requirements, largely for procurement of backup generators. On June 28, 2021, CLWSC announced that it reached an agreement to acquire the Kendall West and Bandera East utilities in Bandera and Medina counties in Texas and that change in ownership applications had been filed with the PUCT under Docket No. 52281. The acquisition, pending approval by the PUCT, would grow CLWSC by 1,400 service connections. Rates will remain the same for those customers of the acquired Certificate of Convenience and Necessity. A decision by the PUCT is expected in the fourth quarter of 2021. Maine Regulatory Affairs On June 17, 2020, the Maine 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 proposed a three step, multi-year rate plan designed to 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. On June 23, 2021, the MPUC approved the first step in the plan adopting the proposed rate smoothing mechanism and implementing a temporary 22.65 % surcharge on all customer bills. The surcharge will be in effect for one year . Action on the rate increase request was deferred by agreement of the parties. On September 8, 2021, Maine Water filed a supplemental application to update its request to increase base rates, initiating the second step in the rate plan. The supplemental application seeks $ 6,880 , or 80.1 % in additional revenue primarily to support a 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) new drinking water treatment facility on the Saco River. A decision on the requested revenue increase is expected in the second quarter of 2022, corresponding with the completion of the new water treatment facility. Note 3. Regulatory Assets, Net Regulatory assets, net are comprised of the following as of September 30, 2021, and December 31, 2020: September 30, 2021 December 31, 2020 Regulatory assets: Income tax temporary differences, net $ 15,772 6,230 Postretirement pensions and other medical benefits 99,213 95,559 Business combinations debt premium, net 20,573 22,479 Balancing and memorandum accounts, net 33,277 25,463 Water Rate Adjustment 5,489 323 Other, net 7,786 8,176 Total regulatory assets, net in Condensed Consolidated Balance Sheets 182,110 158,230 Less: current regulatory assets, net 3,249 1,748 Total regulatory assets, net, less current portion $ 178,861 156,482 As of September 30, 2021, and December 31, 2020, SJW Group’s regulatory assets, net not earning a return primarily included postretirement pensions and other medical benefits unfunded amount, and the business combinations debt premium, net. The total amount of regulatory assets, net not earning a return at September 30, 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 $ 121,090 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 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. 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) Balancing and memorandum accounts recorded to regulatory assets, net for the three and nine months ended September 30, 2021, and 2020 as follows: Three months ended September 30, 2021 Three months ended September 30, 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: MWRAM $ 15,278 363 — 15,641 $ 10,549 ( 1,124 ) 2,625 12,050 Cost of capital memorandum account ( 1,562 ) — — ( 1,562 ) ( 1,560 ) ( 1 ) — ( 1,561 ) Tax memorandum account 333 — — 333 332 1 — 333 All others ( 829 ) 397 — ( 432 ) ( 1,034 ) 37 1 ( 996 ) Total revenue accounts $ 13,220 760 — 13,980 $ 8,287 ( 1,087 ) 2,626 9,826 Cost-recovery accounts: Water supply costs 9,895 388 — 10,283 5,899 1,222 1 7,122 Pension 4,210 366 — 4,576 2,985 ( 253 ) — 2,732 Hydro Generation Research, Development and Demonstration Memorandum Account (“PRVMA”) 928 — ( 121 ) 807 — 1,219 ( 8 ) 1,211 COVID-19 Catastrophic Event Memorandum Account (“CEMA”) 2,618 567 — 3,185 — — — — All others 446 — — 446 444 — — 444 Total cost-recovery accounts $ 18,097 1,321 ( 121 ) 19,297 $ 9,328 2,188 ( 7 ) 11,509 Total $ 31,317 2,081 ( 121 ) 33,277 $ 17,615 1,101 2,619 21,335 Nine months ended September 30, 2021 Nine months ended September 30, 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: MWRAM $ 12,077 3,563 1 15,641 $ 7,015 2,437 2,598 12,050 Cost of capital memorandum account ( 1,561 ) ( 1 ) — ( 1,562 ) ( 1,553 ) ( 8 ) — ( 1,561 ) Tax memorandum account 333 — — 333 ( 6,643 ) ( 2 ) 6,978 333 All others ( 806 ) 369 5 ( 432 ) ( 759 ) ( 128 ) ( 109 ) ( 996 ) Total revenue accounts $ 10,043 3,931 6 13,980 $ ( 1,940 ) 2,299 9,467 9,826 Cost-recovery accounts: Water supply costs 8,123 2,159 1 10,283 4,328 2,827 ( 33 ) 7,122 Pension 3,478 1,098 — 4,576 2,449 261 22 2,732 PRVMA 1,108 — ( 301 ) 807 — 1,219 ( 8 ) 1,211 CEMA 2,266 919 — 3,185 — — — — All others 445 1 — 446 446 2 ( 4 ) 444 Total cost-recovery accounts $ 15,420 4,177 ( 300 ) 19,297 $ 7,223 4,309 ( 23 ) 11,509 Total $ 25,463 8,108 ( 294 ) 33,277 $ 5,283 6,608 9,444 21,335 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (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 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 $ 66,775 from the Offering and the sale of option shares, after deducting the underwriting discounts and commissions and offering expenses. 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 included, among other things, financing infrastructure improvements and other capital expenditures, repayment of debt or other corporate obligations and working capital. Note 6. Equity Plans 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. As of September 30, 2021, 174,154 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 685,660 shares are available for award issuances under the Incentive Plan. In connection with the merger with CTWS on October 9, 2019, SJW Group assumed outstanding awards of restricted stock units and deferred share units under the following stock plans: the CTWS 2014 Performance Stock Program, the CTWS 2004 Performance Stock Program and the CTWS 1994 Performance Stock Program (collectively, the “CTWS Plans”). As of September 30, 2021, approximately 56,326 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units under the CTWS Plans. 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 and nine months ended September 30, 2021, and 2020: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Compensation costs charged to income: ESPP $ 176 152 $ 357 323 Restricted stock and deferred restricted stock 954 906 2,844 1,995 Total compensation costs charged to income $ 1,130 1,058 $ 3,201 2,318 ESPP proceeds $ 1,000 860 $ 2,026 1,830 Restricted Stock and Deferred Restricted Stock For the three months ended September 30, 2021, and 2020, SJW Group granted under the Incentive Plan 1,134 and 761 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 69.20 and $ 58.63 , respectively, per unit. For the nine months ended September 30, 2021, and 2020, SJW Group granted under the Incentive Plan 46,567 and 43,474 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 64.65 and $ 63.87 , respectively, per unit. For the three months ended September 30, 2021, and 2020, SJW Group granted under the Incentive Plan 0 and 58 target units, respectively, performance-based and market-based restricted stock awards with a weighted-average grant date fair value of $ 0.00 and $ 62.95 , respectively, per unit. For the nine months ended September 30, 2021, and 2020, SJW Group granted under 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) the Incentive Plan 30,641 and 24,777 target units, respectively, performance-based and market-based restricted stock awards granted with a weighted-average grant date fair value of $ 66.33 and $ 65.02 , 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 September 30, 2021, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $ 5,442 . This cost is expected to be recognized over a weighted-average period of 1.72 years. Employee Stock Purchase Plan SJW Group’s recorded expenses were $ 91 and $ 265 for the three and nine months ended September 30, 2021, respectively, and $ 85 and $ 244 for the three and nine months ended September 30, 2020, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2022, for the ESPP is approximately $ 124 . This cost is expected to be recognized during the fourth quarter of 2021 and first quarter of 2022. Note 7. 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 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. Lines of Credit On April 23, 2021, SJWC closed its $ 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 line of credit bears interest at variable rates. The SJWC Credit Agreement contains customary representations, warranties and events of default, as well as restrictive covenants customary for facilities of this type. The SJWC Credit Agreement also includes certain customary financial covenants such as a funded debt to capitalization ratio. Also on April 23, 2021, SJW Group, as guarantor, and CLWSC closed its $ 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. Long-Term Debt 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. On May 13, 2021, CLWSC entered into a master credit agreement and promissory note with a commercial bank under which it entered into a borrowing agreement for an aggregate principal amount not to exceed $ 30,000 , of which $ 20,000 was advanced at the closing date. The borrowing carries a fixed interest rate of 4.01 % due on March 20, 2041. The remaining aggregate principal amount of the promissory note is to be advanced at the discretion of CLWSC before the maturity date. The notes are unsecured obligations of CLWSC. 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, CLWSC 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. 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) On June 25, 2021, SJWC entered into a note purchase agreement with certain affiliates of New York Life Insurance (collectively the “Purchasers”), pursuant to which the company sold an aggregate principal amount of $ 50,000 of its 3.00 % Senior Notes, Series N (“Series N Notes”) to the Purchasers. The Series N Notes are unsecured obligations of SJWC and are due on June 25, 2051. Interest is payable semi-annually in arrears on January 1st and July 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series N Notes are outstanding. The Series N Notes are also subject to customary events of default, the occurrence of which may result in all of the Series N Notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement. On August 4, 2021, Connecticut Water entered into a note purchase agreement with certain affiliates of Metropolitan Life Insurance Company, New York Life Insurance Company, the Northwestern Mutual Life Insurance Company and Pacific Life Insurance Company, pursuant to which Connecticut Water sold on August 4, 2021, an aggregate principal amount of $ 50,000 of its 3.07 % Senior Notes, Series 2021A, due 2051 (the “2021A Notes”) and will sell on December 1, 2021, an aggregate principal amount of $ 50,000 of its 3.10 % Senior Notes, Series 2021B, due 2051 (the “2021B Notes” and together with the 2021A Notes, the “CWC Notes”). The closing on December 1, 2021, is subject to customary closing conditions. The CWC Notes are unsecured obligations of Connecticut Water, with the 2021A Notes due on June 1, 2051, and the 2021B Notes due on December 1, 2051. Interest on the CWC Notes is payable semi-annually in arrears on June 1st and December 1st 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 CWC Notes are outstanding. The CWC Notes are also subject to customary events of default, the occurrence of which may result in all of the CWC Notes then outstanding becoming immediately due and payable. The proceeds from the sale of the CWC Notes will be used to repay outstanding short and/or long-term borrowings, to fund Connecticut Water’s capital expenditures, and/or for other general corporate purposes. On August 4, 2021, SJWC entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which the company sold an aggregate principal amount of $ 50,000 of its 3.00 % Senior Notes, Series O (“Series O Notes”), due December 1, 2051. The Series O Notes are unsecured obligations of SJWC. Interest is payable semi-annually in arrears on June 1st and December 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series O Notes are outstanding. The Series O Notes are also subject to customary events of default, the occurrence of which may result in all of the Series O Notes then outstanding becoming immediately due and payable. The closing of the note purchase agreement is expected to occur on December 1, 2021. Note 8. 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 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. 17 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and nine months ended September 30, 2021, and 2020 are as follows: Three months ended September 30, Nine months ended September 30, 2021 2020 2021 2020 Service cost $ 2,711 2,390 $ 8,134 7,170 Interest cost 2,556 2,860 7,666 8,580 Expected return on assets ( 4,748 ) ( 4,126 ) ( 14,242 ) ( 12,429 ) Unrecognized actuarial loss 1,788 1,296 5,362 3,888 Amortization of prior service cost 12 39 37 115 Total $ 2,319 2,459 $ 6,957 7,324 In 2021, SJW Group expects to make required and discretionary cash contributions of up to $ 9,043 to the pension plans and other postretirement benefits. For the three and nine months ended September 30, 2021, SJW Group has made $ 3,517 and $ 4,997 , respectively, contributions to such plans. Note 9. Income Taxes For the three and nine months ended September 30, 2021, income tax expense was $ 2,749 and $ 5,159 , respectively. Income tax expense for the three and nine months ended September 30, 2020, was $ 4,578 and $ 9,226 , respectively. The effective consolidated income tax rates were 13 % and 15 % for the three months ended September 30, 2021 and 2020, respectively, and 11 % and 16 % for the nine months ended September 30, 2021, and 2020, respectively. The lower effective rates for the three and nine months ended September 30, 2021, were primarily due to flow-through tax benefits. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties of approximately $ 7,537 and $ 6,468 as of September 30, 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 (the “Act”) was signed into law. SJW Group has considered the income tax implications of the Act in its estimated tax provision and does not believe it will materially impact the company’s year-end tax rate. Note 10. Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of September 30, 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 September 30, 2021, approximates their carrying value as reported on the condensed consolidated balance sheets. The estimated 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 and nine months ended September 30, 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 $ 1,573,581 and $ 1,570,727 as of September 30, 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 $ 1,446,320 and $ 1,363,821 as of September 30, 2021, and December 31, 2020, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy. CTWS’s 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 $ 3,738 and $ 3,014 as of September 30, 2021, and December 31, 2020, respectively, and are categorized as Level 1 in the fair value hierarchy. 18 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) 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 September 30, 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 $ 162,352 3,168 1,403 — 162,352 4,571 166,923 Operating expense 129,915 2,156 956 122 129,915 3,234 133,149 Operating income (loss) 32,437 1,012 447 ( 122 ) 32,437 1,337 33,774 Net income (loss) 20,625 879 294 ( 2,730 ) 20,625 ( 1,557 ) 19,068 Depreciation and amortization 23,209 113 292 223 23,209 628 23,837 Interest on long-term debt and other interest expense 8,805 — — 4,730 8,805 4,730 13,535 Provision (benefit) for income taxes 3,537 280 100 ( 1,168 ) 3,537 ( 788 ) 2,749 Assets $ 3,352,976 7,141 44,629 64,995 3,352,976 116,765 3,469,741 For Three Months Ended September 30, 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 $ 161,646 2,814 1,403 — 161,646 4,217 165,863 Operating expense 119,885 2,161 961 973 119,885 4,095 123,980 Operating income (loss) 41,761 653 442 ( 973 ) 41,761 122 41,883 Net income (loss) 25,053 827 310 ( 97 ) 25,053 1,040 26,093 Depreciation and amortization 21,782 116 296 223 21,782 635 22,417 Interest on long-term debt and other interest expense 8,112 — — 5,062 8,112 5,062 13,174 Provision (benefit) for income taxes 9,450 179 105 ( 5,156 ) 9,450 ( 4,872 ) 4,578 Assets $ 3,131,778 8,589 45,980 73,367 3,131,778 127,936 3,259,714 19 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2021 (in thousands, except share and per share data) For Nine Months Ended September 30, 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 $ 421,985 7,897 4,067 — 421,985 11,964 433,949 Operating expense 343,965 5,467 2,718 2,307 343,965 10,492 354,457 Operating income (loss) 78,020 2,430 1,349 ( 2,307 ) 78,020 1,472 79,492 Net income (loss) 46,909 2,278 913 ( 7,641 ) 46,909 ( 4,450 ) 42,459 Depreciation and amortization 68,913 332 872 670 68,913 1,874 70,787 Interest on long-term debt and other interest expense 25,323 — — 15,332 25,323 15,332 40,655 Provision (benefit) for income taxes 8,001 665 305 ( 3,812 ) 8,001 ( 2,842 ) 5,159 Assets $ 3,352,976 7,141 44,629 64,995 3,352,976 116,765 3,469,741 For Nine Months Ended September 30, 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 $ 416,085 8,524 4,217 — 416,085 12,741 428,826 Operating expense 323,087 5,281 2,642 4,436 323,087 12,359 335,446 Operating income (loss) 92,998 3,243 1,575 ( 4,436 ) 92,998 382 93,380 Net income (loss) 53,117 3,178 1,141 ( 9,205 ) 53,117 ( 4,886 ) 48,231 Depreciation and amortization 64,654 332 896 670 64,654 1,898 66,552 Interest on long-term debt and other interest expense 24,575 — — 15,063 24,575 15,063 39,638 Provision (benefit) for income taxes 16,101 909 361 ( 8,145 ) 16,101 ( 6,875 ) 9,226 Assets $ 3,131,778 8,589 45,980 73,367 3,131,778 127,936 3,259,714 ____________________ (1) The “All Other” category for the nine months ended September 30, 2021 and September 30, 2020, includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. (2) As of September 30, 2021 and December 31, 2020, 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. 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 13. Subsequent Events On October 29, 2021, San Jose Water sold two non-utility properties located in San Jose, California for $ 13,150 . Also, on the same date, SJW Land sold undeveloped land located in San Jose, California for $ 2,600 . SJW Group will record an estimated pre-tax gain on the sale of real estate investments of $ 13,600 in the fourth quarter of 2021. 20