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, 2022 2021 2022 2021 REVENUE $ 175,981 166,923 $ 449,324 433,949 OPERATING EXPENSE: Production Expenses: Purchased water 38,744 33,121 84,313 76,434 Power 3,913 4,179 10,387 10,573 Groundwater extraction charges 19,059 23,736 51,347 59,419 Other production expenses 11,888 11,069 33,607 30,302 Total production expenses 73,604 72,105 179,654 176,728 Administrative and general 23,909 22,713 71,374 64,932 Maintenance 7,065 6,369 20,651 19,221 Property taxes and other non-income taxes 8,354 8,125 24,242 22,789 Depreciation and amortization 25,529 23,837 78,342 70,787 Gain on sale of nonutility properties ( 82 ) — ( 5,532 ) — Total operating expense 138,379 133,149 368,731 354,457 OPERATING INCOME 37,602 33,774 80,593 79,492 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 14,190 ) ( 13,535 ) ( 42,160 ) ( 40,655 ) Pension non-service cost 970 334 2,860 999 Gain on sale of Texas Water Alliance — — — 3,000 Other, net 875 1,244 2,694 4,782 Income before income taxes 25,257 21,817 43,987 47,618 Provision for income taxes 223 2,749 3,658 5,159 NET INCOME 25,034 19,068 40,329 42,459 Other comprehensive (loss) income, net ( 173 ) ( 12 ) ( 602 ) 133 COMPREHENSIVE INCOME $ 24,861 19,056 $ 39,727 42,592 EARNINGS PER SHARE Basic $ 0.83 0.64 $ 1.33 1.44 Diluted $ 0.82 0.64 $ 1.33 1.43 DIVIDENDS PER SHARE $ 0.36 0.34 $ 1.08 1.02 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 30,269,462 29,816,736 30,246,201 29,496,533 Diluted 30,392,295 29,952,477 30,358,268 29,625,784 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, 2022 December 31, 2021 ASSETS Utility plant: Land $ 39,885 39,004 Depreciable plant and equipment 3,596,198 3,381,908 Construction in progress 127,528 176,427 Intangible assets 35,960 36,276 3,799,571 3,633,615 Less accumulated depreciation and amortization 1,206,690 1,136,116 2,592,881 2,497,499 Real estate investments and nonutility properties 58,012 57,632 Less accumulated depreciation and amortization 16,855 15,951 41,157 41,681 CURRENT ASSETS: Cash and cash equivalents: Cash 13,190 10,908 Restricted cash — 1,211 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 5,665 and $ 4,600 on September 30, 2022 and December 31, 2021, respectively 63,760 53,699 Income tax — 2,308 Other 7,300 4,735 Accrued unbilled utility revenue 53,682 44,026 Prepaid expenses 12,964 9,667 Current regulatory assets, net 738 2,629 Other current assets 6,266 4,902 157,900 134,085 OTHER ASSETS: Net regulatory assets, less current portion 145,945 151,992 Investments 14,438 15,784 Goodwill 640,311 640,471 Other 12,072 10,883 812,766 819,130 $ 3,604,704 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) September 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 30,315,265 on September 30, 2022 and 30,181,348 on December 31, 2021 $ 30 30 Additional paid-in capital 614,226 606,392 Retained earnings 435,856 428,260 Accumulated other comprehensive income ( 765 ) ( 163 ) Total stockholders’ equity 1,049,347 1,034,519 Long-term debt, less current portion 1,453,748 1,492,935 2,503,095 2,527,454 CURRENT LIABILITIES: Line of credit 199,170 62,996 Current portion of long-term debt 4,340 39,106 Accrued groundwater extraction charges, purchased water and power 27,694 17,200 Accounts payable 29,765 30,391 Accrued interest 17,905 14,174 Accrued payroll 11,524 11,583 Income tax payable 3,859 — Other current liabilities 24,453 27,821 318,710 203,271 DEFERRED INCOME TAXES 208,130 200,451 ADVANCES FOR CONSTRUCTION 140,842 130,693 CONTRIBUTIONS IN AID OF CONSTRUCTION 319,866 316,479 POSTRETIREMENT BENEFIT PLANS 89,610 89,998 OTHER NONCURRENT LIABILITIES 24,451 24,049 COMMITMENTS AND CONTINGENCIES $ 3,604,704 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 loss on investment, net of tax of $ 0 — — — — ( 248 ) ( 248 ) Stock-based compensation — — 1,041 ( 23 ) 1,018 Issuance of restricted and deferred stock units 10,529 — ( 6 ) — — ( 6 ) Common stock issuance 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 Net income — — — 25,034 — 25,034 Unrealized loss on investment, net of tax benefit of $ 154 — — — — ( 173 ) ( 173 ) Stock-based compensation — — 1,398 ( 23 ) — 1,375 Issuance of restricted and deferred stock units 1,316 — 13 — — 13 Employee stock purchase plan 18,667 — 1,042 — — 1,042 Common stock issuance, net of costs 47,608 — 3,107 — — 3,107 Dividends paid ($ 0.36 per share) — — — ( 10,896 ) — ( 10,896 ) BALANCES, September 30, 2022 30,315,265 $ 30 $ 614,226 $ 435,856 $ ( 765 ) $ 1,049,347 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 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. 7 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine months ended September 30, 2022 2021 OPERATING ACTIVITIES: Net income $ 40,329 42,459 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 79,862 71,912 Deferred income taxes 7,135 4,140 Stock-based compensation 3,991 3,201 Allowance for equity funds used during construction ( 1,324 ) ( 1,490 ) Gain on sale of nonutility properties and Texas Water Alliance ( 5,532 ) ( 3,000 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 22,511 ) ( 19,647 ) Accounts payable and other current liabilities ( 1,475 ) 3,697 Accrued groundwater extraction charges, purchased water and power 10,494 9,846 Tax receivable and payable, and other accrued taxes ( 1,851 ) 832 Postretirement benefits ( 2,719 ) 265 Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits 21,776 ( 12,418 ) Up-front service concession payment ( 1,600 ) — Other changes, net 2,774 458 NET CASH PROVIDED BY OPERATING ACTIVITIES 129,349 100,255 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 160,515 ) ( 169,238 ) Contributions in aid of construction ( 17,773 ) ( 12,520 ) Additions to real estate investments ( 610 ) ( 606 ) Payments to retire utility plant, net of salvage ( 2,432 ) ( 3,535 ) Proceeds from sale of nonutility properties and Texas Water Alliance 310 3,000 Payments for business acquisitions ( 433 ) — NET CASH USED IN INVESTING ACTIVITIES ( 181,453 ) ( 182,899 ) FINANCING ACTIVITIES: Borrowings on line of credit 152,655 67,099 Repayments on line of credit ( 16,481 ) ( 120,120 ) Long-term borrowings 15,000 137,000 Repayments of long-term borrowings ( 87,757 ) ( 52,700 ) Issuance of common stock, net of issuance costs 3,107 66,775 Dividends paid ( 32,667 ) ( 29,996 ) Receipts of advances and contributions in aid of construction 21,593 23,585 Refunds of advances for construction ( 2,177 ) ( 2,179 ) Other changes, net ( 98 ) 132 NET CASH PROVIDED BY FINANCING ACTIVITIES 53,175 89,596 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 1,071 6,952 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 12,119 9,269 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD 13,190 16,221 LESS RESTRICTED CASH, END OF PERIOD — 2,202 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,190 14,019 Cash paid during the period for: Interest $ 42,473 39,533 Income taxes 572 7,643 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 22,044 26,628 Utility property installed by developers 976 1,527 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 September 30, Nine months ended September 30, 2022 2021 2022 2021 Revenue from contracts with customers $ 169,972 163,103 $ 440,406 422,545 Alternative revenue programs, net 3,172 2,216 ( 1,737 ) 4,984 Other balancing and memorandum accounts, net 1,857 639 6,719 3,637 Other regulatory mechanisms, net ( 494 ) ( 438 ) ( 260 ) ( 1,284 ) Rental income 1,474 1,403 4,196 4,067 $ 175,981 166,923 $ 449,324 433,949 Real Estate Investments and Nonutility Properties The major components of real estate investments and nonutility properties as of September 30, 2022, and December 31, 2021, are as follows: September 30, 2022 December 31, 2021 Land $ 12,615 12,615 Buildings and improvements 45,397 45,017 Subtotal 58,012 57,632 Less: accumulated depreciation and amortization 16,855 15,951 Total $ 41,157 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) September 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 September 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 September 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 nine months ended September 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 $ 1,247,530 and $ 1,651,825 as of September 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 $ 1,458,088 and $ 1,532,041 as of September 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’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 $ 2,790 and $ 3,797 as of September 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 September 30, 2022 and 2021, 2,416 and 1,558 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2022 and 2021, 18,240 and 14,441 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) September 30, 2022 (in thousands, except share and per share data) Note 2. Regulatory Matters Regulatory assets, net are comprised of the following as of September 30, 2022, and December 31, 2021: September 30, 2022 December 31, 2021 Regulatory assets: Income tax temporary differences, net $ 33,811 22,420 Postretirement pensions and other postretirement benefits 64,934 62,197 Business combinations debt premium, net 18,031 19,937 Balancing and memorandum accounts, net 22,583 38,334 Water Rate Adjustment ( 2,800 ) 2,588 Other, net 10,124 9,145 Total regulatory assets, net in Condensed Consolidated Balance Sheets 146,683 154,621 Less: current regulatory assets, net 738 2,629 Total regulatory assets, net, less current portion $ 145,945 151,992 As of September 30, 2022, and December 31, 2021, SJW Group’s regulatory assets, net, not earning a return primarily included postretirement pensions and the unfunded amount of other medical benefits, and business combination debt premiums, net. The total amount of regulatory assets, net not earning a return at September 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 $ 86,113 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 are used to offset the revenue losses tracked in the WCMA. On October 11, 2022, the CPUC issued General Rate Case Decision No. 22-10-005, which approved a recovery of $ 18,174 in balancing and memorandum accounts from customers. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (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, 2022, and 2021 are as follows: Three months ended September 30, 2022 Three months ended September 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 $ 21,096 1,381 — 22,477 $ 15,278 363 — 15,641 WCMA ( 14,961 ) 3,868 ( 8,708 ) ( 19,801 ) 668 — — 668 Cost of capital memorandum account ( 1,568 ) ( 8 ) — ( 1,576 ) ( 1,562 ) — — ( 1,562 ) All others 417 590 — 1,007 ( 1,164 ) 397 — ( 767 ) Total revenue accounts 4,984 5,831 ( 8,708 ) 2,107 13,220 760 — 13,980 Cost-recovery accounts: Water supply costs 11,111 391 — 11,502 9,895 388 — 10,283 Pension 5,069 59 — 5,128 4,210 366 — 4,576 Hydro Generation Research, Development and Demonstration Memorandum Account (“PRVMA”) 543 3 ( 106 ) 440 928 — ( 121 ) 807 COVID-19 Catastrophic Event Memorandum Account (“CEMA”) 2,586 420 — 3,006 2,618 567 — 3,185 All others 479 ( 79 ) — 400 446 — — 446 Total cost-recovery accounts 19,788 794 ( 106 ) 20,476 18,097 1,321 ( 121 ) 19,297 Total $ 24,772 6,625 ( 8,814 ) 22,583 $ 31,317 2,081 ( 121 ) 33,277 Nine months ended September 30, 2022 Nine months ended September 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 5,610 1 22,477 $ 12,077 3,563 1 15,641 WCMA 3,534 2,768 ( 26,103 ) ( 19,801 ) 666 — 2 668 Cost of capital memorandum account ( 1,563 ) ( 13 ) — ( 1,576 ) ( 1,561 ) ( 1 ) — ( 1,562 ) All others ( 386 ) 1,392 1 1,007 ( 1,139 ) 369 3 ( 767 ) Total revenue accounts 18,451 9,757 ( 26,101 ) 2,107 10,043 3,931 6 13,980 Cost-recovery accounts: Water supply costs 10,545 957 — 11,502 8,123 2,159 1 10,283 Pension 4,941 187 — 5,128 3,478 1,098 — 4,576 PRVMA 707 5 ( 272 ) 440 1,108 — ( 301 ) 807 CEMA 3,245 ( 239 ) — 3,006 2,266 919 — 3,185 All others 445 ( 45 ) — 400 445 1 — 446 Total cost-recovery accounts 19,883 865 ( 272 ) 20,476 15,420 4,177 ( 300 ) 19,297 Total $ 38,334 10,622 ( 26,373 ) 22,583 $ 25,463 8,108 ( 294 ) 33,277 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (in thousands, except share and per share data) All balancing accounts and memorandum 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. Capitalization On November 17, 2021, SJW Group entered into an equity distribution agreement (the “Equity Distribution Agreement”) with J.P. Morgan Securities LLC, Janney Montgomery Scott LLC, RBC Capital Markets, LLC and Wells Fargo Securities, LLC, pursuant to which the company may offer and sell shares of its common stock, $ 0.001 par value per share, from time to time in “at-the-market” offerings, having an aggregate gross sales price of up to $ 100,000 . For the three and nine months ended September 30, 2022, SJW Group issued and sold a total of 47,608 shares of common stock with a weighted average price of $ 66.26 per share and received approximately $ 3,107 in net proceeds under the Equity Distribution Agreement. Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 402,723 shares of common stock with a weighted average price of $ 69.91 for a total net proceeds of $ 27,360 and has a remaining $ 71,845 under the Equity Distribution Agreement to issue into shares. 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. Note 4. 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 has 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. Short-term Financing Agreements On August 2, 2022, SJW Group, SJWC, SJWTX, Inc., and CTWS entered into a $ 300,000 syndicated line of credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank, N.A., as Administrative Agent (“JP Morgan”), Wells Fargo Bank, National Association, as Documentation Agent, and a syndicate of banks. Proceeds of borrowings under the Credit Agreement will be used for refinancing existing debt, working capital, and general corporate purposes. The Credit Agreement has a maturity date of August 2, 2027. Under the terms of the Credit Agreement, each of SJW Group, SJWC, SJWTX, Inc., and CTWS is a borrower with several and not joint liability. Each borrower has an initial borrowing entitlement, or sublimit, which can be periodically adjusted from time to time as set forth in the Credit Agreement. The initial sublimit of each borrower is as follows: Initial Sublimit SJW Group $ 50,000 SJWC 140,000 CTWS 90,000 SJWTX, Inc. 20,000 $ 300,000 Borrowings under the Credit Agreement bear interest at either the Alternative Base Rate (as defined in the Credit Agreement and hereinafter referred to as “ABR”) or the Adjusted Term Secured Overnight Financing Rate (as defined in the Credit Agreement and hereinafter referred to as “SOFR”). ABR borrowings (which are borrowings bearing interest at a rate determined by reference to ABR) will bear interest at a rate per annum equal to ABR plus the applicable rate. SOFR borrowings (which are borrowings bearing interest at a rate determined by reference to SOFR) will bear interest at a rate per 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (in thousands, except share and per share data) annum equal to SOFR plus the applicable rate. The applicable rate and pricing is variable depending on the credit ratings of the borrower. The Credit Agreement contains customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, asset sales, and fundamental changes. The Credit Agreement also includes a financial covenant that requires each of the borrowers to maintain its funded debt to capitalization ratio at or below 70 %. This Credit Agreement replaces the existing $ 140,000 credit agreement, dated April 23, 2021, between SJWC and JP Morgan and the existing $ 5,000 credit agreement, dated April 23, 2021, between SJWTX and JP Morgan, with SJW Group as guarantor, both of which were terminated upon entering into the Credit Agreement and were set to mature on December 31, 2023. In addition, on August 2, 2022, CTWS and Citizens Bank, National Association, entered into a fourth modification to the amended and restated revolving credit facility, dated December 18, 2019, as amended, pursuant to which the credit commitment was reduced from $ 75,000 to $ 10,000 . Long-term Financing Agreements 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 at 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. 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. 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. Note 5. Income Taxes For the three and nine months ended September 30, 2022, income tax expense was $ 223 and $ 3,658 , respectively. Income tax expense for the three and nine months ended September 30, 2021, was $ 2,749 and $ 5,159 , respectively. The effective consolidated income tax rates were 1 % and 13 % for the three months ended September 30, 2022 and 2021, respectively, and 8 % and 11 % for the nine months ended September 30, 2022, and 2021, respectively. The lower effective tax rate for the three and nine months ended September 30, 2022, was primarily due to a tax accounting method change at CTWS regarding the non-network asset repairs deduction. SJW Group unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 8,937 and $ 7,961 as of September 30, 2022, and December 31, 2021, respectively. SJW Group does not expect its unrecognized tax benefits to change significantly within the next 12 months. 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (in thousands, except share and per share data) On August 16, 2022, the Inflation Reduction Act of 2022 (the “IRA”) was signed into law. SJW Group has considered the income tax implications of the IRA in its estimated tax provision and does not believe it will materially impact the company’s year-end tax rate. Note 6. 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 7. 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 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 nine months ended September 30, 2022, and 2021 are as follows: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Service cost $ 2,652 2,711 $ 7,956 8,134 Interest cost 2,860 2,556 8,581 7,666 Expected return on assets ( 5,044 ) ( 4,748 ) ( 15,132 ) ( 14,242 ) Unrecognized actuarial loss 1,182 1,788 3,546 5,362 Amortization of prior service cost 4 12 12 37 Total $ 1,654 2,319 $ 4,963 6,957 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 nine months ended September 30, 2022, SJW Group has made $ 2,577 and $ 4,538 , respectively, contributions to such plans. Note 8. 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 September 30, 2022, 179,848 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 612,738 shares are available for award issuances under the Incentive Plan. 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (in thousands, except share and per share data) 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 nine months ended September 30, 2022, and 2021: Three months ended September 30, Nine months ended September 30, 2022 2021 2022 2021 Compensation costs charged to income: ESPP $ 184 176 $ 369 357 Restricted stock and deferred restricted stock 1,214 954 3,622 2,844 Total compensation costs charged to income $ 1,398 1,130 $ 3,991 3,201 ESPP proceeds $ 1,042 1,000 $ 2,091 2,026 Restricted Stock and Deferred Restricted Stock For the three months ended September 30, 2022, and 2021, SJW Group granted under the Incentive Plan 1,723 and 1,134 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 62.56 and $ 69.20 , respectively, per unit. For the nine months ended September 30, 2022, and 2021, SJW Group granted under the Incentive Plan 45,726 and 46,567 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $ 65.31 and $ 64.65 , respectively, per unit. For the three months ended September 30, 2022, and 2021, SJW Group granted under the Incentive Plan 2,193 and 0 target units, respectively, performance-based and market-based restricted stock awards with a weighted-average grant date fair value of $ 69.70 and $ 0.00 , respectively, per unit. For the nine months ended September 30, 2022, and 2021, SJW Group granted under the Incentive Plan 35,846 and 30,641 target units, respectively, performance-based and market-based restricted stock awards granted with a weighted-average grant date fair value of $ 70.31 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 September 30, 2022, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $ 5,660 . This cost is expected to be recognized over a weighted-average period of 1.78 years. Employee Stock Purchase Plan SJW Group’s recorded expenses for its ESPP were $ 94 and $ 276 for the three and nine months ended September 30, 2022, respectively, and $ 91 and $ 265 for the three and nine months ended September 30, 2021, respectively. The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2023, for the ESPP is approximately $ 131 . This cost is expected to be recognized during the fourth quarter of 2022 and first quarter of 2023. Note 9. 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.” 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 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 September 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 $ 171,044 3,463 1,474 — 171,044 4,937 175,981 Operating expense 134,739 2,092 975 573 134,739 3,640 138,379 Operating income (loss) 36,305 1,371 499 ( 573 ) 36,305 1,297 37,602 Net income (loss) 29,176 ( 10 ) 367 ( 4,499 ) 29,176 ( 4,142 ) 25,034 Depreciation and amortization 24,919 84 302 224 24,919 610 25,529 Interest on long-term debt and other interest expense 9,111 — — 5,079 9,111 5,079 14,190 Provision (benefit) for income taxes 103 392 128 ( 400 ) 103 120 223 Assets $ 3,498,396 5,302 43,017 57,989 3,498,396 106,308 3,604,704 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 Nine Months Ended September 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 $ 435,823 9,305 4,196 — 435,823 13,501 449,324 Operating expense 355,620 7,868 2,799 2,444 355,620 13,111 368,731 Operating income (loss) 80,203 1,437 1,397 ( 2,444 ) 80,203 390 80,593 Net income (loss) 51,656 441 998 ( 12,766 ) 51,656 ( 11,327 ) 40,329 Depreciation and amortization 73,888 2,821 903 730 73,888 4,454 78,342 Interest on long-term debt and other interest expense 27,676 — — 14,484 27,676 14,484 42,160 Provision (benefit) for income taxes 4,844 398 341 ( 1,925 ) 4,844 ( 1,186 ) 3,658 Assets $ 3,498,396 5,302 43,017 57,989 3,498,396 106,308 3,604,704 17 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2022 (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 ____________________ (1) The “All Other” category for the nine months ended September 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 nine months ended September 30, 2022 . For the nine months ended September 30, 2021, “All Other” category includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. (2) As of September 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 10. Subsequent Event The CPUC approved the settlement of SJWC’s General Rate Case Application No. 21-01-003 (“2022 GRC”) on October 6, 2022 and issued Decision No. 22-10-005 (“2022 GRC Decision”) on October 11, 2022. SJWC received authority for an increase of $ 25,074 or 6.03 % in 2022, $ 12,955 or 2.94 % in 2023, and $ 16,102 or 3.56 % in 2024. The application included requests to recover $ 18,174 from balancing and memorandum accounts and authorization for a $ 350,000 capital budget. Additionally, it further aligns authorized and actual consumption, particularly for business customers, addresses the water supply mix variability, and provides greater revenue recovery in the fixed charge. The 2022 approved revenue increase is effective retrospectively to January 1, 2022. SJWC will be filing advice letters to implement new rates and to recover interim revenue and balancing and memorandum accounts in accordance with the 2022 GRC Decision. 18