H2O AMERICA 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in thousands, except per share amounts and 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. This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that may affect our actual results, please see our disclosures under “Forward-Looking Statements,” and elsewhere in this Form 10-Q, including Part II, Item 1A under “Risk Factors” as well as the disclosures under Part I, Item 1A in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2023 under “Risk Factors.” General: SJW Group is a holding company with four wholly owned subsidiaries: San Jose Water Company (“SJWC”), SJWNE LLC, SJWTX Holdings, Inc. and SJW Land Company. SJWC is a public utility in the business of providing water service to approximately 232,000 connections that serve a population of approximately one million people in an area comprising approximately 140 square miles in the metropolitan San Jose, California area. The principal business of SJWC consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. SJWC provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, and Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. SJWC distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. SJWC also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site le ases. SJWC has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to serve its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained. SJWC also has approximately 234 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to SJWC’s various watershed properties. SJWNE LLC is the holding company for Connecticut Water Service, Inc. (“CTWS”). CTWS, headquartered in Connecticut, serves as a holding company for water utility companies providing water service to approximately 142,000 connections that serve a population of approximately 462,000 people in 81 municipalities throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut. The subsidiaries held by CTWS that provide utility water services are The Connecticut Water Company (“CWC”) and The Maine Water Company (“MWC”). The remaining two CTWS subsidiaries are Chester Realty, Inc., a real estate company in Connecticut, and New England Water Utility Services, Inc., which provides contract water and sewer operations and other water related services. The properties of CTWS’s subsidiaries consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, water treatment plants, pumping plants, transmission and distribution mains and other facilities and equipment used for the collection, purification, storage and distribution of water throughout Connecticut and Maine. In certain cases, CWC and MWC are or may be a party to limited contractual arrangements for the provision of water supply from neighboring utilities. SJWTX Holdings, Inc. is the holding company for SJWTX, Inc., doing business as The Texas Water Company (“TWC”), Texas Water Operation Services LLC (“TWOS”) and Texas Water Resources, LLC (“TWR”). 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. Comal, Kendall and Hays counties are three of the top five growth counties in the United States. TWC also holds a 25% equity interest 17 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 TWR was formed to hold wholesale water supply assets. SJW Land Company and Chester Realty, Inc. own undeveloped land and operate commercial buildings in Tennessee, California and Connecticut. SJW Land Company and Chester Realty, Inc. owned the following real properties during the three months ended March 31, 2024: % for Three months ended March 31, 2024 of Real Estate Services Description Location Acreage Square Footage Revenue Expense Warehouse building Knoxville, Tennessee 30 361,500 61 % 52 % Commercial building Knoxville, Tennessee 15 135,000 38 % 47 % Undeveloped land and parking lot Knoxville, Tennessee 10 N/A N/A N/A Undeveloped land San Jose, California 101 N/A N/A N/A Commercial building Clinton, CT 22 9,000 1 % 1 % Commercial building Guilford, CT 1 1,300 — % — % Business Strategy for Water Utility Services: SJW Group focuses its business initiatives in three strategic areas: (1) 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; and (3) Out-of-region water and utility-related services. As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets. However, we cannot be certain we will be successful in identifying and consummating any strategic business 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. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the potential for a negative impact on our financial position and operating results, entering markets in which we have no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm operating results or our financial condition. Please also see Note 10 of “Notes to Condensed Consolidated Financial Statements” for SJW Group’s recent acquisition activities. Real Estate Services: SJW Group’s real estate investment activity is conducted through SJW Land Company and Chester Realty, Inc. SJW Land Company owns undeveloped land in California and Tennessee and owns and operates commercial buildings in Tennessee. Chester Realty, Inc. owns and operates land and commercial buildings in Connecticut. SJW Land Company and Chester Realty, Inc. manage their acquired income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. 18 Critical Accounting Policies: The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2023 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2023, that was filed with the Securities and Exchange Commission on February 23, 2024. Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2023. 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 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: 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 and sales. Overview 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 March 31, 2024 2023 Water Utility Services $ 147,607 135,849 Real Estate Services 1,775 1,447 Total operating revenue $ 149,382 137,296 The change in consolidated operating revenues was due to the following factors: Three months ended March 31, 2024 vs. 2023 Increase/(decrease) Water Utility Services: Consumption changes $ 1,797 1 % Increase in customers 791 1 % Rate increases 9,960 5 % Regulatory mechanisms (790) — % Real Estate Services 328 — % Total change in operating revenue $ 12,086 7 % 19 Operating Expense Operating Expense by Segment Three months ended March 31, 2024 2023 Water Utility Services $ 119,391 110,281 Real Estate Services 726 899 All Other 1,352 938 Total operating expense $ 121,469 112,118 The change in consolidated operating expense was due to the following factors: Three months ended March 31, 2024 vs. 2023 Increase/(decrease) Water production expenses: Change in surface water use $ 1,612 1 % Change in usage and new customers 2,331 2 % Purchased water and groundwater extraction charge, energy price change and other production expenses, net 1,601 1 % Balancing and memorandum accounts cost recovery (769) (1) % Total water production expenses 4,775 3 % Administrative and general 1,444 1 % Maintenance 629 — % Property taxes and other non-income taxes 429 — % Depreciation and amortization 2,074 2 % Total change in operating expense $ 9,351 6 % Sources of Water Supply SJWC’s water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from Santa Clara Valley Water District (“Valley Water”) under the terms of a master contract with Valley Water expiring in 2051. During normal rainfall years, purchased water provides approximately 40% to 50% of SJWC’s annual production. An additional 40% to 50% of its water supply is pumped from the underground basin which is subject to a groundwater extraction charge paid to Valley Water. Surface supply, which during a normal rainfall year satisfies about 6% to 8% of SJWC’s annual water supply needs, provides approximately 1% of its water supply in a dry year and approximately 14% in a wet year. In dry years, the decrease in availability of water from surface run-off and diversion and the corresponding increase in purchased and pumped water increases production expenses substantially. 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 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 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 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 20 Drinking Water. SJWC believes that its various sources of water supply will be sufficient to meet customer demand through the remainder of 2024. 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. In addition, CWC has water supply agreements to supplement its water supply with the South Central Connecticut Regional Water Authority and The Metropolitan District that expire in 2058 and 2053, respectively. TWC’s water supply consists of groundwater from wells and purchased treated and untreated raw water from local water agencies. TWC has long-term agreements with the Guadalupe-Blanco River Authority (“GBRA”), which expire in 2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts, provide TWC with an aggregate of 7,650 acre-feet of water per year from Canyon Lake at prices that may be adjusted periodically by GBRA. TWC also has raw water supply agreements with the Lower Colorado River Authority and West Travis Public Utility Agency expiring in 2059 and 2046, respectively, to provide for 350 acre-feet of water per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted periodically by the agencies. 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, 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. 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. MWC has a water supply agreement with the Kennebec Water District expiring in 2040. The following table presents the change in sources of water supply, in billion gallons, for Water Utility Services: Three months ended March 31, Increase/ (decrease) % of Total Change 2024 2023 (billion gallons) Purchased water 2.0 3.3 (1.3) (15) % Groundwater 3.9 2.1 1.8 20 % Surface water 3.0 3.3 (0.3) (3) % Reclaimed water 0.1 0.1 — — % 9.0 8.8 0.2 2 % The changes in the source of supply mix were consistent with the changes in the water production expenses. SJWC’s unaccounted-for water on a 12-month-to-date basis for March 31, 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 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 $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 $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. 21 Other (Expense) Income 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 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 Almost all of the operating revenue of SJW Group results from the sale of water at rates authorized by the subsidiaries’ respective state utilities commissions. The state utilities commissions set rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations. Please also see Note 2 of “Notes to Condensed Consolidated Financial Statements.” California Regulatory Affairs 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. 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. 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. 603 was approved with an effective date of January 1, 2024. SJWC filed Advice Letter No. 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. 601. Advice Letter No. 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 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 22 $25,000. 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 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 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 TWC has no current general rate case pending. However, it filed its application to establish a System Improvement Charge (“SIC”) with the PUCT under Docket No. 54430 on December 30, 2022. 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. 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. All water supply cost increases are recoverable when the next annual WPC adjustment for each system is filed. On April 10, 2023, TWC filed an application with the PUCT to acquire the Elm Ridge water system that serves 21 residential customers. TWC has asked for filed rate doctrine treatment, which allows the acquiring utility’s current rates to be applied at the time of acquisition. 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”). KT Water Development provides service to approximately 570 residential water connections. On August 14, 2023, TWC closed on the acquisition. 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 The rates approved in the Biddeford Saco division by the April 5, 2022 stipulated agreement, which authorized a rate increase of $6,313, or 72.5% went into effect on July 1, 2022. The Saco River Drinking Water Resource Center began supplying the water distribution system on June 16, 2022. As part of the stipulated agreement, MWC agreed to file a final phase of the rate case by April 1, 2023. 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 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 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 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. SJW Group 23 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. Liquidity: Cash Flow from Operating Activities 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. Cash flow from operations increased by approximately $600. This increase was the result of a combination of the following factors: (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 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) $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 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. Over the next five years, Water Utility Services expects to incur approximately $1,621,000 in capital expenditures, which includes replacement of pipes and mains, maintaining water systems, and installing PFAS treatment. A significant portion of this amount is subject to future respective state regulatory utility commissions’ approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction. The Water Utility Services’ distribution systems were constructed during the period from the early 1900’s through today. Expenditure levels for renewal and modernization will occur as the components reach the end of their useful lives. In most cases, replacement costs will significantly exceed the original installation costs of the retired assets due to increases in the costs of goods and services and increased regulation. Cash Flow from Financing Activities Net cash provided by financing activities for the three months ended March 31, 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. 24 Sources of Capital: SJW Group’s ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings. Short-term Financing Agreements SJW Group and its subsidiaries have unsecured line of credit agreements where borrowings are used 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 Syndicated credit agreement: August 2, 2028 SJW Group $ 50,000 10,000 40,000 SJWC 140,000 99,000 41,000 CTWS 90,000 50,000 40,000 TWC 20,000 3,000 17,000 Total syndicated credit agreement 300,000 162,000 138,000 CTWS credit agreement August 2, 2028 10,000 8,748 1,252 CTWS credit agreement May 15, 2025 40,000 40,000 — $ 350,000 210,748 139,252 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 March 31, 2024, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit. 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 on January 22, 2024. The debt and credit agreements of SJW Group and its subsidiaries contain various financial and other covenants. Non-compliance with these covenants could result in accelerated due dates and termination of the agreements. 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 March 31, 2024, SJW Group and its subsidiaries were in compliance with all covenants in their long-term debt agreements. Equity Financing Arrangements On March 1, 2023, SJW Group entered into Amendment No. 1 to the equity distribution agreement (the “Equity Distribution Agreement”), dated November 17, 2021, between SJW Group and J.P. Morgan Securities LLC, Janney Montgomery Scott LLC, RBC Capital Markets, LLC and Wells Fargo Securities, LLC (each a “Sales Agent” and, collectively, the “Sales Agents”), pursuant to which SJW Group increased the aggregate gross sales price of shares of SJW Group’s common stock, $0.001 par value per share, that may be sold under the Equity Distribution Agreement from $100,000 to $240,000. For the three 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 25 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 The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to draw on its lines of credit, issue long-term debt, sell its equity or earn interest income. In addition, government policies, the state of the credit markets and other factors could result in increased interest rates, which would increase SJW Group’s cost of capital. While our ability to obtain financing will continue to be a risk, we believe that based on our 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. Standard & Poor’s noted the change in outlook is due to recent regulatory and legislative developments in Connecticut that are not consistent with Standard & Poor’s view of the regulatory framework for investor owned utilities. The following table are the current Standard & Poor’s Rating Service assigned company ratings: Entity Rating Outlook SJW Group A- Negative SJWC A Stable CTWS A- Negative CWC A- Negative