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, 2023 2022 2023 2022 REVENUE $ 156,886 149,041 $ 294,182 273,343 OPERATING EXPENSE: Production Expenses: Purchased water 32,592 26,352 55,010 45,569 Power 2,379 3,394 4,578 6,474 Groundwater extraction charges 14,994 18,360 25,353 32,288 Other production expenses 11,921 11,596 23,964 21,719 Total production expenses 61,886 59,702 108,905 106,050 Administrative and general 23,527 23,260 47,871 47,465 Maintenance 6,298 6,891 12,356 13,586 Property taxes and other non-income taxes 7,896 7,579 16,297 15,888 Depreciation and amortization 26,121 25,207 52,417 52,813 Gain on sale of nonutility property — — — ( 5,450 ) Total operating expense 125,728 122,639 237,846 230,352 OPERATING INCOME 31,158 26,402 56,336 42,991 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 16,397 ) ( 14,241 ) ( 32,169 ) ( 27,970 ) Pension non-service cost ( 102 ) 941 ( 166 ) 1,890 Other, net 2,115 824 5,381 1,819 Income before income taxes 16,774 13,926 29,382 18,730 Provision for income taxes ( 1,512 ) 2,368 ( 434 ) 3,435 NET INCOME 18,286 11,558 29,816 15,295 Other comprehensive income (loss), net 9 ( 248 ) 102 ( 429 ) COMPREHENSIVE INCOME $ 18,295 11,310 $ 29,918 14,866 EARNINGS PER SHARE Basic $ 0.58 0.38 $ 0.96 0.51 Diluted $ 0.58 0.38 $ 0.95 0.50 DIVIDENDS PER SHARE $ 0.38 0.36 $ 0.76 0.72 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 31,499,068 30,244,511 31,219,324 30,234,381 Diluted 31,594,494 30,346,040 31,319,248 30,341,065 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, 2023 December 31, 2022 ASSETS Utility plant: Land $ 41,386 39,982 Depreciable plant and equipment 3,761,749 3,661,285 Construction in progress 141,179 116,851 Intangible assets 35,947 35,959 Total utility plant 3,980,261 3,854,077 Less accumulated depreciation and amortization 1,277,102 1,223,760 Net utility plant 2,703,159 2,630,317 Real estate investments and nonutility properties 1,388 58,033 Less accumulated depreciation and amortization 191 17,158 Net real estate investments and nonutility properties 1,197 40,875 CURRENT ASSETS: Cash and cash equivalents 25,474 12,344 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 6,414 and $ 5,753 on June 30, 2023 and December 31, 2022, respectively 58,545 59,172 Other 4,814 5,560 Accrued unbilled utility revenue 50,555 45,722 Assets held for sale 40,850 — Prepaid expenses 9,152 9,753 Current regulatory assets, net 5,968 16,068 Other current assets 6,075 6,095 201,433 154,714 OTHER ASSETS: Net regulatory assets, less current portion 130,009 127,275 Investments 16,136 14,819 Goodwill 640,311 640,311 Other 19,913 24,313 806,369 806,718 $ 3,712,158 3,632,624 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, 2023 December 31, 2022 CAPITALIZATION AND LIABILITIES CAPITALIZATION: Stockholders’ equity: Common stock, $ 0.001 par value; authorized 70,000,000 shares; issued and outstanding share s 31,731,030 on June 30, 2023 and 30,801,912 on December 31, 2022 $ 32 31 Additional paid-in capital 716,642 651,004 Retained earnings 464,464 458,356 Accumulated other comprehensive income 1,578 1,477 Total stockholders’ equity 1,182,716 1,110,868 Long-term debt, less current portion 1,519,281 1,491,965 2,701,997 2,602,833 CURRENT LIABILITIES: Lines of credit 83,310 159,578 Current portion of long-term debt 44,328 4,360 Accrued groundwater extraction charges, purchased water and power 23,006 19,707 Accounts payable 36,446 29,581 Accrued interest 15,680 13,907 Accrued payroll 10,011 11,908 Income tax payable 4,604 2,696 Other current liabilities 20,569 22,913 237,954 264,650 DEFERRED INCOME TAXES 228,976 218,155 ADVANCES FOR CONSTRUCTION 140,005 137,696 CONTRIBUTIONS IN AID OF CONSTRUCTION 327,280 323,668 POSTRETIREMENT BENEFIT PLANS 53,001 59,738 OTHER NONCURRENT LIABILITIES 22,945 25,884 COMMITMENTS AND CONTINGENCIES $ 3,712,158 3,632,624 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, 2022 30,801,912 $ 31 $ 651,004 $ 458,356 $ 1,477 $ 1,110,868 Net income — — — 11,530 — 11,530 Unrealized gain on investment, net of taxes of $ 0 — — — — 93 93 Stock-based compensation — — 1,199 ( 22 ) — 1,177 Issuance of restricted and deferred stock units 38,776 — ( 1,538 ) — — ( 1,538 ) Employee stock purchase plan 16,410 — 1,080 — — 1,080 Common stock issuance, net of costs 570,026 — 40,997 — — 40,997 Dividends paid ($ 0.38 per share) — — — ( 11,722 ) — ( 11,722 ) BALANCES, March 31, 2023 31,427,124 31 692,742 458,142 1,570 1,152,485 Net income — — — 18,286 — 18,286 Unrealized gain on investment, net of tax of $( 37 ) — — — — 8 8 Stock-based compensation — — 1,139 ( 17 ) 1,122 Issuance of restricted and deferred stock units 13,429 — ( 20 ) — — ( 20 ) Common stock issuance costs 290,477 1 22,781 — — 22,782 Dividends paid ($ 0.38 per share) — — — ( 11,947 ) — ( 11,947 ) BALANCES, June 30, 2023 31,731,030 $ 32 $ 716,642 $ 464,464 $ 1,578 $ 1,182,716 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss 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 taxes 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, net of 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, 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 CASH FLOWS (UNAUDITED) (in thousands) Six months ended June 30, 2023 2022 OPERATING ACTIVITIES: Net income $ 29,816 15,295 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 53,510 53,830 Deferred income taxes 8,706 2,239 Stock-based compensation 2,338 2,593 Allowance for equity funds used during construction ( 1,111 ) ( 1,084 ) Gain on sale of nonutility property — ( 5,450 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 3,687 ) ( 8,487 ) Accounts payable and other current liabilities ( 107 ) ( 1,158 ) Accrued groundwater extraction charges, purchased water and power 3,300 7,598 Tax receivable and payable, and other accrued taxes ( 3,367 ) ( 22 ) Postretirement benefits ( 628 ) 459 Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits 12,142 17,284 Other changes, net ( 3,548 ) 501 NET CASH PROVIDED BY OPERATING ACTIVITIES 97,364 83,598 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 115,749 ) ( 101,611 ) Contributions in aid of construction ( 9,287 ) ( 13,332 ) Additions to real estate investments — ( 546 ) Payments to retire utility plant, net of salvage ( 468 ) ( 1,836 ) Proceeds from sale of nonutility properties — 227 Other changes, net 125 ( 33 ) NET CASH USED IN INVESTING ACTIVITIES ( 125,379 ) ( 117,131 ) FINANCING ACTIVITIES: Borrowings on line of credit 39,828 88,664 Repayments on line of credit ( 116,095 ) ( 10,324 ) Long-term borrowings 70,000 15,000 Repayments of long-term borrowings ( 1,560 ) ( 51,612 ) Issuance of common stock, net of issuance costs 63,779 — Dividends paid ( 23,669 ) ( 21,771 ) Receipts of advances and contributions in aid of construction 11,047 15,769 Refunds of advances for construction ( 1,341 ) ( 1,345 ) Other changes, net ( 844 ) ( 316 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 41,145 34,065 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 13,130 532 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 12,344 12,119 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD 25,474 12,651 LESS RESTRICTED CASH, END OF PERIOD — 602 CASH AND CASH EQUIVALENTS, END OF PERIOD $ 25,474 12,049 Cash paid during the period for: Interest $ 31,656 30,189 Income taxes 655 458 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 27,580 18,502 Utility property installed by developers 938 1,066 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2023 (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 2022 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. SJWTX Holdings, Inc. is a holding company that was formed with the purpose of effecting a corporate reorganization of our water utility operations in Texas. Texas Water Resources, LLC was formed as a subsidiary of SJWTX Holdings, Inc. to hold future wholesale water supply assets. SJWC, Connecticut Water, SJWTX, Inc. doing business as The Texas Water Company (“Texas Water”), 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, 2023 2022 2023 2022 Revenue from contracts with customers $ 159,724 148,657 $ 295,560 270,434 Alternative revenue programs, net ( 2,204 ) ( 2,982 ) ( 3,595 ) ( 4,909 ) Other balancing and memorandum accounts, net ( 1,617 ) 2,432 178 4,862 Other regulatory mechanisms, net ( 433 ) ( 432 ) ( 824 ) 234 Rental income 1,416 1,366 2,863 2,722 $ 156,886 149,041 $ 294,182 273,343 Real Estate Investments and Nonutility Properties The major components of real estate investments and nonutility properties as of June 30, 2023 and December 31, 2022, are as follows: June 30, 2023 December 31, 2022 Land $ 918 12,615 Buildings and improvements 470 45,418 Subtotal 1,388 58,033 Less: accumulated depreciation and amortization 191 17,158 Total $ 1,197 40,875 In March 2023, SJW Land Company entered into a broker agreement to sell its warehouse buildings and land property located in Knoxville, Tennessee. The company reclassified the Tennessee properties from held-and-used to held-for-sale at March 31, 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) 2023. The company’s intention is to complete the sale of these assets within a twelve month period. The company recorded the Tennessee properties at the lower of their carrying value or estimated fair value less cost to sell, and also stopped recording depreciation on assets held for sale. The company's broker provided the estimated fair value of the Tennessee properties. The estimated costs to sell was subtracted to estimate the fair value. The resulting net fair value of the Tennessee properties exceeded their carrying value, and accordingly no impairment was recorded. The sale of the Tennessee properties does not represent a strategic shift that has or will have a major effect on SJW Group; therefore, the sale does not qualify for treatment as a discontinued operation. The Tennessee warehouse buildings and land property is included in SJW Group’s “Real Estate Services” reportable segment in Note 9 , “Segment and Non-Tariffed Business Reporting”. The following represents the major components of the Tennessee warehouse building and land property recorded in assets held-for-sale on the condensed consolidated balance sheets as of June 30, 2023: June 30, 2023 Land $ 13,170 Buildings and improvements 44,950 Subtotal 58,120 Less: accumulated depreciation and amortization 17,270 Total $ 40,850 On February 15, 2022, the California Public Utilities Commission (“CPUC”) review on a SJWC nonutility property sold in October 2021 was completed and the deferred gain of $ 5,442 was recognized as gain on sale in the first quarter of 2022. Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of June 30, 2023, 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, 2023, approximates their carrying value as reported on the condensed consolidated balance sheets. There have been no changes in valuation techniques during the three and six months ended June 30, 2023. 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 $ 1,354,865 and $ 1,294,354 as of June 30, 2023 and December 31, 2022, 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 $ 1,563,609 and $ 1,496,325 as of June 30, 2023 and December 31, 2022, 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 $ 2,808 and $ 2,809 as of June 30, 2023 and December 31, 2022, 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 plans, shares potentially issuable under the performance stock plans assumed through the business combination with CTWS, and shares potentially issuable under SJW Group’s employee stock purchase plans. For the three months ended June 30, 2023 and 2022, 1,843 and 4,964 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the six months ended June 30, 2023 and 2022, 10,698 and 15,824 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) Note 2. Regulatory Matters Regulatory assets, net are comprised of the following as of June 30, 2023 and December 31, 2022: June 30, 2023 December 31, 2022 Regulatory assets: Income tax temporary differences, net $ 54,110 43,434 Postretirement pensions and other postretirement benefits 30,548 31,493 Business combinations debt premium, net 16,125 17,396 Monterey Water Revenue Adjustment Mechanism (“MWRAM”) 15,834 10,864 Water Conservation Memorandum Account (“WCMA”) ( 7,621 ) ( 5,039 ) 2022 General Rate Case Interim Memorandum Account 15,108 20,650 Cost recovery balancing and memorandum accounts 6,225 16,545 All other balancing and memorandum accounts 3,698 2,749 Water Revenue Adjustment (“WRA”) ( 8,063 ) ( 4,488 ) Other, net 10,013 9,739 Total regulatory assets, net in Condensed Consolidated Balance Sheets 135,977 143,343 Less: current regulatory assets, net 5,968 16,068 Total regulatory assets, net, less current portion $ 130,009 127,275 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. In 2022, SJWC’s general rate case decision approved the use of the Full Cost Balancing Account to track the water supply costs and energy consumption. The MWRAM balancing account 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. 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 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. Mandatory water conservation requirements from Santa Clara Valley Water District ended on April 11, 2023, which also ended SJWC’s Mandatory Conservation Plan, that included drought allocations and surcharges. 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. Connecticut Water has been authorized by the Connecticut Public Utilities Regulatory Authority to utilize a WRA, a decoupling mechanism, to mitigate risk with changes in demand. The WRA is used to reconcile actual water demands with the demands projected in the most recent general rate case and allows the company to implement a surcharge or surcredit as necessary to recover or refund the revenues approved in the general rate case. The WRA allows the company to defer, as a regulatory asset or liability, the amount by which actual revenues deviate from the revenues allowed in the most recent general rate proceedings. As of June 30, 2023 and December 31, 2022, 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 June 30, 2023 and December 31, 2022, either by interest on the regulatory asset/liability or as a component of rate base at the allowed rate of return was $ 49,958 and $ 52,066 , respectively. 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) Note 3. Capitalization In March 2023, SJW Group entered into an Amendment No. 1 to the equity distribution agreement (the “Equity Distribution Agreement”), dated November 17, 2021, between SJW Group 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 SJW Group increased the aggregate gross sales price of shares of SJW Group’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 and six months ended June 30, 2023, SJW Group issued and sold a total of 312,683 and 860,503 shares of common stock, respectively, with a weighted average price of $ 74.60 and $ 75.56 per share, respectively, and received $ 22,782 and $ 63,779 in net proceeds, respectively, under the Equity Distribution Agreement. Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 1,745,354 shares of common stock with a weighted average price of $ 74.49 for a total net proceeds of $ 127,210 and has $ 109,995 remaining under the Equity Distribution Agreement to issue into shares. 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 and developers on certain construction projects. The refunds of the advance deposit payments constitute an obligation of the respective entities. Long-term Financing Agreements In July 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 SJWC 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. Note 5. Income Taxes For the three and six months ended June 30, 2023, income tax benefit was $ 1,512 and $ 434 , respectively. Income tax expense for the three and six months ended June 30, 2022, was $ 2,368 and $ 3,435 , respectively. The effective consolidated income tax rates were ( 9 )% and 17 % for the three months ended June 30, 2023 and 2022, respectively, and ( 1 )% and 18 % for the six months ended June 30, 2023 and 2022, respectively. The lower effective tax rate for the three and six months ended June 30, 2023, was primarily due to the partial release of an uncertain tax position reserve. In April 2023, the Internal Revenue Service issued additional tax guidance that has allowed the company to revisit certain historical income tax reserves. Pursuant to the issuance of this guidance, which provided additional clarification regarding some of the uncertain tax areas, the company re-evaluated the risk relating to repair deductions. The result of the analysis led to a partial release of an uncertain tax position reserve of $ 3,087 . The release relates to repairs expenditures that are more likely than not to be sustained on audit. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 5,877 and $ 9,004 as of June 30, 2023 and December 31, 2022, respectively. SJW Group currently does not expect uncertain tax positions to change significantly over the next 12 months, except in the case of a lapse of the statute of limitations. 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. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) 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. Starting in 2023, Texas Water employees are also eligible to participate under SJWC’s cash balance plan. 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. 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, 2023 and 2022 are as follows: Pension Benefits Other Benefits Three months ended June 30, 2023 2022 2023 2022 Service cost $ 1,892 2,397 $ 160 255 Interest cost 3,557 2,642 317 219 Expected return on assets ( 4,069 ) ( 4,824 ) ( 217 ) ( 221 ) Unrecognized actuarial loss 554 1,275 ( 88 ) ( 75 ) Amortization of prior service cost 4 4 — — Total $ 1,938 1,494 $ 172 178 Pension Benefits Other Benefits Six months ended June 30, 2023 2022 2023 2022 Service cost $ 3,784 4,794 $ 320 510 Interest cost 7,115 5,283 634 438 Expected return on assets ( 8,138 ) ( 9,646 ) ( 434 ) ( 442 ) Unrecognized actuarial loss 1,108 2,515 ( 176 ) ( 151 ) Amortization of prior service cost 7 8 — — Total $ 3,876 2,954 $ 344 355 In 2023, SJW Group expects to make required and discretionary cash contributions of up to $ 8,120 to the pension plans and other postretirement benefits. For the three and six months ended June 30, 2023, SJW Group has made $ 4,060 of contributions to such plans. Note 8. Equity Plans SJW Group’s long-term incentive plans 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 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. In addition, shares are issued to employees under SJW Group’s employee stock purchase plan. As of June 30, 2023, 156,299 shares are issuable upon the vesting of outstanding 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) restricted stock units and deferred restricted stock units and an additional 1,132,390 shares are available for award issuances under the long-term incentive plans. On April 26, 2023, SJW Group adopted the successor plans, 2023 Long-Term Incentive Plan and 2023 Employee Stock Purchase Plan, to replace the Amended and Restated Long-Term Incentive Plan (the, “Predecessor Incentive Plan”) and 2014 Employee Stock Purchase Plan (the, “Predecessor ESPP”), respectively. The Predecessor Incentive Plan terminated on April 23, 2023 and Predecessor ESPP terminated on July 31, 2023. Each outstanding award under the Predecessor Incentive Plan will remain outstanding under the Predecessor Incentive Plan and shall be governed solely by the terms of the documents evidencing such awards. The 2023 Long-Term Incentive Plan reserves a total of 1,142,000 shares of SJW Group’s common stock for issuance to 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 SJW Group and its subsidiaries. The 2023 Employee Stock Purchase Plan reserves for a total of 500,000 shares of SJW Group’s common stock for issuance for eligible employees to purchase common stock at a discount through accumulated payroll deductions. Remaining reserves for both of the predecessor plans will be terminated with the adoption of the successor plans. 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, 2023 and 2022: Three months ended June 30, Six months ended June 30, 2023 2022 2023 2022 Compensation costs charged to income: ESPP $ — — $ 191 185 Restricted stock and deferred restricted stock 1,139 1,041 2,147 2,408 Total compensation costs charged to income $ 1,139 1,041 $ 2,338 2,593 ESPP proceeds $ — — $ 1,080 1,049 Restricted Stock and Deferred Restricted Stock For the three months ended June 30, 2023, and 2022, SJW Group granted 9,610 and 12,604 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value per unit of $ 75.28 and $ 58.04 , respectively. For the six months ended June 30, 2023 and 2022, SJW Group granted 37,342 and 44,003 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value per unit of $ 77.21 and $ 65.41 , respectively. For the three months ended June 30, 2023, no performance-based or market-based restricted stock awards were granted. For the three months ended June 30, 2022, SJW Group granted 32 target units performance-based and market-based restricted stock awards granted with a weighted-average grant date fair value per unit of $ 66.14 . For the six months ended June 30, 2023 and 2022, SJW Group granted 31,345 and 33,653 target units, respectively, performance-based and market-based restricted stock awards granted with a weighted-average grant date fair value per unit of $ 80.05 and $ 70.35 , respectively. 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, 2023, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $ 7,121 . This cost is expected to be recognized over a weighted-average period of 1.99 years. Employee Stock Purchase Plan SJW Group’s recorded expenses for its ESPP were $ 106 and $ 196 for the three and six months ended June 30, 2023, respectively, and $ 89 and $ 182 for the three and six months ended June 30, 2022, respectively. The total unrecognized compensation costs related to the semi-annual offering period that ends July 31, 2023, for the employee stock purchase plan is approximately $ 34 . This cost is expected to be recognized during the third quarter of 2023. 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) 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) Texas Water, a regulated water and non-tariffed wastewater 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, Connecticut Water, Maine Water, NEWUS 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. 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 provides water utility and utility-related services to its customers through SJW Group’s subsidiaries, SJWC, Connecticut Water, Texas Water, Maine Water, and NEWUS together referred to as “Water Utility Services”. The second segment consists of property management and investment activity conducted by SJW Land Company and Chester Realty, Inc., referred to as “Real Estate Services.” The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, such as goodwill, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category. For Three Months Ended June 30, 2023 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 152,525 2,945 1,416 — 152,525 4,361 156,886 Operating expense 122,678 1,789 661 600 122,678 3,050 125,728 Operating income (loss) 29,847 1,156 755 ( 600 ) 29,847 1,311 31,158 Net income (loss) 20,510 596 544 ( 3,364 ) 20,510 ( 2,224 ) 18,286 Depreciation and amortization 25,811 85 1 224 25,811 310 26,121 Interest on long-term debt and other interest expense 10,846 — — 5,551 10,846 5,551 16,397 Provision (benefit) for income taxes 102 320 243 ( 2,177 ) 102 ( 1,614 ) ( 1,512 ) Assets $ 3,605,238 4,480 43,714 58,726 3,605,238 106,920 3,712,158 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 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) June 30, 2023 (in thousands, except share and per share data) For Six Months Ended June 30, 2023 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 285,797 5,522 2,863 — 285,797 8,385 294,182 Operating expense 231,545 3,203 1,560 1,538 231,545 6,301 237,846 Operating income (loss) 54,252 2,319 1,303 ( 1,538 ) 54,252 2,084 56,336 Net income (loss) 33,732 1,214 969 ( 6,099 ) 33,732 ( 3,916 ) 29,816 Depreciation and amortization 51,497 169 304 447 51,497 920 52,417 Interest on long-term debt and other interest expense 21,393 — — 10,776 21,393 10,776 32,169 Provision (benefit) for income taxes 2,826 643 385 ( 4,288 ) 2,826 ( 3,260 ) ( 434 ) Assets $ 3,605,238 4,480 43,714 58,726 3,605,238 106,920 3,712,158 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 ____________________ (1) The “All Other” category for the six months ended June 30, 2023, 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, 2023. For the six months ended June 30, 2022, “All Other” category includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. Note 10. Acquisitions On January 13, 2023, Texas Water reached agreements to acquire KT Water Development Ltd. and KT Water Resource L.P. for the purchase price of $ 7,338 and $ 56,500 , respectively. KT Water Development Ltd. is an investor-owned water utility providing water to approximately 1,725 people through over 570 service connections in the Rockwall Ranch subdivision in southern Comal County, Texas. KT Water Resources L.P. is a privately-held company formed to develop wholesale water supplies for the fast-growing utilities of Comal County, Texas. The Public Utility Commission of Texas approved of the proposed KT Water Development Ltd. acquisition on July 24, 2023. Both transactions are expected to close in the third quarter of 2023. 15