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 March 31, 2024 2023 Operating revenue $ 149,382 137,296 Operating expense: Production Expenses: Purchased water 26,192 22,418 Power 2,427 2,199 Groundwater extraction charges 12,126 10,359 Other production expenses 11,049 12,043 Total production expenses 51,794 47,019 Administrative and general 25,788 24,344 Maintenance 6,687 6,058 Property taxes and other non-income taxes 8,830 8,401 Depreciation and amortization 28,370 26,296 Total operating expense 121,469 112,118 Operating income 27,913 25,178 Other (expense) income: Interest on long-term debt and other interest expense ( 17,584 ) ( 15,772 ) Pension non-service credit (cost) 950 ( 64 ) Other, net 2,651 3,266 Income before income taxes 13,930 12,608 Provision for income taxes 2,231 1,078 Net income 11,699 11,530 Other comprehensive (loss) income, net ( 442 ) 93 Comprehensive income $ 11,257 11,623 Earnings per share Basic $ 0.36 0.37 Diluted $ 0.36 0.37 Dividends per share $ 0.40 0.38 Weighted average shares outstanding Basic 32,076,720 30,936,476 Diluted 32,144,579 31,040,897 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) March 31, 2024 December 31, 2023 Assets Utility plant: Land $ 41,415 41,415 Depreciable plant and equipment 4,005,195 3,967,911 Construction work in progress 133,369 106,980 Intangible assets 35,946 35,946 Total utility plant 4,215,925 4,152,252 Less accumulated depreciation and amortization 1,007,078 981,598 Net utility plant 3,208,847 3,170,654 Nonutility properties and real estate investments 13,377 13,350 Less accumulated depreciation and amortization 195 194 Net nonutility properties and real estate investments 13,182 13,156 Current assets: Cash and cash equivalents 4,542 9,723 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 6,198 and $ 6,551 on March 31, 2024 and December 31, 2023, respectively 62,649 67,870 Income tax 2,911 5,187 Other 2,199 3,684 Accrued unbilled utility revenue 44,345 49,543 Assets held for sale 40,850 40,850 Prepaid expenses 12,822 11,110 Current regulatory assets 1,850 4,276 Other current assets 5,914 6,146 Total current assets 178,082 198,389 Other assets: Regulatory assets, less current portion 238,842 235,910 Investments 17,435 16,411 Postretirement benefit plans 34,244 33,794 Other intangible asset 28,386 28,386 Goodwill 640,311 640,311 Other 8,183 8,056 Total other assets 967,401 962,868 Total assets $ 4,367,512 4,345,067 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) March 31, 2024 December 31, 2023 Capitalization and liabilities Capitalization: Stockholders’ equity: Common stock, $ 0.001 par value; authorized 70,000,000 shares; issued and outstanding share s 32,201,216 on March 31, 2024 and 32,023,004 on December 31, 2023 $ 32 32 Additional paid-in capital 744,621 736,191 Retained earnings 494,249 495,383 Accumulated other comprehensive income 1,349 1,791 Total stockholders’ equity 1,240,251 1,233,397 Long-term debt, less current portion 1,550,298 1,526,699 Total capitalization 2,790,549 2,760,096 Current liabilities: Lines of credit 210,748 171,500 Current portion of long-term debt 9,002 48,975 Accrued groundwater extraction charges, purchased water and power 17,205 24,479 Accounts payable 34,397 46,121 Accrued interest 19,056 15,816 Accrued payroll 8,818 12,229 Current regulatory liabilities 2,480 3,059 Other current liabilities 21,554 20,795 Total current liabilities 323,260 342,974 Deferred income taxes 239,960 238,528 Advances for construction 141,431 146,582 Contributions in aid of construction 331,869 326,451 Postretirement benefit plans 47,323 46,836 Regulatory liabilities, less current portion 469,953 461,108 Other noncurrent liabilities 23,167 22,492 Commitments and contingencies Total capitalization and liabilities $ 4,367,512 4,345,067 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, 2023 32,023,004 $ 32 736,191 495,383 1,791 1,233,397 Net income — — — 11,699 — 11,699 Unrealized loss on investment, net of tax of $ 163 — — — — ( 442 ) ( 442 ) Stock-based compensation — — 1,538 ( 9 ) — 1,529 Issuance of restricted and deferred stock units 30,432 — ( 1,215 ) — — ( 1,215 ) Employee stock purchase plan 21,755 — 1,101 — — 1,101 Common stock issuance, net of costs 126,025 — 7,006 — — 7,006 Dividends paid ($ 0.40 per share) — — — ( 12,824 ) — ( 12,824 ) Balances, March 31, 2024 32,201,216 $ 32 744,621 494,249 1,349 1,240,251 Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss 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 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 SJW Group and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Three months ended March 31, 2024 2023 Operating activities: Net income $ 11,699 11,530 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 28,924 26,842 Deferred income taxes 649 1,052 Stock-based compensation 1,538 1,199 Allowance for equity funds used during construction ( 528 ) ( 180 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue 11,910 8,177 Accounts payable and other current liabilities ( 4,111 ) ( 650 ) Accrued groundwater extraction charges, purchased water and power ( 7,274 ) ( 7,968 ) Tax receivable and payable, and other accrued taxes 4,098 1,727 Postretirement benefits 260 1,667 Regulatory assets and liabilities excluding cost of removal, income tax temporary differences, and postretirement benefits 5,753 8,367 Other changes, net ( 1,702 ) ( 1,156 ) Net cash provided by operating activities 51,216 50,607 Investing activities: Additions to utility plant: Company-funded ( 68,879 ) ( 52,384 ) Contributions in aid of construction ( 4,632 ) ( 2,703 ) Cost to retire utility plant, net of salvage ( 744 ) ( 167 ) Other changes, net ( 18 ) 225 Net cash used in investing activities ( 74,273 ) ( 55,029 ) Financing activities: Borrowings on line of credit 87,645 12,238 Repayments on line of credit ( 49,281 ) ( 99,383 ) Long-term borrowings 25,000 70,000 Repayments of long-term borrowings ( 40,971 ) ( 956 ) Issuance of common stock, net of issuance costs 7,006 40,997 Dividends paid ( 12,824 ) ( 11,722 ) Receipts of advances and contributions in aid of construction 2,285 5,597 Refunds of advances for construction ( 616 ) ( 589 ) Other changes, net ( 368 ) ( 771 ) Net cash provided by financing activities 17,876 15,411 Net change in cash and cash equivalents ( 5,181 ) 10,989 Cash and cash equivalents, beginning of period 9,723 12,344 Cash and cash equivalents, end of period $ 4,542 23,333 Cash paid during the period for: Interest $ 16,011 12,062 Income taxes 177 198 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 26,063 19,906 Utility property installed by developers $ 107 656 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 2024 (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 2023 Annual Report on Form 10-K should be read in conjunction 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. SJW Group’s revenue components are as follows: Three months ended March 31, 2024 2023 Revenue from contracts with customers $ 150,008 135,836 Alternative revenue programs, net ( 1,837 ) ( 1,391 ) Other balancing and memorandum accounts and regulatory mechanisms, net ( 564 ) 1,404 Rental income 1,775 1,447 $ 149,382 137,296 Nonutility Properties and Real Estate Investments The major components of real estate investments and nonutility properties as of March 31, 2024 and December 31, 2023, are as follows: March 31, 2024 December 31, 2023 Land $ 4,134 4,137 Wholesale water supply assets 8,465 8,465 Buildings and improvements 778 748 Subtotal 13,377 13,350 Less: accumulated depreciation and amortization 195 194 Total $ 13,182 13,156 In March 2023, SJW Land Company entered into a broker agreement to sell its warehouse, office 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, 2023. The company’s intention is to complete the sale of these assets within the next twelve months. The company 8 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) records 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. SJW Group's broker provides the estimated fair value of the Tennessee properties. No impairment has been recorded as the estimated fair value less cost to sell exceeds carrying value. The property is classified as part of the Real Estate Services reportable segment. 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. In April 2024, SJW Land Company completed the sale of a warehouse building of the Tennessee properties for $ 27,000 . The estimated pre-tax gain on the sale is $ 7,000 . The following represents the major components of the Tennessee warehouse buildings and land property recorded in assets held-for-sale on the condensed consolidated balance sheets as of March 31, 2024: March 31, 2024 Land $ 13,170 Buildings and improvements 44,950 Subtotal 58,120 Less: accumulated depreciation and amortization 17,270 Total $ 40,850 Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of March 31, 2024, 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 March 31, 2024 approximates their carrying value as reported on the condensed consolidated balance sheets. There have been no changes in valuation techniques during the three months ended March 31, 2024. 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 $ 1,355,609 and $ 1,394,412 as of March 31, 2024 and December 31, 2023, 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. Of the total fair value of long-term debt at March 31, 2024 and December 31, 2023, $ 1,339,659 and $ 1,378,683 , respectively, would be categorized as Level 2 in the fair value hierarchy and $ 15,950 and $ 15,729 , respectively, 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 $ 2,890 and $ 2,833 as of March 31, 2024 and December 31, 2023, 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 March 31, 2024 and 2023, 12,221 and 8,855 anti-dilutive restricted common stock units were excluded from the diluted earnings per share calculation, respectively. New Accounting Standards In November 2023, the FASB issued Accounting Standards Update (“ASU”) 2023-07, “Improvements to Reportable Segment Disclosures.” (“ASU 2023-07”). Among other changes, the ASU requires disclosure of significant segment expenses and extends certain annual disclosures to interim periods. The ASU is effective for SJW Group beginning with its annual financial 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) statements for the year ending December 31, 2024. Early adoption is permitted. SJW Group is currently evaluating the requirements of ASU 2023-07. In December 2023, the FASB issued ASU 2023-09, “Improvements to Income Tax Disclosures.” The ASU amends certain income tax disclosure requirements, including adding requirements to present the reconciliation of income tax expense computed at the statutory rate to actual income tax expense using both percentages and amounts and providing a disaggregation of income taxes paid. Further, certain disclosures are eliminated, including the current requirement to disclose information on changes in unrecognized tax benefits in the next 12 months. The ASU is effective for SJW Group beginning with its annual financial statements for the year ending December 31, 2025. Early adoption is permitted. SJW Group is currently evaluating the requirements of ASU 2023-09. Note 2. Regulatory Matters Regulatory assets and liabilities are comprised of the following as of March 31, 2024 and December 31, 2023: March 31, 2024 December 31, 2023 Regulatory assets: Income tax temporary differences (a) $ 158,793 157,669 Unrecognized pensions and other postretirement benefits (b) 24,593 24,593 Business combinations debt premium (c) 14,219 14,855 Employee benefit costs (d) 9,158 9,815 Monterey Water Revenue Adjustment Mechanism (“MWRAM”) (e) 10,121 9,361 Customer Assistance Program (“CAP”) balancing account (f) 5,850 5,457 Catastrophic event memorandum accounts (“CEMA”) (g) 4,883 4,819 2022 general rate case interim memorandum account (h) 3,266 4,571 Water supply costs (i) — 583 Other (j) 9,809 8,463 Total regulatory assets 240,692 240,186 Less: current regulatory assets (k) 1,850 4,276 Total regulatory assets, less current portion $ 238,842 235,910 Regulatory liabilities: Cost of removal (l) $ 350,369 346,418 Future income tax benefits due to customers (m) 87,908 88,610 Unrecognized pensions and other postretirement benefits (b) 20,303 20,196 Revenue adjustment mechanisms (n) 6,165 5,536 Water supply costs (i) 4,392 — Other (o) 3,296 3,407 Total regulatory liabilities 472,433 464,167 Less: current regulatory liabilities (p) 2,480 3,059 Total regulatory liabilities, less current portion $ 469,953 461,108 ___________________________________ (a) Consists primarily of temporary income tax differences that are flowed through to customers, which will be recovered in future rates as these temporary differences reverse. The company expects to recover regulatory assets related to plant depreciation income tax temporary differences over the lives of the plant assets, which are between 4 to 100 years. (b) Represents actuarial losses and gains and prior service cost that have not yet been recognized as components of net periodic benefit cost for certain pension and other postretirement benefit plans. (c) Consists of debt fair value adjustments recognized through purchase accounting for the completed merger with CTWS in 2019. (d) Includes deferrals of pension and other postretirement benefit expense and cost of accrued benefits for vacation. (e) MWRAM is described in the following section. 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) (f) Represents costs associated with SJWC’s CAP. (g) Primarily related to increased bad debt expenses associated with SJWC’s response to COVID-19. The California Public Utilities Commission (“CPUC”) has authorized water utilities to activate CEMA accounts in order to track savings and costs related to SJWC’s response to catastrophic events, which includes external labor and materials, increases in bad debt from suspension of shutoffs for non-payment, waived deposits and reconnection fees, and divergence from actual versus authorized usage. (h) Represents the difference between revenues collected in interim rates in effect as of January 1, 2022 and revenues that would result from rates authorized in SJWC’s 2022 general rate case retroactive to January 1, 2022. (i) Reflects differences in actual water supply costs compared to amounts assumed in base rates, including applicable changes and variations in costs and quantities that affect the overall mix of the water supply. (j) Other includes other balancing and memorandum accounts and regulatory mechanisms, deferred costs for certain information technology activities, asset retirement obligations and rate case expenses. (k) As of March 31, 2024 and December 31, 2023, primarily relates to the current portion of MWRAM. (l) Represents amounts collected in rates from customers for estimated costs to retire assets at the end of their expected useful lives before the costs are incurred. (m) On December 22, 2017 the Tax Act was signed into law. The Tax Act included a reduction in the federal income tax rate from 35% to 21%. The rate reduction was effective on January 1, 2018 and resulted in a regulatory liability for the excess deferred income taxes. The benefit of amortization of excess deferred income taxes flows back to the customers under current normalization rules and agreed upon methods with the commissions. (n) Consists of Water Rate Adjustment mechanism (“WRA”) and WCMA, which are described in the following section. (o) Other includes other balancing and memorandum accounts, other regulatory mechanisms and accrued tank painting costs. (p) As of March 31, 2024 and December 31, 2023, primarily relates to the current portion of WRA. 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 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. Applicable drought surcharges collected are used to offset the revenue losses tracked in the WCMA. Mandatory water conservation requirements from Santa Clara Valley Water District (“Valley Water”) 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 (“PURA”) to utilize a Water Revenue Adjustment mechanism (“WRA”), a decoupling mechanism, to mitigate risk associated 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 sur-credit 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 March 31, 2024 and December 31, 2023, SJW Group’s regulatory assets not earning a return primarily included unrecognized pensions and other postretirement benefits and business combination debt premiums. The total amount of regulatory assets not earning a return at March 31, 2024 and December 31, 2023, either by interest on the regulatory asset or as a component of rate base at the allowed rate of return, was $ 42,598 and $ 43,141 , respectively. 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, pursuant to which the company may offer and sell shares of its common stock, $ 0.001 par value per share, from time to time in “at-the-market” offerings, having an aggregate gross sales price of up to $ 240,000 . For the three months ended March 31, 2024, SJW Group issued and sold a total of 126,025 shares of 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) 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 at a weighted average price of $ 72.60 for a total net proceeds of $ 151,004 and has $ 85,309 remaining under the Equity Distribution Agreement to issue into shares. Note 4. Lines of Credit 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. Lines of Credit The weighted-average interest rate on short-term borrowings outstanding at March 31, 2024, was 6.42 % compared to 6.48 % at December 31, 2023. Long-term Financing Agreements 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 in January 2024. Note 5. Income Taxes Income tax expense for the three months ended March 31, 2024 and 2023 was $ 2,231 and $ 1,078 , respectively. The effective consolidated income tax rates were 16 % and 9 % for the three months ended March 31, 2024 and 2023, respectively. The higher effective tax rate for the three months ended March 31, 2024 was primarily due to the tax deficiencies recorded in the first quarter of 2024 for share-based payments and other discrete tax items. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 4,488 and $ 4,511 as of March 31, 2024 and December 31, 2023, 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 employees hired before March 31, 2008 and CWC and MWC employees hired before January 1, 2009 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 employees hired before March 1, 2012, and covered by a plan merged into the CWC plan in 2013 are also entitled to benefits based on the employee’s years of service and compensation. CTWS employees hired on or after January 1, 2009, are entitled to an additional 1.5 % of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans. In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009 for CWC, 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. 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three months ended March 31, 2024 and 2023 are as follows: Pension Benefits Other Benefits Three months ended March 31, 2024 2023 2024 2023 Service cost $ 1,665 1,892 $ 166 160 Interest cost 3,613 3,558 295 317 Expected return on assets ( 4,463 ) ( 4,069 ) ( 267 ) ( 217 ) Amortization of actuarial loss (gain) ( 18 ) 554 ( 160 ) ( 88 ) Amortization of prior service cost 4 4 — — Total $ 801 1,939 $ 34 172 In 2024, SJW Group expects to make required and discretionary cash contributions of up to $ 4,515 to the pension plans and other postretirement benefits. For the three months ended March 31, 2024, SJW Group has made no 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 (“ESPP”). As of March 31, 2024, 181,280 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 1,055,383 shares are available for award issuances under the long-term incentive plans. A summary of compensation costs charged to income, by award type, and proceeds from the ESPP, are presented below for the three months ended March 31, 2024 and 2023: Three months ended March 31, 2024 2023 Compensation costs charged to income: ESPP $ 195 191 Restricted stock and deferred restricted stock 1,343 1,008 Total compensation costs charged to income $ 1,538 1,199 ESPP proceeds $ 1,101 1,080 Restricted Stock and Deferred Restricted Stock For the three months ended March 31, 2024 and 2023, SJW Group granted 37,520 and 27,732 , respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value per unit of $ 61.10 and $ 77.88 , respectively. For the three months ended March 31, 2024 and 2023, SJW Group granted 44,433 and 31,345 target units, respectively, of performance-based and market-based restricted stock awards with a weighted-average grant date fair value per unit of $ 53.69 and $ 80.05 , 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 March 31, 2024, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $ 8,149 . This cost is expected to be recognized over a weighted-average period of 2.17 years. 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) Employee Stock Purchase Plan SJW Group’s recorded expenses for its ESPP were $ 97 and $ 90 for the three months ended March 31, 2024 and 2023, respectively. The total unrecognized compensation costs related to the semi-annual offering period that ends July 31, 2024, for the employee stock purchase plan is approximately $ 141 . This cost is expected to be recognized during the second and third quarters of 2024. 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 (iv) SJWNE LLC, a holding company for CTWS and its subsidiaries, CWC, MWC, NEWUS and Chester Realty, Inc. 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.” Water Utility Services’ activities are water utility operations with both regulated and non-tariffed businesses. 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.” 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 executive staff reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiary. The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, such as goodwill, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category. For Three Months Ended March 31, 2024 Water Utility Services Real Estate Services All Other (1) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 144,915 2,692 1,775 — 144,915 4,467 149,382 Operating expense 117,781 1,610 726 1,352 117,781 3,688 121,469 Operating income (loss) 27,134 1,082 1,049 ( 1,352 ) 27,134 779 27,913 Net income (loss) 14,600 732 783 ( 4,416 ) 14,600 ( 2,901 ) 11,699 Depreciation and amortization 28,061 85 1 223 28,061 309 28,370 Interest on long-term debt and other interest expense 11,542 221 — 5,821 11,542 6,042 17,584 Provision (benefit) for income taxes 3,696 318 266 ( 2,049 ) 3,696 ( 1,465 ) 2,231 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) For Three Months Ended March 31, 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 $ 133,272 2,577 1,447 — 133,272 4,024 137,296 Operating expense 108,867 1,414 899 938 108,867 3,251 112,118 Operating income (loss) 24,405 1,163 548 ( 938 ) 24,405 773 25,178 Net income (loss) 13,222 618 425 ( 2,735 ) 13,222 ( 1,692 ) 11,530 Depreciation and amortization 25,686 84 303 223 25,686 610 26,296 Interest on long-term debt and other interest expense 10,547 — — 5,225 10,547 5,225 15,772 Provision (benefit) for income taxes 2,724 323 142 ( 2,111 ) 2,724 ( 1,646 ) 1,078 ____________________ (1) The “All Other” category for the three months ended March 31, 2024 and 2023, includes the accounts of SJW Group, SJWNE LLC, CTWS and SJWTX Holdings, Inc. on a stand-alone basis. SJW Group’s assets by segment are as follows: March 31, 2024 December 31, 2023 Water Utility Services: Regulated $ 4,228,675 4,199,172 Non-tariffed 42,437 43,532 Total water utility services 4,271,112 4,242,704 Real Estate Services 43,506 44,222 All Other 52,894 58,141 Total assets $ 4,367,512 4,345,067 Regulated $ 4,228,675 4,199,172 Non-tariffed 138,837 145,895 Total assets $ 4,367,512 4,345,067 Note 10. Acquisitions In January 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 Resources”). The agreement between SJWTX Holdings, Inc. and KT Water Resources was assigned to TWR prior to closing. KT Water Development was 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 was a wholesale groundwater resource supplier to KT Water Development formed to develop wholesale water supplies for the fast-growing utilities of Comal County, Texas. The 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.” The transaction 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) March 31, 2024 (in thousands, except share and per share data) consideration was allocated to utility plant. The final purchase price allocation was completed during the quarter ended March 31, 2024, with no change from the preliminary purchase price allocation. 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. The nonutility property consists of wells, land, easements, and construction work 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 between the fair value of $ 15,400 and the gross obligation of $ 29,000 was 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. 16