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Item 2. Management’s Discussion and Analysis

2024-04-26 compared with 2023-10-31 · 131 added, 176 removed, 221 unchanged (58% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

(Dollar amounts in thousands, except per share amounts and otherwise noted)

(Dollar amounts in thousands, except per share amounts and where 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, 2023.

21 unchanged sentences

In certain cases, CWC and MWC are or may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities.

In the third quarter of 2023, the corporate reorganization of our water services organization in Texas was completed.

SJWTX Holdings, Inc.

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TWC is a public utility in the business of providing water service to approximately 28,000 connections that serve approximately 85,000 people and approximately 1,000 wastewater connections.

TWC’s service area comprises more than 271 square miles in Bandera, Blanco, Comal, Hays,

Kendall, Medina and Travis Counties in the growing region between San Antonio and Austin, Texas.

TWC’s service area comprises more than 271 square miles in Bandera, Blanco, Comal, Hays, Kendall, Medina and Travis Counties in the growing region between San Antonio and Austin, Texas.

Comal, Kendall and Hays counties are three of the top five growth counties in the United States.

TWC also holds a 25% equity interest in Acequia Water Supply Corporation (“Acequia”).

TWC also holds a 25% equity interest

in Acequia Water Supply Corporation (“Acequia”).

Acequia has been determined to be a variable interest entity within the scope of Accounting Standards Codification Topic 810 with TWC as the primary beneficiary.

As a result, Acequia has been consolidated with TWC.

TWOS was created for non-tariffed service operations and Texas Water Resources, LLC (“TWR”) was formed to hold wholesale water supply assets.

TWOS was created for non-tariffed service operations and TWR was formed to hold wholesale water supply assets.

SJW Land Company and Chester Realty, Inc.

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SJW Land Company and Chester Realty, Inc.

owned the following real properties during the nine months ended September 30, 2023:

% for Nine months ended September 30, 2023 of

owned the following real properties during the three months ended March 31, 2024:

% for Three months ended March 31, 2024 of

Real Estate Services

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SJW Group focuses its business initiatives in three strategic areas:

(1) Regional regulated water utility operations to support the health, safety and quality of life of our customers;

(1) Investing in regional regulated water utility operations to support the health, safety and quality of life of our customers;

(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;

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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.

However, we cannot be certain we will be successful in identifying and consummating any strategic business combinations 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.

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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.

SJW Land Company owns undeveloped land in California and Tennessee and owns and operates commercial buildings in Tennessee.

Chester Realty, Inc.

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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.

manage their acquired income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties.

Critical Accounting Policies:

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Our significant accounting policies are described in the notes to the 2023 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2023.

There have been no changes to our critical or significant accounting policies during the three and nine ended September 30, 2023.

There have been no changes to our critical or significant accounting policies during the three months ended March 31, 2024.

New Accounting Pronouncements:

See Note 1 of “Notes to Unaudited Condensed Consolidated Financial Statements” for a discussion of new accounting pronouncements.

Results of Operations:

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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.

SJW Group’s consolidated net income for the three months ended September 30, 2023 was $36,222, an increase of $11,188, or approximately 45%, from $25,034 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 and an increase from higher customer usage driven primarily by weather conditions and the end of California mandatory water conservation requirements, offset by higher water production expenses, increase in income tax expense, less earnings from regulatory mechanisms and higher debt interest expenses.

SJW Group’s consolidated net income for the nine months ended September 30, 2023 was $66,038, an increase of $25,709, or approximately 64%, from $40,329 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 income taxes due to the partial release of an uncertain tax position reserve, and a decrease in depreciation and amortization primarily due to a one-time impact related to amortization on certain Cupertino concession assets in 2022 net of increases in depreciation related to new utility plant additions, offset by higher water production expenses, higher debt interest expenses, and a one-time gain on sale of nonutility properties of $5,532 in 2022.

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 and sales.

SJW Group’s consolidated net income for the three months ended March 31, 2024 was $11,699, an increase of $169, or approximately 1%, from $11,530 for the same period in 2023.

The increase in net income was primarily driven by rate increases in California and Maine, increases in the infrastructure recovery mechanism in Connecticut, and an increase from higher customer usage driven primarily by weather conditions and the end of California mandatory water conservation requirements.

These factors were offset by higher water production expenses, increased depreciation and amortization for new utility plant placed in service, and higher interest expense and compensation costs.

Operating Revenue

Operating Revenue by Segment

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Water Utility Services $ 147,607 135,849

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Three months ended

September 30,

2022 Nine months ended

September 30,

Increase/(decrease) Increase/(decrease)

Increase/(decrease)

Water Utility Services:

Consumption changes (including unbilled utility revenue) $ 8,307 5 % $ (7,338) (2) %

Consumption changes

Increase in customers 791 1 %

Rate increases 9,960 5 %

Balancing and memorandum accounts:

Monterey Water Revenue Adjustment Mechanism (1,138) (1) % 448 — %

Water Conservation Memorandum Account (“WCMA”) (3,970) (2) % (2,569) — %

Other 210 — % 754 — %

Other regulatory mechanisms 1,731 1 % 586 — %

Other 67 — % 17 — %

Regulatory mechanisms

Real Estate Services 328 — %

Total change in operating revenue

$ 28,862 16 % $ 49,701 11 %

Operating Expense

Operating Expense by Segment

Three months ended September 30, Nine months ended September 30,

2023 2022 2023 2022

Three months ended March 31,

Water Utility Services $ 119,391 110,281

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Three months ended

September 30,

2022 Nine months ended

September 30,

Increase/(decrease) Increase/(decrease)

Increase/(decrease)

Water production expenses:

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Administrative and general 1,444 1 %

Balancing and memorandum account cost recovery

(551) — % (1,865) — %

Maintenance 629 — %

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Depreciation and amortization 2,074 2 %

Gain on sale of nonutility properties 82 — % 5,532 2 %

Total change in operating expense

$ 9,858 7 % $ 17,352 5 %

Sources of Water Supply

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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.

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.

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The opposite is also true where water production expenses decrease in wet years.

In both instances, the impacts of surface water, purchased water, groundwater charges and purchased power are now tracked in SJWC’s Full Cost Balancing Account authorized in the 2022 GRC Decision.

As of September 30, 2023, Santa Clara County’s drought classification remained at “None.” The classification has remained the same since the first quarter of 2023, when it changed from “Abnormally Dry” due to winter storms.

As a result, this year Valley Water received 100% allocations of water from the State Water Project (“SWP”) and the U.S Bureau of Reclamation’s Central Valley Project (“CVP”).

In prior year period, SWP allocation was 5% of contracted amounts and the CVP allocation was reduced to the Public Health and Safety limit due to an exceptionally dry period beginning in 2022.

On October 1, 2023, Valley Water’s 10 reservoirs were 29% of capacity, or 76% of restricted capacity, with 15.4 billion gallons of water in storage.

In both instances, the impacts of surface water, purchased water, groundwater charges and purchased power are tracked in SJWC’s Full Cost Balancing Account authorized in the Decision No.

22-10-005 (“2022 GRC Decision”).

Throughout the three months ended March 31, 2024, water conditions improved across the State of California.

As a result, the California Department of Water Resources announced an increase in the State Water Project allocation from 15% to 30% of contract amount for 2024 and the U.S Bureau of Reclamation announced an increase in the Central Valley Project allocation from 65% to 75%.

On April 1, 2024, Valley Water’s 10 reservoirs were 37% of capacity, or 99% of restricted capacity, with 20.2 billion gallons of water in storage.

Valley Water’s largest reservoir, Anderson, remained drained for a dam seismic retrofit project.

Valley Water also reported that the managed groundwater recharge from January to June in the Santa Clara Plain was 170% of the five-year average.

The groundwater level in the Santa Clara Plain is approximately 23 feet higher than September 2022.

Valley Water also reported that the managed groundwater recharge from January to March in the Santa Clara Plain was 146% of the five-year average.

The groundwater level in the Santa Clara Plain is approximately three feet higher than March 2023.

According to Valley Water, the projected total groundwater storage at the end of 2024 is expected to be in the Normal Stage of the Water Shortage Contingency Plan.

As of September 30, 2023, SJWC’s Lake Elsman was 77.4% of capacity with 1.55 billion gallons of water, approximately 272.0% of the five-year seasonal average.

In addition, the rainfall at SJWC’s Lake Elsman was measured at 0.15 inches for the period from July 1, 2023 through September 30, 2023, which is 40.5% of the five-year average.

SJWC’s Montevina Water Treatment Plant treated 3.4 billion gallons of water through the third quarter, which is 190.2% of the five-year average.

SJWC’s Saratoga Water Treatment Plant treated 0.1 billion gallons of water through the third quarter, which is 78% of the five-year average.

The Saratoga Water Treatment Plant was taken out of service and will remain offline until the next rain season.

As of March 31, 2024, SJWC’s Lake Elsman was 100.8% of capacity with 2.0 billion gallons of water, approximately 160.4% of the five-year seasonal average.

In addition, the rainfall at SJWC’s Lake Elsman was measured at 46.31 inches for the period from July 1, 2023 through March 31, 2024, which is 106.7% of the five-year average.

SJWC’s Montevina Water Treatment Plant treated 1.3 billion gallons of water through the first quarter, which is 154.6% of the five-year average.

SJWC’s Saratoga Water Treatment Plant remains offline until the updated operations plan is granted approval by the California Division of

Drinking Water.

SJWC believes that its various sources of water supply will be sufficient to meet customer demand through the remainder of 2024.

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 in recognition of precipitation volatility and reduced local storage.

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.

On October 2, 2023, SJWC’s request to continue its WCMA and Water Conservation Expense Memorandum Account (“WCEMA”) under the voluntary call for conservation was approved effective April 20, 2023.

SJWC continues to work with Valley Water to promote conservation, educate customers on responsible water use practices, and collaborate on long-range water supply planning.

CWC’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.

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Forty active 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.

In August 2023, TWOS acquired eight wells and the water rights of KT Water Resources LLC.

In August 2023, SJWTX Holdings Inc.’s unregulated subsidiary, TWR acquired eight wells and the water rights of KT Water Resources LLC.

These wells have been projected to yield an additional 6,000 acre-feet per year or more.

In July 2023, TWC implemented its Drought Management Plan as approved by the PUCT as a result of persistent drought conditions, decreasing water levels in Canyon Lake and groundwater wells, and water production levels operating at near-capacity level.

TWC staff is currently working on acquiring easements and routing of the waterline and infrastructure needed to get this water into our Triple Peak water system to serve existing customers and planned new developments.

Water sources at MWC vary among the individual systems, but overall, approximately 90% of the total dependable yield comes from surface water supplies and 10% from wells.

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The following table presents the change in sources of water supply, in billion gallons, for Water Utility Services:

Three months ended September 30, Increase/

(decrease) % of Total Change Nine months ended September 30, Increase/

Three months ended March 31, Increase/

(decrease) % of Total Change

2023 2022 2023 2022

(billion gallons)

Purchased water 2.0 3.3 (1.3) (15) %

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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 September 30, 2023 and 2022 approximated 7.9% and 8.6%, respectively, as a percentage of total production.

SJWC’s unaccounted-for water on a 12-month-to-date basis for March 31, 2024 and 2023 approximated 7.9% and 7.5%, 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 September 30, 2023 and 2022 approximated 13.0% and 14.2% for each of the respective periods, as a percentage of total production.

CTWS’s unaccounted-for water on a 12-month-to-date basis for March 31, 2024 and 2023 approximated 13.4% and 13.9%, 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 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 $9,038 for the three months ended September 30, 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 and increase in customer usage, offset by decreases in SJWC’s regulatory Full Cost Balancing Account 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%.

The change in water production expenses of $11,893 for the nine months ended September 30, 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 and increases in SJWC’s regulatory Full Cost Balancing Account, offset by an increase in available surface water for SJWC and a decrease in customer usage.

The change in water production expenses of $4,775 for the three months ended March 31, 2024, compared to the same period in 2023, was primarily attributable to increases in customer usage, average per unit costs for purchased water, groundwater extraction, and other production expenses and increases resulting to the surface water mix net of regulatory adjustments.

Effective July 1, 2023, 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 $820 for the three months ended September 30, 2023, compared to the same period in 2022.

The increase was primarily attributable to increases in depreciation related to new utility plant additions and an increase in taxes other than income taxes, offset by a decrease in maintenance expenses due to the timing of contract work and materials expenses.

Operating expenses, excluding water production expenses, increased $5,459 for the nine months ended September 30, 2023, compared to the same period in 2022.

The increase was primarily attributable to the $5,450 gain on sale of nonutility properties 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 net of increases in depreciation related to new utility plant additions.

In addition, there were decreases in maintenance expenses due to the timing of contract work and materials expenses.

Operating expenses, excluding water production expenses, increased $4,576 for the three months ended March 31, 2024, compared to the same period in 2023.

The increase was primarily attributable to an increase in depreciation and amortization for new utility plant placed in service and increased compensation costs.

Other (Expense) Income

For the three months ended September 30, 2023, compared to the same period in 2022, the change in other (expense) income was primarily due to an increase in interest expense due to an increase in long-term debt balances, higher interest rates on lines of credit borrowings and an increase in pension non-service cost, offset by the changes in the Rabbi Trust and life insurance policy values.

For the nine months ended September 30, 2023, compared to the same period in 2022, the change in other (expense) income was primarily due to an increase in interest expense due to an increase in long-term debt balances, higher interest rates on lines of credit borrowings and an increase in pension non-service cost, offset by the changes in the Rabbi Trust and life insurance policy values and a true-up on prior real estate sale transactions.

For the three months ended March 31, 2024, compared to the same period in 2023, the change in other (expense) income was primarily due to an increase in interest expense due to higher interest rates and higher average balances on lines of credit borrowings, and an increase in long-term debt balances, offset by decreases in pension non-service cost.

Provision for Income Taxes

For the three and nine months ended September 30, 2023, compared to the same period in 2022, income tax expense increased $4,338 and $469, respectively.

The increase in income tax expense for the three months ended September 30, 2023 was primarily due to a higher pre-tax income.

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 of 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.

For the three months ended March 31, 2024, compared to the same period in 2023, income tax expense increased by $1,153.

The effective consolidated income tax rates were 16% and 9% for the three months ended March 31, 2024 and 2023, respectively.

The higher income tax expense and effective tax rate for the three months ended March 31, 2024 were primarily due to tax deficiencies recorded in the first quarter of 2024 for share-based payments and other discrete tax items.

Regulation and Rates

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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.

On June 29, 2023, the CPUC approved Decision No.

23-06-025 in this proceeding.

The decision authorizes a rate of return of 7.28% based on a return on equity of 8.80%, a cost of debt of 5.46%, and a capital structure of approximately 45% debt and 55% equity.

The CPUC also authorized continuation of the Water Cost of Capital Mechanism (“WCCM”) in the same decision.

The WCCM provides for an adjustment in SJWC’s return on equity and cost of debt if the average Moody’s Aa utility bond index rate between October 1, 2021 and September 30, 2022 varies by more than 100 basis points when compared to the same period from the prior year.

The index rate difference between those periods increased 103 basis points, thereby triggering the WCCM.

Accordingly, SJWC filed a Tier 2 Advice Letter No.

598 on June 30, 2023, which was subsequently approved with an effective date of July 31, 2023.

On July 31, 2023, SJWC filed a Tier 1 Advice Letter No.

599 to implement new rates.

The new rates became effective prospectively on the date of the filing and reflect the WCCM-adjusted return on equity of 9.31%, a cost of debt of 5.26%, and an overall rate of return of 7.47%.

Advice Letter No.

599 was approved with an effective date of July 31, 2023.

Between October 1, 2022 and September 30, 2023, the index rate increased approximately 140 basis points, surpassing the required WCCM trigger.

On October 13, 2023, SJWC filed Advice Letter No.

601 to trigger the WCCM for 2024.

SJWC expects a WCCM-adjusted return on equity of approximately 10.01%, less a 20 basis point reduction due to the reimplementation of the WCMA and WCEMA, to become effective on January 1, 2024.

The CPUC approved the settlement in SJWC’s 2021 General Rate Case application on October 6, 2022 and issued 2022 GRC Decision on October 11, 2022.

SJWC received authority for an increase of revenue requirement by $25,074 or 6.03% in 2022, $12,955 or 2.94% in 2023, and $16,102 or 3.56% in 2024.

The application included requests to recover $18,174 from balancing and memorandum accounts and authorization for a $350,000 capital budget.

Additionally, it further aligned authorized and actual consumption, particularly for business customers, addressed the water supply mix variability, and provided greater revenue recovery in the fixed charge.

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.

601 on October 13, 2023, to inform the CPUC that the Water Cost of Capital Mechanism (“WCCM”) authorized in Decision No.

23-06-025 required an update to SJWC’s authorized rate of return effective January 1, 2024.

The filing requested an adjusted return on equity of 10.01%, a cost of debt of 5.28%, and a resulting authorized rate of return of 7.86%.

Advice Letter No.

601 was approved with an effective date of January 1, 2024.

Separate from the filing, the return on equity was further adjusted by a 20 bps reduction for the reimplementation of the Water Conservation Memorandum Account resulting in an overall rate of return of 7.75%.

SJWC filed Advice Letter No.

586 on November 18, 2022, to increase the authorized revenue requirement by $18,418 or 4% for the escalation year increase in accordance with the 2022 GRC Decision.

603 on November 14, 2023, to establish a Group Insurance Balancing Account to track the difference between the company’s authorized versus actual costs for medical, dental, and opt-out insurance expenses.

Advice Letter No.

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SJWC filed Advice Letter No.

590 on April 6, 2023, to recover a $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.

Advice Letter No.

590 was approved with an effective date of May 8, 2023.

SJWC filed Advice Letter No.

591 on April 11, 2023, to discontinue its drought allocation surcharges and move from Stage 3 to Stage 1 of its Schedule 14.1 Advice Letter No.

591 was approved with an effective date of April 11, 2023.

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.

On October 2, 2023, Advice Letter No.

592 was approved with an effective date of April 20, 2023.

SJWC filed Advice Letter No.

596 on May 31, 2023, to increase the authorized revenue requirement by $27,607 to offset the increases to purchased potable water charges, the groundwater extraction fee, and purchased recycled water charges from its water wholesalers effective July 1, 2023.

605 on November 21, 2023, to increase the authorized revenue requirement by $21,270 or 4.16% for the attrition year increase in accordance with the 2022 GRC Decision and the adjusted Rate of Return approved in Advice Letter No.

Advice Letter No.

596 was approved with an effective date of July 1, 2023.

605 was approved with an effective date of January 1, 2024.

On December 15, 2023, SJWC, along with three other California water utilities, filed a joint request for one-year deferment on the cost of capital filings which would otherwise be due on May 1, 2024.

Postponing the filing a year alleviates administrative processing costs on the utilities as well as the CPUC staff, and provide relief for both CPUC and utility resources already strained by numerous other proceedings.

The request is conditioned on leaving the current WCCM in place such that any adjustments will be made to the respective utilities’ cost of capital during the one-year deferment based on the mechanism.

The request was approved on February 2, 2024.

On January 2, 2024, SJWC filed General Rate Case Application No.

24-01-001 with the CPUC to increase rates charged for water service by $55,196 or 11.11% in 2025, by $22,041 or 3.99% in 2026, and by $25,809 or 4.49% in 2027.

The application proposed a $540,000 three-year capital budget and includes requests to recover $23,462 from balancing and memorandum accounts, further alignment between actual and authorized usage, and a shift to greater revenue collection in the service charge.

The application will undergo a year-long review process and new rates, if approved, are expected to be effective January 1, 2025.

Connecticut Regulatory Affairs

On January 26, 2023, CWC filed for a Water Infrastructure Conservation Adjustment (“WICA”) increase of $3,253 in annualized revenues for $27,775 in completed projects.

PURA approved CWC’s application on March 22, 2023.

On January 25, 2023, CWC filed its 2022 WICA reconciliation with PURA.

On October 3, 2023, CWC filed an application with PURA to adjust customer rates.

If PURA approves the request as proposed, annual revenues of CWC will increase by approximately $21,400, or 18.1%, over current authorized revenues and would be effective on or about July 1, 2024.

A final decision is scheduled for June 28, 2024.

On November 14, 2023, CWC submitted an application to PURA for the approval to issue unsecured notes in the amount of

A decision from PURA approving the application was received on January 10, 2024.

On February 26, 2024, CWC filed its 2023 Water Infrastructure Conservation Adjustment (“WICA”) reconciliation with PURA.

The reconciliation, approved by PURA on March 27, 2024 and effective for 12 months beginning April 1, 2024, replaced the expiring 2022 reconciliation credit of 0.16% with a credit of 0.13%.

The cumulative WICA surcharge as of April 1, 2024 is 7.41%, collecting $7,835 on an annual basis.

On February 27, 2023, CWC filed its 2022 Water Revenue Adjustment mechanism (“WRA”).

On February 28, 2024, CWC filed its 2023 Water Revenue Adjustment (“WRA”).

The mechanism reconciles 2023 revenues as authorized in the CWC’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.

On July 27, 2023, CWC filed for a WICA increase of $1,259 in annualized revenues for $11,464 in completed projects.

PURA approved the application, and effective October 1, 2023, the cumulative WICA surcharge is 7.38%.

On October 3, 2023, CWC filed an application with PURA to adjust customer rates.

If PURA approves the request as proposed, annual revenues of CWC will increase by approximately $21,400, or 18.1%, over current authorized revenues and would be effective on or about July 1, 2024.

The 2023 WRA, as approved by PURA on March 11, 2024 and effective for 12 months beginning on April 1, 2024, imposed a 2.11% sur-credit on customer bills to refund the 2022 revenues over-collection.

Texas Regulatory Affairs

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54430 on December 30, 2022.

This filing will allow TWC 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 TWC’s water revenue by $1,596 and sewer revenue by $29 within one year of the approval from the PUCT.

On October 17, 2023, the PUCT found the application administratively complete.

Once the PUCT files the final order approving the SIC, TWC will be required to file a general rate case within four years.

SIC filings are used to include certain utility plant additions made since 2020 to its rate base, thereby increasing revenue and avoiding the immediate need for a general rate case.

On March 21, 2024, the PUCT filed the final order approving TWC’s request to implement its SIC.

As a result of the final order, the SIC is projected to increase TWC’s water revenue by $1,574 and sewer revenue by $28 within one year of the approval.

Additionally, TWC is required to file a general rate case within four years.

TWC will incrementally increase its SIC annually until its next rate case.

TWC expects to receive the final order during the first quarter of 2024.

Notwithstanding the SIC filing, TWC will continue to file its annual adjustments for the Water Pass-through Charges (“WPC”) for Canyon Lake, Deer Creek and Kendall West customers.

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TWC has asked for filed rate doctrine treatment, which allows the acquiring utility’s current rates to be applied at the time of acquisition.

TWC expects to receive the PUC’s approval to close on the acquisition during the fourth quarter of 2023.

On May 17, 2023, TWC filed its application with the PUCT for an internal stock transfer.

As part of an internal restructure, SJW Group would transfer 100% of the stock held in TWC to SJWTX Holdings, Inc.

On September 18, 2023, the PUCT gave its approval for the transaction to proceed.

SJW Group completed the transfer on September 18, 2023.

On December 12, 2023, the Administrative Law Judge filed Order No.

11, which allowed TWC to proceed and the acquisition closed on January 26, 2024.

The final order, which transfers the Certificate of Convenience and Necessity (“CCN”) and allows filed rate doctrine, is expected to be approved during the second quarter of 2024.

On July 24, 2023, the PUCT approved TWC's application to acquire KT Water Development Ltd.

KT Water Development Ltd.

provides service to approximately 570 residential water connections.

(“KT Water Development”).

KT Water Development provides service to approximately 570 residential water connections.

On August 14, 2023, TWC closed on the acquisition.

The PUCT's final decision that transfers the CCN to TWC is expected in the fourth quarter of 2023, which is when we anticipate approval of our request for fair market value and filed rate doctrine treatment.

On March 7, 2024, the PUCT filed the final order which transferred the CCN to TWC, approved the fair market value, and allowed TWC to charge its existing rates to the customers of KT Water Development.

On January 5, 2024, TWC filed an application with the PUCT to acquire the 3009 Water Company LLC water system that serves approximately 270 residential connections.

TWC requested fair market value and to apply TWC’s existing rates to the customers being acquired.

TWC expects to receive approval to close on the acquisition during the third quarter of 2024.

Maine Regulatory Affairs

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The third filing was submitted on March 31, 2023.

Step 3 of the planned multi-year rate filings for the Saco River Drinking Water Resource Center was filed in accordance with the Commission order on March 31, 2023.

Step 3 of the planned multi-year rate filings for the Saco River Drinking Water Resource Center was filed in accordance with the MPUC order 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 August 25, 2023, the Commission issued an order granting a temporary rate increase of $1,495 or 10% while the case and the Company’s full request are litigated.

A final decision is expected in the fourth quarter of 2023.

On February 2, 2023, MWC 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.

On February 28, 2022, MWC filed requests for general rate increases in the Camden-Rockland, Freeport, Millinocket and Oakland Divisions.

On June 30, 2023, MWC filed a Water Infrastructure Surcharge for the Camden-Rockland division.

On August 25, 2023, the MPUC issued an order granting a temporary rate increase of $1,495 or 10% while the case and the Company’s full request were litigated.

The company reached a settlement agreement with staff and the Office of the Public Advocate and filed a stipulated settlement agreement with the MPUC on December 22, 2023.

The MPUC approved the stipulation in deliberations on January 5, 2024, with an increase in authorized annual revenue of $2,603, or 17.6%, effective January 1, 2024.

The Biddeford and Saco division’s increase in rates is based on an authorized return on equity of 9.5% along with a capital structure of 49% debt and 51% equity.

This return on equity and capital structure will be used for any future Water Infrastructure Surcharge (“WISC”) calculations for all divisions until the MPUC has authorized or approved a different return on equity structure in a different proceeding.

On June 30, 2023, MWC filed a WISC for the Camden-Rockland division.

The requested surcharge is 2.34% or $158.

The Commission is expected to issue a decision regarding the surcharge in November 2023.

The MPUC issued an order approving the surcharge on March 22, 2024.

Other Regulatory Matters

In April 2024, the U.S.

Environmental Protection Agency issued final new national primary drinking water regulations for six PFAS.

The regulations impose maximum contaminant levels and monitoring requirements for the nation’s water systems for six PFAS chemicals under the Safe Drinking Water Act.

The final regulation requires water systems to comply with PFAS monitoring and reporting requirements by 2027, and to comply with the maximum contaminant levels by 2029.

estimates capital expenditures of approximately $230,000 for treatment based on the maximum contaminant levels in the previously proposed regulation.

See discussion below under “Liquidity” for additional information on capital expenditures.

Cash Flow from Operating Activities

During the nine months ended September 30, 2023, SJW Group generated cash flows from operations of approximately $159,300, compared to approximately $129,300 for the same period in 2022.

During the three months ended March 31, 2024, SJW Group generated cash flows from operations of approximately $51,200, compared to approximately $50,600 for the same period in 2023.

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.

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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 $37,100, (2) a decrease in payments of amounts previously invoiced and accrued including accrued production costs of $5,000, and (3) increased tax accruals of $2,500 compared to the prior period, offset by (4) a decrease of $5,700 in regulatory assets primarily due to lower surcharge collections on balancing and memorandum accounts, (5) a decrease in collections from accounts receivable and accrued unbilled utility revenue of $4,300, and (6) a decrease of $4,600 in other changes primarily due to prior funds received from the State of California Water and Wastewater Arrearages Payment Program and the partial release of uncertain tax position reserve.

As of September 30, 2023, Water Utility Services’ write-offs for uncollectible accounts represented 1% of its total revenue, increased from less than 1% as of September 30, 2022.

Management believes that the collection rate for its accounts receivables will increase as service disconnections gradually return to normal operations.

(1) an increase in collections from accounts receivable and accrued unbilled utility revenue of $3,700, and (2) increased tax accruals of $2,400 compared to the prior period, offset by (3) a decrease of $2,800 attributable to changes in payments of amounts previously invoiced and accrued including accrued production costs, (4) a decrease of $2,600 attributable to changes in regulatory assets and liabilities, including the effect of lower surcharge collections on balancing and memorandum accounts, and (5) general working capital and net income, adjusted for non-cash items, decreased by $100.

As of March 31, 2024, Water Utility Services’ write-offs for uncollectible accounts represented less than 1% of its total revenue, which decreased from 2% as of March 31, 2023.

Management believes that the collection rate will continue for its accounts receivables as service disconnections return to normal operations.

On December 28, 2023, SJWC submitted the application to receive $10,237 through the State of California Water and Wastewater Arrearages Payment Program to relieve outstanding payment delinquencies for customer accounts greater than 60-days past due as of December 31, 2022.

We anticipate the funds to be received in the second quarter of 2024 after the State of California Water and Wastewater Arrearages Payment Program completes the review of this application.

Cash Flow from Investing Activities

During the nine months ended September 30, 2023, SJW Group used cash flows from investing activities of approximately $241,700, compared to approximately $181,500 for the same period in 2022.

During the three months ended March 31, 2024, SJW Group used cash flows from investing activities of approximately $74,300, compared to approximately $55,000 for the same period in 2023.

This increase was primarily driven by additions to utility plant.

SJW Group used approximately:

(1) $195,900 of cash for company-funded utility capital expenditures, (2) $24,200 for nonutility properties, real estate investments and other intangible asset, (3) $13,600 for developer-funded utility capital expenditures, and (4) $7,300 for business acquisitions during the nine months ended September 30, 2023.

(1) $68,900 of cash for company-funded utility capital expenditures and (2) $4,600 for developer-funded utility capital expenditures during the three months ended March 31, 2024.

For the same period in 2023, SJW Group used approximately:

(1) 52,384 of cash for company-funded utility capital expenditures and (2) 2,703 for developer-funded utility capital expenditures.

Water Utility Services’ estimated utility capital expenditures for 2024, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately $332,000.

As of September 30, 2023, approximately $195,900 or 77% of the $255,000 has been invested.

As of March 31, 2024, approximately $68,900 or 21% of the $332,000 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.

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Cash Flow from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, 2023 increased by approximately $38,000 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 $139,700, and (2) an increase in net proceeds from our common stock equity offerings of $72,200, offset by (3) a decrease in net borrowings and repayments on our lines of credit of $167,300, (4) $3,100 increase in dividends paid to stockholders, and (5) $2,700 decrease in net cash receipts from advances and contributions in aid of construction.

Net cash provided by financing activities for the three months ended March 31, 2024 increased by approximately $2,500 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings and repayments on our lines of credit of $125,500, offset by (2) a decrease in net borrowings and repayments on long-term debt of $85,000, and (3) a decrease in net proceeds from our common stock equity offerings of $34,000.

Sources of Capital:

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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 September 30, 2023 are as follows:

SJW Group and its subsidiaries have unsecured line of credit agreements where borrowings are used to refinance existing debt, for working capital, and for general corporate purposes.

A summary of the line of credit agreements as of March 31, 2024 are as follows:

Maturity Date Line Limit Amounts Outstanding Unused Portion

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$ 350,000 210,748 139,252

For the nine months ended September 30, 2023, cost of borrowing on the lines of credit averaged 6.16% compared to 2.79% in the same period in 2022.

For the three months ended March 31, 2024, cost of borrowing on the lines of credit averaged 6.54% compared to 5.74% in the same period in 2023.

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 September 30, 2023, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.

As of March 31, 2024, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.

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.

On November 15, 2023, CWC entered into a note purchase agreement with certain affiliates of American United Life Insurance, The State Life Insurance, Mutual of Omaha Insurance, and United of Omaha Life Insurance, pursuant to which the company sold an aggregate principal amount of $25,000 of its 6.46% Senior Notes, Series 2023 (“Series 2023 Notes”).

The Series 2023 Notes are unsecured obligations of CWC and are due on January 1, 2054.

Interest is payable semi-annually in arrears on January 15th and July 15th of each year.

The closing of the notes purchase agreement occurred on January 22, 2024.

The debt and credit agreements of SJW Group and its subsidiaries contain various financial and other covenants.

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In addition, the credit agreements contain customary representations and warranties and are subject to customary events of default, which may result in the outstanding debt becoming immediately due and payable.

As of September 30, 2023, SJW Group and its subsidiaries were in compliance with all covenants in their long-term debt agreements.

As of March 31, 2024, SJW Group and its subsidiaries were in compliance with all covenants in their long-term debt agreements.

Equity Financing Arrangements

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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, with 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 with a weighted average price of $74.05 for a total net proceeds of $138,716 and has $98,209 remaining to issue from the sale of shares as of September 30, 2023 under the Equity Distribution Agreement.

For the three months ended March 31, 2024, SJW Group issued and sold a total of 126,025 shares of common stock with a weighted average price of $57.13 per share and received $7,006 in net proceeds under the Equity Distribution Agreement.

Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 2,130,682 shares of common stock with a weighted average

price of $72.60 for a total net proceeds of $151,004 and has $85,309 remaining to issue from the sale of shares as of March 31, 2024 under the Equity Distribution Agreement.

Credit Rating

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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.

While our ability to obtain financing will continue to be a risk, we believe that based on our 2024 and 2023 activities, we will have access to the external funding sources necessary to implement our ongoing capital investment programs in the future.

SJW Group, CTWS and CWC were put on negative watch on September 19, 2023.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis