H2O America: Form 10-Q for the period ended Mar 31, 2025

(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, 2024.

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, 2024 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 the following wholly owned subsidiaries: San Jose Water Company (“SJWC”), The Connecticut Water Company (“CWC”), The Maine Water Company (“MWC”), SJWTX, Inc. doing business as The Texas Water Company (“TWC”). These subsidiaries provide water service to approximately 404,000 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.

Together, SJWC, excluding the City of Cupertino (“Cupertino”) service concession arrangement operations, CWC, MWC and TWC are referred to as “Water Utility Services,” which is our single reportable segment.

Other business activities that are not separately reportable segments are SJWC’s Cupertino service concession arrangement operations, Texas Water Operation Services, LLC (“TWOS”), Texas Water Resources, LLC (“TWR”), New England Water Utility Services, Inc. (“NEWUS”), SJW Land Company and Chester Realty, Inc. and are collectively referred to as “Other Services.”

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 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.

As previously disclosed, SJW Group updated its segment presentation in the fourth quarter of 2024. Accordingly, prior period information has been recast to conform with the current period presentation.

Critical Accounting Estimates:

The discussion and analysis of our financial condition and results of operations is based on the accounting estimates used and disclosed in our 2024 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, 2024, that was filed with the Securities and Exchange Commission on February 28, 2025.

Our critical accounting estimates 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, 2024. Our significant accounting policies are described in the notes to the 2024 consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2024. There have been no changes to critical accounting estimates or significant accounting policies during the three months ended March 31, 2025.

New Accounting Pronouncements:

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

Results of Operations:

Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased precipitation curtail water usage and sales.

Overview

SJW Group’s consolidated net income for the three months ended March 31, 2025 was $16,551, an increase of $4,852, or 41%, from $11,699 for the same period in 2024. The increase in net income for the three months ended March 31, 2025 was primarily driven by rate increases in California and Connecticut. These factors were offset by higher water production expenses and increased other operating expenses as discussed below.

Operating Revenue

SJW Group has a single reportable segment, referred to as “Water Utility Services”. All other business activities not separately reportable are included in “Other Services.” Operating revenue for the Water Utility Services reportable segment and Other Services was as follows:

18

The change in consolidated operating revenue was due to the following factors:

(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.

(3) Excludes portion attributable to rate increases, which are shown in the rate increase lines above.

Operating Expense

Operating expense is summarized below:

The change in consolidated operating expense was due to the following factors:

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 (“FCBA”) authorized by the California Public Utilities Commission (“CPUC”) for cost recovery.

For the three months ended March 31, 2025, 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 35% to 40% of contract amount for 2025 and the U.S. Bureau of Reclamation kept the Central Valley Project allocation at 75%. On April 1, 2025, Valley Water’s 10 reservoirs were 89% of restricted capacity, with 18.1 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 2025 to March 2025 in the Santa Clara Plain was 72% of the five-year average. The groundwater level in the Santa Clara Plain is approximately 15 feet lower than March 2024. According to Valley Water, the projected total groundwater storage at the end of 2025 is expected to be in the Normal Stage of the Water Shortage Contingency Plan.

As of March 31, 2025, SJWC’s Lake Elsman was 100% of capacity with 2.0 billion gallons of water, 159.2% of the five-year seasonal average. In addition, the rainfall at SJWC’s Lake Elsman was measured at 37.34 inches for the period from July 1, 2024 through March 31, 2025, which is 90.7% of the five-year average. SJWC’s Montevina Water Treatment Plant treated 0.7 billion gallons of water for the first quarter of 2025, which is 96.1% of the five-year average. SJWC’s Saratoga Water Treatment Plant was granted approval by the Division of Drinking Water to resume operation in the first quarter of 2025 but provided no meaningful production while going through startup activities. SJWC believes that its various sources of water supply will be sufficient to meet customer demand in 2025.

California faces long-term water supply challenges. SJWC actively works with Valley Water to meet these challenges by continuing to educate customers on responsible water use practices and conducting long-range water supply planning. Valley Water’s 15% voluntary call for conservation and certain watering and water waste rules established in 2023, are still in place for 2025. The call for continued conservation is due to a major storage reservoir currently offline for seismic retrofits.

CWC’s water sources vary among the individual systems, but overall, approximately 60% of the total dependable yield comes from surface water supplies and 40% from wells. In addition, CWC has water supply agreements to supplement its water supply with the South Central Connecticut Regional Water Authority and The Metropolitan District that expire in 2058 and 2053, respectively. CWC believes that it will be able to meet customer demand for 2025 with its existing water supply which consists of groundwater from wells, surface water in reservoirs and purchased water treated by neighboring water utilities.

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 7,602 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 County 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. TWC also owns eight wells and the associated water rights of KT Water Resources, LLC. These wells have been projected to yield at least 6,000 acre-feet per year. Development of the KT Water System continues. TWC expects to meet customer demand for 2025 with TWC’s water supply which consists of groundwater from wells, surface water and purchased treated and raw water from the GBRA, based on current conditions.

The Texas service area is currently experiencing drought conditions that result in water usage restrictions for customers. 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. MWC believes that it will be able to meet customer demand for 2025 with its existing water supply which consists of groundwater from wells, surface water in reservoirs and purchased water treated by neighboring water utilities.

The following table presents the change in sources of water supply:

The changes in the source of supply mix were consistent with the changes in the water production expenses.

Water Production Expenses

The increase in water production expenses of $7,173 for the three months ended March 31, 2025, compared to the same period in 2024, was primarily attributable to increases in average per unit costs for purchased water and groundwater extraction, decreases in availability of surface water, and increases in production volume, offset by decreases resulting from regulatory adjustments through SJWC’s FCBA. 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.

Other Operating Expenses

Operating expenses, excluding water production expenses, increased $3,061 for the three months ended March 31, 2025, compared to the same period in 2024. The increase was primarily attributable to increases in expenses related to general and administrative expenses for customer credit losses and insurance costs and an increase in maintenance costs.

Other (Expense) Income

For the three months ended March 31, 2025, compared to the same period in 2024, 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 increases in pension non-service credit.

Provision for Income Taxes

For the three months ended March 31, 2025, compared to the same period in 2024, income tax expense increased $1,240. The effective consolidated income tax rates were 17% and 16% for the three months ended March 31, 2025 and 2024, respectively. The increase in income tax expense for the three months ended March 31, 2025 was primarily due to a higher pre-tax income.

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

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. On December 19, 2024, the CPUC approved a final decision, Decision No. 24-12-077, for rate increases of $21,318 or 3.91% in 2025, $14,432 or 2.55% in 2026, and $17,373 or 2.98% in 2027. The decision also provides a three-year capital budget of $450,000 and recovery of $15,792 in balancing and memorandum accounts.

On December 18, 2024, SJWC, along with three other California water utilities, filed a joint request for a one-year deferment on the cost of capital filings which would otherwise be due on May 1, 2025. Postponing the filing a year alleviates administrative 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 was conditioned on leaving the current Water Cost of Capital Mechanism 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 January 14, 2025.

SJWC filed Advice Letter No. 613 on December 20, 2024, to increase the authorized revenue requirement by $21,318, or 3.91%, and implement new water rates and recover $15,792 in balancing and memorandum accounts in accordance with Decision No. 24-12-077. This filing was approved with an effective date of January 1, 2025.

Connecticut Regulatory Affairs

On January 28, 2025, CWC filed for a Water Infrastructure Conservation Adjustment (“WICA”) increase of $1,600 in annualized revenues for $15,700 in completed projects. On March 26, 2025, PURA approved the filing in its entirety. The cumulative WICA surcharge as of April 1, 2025, is 4.90%, collecting $6,000 on an annual basis.

On February 24, 2025, CWC filed its 2024 Water Rate Adjustment mechanism (“WRA”). The mechanism reconciles 2024 revenues as authorized in the CWC’s most recent rate case as well as provides for recovery of certain amounts of executive compensation as the result of the achievement of performance metrics as prescribed by PURA. The 2024 WRA surcharge of 3.62%, approved by PURA on March 26, 2025, is effective for 12 months beginning April 1, 2025.

On March 6, 2025, CWC submitted an application requesting that PURA approve the issuance of $19,402 in Drinking Water State Revolving Fund Loans that the Company proposes to use to fund three projects pertaining to: (1) the interconnection of the Green Springs Water System in Madison, Connecticut with the Guilford Water System; (2) a facility for centralized treatment of raw water from certain wells in CWC’s Gallup System in Plainfield, Connecticut; and (3) a Lead Service Line Identification Program. PURA issued a proposed final decision on April 11, 2025 approving the Company’s request. A final decision is forthcoming.

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, thereby increasing revenue and avoiding the immediate need for a general rate case. TWC’s SIC application included capital investment that improves its water and wastewater systems to better serve its customers. On March 21, 2024, the PUCT filed the final order approving TWC’s request to implement its SIC which applies to certain customers. As a result of this final order, TWC increased its annual water rates by $1,574 and its annual sewer rates by $28 on an annual basis. On September 12, 2024, TWC filed its application to amend its SIC with the PUCT under Docket No. 56974. Its amended SIC will apply to all customers and seeks to increase its annual water revenue by $3,915 and its annual sewer revenue by $195, 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 second quarter 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.

Maine Regulatory Affairs

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.

On December 31, 2024, MWC filed for a unified tariff across its 10 separate rate divisions. A decision in this case is expected in the fourth quarter of 2025.

On April 15, 2025, MWC filed a Water Infrastructure Surcharge in both the Oakland and Biddeford Saco divisions. The combined requested surcharge is 3.00% or $547. A decision is expected in the second quarter of 2025.

Liquidity:

Cash Flow from Operating Activities

During the three months ended March 31, 2025, SJW Group generated cash flows from operations of $43,181, compared to $51,216 for the same period in 2024. 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 $8,035 for the three months ended March 31, 2025 from the same period in the prior year. This decrease was the result of a combination of the following factors: (1) a decrease of $6,631 attributable to changes in payments related to accounts payable and other current liabilities, (2) a decrease attributable to accounts receivable and accrued unbilled utility revenue of $6,555, (3) a decrease of $6,330 attributable to changes in regulatory assets and liabilities, including the effect of lower surcharge collections on balancing and memorandum accounts, offset by (4) general working capital and net income, adjusted for non-cash items and tax accruals, increased by $6,014, and (5) an increase of $5,467 attributable to changes in payments of amounts previously invoiced and accrued for production costs.

As of March 31, 2025, Water Utility Services’ write-offs for credit losses represented less than 1% of its total revenue, unchanged from March 31, 2024. Management believes that the collection rate will continue to improve for its accounts receivables as service disconnections return to normal operations.

Cash Flow from Investing Activities

Net cash used in investing activities for the three months ended March 31, 2025, increased by $10,486 from the same period in the prior year, primarily as a result of (1) an increase in company-funded capital expenditures of $8,582, (2) an increase for developer-funded capital expenditures of $2,252, offset by a (3) decrease of $348 in utility plant retirement and other costs.

Cash Flow from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2025 increased by $36,284 from the same period in the prior year, primarily as a result of (1) an increase attributable to lower repayments on long-term debt of $39,900, (2) an increase in net proceeds from our common stock equity offerings of $19,539, (3) an increase in cash receipts of advances and contributions in aid of construction of $7,553, offset by (4) a decrease in proceeds of $25,000 from the issuance of long-term debt and (5) a decrease in net borrowings on the lines of credit of $4,899.

Budgeted Capital Expenditures

Water Utility Services’ estimated utility capital expenditures for 2025, exclusive of capital expenditures financed by customer contributions and advances, are anticipated to be approximately $451,000. The budgeted capital expenditures exclude capitalizable costs of $22,000 budgeted in 2025 that are associated with cloud-based computing arrangements. As of March 31, 2025, $77,461, or 17%, of the $451,000 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 $1,900,000 in capital expenditures, which includes replacement of pipes and mains, maintaining water systems, and installing approximately $300,000 in 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.

In addition to these capital expenditures, Water Utility Services expects to incur approximately $105,000 over the next five years, including $22,000 in 2025, in capitalizable costs associated with cloud-based computing arrangements. For the three months ended March 31, 2025, Water Utility Services’ incurred $756 in cloud-based computing expenses.

Sources of Capital:

SJW Group’s ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings.

Short-term Financing Agreements

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

A summary of the line of credit agreements as of March 31, 2025 are as follows:

(1) On April 15, 2025, CTWS extended the maturity date on its $40,000 credit agreement from May 15, 2025 to August 13, 2025.

For the three months ended March 31, 2025, cost of borrowing on the lines of credit averaged 5.47% compared to 6.54% in the same period in 2024.

All of SJW Group’s and subsidiaries’ lines of credit contain customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. All of the lines of credit also include certain customary financial covenants such as a funded debt to capitalization ratio and a minimum interest coverage ratio. As of March 31, 2025, SJW Group and its subsidiaries were in compliance with all covenants on their lines of credit.

Long-term Financing Agreements

The debt and credit agreements of SJW Group and its subsidiaries contain various financial and other covenants. Non-compliance with these covenants could result in accelerated due dates and termination of the agreements. In addition, the credit agreements contain customary representations and warranties and are subject to customary events of default, which may result in the outstanding debt becoming immediately due and payable. As of March 31, 2025, SJW Group and its subsidiaries were in compliance with all covenants in their long-term debt agreements.

Equity Financing Arrangements

In October 2024, SJW Group entered into an equity distribution agreement (the, “Equity Distribution Agreement”) with BofA Securities, Inc., J.P. Morgan Securities 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 $200,000. The Equity Distribution Agreement replaced the previous agreement that ended in 2024. For the three months ended March 31, 2025, SJW Group issued and sold a total of 495,900 shares of common stock with a weighted average price of $53.87 per share and received $26,545 in net proceeds under the Equity Distribution Agreement. Since the inception of the New Equity Distribution Agreement, SJW Group has issued and sold 871,413 shares of common stock at a weighted average price of $54.56 for a total net proceeds of $46,713 and has $152,460 of aggregate gross sales price of shares remaining to issue under the Equity Distribution Agreement as of March 31, 2025.

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 2025 and 2024 activities, we will have access to the external funding sources necessary to implement our ongoing capital investment programs in the future. On March 17, 2025, Standard & Poor’s Ratings Services revised the outlook for SJW Group, CTWS and CWC from negative to stable.

The following table presents the current Standard & Poor’s Ratings Services assigned company ratings:

SJW Group is subject to market risks in the normal course of business, including changes in interest rates, pension plan asset values, and equity prices. The exposure to changes in interest rates can result from the issuance of debt and short-term funds obtained through the company’s variable rate lines of credit. SJW Group’s subsidiaries sponsor noncontributory pension and other post-retirement plans for its employees. Pension and other post-retirement costs and the funded status of the plans may be affected by a number of factors including the discount rate, mortality rates of plan participants, investment returns on plan assets, and pension reform legislation.

SJW Group has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or financial instruments with concentrations of credit risk.

SJW Group’s management, with the participation of its Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of SJW Group’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, the “Exchange Act”), as of the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that SJW Group’s disclosure controls and procedures as of the end of the period covered by this report have been designed and are functioning effectively to provide reasonable assurance that the information required to be disclosed by SJW Group in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. SJW Group believes that a control system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the control system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected.

There has been no change in internal control over financial reporting during the first fiscal quarter of 2025 that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting of SJW Group.

In addition to the other information set forth in this report, you should carefully consider the factors discussed in “Risk Factors” in SJW Group’s annual report on Form 10-K for the year ended December 31, 2024 and our other public filings, which could materially affect our business, financial condition or future results. There have been no material changes from risk factors previously disclosed in “Risk Factors” in SJW Group’s annual report on Form 10-K for the year ended December 31, 2024.