SJW (SJW) - 2025 Q2 - Quarterly Report

Forward-Looking Statements This section highlights that the report contains forward-looking statements subject to various risks and uncertainties, and interim results are not indicative of full-year performance - The report contains forward-looking statements subject to risks, uncertainties, and assumptions that are difficult to predict. Results for a quarter are not indicative of full-year results due to seasonality and other factors[9][11] - In May 2025, the Company changed its corporate name from SJW Group to H2O America, and its trading symbol from SJW to HTO on the Nasdaq Global Select Market[12][29] - Key risks include those associated with the proposed acquisition of Quadvest, governmental policies and regulations, changes in water demand, weather conditions, climate change impacts, unexpected costs, and financing terms[13] PART I. FINANCIAL INFORMATION Item 1. Financial Statements This section presents H2O America's unaudited condensed consolidated financial statements, including comprehensive income, balance sheets, equity changes, cash flows, and detailed notes on accounting policies and regulatory matters Condensed Consolidated Statements of Comprehensive Income Condensed Consolidated Statements of Comprehensive Income (Three Months Ended June 30) | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (YoY) | % Change (YoY) | | :--------------------------------- | :------------------ | :------------------ | :----------- | :------------- | | Operating revenue | $198,255 | $176,174 | $22,081 | 12.53% | | Total operating expense | $154,390 | $135,604 | $18,786 | 13.85% | | Operating income | $43,865 | $40,570 | $3,295 | 8.12% | | Income before income taxes | $29,345 | $24,420 | $4,925 | 20.17% | | Provision for income taxes | $4,670 | $3,724 | $946 | 25.40% | | Net income | $24,675 | $20,696 | $3,979 | 19.22% | | Basic EPS | $0.71 | $0.64 | $0.07 | 10.94% | | Diluted EPS | $0.71 | $0.64 | $0.07 | 10.94% | | Dividends per share | $0.42 | $0.40 | $0.02 | 5.00% | Condensed Consolidated Statements of Comprehensive Income (Six Months Ended June 30) | Metric | 2025 (in thousands) | 2024 (in thousands) | Change (YoY) | % Change (YoY) | | :--------------------------------- | :------------------ | :------------------ | :----------- | :------------- | | Operating revenue | $365,854 | $325,556 | $40,298 | 12.38% | | Total operating expense | $286,093 | $257,073 | $29,020 | 11.30% | | Operating income | $79,761 | $68,483 | $11,278 | 16.47% | | Income before income taxes | $49,367 | $38,350 | $11,017 | 28.73% | | Provision for income taxes | $8,141 | $5,955 | $2,186 | 36.71% | | Net income | $41,226 | $32,395 | $8,831 | 27.26% | | Basic EPS | $1.20 | $1.00 | $0.20 | 20.00% | | Diluted EPS | $1.20 | $1.00 | $0.20 | 20.00% | | Dividends per share | $0.84 | $0.80 | $0.04 | 5.00% | Condensed Consolidated Balance Sheets Condensed Consolidated Balance Sheets (as of June 30, 2025 vs. December 31, 2024) | Metric | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | Change (in thousands) | | :--------------------------------- | :--------------------------- | :----------------------------- | :-------------------- | | Assets | | | | | Total utility plant (net) | $3,654,396 | $3,488,611 | $165,785 | | Total current assets | $200,450 | $190,714 | $9,736 | | Total other assets | $990,865 | $977,768 | $13,097 | | Total assets | $4,846,926 | $4,658,309 | $188,617 | | Capitalization and Liabilities | | | | | Total stockholders' equity | $1,465,971 | $1,366,974 | $98,997 | | Long-term debt, less current portion | $1,692,212 | $1,706,904 | $(14,692) | | Total capitalization | $3,158,183 | $3,073,878 | $84,305 | | Total current liabilities | $314,234 | $261,173 | $53,061 | | Deferred income taxes | $286,031 | $276,043 | $9,988 | | Total capitalization and liabilities | $4,846,926 | $4,658,309 | $188,617 | Condensed Consolidated Statements of Changes in Stockholders' Equity Changes in Stockholders' Equity (Six Months Ended June 30, 2025) | Metric | December 31, 2024 (in thousands) | Net Income (in thousands) | Stock-based Compensation (in thousands) | Common Stock Issuance (net) (in thousands) | Dividends Paid (in thousands) | June 30, 2025 (in thousands) | | :--------------------------------- | :------------------------------- | :------------------------ | :----------------------------------- | :--------------------------------------- | :---------------------------- | :----------------------------- | | Common Stock (shares) | 33,629,169 | — | 48,291 | 1,583,493 | — | 35,287,080 | | Common Stock (amount) | $34 | — | — | $1 | — | $35 | | Additional Paid-in Capital | $827,796 | — | $2,674 | $83,713 | — | $914,330 | | Retained Earnings | $537,184 | $41,226 | $(18) | — | $(28,746) | $549,646 | | Accumulated Other Comprehensive Income | $1,960 | — | — | — | — | $1,960 | | Total Stockholders' Equity | $1,366,974 | $41,226 | $2,656 | $83,714 | $(28,746) | $1,465,971 | Condensed Consolidated Statements of Cash Flows Condensed Consolidated Statements of Cash Flows (Six Months Ended June 30) | Activity | 2025 (in thousands) | 2024 (in thousands) | Change (YoY) (in thousands) | | :--------------------------------- | :------------------ | :------------------ | :-------------------------- | | Net cash provided by operating activities | $104,017 | $100,532 | $3,485 | | Net cash used in investing activities | $(217,874) | $(130,982) | $(86,892) | | Net cash provided by financing activities | $122,592 | $43,531 | $79,061 | | Net change in cash and cash equivalents | $8,735 | $13,081 | $(4,346) | | Cash and cash equivalents, end of period | $19,849 | $22,804 | $(2,955) | Notes to Unaudited Condensed Consolidated Financial Statements Note 1. General This note provides general company information, including its recent name change, operational structure, seasonality of water sales, fair value of debt, and new accounting standard evaluations - H2O America changed its corporate name from SJW Group to H2O America and its trading symbol from SJW to HTO in May 2025, operating through wholly-owned subsidiaries including San Jose Water Company (SJWC), SJWTX Holdings, Inc., and SJWNE LLC[29] - Water sales are seasonal, with higher revenue in warm, dry summer months and lower in winter months, making interim results not indicative of full-year performance[30][100] Revenue Components (Three Months Ended June 30) | Revenue Component | 2025 (in thousands) | 2024 (in thousands) | | :-------------------------------------- | :------------------ | :------------------ | | Revenue from contracts with customers | $197,777 | $173,106 | | Alternative revenue programs, net | $1,759 | $1,314 | | Other balancing and memorandum accounts and regulatory mechanisms, net | $(2,288) | $977 | | Rental income | $1,007 | $777 | | Total Operating Revenue | $198,255 | $176,174 | Revenue Components (Six Months Ended June 30) | Revenue Component | 2025 (in thousands) | 2024 (in thousands) | | :-------------------------------------- | :------------------ | :------------------ | | Revenue from contracts with customers | $362,640 | $323,114 | | Alternative revenue programs, net | $2,351 | $(523) | | Other balancing and memorandum accounts and regulatory mechanisms, net | $(988) | $413 | | Rental income | $1,851 | $2,552 | | Total Operating Revenue | $365,854 | $325,556 | - The fair value of long-term debt was $1,513,238 thousand as of June 30, 2025, up from $1,490,024 thousand as of December 31, 2024, determined using discounted cash flow analysis[35] - H2O America is evaluating the requirements of new accounting standards ASU 2023-09 (Improvements to Income Tax Disclosures, effective December 31, 2025) and ASU 2024-03 (Disaggregation of Income Statement Expenses, effective December 31, 2027)[38] Note 2. Regulatory Matters This note details the company's regulatory assets and liabilities, including balancing accounts, decoupling mechanisms, and the treatment of PFAS legal settlement proceeds Regulatory Assets and Liabilities (as of June 30, 2025 vs. December 31, 2024) | Category | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------------------------- | :--------------------------- | :----------------------------- | | Total regulatory assets | $245,276 | $242,227 | | Less: current regulatory assets | $12,626 | $18,172 | | Total regulatory assets, less current portion | $232,650 | $224,055 | | Total regulatory liabilities | $508,982 | $484,841 | | Less: current regulatory liabilities | $2 | $1,122 | | Total regulatory liabilities, less current portion | $508,980 | $483,719 | - SJWC uses balancing accounts (e.g., FCBA, MWRAM, WCMA) to track under-collection or over-collection of expenses and revenues, and memorandum accounts for catastrophic events, water quality, energy efficiency, and water conservation[48][49] - A $15,792 thousand recovery from balancing and memorandum accounts was approved by CPUC effective January 1, 2025[49] - CWC utilizes a Water Rate Adjustment (WRA) mechanism, a decoupling mechanism authorized by PURA, to mitigate demand-related risks and reconcile actual revenues with allowed revenues[50] - A regulatory liability for excess deferred income taxes resulted from the Tax Cuts and Jobs Act of 2017, with benefits flowing back to customers through amortization[52] - PFAS legal settlement proceeds received by SJWC and CWC are recorded as a regulatory liability, intended to offset future costs or be returned to customers through future rates, subject to regulatory approval[52] Note 3. Capitalization This note outlines H2O America's equity distribution agreement and common stock issuance activities - H2O America has an equity distribution agreement to sell up to $200,000 thousand of common stock in 'at-the-market' offerings[51] - For the six months ended June 30, 2025, the company issued 1,583,493 shares, receiving $83,713 thousand in net proceeds[51] - As of June 30, 2025, $95,017 thousand of aggregate gross sales price of shares remained to be issued[51] Note 4. Lines of Credit and Long-Term Liabilities This note details the company's short-term borrowings, unused credit lines, and recent credit agreement extensions - The weighted average interest rate on short-term borrowings outstanding at June 30, 2025, was 5.43%, down from 6.08% at December 31, 2024[54] - As of June 30, 2025, the unused portion of lines of credit was $199,160 thousand[54] - CTWS extended its $40,000 thousand credit agreement maturity to August 13, 2025, and SJWC entered a new $10,000 thousand credit agreement maturing June 11, 2026[54][55] Note 5. Income Taxes This note presents the company's income tax expense and effective rates, along with unrecognized tax benefits Income Tax Expense and Effective Rates | Period | Income Tax Expense (in thousands) | Effective Consolidated Income Tax Rate | | :--------------------------------- | :-------------------------------- | :------------------------------------- | | Three months ended June 30, 2025 | $4,670 | 16% | | Three months ended June 30, 2024 | $3,724 | 15% | | Six months ended June 30, 2025 | $8,141 | 16% | | Six months ended June 30, 2024 | $5,955 | 16% | - Unrecognized tax benefits (before state tax deductions, excluding interest and penalties) were $3,896 thousand as of June 30, 2025, up from $3,707 thousand at December 31, 2024[57] - No significant changes in uncertain tax positions are expected over the next 12 months[57] Note 6. Commitments and Contingencies This note details the company's involvement in legal proceedings, including a class action lawsuit and multi-district litigation against PFAS manufacturers, and related settlement proceeds - CWC is a defendant in a putative class action lawsuit alleging water contamination, which it intends to vigorously defend[59][164] - SJWC and CWC are plaintiffs in a Multi-District Litigation (MDL) lawsuit against PFAS manufacturers for damages and reimbursement of costs[60][165] - Settlements with Chemours, Corteva, DuPont, 3M, Tyco Fire Products, and BASF have been approved[61][166] - During Q2 2025, the Company received $6,443 thousand in cash proceeds from a 3M PFAS legal settlement, allocated to SJWC ($4,420k), CWC ($1,906k), and MWC ($117k)[62][167] - These proceeds are recorded as a regulatory liability, subject to regulatory approval, to offset future costs or be refunded to customers[62][167] - Additional cash proceeds from 3M and other pending settlements (DuPont, Tyco, BASF) are expected in 2025 and subsequent years, but the amount is not estimable as of the filing date[63][64][168] Note 7. Benefit Plans This note describes H2O America's defined benefit pension plans and postretirement health care benefits, including net periodic benefit costs and expected contributions - H2O America maintains noncontributory defined benefit pension plans and employer-sponsored postretirement health care and life insurance benefits for eligible employees[65][66] Net Periodic Benefit Costs (Three Months Ended June 30) | Component | Pension Benefits 2025 (in thousands) | Pension Benefits 2024 (in thousands) | Other Benefits 2025 (in thousands) | Other Benefits 2024 (in thousands) | | :--------------------------------- | :----------------------------------- | :----------------------------------- | :--------------------------------- | :--------------------------------- | | Service cost | $1,644 | $1,666 | $156 | $166 | | Interest cost | $3,901 | $3,613 | $337 | $295 | | Expected return on assets | $(4,944) | $(4,463) | $(295) | $(267) | | Amortization of actuarial (gain) loss | $(458) | $(18) | $(214) | $(161) | | Amortization of prior service cost | $4 | $4 | — | — | | Total | $147 | $802 | $(16) | $33 | Net Periodic Benefit Costs (Six Months Ended June 30) | Component | Pension Benefits 2025 (in thousands) | Pension Benefits 2024 (in thousands) | Other Benefits 2025 (in thousands) | Other Benefits 2024 (in thousands) | | :--------------------------------- | :----------------------------------- | :----------------------------------- | :--------------------------------- | :--------------------------------- | | Service cost | $3,287 | $3,331 | $312 | $332 | | Interest cost | $7,801 | $7,226 | $674 | $591 | | Expected return on assets | $(9,887) | $(8,926) | $(590) | $(534) | | Amortization of actuarial (gain) loss | $(915) | $(35) | $(428) | $(322) | | Amortization of prior service cost | $7 | $7 | — | — | | Total | $293 | $1,603 | $(32) | $67 | - H2O America expects to contribute up to $6,113 thousand to pension and other postretirement plans in 2025, having already contributed $2,105 thousand for the six months ended June 30, 2025[67] Note 8. Equity Plans This note details the company's equity plans, including shares issuable upon vesting of restricted stock units and available for future awards, along with related compensation costs - As of June 30, 2025, 230,275 shares are issuable upon vesting of outstanding restricted stock units, and 913,976 additional shares are available for award issuances under long-term incentive plans[68] Compensation Costs Charged to Income (Three and Six Months Ended June 30) | Award Type | Three Months Ended June 30, 2025 (in thousands) | Three Months Ended June 30, 2024 (in thousands) | Six Months Ended June 30, 2025 (in thousands) | Six Months Ended June 30, 2024 (in thousands) | | :--------------------------------- | :---------------------------------------------- | :---------------------------------------------- | :-------------------------------------------- | :-------------------------------------------- | | ESPP | $100 | — | $189 | $195 | | Restricted stock and deferred restricted stock | $1,364 | $1,275 | $2,485 | $2,618 | | Total compensation costs | $1,464 | $1,275 | $2,674 | $2,813 | | ESPP proceeds | — | — | $1,116 | $1,101 | - Total unrecognized compensation costs for restricted and deferred restricted stock plans were $8,405 thousand as of June 30, 2025, expected to be recognized over a weighted average period of 1.93 years[72] Note 9. Segment Reporting This note provides financial information by segment, distinguishing between Water Utility Services and Other Services, including operating revenue, net income, capital expenditures, and assets - H2O America operates a single reportable segment, 'Water Utility Services,' which includes SJWC, CWC, TWC, MWC, and Acequia[74] - 'Other Services' includes non-utility activities like property management and contract water/sewer operations[74] Segment Operating Revenue (Three Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $194,674 | $172,046 | | Other Services | $3,581 | $4,128 | | Consolidated Total | $198,255 | $176,174 | Segment Operating Revenue (Six Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $359,830 | $316,961 | | Other Services | $6,024 | $8,595 | | Consolidated Total | $365,854 | $325,556 | Segment Net Income (Loss) (Three Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $28,970 | $24,005 | | Other Services | $771 | $249 | | Unallocated Corporate | $(5,066) | $(3,558) | | Consolidated Net Income | $24,675 | $20,696 | Segment Net Income (Loss) (Six Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $47,923 | $38,786 | | Other Services | $1,081 | $1,583 | | Unallocated Corporate | $(7,778) | $(7,974) | | Consolidated Net Income | $41,226 | $32,395 | Segment Capital Expenditures (Three and Six Months Ended June 30) | Period | Water Utility Services (in thousands) | Other Services (in thousands) | Unallocated Corporate (in thousands) | Consolidated Total (in thousands) | | :--------------------------------- | :------------------------------------ | :---------------------------- | :----------------------------------- | :-------------------------------- | | Three months ended June 30, 2025 | $132,058 | — | — | $132,058 | | Three months ended June 30, 2024 | $96,636 | — | — | $96,636 | | Six months ended June 30, 2025 | $216,403 | — | — | $216,403 | | Six months ended June 30, 2024 | $170,147 | — | — | $170,147 | Segment Assets (as of June 30, 2025 vs. December 31, 2024) | Segment | June 30, 2025 (in thousands) | December 31, 2024 (in thousands) | | :-------------------- | :--------------------------- | :----------------------------- | | Water Utility Services | $4,728,012 | $4,567,182 | | Other Services | $27,994 | $25,053 | | Unallocated Corporate | $90,920 | $66,074 | | Total assets | $4,846,926 | $4,658,309 | Note 10. Subsequent Events This note describes significant events occurring after the reporting period, including a major acquisition agreement, debt issuance, credit agreement termination, and new legislation - On July 7, 2025, H2O America, through its indirect subsidiary TWC, entered into an Asset Purchase Agreement to acquire Quadvest Retail's water and sewer utility business for a base amount of $483,600 thousand[83][84] - Concurrently, TWOS agreed to acquire Quadvest Wholesale's wholesale water and sewer business for a base amount of $56,400 thousand[84] - Both transactions are subject to closing conditions, including regulatory approvals[84] - On July 10, 2025, MWC issued a $25,000 thousand unsecured promissory note at a fixed interest rate of 6.70%, due July 20, 2055, following MPUC approval[85] - On July 11, 2025, CTWS repaid and terminated a $40,000 thousand credit agreement[86] - The One Big Beautiful Bill Act (OBBBA) was signed into law on July 4, 2025, and the company is evaluating its impact on income tax provisions, with changes to be recognized in Q3 2025[87][123] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on H2O America's financial condition and results of operations, covering business strategy, accounting estimates, operating results, regulatory developments, and liquidity General This section provides an overview of H2O America's business as a holding company primarily involved in public utilities providing water and wastewater services through its subsidiaries - H2O America is a holding company primarily involved in public utilities providing water and wastewater services through subsidiaries SJWC, CWC, MWC, and TWC, serving approximately 407,000 connections and over 1.6 million people in California, Connecticut, Maine, and Texas[91] - The 'Water Utility Services' segment includes regulated water utility operations, while 'Other Services' encompasses non-tariffed operations like contract water/sewer services and property management[92][93] Business Strategy for Water Utility Services This section outlines H2O America's strategic focus on investing in regulated water utility operations, providing related non-tariffed services, and expanding through acquisitions - H2O America's business strategy focuses on three areas: investing in regional regulated water utility operations, providing regional non-tariffed water utility-related services, and offering out-of-region water and utility-related services[94] - The company is set to acquire Quadvest's regulated systems for $483,600 thousand and wholesale systems for $56,400 thousand, aiming to expand operational scale and market exposure in Texas[96] Critical Accounting Estimates This section confirms that there have been no changes to critical accounting estimates or significant accounting policies during the reported periods - There have been no changes to critical accounting estimates or significant accounting policies during the three and six months ended June 30, 2025[98] New Accounting Pronouncements This section refers to Note 1 for a discussion of new accounting pronouncements currently being evaluated by the company - Refer to Note 1 for a discussion of new accounting pronouncements, including ASU 2023-09 and ASU 2024-03, which the company is currently evaluating[99] Results of Operations Overview This overview summarizes the consolidated net income increase for the three and six months ended June 30, 2025, driven by rate increases and partially offset by higher operating expenses - Consolidated net income increased by $3,979 thousand (19%) to $24,675 thousand for the three months ended June 30, 2025, and by $8,831 thousand (27%) to $41,226 thousand for the six months ended June 30, 2025[101] - This increase was primarily due to rate increases in California and Connecticut, partially offset by higher water production and other operating expenses[101] Operating Revenue This section details the operating revenue by segment and the factors contributing to changes in consolidated operating revenue for the three and six months ended June 30 Operating Revenue by Segment (Three Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $194,674 | $172,046 | | Other Services | $3,581 | $4,128 | | Total operating revenue | $198,255 | $176,174 | Operating Revenue by Segment (Six Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $359,830 | $316,961 | | Other Services | $6,024 | $8,595 | | Total operating revenue | $365,854 | $325,556 | Change in Consolidated Operating Revenue (2025 vs. 2024) | Factor | Three Months Ended June 30 (Increase/(decrease) in thousands) | Six Months Ended June 30 (Increase/(decrease) in thousands) | | :--------------------------------- | :---------------------------------------------------------- | :-------------------------------------------------------- | | Consumption changes | $4,885 | $5,870 | | Increase in customers | $331 | $559 | | Rate increases (pass-through water costs) | $6,675 | $12,000 | | Rate increases (all other) | $10,935 | $22,827 | | Regulatory mechanisms | $(2,255) | $(2,435) | | Service and other revenue | $(546) | $(2,571) | | Other Services | $2,056 | $4,048 | | Total change in operating revenue | $22,081 | $40,298 | Operating Expense This section presents operating expenses by segment and details the factors contributing to changes in consolidated operating expenses for the three and six months ended June 30 Operating Expense by Segment (Three Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $148,027 | $132,249 | | Other Services | $2,565 | $2,839 | | Unallocated Corporate | $3,798 | $516 | | Total operating expense | $154,390 | $135,604 | Operating Expense by Segment (Six Months Ended June 30) | Segment | 2025 (in thousands) | 2024 (in thousands) | | :-------------------- | :------------------ | :------------------ | | Water Utility Services | $277,007 | $250,030 | | Other Services | $4,571 | $5,175 | | Unallocated Corporate | $4,515 | $1,868 | | Total operating expense | $286,093 | $257,073 | Change in Consolidated Operating Expense (2025 vs. 2024) | Factor | Three Months Ended June 30 (Increase/(decrease) in thousands) | Six Months Ended June 30 (Increase/(decrease) in thousands) | | :--------------------------------- | :---------------------------------------------------------- | :-------------------------------------------------------- | | Water production expenses | $10,399 | $17,572 | | Administrative and general | $8,327 | $10,299 | | Maintenance | $(411) | $401 | | Property taxes and other non-income taxes | $87 | $452 | | Depreciation and amortization | $384 | $296 | | Total change in operating expense | $18,786 | $29,020 | Sources of Water Supply This section details the various sources of water supply for the company's subsidiaries and changes in supply volumes for the three and six months ended June 30 - SJWC's water supply consists of groundwater (40-50%), purchased water (40-50%), and surface water (6-8% in normal years)[106] - Purchased water and groundwater extraction charges are tracked in the Full Cost Balancing Account (FCBA) for cost recovery[106] - California water conditions remained positive in H1 2025, with State Water Project allocation increasing to 50% and Central Valley Project allocation to 80%[107][108] - SJWC's Lake Elsman was at 93.5% capacity, 156.5% of the five-year seasonal average[108] - CWC's water supply is approximately 60% surface water and 40% wells, supplemented by long-term agreements with regional water authorities[110] - TWC's supply includes groundwater from wells and purchased treated/untreated raw water from local agencies, with long-term take-or-pay agreements with GBRA[111] - Despite drought, TWC expects to meet demand in 2025[112] - MWC's water sources are approximately 90% surface water and 10% wells, supplemented by a supply agreement with Kennebec Water District[113] Change in Sources of Water Supply (Three Months Ended June 30) | Source | 2025 (billion gallons) | 2024 (billion gallons) | Increase/(decrease) (billion gallons) | | :--------------- | :--------------------- | :--------------------- | :------------------------------------ | | Purchased water | 4.7 | 4.4 | 0.3 | | Groundwater | 5.2 | 4.9 | 0.3 | | Surface water | 2.8 | 3.1 | (0.3) | | Reclaimed water | 0.3 | 0.2 | 0.1 | | Total | 13.0 | 12.6 | 0.4 | Change in Sources of Water Supply (Six Months Ended June 30) | Source | 2025 (billion gallons) | 2024 (billion gallons) | Increase/(decrease) (billion gallons) | | :--------------- | :--------------------- | :--------------------- | :------------------------------------ | | Purchased water | 7.5 | 6.5 | 1.0 | | Groundwater | 9.4 | 8.8 | 0.6 | | Surface water | 5.4 | 6.1 | (0.7) | | Reclaimed water | 0.3 | 0.2 | 0.1 | | Total | 22.6 | 21.6 | 1.0 | Water Production Expenses This section explains the increase in water production expenses, attributing it to higher per-unit costs, increased production volume, and decreased surface water availability - Water production expenses increased by $10,399 thousand (three months) and $17,572 thousand (six months) primarily due to higher average per unit costs for purchased water and groundwater extraction, increased production volume, and decreased surface water availability, partially offset by regulatory adjustments[115][116] - Valley Water increased the unit price of purchased water by approximately 12% and groundwater extraction charge by 13% for SJWC effective July 1, 2024, with further increases of 9% and 10% respectively, effective July 1, 2025[117] Other Operating Expenses This section details the increase in other operating expenses, primarily due to higher administrative and general expenses, including customer credit losses, acquisition costs, and insurance - Operating expenses (excluding water production) increased by $8,387 thousand (three months) and $11,448 thousand (six months) due to higher administrative and general expenses, including customer credit losses (following prior year's payment program funds), acquisition costs, insurance, and contracted work[118][119] Other (Expense) Income This section explains the changes in other (expense) income, primarily driven by increased pension non-service credit, prior year real estate sales, and interest expense - The change in other (expense) income for the three months was mainly due to increased pension non-service credit and a prior year loss on real estate sales[120] - For the six months, it was due to lower income from other activities and increased interest expense, offset by higher pension non-service credit and prior year real estate sale loss[121] Provision for Income Taxes This section discusses the increase in income tax expense due to higher pre-tax income and the company's evaluation of new tax legislation - Income tax expense increased by $946 thousand (three months) and $2,186 thousand (six months) primarily due to higher pre-tax income[122] - Effective consolidated income tax rates were 16% (2025) vs. 15% (2024) for three months, and 16% for both periods for six months[122] - The company is evaluating the impact of the One Big Beautiful Bill Act (OBBBA), signed July 4, 2025, on its income tax provision, with changes to be recognized in Q3 2025[123] Regulation and Rates California Regulatory Affairs This section details CPUC approvals for SJWC's General Rate Case, including authorized rate increases, capital budget, and recovery from balancing accounts, along with recent advice letter approvals - CPUC approved SJWC's General Rate Case Decision No. 24-12-077, authorizing rate increases of $21,318 thousand (3.91%) in 2025, $14,432 thousand (2.55%) in 2026, and $17,373 thousand (2.98%) in 2027[125] - The approval also included a $450,000 thousand three-year capital budget and $15,792 thousand recovery from balancing/memorandum accounts[125] - SJWC received approval for Advice Letter No. 613 to implement new water rates and recover balancing/memorandum accounts effective January 1, 2025[127] - SJWC filed and received approval for Advice Letter No. 616 to increase revenue by $22,536 thousand (4.00%) to offset increased purchased water and groundwater extraction charges, effective July 1, 2025[128] - SJWC filed and received approval for Advice Letter No. 617 to increase revenue by $6,818 thousand (1.16%) for Advanced Metering Infrastructure (AMI) plant additions, effective July 1, 2025[129] - SJWC's Advice Letter No. 618 to establish the Water Contamination Litigation Memorandum Account (WCLMA) was approved in July 2025, effective June 24, 2025[130] Connecticut Regulatory Affairs This section outlines PURA approvals for CWC's Water Infrastructure Conservation Adjustment (WICA), Water Rate Adjustment (WRA), Drinking Water State Revolving Fund Loans, and new legislation for emerging contaminants - PURA approved CWC's Water Infrastructure Conservation Adjustment (WICA) increase of $1,600 thousand in annualized revenues for $15,700 thousand in completed projects, resulting in a cumulative WICA surcharge of 4.90% effective April 1, 2025[131] - CWC's 2024 Water Rate Adjustment (WRA) surcharge of 3.62% was approved by PURA, effective for 12 months beginning April 1, 2025[132] - PURA approved CWC's request to issue $19,402 thousand in Drinking Water State Revolving Fund Loans for three projects, including system interconnection, raw water treatment, and a Lead Service Line Identification Program[133] - The Connecticut General Assembly approved Public Act No. 25-142, allowing CWC to surcharge customers for investments related to emerging contaminants like PFAS[134] - CWC submitted its Water Quality and Treatment Adjustment (WQTA) Assessment Report on July 2, 2025[135] Texas Regulatory Affairs This section details PUCT approvals for TWC's System Improvement Charge (SIC) applications, resulting in increased water and sewer rates, and future general rate case requirements - PUCT approved TWC's System Improvement Charge (SIC) application (Docket No. 54430), increasing annual water rates by $1,574 thousand and sewer rates by $28 thousand[136] - PUCT also approved TWC's amended SIC application (Docket No. 56974), further increasing annual water revenue by $3,915 thousand and sewer revenue by $195 thousand, applicable to all customers[137] - TWC is required to file a general rate case by March 21, 2028, and will continue annual adjustments for Water Pass-through Charges (WPC)[138] Maine Regulatory Affairs This section outlines MPUC approvals for MWC's rate increases, a unified tariff filing, and a Water Infrastructure Surcharge for specific divisions - MPUC approved a settlement stipulation for MWC's Camden Rockland division, authorizing an increase in rates of $865 thousand (13.00%) effective July 1, 2025[139] - MWC filed for a unified tariff across its 10 rate divisions, with a decision expected in Q4 2025[140] - MPUC approved a Water Infrastructure Surcharge of 3.00% ($547 thousand combined) for MWC's Oakland and Biddeford Saco divisions, effective July 1, 2025[140] Liquidity Cash Flow from Operating Activities This section details the increase in net cash provided by operating activities, driven by higher net income and partially offset by changes in regulatory accounts and working capital - Net cash provided by operating activities increased by $3,485 thousand to $104,017 thousand for the six months ended June 30, 2025, primarily due to higher net income (adjusted for non-cash items) and increased payments for production costs[141] - This was partially offset by changes in regulatory assets/liabilities, tax accruals, accounts receivable, and accounts payable[141] - Water Utility Services' write-offs for credit losses remained below 1% of total revenue, consistent with the prior year, and management expects collection rates to improve[142] Cash Flow from Investing Activities This section explains the increase in net cash used in investing activities, primarily due to higher capital expenditures and decreased proceeds from real estate sales - Net cash used in investing activities increased by $86,892 thousand for the six months ended June 30, 2025, primarily due to a $46,072 thousand increase in company-funded utility capital expenditures and a $40,628 thousand decrease in proceeds from real estate sales (due to the completion of Tennessee property sales in 2024)[143] Cash Flow from Financing Activities This section details the increase in net cash provided by financing activities, driven by common stock offerings, lower debt repayments, and increased contributions, partially offset by higher dividends and lower debt proceeds - Net cash provided by financing activities increased by $79,061 thousand for the six months ended June 30, 2025, driven by higher net proceeds from common stock offerings ($51,411k), lower repayments on long-term debt ($39,750k), and increased cash receipts from advances/contributions in aid of construction ($20,239k)[144] - These were partially offset by increased dividend payments ($3,022k), decreased net borrowings on lines of credit ($3,396k), and lower proceeds from long-term debt issuance ($25,000k)[144] Budgeted Capital Expenditures This section outlines the estimated utility capital expenditures for Water Utility Services for 2025 and the next five years, including significant investments in PFAS treatment and cloud-based computing - Water Utility Services' estimated utility capital expenditures for 2025 are approximately $451,000 thousand, with $204,440 thousand (45%) invested as of June 30, 2025[145] - This excludes $22,000 thousand in capitalizable cloud-based computing costs[145] - Over the next five years, Water Utility Services expects to incur approximately $1,900,000 thousand in capital expenditures, including $300,000 thousand for PFAS treatment, with a significant portion subject to regulatory approval[146] - An additional $105,000 thousand is expected for capitalizable cloud-based computing arrangements over the next five years, including $22,000 thousand in 2025[148] Sources of Capital Short-term Financing Agreements This section details the company's lines of credit agreements, including maturity dates, limits, outstanding amounts, unused portions, and compliance with covenants Lines of Credit Agreements (as of June 30, 2025) | Agreement | Maturity Date | Line Limit (in thousands) | Outstanding (in thousands) | Unused Portion (in thousands) | | :--------------------------------- | :------------ | :------------------------ | :------------------------- | :---------------------------- | | H2O America Syndicated | August 2, 2029 | $50,000 | — | $50,000 | | SJWC Syndicated | August 2, 2029 | $140,000 | $66,000 | $74,000 | | CTWS Syndicated | August 2, 2029 | $90,000 | $67,000 | $23,000 | | TWC Syndicated | August 2, 2029 | $20,000 | — | $20,000 | | SJWC Credit Agreement | June 11, 2026 | $10,000 | — | $10,000 | | CTWS Credit Agreement | August 2, 2028 | $10,000 | $2,840 | $7,160 | | CTWS Credit Agreement (terminated July 11, 2025) | August 13, 2025 | $40,000 | $25,000 | $15,000 | | Total | | $360,000 | $160,840 | $199,160 | - The average cost of borrowing on lines of credit for the six months ended June 30, 2025, was 5.45%, down from 6.53% in the same period of 2024[151] - H2O America and its subsidiaries were in compliance with all financial and other covenants on their lines of credit as of June 30, 2025[152] Long-term Financing Agreements This section details MWC's recent promissory note issuance and confirms the company's compliance with long-term debt covenants - MWC issued a $25,000 thousand promissory note on July 10, 2025, at a fixed interest rate of 6.70%, due July 20, 2055, following MPUC approval[154] - H2O America and its subsidiaries were in compliance with all covenants in their long-term debt agreements as of June 30, 2025[153] Equity Financing Arrangements This section outlines H2O America's equity distribution agreement, including shares issued and net proceeds received during the period - Under an equity distribution agreement, H2O America issued 1,583,493 shares of common stock for $83,713 thousand in net proceeds during the six months ended June 30, 2025[155] - $95,017 thousand of aggregate gross sales price remains available under the agreement[155] Credit Rating This section reports on Standard & Poor's Ratings Services' revised outlook for H2O America and its subsidiaries following the Quadvest acquisition announcement - Standard & Poor's Ratings Services revised the outlook for H2O America, CTWS, and CWC from stable to negative on July 15, 2025, following the announcement of the Quadvest acquisition[156] Standard & Poor's Ratings Services Assigned Company Ratings (as of July 15, 2025) | Entity | Rating | Outlook | | :----------- | :----- | :------ | | H2O America | A- | Negative | | SJWC | A | Stable | | CTWS | A- | Negative | | CWC | A- | Negative | Item 3. Quantitative and Qualitative Disclosures About Market Risk H2O America is exposed to market risks, including changes in interest rates, pension plan asset values, and equity prices, but does not use derivative financial instruments or have significant off-balance sheet risks - Market risks include changes in interest rates (from debt issuance and variable rate lines of credit), pension plan asset values, and equity prices[158] - Pension and post-retirement costs are affected by discount rates, mortality rates, investment returns, and pension reform legislation[159] - H2O America has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or financial instruments with concentrations of credit risk[160] Item 4. Controls and Procedures Management, including the CEO and CFO, evaluated the effectiveness of H2O America's disclosure controls and procedures as of June 30, 2025, concluding they are effective, with no material changes in internal control over financial reporting - The CEO and CFO concluded that H2O America's disclosure controls and procedures were effective as of June 30, 2025, providing reasonable assurance that required information is recorded, processed, summarized, and reported timely[161] - No material changes in internal control over financial reporting occurred during the second fiscal quarter of 2025[162] PART II. OTHER INFORMATION Item 1. Legal Proceedings H2O America is involved in routine litigation and specific lawsuits related to water contamination, including a class action against CWC and multi-district litigation against PFAS manufacturers, from which the company has received settlement proceeds and expects more - CWC is a defendant in a putative class action lawsuit alleging water contamination, which it is vigorously defending[164] - SJWC and CWC are plaintiffs in a Multi-District Litigation (MDL) against PFAS manufacturers[165] - Settlements with Chemours, Corteva, DuPont, 3M, Tyco Fire Products, and BASF have been approved[166] - During Q2 2025, the Company received $6,443 thousand in cash proceeds from a 3M PFAS legal settlement, recorded as a regulatory liability subject to regulatory approval[167] - Additional cash proceeds from 3M and other pending settlements (DuPont, Tyco, BASF) are expected in 2025 and subsequent years, but the amount is not estimable[168] Item 1A. Risk Factors This section highlights specific risk factors related to the proposed acquisition of Quadvest, including regulatory approval challenges, integration difficulties, potential for lower realized value, and the impact of transaction failure on H2O America's business and financial results - The proposed Quadvest acquisition is subject to regulatory approvals (e.g., Hart Scott-Rodino Act, PUCT), which may impose conditions, limitations, or costs, potentially delaying or preventing completion[171][172] - Delays in the PUCT approval process for the Quadvest acquisition could reduce or eliminate anticipated benefits, with the exact timeline unknown[174][175] - Failure to successfully integrate Quadvest's business could negatively impact H2O America's future business and financial results, due to challenges like managing customer relationships, integrating complex systems, and potential unforeseen liabilities[176][177][179] - A lower fair market value determination by the PUCT for the Regulated Business could result in H2O America not realizing the full expected value in rates[178] - Failure to complete the Quadvest transactions could negatively impact stock prices, business operations, and financial results, potentially requiring H2O America to pay a $21 million termination fee under certain circumstances[180][181][182] - Inability to obtain financing for the proposed transactions on favorable terms could adversely affect H2O America's financial condition, results of operations, or cash flows, potentially leading to dilution or restrictive debt covenants[183] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This item states that there were no unregistered sales of equity securities or use of proceeds to report for the period Item 3. Defaults Upon Senior Securities This item indicates that there were no defaults upon senior securities to report for the period Item 4. Mine Safety Disclosures This item is not applicable to H2O America's business operations Item 5. Other Information This section details the company's recent corporate name change, quarterly dividend declaration, executive officer appointments, and confirms no insider trading arrangements were adopted or terminated during the quarter - On May 5, 2025, SJW Group officially changed its corporate name to H2O America[188] - On July 25, 2025, the Board declared a regular quarterly dividend of $0.42 per share of common stock, payable September 2, 2025, to stockholders of record as of August 11, 2025[189] - The Board designated Andrew F. Walters (CEO), Ann P. Kelly (CFO & Treasurer), Bruce A. Hauk (President & COO), Kristen A. Johnson (President of Shared Services, SVP & CAO), and Willie Brown (VP & General Counsel) as executive officers, effective July 25, 2025[190][193] - No directors or officers adopted or terminated Rule 10b5-1(c) plans or non-Rule 10b5-1 trading arrangements during the quarter ended June 30, 2025[191] Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including corporate governance documents, asset purchase agreements, certifications, and XBRL-related documents Signatures - The report was signed on behalf of H2O America by Ann P. Kelly, Chief Financial Officer and Treasurer, on July 29, 2025[199]