Company Quick10K Filing
Quick10K
SJW Group
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$61.18 27 $1,680
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-02-20 Earnings, Exhibits
8-K 2018-12-03 Regulation FD, Other Events, Exhibits
8-K 2018-11-28 Enter Agreement, Exhibits
8-K 2018-11-26 Other Events, Exhibits
8-K 2018-10-24 Earnings, Exhibits
8-K 2018-08-05 Enter Agreement, Regulation FD, Exhibits
8-K 2018-07-25 Earnings, Exhibits
8-K 2018-05-30 Enter Agreement, Regulation FD, Exhibits
8-K 2018-04-25 Earnings, Shareholder Vote, Exhibits
8-K 2018-03-22 Other Events
8-K 2018-03-14 Enter Agreement, Regulation FD, Exhibits
8-K 2018-02-21 Earnings, Exhibits
8-K 2018-02-06 Regulation FD
8-K 2018-01-04 Other Events, Exhibits
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MSEX Middlesex Water
AEGN Aegion
MYRG MYR Group
YORW York Water
ARTNA Artesian Resources
PLPC Preformed Line Products
GWRS Global Water Resources
SJW 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Note 1. General
Note 2. Equity Plans
Note 3. Real Estate Investments
Note 4. Defined Benefit Plan
Note 5. Segment and Non-Tariffed Business Reporting
Note 6. Long-Term Liabilities and Bank Borrowings
Note 7. Fair Value Measurement
Note 8. Regulatory Rate Filings
Note 9. Balancing and Memorandum Accounts
Note 10. Regulatory Assets and Liabilities
Note 11. California Water Service Group Stock
Note 12. Sjw Group and Ctws Merger Agreement
Note 13. Legal Proceedings
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 5. Other Information
Item 6. Exhibits
EX-31.1 sjw-93018xex311.htm
EX-31.2 sjw-93018xex312.htm
EX-32.1 sjw-93018xex321.htm
EX-32.2 sjw-93018xex322.htm

SJW Group Earnings 2018-09-30

SJW 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sjw-93018x10q.htm 10-Q Document


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________ 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
Commission file number 1-8966
SJW Group
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0066628
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
110 West Taylor Street, San Jose, CA
 
95110
(Address of principal executive offices)
 
(Zip Code)
408-279-7800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x  No  o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one)
 
Large accelerated filer  x
 
Accelerated filer  o
 
Non-accelerated filer  o
 
Smaller reporting company  o
 
 
 
 
Emerging growth company  o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o   No  x
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 22, 2018, there were 20,631,171 shares of the registrant’s Common Stock outstanding.
 




PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
REVENUE
$
124,853

 
124,578

 
$
298,981

 
295,696

OPERATING EXPENSE:
 
 
 
 
 
 
 
Production Expenses:
 
 
 
 
 
 
 
Purchased water
33,545

 
30,833

 
72,673

 
66,938

Power
1,882

 
2,500

 
4,774

 
5,491

Groundwater extraction charges
14,890

 
15,756

 
34,341

 
34,098

Other production expenses
4,836

 
4,216

 
13,674

 
12,067

Total production expenses
55,153

 
53,305

 
125,462

 
118,594

Administrative and general
12,752

 
11,949

 
36,278

 
34,909

Maintenance
4,980

 
4,607

 
14,036

 
12,991

Property taxes and other non-income taxes
4,016

 
3,454

 
11,332

 
10,260

Depreciation and amortization
13,682

 
12,065

 
40,921

 
36,217

Merger related expenses
8,442

 

 
14,994

 

Total operating expense
99,025

 
85,380

 
243,023

 
212,971

OPERATING INCOME
25,828

 
39,198

 
55,958

 
82,725

OTHER (EXPENSE) INCOME:
 
 
 
 
 
 
 
Interest on long-term debt and other interest expense
(6,077
)
 
(5,541
)
 
(18,213
)
 
(17,354
)
Pension non-service cost
(589
)
 
(953
)
 
(1,767
)
 
(2,860
)
Unrealized loss on California Water Service Group stock

 

 
(527
)
 

Gain on sale of California Water Service Group stock
191

 

 
104

 

Gain on sale of real estate investments

 

 

 
6,903

Other, net
538

 
359

 
1,980

 
1,436

Income before income taxes
19,891

 
33,063

 
37,535

 
70,850

Provision for income taxes
4,103

 
13,523

 
7,591

 
27,055

NET INCOME BEFORE NONCONTROLLING INTEREST
15,788

 
19,540

 
29,944

 
43,795

Less net income attributable to the noncontrolling interest

 

 

 
1,896

SJW GROUP NET INCOME
15,788

 
19,540

 
29,944

 
41,899

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on investment

 
80

 

 
252

SJW GROUP COMPREHENSIVE INCOME
$
15,788

 
19,620

 
$
29,944

 
42,151

SJW GROUP EARNINGS PER SHARE
 
 
 
 
 
 
 
Basic
$
0.77

 
0.95

 
$
1.45

 
2.04

Diluted
$
0.76

 
0.94

 
$
1.45

 
2.03

DIVIDENDS PER SHARE
$
0.28

 
0.22

 
$
0.84

 
0.65

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
20,626,654

 
20,516,172

 
20,593,570

 
20,502,274

Diluted
20,732,040

 
20,697,097

 
20,721,970

 
20,675,479




See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2018
 
December 31,
2017
ASSETS
 
 
 
Utility plant:
 
 
 
Land
$
18,300

 
17,831

Depreciable plant and equipment
1,783,654

 
1,714,228

Construction in progress
79,475

 
45,851

Intangible assets
15,748

 
14,413

 
1,897,177

 
1,792,323

Less accumulated depreciation and amortization
593,916

 
553,059

 
1,303,261

 
1,239,264

Real estate investments
56,336

 
56,213

Less accumulated depreciation and amortization
12,029

 
11,132

 
44,307

 
45,081

CURRENT ASSETS:
 
 
 
Cash and cash equivalents
13,327

 
7,799

Accounts receivable:
 
 
 
Customers, net of allowances for uncollectible accounts
22,595

 
17,305

Income tax

 
7,981

Other
826

 
1,118

Accrued unbilled utility revenue
38,097

 
27,905

Other current assets
5,522

 
4,750

 
80,367

 
66,858

OTHER ASSETS:
 
 
 
Investment in California Water Service Group

 
4,535

Net regulatory assets, less current portion
104,670

 
99,554

Other
4,263

 
2,709

 
108,933

 
106,798

 
$
1,536,868

 
1,458,001












See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2018
 
December 31,
2017
CAPITALIZATION AND LIABILITIES
 
 
 
CAPITALIZATION:
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and outstanding shares 20,631,171 on September 30, 2018 and 20,520,856 on December 31, 2017
$
21

 
21

Additional paid-in capital
84,045

 
84,866

Retained earnings
390,891

 
376,119

Accumulated other comprehensive income

 
2,203

Total stockholders’ equity
474,957

 
463,209

Long-term debt, less current portion
431,341

 
431,092

 
906,298

 
894,301

CURRENT LIABILITIES:
 
 
 
Line of credit
76,000

 
25,000

Accrued groundwater extraction charges, purchased water and power
22,856

 
14,382

Accounts payable
26,956

 
22,960

Accrued interest
7,402

 
6,869

Accrued property taxes and other non-income taxes
4,056

 
1,904

Accrued payroll
4,568

 
6,011

Income tax payable
1,340

 

Other current liabilities
8,502

 
7,926

 
151,680

 
85,052

DEFERRED INCOME TAXES
80,901

 
85,795

ADVANCES FOR CONSTRUCTION
80,124

 
83,695

CONTRIBUTIONS IN AID OF CONSTRUCTION
167,769

 
160,830

POSTRETIREMENT BENEFIT PLANS
75,877

 
72,841

REGULATORY LIABILITY
60,650

 
62,476

OTHER NONCURRENT LIABILITIES
13,569

 
13,011

COMMITMENTS AND CONTINGENCIES

 

 
$
1,536,868

 
1,458,001











See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Nine months ended September 30,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income before noncontrolling interest
$
29,944

 
43,795

Adjustments to reconcile net income before noncontrolling interest to net cash provided by operating activities:
 
 
 
Depreciation and amortization
42,649

 
37,877

Deferred income taxes
(5,445
)
 
1,283

Stock-based compensation
1,383

 
1,633

Unrealized loss on California Water Service Group stock
527

 

Gain on sale of real estate investments

 
(6,903
)
Gain on sale of California Water Service Group stock
(104
)
 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and accrued unbilled utility revenue
(15,190
)
 
(18,335
)
Accounts payable and other current liabilities
3,493

 
2,215

Accrued groundwater extraction charges, purchased water and power
8,474

 
10,850

Tax payable and receivable, and other accrued taxes
12,482

 
14,228

Postretirement benefits
3,036

 
3,355

Regulatory assets and liability related to balancing and memorandum accounts
(4,822
)
 
(503
)
Other changes, net
(2,716
)
 
(1,528
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
73,711

 
87,967

INVESTING ACTIVITIES:
 
 
 
Additions to utility plant:
 
 
 
Company-funded
(97,753
)
 
(103,417
)
Contributions in aid of construction
(5,908
)
 
(2,631
)
Additions to real estate investments
(123
)
 
(116
)
Payments to retire utility plant, net of salvage
(3,789
)
 
(2,323
)
Proceeds from sale of real estate investments

 
11,180

Proceeds from non-refundable deposit

 
3,000

Proceeds from sale of California Water Service Group stock
4,112

 

Payments for business/asset acquisition
(2,496
)
 
(1,149
)
NET CASH USED IN INVESTING ACTIVITIES
(105,957
)
 
(95,456
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
52,000

 
28,500

Repayments of line of credit
(1,000
)
 
(29,700
)
Repayments of long-term borrowings

 
(2,717
)
Payment to noncontrolling interest

 
(1,896
)
Dividends paid
(17,297
)
 
(13,380
)
Receipts of advances and contributions in aid of construction
8,968

 
10,486

Refunds of advances for construction
(2,075
)
 
(1,982
)
Other changes, net
(2,822
)
 
397

NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
37,774

 
(10,292
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
5,528

 
(17,781
)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
7,799

 
25,350

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
13,327

 
7,569

Cash paid during the period for:
 
 
 
Interest
$
19,705

 
18,383

Income taxes
5,145

 
14,552

Supplemental disclosure of non-cash activities:
 
 
 
Change in accrued payables for construction costs capitalized
1,221

 
11,241

Utility property installed by developers
567

 
874





See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5



SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2018
(in thousands, except share and per share data)

Note 1.
General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.
The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). The Notes to Consolidated Financial Statements in SJW Group’s 2017 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
Recently Adopted Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The new standard replaced most existing revenue recognition guidance in generally accepted accounting principles. The updated guidance also requires additional disclosures regarding the nature, timing and uncertainty of revenue transactions. SJW Group adopted the new revenue standard on January 1, 2018, using the modified retrospective method, and determined that no adjustment to the opening balance of retained earnings was necessary for contracts with remaining obligations as of the effective date. In addition, SJW Group applied the “right to invoice” practical expedient. The adoption of the new standard requires certain changes to the recognition of balancing and memorandum account revenue and related costs (See Note 9, “Balancing and Memorandum Accounts”). However, the changes did not have a material impact on our consolidated results of operations, financial position, or cash flows. Concurrently, the company implemented ASU 2017-10, “Identifying the Customer in a Service Concession Arrangement.” Upon adoption of ASU 2017-10, the service concession fee paid to the City of Cupertino was determined to be an up-front payment and accordingly will be amortized as a reduction to future revenue as opposed to amortized as an expense on SJW Group’s Consolidated Statements of Comprehensive Income.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall” which changes the recognition of changes in fair value of financial liabilities when the fair value option is elected. In addition, the standard requires equity investments to be measured at fair value with changes in fair value recognized in net income instead of through other comprehensive income. The updated guidance affects the accounting for the company’s equity investment in California Water Service Group stock classified as an available-for-sale security (see Note 7 and Note 11 of “Notes to Unaudited Consolidated Financial Statements”). The new standard became effective for SJW Group beginning in the first quarter of the fiscal year ending December 31, 2018. Prior to adoption of ASU 2016-01, SJW Group recognized changes in fair value of its equity investment in California Water Service Group stock through other comprehensive income or loss on the statement of comprehensive income. Upon adoption on January 1, 2018, SJW Group began recording the change in fair value of its equity investment in other income and expense. In addition, the ASU stated that entities should apply the new standard by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As such, SJW Group recorded a cumulative-effect adjustment of $2,203 to beginning retained earnings to eliminate the cumulative change in fair value of its equity investment, net of tax from accumulated other comprehensive income.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which modifies existing guidance and is intended to reduce diversity in practice with respect to accounting for the income tax consequences of intra-entity transfers of assets. The ASU requires that the current and deferred income tax consequences of intra-entity transfers of assets be immediately recognized. Prior guidance allowed the entities to defer the consolidated tax consequences of an intercompany transfer of an asset other than inventory to a future period and amortize those tax consequences over time. SJW Group adopted ASU 2016-16 effective January 1, 2018. Upon adoption of ASU 2016-16, SJW Group did not record a unamortized tax expense. As a result, the company did not record a cumulative catch-up adjustments upon adoption of this ASU.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs,” which requires employers to present the service cost component of the net periodic benefit cost in the same income statement line item as other employee compensation costs arising from services rendered during the period. The standard provides that only the service cost component of net periodic pension costs is eligible for asset capitalization. Companies should present the other components of net periodic benefit costs separately from the line items that include the

6


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


service cost and outside of any subtotal of operating income, if one is presented. ASU 2017-07 requires retrospective presentation in the income statement of the service cost component and the other components of net periodic cost and net periodic postretirement benefit cost and prospective presentation from date of adoption for the capitalization in assets of only the service cost component of net periodic cost and net periodic postretirement benefit cost. SJW Group adopted ASU 2017-07 effective January 1, 2018. As such, the consolidated statements of comprehensive income for the periods presented have been reclassified to reflect the retrospective changes. See Note 4 of “Defined Benefit Plan” for further discussion.
Revenue
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales.
On January 1, 2018, SJW Group adopted FASB Accounting Standards Codification (“ASC”) Topic 606 - “Revenue from Contracts with Customers.” In accordance with Topic 606, management has determined that the company has principally four categories of revenues. The first category, revenue from contracts with customers, represents metered revenue of Water Utility Services which includes billings to customers based on meter readings plus an estimate of water used between the customers’ last meter reading and the end of the accounting period. SJW Group satisfies its performance obligation upon delivery of water to the customer at which time the customer consumes the benefits provided by the company. The customer is typically billed on a bi-monthly basis after water delivery has occurred. The customer is charged both a service charge which is based upon meter size and covers a portion of the fixed costs of furnishing water to the customer and a consumption charge based on actual water usage. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. As the company has the right to bill for services that it has provided, SJW Group estimates the dollar value of deliveries during the unbilled period and recognizes the associated revenue. Actual results could differ from those estimates, which may result in an adjustment to revenue when billed in a subsequent period. The second category, rental income, represents lease rental income from SJW Land Company tenants. The tenants pay monthly in accordance with lease agreements and SJW Group recognizes the income ratably over the lease term as this is the most representative of the pattern in which the benefit is expected to be derived from SJW Group’s underlying asset. The third and fourth revenue categories are other balancing and memorandum accounts and alternative revenue programs. Both are scoped out of Topic 606 and are accounted for under FASB ASC Topic 980 - “Regulated Operations.” Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the Water Conservation Memorandum Account (“WCMA”), San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to California Public Utilities Commission (“CPUC”) authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.
From 2014 to 2016, California was in a severe drought. In response to the drought, the State Water Resources Control Board (the “State Water Board”) imposed mandatory water use restrictions and conservation targets. The Santa Clara Valley Water District (“SCVWD”), San Jose Water Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than the State Water Board. While the Governor of California declared the drought over on April 7, 2017, the State Water Board made certain water use restrictions permanent while SCVWD maintained a conservation target at 20%.
On May 31, 2018, Governor Edmund G. Brown signed into law Assembly Bill 1668 and Senate Bill 606. Both bills set an initial limit for indoor water use of 55 gallons per person per day by 2022 and reduced the limit further to 50 gallons per person per day by 2030.  Implementation details remain to be developed as to how local water providers will meet this mandate as well as to how the CPUC will direct its regulated utilities to comply.

7


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


To encourage conservation, San Jose Water Company received approval from the CPUC to implement a Mandatory Conservation Revenue Adjustment Memorandum Account in 2014. This account was subsequently replaced with a WCMA. The WCMA allows San Jose Water Company to track lost revenue, net of related water costs, associated with reduced sales due to water conservation and associated calls for water use reductions. San Jose Water Company records the lost revenue captured in the WCMA regulatory accounts once the revenue recognition requirements of FASB ASC Topic 980 - “Regulated Operations,” subtopic 605-25 are met. For further discussion, please see Note 8 and Note 9.
The major streams of revenue for SJW Group are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Revenue from contracts with customers
$
120,007

 
125,722

 
$
294,319

 
290,146

Alternative revenue programs, net - WCMA
4,193

 
1,333

 
7,794

 
11,248

Other balancing and memorandum accounts revenue, net *
(788
)
 
(3,868
)
 
(7,235
)
 
(9,979
)
Rental income
1,441

 
1,391

 
4,103

 
4,281

 
$
124,853

 
124,578

 
$
298,981

 
295,696

*    The balances for three and nine months ended September 30, 2018, exclude $2,527 and $3,556, respectively, of amounts related to cost-recovery balancing accounts which upon adoption of Topic 606 are recorded as capitalized costs rather than revenue until recovery is approved by the CPUC. Prior to adoption of Topic 606, these amounts were recorded as revenue. For further discussion, please see Note 9.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law. Among other things, the Tax Act permanently lowers the corporate statutory tax rate to 21% from the previous maximum rate of 35%, effective for tax years including or commencing January 1, 2018. See Note 8 and Note 9, for discussion on the effect of the Tax Act on SJW Group’s regulatory activities.
Earnings per Share
Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with deferred restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”) and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended September 30, 2018 and 2017, 306 and 683 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2018, and 2017, 3,562 and 3,670 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.
Utility Plant Depreciation
A portion of depreciation expense is allocated to administrative and general expense. For the three months ended September 30, 2018 and 2017, the amounts allocated to administrative and general expense were $575 and $551, respectively. For the nine months ended September 30, 2018, and 2017, the amounts allocated to administrative and general expense were $1,728 and $1,660, respectively.

Note 2.
Equity Plans
SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on estimated fair value for stock-based payment awards.
The Incentive Plan allows SJW Group to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Group. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance stock units, or other stock-based awards. As of September 30, 2018, the remaining number of shares available under the Incentive Plan was 881,914, and an additional 143,581 shares were issuable

8


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


under outstanding restricted stock units and deferred restricted stock units. In addition, shares are issued to employees under the company’s ESPP.
Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income, proceeds from the exercise of stock options and similar instruments, and the tax benefit realized from stock options and similar instruments exercised, that were recorded to additional paid-in capital and common stock, by award type, are presented below for the three and nine months ended September 30, 2018, and 2017.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Adjustments to additional paid-in capital and common stock for:
 
 
 
 
 
 
 
Compensation costs charged to income:
 
 
 
 
 
 
 
   ESPP
$
127

 
114

 
$
242

 
214

   Restricted stock and deferred restricted stock
377

 
475

 
1,141

 
1,419

Total compensation costs charged to income
$
504

 
589

 
$
1,383

 
1,633

Proceeds from ESPP
$
718

 
645

 
$
1,371

 
1,215

Stock, Restricted Stock and Deferred Restricted Stock
On January 2, 2018, service-based restricted stock units covering an aggregate of 12,296 shares of common stock of SJW Group were granted to certain officers of SJW Group and its subsidiaries. The units vest in three equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense of $60.22 per unit which was based on the award grant date fair value is being recognized over the service period beginning in 2018.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an aggregate target number of SJW Group’s shares of common stock equal to 4,081 that will vest based on the actual attainment of specified performance goals measured for the 2018 calendar year and continued service through December 31, 2018. The number of shares issuable under such units, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the stock-based compensation expense of $58.02 per unit which was based on the award grant date fair value is being recognized assuming the performance goals will be attained.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an aggregate target number of SJW Group’s shares of common stock equal to 5,259 that will vest based on the actual attainment of specified performance goals for the 2020 calendar year and continued service through December 31, 2020. The number of shares issuable under the awards, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the stock-based compensation expense of $55.89 per unit which is based on the award grant date fair value is being recognized assuming the performance goals will be attained.
On January 30, 2018, performance-based restricted stock units were granted to an officer of SJW Group covering a target number of shares of SJW Group’s common stock equal to 6,342 that will vest based on continued service and attainment of specified performance goals over the period from January 1, 2018, to December 31, 2020. The number of shares issuable under the award, ranging between 0% and 200% of the target number of shares, is based on the level of actual attainment of specified performance goals. These units do not include dividend equivalent rights. The fair value of the performance-based restricted stock award was estimated utilizing the Monte Carlo valuation model, using the fair value of SJW Group’s common stock with the effect of market conditions and no dividend yield on the date of grant, and assumes the performance goals will be attained. Stock-based compensation expense is recognized at $63.85 per unit. If such goals are not met and requisite service is not rendered, no compensation cost will be recognized and any recognized compensation cost will be reversed.
On April 25, 2018, restricted stock units covering an aggregate of 7,385 shares of common stock of SJW Group were granted to the non-employee board members of SJW Group. The units vest upon continuous board service through the day immediately preceding the date of the next annual stockholder meeting with no dividend equivalent rights. Stock-based compensation expense of $55.80 per unit, which is based on the award grant date fair value, is being recognized over the service period beginning in 2018.

9


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


As of September 30, 2018, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $2,180. This cost is expected to be recognized over a remaining weighted average period of 1.45 years.
Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85% of the fair value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock were reserved for issuance under the ESPP.
SJW Group’s recorded expenses were $66 and $198 for the three and nine months ended September 30, 2018, respectively, and $60 and $177 for the three and nine months ended September 30, 2017, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2019, for the ESPP is approximately $117. This cost is expected to be recognized during the fourth quarter of 2018 and first quarter of 2019.

Note 3.
Real Estate Investments
The major components of real estate investments as of September 30, 2018, and December 31, 2017, are as follows: 
 
September 30,
2018
 
December 31,
2017
Land
$
13,262

 
13,262

Buildings and improvements
43,074

 
42,951

Subtotal
56,336

 
56,213

Less: accumulated depreciation and amortization
12,029

 
11,132

Total
$
44,307

 
45,081

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years.
On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interests in the commercial building and land the partnership owned and operated for $11,000. 444 West Santa Clara Street, L.P. recognized a pre-tax gain on sale of real estate investments of $6,323, after selling expenses of $1,157. SJW Land Company holds a 70% limited interest in 444 West Santa Clara Street, L.P. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on sale of real estate investments of $4,427 and $1,896, respectively, on the transaction. In addition, SJW Land Company sold undeveloped land located in San Jose, California for $1,350 on April 6, 2017. SJW Land Company recognized a pre-tax gain on sale of real estate investments of $580 on the transaction, after selling expenses of $14.

Note 4.
Defined Benefit Plan
San Jose Water Company sponsors a noncontributory defined benefit pension plan for its eligible employees. Employees hired before March 31, 2008, are entitled to receive retirement benefits using a formula based on the employee’s three highest years of compensation (whether or not consecutive). For employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based on compensation credits and interest credits for each employee. Officers hired before March 31, 2008, are eligible to receive additional retirement benefits under the Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008, are eligible to receive additional retirement benefits under the Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management may participate. San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan.

10


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


The components of net periodic benefit costs for San Jose Water Company’s pension plan, its Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and Social Welfare Plan for the three and nine months ended September 30, 2018, and 2017 are as follows:
 
Three months ended September 30,

Nine months ended September 30,
 
2018

2017

2018

2017
Service cost
$
1,601

 
1,308

 
$
4,804

 
3,922

Interest cost
1,876

 
1,912

 
5,629

 
5,735

Other cost
1,139

 
1,101

 
3,417

 
3,304

Expected return on assets
(2,426
)
 
(2,060
)
 
(7,279
)
 
(6,179
)
 
$
2,190

 
2,261

 
$
6,571

 
6,782

Effective January 1, 2018, SJW Group adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” The new standard requires retrospective presentation in the income statement of the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost and prospective presentation from date of adoption for the capitalization in assets of only the service cost component of net periodic pension cost and net periodic postretirement benefit cost. As of September 30, 2017, utility plant included $420 of capitalized pension non-service cost. The components of net periodic benefit cost have been recorded in the consolidated statements of comprehensive income as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2018
 
2017
 
2018
 
2017
Other production expenses
$
424

 
342

 
$
1,273

 
1,027

Administrative and general expense
898

 
733

 
2,695

 
2,197

Maintenance expense
279

 
233

 
836

 
698

Pension non-service costs
589

 
953

 
1,767

 
2,860

 
$
2,190

 
2,261

 
$
6,571

 
6,782


11


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


The following tables summarize the fair values of plan assets by major categories as of September 30, 2018, and December 31, 2017: 
 
 
 
Fair Value Measurements at September 30, 2018
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
$
4,286

 
$
4,286

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
6,613

 
6,572

 
41

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
55,782

 
55,782

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
9,747

 
9,747

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
9,848

 
9,848

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
5,881

 
5,881

 

 

REIT
NAREIT - Equity REIT’S
 
6,346

 

 
6,346

 

Fixed Income (b)
(b)
 
46,528

 

 
46,528

 

Total
 
 
$
145,031

 
$
92,116

 
$
52,915

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities and cash to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.
 
 
 
Fair Value Measurements at December 31, 2017
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
$
8,207

 
$
8,207

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
6,413

 
6,376

 
37

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
50,351

 
50,351

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
9,358

 
9,358

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
8,725

 
8,725

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
5,973

 
5,973

 

 

REIT
NAREIT - Equity REIT’S
 
6,143

 

 
6,143

 

Fixed Income (b)
(b)
 
44,994

 

 
44,994

 

Total
 
 
$
140,164

 
$
88,990

 
$
51,174

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities and cash to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.

12


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


In 2018, San Jose Water Company expects to make required and discretionary cash contributions of up to $7,450 to the pension plans and Social Welfare Plan. For the three and nine months ended September 30, 2018, $2,048 and $3,468, respectively, has been contributed to such plans.

Note 5.
Segment and Non-Tariffed Business Reporting
SJW Group is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility which operates both regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated a commercial building rental that was sold in April 2017, and (iv) Hydro Sub, Inc., a Connecticut corporation that was formed on March 9, 2018 for the sole purpose of effecting the SJW Group and Connecticut Water Service, Inc. (“CTWS”) proposed merger (see discussion on the proposed merger at Note 12). In November 2017, SJW Group sold all its equity interest in its then wholly-owned subsidiary Texas Water Alliance Limited, a non-tariffed water utility operation which had acquired permits and leases necessary to develop a water supply project in Texas. In accordance with FASB ASC Topic 280 - “Segment Reporting,” SJW Group has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, San Jose Water Company, CLWSC, and Texas Water Alliance Limited (up to November 2017), together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company, referred to as “Real Estate Services.”
SJW Group’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Group’s chief operating decision maker includes the Chairman, President and Chief Executive Officer, and his senior staff. The senior staff reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiaries.
The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category.
 
For Three Months Ended September 30, 2018
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
121,009

 
2,403

 
1,441

 

 
121,009

 
3,844

 
124,853

Operating expense
87,230

 
1,623

 
934

 
9,238

 
87,230

 
11,795

 
99,025

Operating income (loss)
33,779

 
780

 
507

 
(9,238
)
 
33,779

 
(7,951
)
 
25,828

Net income (loss) before noncontrolling interest
22,333

 
561

 
359

 
(7,465
)
 
22,333

 
(6,545
)
 
15,788

Depreciation and amortization
13,298

 
85

 
299

 

 
13,298

 
384

 
13,682

Senior note and other interest expense
5,534

 

 

 
543

 
5,534

 
543

 
6,077

Income tax expense (benefit) in net income
5,910

 
218

 
113

 
(2,138
)
 
5,910

 
(1,807
)
 
4,103

Assets
$
1,480,726

 
4,577

 
47,469

 
4,096

 
1,480,726

 
56,142

 
1,536,868


13


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


 
For Three Months Ended September 30, 2017
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
120,727

 
2,460

 
1,391

 

 
120,727

 
3,851

 
124,578

Operating expense
82,135

 
1,511

 
875

 
859

 
82,135

 
3,245

 
85,380

Operating income (loss)
38,592

 
949

 
516

 
(859
)
 
38,592

 
606

 
39,198

Net income (loss) before noncontrolling interest
19,866

 
473

 
305

 
(1,104
)
 
19,866

 
(326
)
 
19,540

Depreciation and amortization
11,623

 
143

 
299

 

 
11,623

 
442

 
12,065

Senior note, mortgage and other interest expense
4,999

 

 
(2
)
 
544

 
4,999

 
542

 
5,541

Income tax expense (benefit) in net income
13,242

 
340

 
178

 
(237
)
 
13,242

 
281

 
13,523

Assets
$
1,438,433

 
20,239

 
48,917

 
3,981

 
1,438,433

 
73,137

 
1,511,570

 
For Nine Months Ended September 30, 2018
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
289,160

 
5,718

 
4,103

 

 
289,160

 
9,821

 
298,981

Operating expense
219,573

 
3,789

 
2,674

 
16,987

 
219,573

 
23,450

 
243,023

Operating income (loss)
69,587

 
1,929

 
1,429

 
(16,987
)
 
69,587

 
(13,629
)
 
55,958

Net income (loss)
42,150

 
1,389

 
1,011

 
(14,606
)
 
42,150

 
(12,206
)
 
29,944

Depreciation and amortization
39,771

 
253

 
897

 

 
39,771

 
1,150

 
40,921

Senior note and other interest expense
16,582

 

 

 
1,631

 
16,582

 
1,631

 
18,213

Income tax expense (benefit) in net income
11,052

 
540

 
299

 
(4,300
)
 
11,052

 
(3,461
)
 
7,591

Assets
$
1,480,726

 
4,577

 
47,469

 
4,096

 
1,480,726

 
56,142

 
1,536,868

 
For Nine Months Ended September 30, 2017
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
285,781

 
5,634

 
4,281

 

 
285,781

 
9,915

 
295,696

Operating expense
204,166

 
3,565

 
2,765

 
2,475

 
204,166

 
8,805

 
212,971

Operating income (loss)
81,615

 
2,069

 
1,516

 
(2,475
)
 
81,615

 
1,110

 
82,725

Net income (loss)
39,895

 
965

 
5,986

 
(3,051
)
 
39,895

 
3,900

 
43,795

Depreciation and amortization
34,875

 
421

 
921

 

 
34,875

 
1,342

 
36,217

Senior note, mortgage and other interest expense
15,639

 

 
60

 
1,655

 
15,639

 
1,715

 
17,354

Income tax expense (benefit) in net income
24,943

 
713

 
2,294

 
(895
)
 
24,943

 
2,112

 
27,055

Assets
$
1,438,433

 
20,239

 
48,917

 
3,981

 
1,438,433

 
73,137

 
1,511,570

 *    The “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the nine months ended September 30, 2018, Hydro Sub, Inc. had no recorded revenue or expenses and as of September 30, 2018, held no assets and had incurred no liabilities. For the nine months ended September 30, 2017, the “All Other” category includes the accounts of SJW Group on a stand-alone basis.


14


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


Note 6.
Long-Term Liabilities and Bank Borrowings
SJW Group’s contractual obligations and commitments include senior notes, mortgages, and other obligations. San Jose Water Company, a subsidiary of SJW Group, has received advance deposit payments from its customers on certain construction projects. Refunds of the advance deposit payments constitute an obligation of San Jose Water Company solely.

Note 7.
Fair Value Measurement
The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of September 30, 2018, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of September 30, 2018, approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of such financial instruments is determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation techniques during the three and nine months ended September 30, 2018. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of pension plan assets is discussed in Note 4.
The fair value of SJW Group’s long-term debt was approximately $485,344 and $537,840 as of September 30, 2018, and December 31, 2017, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of the long-term debt was $431,341 and $431,092 as of September 30, 2018, and December 31, 2017, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
As of September 30, 2018, and December 31, 2017, the fair value of the company’s investment in California Water Service Group was $0 and $4,535, respectively, and was categorized as Level 1 of the fair value hierarchy. For the three and nine months ended September 30, 2018, SJW Group recognized an unrealized gain of $0 and an unrealized loss of $527, respectively, due to the change in fair value of the company’s investment in California Water Service Group. During the third quarter of 2018, SJW Group sold all of the company’s remaining investment in California Water Service Group which is discussed in Note 11.
 
Note 8.
Regulatory Rate Filings
California Regulatory Affairs
On January 4, 2018, San Jose Water Company filed General Rate Case Application No. 18-01-004 (“GRC”) with the CPUC requesting authority for an increase of revenue of $34,288, or 9.76%, in 2019, $14,232, or 3.70%, in 2020 and $20,582, or 5.17%, in 2021. Among other things, the application also includes requests to recover $20,725 from balancing and memorandum accounts, the establishment of a Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism (“WRAM/SRM”), and a shift to greater revenue collection in the service charge. On June 28, 2018, the CPUC issued an order in the case identifying the issues to be considered, including whether the proposed merger between SJW Group and Connecticut Water Service, Inc. will have any ratemaking impact on the customers of San Jose Water Company (see discussion on the proposed merger at Note 12). This consideration was subsequently removed from the GRC to be considered in an Order Instituting Investigation (“OII”) on the proposed merger issued on July 20, 2018, see below for further discussion. On August 10, 2018, San Jose Water Company and the Office of Ratepayer Advocates filed a joint motion for partial settlement (“Settlement”) of the GRC with the CPUC, resolving all issues in the GRC with the exception of authorization of a WRAM/SRM and the recovery of the balance in the Hydro Generation Research, Development and Demonstration Memorandum Account, such issues being subsequently contested in legal briefs. On October 16, 2018 the CPUC issued a Proposed Decision adopting the Settlement in part, without any impact on the proposed revenue requirement outlined in the Settlement, and delaying ruling on the contested issues in order to allow the Settlement rates to become effective January 1, 2019. Comments on the Proposed Decision are due on November 5, 2018. New rates resulting from the GRC, if approved, are expected to become effective January 1, 2019.
The CPUC directed its Class A water utilities, including San Jose Water Company, to reflect the changes to the Internal Revenue Code resulting from the passage of the Tax Act in customer rates. On May 8, 2018, the CPUC directed San Jose Water Company to file an advice letter to implement a change in water rates to reflect the lower income tax rate provided by the Tax Act, effective July 1, 2018. On May 23, 2018, San Jose Water Company filed Advice Letter No. 522 in compliance with

15


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


the CPUC’s directive. On June 7, 2018, San Jose Water Company filed Advice Letter No. 522A amending the rate change to reflect a reduction in revenue requirement for 2018 of $14,801 or 3.89%, with no impact on after tax income. This request became effective July 1, 2018.
On June 13, 2018, San Jose Water Company filed Advice Letter No. 523 with the CPUC requesting authorization to implement surcharges to offset the increases to purchased potable water charges, the ground water extraction fee, and purchased recycled water charges implemented by the Santa Clara Valley Water District and South Bay Water Recycling effective July 1, 2018. The increases amount to a revenue increase of $13,732 or 3.75%. This request became effective July 1, 2018.
San Jose Water Company filed Advice Letter No. 524 with the CPUC on July 26, 2018, requesting authorization to recover the 2017 capital additions related to the Montevina Water Treatment Plant Upgrade Project. The filing requested a revenue increase of $3,155 or 0.83% and became effective August 25, 2018.
On July 20, 2018 the CPUC issued OII No. 18-07-007 concerning SJW Group’s merger with Connecticut Water Service, Inc. In its filing, the CPUC committed to a schedule that would complete its investigation in a time frame to allow the proposed merger to move forward by the end of 2018, if appropriate. At a required pre-hearing Conference on August 22, 2018, the CPUC confirmed its commitment to the schedule and a Scoping Memorandum was subsequently issued on September 7, 2018, which identified issues to be considered on whether the proposed merger is subject to CPUC approval and its likely impacts within California. On September 14, 2018, SJW Group and San Jose Water Company submitted joint comments in response to the issues identified above in accordance with the Scoping Memorandum’s adopted schedule, and reply comments were submitted on October 19, 2018. OII No. 18-07-007 is on track to meet the schedule for a commission decision in the matter in December of 2018.
In January 2017, a San Jose Water Company customer inquired about the company’s billing practice as it related to the proration of service charges in billing cycles where a rate change occurred. After reviewing its existing practice as well as those of other Class A water utilities, San Jose Water Company determined that it was appropriate to modify its existing practice to prorate service charges similar to the manner in which it prorates quantity charges - that is by applying both the old and new rates to the portion of the billing cycle for which the rates were in effect. This change was implemented on January 30, 2017, and retroactively applied to January 1, 2017. Subsequently, on May 8, 2017, the CPUC’s Water Division notified San Jose Water Company that it had violated Public Utilities Code 532 and other CPUC Orders and directed the company to file an advice letter providing refunds for the period of January 1, 2014, through December 31, 2016. As directed, San Jose Water Company filed Advice Letter 510 on June 6, 2017, to propose customer refunds in the amount of $1,800 for the same period. On June 22, 2017, San Jose Water Company was served with Complaint 17-06-009 regarding its billing practice for service charge rate changes. On August 11, 2017, the Water Division rejected Advice Letter 510 in light of the CPUC’s investigation into San Jose Water Company’s past and present billing practice. The billing issue was made a part of San Jose Water Company’s current GRC proceeding. Testimony was provided by the Office of Ratepayer Advocates (now the Public Advocates Office or “Cal PA”) on May 23, 2018. On June 8, 2018, the company provided its rebuttal testimony. On August 10, 2018, San Jose Water Company and Cal PA submitted a partial settlement agreement on issues presented in the GRC. Both the company and Cal PA settled on the billing issue limiting the duration from which to calculate customer refunds from June 1, 2011 through December 31, 2016. Accordingly, San Jose Water Company has provided an additional reserve to cover the remaining period covered by the settlement.
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent. The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate service charges when increases occurred during a billing period, and whether the company double-billed service charges during one billing period when allegedly switching from billing such charges in advance to billing in arrears.  The OII resulted from a report by the CPUC’s Consumer Protection and Enforcement Division (“CPED”), dated August 16, 2018, recommending an investigation into San Jose Water Company’s billing practice.  CPED calculated a refund obligation of approximately $2,061 for the years 2014 to 2016 that had been the subject of San Jose Water Company’s Advice Letter 510.  CPED calculated a further refund obligation of approximately $1,990 for the years 1987 to 2013.  CPED also asserted that the company double-billed its customers during a billing period when it allegedly converted from billing in advance to billing in arrears, assumed that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $4,935.  The OII notes these estimates and identifies the proper refund amount as an issue in the proceeding.  The OII also identifies the CPUC’s authority to consider imposing penalties on San Jose Water Company in amounts ranging from five hundred dollars to fifty thousand dollars per offense, per day. San Jose Water Company continues to cooperate with the CPUC to resolve these issues. On October 15, 2018, San Jose Water Company filed a response to the OII with the CPUC, in which the company stated that it

16


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


believes it would not be appropriate for the Commission to require refunds extending prior to June 2011, that no double billing has occurred and that no penalties should be imposed on the company. As a result, the company believes it is only probable that refunds agreed to in the partial settlement with Cal PA will be refunded to customers and has provided for this amount in the accompanying unaudited condensed consolidated financial statements.
Texas Regulatory Affairs
As required, CLWSC submitted on July 31, 2018 its Water Pass-Through Charge (“WPC”) true-up report to the Public Utilities Commission of Texas (“PUCT”) reflecting a change from $1.15 to $1.13 per thousand gallons. The WPC is the annual filing to change that component of CLWSC’s water rates for the changes in purchased water costs since the last annual true-up report. This change for 2018 became effective on water bills being prepared as of February 1, 2018.
The PUCT directed CLWSC (as well as other Class A water utilities in Texas) to quantify all of the impacts of the passage of the Tax Act and make rate adjustments reflecting such impacts on a prospective basis. PUCT Order 47945-36 as amended by 47945-41 orders the water utilities to record a regulatory liability that reflects (1) the difference between the revenues collected under existing rates and the revenues that would have been collected had the existing rates been set using the recently approved federal income tax rates; and (2) the balance of excess accumulated deferred federal income taxes that now exists because of the decrease in the federal income tax rate from 35% to 21%. A rate proposal reflecting these tax changes was submitted for PUCTs review on April 19, 2018.
CLWSC subsequently amended its filing on April 30, 2018 to update the customer notice, and to replace estimates for April with recorded April 2018 information. This filing will return to the ratepayers the difference between the revenues collected under the existing rates and what water rates would have been using the 21% federal income tax rate now effective under the Tax Act. The accrued amounts for the period January 25, 2018 through April 30, 2018 were refunded along with the regular monthly Federal Tax Cut Credit (“FTCC”) on bills prepared during the month of June. The FTCC customer credit will continue to be reflected on customer bills every month until the implementation of new rates resulting from the next rate case. It is projected this credit will reduce water revenue by $1,023 in 2018 with no impact on after tax income.
CLWSC’s Sale Transfer and Merger application (“STM”) to acquire the Deer Creek Ranch Water Co., LLC’s assets is still pending before PUCT. Notices to customers and surrounding water companies and municipalities were mailed in January 2018 and on April 3, 2018 and the PUCT filed 47888-12, Order No. 4, approving the transaction between CLWSC and the Deer Creek Ranch Water Co., LLC to proceed in closing. The acquisition subsequently closed on July 2, 2018. The required completed transaction report was filed with the PUCT on July 5, 2018, and the Joint Proposed Notice of Approval was filed with the PUCT on September 17, 2018. The final order transferring the Certificate of Convenience and Necessity, or the exclusive right to provide water utility service, from Deer Creek Ranch Water Co., LLC to CLWSC is expected to be received from the PUCT prior to December 31, 2018.

Note 9.
Balancing and Memorandum Accounts
San Jose Water Company has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC, such as the Tax Act memorandum account.

17


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the WCMA, San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges, if any. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.
Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $4,660 and $8,070 due to lost revenues accumulated in the 2018 WCMA account for the three and nine months ended September 30, 2018, respectively. For the three and nine months ended September 30, 2018, the 2018 WCMA account was offset by a reserve in the amount of $596 and $1,003, respectively, which is the estimated amount that will not be collected within the 24-month period, as required by the guidance. The amounts have been reflected in the 2018 WCMA balance shown in the table below.
A cost of capital memorandum account was approved by the CPUC on March 14, 2018. The account tracks the difference between current water rates and the lower rates adopted in the cost of capital decision issued on March 22, 2018. San Jose Water Company recorded a regulatory liability of $8 and $1,371 in the cost of capital memorandum account for the three and nine months ended September 30, 2018, respectively, with a corresponding reduction to revenue. The amount has been reflected in the 2018 cost of capital memorandum account balance shown in the table below.
The CPUC directed San Jose Water Company to establish a memorandum account to capture the impact of the Tax Act on its regulated revenue requirement. The CPUC indicated that any benefit from implementing the new law should ultimately be passed on to ratepayers. Accordingly, San Jose Water Company recorded a regulatory liability of $459 and $5,955 in the tax memorandum account for the three and nine months ended September 30, 2018, respectively, with a corresponding reduction to revenue. The amount has been reflected in the tax memorandum account balance shown in the table below.
San Jose Water Company re-evaluated the accounting for cost-recovery balancing and memorandum accounts under the new revenue recognition guidance, ASU 2014-09, “Revenue from Contracts with Customers.” Prior to adoption, San Jose Water Company recorded cost-recovery accounts as a component of revenue. Upon adoption of ASU 2014-09, San Jose Water Company began recording such balances as capitalized costs until recovery is approved by the CPUC. The change is reflected in the cost-recovery balancing and memorandum accounts as shown in the table below.

18


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


 
Three months ended September 30, 2018
 
Three months ended September 30, 2017
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections) Adjustments
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections) Adjustments
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014-2016 WCMA
$
365

 
100

 
1

 

 
466

 
$
3,003

 
44

 
(2,665
)
 

 
382

2017 WCMA*
6,912

 
28

 

 

 
6,940

 
1,001

 
3,954

 

 
6

 
4,961

2018 WCMA*
3,003

 
4,064

 

 

 
7,067

 

 

 

 

 

2012 General Rate Case true-up
11,324

 

 
2

 

 
11,326

 
15,765

 

 
(4,123
)
 

 
11,642

2015 General Rate Case true-up
117

 

 
1

 


 
118

 
2,411

 

 
(2,297
)
 

 
114

Cost of capital memorandum account
(1,507
)
 
(8
)
 

 

 
(1,515
)
 
(144
)
 

 

 

 
(144
)
Tax memorandum account
(5,496
)
 
(459
)
 

 

 
(5,955
)
 

 

 

 

 

Drought surcharges

 

 

 

 

 
(961
)
 

 

 

 
(961
)
Cost-recovery accounts

 

 

 

 

 
4,407

 
2,502

 

 

 
6,909

All others
4,558

 
(34
)
 

 

 
4,524

 
3,534

 
50

 

 

 
3,584

Total revenue accounts
$
19,276

 
3,691

 
4

 

 
22,971

 
$
29,016

 
6,550

 
(9,085
)
 
6

 
26,487

Cost-recovery accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
9,387

 
2,366

 

 

 
11,753

 

 

 

 

 

Pension
(2,137
)
 
161

 

 

 
(1,976
)
 

 

 

 

 

Total cost-recovery accounts
$
7,250

 
2,527

 

 

 
9,777

 
$

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
26,526

 
6,218

 
4

 

 
32,748

 
$
29,016

 
6,550

 
(9,085
)
 
6

 
26,487



19


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


 
Nine months ended September 30, 2018
 
Nine months ended September 30, 2017
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections) Adjustments
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections) Adjustments
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014-2016 WCMA
$
190

 
272

 
4

 

 
466

 
$
1,589

 
4,697

 
(4,452
)
 
(1,452
)
 
382

2017 WCMA*
6,489

 
451

 

 

 
6,940

 

 
11,003

 

 
(6,042
)
 
4,961

2018 WCMA*

 
7,067

 

 

 
7,067

 

 

 

 

 

2012 General Rate Case true-up
11,320

 

 
6

 

 
11,326

 
20,682

 

 
(9,040
)
 

 
11,642

2015 General Rate Case true-up
115

 

 
3

 

 
118

 
5,528

 

 
(5,414
)
 

 
114

Cost of capital memorandum account
(144
)
 
(1,371
)
 

 

 
(1,515
)
 
(817
)
 

 
673

 

 
(144
)
Tax memorandum account

 
(5,955
)
 

 

 
(5,955
)
 

 

 

 

 

Drought surcharges

 

 

 

 

 
(7,688
)
 

 
(767
)
 
7,494

 
(961
)
Cost-recovery accounts

 

 

 

 

 
3,181

 
4,503

 
(775
)
 

 
6,909

All others
3,736

 
787

 
1

 

 
4,524

 
3,434

 
933

 
(859
)
 
76

 
3,584

Total revenue accounts
$
21,706

 
1,251

 
14

 

 
22,971

 
$
25,909

 
21,136

 
(20,634
)
 
76

 
26,487

Cost-recovery accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
8,679

 
3,074

 

 

 
11,753

 

 

 

 

 

Pension
(2,459
)
 
482

 
1

 

 
(1,976
)
 

 

 

 

 

Total cost-recovery accounts
$
6,220

 
3,556

 
1

 

 
9,777

 
$

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
27,926

 
4,807

 
15

 

 
32,748

 
$
25,909

 
21,136

 
(20,634
)
 
76

 
26,487

*    As of September 30, 2018, the reserve balances for the 2017 and 2018 WCMA were $985 and $1,003, respectively, which have been netted from the balances above. As of September 30, 2017, the reserve balance for the 2017 WCMA was $1,142 which has been netted from the balance above.
In connection with the GRC application, the company included various balancing and memorandum accounts with an aggregate balance totaling $20,725 for recovery. For further discussion on the proposed settlement, please see Note 8.
As of September 30, 2018, the total balance in San Jose Water Company’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $3,904. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company’s next general rate case or at the time an individual account balance reaches a threshold of 2% of authorized revenue, whichever occurs first.


20


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


Note 10.
Regulatory Assets and Liabilities
Regulatory assets and liabilities are comprised of the following as of September 30, 2018 and December 31, 2017:
 
 
September 30, 2018
 
December 31, 2017
Regulatory assets:
 
 
 
 
Postretirement pensions and other medical benefits
 
$
68,556

 
68,556

Balancing and memorandum accounts, net
 
32,748

 
27,925

Other, net
 
3,366

 
3,073

Total regulatory assets, net in Consolidated Balance Sheets
 
$
104,670

 
99,554

 
 
 
 
 
Regulatory liability:
 
 
 
 
Income tax temporary differences, net
 
$
60,650

 
62,476

Total regulatory liability in Consolidated Balance Sheets
 
$
60,650

 
62,476


Note 11.
California Water Service Group Stock
For the three and nine months ended September 30, 2018, SJW Group sold 82,340 and 100,000 shares, respectively, of California Water Service Group for $3,398 and $4,112, respectively, before fees of $7 and $9, respectively. SJW Group recognized a gain on the sale of the stock of approximately $191 and $104, respectively, and a tax expense of approximately $53 and $29, respectively, for a net gain of $138 and $75 for the three and nine months ended September 30, 2018, respectively. As of September 30, 2018, SJW Group held no remaining shares of California Water Service Group. The company classified its investment in California Water Service Group as available for sale. The stock was carried at the quoted market price with the changes in gain or loss reported as a component of other expense (income) on the Consolidated Statements of Comprehensive Income.

Note 12.
SJW Group and CTWS Merger Agreement
On March 14, 2018, SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group and CTWS entered into an Agreement and Plan of Merger to merge the two companies in an all-stock transaction. On August 5, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a Second Amended and Restated Agreement & Plan of Merger (the “Merger Agreement”), which among other things, changed the merger to an all-cash transaction. Under the terms of the Merger Agreement, Hydro Sub, Inc. will merge with and into CTWS (the “Merger”), with CTWS surviving the Merger as a wholly-owned subsidiary of SJW Group. Subject to the terms and conditions of the Merger Agreement, at the time at which the Merger becomes effective (the “Effective Time”), each share of common stock, without par value, of CTWS (“CTWS Common Share”), other than CTWS Common Shares directly or indirectly owned by SJW Group, Hydro Sub, Inc., CTWS or any of their respective subsidiaries (in each case, other than any CTWS Common Shares held on behalf of third parties), issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $70.00 per share in cash (without interest and less any applicable withholding taxes).
The transaction, which is expected to close during the first quarter of 2019, was approved by the boards of directors of both companies. Consummation of the Merger is subject to customary conditions, including, without limitation: approval by CTWS shareholders; approval by certain regulators; the absence of any law or judgment prohibiting the consummation of the Merger; the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers); each party’s performance in all material respects of its obligations contained in the Merger Agreement; and the absence of any material adverse effect on SJW Group or CTWS since the date of the Merger Agreement, which has not been ameliorated or cured. There is no guarantee that all of the closing conditions and approvals will be satisfied, and the failure to complete the proposed merger may adversely affect the financial conditions and results of operations of SJW Group.
CTWS previously received an unsolicited proposal from Eversource Energy. The CTWS board of directors has determined that the proposal was neither a superior proposal nor reasonably likely to lead to superior proposal. On April, 27, 2018, Eversource Energy filed a preliminary proxy statement to solicit proxies in opposition to the proposed merger. Eversource Energy has not revised its preliminary proxy statement in connection with the revised all-cash Merger, and it is unclear what additional actions

21


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2018
(in thousands, except share and per share data)


Eversource Energy may take to further its proposal. In addition, on August 17, 2018, California Water Service Group, which had previously launched an unsolicited tender offer to acquire all outstanding shares of SJW Group, announced that it had abandoned such offer.

Note 13.
Legal Proceedings
On June 14, 2018, certain shareholders of CTWS filed two nearly identical class-action complaints in Connecticut state court against the CTWS board of directors, SJW Group, Eric W. Thornburg, Chairman, President and Chief Executive Officer of SJW Group, and CTWS. The complaints, as amended on September 18, 2018 and September 20, 2018, allege that the CTWS board breached its fiduciary duties in connection with the Merger, that CTWS’s preliminary proxy statement, filed with the SEC on August 20, 2018, omits certain material information and that SJW Group and Mr. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the actions seek to recover rescissory and other damages and attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit and intends to vigorously defend this litigation. At this time, SJW Group cannot determine the likelihood that liability exists on the part of SJW Group or Mr. Thornburg and we are unable to provide a reasonable estimate of potential loss, if any.
Additional complaints have been filed in connection with the Merger but neither SJW Group nor any of its officers or directors are named as defendants therein. On October 5, 2018, certain shareholders of CTWS filed two complaints, one individually and the other as a putative class action, in the United States District Court for the District of Connecticut against CTWS, the CTWS board of directors and the Merger. The complaints allege that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Section 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the actions seek an order (1) enjoining the defendants from consummating or closing on the Merger; (2) rescinding the Merger or awarding rescissory damages; (3) directing the defendants to disseminate a corrective proxy statement; (4) declaring that the defendants have violated Section 14(a) and/or 20(a) of the Securities Exchange Act of 1934, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit and accordingly has not accrued any amounts.
SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows.


22



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts and 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 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, 2017.
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. Such forward-looking statements are identified by words including “expect,” “estimate,” “anticipate,” “intends,” “seeks,” “plans,” “projects,” “may,” “should,” “will,” and variation of such words, and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”) under the items entitled “Risk Factors,” and in other reports SJW Group files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Group undertakes no obligation to update or revise the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:
SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company, SJWTX, Inc., SJW Land Company, and Hydro Sub, Inc.
San Jose Water Company is a public utility in the business of providing water service to approximately 231,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.
The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site leases.
San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained.
San Jose Water Company also has approximately 411 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to San Jose Water Company’s various watershed properties.
SJWTX, Inc., doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately 15,800 connections that serve approximately 48,000 people. CLWSC’s service area comprises more than 246 square miles in western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.

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SJW Land Company owned the following real properties during the nine months ended September 30, 2018:
 
 
 
 
 
 
 
 
% for Nine months ended
September 30, 2018
of SJW Land Company
Description
 
Location
 
Acreage
 
Square Footage
 
Revenue
 
Expense
Warehouse building
 
Knoxville, Tennessee
 
30
 
361,500
 
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