H2O AMERICA 10-Q

ITEM 1. FINANCIAL STATEMENTS SJW Group and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (in thousands, except share and per share data) Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Operating revenue $ 225,063 204,843 $ 550,619 499,025 Operating expense: Production Expenses: Purchased water 54,310 46,044 118,631 101,054 Power 3,396 2,785 8,560 7,363 Groundwater extraction charges 25,081 21,398 54,759 46,751 Other production expenses 12,919 12,415 36,020 36,379 Total production expenses 95,706 82,642 217,970 191,547 Administrative and general 25,708 23,888 71,964 71,759 Maintenance 8,512 6,457 23,080 18,813 Property taxes and other non-income taxes 9,361 8,795 26,610 25,092 Depreciation and amortization 27,423 26,455 84,159 78,872 Total operating expense 166,710 148,237 423,783 386,083 Operating income 58,353 56,606 126,836 112,942 Other (expense) income: Interest on long-term debt and other interest expense ( 17,516 ) ( 16,744 ) ( 53,394 ) ( 48,913 ) Pension non-service credit (cost) 940 ( 740 ) 2,829 ( 906 ) Other, net ( 1,197 ) 1,661 2,659 7,042 Income before income taxes 40,580 40,783 78,930 70,165 Provision for income taxes 1,928 4,561 7,883 4,127 Net income 38,652 36,222 71,047 66,038 Other comprehensive income (loss), net — 318 ( 442 ) 420 Comprehensive income $ 38,652 36,540 $ 70,605 66,458 Earnings per share Basic $ 1.17 1.14 $ 2.19 2.10 Diluted $ 1.17 1.13 $ 2.18 2.09 Dividends per share $ 0.40 0.38 $ 1.20 1.14 Weighted average shares outstanding Basic 32,896,967 31,862,518 32,458,666 31,436,077 Diluted 32,982,580 31,934,636 32,530,954 31,526,732 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 4 SJW Group and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) September 30, 2024 December 31, 2023 Assets Utility plant: Land $ 44,646 41,415 Depreciable plant and equipment 4,141,490 3,967,911 Construction work in progress 203,040 106,980 Intangible assets 64,372 35,946 Total utility plant 4,453,548 4,152,252 Less: accumulated depreciation and amortization 1,047,631 981,598 Net utility plant 3,405,917 3,170,654 Nonutility properties and real estate investments 1,352 13,350 Less: accumulated depreciation and amortization 97 194 Net nonutility properties and real estate investments 1,255 13,156 Current assets: Cash and cash equivalents 3,967 9,723 Accounts receivable: Customers, net of allowances for uncollectible accounts of $ 848 and $ 6,551 on September 30, 2024 and December 31, 2023, respectively 75,849 67,870 Income tax 11,262 5,187 Other 6,286 3,684 Accrued unbilled utility revenue 68,342 49,543 Assets held for sale — 40,850 Prepaid expenses 15,411 11,110 Current regulatory assets 828 4,276 Other current assets 5,331 6,146 Total current assets 187,276 198,389 Other assets: Regulatory assets, less current portion 253,162 235,910 Investments 18,213 16,411 Postretirement benefit plans 39,387 33,794 Other intangible asset — 28,386 Goodwill 640,311 640,311 Other 6,781 8,056 Total other assets 957,854 962,868 Total assets $ 4,552,302 4,345,067 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 5 SJW Group and Subsidiaries CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (in thousands, except share and per share data) September 30, 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 33,226,735 on September 30, 2024 and 32,023,004 on December 31, 2023 $ 33 32 Additional paid-in capital 804,848 736,191 Retained earnings 527,575 495,383 Accumulated other comprehensive income 1,349 1,791 Total stockholders’ equity 1,333,805 1,233,397 Long-term debt, less current portion 1,673,715 1,526,699 Total capitalization 3,007,520 2,760,096 Current liabilities: Lines of credit 93,235 171,500 Current portion of long-term debt 8,088 48,975 Accrued groundwater extraction charges, purchased water and power 38,433 24,479 Accounts payable 44,480 46,121 Accrued interest 19,549 15,816 Accrued payroll 12,180 12,229 Current regulatory liabilities 1,770 3,059 Other current liabilities 26,314 20,795 Total current liabilities 244,049 342,974 Deferred income taxes 268,370 238,528 Advances for construction 150,546 146,582 Contributions in aid of construction 336,559 326,451 Postretirement benefit plans 48,158 46,836 Regulatory liabilities, less current portion 473,899 461,108 Other noncurrent liabilities 23,201 22,492 Commitments and contingencies Total capitalization and liabilities $ 4,552,302 4,345,067 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 6 SJW Group and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share and per share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive 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 Net income — — — 20,696 — 20,696 Stock-based compensation — — 1,275 ( 8 ) 1,267 Issuance of restricted and deferred stock units 9,083 — ( 2 ) — — ( 2 ) Common stock issuance, net of costs 458,605 1 25,295 — — 25,296 Dividends paid ($ 0.40 per share) — — — ( 12,900 ) — ( 12,900 ) Balances, June 30, 2024 32,668,904 33 771,189 502,037 1,349 1,274,608 Net income — — — 38,652 — 38,652 Stock-based compensation — — 1,566 ( 8 ) — 1,558 Issuance of restricted and deferred stock units 1,388 — ( 1 ) — — ( 1 ) Employee stock purchase plan 21,098 — 1,087 — — 1,087 Common stock issuance, net of costs 535,345 — 31,007 — — 31,007 Dividends paid ($ 0.40 per share) — — — ( 13,106 ) — ( 13,106 ) Balances, September 30, 2024 33,226,735 $ 33 804,848 527,575 1,349 1,333,805 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 7 SJW Group and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (UNAUDITED) (in thousands, except share and per share data) Common Stock Additional Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity Number of Shares Amount Balances, December 31, 2022 30,801,912 $ 31 651,004 458,356 1,477 1,110,868 Net income — — — 11,530 — 11,530 Unrealized gain on investment, net of taxes of $ 0 — — — — 93 93 Stock-based compensation — — 1,199 ( 22 ) — 1,177 Issuance of restricted and deferred stock units 38,776 — ( 1,538 ) — — ( 1,538 ) Employee stock purchase plan 16,410 — 1,080 — — 1,080 Common stock issuance, net of costs 570,026 — 40,997 — — 40,997 Dividends paid ($ 0.38 per share) — — — ( 11,722 ) — ( 11,722 ) Balances, March 31, 2023 31,427,124 31 692,742 458,142 1,570 1,152,485 Net income — — — 18,286 — 18,286 Unrealized gain on investment, net of taxes of $( 37 ) — — — — 8 8 Stock-based compensation — — 1,139 ( 17 ) 1,122 Issuance of restricted and deferred stock units 13,429 — ( 20 ) — — ( 20 ) Common stock issuance, net of costs 290,477 1 22,781 — — 22,782 Dividends paid ($ 0.38 per share) — — — ( 11,947 ) — ( 11,947 ) Balances, June 30, 2023 31,731,030 32 716,642 464,464 1,578 1,182,716 Net income — — — 36,222 — 36,222 Unrealized gain on investment, net of taxes of $ 193 — — — — 318 318 Stock-based compensation — — 1,238 ( 8 ) — 1,230 Issuance of restricted and deferred stock units 14,840 — ( 706 ) — — ( 706 ) Employee stock purchase plan 17,712 — 1,061 — — 1,061 Common stock issuance, net of costs 169,421 — 11,505 — — 11,505 Dividends paid ($ 0.38 per share) — — — ( 12,093 ) — ( 12,093 ) Balances, September 30, 2023 31,933,003 $ 32 729,740 488,585 1,896 1,220,253 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 8 SJW Group and Subsidiaries CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (in thousands) Nine months ended September 30, 2024 2023 Operating activities: Net income $ 71,047 66,038 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 85,811 80,544 Deferred income taxes 27,142 12,996 Stock-based compensation 4,379 3,576 Allowance for equity funds used during construction ( 1,750 ) ( 1,649 ) Changes in operating assets and liabilities: Accounts receivable and accrued unbilled utility revenue ( 26,509 ) ( 26,782 ) Accounts payable and other current liabilities ( 2,271 ) 557 Accrued groundwater extraction charges, purchased water and power 13,954 13,463 Tax receivable and payable, and other accrued taxes ( 17,960 ) 690 Postretirement benefits ( 2,363 ) ( 1,851 ) Regulatory assets and liabilities excluding cost of removal, income tax temporary differences, and postretirement benefits 836 16,092 Other changes, net 1,750 ( 4,371 ) Net cash provided by operating activities 154,066 159,303 Investing activities: Additions to utility plant: Company-funded ( 252,275 ) ( 195,937 ) Contributions in aid of construction ( 18,757 ) ( 13,604 ) Additions to nonutility assets and real estate investments — ( 24,244 ) Cost to retire utility plant, net of salvage ( 2,286 ) ( 908 ) Proceeds from sale of real estate investments 40,669 — Payments for business acquisitions — ( 7,286 ) Other changes, net ( 29 ) 238 Net cash used in investing activities ( 232,678 ) ( 241,741 ) Financing activities: Borrowings on line of credit 156,000 102,655 Repayments on line of credit ( 235,149 ) ( 133,800 ) Long-term borrowings 150,329 70,000 Repayments of long-term borrowings ( 43,053 ) ( 3,062 ) Issuance of common stock, net of issuance costs 63,309 75,284 Dividends paid ( 38,830 ) ( 35,762 ) Receipts of advances and contributions in aid of construction 22,304 18,889 Refunds of advances for construction ( 2,113 ) ( 2,148 ) Other changes, net 59 ( 895 ) Net cash provided by financing activities 72,856 91,161 Net change in cash and cash equivalents ( 5,756 ) 8,723 Cash and cash equivalents, beginning of period 9,723 12,344 Cash and cash equivalents, end of period $ 3,967 21,067 Cash paid during the period for: Interest $ 52,299 44,132 Interest, net of amounts capitalized $ 49,716 42,199 Income taxes $ 1,292 818 Supplemental disclosure of non-cash activities: Accrued payables for additions to utility plant $ 35,970 26,315 Utility property installed by developers $ 699 1,295 Proceeds receivable from sale of real estate investments $ 2,801 — Accrued selling expenses on sale of real estate investments $ 2,201 — Seller financing in asset acquisition, net of discount $ — 15,400 See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements. 9 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 30, 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 five wholly owned subsidiaries: San Jose Water Company (“SJWC”), SJWTX Holdings, Inc., SJW Land Company, SJWNE LLC, and National Water Utility Service, LLC (“National Water Utility”). 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. National Water Utility is the contracting entity for shared services among the SJW Group affiliates formed in October 2024. SJWC, CWC, TWC , TWOS, TWR, MWC, NEWUS and National Water Utility 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 September 30, Nine months ended September 30, 2024 2023 2024 2023 Revenue from contracts with customers $ 216,677 211,716 $ 539,790 507,276 Alternative revenue programs, net 7,369 957 6,847 ( 2,638 ) Other balancing and memorandum accounts and regulatory mechanisms, net ( 1,432 ) ( 9,260 ) ( 1,019 ) ( 9,906 ) Rental income 2,449 1,430 5,001 4,293 $ 225,063 204,843 $ 550,619 499,025 Nonutility Properties and Real Estate Investments The major components of nonutility properties and real estate investments as of September 30, 2024 and December 31, 2023, are as follows: September 30, 2024 December 31, 2023 Land $ 915 4,137 Wholesale water supply assets — 8,465 Buildings and improvements 437 748 Subtotal 1,352 13,350 Less: accumulated depreciation and amortization 97 194 Total $ 1,255 13,156 10 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) In March 2023, SJW Land Company entered into a broker agreement to sell its warehouse, office building, 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 recorded the Tennessee properties at the lower of their carrying value or estimated fair value less cost to sell, and also stopped recording depreciation on assets held for sale. SJW Group's broker provided the estimated fair value of the Tennessee properties. In April 2024, SJW Land Company completed the sale of a warehouse building of the Tennessee properties for $ 27,000 . The pre-tax gain on the sale was $ 6,918 . In June 2024, SJW Land Company completed the sale of an office building, land, and parking lot of the Tennessee properties for $ 17,000 . The pre-tax loss on the sale was $ 7,887 . The net pre-tax loss associated with these transactions for the nine months ended September 30, 2024 was $ 969 and is included in the “Other, net” line on the condensed consolidated statements of comprehensive income. A portion of the proceeds from these sales totaling $ 2,801 is being held in escrow pending completion of certain post-closing obligations. As a result of these two transactions, the sale of the Tennessee properties is complete and the company does not have any other assets held for sale. The sale of the Tennessee properties does not represent a strategic shift that has or will have a major effect on SJW Group; therefore, the sale does not qualify for treatment as a discontinued operation. The Tennessee properties are included in SJW Group’s “Real Estate Services” reportable segment in Note 9 , “Segment and Non-Tariffed Business Reporting”. The following represents the major components of the Tennessee properties that were recorded in assets held-for-sale on the condensed consolidated balance sheets as of December 31, 2023: December 31, 2023 Land $ 13,170 Buildings and improvements 44,950 Subtotal 58,120 Less: accumulated depreciation and amortization 17,270 Total $ 40,850 In August 2023, a non-regulated subsidiary, TWR, acquired eight wells and the associated water rights of KT Water Resources, LLC, as discussed in Note 10 , “Acquisitions”. In connection with a transaction in the third quarter of 2024, TWC purchased these assets from TWR for use in utility operations. Accordingly, SJW Group reclassified $ 28,386 related to indefinite life water rights from other intangible assets to utility plant intangible assets and $ 11,684 from nonutility property to utility plant. Fair Value Measurement The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of September 30, 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 September 30, 2024 approximates their carrying value as reported on the condensed consolidated balance sheets. There have been no changes in valuation techniques during the three and nine months ended September 30, 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 $ 1,534,801 and $ 1,394,412 as of September 30, 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 September 30, 2024 and December 31, 2023, $ 1,518,400 and $ 1,378,683 , respectively, would be categorized as Level 2 in the fair value hierarchy and $ 16,401 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 11 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) investments in the Rabbi Trust was $ 2,952 and $ 2,833 as of September 30, 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 September 30, 2024 and 2023, 485 and 1,826 anti-dilutive restricted common stock units were excluded from the diluted earnings per share calculation, respectively. For the nine months ended September 30, 2024 and 2023, 5,289 and 12,524 anti-dilutive restricted common stock units were excluded from the diluted earnings per share calculation, respectively. Accounts Receivable During the second quarter of 2024, SJW Group recorded a reduction to its allowance for credit losses of $ 7,822 , of which $ 3,960 resulted in a reduction to regulatory assets and $ 3,862 was recorded through administrative and general expense ($ 2,782 net of tax or $ 0.09 per diluted share for the nine months ended September 30, 2024). New Accounting Standards The recently issued accounting standards that have not yet been adopted by the company as of September 30, 2024 are as follows: Standard Description Date of Adoption Application Effect on the Condensed Consolidated Financial Statements Accounting Standards Update (“ASU”) 2023-07 “Improvements to Reportable Segment Disclosures” The ASU requires disclosure of significant segment expenses, extends certain annual disclosures to interim periods, and requires additional qualitative disclosures regarding the chief operating decision maker. The ASU is effective for SJW Group beginning with its annual financial statements for the year ending December 31, 2024. Early adoption is permitted. Retrospective SJW Group is currently evaluating the requirements of ASU 2023-07. 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. Prospective, with retrospective application also permitted. SJW Group is currently evaluating the requirements of ASU 2023-09. 12 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) Note 2. Regulatory Matters Regulatory assets and liabilities are comprised of the following as of September 30, 2024 and December 31, 2023: September 30, 2024 December 31, 2023 Regulatory assets: Income tax temporary differences (a) $ 173,671 157,669 Unrecognized pensions and other postretirement benefits (b) 24,593 24,593 Business combinations debt premium (c) 12,948 14,855 Employee benefit costs (d) 5,433 9,815 Monterey Water Revenue Adjustment Mechanism (“MWRAM”) (e) 10,327 9,361 Customer Assistance Program (“CAP”) balancing account (f) 6,683 5,457 Catastrophic event memorandum accounts (“CEMA”) (g) 975 4,819 2022 general rate case interim memorandum account (h) 3,354 4,571 Revenue adjustment mechanisms (n) 2,528 — Water supply costs (i) — 583 Other (j) 13,478 8,463 Total regulatory assets 253,990 240,186 Less: current regulatory assets (k) 828 4,276 Total regulatory assets, less current portion $ 253,162 235,910 Regulatory liabilities: Cost of removal (l) 360,176 346,418 Future income tax benefits due to customers (m) 85,966 88,610 Unrecognized pensions and other postretirement benefits (b) 20,515 20,196 Revenue adjustment mechanisms (n) 1,770 5,536 Water supply costs (i) 3,648 — Other (o) 3,594 3,407 Total regulatory liabilities 475,669 464,167 Less: current regulatory liabilities (p) 1,770 3,059 Total regulatory liabilities, less current portion $ 473,899 461,108 ___________________________________ (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. (f) Represents costs associated with SJWC’s CAP. (g) 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. At December 31, 2023, the balance primarily relates to increased bad debt expenses associated with SJWC’s response to COVID-19. (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 primarily SJWC’s Full Cost Balancing Account which tracks 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, tank painting, well reconditioning and rate case expenses. (k) As of September 30, 2024, primarily relates to the current portion of CWC’s deferred well redevelopment and rate case costs. As of December 31, 2023, primarily relates to the current portion of MWRAM. 13 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) (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 Cuts and Jobs Act of 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 Water Conservation Memorandum Account (“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 September 30, 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 the revenue authorized by the CPUC to offset those expense changes. SJWC has been authorized for the use of the Full Cost Balancing Account to track 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, both mandatory and voluntary. 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. 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 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 September 30, 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 September 30, 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 $ 41,962 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 and nine months ended September 30, 2024, SJW Group issued and sold a total of 535,345 and 1,119,975 shares of common stock, respectively, at a weighted average price of $ 59.17 and $ 57.70 per share, respectively, and received $ 31,007 and $ 63,309 in net proceeds, respectively, under the Equity Distribution Agreement. Since the inception of the Equity Distribution Agreement, SJW Group has issued and sold 3,124,632 shares of common stock at a weighted average price of $ 67.88 for a total net proceeds of $ 207,307 and has $ 27,889 of aggregate gross sales price of shares remaining to issue under the Equity Distribution Agreement as of September 30, 2024. 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. 14 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) Lines of Credit In August 2024, SJW Group, SJWC, TWC, and CTWS entered into an amendment to its credit agreement with JPMorgan Chase Bank and a syndicate of banks, which provided, among other matters, for an extension of the maturity date from August 2, 2028 to August 2, 2029. The weighted average interest rate on short-term borrowings outstanding at September 30, 2024, was 6.61 %, compared to 6.48 % at December 31, 2023. As of September 30, 2024, the unused portion of the lines of credit was $ 256,765 . Long-term Financing Agreements On November 15, 2023, CWC entered into a note purchase agreement with certain institutional investors, 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. On July 31, 2024, SJWC entered into and closed a note purchase agreement with certain institutional investors, pursuant to which the company sold an aggregate principal amount of $ 75,000 of its 5.63 % Senior Notes, Series Q (“Series Q Notes”). The Series Q Notes are unsecured obligations of SJWC and are due on July 31, 2054. Interest is payable semi-annually in arrears on January 31st and July 31st of each year. The Series Q Notes are also subject to customary events of default. On July 31, 2024, CWC entered into a note purchase agreement with certain institutional investors, pursuant to which the company sold $ 50,000 of its 5.78 % Senior Notes, Series 2024 (“Series 2024 Notes”). The Series 2024 Notes are unsecured obligations of CWC and are due on July 31, 2054. Interest is payable semi-annually in arrears on January 31st and July 31st of each year. The closing of the notes purchase agreement occurred in August 2024. Note 5. Income Taxes For the three and nine months ended September 30, 2024, income tax expense was $ 1,928 and $ 7,883 , respectively. Income tax expense for the three and nine months ended September 30, 2023 was $ 4,561 and $ 4,127 , respectively. The effective consolidated income tax rates were 5 % and 11 % for the three months ended September 30, 2024 and 2023, respectively, and 10 % and 6 % for the nine months ended September 30, 2024 and 2023, respectively. The lower effective tax rate for the three months ended September 30, 2024 was primarily due to a tax accounting method change related to the repairs deduction. The higher effective tax rate for the nine months ended September 30, 2024 was primarily due to lower discrete tax benefits in 2024. SJW Group had unrecognized tax benefits, before the impact of deductions of state taxes, excluding interest and penalties, of approximately $ 4,920 and $ 4,511 as of September 30, 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. In October 2023, CWC, a subsidiary of SJW Group, was named as a defendant in a class action lawsuit alleging that the water provided by CWC contained contaminants. CWC intends to vigorously defend itself in this lawsuit. At this time, SJW Group is unable to provide a reasonable estimate of any loss. In September 2024, SJWC entered into a 12 -year agreement with the City of Cupertino effective on October 1, 2024 pursuant to which SJWC will operate the City of Cupertino municipal water system, replacing the previous agreement with the City of Cupertino. The agreement can be extended for an additional term of eight years . In accordance with the new agreement, SJWC will pay an upfront concession fee of $ 22,100 in the fourth quarter of 2024. Additionally, SJWC agreed to pay an annual investment rent of $ 1,800 , subject to increases each year based on a specified construction cost index. 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 15 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) 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. The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and nine months ended September 30, 2024 and 2023 are as follows: Pension Benefits Other Benefits Three months ended September 30, 2024 2023 2024 2023 Service cost $ 1,666 1,892 $ 166 160 Interest cost 3,613 3,557 295 317 Expected return on assets ( 4,463 ) ( 3,442 ) ( 267 ) ( 217 ) Amortization of actuarial (gain) loss ( 18 ) 554 ( 161 ) ( 87 ) Amortization of prior service cost 4 4 — — Total $ 802 2,565 $ 33 173 Pension Benefits Other Benefits Nine months ended September 30, 2024 2023 2024 2023 Service cost $ 4,997 5,676 $ 498 480 Interest cost 10,839 10,672 886 951 Expected return on assets ( 13,389 ) ( 11,580 ) ( 801 ) ( 651 ) Amortization of actuarial (gain) loss ( 53 ) 1,662 ( 483 ) ( 263 ) Amortization of prior service cost 11 11 — — Total $ 2,405 6,441 $ 100 517 For the three and nine months ended September 30, 2024, SJW Group has made $ 2,258 and $ 4,516 , respectively, of contributions to such plans. SJW Group does not expect to make any additional required and discretionary cash contributions to the pension plans and other postretirement benefit plans for the remainder of 2024. 16 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) 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 September 30, 2024, 187,810 shares are issuable upon the vesting of outstanding restricted stock units and deferred restricted stock units and an additional 1,038,040 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 and nine months ended September 30, 2024 and 2023: Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Compensation costs charged to income: ESPP $ 259 187 $ 454 378 Restricted stock and deferred restricted stock 1,307 1,051 3,925 3,198 Total compensation costs charged to income $ 1,566 1,238 $ 4,379 3,576 ESPP proceeds $ 1,087 1,061 $ 2,188 2,141 Restricted Stock and Deferred Restricted Stock For the three months ended September 30, 2024, there was no grant activity of service-based restricted stock awards. For the three months ended September 30, 2023, SJW Group granted 968 one-year and three-year service-based restricted stock awards with a weighted average grant date fair value per unit of $ 63.96 . For the nine months ended September 30, 2024 and 2023, SJW Group granted 64,482 and 38,310 , respectively, one-year and three-year service-based restricted stock awards with a weighted average grant date fair value per unit of $ 56.70 and $ 76.88 , respectively. For the three months ended September 30, 2024 and 2023, there was no grant activity of performance-based or market-based restricted stock awards. For the nine months ended September 30, 2024 and 2023, SJW Group granted 45,763 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 $ 55.60 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 September 30, 2024, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $ 6,739 . This cost is expected to be recognized over a weighted average period of 1.77 years. Employee Stock Purchase Plan The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2025, for the ESPP is approximately $ 135 . This cost is expected to be recognized during the fourth quarter of 2024. Note 9. Segment and Non-Tariffed Business Reporting SJW Group is a holding company with five 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, (iv) SJWNE LLC, a holding company for CTWS and its subsidiaries, CWC, MWC, NEWUS and Chester Realty, Inc., and (v) National Water Utility. The first segment provides water utility and utility-related services to its customers through SJW Group’s subsidiaries, SJWC, CWC, TWC, MWC, NEWUS, and National Water Utility 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. 17 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) 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 September 30, 2024 Water Utility Services (1) Real Estate Services All Other (2) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 220,938 4,103 22 — 220,938 4,125 225,063 Operating expense 161,929 2,799 205 1,777 161,929 4,781 166,710 Operating income (loss) 59,009 1,304 ( 183 ) ( 1,777 ) 59,009 ( 656 ) 58,353 Net income (loss) 43,751 915 34 ( 6,048 ) 43,751 ( 5,099 ) 38,652 Depreciation and amortization 27,113 85 1 224 27,113 310 27,423 Interest on long-term debt and other interest expense 11,516 75 — 5,925 11,516 6,000 17,516 Provision (benefit) for income taxes 1,182 389 15 342 1,182 746 1,928 For Three Months Ended September 30, 2023 Water Utility Services (1) Real Estate Services All Other (2) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 199,537 3,876 1,430 — 199,537 5,306 204,843 Operating expense 144,102 2,337 691 1,107 144,102 4,135 148,237 Operating income (loss) 55,435 1,539 739 ( 1,107 ) 55,435 1,171 56,606 Net income (loss) 37,545 2,198 563 ( 4,084 ) 37,545 ( 1,323 ) 36,222 Depreciation and amortization 26,147 84 1 223 26,147 308 26,455 Interest on long-term debt and other interest expense 10,839 112 — 5,793 10,839 5,905 16,744 Provision (benefit) for income taxes 5,933 428 196 ( 1,996 ) 5,933 ( 1,372 ) 4,561 For Nine Months Ended September 30, 2024 Water Utility Services (1) Real Estate Services All Other (2) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 537,899 10,146 2,574 — 537,899 12,720 550,619 Operating expense 411,959 6,788 1,391 3,645 411,959 11,824 423,783 Operating income (loss) 125,940 3,358 1,183 ( 3,645 ) 125,940 896 126,836 Net income (loss) 82,307 2,145 617 ( 14,022 ) 82,307 ( 11,260 ) 71,047 Depreciation and amortization 83,231 255 3 670 83,231 928 84,159 Interest on long-term debt and other interest expense 35,095 520 — 17,779 35,095 18,299 53,394 Provision (benefit) for income taxes 10,203 1,008 213 ( 3,541 ) 10,203 ( 2,320 ) 7,883 18 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 2024 (in thousands, except share and per share data) For Nine Months Ended September 30, 2023 Water Utility Services (1) Real Estate Services All Other (2) SJW Group Regulated Non-tariffed Non-tariffed Non-tariffed Regulated Non-tariffed Total Operating revenue $ 485,334 9,398 4,293 — 485,334 13,691 499,025 Operating expense 375,647 5,540 2,251 2,645 375,647 10,436 386,083 Operating income (loss) 109,687 3,858 2,042 ( 2,645 ) 109,687 3,255 112,942 Net income (loss) 71,277 3,412 1,532 ( 10,183 ) 71,277 ( 5,239 ) 66,038 Depreciation and amortization 77,644 253 305 670 77,644 1,228 78,872 Interest on long-term debt and other interest expense 32,232 112 — 16,569 32,232 16,681 48,913 Provision (benefit) for income taxes 8,759 1,071 581 ( 6,284 ) 8,759 ( 4,632 ) 4,127 ____________________ (1) The “Water Utility Services” category for the three and nine months ended September 30, 2024 and 2023, includes the accounts of SJWC, CWC, TWC, MWC, and NEWUS on a stand-alone basis. (2) The “All Other” category for the three and nine months ended September 30, 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: September 30, 2024 December 31, 2023 Water Utility Services: Regulated $ 4,496,972 4,199,172 Non-tariffed 1,424 43,532 Total water utility services 4,498,396 4,242,704 Real Estate Services 849 44,222 All Other 53,057 58,141 Total assets $ 4,552,302 4,345,067 Regulated $ 4,496,972 4,199,172 Non-tariffed 55,330 145,895 Total assets $ 4,552,302 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 19 SJW GROUP AND SUBSIDIARIES NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued) September 30, 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 have been 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. 20