H2O AMERICA 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts and otherwise noted) The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the condensed consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2022. This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that may affect our actual results, please see our disclosures under “Forward-Looking Statements,” and elsewhere in this Form 10-Q, including Part II, Item 1A under “Risk Factors.” General: 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. SJWC is a public utility in the business of providing water service to approximately 232,000 connections that serve a population of approximately one million people in an area comprising approximately 139 square miles in the metropolitan San Jose, California area. The principal business of SJWC consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. SJWC provides water ser vice to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, and Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. SJWC distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. SJWC also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site leases. SJWC has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to serve its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained. SJWC also has approximately 234 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to SJWC’s various watershed properties. SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”). CTWS, headquartered in Connecticut, serves as a holding company for water utility companies providing water service to approximately 140,000 connections that serve a population of approximately 458,000 people in 81 municipalities throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut. The subsidiaries held by CTWS that provide utility water services are The Connecticut Water Company (“Connecticut Water”) and The Maine Water Company (“Maine Water”). The remaining two CTWS subsidiaries are Chester Realty, Inc., a real estate company in Connecticut, and New England Water Utility Services, Inc., which provides contract water and sewer operations and other water related services. The properties of CTWS’s subsidiaries consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, water treatment plants, pumping plants, transmission and distribution mains and other facilities and equipment used for the collection, purification, storage and distribution of water throughout Connecticut and Maine. In certain cases, Connecticut Water and Maine Water are or may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities. SJWTX, Inc., doing business as The Texas Water Company (“Texas Water”), is a public utility in the business of providing water service to approximately 26,000 connections that serve approximately 78,000 people and approximately 900 wastewater connections. In 2022, SJWTX, Inc. filed and was approved with the State of Texas an assumed named certificate to operate under the name The Texas Water Company. Texas Water was previously doing business as Canyon Lake Water Service Company. Texas Water’s service area comprises more than 268 square miles in Bandera, Blanco, Comal, Hays, Kendall, Medina and Travis Counties in the growing region between San Antonio and Austin, Texas. Texas Water holds a 25% equity interest in Acequia Water Supply Corporation (“Acequia”). Acequia has been determined to be a variable interest entity within 15 the scope of Accounting Standards Codification Topic 810 with Texas Water as the primary beneficiary. As a result, Acequia has been consolidated with Texas Water. Texas Water is undergoing a corporate reorganization to separate regulated operations from non-tariffed activities. In November 2021, SJWTX Holdings, Inc. and Texas Water Operation Services LLC (“TWOS”) were formed for the purpose of effecting a corporate reorganization of our water services organization in Texas. TWOS was created for non-tariffed operations and is wholly-owned by SJWTX Holdings, Inc.. SJWTX Holdings, Inc. is a wholly-owned subsidiary of SJW Group, incorporated to hold the investments in Texas Water and TWOS. SJW Land Company and Chester Realty, Inc. own undeveloped land and operate commercial buildings in Tennessee, California and Connecticut. SJW Land Company and Chester Realty, Inc. owned the following real properties during the three months ended March 31, 2023: % for Three months ended March 31, 2023 of Real Estate Services Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 52 % 42 % Commercial building Knoxville, Tennessee 15 135,000 47 % 57 % Undeveloped land and parking lot Knoxville, Tennessee 10 N/A N/A N/A Undeveloped land San Jose, California 101 N/A N/A N/A Commercial building Clinton, CT 22 9,000 1 % 1 % Commercial building Guilford, CT 1 1,300 — % — % Business Strategy for Water Utility Services: SJW Group focuses its business initiatives in three strategic areas: (1) Regional regulated water utility operations; (2) Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California, the Public Utilities Regulatory Authority (“PURA”) in Connecticut, the Public Utilities Commission of Texas (“PUCT”) in Texas, and the Maine Public Utilities Commission (“MPUC”) in Maine; and (3) Out-of-region water and utility related services. As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets. However, we cannot be certain we will be successful in identifying and consummating any strategic business combination or acquisitions relating to such opportunities. In addition, the execution of our business strategy will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the potential for a negative impact on our financial position and operating results, entering markets in which we have no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm operating results or our financial condition. Please also see Note 10 of “Notes to Condensed Consolidated Financial Statements” for SJW Group’s current acquisition activities. Real Estate Services: SJW Group’s real estate investment activity is conducted through SJW Land Company and Chester Realty, Inc. As noted above, SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee. Chester Realty, Inc. owns and operates land and commercial buildings in Connecticut. SJW Land Company and Chester Realty, Inc. manage income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. 16 Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2022 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2022, that was filed with the Securities and Exchange Commission on February 24, 2023. Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2022. Our significant accounting policies are described in our notes to the 2022 Consolidated Financial Statements included in our annual report on Form 10-K for the year ended December 31, 2022. There have been no changes to our critical or significant accounting policies during the three months ended March 31, 2023. Results of Operations: 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 rainfall curtail water usage and sales. Overview SJW Group’s consolidated net income for the three months ended March 31, 2023, was $11,530, an increase of $7,793, or approximately 209%, from $3,737 for the same period in 2022. The increase in net income was primarily driven by rate increases in California and Maine, and the delay in SJWC's 2022 General Rate Case, a decrease in depreciation and amortization primarily due to a one-time impact related to amortization on certain Cupertino concession assets in the first quarter 2022 net of increases in depreciation related to new utility plant additions, offset by a one-time gain on sale of nonutility properties of $5,450 in the first quarter 2022. Operating Revenue Operating Revenue by Segment Three months ended March 31, 2023 2022 Water Utility Services $ 135,849 122,946 Real Estate Services 1,447 1,356 $ 137,296 124,302 The change in consolidated operating revenues was due to the following factors: Three months ended March 31, 2023 vs. 2022 Increase/(decrease) Water Utility Services: Consumption changes (including unbilled utility revenue) $ (6,619) (5) % Increase in customers 1,006 1 % Rate increases 17,404 14 % Balancing and memorandum accounts: Monterey Water Revenue Adjustment Mechanism 1,114 1 % Water Conservation Memorandum Account (“WCMA”) 498 — % Other 410 — % Other regulatory mechanisms (1,019) (1) % Other 109 — % Real Estate Services 91 — % $ 12,994 10 % 17 Operating Expense Operating Expense by Segment Three months ended March 31, 2023 2022 Water Utility Services $ 110,281 105,430 Real Estate Services 899 909 All Other 938 1,374 $ 112,118 107,713 The change in consolidated operating expense was due to the following factors: Three months ended March 31, 2023 vs. 2022 Increase/(decrease) Water production expenses: Change in surface water use $ (4,646) (4) % Change in usage and new customers (7,031) (7) % Purchased water and groundwater extraction charge, energy price change and other production expenses, net 6,192 6 % Balancing and memorandum accounts cost recovery 6,156 6 % Total water production expenses 671 1 % Administrative and general 1,521 1 % Balance and memorandum account cost recovery (1,382) (1) % Maintenance (637) (1) % Property taxes and other non-income taxes 92 — % Depreciation and amortization (1,310) (1) % Gain on sale of nonutility properties 5,450 5 % $ 4,405 4 % Sources of Water Supply SJWC’s water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from Santa Clara Valley Water District (“Valley Water”) under the terms of a master contract with Valley Water expiring in 2051. During normal rainfall years, purchased water provides approximately 40% to 50% of SJWC’s annual production. An additional 40% to 50% of its water supply is pumped from the underground basin which is subject to a groundwater extraction charge paid to Valley Water. Surface supply, which during a normal rainfall year satisfies about 6% to 8% of SJWC’s annual water supply needs, provides approximately 1% of its water supply in a dry year and approximately 14% in a wet year. In dry years, the decrease in water from surface run-off and diversion and the corresponding increase in purchased and pumped water increases production expenses substantially. Due to many winter storms, Santa Clara County’s drought classification was changed in March 2023 from “Abnormally Dry” to “None.” In addition, the improved water conditions across the entire State of California have resulted in increased water allocations from the State Water Project (“SWP”) and the U.S Bureau of Reclamation’s Central Valley Project (“CVP”). The SWP and CVP allocations are currently 75% of contracted amounts or 24,439 million gallons, and 100% of contracted amounts or 38,906 million gallons, respectively. In April 2022, SWP allocation was 5% of contracted amounts or 1,629 million gallons, and CVP allocation was reduced to the Public Health and Safety limit due to an exceptionally dry beginning in 2022. On April 1, 2023, Valley Water’s 10 reservoirs were 68% of capacity with 36,785 million gallons of water in storage. Valley Water’s largest reservoir, Anderson, remains drained for a dam seismic retrofit project. Valley Water also reported that the managed groundwater recharge from January to March in the Santa Clara Plain was 148% of the five-year average. The groundwater level in the Santa Clara Plain is approximately 24 feet higher than March 2022. According to Valley Water, the projected total groundwater storage at the end of 2023 is expected to be in the Normal Stage of the Water Shortage Contingency Plan. As of March 31, 2023, SJWC’s Lake Elsman was 100.9% of capacity with 2,024 million gallons of water, approximately 160.7% of the five-year seasonal average. In addition, the rainfall at SJWC’s Lake Elsman was measured at 79.59 inches for the period from July 1, 2022 through March 31, 2023, which is 239.2% of the five-year average. SJWC’s Montevina Water Treatment Plant treated 1,469 million gallons of water through the first quarter, which is 238.8% of the five-year average. 18 SJWC’s Saratoga Water Treatment Plant treated 39 million gallons of water through the first quarter, which is 75% of the five-year average. SJWC believes that its various sources of water supply will be sufficient to meet customer demand in 2023. On April 11, 2023, Valley Water rescinded its water shortage emergency and 15% mandatory conservation target. Valley Water also established a 15% voluntary call for conservation and retained certain watering and water waste rules. On the same day, SJWC ended its Mandatory Conservation Plan, which included drought allocations and surcharges, and lowered its drought response from Stage 3 to Stage 1. SJWC’s request to continue its WCMA and Water Conservation Expense Memorandum Account (“WCEMA”) under the voluntary call for conservation is pending before the CPUC. California also faces long-term water supply challenges. SJWC actively works with Valley Water to meet the challenges by continuing to educate customers on responsible water use practices and conducting long-range water supply planning. Connecticut Water’s water sources vary among the individual systems, but overall approximately 80% of the total dependable yield comes from surface water supplies and 20% from wells. In addition, Connecticut Water has water supply agreements to supplement its water supply with the South Central Connecticut Regional Water Authority and The Metropolitan District that expire 2058 and 2053, respectively. Texas Water’s water supply consists of groundwater from wells and purchased treated and untreated raw water from local water agencies. Texas Water has long-term agreements with the Guadalupe-Blanco River Authority (“GBRA”), which expire in 2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts, provide Texas Water with an aggregate of 7,650 acre-feet of water per year from Canyon Lake at prices that may be adjusted periodically by GBRA. Texas Water also has raw water supply agreements with the Lower Colorado River Authority and West Travis Public Utility Agency expiring in 2059 and 2046, respectively, to provide for 350 acre-feet of water per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted periodically by the agencies. Production wells located in a Comal Trinity Groundwater Conservation District, a regulated portion of the Trinity aquifer, are charged a groundwater pump tax based upon usage. Water sources at Maine Water vary among the individual systems, but overall approximately 90% of the total dependable yield comes from surface water supplies and 10% from wells. Maine Water has a water supply agreement with the Kennebec Water District expiring in 2040. The following table presents the change in sources of water supply, in million gallons, for Water Utility Services: Three months ended March 31, Increase/ (decrease) % of Total Change 2023 2022 Purchased water 3,388 3,764 (376) (4) % Groundwater 2,068 3,858 (1,790) (17) % Surface water 3,303 2,567 736 7 % Reclaimed water 65 125 (60) (1) % 8,824 10,314 (1,490) (15) % The changes in the source of supply mix were consistent with the changes in the water production expenses. SJWC’s unaccounted-for water on a 12-month-to-date basis for March 31, 2023, and 2022 approximated 7.5% and 7.2%, respectively, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially offset by SJWC’s main replacements and lost water reduction programs. CTWS’s unaccounted-for water on a 12-month-to-date basis for March 31, 2023, and 2022 approximated 13.9% for each of the respective periods, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through CTWS’s systems, unadjusted for any required system flushing, partially offset by Water Infrastructure Conservation Adjustment and Water Infrastructure Surcharge main replacement programs and lost water reduction initiatives. Water Production Expenses The change in water production expenses of $671 for the three months ended March 31, 2023, compared to the same period in 2022, was primarily attributable to increases in average per unit costs for purchased water, groundwater extraction, and other production expenses, offset by a decrease in customer usage and an increase in available surface water for SJWC. Effective July 1, 2022, Valley Water increased the unit price of purchased water by approximately 14% and the groundwater extraction charge by approximately 15%. Other Operating Expenses Operating expenses, excluding water production expenses, increased $3,734 for the three months ended March 31, 2023, compared to the same period in 2022. The increase was primarily attributable to the $5,450 gain on sale of nonutility properties 19 recorded in the prior year, partially offset by decreases in depreciation and amortization due to a $2,400 one-time impact related to amortization on certain Cupertino concession assets in the first quarter 2022 net of increases in depreciation related to new utility plant additions, and a decrease in maintenance expenses due to the timing of contract work and materials expenses. Other (Expense) Income For the three months ended March 31, 2023, compared to the same period in 2022, the change in other (expense) income was primarily due to a true-up on prior real estate sale transactions, an increase in the return from retirement plan assets, and an increase in pension non-service cost. Provision for Income Taxes For the three months ended March 31, 2023, compared to the same period in 2022, income tax expense increased by $11. The effective consolidated income tax rates were 9% and 22% for the three months ended March 31, 2023 and 2022, respectively. The lower effective tax rate for the three months ended March 31, 2023, was primarily due to discrete tax items. Regulation and Rates Almost all of the operating revenue of SJW Group results from the sale of water at rates authorized by the subsidiaries’ respective state utilities commissions. The state utilities commissions set rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations. Please also see Note 2 of “Notes to Condensed Consolidated Financial Statements.” California Regulatory Affairs 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%, an increase 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% which is an increase from the current rate of 8.90%. In addition, the request seeks to adjust SJWC’s currently authorized capital structure of approximately 47% debt and 53% equity to approximately 45% debt and 55% equity. Intervenors in this proceeding, namely the Public Advocates Office and Water Rate Advocates for Transparency, Equity, and Sustainability, have suggested a lower return on equity while the latter has also suggested a higher cost of debt and different capital structure as part of their testimonies. If approved, new rates are expected to become effective in the third quarter of 2023. SJWC filed Advice Letter No. 585 on November 10, 2022 to recover $20,554 in the Interim Rates Memorandum Account in accordance with the 2022 GRC Decision. Advice Letter No. 585 was approved with an effective date of January 1, 2023. SJWC filed Advice Letter No. 586 on November 18, 2022 to increase revenue requirement by $18,418 or 4% for the escalation year increase in accordance with the 2022 GRC Decision. Advice Letter No. 586 was approved with an effective date of January 1, 2023. SJWC filed Advice Letter No. 590 on April 6, 2023 to recover $14,196 under-collection in its Monterey-Water Revenue Adjustment Mechanism Balancing Account as of March 31, 2023. SJWC proposed that this amount be recovered via a 12-month volume surcharge. This filing is pending before the CPUC. SJWC filed Advice Letter No. 592 on April 20, 2023 to continue its WCMA and WCEMA under Valley Water’s voluntary call for 15% conservation. This filing is pending before the CPUC. Connecticut Regulatory Affairs On January 26, 2023, Connecticut Water filed for a Water Infrastructure Conservation Adjustment (“WICA”) increase of $3,253 in annualized revenues for approximately $27,775 in completed projects. PURA approved the Company’s application on March 22, 2023. On January 25, 2023 Connecticut Water filed its 2022 WICA reconciliation with PURA. The reconciliation, approved by PURA on March 29, 2023 and effective for 12 months beginning April 1, 2023, replaced the expiring 2021 reconciliation credit of 0.02% with a credit of 0.16%. The cumulative WICA surcharge as of April 1, 2023 is 6.19%, collecting $6,544 on an annual basis. On February 27, 2023 Connecticut Water filed its 2022 Water Revenue Adjustment mechanism (“WRA”). The mechanism reconciles 2022 revenues as authorized in the Company’s most recent rate case. The 2022 WRA, as approved by PURA on March 24, 2023 and effective for 12 months beginning on April 1, 2023 imposes a 4.97% surcredit on customer bills to refund the 2022 revenue over-collection. 20 Texas Regulatory Affairs Texas Water has no current general rate case pending. However, it filed its application to establish a System Improvement Charge (“SIC”) with the PUCT under Docket No. 54430 on December 30, 2022. This filing will allow Texas Water to add certain utility plant additions made since 2020 to its rate base, thereby increasing revenue and avoiding the immediate need for a general rate case. The SIC is projected to increase Texas Water’s water revenue by $1,596 and sewer revenue by $29 within one year of the approval from the PUCT. The PUCT will determine the completeness of the application and sufficiency of the notices on April 11, 2023. Once the PUCT files the final order approving the SIC, Texas Water will be required to file a general rate case within four years. Texas Water will incrementally increase its SIC annually until that rate case. Texas Water expects to receive the final order during the second half of 2023. Notwithstanding the SIC filing, Texas Water will continue to file its annual adjustments for the Water Pass-through Charges (“WPC”) for Canyon Lake, Deer Creek, and Kendall West customers. All water supply cost increases are recoverable when the next annual WPC adjustment for each system is filed. Texas Water plans to acquire a system owned by KT Water Development that provides service to approximately 570 residential connections using the fair market value process and filed rate doctrine. Texas Water filed its Sales, Transfer, and Merger application with the PUCT on January 3, 2023 under Docket No. 54530. The PUCT found the application to be administratively complete on March 7, 2023. Texas Water mailed the customer notices to all KT Water customers on March 24, 2023. Maine Regulatory Affairs The rates approved in the Biddeford Saco division by the April 5, 2022 stipulated agreement, which authorized a rate increase of $6,313, or 72.5% went into effect on July 1, 2022. The Saco River Drinking Water Resource Center began supplying the water distribution system on June 16, 2022. As part of the stipulated agreement, Maine Water agreed to file a final phase of the rate case by April 1, 2023. The third filing was submitted on March 31, 2023. The filing requested an increase in revenue requirement of $2,949, or 19.9% and requested that the increase be implemented over two years with a 12% increase effective July 1, 2023 followed by a 9% increase effective July 1, 2024 with a slight decrease in year three to reach the overall 19.9% requested. On February 28, 2022, Maine Water filed requests for general rate increases in the Camden-Rockland, Freeport, Millinocket and Oakland Divisions. On February 2, 2023, Maine Water Company received final decisions from the MPUC on four general rate cases filed in 2022. The rate increases are retroactively effective for January 1, 2023, and authorize a $692 increase in annual revenues. Liquidity: Cash Flow from Operating Activities During the three months ended March 31, 2023, SJW Group generated cash flows from operations of approximately $50,600, compared to $45,300 for the same period in 2022. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, stock-based compensation, allowance for equity funds used during construction, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations increased by approximately $5,300. This increase was the result of a combination of the following factors: (1) general working capital and net income, adjusted for non-cash items, increased by $11,800, (2) an increase in collections from accounts receivable and accrued unbilled utility revenue of $3,900, and (3) an increase of $3,200 in regulatory assets primarily due to the recognition of balancing and memorandum accounts, offset by (4) payments of amounts previously invoiced and accrued including accrued production costs, decreased by $9,100, and (5) a decrease of $4,500 in other changes primarily due to prior funds received from the State of California Water and Wastewater Arrearages Payment Program. As of March 31, 2023, Water Utility Services’ write-offs for uncollectible accounts represented 2% of its total revenue, increased from less than 1% as of March 31, 2022. The increase in write-offs from prior year is due to the end of state moratoriums to halt collection efforts related to the COVID pandemic. Management believes that the collection rate for its accounts receivables will gradually return to pre-pandemic levels now that service disconnections are once again allowable in order to mitigate payment delinquencies. Cash Flow from Investing Activities During the three months ended March 31, 2023, SJW Group used cash flows from investing activities of approximately $55,000, compared to $49,400 for the same period in 2022. SJW Group used approximately: (1) $52,400 of cash for company-funded capital expenditures, (2) $2,700 for developer-funded capital expenditures, and (3) $200 for utility plant retirements. 21 Water Utility Services’ estimated capital expenditures for 2023, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately $255,000. As of March 31, 2023, approximately $52,400 or 21% of the $255,000 has been invested. Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, Water Utility Services expects to incur approximately $1,350,000 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future respective state regulatory utility commissions’ approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction. The Water Utility Services’ distribution systems were constructed during the period from the early 1900’s through today. Expenditure levels for renewal and modernization will occur as the components reach the end of their useful lives. In most cases, replacement costs will significantly exceed the original installation costs of the retired assets due to increases in the costs of goods and services and increased regulation. Cash Flow from Financing Activities Net cash provided by financing activities for the three months ended March 31, 2023, increased by approximately $5,300 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings and repayments on long-term debt of $70,200, and (2) an increase in net proceeds from our common stock equity offerings of $41,000, offset by (3) a decrease in net borrowings and repayments on our lines of credit of $100,100, and (4) $4,400 decrease in net cash receipts from advances and contributions in aid of construction. Sources of Capital: SJW Group’s ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings. Short-term Financing Agreements SJW Group and its subsidiaries have unsecured line of credit agreements where borrowings are used for long-term capital expenditure financing, working capital, and general corporate purposes. A summary of the line of credit agreements as of March 31, 2023, are as follows: Maturity Date Line Limit Amounts Outstanding Unused Portion Syndicated credit agreement: August 2, 2027 SJW Group $ 50,000 — 50,000 SJWC 140,000 25,000 115,000 CTWS 90,000 — 90,000 Texas Water 20,000 — 20,000 Total syndicated credit agreement 300,000 25,000 275,000 CTWS credit agreement December 14, 2023 10,000 7,433 2,567 CTWS credit agreement May 15, 2025 40,000 40,000 — $ 350,000 72,433 277,567 During the three months ended March 31, 2023, cost of borrowing on the lines of credit averaged 5.74% compared to 1.64% in the same period in 2022. All of SJW Group’s and subsidiaries lines of credit contain customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. All of the lines of credit also include certain customary financial covenants such as a funded debt to capitalization ratio and a minimum interest coverage ratio. As of March 31, 2023, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit. 22 Long-term Financing Agreements 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 of the note purchase agreement occurred on January 25, 2023. Equity Financing Arrangements On March 1, 2023, SJW Group entered into an Amendment No. 1 to the equity distribution agreement (the “Equity Distribution Agreement”), dated November 17, 2021, between the Company and J.P. Morgan Securities LLC, Janney Montgomery Scott LLC, RBC Capital Markets, LLC and Wells Fargo Securities, LLC (each a “Sales Agent” and, collectively, the “Sales Agents”), pursuant to which the Company increased the aggregate gross sales price of shares of the Company’s common stock, $0.001 par value per share, that may be sold under the Equity Distribution Agreement from $100,000 to $240,000. For the three months ended March 31, 2023, SJW Group issued and sold a total of 547,820 shares of common stock with a weighted average price of $76.10 per share and received approximately $40,997 in net proceeds under the Equity Distribution Agreement. Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 1,432,671 shares of common stock with a weighted average price of $74.46 for a total net proceeds of $104,429 and has $133,323 remaining to issue from the sale of shares as of March 31, 2023 under the Equity Distribution Agreement. Credit Rating The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to draw on its lines of credit, issue long-term debt, sell its equity or earn interest income. In addition, government policies, the state of the credit markets and other factors could result in increased interest rates, which would increase SJW Group’s cost of capital. While our ability to obtain financing will continue to be a risk, we believe that based on our 2023 and 2022 activities, we will have access to the external funding sources necessary to implement our on-going capital investment programs in the future. The current Standard & Poor’s Rating Service assigned company rating for SJW Group with a stable outlook is an A-, for SJWC with a stable outlook is an A, CTWS with a stable outlook is an A-, and Connecticut Water with a stable outlook is an A-.