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 June 30, Six months ended June 30, 2022 2021 2022 2021 REVENUE $ 149,041 152,241 $ 273,343 267,026 OPERATING EXPENSE: Production Expenses: Purchased water 26,352 27,668 45,569 43,313 Power 3,394 3,391 6,474 6,394 Groundwater extraction charges 18,360 20,138 32,288 35,683 Other production expenses 11,596 9,831 21,719 19,233 Total production expenses 59,702 61,028 106,050 104,623 Administrative and general 23,260 21,326 47,465 42,219 Maintenance 6,891 6,587 13,586 12,852 Property taxes and other non-income taxes 7,579 7,149 15,888 14,664 Depreciation and amortization 25,207 23,512 52,813 46,950 Gain on sale of nonutility properties — — ( 5,450 ) — Total operating expense 122,639 119,602 230,352 221,308 OPERATING INCOME 26,402 32,639 42,991 45,718 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 14,241 ) ( 13,681 ) ( 27,970 ) ( 27,120 ) Pension non-service cost 941 339 1,890 665 Gain on sale of Texas Water Alliance — 3,000 — 3,000 Other, net 824 1,784 1,819 3,538 Income before income taxes 13,926 24,081 18,730 25,801 Provision for income taxes 2,368 3,306 3,435 2,410 NET INCOME 11,558 20,775 15,295 23,391 Other comprehensive (loss) income, net ( 248 ) 107 ( 429 ) 145 COMPREHENSIVE INCOME $ 11,310 20,882 $ 14,866 23,536 EARNINGS PER SHARE Basic $ 0.38 0.70 $ 0.51 0.80 Diluted $ 0.38 0.69 $ 0.50 0.79 DIVIDENDS PER SHARE $ 0.36 0.34 $ 0.72 0.68 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 30,244,511 29,799,499 30,234,381 29,333,776 Diluted 30,346,040 29,924,191 30,341,065 29,459,782 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 3 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) June 30, 2022 December 31, 2021 ASSETS Utility plant: Land $ 39,900 39,004 Depreciable plant and equipment 3,468,240 3,381,908 Construction in progress 192,580 176,427 Intangible assets 36,220 36,276 3,736,940 3,633,615 Less accumulated depreciation and amortization 1,183,159 1,136,116 2,553,781 2,497,499 Real estate investments and nonutility properties 58,234 57,632 Less accumulated depreciation and amortization 16,553 15,951 41,681 41,681 CURRENT ASSETS: Cash and cash equivalents: Cash 12,049 10,908 Restricted cash 602 1,211 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 5,222 and $ 4,600 on June 30, 2022 and December 31, 2021, respectively 58,815 53,699 Income tax — 2,308 Other 4,079 4,735 Accrued unbilled utility revenue 47,824 44,026 Prepaid expenses 8,106 9,667 Current regulatory assets, net 2,841 2,629 Other current assets 4,476 4,902 138,792 134,085 OTHER ASSETS: Net regulatory assets, less current portion 139,312 151,992 Investments 15,011 15,784 Goodwill 640,311 640,471 Other 12,159 10,883 806,793 819,130 $ 3,541,047 3,492,395 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) June 30, 2022 December 31, 2021 CAPITALIZATION AND LIABILITIES CAPITALIZATION: Stockholders’ equity: Common stock, $ 0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 30,247,674 on June 30, 2022 and 30,181,348 on December 31, 2021 $ 30 30 Additional paid-in capital 608,666 606,392 Retained earnings 421,741 428,260 Accumulated other comprehensive income ( 592 ) ( 163 ) Total stockholders’ equity 1,029,845 1,034,519 Long-term debt, less current portion 1,455,709 1,492,935 2,485,554 2,527,454 CURRENT LIABILITIES: Line of credit 141,336 62,996 Current portion of long-term debt 38,966 39,106 Accrued groundwater extraction charges, purchased water and power 24,798 17,200 Accounts payable 26,580 30,391 Accrued interest 14,615 14,174 Accrued payroll 9,814 11,583 Income tax payable 1,087 — Other current liabilities 20,633 27,821 277,829 203,271 DEFERRED INCOME TAXES 203,561 200,451 ADVANCES FOR CONSTRUCTION 138,430 130,693 CONTRIBUTIONS IN AID OF CONSTRUCTION 319,564 316,479 POSTRETIREMENT BENEFIT PLANS 92,060 89,998 OTHER NONCURRENT LIABILITIES 24,049 24,049 COMMITMENTS AND CONTINGENCIES $ 3,541,047 3,492,395 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 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, 2021 30,181,348 $ 30 $ 606,392 $ 428,260 $ ( 163 ) $ 1,034,519 Net income — — — 3,737 — 3,737 Unrealized loss on investment, net of tax benefit of $ 67 — — — — ( 181 ) ( 181 ) Stock-based compensation — — 1,552 ( 20 ) — 1,532 Issuance of restricted and deferred stock units 37,879 — ( 1,269 ) — — ( 1,269 ) Employee stock purchase plan 17,918 — 1,049 — — 1,049 Common stock issuance costs — — ( 87 ) — — ( 87 ) Dividends paid ($ 0.36 per share) — — — ( 10,882 ) — ( 10,882 ) BALANCES, March 31, 2022 30,237,145 30 607,637 421,095 ( 344 ) 1,028,418 Net income — — — 11,558 — 11,558 Unrealized gain on investment, net of tax of $ — — — — — ( 248 ) ( 248 ) Stock-based compensation — — 1,041 ( 23 ) 1,018 Issuance of restricted and deferred stock units 10,529 — ( 6 ) — — ( 6 ) Common stock issuance, net of costs — — ( 6 ) — — ( 6 ) Dividends paid ($ 0.36 per share) — — — ( 10,889 ) — ( 10,889 ) BALANCES, June 30, 2022 30,247,674 $ 30 $ 608,666 $ 421,741 $ ( 592 ) $ 1,029,845 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 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, 2020 28,556,605 $ 29 $ 510,158 $ 408,037 $ ( 1,064 ) $ 917,160 Net income — — — 2,616 — 2,616 Unrealized income on investment, net of taxes of $ 14 — — — — 38 38 Stock-based compensation — — 1,280 ( 32 ) — 1,248 Issuance of restricted and deferred stock units 30,547 — ( 964 ) — — ( 964 ) Employee stock purchase plan 18,235 — 1,026 — — 1,026 Common stock issuance, net of costs 1,184,500 1 66,895 — — 66,896 Dividends paid ($ 0.34 per share) — — — ( 9,724 ) — ( 9,724 ) BALANCES, March 31, 2021 29,789,887 30 578,395 400,897 ( 1,026 ) 978,296 Net income — — — 20,775 — 20,775 Unrealized gain on investment, net of tax of $ 39 — — — — 107 107 Stock-based compensation — — 791 ( 28 ) — 763 Issuance of restricted and deferred stock units 15,040 — ( 9 ) — — ( 9 ) Common stock issuance, net of costs — — ( 120 ) — — ( 120 ) Dividends paid ($ 0.34 per share) — — — ( 10,133 ) — ( 10,133 ) BALANCES, June 30, 2021 29,804,927 $ 30 $ 579,057 $ 411,511 $ ( 919 ) $ 989,679 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Six months ended June 30, 2022 2021 OPERATING ACTIVITIES: Net income $ 15,295 23,391 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,830 48,406 Deferred income taxes 2,239 903 Stock-based compensation 2,593 2,071 Allowance for equity funds used during construction ( 1,084 ) ( 916 ) Gain on sale of nonutility properties and Texas Water Alliance ( 5,450 ) ( 3,000 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 8,487 ) ( 7,812 ) Accounts payable and other current liabilities ( 1,158 ) 553 Accrued groundwater extraction charges, purchased water and power 7,598 7,106 Tax receivable and payable, and other accrued taxes ( 22 ) 2,647 Postretirement benefits 459 1,955 Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits 17,284 ( 8,231 ) Other changes, net 501 23 NET CASH PROVIDED BY OPERATING ACTIVITIES 83,598 67,096 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 101,611 ) ( 100,057 ) Contributions in aid of construction ( 13,332 ) ( 7,357 ) Additions to real estate investments ( 546 ) ( 230 ) Payments to retire utility plant, net of salvage ( 1,836 ) ( 909 ) Proceeds from sale of nonutility properties and Texas Water Alliance 227 3,000 Payments for business acquisitions ( 33 ) ( 1,452 ) NET CASH USED IN INVESTING ACTIVITIES ( 117,131 ) ( 107,005 ) FINANCING ACTIVITIES: Borrowings on line of credit 88,664 45,669 Repayments on line of credit ( 10,324 ) ( 82,222 ) Long-term borrowings 15,000 87,000 Repayments of long-term borrowings ( 51,612 ) ( 51,617 ) Issuance of common stock, net of issuance costs — 66,775 Debt issuance costs — ( 296 ) Dividends paid ( 21,771 ) ( 19,857 ) Receipts of advances and contributions in aid of construction 15,769 14,673 Refunds of advances for construction ( 1,345 ) ( 1,363 ) Other changes, net ( 316 ) ( 21 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 34,065 58,741 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 532 18,832 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 12,119 9,269 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD 12,651 28,101 LESS RESTRICTED CASH, END OF PERIOD 602 2,659 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 12,049 25,442 Cash paid during the period for: Interest $ 30,189 29,266 Income taxes 458 1,020 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 18,502 29,123 Utility property installed by developers 1,066 1,230 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2022 (in thousands, except share and per share data) Note 1. General In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods. The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission. The Notes to Consolidated Financial Statements in SJW Group’s 2021 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements. SJW Group is a holding company with five wholly-owned subsidiaries: San Jose Water Company (“SJWC”), SJWNE LLC, SJWTX, Inc., SJW Land Company, and SJWTX Holdings, Inc. SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”) whose wholly-subsidiaries are The Connecticut Water Company (“Connecticut Water”), The Maine Water Company (“Maine Water”), New England Water Utility Services, Inc. (“NEWUS”), and Chester Realty, Inc. SJWC, Connecticut Water, SJWTX, Inc. doing business as Canyon Lake Water Service Company (“CLWSC”), Maine Water and NEWUS are referred to as “Water Utility Services.” SJW Land Company and Chester Realty, Inc. are collectively referred to as “Real Estate Services.” Revenue Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased precipitation curtail water usage resulting in lower sales. The major streams of revenue for SJW Group are as follows: Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Revenue from contracts with customers $ 148,657 147,204 $ 270,434 259,442 Alternative revenue programs, net ( 2,982 ) 2,656 ( 4,909 ) 2,768 Other balancing and memorandum accounts, net 2,432 1,477 4,862 2,998 Other regulatory mechanisms, net ( 432 ) ( 416 ) 234 ( 846 ) Rental income 1,366 1,320 2,722 2,664 $ 149,041 152,241 $ 273,343 267,026 Real Estate Investments and Nonutility Properties The major components of real estate investments and nonutility properties as of June 30, 2022, and December 31, 2021, are as follows: June 30, 2022 December 31, 2021 Land $ 12,900 12,615 Buildings and improvements 45,334 45,017 Subtotal 58,234 57,632 Less: accumulated depreciation and amortization 16,553 15,951 Total $ 41,681 41,681 On October 29, 2021, SJWC sold two nonutility properties located in San Jose, California for $ 13,150 . SJW Group recognized a pre-tax gain on the sale of nonutility properties of $ 7,230 , after selling expenses of $ 277 for one of the properties sold, and a gain of $ 5,442 , after selling expenses of $ 178 , was deferred on the other nonutility property pending California Public Utilities 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) Commission (“CPUC”) review for the year ended December 31, 2021. On February 15, 2022, the CPUC review was completed and $ 5,442 was recognized as gain on sale of the second nonutility property. A former wholly owned subsidiary of SJW Group, Texas Water Alliance Limited, was sold to Guadalupe-Blanco River Authority (“GBRA”) in 2017. The sales agreement with GBRA included a holdback amount of $ 3,000 to be paid to SJW Group on June 30, 2021, subject to reduction under certain conditions. SJW Group received the holdback amount without reduction from the GBRA on June 29, 2021 and recognized a pre-tax gain on sale of $ 3,000 . Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of June 30, 2022, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of June 30, 2022, approximates their carrying value as reported on the condensed consolidated balance sheets. The estimated fair value of such financial instruments were determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation techniques during the three and six months ended June 30, 2022. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of SJW Group’s long-term debt was approximately $ 1,348,114 and $ 1,651,825 as of June 30, 2022, and December 31, 2021, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of long-term debt was $ 1,494,675 and $ 1,532,041 as of June 30, 2022, and December 31, 2021, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy. CTWS additional retirement benefits under the supplemental executive retirement plans and retirement contracts are funded by investment assets held by a Rabbi Trust. The fair value of the money market funds, mutual funds and fixed income investments in the Rabbi Trust was $ 3,117 and $ 3,797 as of June 30, 2022, and December 31, 2021, respectively, and are categorized as Level 1 in the fair value hierarchy. Earnings per Share Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”), shares potentially issuable under the performance stock plans assumed through the business combination with CTWS, and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended June 30, 2022 and 2021, 4,964 and 4,304 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the six months ended June 30, 2022 and 2021, 15,824 and 12,883 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) Note 2. Regulatory Matters Regulatory assets, net are comprised of the following as of June 30, 2022, and December 31, 2021: June 30, 2022 December 31, 2021 Regulatory assets: Income tax temporary differences, net $ 25,946 22,420 Postretirement pensions and other postretirement benefits 64,022 62,197 Business combinations debt premium, net 18,667 19,937 Balancing and memorandum accounts, net 24,772 38,334 Water Rate Adjustment ( 1,176 ) 2,588 Other, net 9,922 9,145 Total regulatory assets, net in Condensed Consolidated Balance Sheets 142,153 154,621 Less: current regulatory assets, net 2,841 2,629 Total regulatory assets, net, less current portion $ 139,312 151,992 As of June 30, 2022, and December 31, 2021, SJW Group’s regulatory assets, net not earning a return primarily included postretirement pensions and other medical benefits unfunded amount, and business combination debt premiums, net. The total amount of regulatory assets, net not earning a return at June 30, 2022, and December 31, 2021, either by interest on the regulatory asset/liability or as a component of rate base at the allowed rate of return was $ 85,798 and $ 84,887 , respectively. Balancing and Memorandum Accounts SJWC has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and revenue authorized by the CPUC to offset those expense changes. SJWC also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC. The Monterey Water Revenue Adjustment Mechanism (“MWRAM”) tracks the difference between the revenue received for actual metered sales through the tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a uniform rate would have been in effect. The Water Conservation Memorandum Account (“WCMA”) allows SJWC to track lost revenue, net of related water costs, associated with reduced sales due to water conservation and associated calls for water use reductions. SJWC records the lost revenue captured in the WCMA balancing accounts. Drought surcharges collected will be used to offset the revenue losses tracked in the WCMA. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) Balancing and memorandum accounts recorded to regulatory assets, net for the three and six months ended June 30, 2022, and 2021 as follows: Three months ended June 30, 2022 Three months ended June 30, 2021 Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Revenue accounts: MWRAM $ 19,060 2,036 — 21,096 $ 13,853 1,424 1 15,278 WCMA ( 3,061 ) ( 1,000 ) ( 10,900 ) ( 14,961 ) 666 — 2 668 Cost of capital memorandum account ( 1,564 ) ( 4 ) — ( 1,568 ) ( 1,561 ) ( 1 ) — ( 1,562 ) All others ( 73 ) 490 — 417 ( 1,313 ) 147 2 ( 1,164 ) Total revenue accounts $ 14,362 1,522 ( 10,900 ) 4,984 $ 11,645 1,570 5 13,220 Cost-recovery accounts: Water supply costs 10,789 322 — 11,111 8,910 984 1 9,895 Pension 5,006 63 — 5,069 3,844 366 — 4,210 Hydro Generation Research, Development and Demonstration Memorandum Account (“PRVMA”) 632 1 ( 90 ) 543 1,027 — ( 99 ) 928 COVID-19 Catastrophic Event Memorandum Account (“CEMA”) 2,438 148 — 2,586 2,266 352 — 2,618 All others 573 ( 94 ) — 479 445 1 — 446 Total cost-recovery accounts $ 19,438 440 ( 90 ) 19,788 $ 16,492 1,703 ( 98 ) 18,097 Total $ 33,800 1,962 ( 10,990 ) 24,772 $ 28,137 3,273 ( 93 ) 31,317 Six months ended June 30, 2022 Six months ended June 30, 2021 Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Beginning Balance Regulatory Asset Increase (Decrease) Refunds (Collections) Adjustments Ending Balance Revenue accounts: MWRAM $ 16,866 4,229 1 21,096 $ 12,077 3,200 1 15,278 WCMA 3,534 ( 1,100 ) ( 17,395 ) ( 14,961 ) 666 — 2 668 Cost of capital memorandum account ( 1,563 ) ( 5 ) — ( 1,568 ) ( 1,561 ) ( 1 ) — ( 1,562 ) All others ( 386 ) 802 1 417 ( 1,139 ) ( 28 ) 3 ( 1,164 ) Total revenue accounts $ 18,451 3,926 ( 17,393 ) 4,984 $ 10,043 3,171 6 13,220 Cost-recovery accounts: Water supply costs 10,545 566 — 11,111 8,123 1,771 1 9,895 Pension 4,941 128 — 5,069 3,478 732 — 4,210 PRVMA 707 2 ( 166 ) 543 1,108 — ( 180 ) 928 CEMA 3,245 ( 659 ) — 2,586 2,266 352 — 2,618 All others 445 34 — 479 445 1 — 446 Total cost-recovery accounts $ 19,883 71 ( 166 ) 19,788 $ 15,420 2,856 ( 179 ) 18,097 Total $ 38,334 3,997 ( 17,559 ) 24,772 $ 25,463 6,027 ( 173 ) 31,317 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in SJWC’s next general rate case or at the time an individual account balance reaches a threshold of 2 % of authorized revenue, whichever occurs first. Note 3. Bank Borrowings and Long-Term Liabilities SJW Group’s contractual obligations and commitments include senior notes, bank term loans, revenue bonds, state revolving fund loans and other obligations. Water Utility Services had received advance deposit payments from its customers on certain construction projects. The refunds of the advance deposit payments constitute an obligation of the respective entities. On April 6, 2022, Maine Water entered into a credit agreement with a commercial bank, pursuant to an existing master loan agreement under which the commercial bank issued Maine Water a promissory note on the same date with an aggregate principal amount of $ 15,000 and a fixed interest rate of 4.54 %, due May 31, 2042. The notes are unsecured obligations of Maine Water. Interest is payable quarterly in arrears on the 20th day of January, April, July and October of each year. The promissory note contains customary representations and warranties. Under the promissory note, Maine Water is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. Proceeds from the borrowing were received on May 13, 2022. On June 28, 2022, Connecticut Water entered into a note purchase agreement with certain affiliates of New York Life Insurance Company, pursuant to which Connecticut Water sold an aggregate principal amount of $ 25,000 of its 4.71 % Senior Notes, Series 2022, due 2052. The closing of the note purchase agreement is expected to occur on December 15, 2022, and is subject to customary closing conditions and regulatory approval. The Series 2022 Notes are unsecured obligations of Connecticut Water. Interest is payable semi-annually in arrears on June 15th and December 15th of each year. The note purchase agreement contains customary representations and warranties. Connecticut Water has agreed to customary affirmative and negative covenants for as long as the Series 2022 Notes are outstanding. The Series 2022 Notes are also subject to customary events of default, the occurrence of which may result in all of the Series 2022 Notes then outstanding becoming immediately due and payable. Note 4. Income Taxes For the three and six months ended June 30, 2022, income tax expense was $ 2,368 and $ 3,435 , respectively. Income tax expense for the three and six months ended June 30, 2021, was $ 3,306 and $ 2,410 , respectively. The effective consolidated income tax rates were 17 % and 14 % for the three months ended June 30, 2022 and 2021, respectively, and 18 % and 9 % for the six months ended June 30, 2022, and 2021, respectively. The higher effective tax rate for the three and six months ended June 30, 2022, was primarily due to discrete tax expense items. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 8,221 and $ 7,961 as of June 30, 2022, and December 31, 2021, respectively. SJW Group does not expect its unrecognized tax benefits to change significantly within the next 12 months. Note 5. Commitments and Contingencies SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows. Note 6. Benefit Plans SJW Group maintains noncontributory defined benefit pension plans for its eligible employees. SJWC and CTWS employees hired before March 31, 2008, and January 1, 2009, respectively, are entitled to benefits under the pension plans based on the employee’s years of service and compensation. For SJWC employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based upon compensation credits and interest credits for each employee. Certain CTWS employees hired before March 1, 2012, and covered by a plan merged into the CTWS plan in 2013 are also entitled to benefits based on the employee’s years of service and compensation. CTWS employees hired on or after January 1, 2009, are entitled to 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) an additional 1.5 % of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans. In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009, for CTWS are eligible to receive additional retirement benefits under supplemental executive retirement plans and retirement contracts. SJWC’s senior management hired on or after March 31, 2008, are eligible to receive additional retirement benefits under SJWC’s Cash Balance Executive Supplemental Retirement Plan. The supplemental retirement plans and Cash Balance Executive Supplemental Retirement Plan are non-qualified plans in which only senior management and other designated members of management may participate. SJW Group also provides health care and life insurance benefits for retired employees under employer-sponsored postretirement benefits that are not pension plans. The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and six months ended June 30, 2022, and 2021 are as follows: Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Service cost $ 2,652 2,688 $ 5,304 5,423 Interest cost 2,861 2,530 5,721 5,110 Expected return on assets ( 5,045 ) ( 4,742 ) ( 10,088 ) ( 9,494 ) Unrecognized actuarial loss 1,200 1,794 2,364 3,574 Amortization of prior service cost 4 13 8 25 Total $ 1,672 2,283 $ 3,309 4,638 In 2022, SJW Group expects to make required and discretionary cash contributions of up to $ 7,842 to the pension plans and other postretirement benefits. For the three and six months ended June 30, 2022, SJW Group has made $ 1,961 contributions to such plans. Note 7. 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. SJW Group also maintains stock plans in connection with its acquisition of CTWS which are no longer granting new stock awards. As of June 30, 2022, 178,820 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 615,154 shares are available for award issuances under the Incentive Plan. A summary of compensation costs charged to income and proceeds from the exercise of 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 six months ended June 30, 2022, and 2021: Three months ended June 30, Six months ended June 30, 2022 2021 2022 2021 Compensation costs charged to income: ESPP $ — — $ 185 181 Restricted stock and deferred restricted stock 1,041 791 2,408 1,890 Total compensation costs charged to income $ 1,041 791 $ 2,593 2,071 ESPP proceeds $ — — $ 1,049 1,026 Restricted Stock and Deferred Restricted Stock For the three months ended June 30, 2022, and 2021, SJW Group granted under the Incentive Plan 12,604 and 11,732 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 58.04 and $ 65.43 , respectively, per unit. For the six months ended June 30, 2022, and 2021, SJW Group granted under the 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) Incentive Plan 44,003 and 45,433 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 65.41 and $ 64.53 , respectively, per unit. For the three months ended June 30, 2022, and 2021, SJW Group granted under the Incentive Plan 32 and 1,182 target units, respectively, performance-based and market-based restricted stock awards with a weighted-average grant date fair value of $ 66.14 and $ 65.70 , respectively, per unit. For the six months ended June 30, 2022, and 2021, SJW Group granted under the Incentive Plan 33,653 and 30,641 target units, respectively, performance-based and market-based restricted stock awards granted with a weighted-average grant date fair value of $ 70.35 and $ 66.33 , 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 June 30, 2022, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $ 6,721 . This cost is expected to be recognized over a weighted-average period of 1.88 years. Employee Stock Purchase Plan SJW Group’s recorded expenses for its ESPP were $ 89 and $ 182 for the three and six months ended June 30, 2022, respectively, and $ 86 and $ 174 for the three and six months ended June 30, 2021, respectively. The total unrecognized compensation costs related to the semi-annual offering period that ends July 29, 2022, for the ESPP is approximately $ 31 . This cost is expected to be recognized during the third quarter of 2022. Note 8. Segment and Non-Tariffed Business Reporting SJW Group is a holding company with five 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, (iv) SJWNE LLC a holding company for CTWS and its subsidiaries, The Connecticut Water Company, The Maine Water Company, New England Water Utility Services, Inc. and Chester Realty, Inc., and (v) SJWTX Holdings, Inc. which was formed for the purpose of effecting a corporate reorganization of the water utility operations in Texas. 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.” 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) 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 June 30, 2022 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 144,261 3,414 1,366 — 144,261 4,780 149,041 Operating expense 119,430 1,797 915 497 119,430 3,209 122,639 Operating income (loss) 24,831 1,617 451 ( 497 ) 24,831 1,571 26,402 Net income (loss) 12,765 1,768 323 ( 3,298 ) 12,765 ( 1,207 ) 11,558 Depreciation and amortization 24,458 165 301 283 24,458 749 25,207 Interest on long-term debt and other interest expense 9,805 — ( 3 ) 4,439 9,805 4,436 14,241 Provision (benefit) for income taxes 2,721 443 110 ( 906 ) 2,721 ( 353 ) 2,368 Assets $ 3,435,758 4,220 44,033 57,036 3,435,758 105,289 3,541,047 For Three Months Ended June 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 $ 148,237 2,684 1,320 — 148,237 4,004 152,241 Operating expense 115,572 1,942 881 1,207 115,572 4,030 119,602 Operating income (loss) 32,665 742 439 ( 1,207 ) 32,665 ( 26 ) 32,639 Net income (loss) 20,585 677 296 ( 783 ) 20,585 190 20,775 Depreciation and amortization 22,887 110 291 224 22,887 625 23,512 Interest on long-term debt and other interest expense 8,347 — — 5,334 8,347 5,334 13,681 Provision (benefit) for income taxes 4,580 203 96 ( 1,573 ) 4,580 ( 1,274 ) 3,306 Assets $ 3,300,414 8,248 45,090 55,770 3,300,414 109,108 3,409,522 For Six Months Ended June 30, 2022 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 264,779 5,842 2,722 — 264,779 8,564 273,343 Operating expense 220,881 5,776 1,824 1,871 220,881 9,471 230,352 Operating income (loss) 43,898 66 898 ( 1,871 ) 43,898 ( 907 ) 42,991 Net income (loss) 22,480 451 631 ( 8,267 ) 22,480 ( 7,185 ) 15,295 Depreciation and amortization 48,969 2,737 601 506 48,969 3,844 52,813 Interest on long-term debt and other interest expense 18,568 — ( 3 ) 9,405 18,568 9,402 27,970 Provision (benefit) for income taxes 4,741 6 213 ( 1,525 ) 4,741 ( 1,306 ) 3,435 Assets $ 3,435,758 4,220 44,033 57,036 3,435,758 105,289 3,541,047 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2022 (in thousands, except share and per share data) For Six Months Ended June 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 $ 259,633 4,729 2,664 — 259,633 7,393 267,026 Operating expense 214,050 3,311 1,762 2,185 214,050 7,258 221,308 Operating income (loss) 45,583 1,418 902 ( 2,185 ) 45,583 135 45,718 Net income (loss) 26,284 1,399 619 ( 4,911 ) 26,284 ( 2,893 ) 23,391 Depreciation and amortization 45,704 219 580 447 45,704 1,246 46,950 Interest on long-term debt and other interest expense 16,518 — — 10,602 16,518 10,602 27,120 Provision (benefit) for income taxes 4,464 385 205 ( 2,644 ) 4,464 ( 2,054 ) 2,410 Assets $ 3,300,414 8,248 45,090 55,770 3,300,414 109,108 3,409,522 ____________________ (1) The “All Other” category for the six months ended June 30, 2022, includes the accounts of SJW Group, SJWNE LLC, CTWS and SJWTX Holdings, Inc. on a stand-alone basis. SJWTX Holdings, Inc. had no activity for the six months ended June 30, 2022 . For the six months ended June 30, 2021, “All Other” category includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. (2) As of June 30, 2022 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 9. Subsequent Event On July 14, 2022, SJWC entered into a note purchase agreement with certain affiliates of New York Life Insurance, Metropolitan Life Insurance, Northwestern Mutual Life Insurance, and John Hancock Life Insurance (collectively the “Purchasers”), pursuant to which the company will sell an aggregate principal amount of $ 70,000 of its 4.85 % Senior Notes, Series P (“Series P Notes”) to the Purchasers. The Series P Notes are unsecured obligations of SJWC and are due on February 1, 2053. Interest is payable semi-annually in arrears on February 1st and August 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series P Notes are outstanding. The Series P Notes are also subject to customary events of default. The closing is expected to occur in January 2023 upon satisfaction of customary closing conditions. 17