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, 2023 2022 2023 2022 REVENUE $ 204,843 175,981 $ 499,025 449,324 OPERATING EXPENSE: Production Expenses: Purchased water 46,044 38,744 101,054 84,313 Power 2,785 3,913 7,363 10,387 Groundwater extraction charges 21,398 19,059 46,751 51,347 Other production expenses 12,415 11,888 36,379 33,607 Total production expenses 82,642 73,604 191,547 179,654 Administrative and general 23,888 23,909 71,759 71,374 Maintenance 6,457 7,065 18,813 20,651 Property taxes and other non-income taxes 8,795 8,354 25,092 24,242 Depreciation and amortization 26,455 25,529 78,872 78,342 Gain on sale of nonutility property — ( 82 ) — ( 5,532 ) Total operating expense 148,237 138,379 386,083 368,731 OPERATING INCOME 56,606 37,602 112,942 80,593 OTHER (EXPENSE) INCOME: Interest on long-term debt and other interest expense ( 16,744 ) ( 14,190 ) ( 48,913 ) ( 42,160 ) Pension non-service (cost) credit ( 740 ) 970 ( 906 ) 2,860 Other, net 1,661 875 7,042 2,694 Income before income taxes 40,783 25,257 70,165 43,987 Provision for income taxes 4,561 223 4,127 3,658 NET INCOME 36,222 25,034 66,038 40,329 Other comprehensive income (loss), net 318 ( 173 ) 420 ( 602 ) COMPREHENSIVE INCOME $ 36,540 24,861 $ 66,458 39,727 EARNINGS PER SHARE Basic $ 1.14 0.83 $ 2.10 1.33 Diluted $ 1.13 0.82 $ 2.09 1.33 DIVIDENDS PER SHARE $ 0.38 0.36 $ 1.14 1.08 WEIGHTED AVERAGE SHARES OUTSTANDING Basic 31,862,518 30,269,462 31,436,077 30,246,201 Diluted 31,934,636 30,392,295 31,526,732 30,358,268 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, 2023 December 31, 2022 ASSETS Utility plant: Land $ 41,427 39,982 Depreciable plant and equipment 3,879,507 3,661,285 Construction in progress 113,204 116,851 Intangible assets 35,946 35,959 Total utility plant 4,070,084 3,854,077 Less accumulated depreciation and amortization 1,305,134 1,223,760 Net utility plant 2,764,950 2,630,317 Nonutility properties and real estate investments 13,072 58,033 Less accumulated depreciation and amortization 192 17,158 Net nonutility properties and real estate investments 12,880 40,875 CURRENT ASSETS: Cash and cash equivalents 21,067 12,344 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 6,661 and $ 5,753 on September 30, 2023 and December 31, 2022, respectively 70,374 59,172 Other 4,381 5,560 Accrued unbilled utility revenue 62,253 45,722 Assets held for sale 40,850 — Prepaid expenses 14,996 9,753 Current regulatory assets, net 8,573 16,068 Other current assets 6,277 6,095 228,771 154,714 OTHER ASSETS: Net regulatory assets, less current portion 131,420 127,275 Investments 15,901 14,819 Other intangible asset 28,386 — Goodwill 640,311 640,311 Other 20,809 24,313 836,827 806,718 $ 3,843,428 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) September 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 31,933,003 on September 30, 2023 and 30,801,912 on December 31, 2022 $ 32 31 Additional paid-in capital 729,740 651,004 Retained earnings 488,585 458,356 Accumulated other comprehensive income 1,896 1,477 Total stockholders’ equity 1,220,253 1,110,868 Long-term debt, less current portion 1,533,769 1,491,965 2,754,022 2,602,833 CURRENT LIABILITIES: Lines of credit 128,433 159,578 Current portion of long-term debt 43,464 4,360 Accrued groundwater extraction charges, purchased water and power 33,170 19,707 Accounts payable 35,926 29,581 Accrued interest 19,165 13,907 Accrued payroll 11,264 11,908 Income tax payable 11,809 2,696 Other current liabilities 24,885 22,913 308,116 264,650 DEFERRED INCOME TAXES 234,558 218,155 ADVANCES FOR CONSTRUCTION 143,810 137,696 CONTRIBUTIONS IN AID OF CONSTRUCTION 328,633 323,668 POSTRETIREMENT BENEFIT PLANS 51,150 59,738 OTHER NONCURRENT LIABILITIES 23,139 25,884 COMMITMENTS AND CONTINGENCIES $ 3,843,428 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 taxes of $( 37 ) — — — — 8 8 Stock-based compensation — — 1,139 ( 17 ) 1,122 Issuance of restricted and deferred stock units 13,429 — ( 20 ) — — ( 20 ) Common stock issuance, net of costs 290,477 1 22,781 — — 22,782 Dividends paid ($ 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 Net income — — — 36,222 — 36,222 Unrealized gain on investment, net of taxes of $ 193 — — — — 318 318 Stock-based compensation — — 1,238 ( 8 ) — 1,230 Issuance of restricted and deferred stock units 14,840 — ( 706 ) — — ( 706 ) Employee stock purchase plan 17,712 — 1,061 — — 1,061 Common stock issuance, net of costs 169,421 — 11,505 — — 11,505 Dividends paid ($ 0.38 per share) — — — ( 12,093 ) — ( 12,093 ) BALANCES, September 30, 2023 31,933,003 $ 32 $ 729,740 $ 488,585 $ 1,896 $ 1,220,253 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 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 taxes 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 Net income — — — 25,034 — 25,034 Unrealized loss on investment, net of taxes 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. 7 SJW GROUP AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine months ended September 30, 2023 2022 OPERATING ACTIVITIES: Net income $ 66,038 40,329 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 80,544 79,862 Deferred income taxes 12,996 7,135 Stock-based compensation 3,576 3,991 Allowance for equity funds used during construction ( 1,649 ) ( 1,324 ) Gain on sale of nonutility asset — ( 5,532 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 26,782 ) ( 22,511 ) Accounts payable and other current liabilities 557 ( 1,475 ) Accrued groundwater extraction charges, purchased water and power 13,463 10,494 Tax receivable and payable, and other accrued taxes 690 ( 1,851 ) Postretirement benefits ( 1,851 ) ( 2,719 ) Regulatory assets and liabilities excluding income tax temporary differences, net and postretirement benefits 16,092 21,776 Up-front service concession payment — ( 1,600 ) Other changes, net ( 4,371 ) 2,774 NET CASH PROVIDED BY OPERATING ACTIVITIES 159,303 129,349 INVESTING ACTIVITIES: Additions to utility plant: Company-funded ( 195,937 ) ( 160,515 ) Contributions in aid of construction ( 13,604 ) ( 17,773 ) Additions to nonutility assets ( 24,244 ) ( 610 ) Payments to retire utility plant, net of salvage ( 908 ) ( 2,432 ) Proceeds from sale of nonutility properties — 310 Payments for business acquisitions ( 7,286 ) ( 433 ) Other changes, net 238 — NET CASH USED IN INVESTING ACTIVITIES ( 241,741 ) ( 181,453 ) FINANCING ACTIVITIES: Borrowings on line of credit 102,655 152,655 Repayments on line of credit ( 133,800 ) ( 16,481 ) Long-term borrowings 70,000 15,000 Repayments of long-term borrowings ( 3,062 ) ( 87,757 ) Issuance of common stock, net of issuance costs 75,284 3,107 Dividends paid ( 35,762 ) ( 32,667 ) Receipts of advances and contributions in aid of construction 18,889 21,593 Refunds of advances for construction ( 2,148 ) ( 2,177 ) Other changes, net ( 895 ) ( 98 ) NET CASH PROVIDED BY FINANCING ACTIVITIES 91,161 53,175 NET CHANGE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH 8,723 1,071 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD 12,344 12,119 CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD 21,067 13,190 LESS RESTRICTED CASH, END OF PERIOD — — CASH AND CASH EQUIVALENTS, END OF PERIOD $ 21,067 13,190 Cash paid during the period for: Interest $ 44,132 42,473 Income taxes 818 572 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 26,315 22,044 Utility property installed by developers 1,295 976 Seller financing in asset acquisition, net of discount 15,400 — See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 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 four wholly owned subsidiaries: San Jose Water Company (“SJWC”), SJWTX Holdings, Inc., SJW Land Company, and SJWNE LLC. SJWTX Holdings, Inc., is a holding company for its wholly owned subsidiaries, SJWTX, Inc., doing business as The Texas Water Company (“TWC”), Texas Water Operation Services, LLC, (“TWOS”) and Texas Water Resources, LLC (“TWR”) . SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”) whose wholly owned subsidiaries are The Connecticut Water Company (“CWC”), The Maine Water Company (“MWC”), New England Water Utility Services, Inc. (“NEWUS”), and Chester Realty, Inc. SJWC, CWC, TWC , TWOS, TWR, MWC 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, 2023 2022 2023 2022 Revenue from contracts with customers $ 211,716 169,972 $ 507,276 440,406 Alternative revenue programs, net 957 3,172 ( 2,638 ) ( 1,737 ) Other balancing and memorandum accounts, net ( 8,742 ) 1,857 ( 8,564 ) 6,719 Other regulatory mechanisms, net ( 518 ) ( 494 ) ( 1,342 ) ( 260 ) Rental income 1,430 1,474 4,293 4,196 $ 204,843 175,981 $ 499,025 449,324 Nonutility Properties and Real Estate Investments The major components of real estate investments and nonutility properties as of September 30, 2023 and December 31, 2022, are as follows: September 30, 2023 December 31, 2022 Land $ 4,137 12,615 Wholesale water supply assets 8,465 — Buildings and improvements 470 45,418 Subtotal 13,072 58,033 Less: accumulated depreciation and amortization 192 17,158 Total $ 12,880 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, 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 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 September 30, 2023: September 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 September 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 September 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 nine months ended September 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 $ 1,299,114 and $ 1,294,354 as of September 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 $ 1,577,233 and $ 1,496,325 as of September 30, 2023 and December 31, 2022, respectively. Of the total fair value of long-term debt,$ 1,283,602 would be categorized as Level 2 in the fair value hierarchy and $ 15,512 would be categorized as Level 3 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 September 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 September 30, 2023 and 2022, 1,826 and 2,416 anti-dilutive restricted common stock units were excluded from the diluted earnings per share calculation, respectively. For the nine months ended September 30, 2023 and 2022, 12,524 and 18,240 anti-dilutive restricted common stock units were excluded from the diluted earnings per share calculation, respectively. 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) Note 2. Regulatory Matters Regulatory assets, net are comprised of the following as of September 30, 2023 and December 31, 2022: September 30, 2023 December 31, 2022 Regulatory assets: Income tax temporary differences, net $ 62,745 43,434 Postretirement pensions and other postretirement benefits 30,076 31,493 Business combinations debt premium, net 15,490 17,396 Monterey Water Revenue Adjustment Mechanism (“MWRAM”) 12,162 10,864 Water Conservation Memorandum Account (“WCMA”) ( 7,683 ) ( 5,039 ) 2022 General Rate Case Interim Memorandum Account 9,513 20,650 Cost recovery balancing and memorandum accounts 8,267 16,545 All other balancing and memorandum accounts 4,344 2,749 Water Revenue Adjustment (“WRA”) ( 5,428 ) ( 4,488 ) Other, net 10,507 9,739 Total regulatory assets, net in Condensed Consolidated Balance Sheets 139,993 143,343 Less: current regulatory assets, net 8,573 16,068 Total regulatory assets, net, less current portion $ 131,420 127,275 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. On October 2, 2023, the CPUC approved the continuation of WCMA and Water Conservation Expense Memorandum Account under the voluntary call for conservation effective April 20, 2023. 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. CWC 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 September 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 September 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 $ 48,954 and $ 52,066 , respectively. 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) Note 3. Capitalization In March 2023, SJW Group entered into 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 nine months ended September 30, 2023, SJW Group issued and sold a total of 169,421 and 1,029,924 shares of common stock, respectively, at a weighted average price of $ 69.57 and $ 74.57 per share, respectively, and received $ 11,505 and $ 75,284 in net proceeds, respectively, under the Equity Distribution Agreement. Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 1,914,775 shares of common stock at a weighted average price of $ 74.05 for a total net proceeds of $ 138,716 and has $ 98,209 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. Short-term Financing Agreements In August 2023, SJW Group, SJWC, TWC, and CTWS entered into the First Amendment to Credit Agreement with JPMorgan Chase Bank which provided for, among other matters, an extension of the maturity date from August 2, 2027 to August 2, 2028. The weighted-average interest rate on short-term borrowings outstanding at September 30, 2023 was 6.48 % compared to 5.40 % at December 31, 2022. 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. In August 2023, TWR closed on an asset acquisition from KT Water Resources L.P. which included of an obligation for a post-closing production payment of $ 29,000 to the seller over a period of up to 29 years. This obligation was recorded at its fair value of $ 15,400 as of the date of the acquisition. Please see Note 10 of “Notes to Condensed Consolidated Financial Statements” for additional information about this obligation. Note 5. Income Taxes For the three and nine months ended September 30, 2023, income tax expense was $ 4,561 and $ 4,127 , respectively. Income tax expense for the three and nine months ended September 30, 2022 was $ 223 and $ 3,658 , respectively. The effective consolidated income tax rates were 11 % and 1 % for the three months ended September 30, 2023 and 2022, respectively, and 6 % and 8 % for the nine months ended September 30, 2023 and 2022, respectively. The higher effective tax rate for the three months ended September 30, 2023 was primarily due to the tax benefit relating to a tax accounting method change recorded in the third quarter 2022. There was no such benefit recorded in the third quarter of 2023. The lower effective tax rate for the nine months ended September 30, 2023 was primarily due to higher flow-through tax benefits. 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 which was recorded in the second quarter of 2023. The release relates to repairs expenditures that are more likely than not to be sustained on audit. 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 5,981 and $ 9,004 as of September 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. 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, TWC 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 nine months ended September 30, 2023 and 2022 are as follows: Pension Benefits Other Benefits Three months ended September 30, 2023 2022 2023 2022 Service cost $ 1,892 2,397 $ 160 255 Interest cost 3,557 2,642 317 218 Expected return on assets ( 3,442 ) ( 4,823 ) ( 217 ) ( 221 ) Unrecognized actuarial loss 554 1,257 ( 87 ) ( 75 ) Amortization of prior service cost 4 4 — — Total $ 2,565 1,477 $ 173 177 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) Pension Benefits Other Benefits Nine months ended September 30, 2023 2022 2023 2022 Service cost $ 5,676 7,191 $ 480 765 Interest cost 10,672 7,925 951 656 Expected return on assets ( 11,580 ) ( 14,469 ) ( 651 ) ( 663 ) Unrecognized actuarial loss 1,662 3,772 ( 263 ) ( 226 ) Amortization of prior service cost 11 12 — — Total $ 6,441 4,431 $ 517 532 In 2023, SJW Group expects to make required and discretionary cash contributions of up to $ 8,653 to the pension plans and other postretirement benefits. For the three and nine months ended September 30, 2023, SJW Group has made $ 3,567 and $ 7,627 , respectively, 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 September 30, 2023, 150,882 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 1,136,979 shares are available for award issuances under the long-term incentive plans. On April 26, 2023, SJW Group adopted the successor plans, the 2023 Long-Term Incentive Plan and the 2023 Employee Stock Purchase Plan, to replace the Amended and Restated Long-Term Incentive Plan (the, “Predecessor Incentive Plan”) and the 2014 Employee Stock Purchase Plan (the, “Predecessor ESPP”), respectively. The Predecessor Incentive Plan terminated on April 23, 2023 and the 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 were terminated with the adoption of the successor plans. A summary of compensation costs charged to income, by award type, and proceeds from the ESPP, are presented below for the three and nine months ended September 30, 2023 and 2022: Three months ended September 30, Nine months ended September 30, 2023 2022 2023 2022 Compensation costs charged to income: ESPP $ 187 184 $ 378 369 Restricted stock and deferred restricted stock 1,051 1,214 3,198 3,622 Total compensation costs charged to income $ 1,238 1,398 $ 3,576 3,991 ESPP proceeds $ 1,061 1,042 $ 2,141 2,091 Restricted Stock and Deferred Restricted Stock For the three months ended September 30, 2023 and 2022, SJW Group granted 968 and 1,723 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value per unit of $ 63.96 and $ 62.56 , respectively. For the nine months ended September 30, 2023 and 2022, SJW Group granted 38,310 and 45,726 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value per unit of $ 76.88 and $ 65.31 , respectively. 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) For the three months ended September 30, 2023, no performance-based or market-based restricted stock awards were granted. For the three months ended September 30, 2022, SJW Group granted 2,193 target units performance-based and market-based restricted stock awards with a weighted-average grant date fair value per unit of $ 69.70 . For the nine months ended September 30, 2023 and 2022, SJW Group granted 31,345 and 35,846 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 $ 70.31 , 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 September 30, 2023, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $ 5,734 . This cost is expected to be recognized over a weighted-average period of 1.81 years. Employee Stock Purchase Plan SJW Group’s recorded expenses for its ESPP were $ 81 and $ 277 for the three and nine months ended September 30, 2023, respectively, and $ 94 and $ 276 for the three and nine months ended September 30, 2022, respectively. The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2024, for the employee stock purchase plan is approximately $ 130 . This cost is expected to be recognized during the fourth quarter of 2023. Note 9. Segment and Non-Tariffed Business Reporting SJW Group is a holding company with four subsidiaries: (i) SJWC, (ii) SJWTX Holdings, Inc., a holding company for TWC its consolidated variable interest entity, Acequia Water Supply Corporation, TWOS and TWR, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated commercial building rentals, and (iv) SJWNE LLC, a holding company for CTWS and its subsidiaries, CWC, MWC, NEWUS and Chester Realty, Inc. SJWC, SJWTX Holdings, Inc. and SJWNE LLC are water utility operations with both regulated and non-tariffed businesses. 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, CWC, TWC, MWC, 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. 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) For Three Months Ended September 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 $ 199,537 3,876 1,430 — 199,537 5,306 204,843 Operating expense 144,102 2,337 691 1,107 144,102 4,135 148,237 Operating income (loss) 55,435 1,539 739 ( 1,107 ) 55,435 1,171 56,606 Net income (loss) 37,545 2,198 563 ( 4,084 ) 37,545 ( 1,323 ) 36,222 Depreciation and amortization 26,147 84 1 223 26,147 308 26,455 Interest on long-term debt and other interest expense 10,839 112 — 5,793 10,839 5,905 16,744 Provision (benefit) for income taxes 5,933 428 196 ( 1,996 ) 5,933 ( 1,372 ) 4,561 Assets 3,706,359 43,872 44,560 48,637 3,706,359 137,069 3,843,428 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 Nine Months Ended September 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 485,334 9,398 4,293 — 485,334 13,691 499,025 Operating expense 375,647 5,540 2,251 2,645 375,647 10,436 386,083 Operating income (loss) 109,687 3,858 2,042 ( 2,645 ) 109,687 3,255 112,942 Net income (loss) 71,277 3,412 1,532 ( 10,183 ) 71,277 ( 5,239 ) 66,038 Depreciation and amortization 77,644 253 305 670 77,644 1,228 78,872 Interest on long-term debt and other interest expense 32,232 112 — 16,569 32,232 16,681 48,913 Provision (benefit) for income taxes 8,759 1,071 581 ( 6,284 ) 8,759 ( 4,632 ) 4,127 Assets 3,706,359 43,872 44,560 48,637 3,706,359 137,069 3,843,428 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) 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 ____________________ (1) The “All Other” category for the three and nine months ended September 30, 2023 and 2022, includes the accounts of SJW Group, SJWNE LLC, CTWS and SJWTX Holdings, Inc. on a stand-alone basis. Note 10. Acquisitions On January 13, 2023, TWC reached an agreement to acquire KT Water Development Ltd. (“KT Water Development”) and SJWTX Holdings, Inc. reached an agreement to acquire KT Water Resources L.P. (“KT Water Resour ces”). The agreement between SJWTX Holdings, Inc. and KT Water Resources, LP, was assigned to TWR prior to closing. KT Water Development 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 wholesale groundwater resource supplier to KT Water Development formed to develop wholesale water supplies for the fast-growing utilities of Comal County, Texas. T he Public Utility Commission of Texas (“PUCT”) approved the proposed KT Water Development acquisition on July 24, 2023. The acquisition of KT Water Resources did not require PUCT approval. Both transactions closed on August 14, 2023. Further information regarding each of the acquisitions is set forth below. KT Water Development The purchase price of KT Water Development was $ 7,338 , all of which was cash, and was determined in accordance with a fair market value process defined under the Texas Water Code. The transaction was accounted for as a business combination in accordance with Accounting Standards Codification (“ASC”) Topic 805—“Business Combinations.” Based on the preliminary purchase price allocation, the transaction consideration was allocated to utility plant. The final allocation will be completed within one year from the acquisition date. Transaction costs were not material. The results of KT Water Development are included in SJW Group’s consolidated statements of comprehensive income since the acquisition date and were not material. Pro forma financial information has not been presented because the acquisition was not material to SJW Group’s consolidated financial statements. KT Water Resources The total purchase price of KT Water Resources of $ 39,891 and consisted of a $ 24,491 up-front cash payment and an obligation for a post-closing production payment with an acquisition date fair value of $ 15,400 . Considering transaction costs of $ 170 , the total cost of the acquisition was $ 40,061 . The KT Water Resources acquisition was accounted for as an asset acquisition in accordance with ASC Topic 805. The total cost was allocated as follows based on the fair values of the assets acquired: $ 28,386 to other intangible asset, $ 11,684 to nonutility property, and $ 9 to other current liabilities. The other intangible asset represents indefinite life water rights that will not be amortized, but instead will be tested for impairment annually, or more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. The nonutility property consists of wells, land, easements, and construction in progress. The post-closing production payment represents an obligation to pay a total amount of $ 29,000 to the seller over a period up to 29 years. The repayment schedule is based on the quantity of groundwater produced from the acquired wells, subject to certain provisions in the purchase agreement. The fair value of the post-closing payment as of the acquisition date was determined by discounting forecasted repayments based on management’s estimates of future groundwater production. The difference 17 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2023 (in thousands, except share and per share data) between the fair value of $ 15,400 and the gross obligation of $ 29,000 is recorded as a debt discount and is being amortized as interest expense using the effective interest method over the life of the obligation. The post-closing production payment obligation is classified as long-term debt in the condensed consolidated balance sheets. 18