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 whose primary business involves ownership of public utilities that provide water and wastewater services, including the production, purchase, storage, purification, distribution, wholesale and retail sale of water. The water utility business of SJW Group is conducted through five wholly owned subsidiaries: San Jose Water Company (“SJWC”), Connecticut Water Company (“CWC”), The Maine Water Company (“MWC”), SJWTX, Inc. doing business as Texas Water Company (“TWC”) and National Water Utility Service, LLC (“National Water Utility”). National Water Utility is the contracting entity for shared services among the SJW Group affiliates formed in October 2024. The remaining subsidiaries provide water service to approximately 403,000 connections and wastewater service to approximately 4,000 connections and serve a combined population of over 1.6 million people in California, Connecticut, Maine and Texas. Water utility services provided by these businesses are subject to regulation by the applicable state public utility commissions. These subsidiaries also engage in non-tariffed operations that are not subject to public utility commission regulation, including contract water and sewer operations, maintenance agreements, and antenna site leases. Collectively, these water utility and utility-related services form our “Water Utility Services” segment. 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. SJW Group’s second segment, “Real Estate Services,” consists of property management and investment activity conducted by SJW Land Company and Chester Realty, Inc., which own undeveloped land and operate commercial buildings in California and Connecticut. In the second quarter of 2024, SJW Land Company completed the sale of its Tennessee properties. 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 applicable state public utility commissions; 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 21 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. At the end of the second quarter of 2024, all of Tennessee properties have been sold. 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. 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 and nine months ended September 30, 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 September 30, 2024 was $38,652, an increase of $2,430, or approximately 7%, from $36,222 for the same period in 2023. SJW Group’s consolidated net income for the nine months ended September 30, 2024 was $71,047, an increase of $5,009, or approximately 8%, from $66,038 for the same period in 2023. The increase in net income for the three months ended September 30, 2024 was primarily driven by rate increases in California and Connecticut and lower income tax expense attributable to a tax accounting method change. These factors were offset by higher water production expenses and increased other operating expenses as discussed below, lower customer usage in our Texas service areas driven primarily by weather conditions, and decreased real estate revenue due to the Tennessee properties that were sold in the second quarter of 2024. The increase in net income for the nine months ended September 30, 2024 was also primarily driven by rate increases in California and Connecticut, as well as growth in customers, primarily in Texas. These factors were offset by decreased real estate revenue due to the Tennessee properties that were sold in the second quarter of 2024, higher water production expenses, higher interest expense and an increase in other operating expenses as discussed below. 22 Operating Revenue Operating Revenue by Segment Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Water Utility Services $ 225,041 203,413 $ 548,045 494,732 Real Estate Services 22 1,430 2,574 4,293 Total operating revenue $ 225,063 204,843 $ 550,619 499,025 The change in consolidated operating revenue was due to the following factors: Increase/(decrease) in Operating Revenue Three months ended September 30, 2024 vs. 2023 Nine months ended September 30, 2024 vs. 2023 Water Utility Services: Consumption changes $ (863) — % $ 4,751 1 % Increase in customers 812 — % 2,442 — % Rate increases for: Pass-through water costs 1 8,463 4 % 19,169 4 % All other increases 2 8,514 4 % 20,798 4 % Regulatory mechanisms (845) — % 456 — % Service and other revenue 5,547 3 % 5,697 1 % Real Estate Services (1,408) (1) % (1,719) — % Total change in operating revenue $ 20,220 10 % $ 51,594 10 % ____________________ (1) Consists of rate increases specifically associated with changes in the water supply costs that are passed through to customers. (2) Primarily associated with general rate cases and related annual escalation adjustments, infrastructure surcharges, and cost of capital adjustments. Operating Expense Operating Expense by Segment Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Water Utility Services $ 164,728 146,439 $ 418,747 381,187 Real Estate Services 205 691 1,391 2,251 All Other 1,777 1,107 3,645 2,645 Total operating expense $ 166,710 148,237 $ 423,783 386,083 23 The change in consolidated operating expense was due to the following factors: Increase/(decrease) in Operating Expense Three months ended September 30, 2024 vs. 2023 Nine months ended September 30, 2024 vs. 2023 Water production expenses: Change in surface water use $ 117 — % $ 4,742 1 % Change in usage and new customers 5,244 4 % 9,819 3 % Purchased water and groundwater extraction charge, energy price change and other production expenses, net 8,610 6 % 16,872 4 % Balancing and memorandum accounts cost recovery (907) (1) % (5,010) (2) % Total water production expenses 13,064 9 % 26,423 6 % Administrative and general 1,820 1 % 205 — % Maintenance 2,055 1 % 4,267 1 % Property taxes and other non-income taxes 566 — % 1,518 — % Depreciation and amortization 968 1 % 5,287 1 % Total change in operating expense $ 18,473 12 % $ 37,700 8 % 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 by the California Public Utilities Commission (“CPUC”). For the nine months ended September 30, 2024, water conditions remained positive across the State of California. As a result, the California Department of Water Resources (“DWR”) announced an increase in the State Water Project allocation from 15% to 30% of contract amount during the first quarter of 2024 and the U.S. Bureau of Reclamation announced an increase in the Central Valley Project allocation from 65% to 75% during the same period. The DWR further announced an increase in the State Water Project allocation from 30% to 40% of contract amount during the second quarter of 2024 while the U.S. Bureau of Reclamation’s Central Valley Project allocation remained at 75% during the same period. Water allocations for the State Water Project and the Central Valley Project remained at 40% and 75%, respectively, during the third quarter of 2024. On October 1, 2024, Valley Water’s 10 reservoirs were 27% of capacity, or 71% of restricted capacity, with 14.5 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 September in the Santa Clara Plain was 122% of the five-year average. The groundwater level in the Santa Clara Plain is approximately three feet lower than September 2023. According to Valley Water, the projected total groundwater storage at the end of 2024 is expected to be in the Normal Stage of the Water Shortage Contingency Plan. As of September 30, 2024, SJWC’s Lake Elsman was 74.2% of capacity with 1.5 billion gallons of water, approximately 220.3% of the five-year seasonal average. However, the rainfall at SJWC’s Lake Elsman was measured at zero inches for the period from July 1, 2024 through September 30, 2024. SJWC’s Montevina Water Treatment Plant treated 2.7 billion gallons of water for the nine months ended September 30, 2024, which is 131.7% of the five-year average. SJWC’s Saratoga Water Treatment Plant remains offline until the next rain season (November to March). 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 24 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 approximately 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, a non-regulated subsidiary, Texas Water Resources, LLC (“TWR”), acquired eight wells and the associated water rights of KT Water Resources, LLC. 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. These wells have been projected to yield at least 6,000 acre-feet per year or more. Development of the KT Water System continues. The Texas service area is currently experiencing drought conditions that result in water usage restrictions for customers . These water usage restrictions will likely impact revenue for the remainder of 2024. Significant future capital investment of transmission main and storage facilities in addition to developing additional supply sources is planned for 2025 and beyond. 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 September 30, Increase/ (decrease) % of Total Change Nine months ended September 30, Increase/ (decrease) % of Total Change 2024 2023 2024 2023 (billion gallons) (billion gallons) Purchased water 6.9 6.7 0.2 1 % 13.4 15.4 (2.0) (6) % Groundwater 5.4 4.8 0.6 4 % 14.1 10.0 4.1 11 % Surface water 3.1 3.1 — — % 9.2 10.0 (0.8) (2) % Reclaimed water 0.4 0.4 — — % 0.6 0.6 — — % 15.8 15.0 0.8 5 % 37.3 36.0 1.3 3 % The changes in the source of supply mix were consistent with the changes in the water production expenses. SJWC’s unaccounted-for water on a 12-month-to-date basis for September 30, 2024 and 2023 approximated 8.9% and 7.9%, 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 the system, partially offset by SJWC’s main replacements and lost water reduction programs. Connecticut Water Service, Inc. (“CTWS”)’s unaccounted-for water on a 12-month-to-date basis for September 30, 2024 and 2023 approximated 14.4% and 13.0%, 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 $13,064 for the three months ended September 30, 2024, compared to the same period in 2023, was primarily attributable to increases in average per unit costs for purchased water and groundwater extraction, and increases in production volume, offset by decreases resulting from regulatory adjustments through SJWC’s Full Cost Balancing Account. The change in water production expenses of $26,423 for the nine months ended September 30, 2024, compared to the same period in 2023, was primarily attributable to increases in average per unit costs for purchased water and groundwater extraction, and production volume, offset by decreases resulting from regulatory adjustments. Effective July 1, 2024, Valley Water increased the unit price of purchased water by approximately 12% and the groundwater extraction charge by approximately 13% for SJWC. Effective July 1, 2023, Valley Water increased the unit price of purchased water by approximately 14% and the groundwater extraction charge by approximately 15%. 25 Other Operating Expenses Operating expenses, excluding water production expenses, increased $5,409 for the three months ended September 30, 2024, compared to the same period in 2023. The increase was primarily attributable to increases in expenses related to contracted work for others, increases in general and administrative expenses for contracted work and inflationary increases offset by higher allocations to construction activities, and increases in depreciation and amortization for new utility plant placed in service. Operating expenses, excluding water production expenses, increased $11,277 for the nine months ended September 30, 2024, compared to the same period in 2023. The increase was primarily attributable to increases in depreciation and amortization for new utility plant placed in service and higher maintenance expenses related to contracted work for others, security expenses, and adjustments to certain regulatory assets as a result of the final decision in the Connecticut general rate case (“GRC”), and a slight increase in administrative and general expenses. The general and administrative expenses change is primarily from inflationary increases offset by decreases in the allowance for credit losses of $6,847 and higher allocations to construction activities. The higher allocations and inflationary increases are expected to impact the remainder of 2024. Other (Expense) Income For the three months ended September 30, 2024, compared to the same period in 2023, the change in other (expense) income was primarily due to lower income from certain service and other activities and higher interest expense on long-term debt, offset by an increase in return on pension plan assets. For the nine months ended September 30, 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 average balances and interest rates, decreases in gains from real estate sale transactions of $2,054 and lower income from certain service and other activities, offset by an increase in return on pension plan assets. Provision for Income Taxes For the three and nine months ended September 30, 2024, compared to the same period in 2023, income tax expense decreased $2,633 and increased $3,756, respectively. The decrease in income tax expense for the three months ended September 30, 2024 was primarily due to a tax accounting method change. The increase in income tax expense for the nine months ended September 30, 2024 was primarily due to a higher pre-tax income in 2024. 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. 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 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 26 processing costs on the utilities as well as the CPUC staff, and provides 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. Based on the change in the average Moody’s Aa utility bond index rate between the 12 months ended September 30, 2023 and September 30, 2024, there will be no adjustment to SJWC’s cost of capital for 2025. 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. On June 14, 2024, SJWC notified the CPUC that it had reached an all-party settlement agreement in principle with the Public Advocates Office and Water Rate Advocates for Transparency, Equity and Sustainability, also known as WRATES, in its 2025 through 2027 general rate case application on all but two policy issues that will be litigated. On August 13, 2024, WRATES notified the CPUC that it would not join in the settlement agreement. Per the procedural ruling, the formal settlement motion and agreement between SJWC and the Public Advocates Office was submitted on August 19, 2024 and updated on September 27, 2024. The settlement agreement provides for rate increases of $21,305 or 3.91% in 2025, $14,427 or 2.55% in 2026, and $17,347 or 2.98% in 2027. The settlement agreement also provides a three-year capital budget of $450,000 and recovery of $15,792 in memorandum and balancing accounts. Briefs on the two policy issues were also submitted on August 19, 2024. A decision on the GRC is expected by the CPUC in the fourth quarter of 2024. SJWC filed Advice Letter No. 609 on May 16, 2024, to increase the authorized revenue requirement by $28,275, or 5.3%, to offset the increases to purchased potable water charges, the groundwater extraction fee, and purchased recycled water charges from its water wholesalers effective July 1, 2024. Advice Letter No. 609 was approved with an effective date of July 1, 2024. SJWC filed Advice Letter No. 610/610A on May 23, 2024, to increase the authorized revenue requirement by $768, or 0.14%, to recover revenue related to the plant additions for the Advanced Metering Infrastructure project. Advice Letter No. 610/610A was approved with an effective date of July 1, 2024. Connecticut Regulatory Affairs On October 3, 2023, CWC filed an application with Public Utilities Regulatory Authority (“PURA”) in Connecticut to adjust customer rates. The proposal requested an increase in annual revenues of approximately $21,400, or 18.1%, over current authorized revenues. On June 28, 2024, PURA issued a final decision authorizing an increase in annual revenues of $6,455, or 5.5%, with the ability to earn additional revenue of $1,116 through the annual Water Revenue Adjustment (“WRA”) filing for achievement of certain performance metrics. In addition, the decision authorized a return on equity of 9.3% on a capital structure comprised of 53% equity and 47% long term debt. New rates became effective on July 1, 2024. On November 14, 2023, CWC submitted an application to PURA for the approval to issue unsecured notes in the amount of $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. Based on the general rate case decision, as of July 1, 2024, the base WICA surcharge will be reset to zero; however, the credit of 0.13% for 2023 reconciliation will continue to apply into 2025. On February 28, 2024, CWC filed its 2023 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. On June 21, 2024, CWC submitted an application to PURA for the approval to issue unsecured notes in an amount of up to $150,000. PURA approved the application on August 14, 2024. On July 26, 2024, CWC filed for a WICA increase of $4,300 in annualized revenue for $41,900 in completed infrastructure projects. PURA approved the application, and effective October 1, 2024, the cumulative WICA surcharge is 3.43%. 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 Public Utilities Commission of Texas (“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. On September 12, 2024, TWC filed its application to amend its SIC with the 27 PUCT under Docket No. 56974. Its amended SIC will apply to all customers and seeks to increase its annual water revenue by $4,115 and its annual sewer revenue by $202, in addition to the original SIC filed with the PUCT under Docket No. 54430 on December 30, 2022. On October 14, 2024, the PUCT notified TWC that the filing was administratively complete in order to establish a procedural schedule. TWC expects to receive the final approval from the PUCT in the first half of 2025. Additionally, TWC is required to file a general rate case on or before March 21, 2028. Notwithstanding any SIC filing, TWC will continue to file its annual adjustments for the Water Pass-through Charges (“WPC”) for Canyon Lake, Deer Creek, Kendall West, Clear Water Estates, and Saddleridge 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 to acquire the Elm Ridge customers using TWC’s existing rates. 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. On July 23, 2024, the PUCT filed the final approval which allowed TWC to charge its existing rates to customers of Elm Ridge. 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 Certificate of Convenience and Necessity 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 received the PUCT’s approval to proceed with the transaction. The closing date has not been scheduled. 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 Maine Public Utilities Commission (“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 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. On June 24, 2024, MWC filed a WISC in both the Freeport and Oakland divisions. The combined requested surcharge is 3.00% or $52. The MPUC issued an order approving the surcharges on August 1, 2024. On September 30, 2024, MWC filed a WISC for the Millinocket division. The requested surcharge is 3.00% or $46. The MPUC is expected to issue a decision in the fourth quarter of 2024. On October 25, 2024, MWC filed an application with MPUC to adjust customer rates in the Camden Rockland division. The proposal requested an increase in annual revenues of approximately $1,057, or 15.9%, over current authorized revenues. A decision is expected in the second quarter of 2025. Other Regulatory Matters In April 2024, the U.S. Environmental Protection Agency issued final new national primary drinking water regulations for six polyfluroralkyl substances (“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 estimates capital expenditures of approximately $230,000 for PFAS treatment based on finalized maximum contaminant levels. See discussion below under “Liquidity” for additional information on capital expenditures. 28 Liquidity: Cash Flow from Operating Activities During the nine months ended September 30, 2024, SJW Group generated cash flows from operations of approximately $154,100, compared to approximately $159,300 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 decreased by approximately $5,200. This decrease was the result of a combination of the following factors: (1) a decrease of $15,300 attributable to changes in regulatory assets and liabilities, including the effect of lower surcharge collections on balancing and memorandum accounts, (2) a decrease of $2,300 attributable to changes in payments for accounts payable and other current liabilities, offset by (3) general working capital and net income, adjusted for non-cash items and tax accruals, increased by $12,100, and (4) an increase attributable to accounts receivable and accrued unbilled utility revenue of $300. As of September 30, 2024, Water Utility Services’ write-offs for uncollectible accounts represented less than 1% of its total revenue, which decreased from 1% as of September 30, 2023. Management believes that the collection rate will continue to improve for its accounts receivables as service disconnections return to normal operations. On December 28, 2023, SJWC submitted the application 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 received $9,130 in the second quarter of 2024 under the State of California Water and Wastewater Arrearages Payment Program. Cash Flow from Investing Activities During the nine months ended September 30, 2024, SJW Group used cash flows from investing activities of approximately $232,700, compared to approximately $241,700 for the same period in 2023. This decrease was primarily driven by additions to utility plant, offset by proceeds of $40,700 for the completed sales of the Tennessee properties. SJW Group used approximately: (1) $252,300 of cash for company-funded utility capital expenditures and (2) $18,800 for developer-funded utility capital expenditures during the nine months ended September 30, 2024. For the same period in 2023, SJW Group used approximately: (1) $195,900 of cash for company-funded utility capital expenditures and (2) $24,200 for nonutility properties, real estate investments and other intangible asset, and (3) $13,600 for developer-funded utility capital expenditures. Water Utility Services’ estimated utility capital expenditures for 2024, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately $332,000. As of September 30, 2024, approximately $252,300, or 76%, 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 nine months ended September 30, 2024 decreased by approximately $18,300 from the same period in the prior year, primarily as a result of (1) a decrease in net borrowings on our lines of credit of $48,000, (2) a decrease in net proceeds from our common stock equity offerings of $12,000, offset by (3) an increase in net borrowings and repayments on long-term debt of $40,300. 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. 29 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 September 30, 2024 are as follows: Maturity Date Line Limit Amounts Outstanding Unused Portion Syndicated credit agreement: August 2, 2029 SJW Group $ 50,000 — 50,000 SJWC 140,000 — 140,000 CTWS 90,000 45,000 45,000 TWC 20,000 2,000 18,000 Total syndicated credit agreement 300,000 47,000 253,000 CTWS credit agreement August 2, 2028 10,000 6,235 3,765 CTWS credit agreement May 15, 2025 40,000 40,000 — $ 350,000 93,235 256,765 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. For the nine months ended September 30, 2024, cost of borrowing on the lines of credit averaged 6.53% compared to 6.16% in the same period in 2023. All of SJW Group’s and subsidiaries’ lines of credit contain customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. All of the lines of credit also include certain customary financial covenants such as a funded debt to capitalization ratio and a minimum interest coverage ratio. As of September 30, 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 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 on January 22, 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. 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 September 30, 2024, SJW Group and its subsidiaries were in compliance with all covenants in their long-term debt agreements. During the balance of 2024, SJW Group subsidiaries plan to raise approximately $35,000 in long-term debt to pay down the line of credit agreements, subject to market conditions. Equity Financing Arrangements 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 30 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, with 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. The Equity Distribution Agreement is set to expire on November 17, 2024. Prior to this date, SJW Group intends to enter into a new equity distribution agreement to establish a new “at-the-market” offering program. 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