SECURITIES AND EXCHANGE COMMISSION

___________________________________________



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)

(Registrant’s telephone number, including area code)

~~Not Applicable~~Securities registered pursuant to Section 12(b) of the Act:

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 ☒ Non-accelerated filer ☐

Accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

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. ☐

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,~~28, 2019, there were ~~20,631,171~~28,456,490 shares of the registrant’s Common Stock outstanding.

FORWARD-LOOKING STATEMENTS

The accuracy of such statements is subject to a number of risks, uncertainties and assumptions including, but not limited to, the following factors:

the risk that the benefits expected from the merger of SJW Group and Connecticut Water Service, Inc. (the “Merger”) will not be realized;

the risk that the integration of Connecticut Water Service, Inc. will be more difficult, time-consuming or expensive than anticipated;

the effect of water, utility, environmental and other governmental policies and regulations, including actions concerning rates, authorized return on equity, authorized debt-to-equity ratios, capital expenditures and other decisions;

the outcome of the California Public Utilities Commission’s investigation into the Merger;

litigation, including litigation relating to the Merger;

changes in demand for water and other products and services;

unanticipated weather conditions and changes in seasonality;

climate change and the effects thereof;

catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, hurricanes, terrorist acts, physical attacks, cyber-attacks, or other similar occurrences that could adversely affect our facilities, operations, financial condition, results of operations and reputation;

unexpected costs, charges or expenses resulting from the Merger;

our ability to successfully evaluate investments in new business and growth initiatives;

the risk of work stoppages, strikes and other labor-related actions;

changes in general economic, political, business and financial market conditions;

the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings, changes in interest rates, compliance with regulatory requirements, compliance with the terms and conditions of our outstanding indebtedness, and general market and economic conditions; and

legislative and economic developments.

Results for a quarter are not indicative of results for a full year due to seasonality and other factors. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described in our filings with the SEC, including our most recent reports on Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements are not guarantees of performance, and speak only as of the date made, and we undertake no obligation to update or revise any forward-looking statements except as required by law.

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,					Three months ended September 30,					Nine months ended September 30,
	2018			2017		2018			2017		2019			2018		2019			2018
REVENUE	$	124,853		124,578		$	298,981		295,696		$	113,997		124,853		$	294,644		298,981
OPERATING EXPENSE:
Production Expenses:
Purchased water	33,545			30,833		72,673			66,938		35,583			33,545		75,626			72,673
Power	1,882			2,500		4,774			5,491		2,294			1,882		4,947			4,774
Groundwater extraction charges	14,890			15,756		34,341			34,098		13,182			14,890		29,145			34,341
Other production expenses	4,836			4,216		13,674			12,067		5,295			4,836		15,553			13,674
Total production expenses	55,153			53,305		125,462			118,594		56,354			55,153		125,271			125,462
Administrative and general	12,752			11,949		36,278			34,909		14,712			12,752		40,411			36,278
Maintenance	4,980			4,607		14,036			12,991		4,923			4,980		13,977			14,036
Property taxes and other non-income taxes	4,016			3,454		11,332			10,260		4,065			4,016		12,041			11,332
Depreciation and amortization	13,682			12,065		40,921			36,217		15,122			13,682		45,368			40,921
Merger related expenses	8,442			—		14,994			—		1,737			8,442		6,113			14,994
Total operating expense	99,025			85,380		243,023			212,971		96,913			99,025		243,181			243,023
OPERATING INCOME	25,828			39,198		55,958			82,725		17,084			25,828		51,463			55,958
OTHER (EXPENSE) INCOME:
Interest on long-term debt and other interest expense	(6,077		)	(5,541	)	(18,213		)	(17,354	)	(6,588		)	(6,077	)	(19,093		)	(18,213	)
Pension non-service cost	(589		)	(953	)	(1,767		)	(2,860	)	(921		)	(589	)	(2,749		)	(1,767	)
Unrealized loss on California Water Service Group stock	—			—		(527		)	—		—			—		—			(527	)
Interest income on money market fund											2,165			—		6,339			—
Gain on sale of California Water Service Group stock	191			—		104			—		—			191		—			104
Gain on sale of real estate investments	—			—		—			6,903		—			—		745			—
Other, net	538			359		1,980			1,436		303			538		1,210			1,980
Income before income taxes	19,891			33,063		37,535			70,850		12,043			19,891		37,915			37,535
Provision for income taxes	4,103			13,523		7,591			27,055		2,565			4,103		8,802			7,591
NET INCOME BEFORE NONCONTROLLING INTEREST	15,788			19,540		29,944			43,795		9,478			15,788		29,113			29,944
Less net income attributable to the noncontrolling interest	—			—		—			1,896		—			—		224			—
SJW GROUP NET INCOME	15,788			19,540		29,944			41,899		9,478			15,788		28,889			29,944
Other comprehensive income, net of tax:
Unrealized gain on investment	—			80		—			252
SJW GROUP COMPREHENSIVE INCOME	$	15,788		19,620		$	29,944		42,151		$	9,478		15,788		$	28,889		29,944
SJW GROUP EARNINGS PER SHARE
Basic	$	0.77		0.95		$	1.45		2.04		$	0.33		0.77		$	1.02		1.45
Diluted	$	0.76		0.94		$	1.45		2.03		$	0.33		0.76		$	1.01		1.45
DIVIDENDS PER SHARE	$	0.28		0.22		$	0.84		0.65		$	0.30		0.28		$	0.90		0.84
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	20,626,654			20,516,172		20,593,570			20,502,274		28,451,811			20,626,654		28,438,521			20,593,570
Diluted	20,732,040			20,697,097		20,721,970			20,675,479		28,549,928			20,732,040		28,528,002			20,721,970

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)


	September 30, 2018		December 31, 2017	September 30, 2019		December 31, 2018
ASSETS
Utility plant:
Land	$	18,300	17,831	$	18,286	18,296
Depreciable plant and equipment	1,783,654		1,714,228	1,897,117		1,833,051
Construction in progress	79,475		45,851	109,245		68,765
Intangible assets	15,748		14,413	15,799		15,799
	1,897,177		1,792,323	2,040,447		1,935,911
Less accumulated depreciation and amortization	593,916		553,059	647,841		607,090
	1,303,261		1,239,264	1,392,606		1,328,821
Real estate investments	56,336		56,213	56,473		56,336
Less accumulated depreciation and amortization	12,029		11,132	13,224		12,327
	44,307		45,081	43,249		44,009
CURRENT ASSETS:
Cash and cash equivalents	13,327		7,799
Cash and cash equivalents:
Cash				12,702		8,722
Money market fund				412,000		412,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts	22,595		17,305	27,965		19,154
Income tax	—		7,981	63		1,888
Other	826		1,118	2,719		1,203
Accrued unbilled utility revenue	38,097		27,905	38,200		27,974
Current regulatory assets, net				7,493		26,910
Other current assets	5,522		4,750	6,672		4,871
	80,367		66,858	507,814		502,722
OTHER ASSETS:
Investment in California Water Service Group	—		4,535
Net regulatory assets, less current portion	104,670		99,554	73,780		76,715
Other	4,263		2,709	4,933		4,122
	108,933		106,798	78,713		80,837
	$	1,536,868	1,458,001	$	2,022,382	1,956,389

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share data)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total Stockholders’ Equity
BALANCES, December 31, 2018	28,404,316	$	28	$	495,366		$	393,918		$	—	$	—		$	889,312
Net income before noncontrolling interest	—	—		—			5,873			—		—			5,873
Cumulative effect of change in accounting principle, net of tax effect of $33	—	—		—			97			—		—			97
Share-based compensation	—	—		886			(16		)	—		—			870
Issuance of restricted and deferred stock units	14,312	—		(132		)	—			—		—			(132		)
Employee stock purchase plan	15,932	—		811			—			—		—			811
Common stock issuance cost	—	—		(10		)	—			—		—			(10		)
Dividends paid ($0.30 per share)	—	—		—			(8,528		)	—		—			(8,528		)
BALANCES, March 31, 2019	28,434,560	28		496,921			391,344			—		—			888,293
Net income before noncontrolling interest	—	—		—			13,538			—		224			13,762
Distribution to noncontrolling interest	—	—		—			—			—		(224		)	(224		)
Share-based compensation	—	—		718			(16		)	—		—			702
Issuance of restricted and deferred stock units	7,579	—		(6		)	—			—		—			(6		)
Dividends paid ($0.30 per share)	—	—		—			(8,532		)	—		—			(8,532		)
BALANCES, June 30, 2019	28,442,139	28		497,633			396,334			—		—			893,995
Net income before noncontrolling interest	—	—		—			9,478			—		—			9,478
Share-based compensation	—	—		952			(16		)	—		—			936
Issuance of restricted and deferred stock units	—	—		—			—			—		—			—
Employee stock purchase plan	14,351	—		792			—			—		—			792
Dividends paid ($0.30 per share)	—	—		—			(8,537		)	—		—			(8,537		)
BALANCES, September 30, 2019	28,456,490	$	28	$	499,377		$	397,259		$	—	$	—		$	896,664

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interest		Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interest		Total Stockholders’ Equity
BALANCES, December 31, 2017	20,520,856	$	21	$	84,866		$	376,119		$	2,203		$	—	$	463,209
Net income before noncontrolling interest	—	—		—			1,285			—			—		1,285
Cumulative effect of change in accounting principle, net of tax effect of $1,507	—	—		—			2,203			(2,203		)	—		—
Share-based compensation	—	—		487			(30		)	—			—		457
Issuance of restricted and deferred stock units	51,442	—		(2,020		)	—			—			—		(2,020		)
Employee stock purchase plan	12,838	—		653			—			—			—		653
Dividends paid ($0.28 per share)	—	—		—			(5,754		)	—			—		(5,754		)
BALANCES, March 31, 2018	20,585,136	21		83,986			373,823			—			—		$	457,830
Net income before noncontrolling interest	—	—		—			12,871			—			—		12,871
Share-based compensation	—	—		392			(30		)	—			—		362
Issuance of restricted and deferred stock units	9,350	—		(3		)	—			—			—		(3		)
Dividends paid ($0.28 per share)	—	—		—			(5,766		)	—			—		(5,766		)
BALANCES, June 30, 2018	20,594,486	$	21	$	84,375		$	380,898		$	—		$	—	$	465,294
Net income before noncontrolling interest	—	—		—			15,788			—			—		15,788
Share-based compensation	—	—		504			(18		)	—			—		486
Issuance of restricted and deferred stock units	23,616	—		(1,552		)	—			—			—		(1,552		)
Employee stock purchase plan	13,069	—		718			—			—			—		718
Dividends paid ($0.28 per share)	—	—		—			(5,777		)	—			—		(5,777		)
BALANCES, September 30, 2018	20,631,171	$	21	$	84,045		$	390,891		$	—		$	—	$	474,957

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Nine months ended September 30,					Nine months ended September 30,
	2018			2017		2019			2018
OPERATING ACTIVITIES:
Net income before noncontrolling interest	$	29,944		43,795		$	29,113		29,944
Adjustments to reconcile net income before noncontrolling interest to net cash provided by operating activities:
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	42,649			37,877		47,363			42,649
Deferred income taxes	(5,445		)	1,283		(7,214		)	(5,445	)
Stock-based compensation	1,383			1,633		2,556			1,383
Gain on sale of real estate investments						(745		)	—
Loss on sale of utility property						20			—
Unrealized loss on California Water Service Group stock	527			—		—			527
Gain on sale of real estate investments	—			(6,903	)
Gain on sale of California Water Service Group stock	(104		)	—
Loss 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	)	(20,553		)	(15,190	)
Accounts payable and other current liabilities	3,493			2,215		4,166			3,493
Accrued groundwater extraction charges, purchased water and power	8,474			10,850		9,055			8,474
Tax payable and receivable, and other accrued taxes	12,482			14,228		4,471			12,482
Postretirement benefits	3,036			3,355		2,514			3,036
Regulatory assets and liability related to balancing and memorandum accounts	(4,822		)	(503	)	22,789			(4,822	)
Other changes, net	(2,716		)	(1,528	)	(2,258		)	(2,716	)
NET CASH PROVIDED BY OPERATING ACTIVITIES	73,711			87,967		91,277			73,711
INVESTING ACTIVITIES:
Additions to utility plant:
Company-funded	(97,753		)	(103,417	)	(101,120		)	(97,753	)
Contributions in aid of construction	(5,908		)	(2,631	)	(10,040		)	(5,908	)
Additions to real estate investments	(123		)	(116	)	(137		)	(123	)
Payments to retire utility plant, net of salvage	(3,789		)	(2,323	)	(4,374		)	(3,789	)
Proceeds from sale of real estate investments	—			11,180		745			—
Proceeds from non-refundable deposit	—			3,000
Payments for business/asset acquisition						—			(2,496	)
Proceeds from sale of utility property						150			—
Proceeds from sale of California Water Service Group stock	4,112			—		—			4,112
Payments for business/asset acquisition	(2,496		)	(1,149	)
NET CASH USED IN INVESTING ACTIVITIES	(105,957		)	(95,456	)	(114,776		)	(105,957	)
FINANCING ACTIVITIES:
Borrowings on line of credit	52,000			28,500		73,000			52,000
Repayments of line of credit	(1,000		)	(29,700	)	(111,000		)	(1,000	)
Repayments of long-term borrowings	—			(2,717	)
Long-term borrowings						80,000			—
Payment to noncontrolling interest	—			(1,896	)	(224		)	—
Debt issuance and broker fee costs						(1,157		)	—
Dividends paid	(17,297		)	(13,380	)	(25,596		)	(17,297	)
Receipts of advances and contributions in aid of construction	8,968			10,486		13,373			8,968
Refunds of advances for construction	(2,075		)	(1,982	)	(2,295		)	(2,075	)
Other changes, net	(2,822		)	397		1,378			(2,822	)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES	37,774			(10,292	)
NET CASH PROVIDED BY FINANCING ACTIVITIES						27,479			37,774
NET CHANGE IN CASH AND CASH EQUIVALENTS	5,528			(17,781	)	3,980			5,528
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	7,799			25,350		420,722			7,799
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	13,327		7,569		$	424,702		13,327
Cash paid during the period for:
Interest	$	19,705		18,383		$	19,821		19,705
Income taxes	5,145			14,552		16,286			5,145
Supplemental disclosure of non-cash activities:
Change in accrued payables for construction costs capitalized	1,221			11,241		505			1,221
Utility property installed by developers	567			874		(109		)	567

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, ~~2018~~2019

(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~~2018 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In ~~May 2014,~~February 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting ~~Standard~~Standards Update (“ASU”) ~~2014-09, “Revenue from Contracts with Customers.~~2016-02, “Leases (Topic 842),” ~~The core principle of~~as amended, which supersedes the ~~guidance is that an entity should~~lease requirements in “Leases (Topic 840).” This ASU generally requires lessees to recognize ~~revenue~~operating and financing lease liabilities and corresponding right-of-use assets on the Consolidated Balance Sheets and to ~~depict~~provide enhanced disclosures surrounding 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 cash flows arising from leasing arrangements. ASU 2016-02 also makes some changes to lessor accounting and aligns with the new revenue ~~transactions.~~recognition guidance. SJW Group adopted the new ~~revenue~~ standard oneffective January 1, ~~2018, using the~~2019, on a modified retrospective ~~method,~~basis and ~~determined that no adjustment to~~did not restate comparative periods. SJW Group also elected the ~~opening balance~~package of ~~retained earnings was necessary for contracts with remaining obligations as of~~practical expedients permitted under the ~~effective date.~~transition guidance and combined lease and non-lease components. In addition, SJW Group ~~applied~~kept leases with an initial term of 12 months or less off the ~~“right to invoice” practical expedient.~~Consolidated Balance Sheets and recognized the associated lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease term. The adoption of ~~the new~~this 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~~consolidated 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

~~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.statements.

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 from 2014 to 2016 in California, 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”~~Valley Water”), 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~~permanent. Further, Valley Water has maintained a conservation target atof 20%.

~~On May 31,~~ compared to 2013 water usage. In 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~~California Public Utilities Commission (“CPUC”) will direct its regulated utilities to comply.

~~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.~~Water Conservation Memorandum Account (“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~~Accounting Standards Codification (“ASC”) Topic 980 - “Regulated Operations,” subtopic 605-25 are met. For further discussion, please see Note 8 and Note 9.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

The major streams of revenue for SJW Group are as follows:



	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
Revenue from contracts with customers	$	130,777		120,007		$	314,003		294,319
Alternative revenue programs, net - WCMA	(11,912		)	4,193		(14,218		)	7,794
Other balancing and memorandum accounts revenue, net	(6,221		)	(788	)	(9,229		)	(7,235	)
Rental income	1,353			1,441		4,088			4,103
	$	113,997		124,853		$	294,644		298,981

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, 2019 and 2018, 524 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, 2019 and 2018, 10,158 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~~2019 and ~~2017,~~2018, the amounts allocated to administrative and general expense were ~~$575~~$663 and ~~$551,~~$575, respectively. For the nine months ended September 30, ~~2018,~~2019, and ~~2017,~~2018, the amounts allocated to administrative and general expense were ~~$1,728~~$1,995 and ~~$1,660,~~$1,728, 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 the estimated fair value ~~for~~of 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,~~shares, or other ~~stock-based~~share-based awards. As of September 30, ~~2018,~~2019, 157,063 shares are issuable upon the ~~remaining number~~exercise of outstanding restricted stock units and deferred restricted stock units and an additional 823,597 shares are available for award issuances under the Incentive ~~Plan was 881,914, and an additional 143,581~~Plan. In addition, shares ~~were issuable~~are issued to employees under the company’s ESPP.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(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 any stock options and similar instruments and the tax benefit realized from any stock options and similar instruments exercised, that ~~were~~are 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~~,2019, and ~~2017~~.2018.



	Three months ended September 30,			Nine months ended September 30,
	2019		2018	2019		2018
Adjustments to additional paid-in capital and common stock for:
Compensation costs charged to income:
ESPP	$	140	127	$	283	242
Restricted stock and deferred restricted stock	812		377	2,273		1,141
Total compensation costs charged to income	$	952	504	$	2,556	1,383
ESPP proceeds	$	792	718	$	1,603	1,371

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,~~2019, service-based restricted stock units covering an aggregate of ~~12,296~~17,451 shares of common stock of SJW Group were granted to certain officers of SJW Group and its subsidiaries. The units vest in ~~three~~3 equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense of ~~$60.22~~$51.28 per unit which was based on the award grant date fair value is being recognized over the service period beginning in ~~2018.~~2019.

On January ~~30, 2018,~~29, 2019, 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~~9,882 that will vest based on the actual attainment of specified performance goals measured ~~for~~in two separate tranches over the ~~2018 calendar year~~period from January 1, 2019, to December 31, 2019, and January 1, 2019, to December 31, 2020, each covering 50% of the target shares, and continued service through December 31, ~~2018.~~2019, and December 31, 2020, respectively. 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 allow for pro-rata vesting, based on actual performance and number of months in service over the performance period, in the event an officer’s employment terminates under specific circumstances prior to the end of the performance period. The awards have no market conditions and the stock-based compensation expense of ~~$58.02~~$57.12 and $55.97 per unit for each of the two tranches which was based on the award grant date fair ~~value is~~values are being recognized assuming the performance goals will be attained.

On January ~~30, 2018,~~29, 2019, 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~~9,043 that will vest based on the actual attainment of specified performance goals ~~for~~over the ~~2020 calendar year~~period from January 1, 2019, to December 31, 2021 and continued service through December 31, ~~2020.~~2021. The number of shares issuable under ~~the awards,~~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 allow for pro-rata vesting, based on actual performance and number of months in service over the performance period, in the event an officer’s employment terminates under specific circumstances prior to the end of the performance period. The awards have no market conditions and the stock-based compensation expense of ~~$55.89~~$54.84 per unit which iswas based on the award grant date fair value is being recognized assuming the performance goals will be attained.

On January ~~30, 2018,~~29, 2019, performance-based restricted stock units were granted to ~~an officer~~certain officers of SJW Group covering a target number of shares of SJW Group’s common stock equal to ~~6,342~~9,437 that will vest based on continued service and attainment of specified performance goals over the period from January 1, ~~2018,~~2019, to December 31, ~~2020.~~2021. 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 awards allow for pro-rata vesting, based on actual performance and number of months in service over the performance period, in the event an officer’s employment terminates under specific circumstances prior to the end of the performance period. 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 being recognized at ~~$63.85~~$70.47 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.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

On April ~~25, 2018,~~24, 2019, restricted stock units covering an aggregate of ~~7,385~~9,114 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~~$60.30 per unit, which is based on the award grant date fair value, is being recognized over the service period beginning in ~~2018.~~

~~SJW GROUP AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~September 30, 2018~~

~~(in thousands, except share and per share data)~~

2019.

As of September 30, ~~2018,~~2019, the total unrecognized compensation costs related to restricted and deferred restricted stock plans ~~was $2,180.~~amounted to $3,466. This cost is expected to be recognized over a ~~remaining weighted average~~weighted-average period of ~~1.45~~1.17 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~~have been reserved for issuance under the ESPP.

SJW Group’s recorded expenses were $82 and $223 for the three and nine months ended September 30, 2019, respectively, and $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,~~2020, for the ESPP is approximately ~~$117.~~$134. This cost is expected to be recognized during the fourth quarter of ~~2018~~2019 and first quarter of ~~2019.~~2020.


Note 3.	Real Estate Investments

The major components of real estate investments as of September 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, are as follows:



	September 30, 2019		December 31, 2018
Land	$	13,262	13,262
Buildings and improvements	43,211		43,074
Subtotal	56,473		56,336
Less: accumulated depreciation and amortization	13,224		12,327
Total	$	43,249	44,009

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~~ Substantially 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.~~ relate to assets that are currently subject to operating leases.

SJW Land Company holds a 70% limited interest in 444 West Santa Clara Street, L.P. On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interest in the commercial building and land the partnership owned and operated. In connection with this sale, the partnership was required to deposit $750 into an escrow account for estimated repairs to the creek next to the land the partnership sold. On April 22, 2019, all creek repairs were completed and a reimbursement of $745 was provided to the partnership. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on ~~sale~~the creek reimbursement of ~~real estate investments of $4,427~~$521 and ~~$1,896,~~$224, 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~~retirement 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~~San Jose Water Company’s Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008, are eligible to receive additional retirement benefits under the San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management of San Jose Water Company 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.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(in thousands, except share and per share data)

The components of net periodic benefit costs for San Jose Water Company’s ~~pension~~retirement 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~~,2019, and ~~2017~~2018 are as follows:



	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019			2018
Service cost	$	1,479		1,601		$	4,437		4,804
Interest cost	2,113			1,876		6,338			5,629
Other cost	1,117			1,139		3,352			3,417
Expected return on assets	(2,310		)	(2,426	)	(6,929		)	(7,279	)
	$	2,399		2,190		$	7,198		6,571

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,
	2019		2018	2019		2018
Other production expenses	$	370	424	$	1,110	1,273
Administrative and general expense	837		898	2,526		2,695
Maintenance expense	271		279	813		836
Pension non-service costs	921		589	2,749		1,767
	$	2,399	2,190	$	7,198	6,571

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

~~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,~~2019, and December 31, ~~2017:~~2018:


		Fair Value Measurements at September 30, 2018									Fair Value Measurements at September 30, 2019
				Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs					Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
Asset Category	Benchmark	Total		(Level 1)		(Level 2)		(Level 3)		Benchmark	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	—	$	4,286	$	4,286	$	—	$	—	—	$	7,884	$	7,884	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	6,613		6,572		41		—		Russell 3000 Value	6,667		6,667		—		—
U.S. Large Cap Equity	Russell 1000, Russell 1000 Growth, Russell 1000 Value	55,782		55,782		—		—		Russell 1000, Russell 1000 Growth, Russell 1000 Value	53,141		53,141		—		—
U.S. Mid Cap Equity	Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	9,747		9,747		—		—		Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	10,179		10,179		—		—
U.S. Small Cap Equity	Russell 2000, Russell 2000 Growth, Russell 2000 Value	9,848		9,848		—		—		Russell 2000, Russell 2000 Growth, Russell 2000 Value	10,373		10,373		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	5,881		5,881		—		—		MSCI EAFE	5,638		5,638		—		—
REIT	NAREIT - Equity REIT’S	6,346		—		6,346		—		NAREIT - Equity REIT’S	7,779		—		7,779		—
Fixed Income (b)	(b)	46,528		—		46,528		—		(b)	53,331		—		53,331		—
Total		$	145,031	$	92,116	$	52,915	$	—		$	154,992	$	93,882	$	61,110	$	—

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.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

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
$ —



		Fair Value Measurements at December 31, 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	—	$	8,136	$	8,136	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	5,670		5,632		38		—
U.S. Large Cap Equity	Russell 1000, Russell 1000 Growth, Russell 1000 Value	47,040		47,040		—		—
U.S. Mid Cap Equity	Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	8,372		8,372		—		—
U.S. Small Cap Equity	Russell 2000, Russell 2000 Growth, Russell 2000 Value	8,528		8,528		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	4,969		4,969		—		—
REIT	NAREIT - Equity REIT’S	5,889		—		5,889		—
Fixed Income (b)	(b)	44,855		—		44,855		—
Total		$	133,459	$	82,677	$	50,782	$	—

~~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, 2019, SJW Group is a holding company with ~~four~~4 subsidiaries: (i) San Jose Water Company, a water utility ~~which operates~~operation with 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,~~rentals, 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 and subsequently dissolved following the completion of the merger on October 9, 2019 (see discussion ~~on the proposed merger at~~in Note ~~12)~~12, “Subsequent Events”). 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~~2 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),~~CLWSC, 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.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(in thousands, except share and per share data)



	For Three Months Ended September 30, 2019
	Water Utility Services			Real Estate Services	All Other*		SJW Group
	Regulated		Non-tariffed	Non-tariffed	Non-tariffed		Regulated	Non-tariffed		Total
Operating revenue	$	110,218	2,426	1,353	—		110,218	3,779		113,997
Operating expense	89,924		1,636	935	4,418		89,924	6,989		96,913
Operating income (loss)	20,294		790	418	(4,418	)	20,294	(3,210	)	17,084
Net income (loss)	10,964		555	304	(2,345	)	10,964	(1,486	)	9,478
Depreciation and amortization	14,712		111	299	—		14,712	410		15,122
Senior note and other interest expense	6,044		—	—	544		6,044	544		6,588
Income tax expense (benefit) in net income	2,912		216	95	(658	)	2,912	(347	)	2,565
Assets	$	1,556,049	5,899	46,160	414,274		1,556,049	466,333		2,022,382



	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)	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, mortgage 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

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

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, 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

* The “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the three and nine months ended September 30, 2019, and 2018, Hydro Sub, Inc. had no recorded revenue or expenses and as of September 30, 2019, and 2018, held no assets and ~~had~~has 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.~~

~~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.

On March 28, 2019, San Jose Water Company entered into a note purchase agreement with certain affiliates of MetLife, Inc., Brighthouse Financial, Inc. and New York Life Insurance (collectively the “Purchasers”), pursuant to which the company sold an aggregate principal amount of $80,000 of its 4.29% Senior Notes, Series M (“Series M Notes”) to the Purchasers. The Series M Notes are unsecured obligations of San Jose Water Company, due on April 1, 2049. Interest is payable semi-annually in arrears on April 1st and October 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the Series M Notes are outstanding. The Series M Notes are also subject to customary events of default, the occurrence of which may result in all of the Series M Notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement.


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~~,2019, but require disclosure of their fair values: cash and cash equivalents, a money market fund, accounts receivable and accounts payable. The estimated fair value of such instruments as of September 30, ~~2018~~,2019, approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value ~~of such financial instruments is~~was 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~~.2019. 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~~$641,395 and ~~$537,840~~$490,148 as of September 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, 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~~$511,076 and ~~$431,092~~$431,424 as of September 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.

Financial instruments that are potentially subject to concentration of credit risk consist primarily of a short-term money market fund. The money market fund is managed by a reputable financial institution.

As of September 30, ~~2018,~~2019, and December 31, ~~2017, the fair value of the company’s investment~~2018, SJW Group no longer held any equity investments in California Water Service Group ~~was $0 and $4,535, respectively, and~~which 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

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

value of the company’s investment in California Water Service Group. During the ~~third quarter of~~three and nine months ended September 30, 2018, SJW Group sold ~~all~~82,340 and 100,000 shares, respectively, of ~~the company’s remaining investment in~~ California Water Service Group ~~which is discussed in Note 11.~~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.


Note 8.	Regulatory Rate Filings

California Regulatory Affairs

On ~~January 4, 2018,~~June 19, 2019, the CPUC issued its final decision resolving the remaining issues in San Jose Water ~~Company filed~~Company’s 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,. Decision 19-06-010 denied the establishment of a Water Revenue Adjustment Mechanism and Sales ~~Reconciliation~~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 andauthorized 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~~balance 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,$1,243. San Jose Water Company filed Advice Letter No. ~~522 in compliance with~~

~~SJW GROUP AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~September 30, 2018~~

~~(in thousands, except share~~534 on August 1, 2019, to recover this amount via a surcharge over a three-year period. The CPUC rejected the advice letter on October 10, 2019, citing an error and ~~per share data)~~

~~the CPUC’s directive. On June 7, 2018,~~recommended a correction and a new filing for recovery. San Jose Water Company ~~filed Advice Letter No. 522A amending~~anticipates correcting the ~~rate change to reflect~~record and filing a ~~reduction~~new advice letter for recovery in ~~revenue requirement for 2018~~the fourth quarter 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, 2018.2019.

On July 20, 2018, the CPUC issued ~~OII~~an Order Instituting Investigation (“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 aCTWS. A Scoping Memorandum was ~~subsequently~~ issued on September 7, 2018, which identified the issues to be considered onin the proceeding as to whether the proposed merger is subject to CPUC approval and ~~its~~to evaluate the merger’s 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~~A Public Participation Hearing was held on ~~track~~January 31, 2019. On March 4, 2019, the CPUC suspended this proceeding due to ~~meet~~SJW Group’s announcement of its intention to file a new merger approval application with the ~~schedule for~~Connecticut Public Utilities Regulatory Authority (“PURA”). On April 3, 2019, SJW Group and CTWS jointly filed a ~~commission decision in~~new merger application with PURA. After securing the ~~matter in December~~required approvals from both PURA and Maine Public Utilities Commission, SJW Group announced the close of ~~2018.~~the merger on October 9, 2019, and notified the CPUC accordingly.

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~~proceeding and a settlement agreement was ~~provided by~~reached with the Office of Ratepayer Advocates (now the Public Advocates ~~Office or “Cal PA”)~~Office) 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. In accordance with Decision 18-11-025 for the GRC, San Jose Water Company filed Advice Letter No. 530 proposing total refunds of $2,020 for the period from June 1, 2011 through December 31, 2016. This advice letter became effective February 8, 2019, and refunds were completed by mid-May 2019. On April 22, 2019, the CPUC dismissed Complaint 17-07-009 citing the relief provided in Advice Letter No. 530 and the current OII on this matter (see below for further discussion). The Complainant filed an appeal with the CPUC to dispute the dismissal. This appeal was rejected and the Complaint was dismissed via CPUC Decision No. 19-09-040 on September 24, 2019.

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 No. 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~~500 dollars to ~~fifty thousand~~50000 dollars per offense, per day. On July 24, 2019, San Jose Water Company ~~continues to cooperate with the~~and CPED jointly filed a motion for CPUC ~~to resolve these issues. On October 15, 2018,~~approval of a Settlement Agreement (“Agreement”) over San Jose Water ~~Company filed a response to the OII with the CPUC, in which the company stated that it~~Company’s past customer billing practices. The

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(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,Agreement requires the company ~~believes it is only probable that~~to pay approximately $2,100 in customer credits, consisting of $1,757 for refunds ~~agreed~~during the period from 1987 to 2011 and an additional $350 in ~~the partial settlement with Cal PA will be refunded~~customer credits to low income water customers, and invest $5,000 in utility plant that is not allowed an investment return or rate recovery. San Jose Water Company has ~~provided for this amount~~recorded the $2,100 customer credit expense as an offset to revenues in the accompanying ~~unaudited condensed consolidated~~June 30, 2019, Condensed Consolidated Statements of Comprehensive Income. The $5,000 commitment to invest in utility plant will be recognized as plant in service on the company’s financial ~~statements.~~statements once invested. The Agreement is subject to final approval by the CPUC which is expected in the fourth quarter of 2019.

On March 29, 2019, San Jose Water Company filed Advice Letter No. 532 with the CPUC requesting authorization to recover the $9,020 balance in its WCMA for the period of January 1, 2018, through December 31, 2018. This advice letter is pending before the CPUC.

On August 30, 2019, San Jose Water Company filed Advice Letter No. 535 with the CPUC requesting authorization to increase the total 2019 authorized revenue requirements by $655 or 0.17% for plant additions related to the Montevina Water Treatment Plant Upgrade Project in 2018. This advice letter became effective September 29, 2019.

San Jose Water Company filed Advice Letter No. 537 with the CPUC requesting authorization to refund the balance in its 2018 Tax Accounting Memorandum Account as required by the GRC decision on October 18, 2019. For a typical residential customer with a 3/4-inch meter, the refund will be $1.74 per month for 12 months or until the balance is amortized. This advice letter is pending before the CPUC and is expected to have an effective date of January 1, 2020.

Texas Regulatory Affairs

~~As required, CLWSC submitted on July 31, 2018 its Water Pass-Through Charge (“WPC”) true-up report to the~~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 Cuts and Jobs Act (H.R. 1) (“Tax Act”) on December 22, 2017 and make rate adjustments reflecting such impacts on a prospective basis. PUCT Order 47945-36 as amended by Order 47945-41 ~~orders~~requires 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 PUCT’s 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 WCMA or Tax Act memorandum ~~account.~~

~~SJW GROUP AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

~~September 30, 2018~~

~~(in thousands, except share and per share data)~~

accounts.

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~~that do not ~~be collected within~~meet 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~~established in ASC Topic 980-605-25. For other 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 October 4, 2019 the CPUC issued two proposed decisions for Advice Letter No. 532, which was filed for the recovery of the 2018 WCMA balance. The first proposed resolution was an approval for the collection of the 2018 WCMA balance and the second proposed resolution denied recovery. Both proposed decisions are expected to be presented to the CPUC decision meeting on November 7, 2019. Due to the conflicting proposed decisions, San Jose Water Company believes it no longer meets the probability criteria under ASC Topic 980-605-25 for the 2018 WCMA and has fully reserved the balance as of

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

September 30, 2019. 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~~

As a result of the ~~three and nine months ended September 30, 2018,~~current status of the CPUC filing for the 2018 WCMA ~~account was offset by a reserve in~~above, San Jose Water Company also fully reserved the ~~amount~~2019 WCMA as 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.September 30, 2019.

~~A cost~~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. Activity for the three and nine months ended September 30, 2019, respectively, represents interest activity on the accumulated balance. The amount has been reflected in the ~~2018~~ cost of capital memorandum account balance shown in the table below.

The CPUC has 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 has 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. Activity for the three and nine months ended September 30, 2019, represents interest activity on the accumulated balance. 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.



	Three months ended September 30, 2019									Three months ended September 30, 2018
	Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections) Adjustments		Ending Balance		Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections) Adjustments	Ending Balance

Revenue accounts:
2014-2017 WCMA*	$	5,315		—		(2,397	)	2,918		$	7,277		128		1	7,406
2018 WCMA*	8,958			(8,958	)	—		—		3,003			4,064		—	7,067
2019 WCMA*	557			(557	)	—		—		—			—		—	—
2012 General Rate Case true-up	7,731			(1	)	(3,631	)	4,099		11,324			—		2	11,326
Cost of capital memorandum account	(1,540		)	(7	)	—		(1,547	)	(1,507		)	(8	)	—	(1,515	)
Tax memorandum account	(6,585		)	(33	)	—		(6,618	)	(5,496		)	(459	)	—	(5,955	)
All others	7,192			281		(1,630	)	5,843		4,675			(34	)	—	4,642
Total revenue accounts	$	21,628		(9,275	)	(7,658	)	4,695		$	19,276		3,691		3	22,971
Cost-recovery accounts:
Water supply costs	5,912			1,049		(1,871	)	5,090		9,387			2,366		—	11,753
Pension	(233		)	199		1,208		1,174		(2,137		)	161		—	(1,976	)
All others	870			2		(223	)	649		—			—		—	—
Total cost-recovery accounts	$	6,549		1,250		(886	)	6,913		$	7,250		2,527		—	9,777

Total	$	28,177		(8,025	)	(8,544	)	11,608		$	26,526		6,218		3	32,748

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(in thousands, except share and per share data)


	Three months ended September 30, 2018									Three months ended September 30, 2017									Nine months ended September 30, 2019									Nine months ended September 30, 2018
	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		Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections) Adjustments		Ending Balance		Beginning Balance			Regulatory Asset Increase (Decrease)		Refunds (Collections) Adjustments	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
2014-2017 WCMA*																			$	7,750		—		(4,832	)	2,918		$	6,679		723		4	7,406
2018 WCMA*	3,003			4,064		—	—	7,067		—			—	—		—	—		9,386			(9,386	)	—		—		—			7,067		—	7,067
2019 WCMA*																			—			—		—		—		—			—		—	—
2012 General Rate Case true-up	11,324			—		2	—	11,326		15,765			—	(4,123	)	—	11,642		11,328			95		(7,324	)	4,099		11,320			—		6	11,326
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	)	(1,523		)	(24	)	—		(1,547	)	(144		)	(1,371	)	—	(1,515	)
Tax memorandum account	(5,496		)	(459	)	—	—	(5,955	)	—			—	—		—	—		(6,504		)	(114	)	—		(6,618	)	—			(5,955	)	—	(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		5,112			4,019		(3,288	)	5,843		3,851			787		4	4,642
Total revenue accounts	$	19,276		3,691		4	—	22,971		$	29,016		6,550	(9,085	)	6	26,487		$	25,549		(5,410	)	(15,444	)	4,695		$	21,706		1,251		14	22,971
Cost-recovery accounts:
Water supply costs	9,387			2,366		—	—	11,753		—			—	—		—	—		9,617			(754	)	(3,773	)	5,090		8,679			3,074		—	11,753
Pension	(2,137		)	161		—	—	(1,976	)	—			—	—		—	—		(1,843		)	582		2,435		1,174		(2,459		)	482		1	(1,976	)
All others																			1,090			8		(449	)	649		—			—		—	—
Total cost-recovery accounts	$	7,250		2,527		—	—	9,777		$	—		—	—		—	—		$	8,864		(164	)	(1,787	)	6,913		$	6,220		3,556		1	9,777

Total	$	26,526		6,218		4	—	32,748		$	29,016		6,550	(9,085	)	6	26,487		$	34,413		(5,574	)	(17,231	)	11,608		$	27,926		4,807		15	32,748

~~SJW GROUP AND SUBSIDIARIES~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)~~

* As of September 30, 2019, the 2019 WCMA and 2018

( WCMA balances were reserved 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

* full. As of September 30, 2018, the reserve balances for the ~~2017 and~~ 2018 WCMA ~~were $985 and~~was $1,003 ~~respectively,~~ which ~~have~~has been ~~netted from~~included in the ~~balances~~balance above. As of September 30, ~~2017,~~2018, the reserve balance for the 2017 WCMA was ~~$1,142~~$985 which has been ~~netted from~~included in 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,~~2019, 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.~~$1,183. 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.

~~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~~2019, and December 31, ~~2017:~~2018:



	September 30, 2019		December 31, 2018
Regulatory assets:
Postretirement pensions and other medical benefits	$	66,233	66,233
Balancing and memorandum accounts, net	11,608		34,413
Other, net	3,432		2,979
Total regulatory assets, net in Consolidated Balance Sheets	81,273		103,625
Less: current regulatory asset, net	7,493		26,910
Total regulatory assets, net, less current portion	$	73,780	76,715

Regulatory liability:
Income tax temporary differences, net	$	56,936	59,149
Total regulatory liability in Consolidated Balance Sheets	$	56,936	59,149

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

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, ~~2018~~2019

(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.~~11.	Legal Proceedings

Class Action Suits Related to the Merger

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~~The parties to the lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of additional disclosures by CTWS. Pursuant to the agreements to settle the lawsuits, the plaintiffs have reserved the right to seek a mootness fee from CTWS. The parties moved to stay proceedings, other than fee-related proceedings, until such time ~~SJW Group cannot determine~~as the ~~likelihood~~transaction closes, and the court granted the parties’ motion to stay on November 14, 2018. On November 20, 2018, the plaintiffs filed an opening brief in support of their fee application. The initial stay of proceedings expired on February 28, 2019. On March 1, 2019, the court granted the parties’ motion to continue the stay and ordered that ~~liability exists on~~ the ~~part of SJW Group or Mr. Thornburg~~stay was to continue until May 29, 2019. On May 29, 2019, the court granted the parties’ motion to continue the stay and ~~we are unable~~such stay was further extended until September 11, 2019. On September 19, 2019, the court granted the parties’ motion to ~~provide a reasonable estimate of potential loss, if any.~~continue the stay and ordered that the stay be continued until November 11, 2019. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed now that the transaction has closed.

Additional complaints have been filed in connection with the ~~Merger~~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 each case, in the United States District Court for the District of Connecticut against CTWS and the CTWS board of ~~directors and the Merger.~~directors. The complaints allege that the preliminary proxy statement issued in connection with the ~~Merger~~merger omitted material information in violation of ~~Section~~Sections 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;~~merger; (2) rescinding the ~~Merger~~merger or awarding rescissory damages; (3) directing the defendants to disseminate a corrective proxy statement; (4) declaring that the defendants have violated ~~Section~~Sections 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~~merit. CTWS has entered into an agreement in principle to settle and ~~accordingly has~~release all claims that were or could have been alleged by the plaintiffs. The settlements provide for the dismissal of the actions subject to, among other things, CTWS making certain additional disclosures, which CTWS included in the definitive proxy statement in connection with the merger. The complaints filed in the U.S. District Court for the District of Connecticut were voluntarily dismissed without prejudice on May 14, 2019.

Billing Practice OII with CPUC

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. By a decision adopted November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged overcharging issue for the period since June 2011 by requiring customer credits to customers totaling $2,020. That amount was refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective February 8, 2019. See discussion on the matter in Note 8, “Regulatory Rate Filings.” On July 24, 2019, San Jose Water Company and CPED jointly filed a motion for CPUC approval of a Settlement Agreement (“Agreement”) over San Jose Water Company’s past customer billing practices. The Agreement requires the company to pay approximately $2,100 in additional customer refunds, consisting of $1,757 for refunds during the period from 1987 to 2011 and $350 in customer credits to low income water customers, and invest $5,000 in utility plant that is not ~~accrued any amounts.~~allowed an investment return or rate recovery. San Jose Water Company recorded the $2,100 customer credit expense as an offset to revenues during the second quarter of 2019. The $5,000 commitment to invest in utility plant will be recognized as plant in service on the company’s financial statements once invested. The Agreement is subject to final approval by the CPUC which is expected in the fourth quarter of 2019.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2019

(in thousands, except share and per share data)

SJW Group is subject to ordinary routine litigation incidental to its business. ~~There~~Except as disclosed above, 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.


Note 12.	Subsequent Events

On October 8, 2019, SJW Group entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which SJW Group sold an aggregate principal amount of $310,000 of its 3.05% Senior Notes, Series 2019A, due November 1, 2029, $75,000 of its 3.15% Senior Notes, Series 2019B, due November 1, 2031, and $125,000 of its 3.53% Senior Notes, Series 2019C, due November 1, 2039. The notes are unsecured obligations of the Company. Interest is payable semi-annually in arrears on May 1st and November 1st of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, SJW Group is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement.

On October 9, 2019, SJW Group completed the merger transaction with CTWS, a holding company whose subsidiaries are primarily public utilities providing water service to approximately 138,000 service connections that serve a population of approximately 450,000 people in 80 municipalities with a service area of approximately 269 square miles throughout Connecticut and Maine and 3,000 wastewater connections in Southbury, Connecticut. The total purchase price was $838,476 in cash and the purchase price allocation for the business combination consisted primarily of acquired utility plant and assumed liabilities. Due to the timing of the business combination and the complexities involved in determining fair value of assets acquired, SJW Group has not yet completed the purchase price allocation.


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~~.2018.

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, actualActual results may differ materially ~~and adversely~~ from those currently anticipated and expressed in ~~any~~such forward-looking ~~statements. Important~~statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that ~~could cause or contribute to such differences include, but are not limited to, those discussed~~may affect our actual results, please see our disclosures under “Forward-Looking Statements,” and elsewhere 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.~~Item 1A under “Risk Factors.”

General:

As of September 30, 2019, SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company, SJWTX, Inc., SJW Land Company, and 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”) merger and subsequently dissolved following the completion of the merger on October 9, 2019.

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~~139 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~~17,500 connections that serve approximately ~~48,000~~52,000 people. CLWSC’s service area comprises more than 246 square miles in ~~western~~the southern region of the Texas Hill Country in Blanco, Comal, ~~County~~Hays and ~~southern Blanco County in~~Travis counties, 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.

SJW Land Company owned the following real properties during the nine months ended September 30, ~~2018:~~2019:


				% for Nine months ended September 30, 2018 of SJW Land Company							% for Nine months ended September 30, 2019 of SJW Land Company
Description	Location	Acreage	Square Footage	Revenue		Expense		Location	Acreage	Square Footage	Revenue		Expense
Warehouse building	Knoxville, Tennessee	30	361,500	44	%	41	%	Knoxville, Tennessee	30	361,500	46	%	40	%
Commercial building	Knoxville, Tennessee	15	135,000	56	%	59	%	Knoxville, Tennessee	15	135,000	54	%	60	%
Undeveloped land and parking lot	Knoxville, Tennessee	10	N/A	N/A		N/A		Knoxville, Tennessee	10	N/A	N/A		N/A
Undeveloped land								San Jose, California	103	N/A	N/A		N/A

SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. which operated a California commercial property that was sold in the second quarter of 2017. The limited partnership has been determined to be a variable interest entity within the scope of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 810 - “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, it has been consolidated with SJW Land Company.

~~Hydro Sub, Inc., a wholly-owned subsidiary of~~On October 9, 2019, SJW Group iscompleted the merger transaction with CTWS, a holding company whose subsidiaries are primarily public utilities providing water service to approximately 138,000 service connections that serve a population of approximately 450,000 people in 80 municipalities with a service area of approximately 269 square miles throughout Connecticut ~~corporation that~~and Maine and 3,000 wastewater connections in Southbury, Connecticut. The total purchase price was ~~formed on March 9, 2018,~~$838,476 in cash and the purchase price allocation for the ~~sole purpose~~business combination consisted of ~~effecting~~primarily acquired utility plant and assumed liabilities. Due to the ~~proposed merger~~timing of the business combination and the complexities involved in determining fair value of assets acquired, SJW Group ~~and Connecticut Water Service, Inc. (“CTWS”). On March 14, 2018, SJW Group, Hydro Sub, Inc. and CTWS~~entered into an Agreement and Plan of Merger with regard to the merger, 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 provided, among other things, that SJW Group will acquire CTWS in an all-cash transaction. The transaction, which is expected to close during the first quarter of 2019, was approved by the boards of directors of both companies and is subject to the satisfaction of customary closing conditions and approval by certain regulators and CTWS shareholders. Under certain circumstances, SJW Group will be obligated to pay a termination fee of $42,500 to CTWS if the Merger Agreement is terminated by SJW Group, including without limitation in the event that SJW Group materially breaches its non-solicitation obligations or SJW Group enters into an alternative acquisition agreement, in each case subject to the terms of the Merger Agreement, as amended. Pursuant to the terms of the Merger Agreement, SJW Group may be required to reimburse CTWS up to $5,000 of certain fees and expenses (any termination fee payable by SJW Group under the Merger Agreement would be reduced by such amount) if the Merger Agreement is terminated under certain circumstances. Recent updates related to the proposed merger include the following:

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.

Business Strategy for Water Utility Services:

SJW Group focuses its business initiatives in three strategic areas:

As part of our pursuit of the above three strategic areas, ~~the company considers~~we consider from time to time opportunities to acquire businesses and ~~strategic assets.~~assets, including the recent CTWS merger which closed on October 9, 2019. However, ~~SJW Group~~we cannot be certain itwe will be successful in identifying and consummating any strategic business combination or acquisitions relating to such opportunities. In addition, the execution of our business strategy will expose us to different risks than those associated with ~~our~~the current utility operations. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the potential for a negative impact on SJW Group’s financial position and operating results, entering markets in which SJW Group has no or limited direct prior experience and the potential loss of key employees of any acquired company. Any ~~future~~strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm ~~its~~ operating results or our financial condition. As noted above, the company entered into an Agreement and Plan of Merger on March 14, 2018 and on August 5, 2018, a Second Amended and Restated Agreement & Plan of Merger for an all-cash transaction (See Note 12, “Notes to Unaudited Condensed Consolidated Financial Statements”).

Real Estate Services:

SJW Group’s real estate investment activity is conducted through SJW Land Company. As noted above, SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee. SJW Land Company also owns a limited partnership interest in 444 West Santa Clara Street, L.P. The partnership owned a commercial building in San Jose, California that was sold in the second quarter of 2017.

SJW Land Company manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. ~~SJW Land Company’s real estate investments diversify SJW Group’s asset base.~~

Critical Accounting Policies:

The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our ~~2017~~2018 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, ~~2017,~~2018, that was filed with the SEC on February 27, ~~2018.~~2019.

Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, ~~2017.~~2018. There have been no changes in our critical accounting ~~policies except as indicated below.~~policies. Our significant accounting policies are described in our notes to the ~~2017~~2018 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, ~~2017.~~

New Accounting Pronouncements:

In ~~February 2016,~~August 2018, the FASB issued Accounting Standards Update (“ASU”) ~~2016-02, “Leases (Topic 842),~~2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20: “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which ~~supersedes~~aims to improve the ~~lease requirements in “Leases (Topic 840).”~~overall usefulness of disclosure to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the Consolidated Statement of Financial Position. ASU 2016-02 also makes some changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will beupdate is effective for SJW Group during the ~~company in the first quarter of 2019~~year ending December 31, 2020. Retrospective adoption is required and ~~earlier~~early adoption is permitted. In July 2018, the FASB issued ASU 2018-10, “Codification Improvements of Topic 842, Leases” and ASU 2018-11, “Leases (Topic 842): Targeted Improvements.” ASU 2018-11 provides companies another transition method by allowing entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. ASU 2018-11 also provides lessors with a practical expedient, by class of underlying asset, to not separate nonlease components from the associated lease component. If a lessor makes that accounting policy election, it is required to account for the nonlease components together with the associated lease component as a single lease component and to provide certain disclosures. Lessees were already afforded a similar practical expedient in ASU 2016-02. Management is currently evaluating the effect ~~ASU 2016-02, 2018-10 and 2018-11~~that the new standard will have on its ~~consolidated financial statements and related~~defined benefit plan disclosures.

Results of Operations:

See “Revenue” in Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and political and regulatory activities that have ~~occurred in response to drought conditions.~~occurred.

SJW Group’s consolidated net income for the three months ended September 30, ~~2018~~2019, was ~~$15,788,~~$9,478, a decrease of ~~$3,752,~~$6,310 or approximately ~~19%~~40%, from ~~$19,540~~$15,788 for the same period in ~~2017.~~2018. SJW Group’s consolidated net income for the nine months ended September 30, ~~2018,~~2019, was ~~$29,944,~~$28,889, a decrease of ~~$11,955,~~$1,055, or approximately ~~29%~~4%, from ~~$41,899~~$29,944 for the same period in

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

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

Nine months ended
September 30,

Sources of Water Supply

San Jose Water Company’s water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from the Santa Clara Valley Water District (“~~SCVWD”~~Valley Water”) under the terms of a master contract with ~~SCVWD~~Valley Water expiring in 2051. Surface water is the least expensive source of water. Changes and variations in quantities from each of these sources affect the overall mix of the water supply, thereby affecting the cost of the water supply. In addition, the water rate for purchased water and the groundwater extraction charge may be increased by the ~~SCVWD~~Valley Water at any time. If an increase occurs, then San Jose Water Company would file an advice letter with the CPUC seeking authorization to increase revenues to offset the cost increase.

CLWSC’s water supply consists of groundwater from wells and purchased treated and untreated raw water from ~~the Guadalupe-Blanco River Authority (“GBRA”).~~local water agencies. CLWSC has long-term agreements with the ~~GBRA,~~Guadalupe-Blanco River Authority (“GBRA”), which expire in 2037, 2040, 2044 and 2050. The agreements, which are take-or-pay contracts, provide CLWSC with an aggregate of 6,900 acre-feet of water per year from Canyon Lake at prices that may be adjusted periodically by GBRA. P~~roduction~~ CLWSC also has raw water supply agreements with the Lower Colorado River Authority (“LCRA”) and West Travis Public Utility Agency (“WTPUA”) expiring in 2053 and 2046, respectively, to provide for 250 acre-feet of water per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted periodically by the agencies. Production wells located in a Comal Trinity Groundwater Conservation District, a regulated portion of the Trinity aquifer, are ~~required to submit~~charged a groundwater pump tax based upon usage.

The following table presents the change in sources of water supply, in million gallons, for Water Utility Services:

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

Unaccounted-for water on a 12-month-to-date basis for September 30, 2019, and 2018 approximated 8.3% and ~~2017 approximated~~ 7.8% ~~and 8.7%~~, respectively, as a percentage of total production. The ~~decrease in~~ unaccounted-for water estimate is ~~primarily due to higher water~~based on the results of past experience and the impact of flows through the system, ~~from reduced conservation activities, combined with~~partially offset by Water Utility Services’ main replacements and lost water reduction programs.

Water Production Expenses

The ~~increase~~change in water production expenses for the three and nine months ended September 30, ~~2018,~~2019, compared to the same periods in ~~2017,~~2018, was primarily attributable to ~~an increase in usage and~~increased use of surface water, offset by higher per unit costs for purchased water, groundwater extraction and energy charges ~~partially offset by an increased use of surface water~~ and cost-recovery balancing and

Other Operating Expenses

Operating expenses, excluding water production expenses, ~~increased $11,797~~decreased $3,313 for the three months ended September 30, ~~2018,~~2019, compared to the same period in ~~2017.~~2018. The ~~increase~~decrease was primarily attributable to ~~an increase~~a decrease of ~~$8,442~~$6,705 in merger related expenses incurred in connection with the company’s ~~proposed~~ merger with CTWS, offset by an increase of ~~$1,617~~$1,960 in administrative and general expenses primarily due to integration costs for the merger with CTWS and annual wage increases, and an increase of $1,440 in depreciation and amortization expense due to increases in utility plant.

Operating expenses, excluding water production expenses, increased $349 for the nine months ended September 30, 2019, compared to the same period in 2018. The increase was primarily attributable to an increase of $4,133 in administrative and general expenses primarily due to integration costs for the merger with CTWS, annual wage increases and maintenance agreements, an increase of $4,447 in depreciation and amortization expense due to increases in utility plant ~~an increase of $964 in administrative~~ and ~~general expenses primarily due to increases in uninsured losses, annual wage increases, and rate case filing expenses,~~ an increase in property and other non-income taxes of ~~$562~~$709 primarily due to an increase in utility plant additions and annual assessments, ~~and an increase~~offset by a decrease of ~~$373 in maintenance expenses due to annual wage increases. These increases were offset partially by $161 of balancing and memorandum account cost recoveries.~~

Other (Expense) Income

For the three and nine months ended September 30, ~~2018,~~2019, compared to the same ~~period~~periods in ~~2017,~~2018, the change in other (expense) income was primarily due to interest income earned on the ~~$191 pre-tax gain on sale of California Water Service Group stock~~invested proceeds from our equity offering in ~~the current year.~~

Provision for Income Taxes

For the three ~~months~~ and nine months ended September 30, ~~2018,~~2019, compared to the same period in ~~2017,~~2018, income tax expense decreased ~~$9,420~~$1,538 and ~~$19,464,~~increased $1,211, respectively. The decrease in income tax expense of $1,538 is primarily due to a lower ~~tax rate and lower~~ pre-tax ~~income. The effective consolidated~~ income ~~tax rate was 21% and 41% for~~in the three months ended September 30, 2019. The increase in income tax expenses of $1,211 is primarily due to higher excess tax benefits recorded in 2018. The effective consolidated income tax rates was 21% for the three months ended

September 30, 2019 and 2018, and ~~2017, respectively,~~23% and 20% for the nine months ended September 30, 2019, and ~~38%~~2018, respectively. The lower effective tax rate for the nine months ended September 30, 2018 ~~and 2017, respectively. The federal statutory income tax rate decreased from 35%~~was due to ~~21% effective January 1, 2018 thus reducing the income tax expense and the effective consolidated income tax rate in 2018. The estimated reversal~~recognition of excess ~~deferred taxes~~tax benefits of $1,443 relating to stock-based compensation. In comparison, the excess tax benefits recognized for the regulated entity San Jose Water Company also contributed to the decrease in the effective consolidated income tax rate in 2018. The benefit of the reversal of excess deferred taxes for the year 2018 is expected to flow back to the customers through the tax memorandum account.

The CPUC has directed San Jose Water Company to establish a memorandum account to capture all of the impacts of the Tax Act including the benefit of the reduction in the federal statutory income tax rate from 35% to 21% on its regulated revenue requirement. The PUCT has directed water utilities to record as a regulatory liability the difference between the revenue collected under existing rates and the revenue that would have been collected had the existing rates been set using the new federal statutory income tax rate. The benefits associated with regulatory activities is expected to flow back to customers as directed by the CPUC and PUCT, with no impact to net income. With the CPUC approval of Advice Letter No. 522A, the benefit of the reduction in the federal statutory income tax rate from 35% to 21% was reflected in customer bills effective July 1, 2018. The other impacts of the Tax Act will continue to be recorded in the tax memorandum account. Accordingly, San Jose Water Company recorded $459 and $5,955 liability in the tax memorandum account for the three and nine months ended September 30, ~~2018, respectively. CLWSC refunded the accrued amounts~~2019 was $64.

The Company has recognized a deferred tax asset for the ~~period January 25, 2018, through April 30, 2018,~~transaction costs associated with the merger with CTWS which was consummated on October 9, 2019. Accordingly, the deferred tax asset for the transaction costs will be written off to earnings in the ~~second~~fourth quarter of ~~2018.~~2019. The ~~Federal Tax Cut Credit will continue to be reflected separately on customer bills each month starting from May 1, 2018 until the implementation~~estimated amount of ~~new rates resulting~~write-off is $5,679. The actual write-off may differ from the ~~next rate case.~~estimate as the company is currently analyzing the tax deductibility of certain transaction costs.

SJW Group expects the regulators and the Internal Revenue Service to issue guidance in future periods that will determine the final disposition of the excess deferred taxes and other impacts of the Tax ~~Act.~~Cuts and Jobs Act (H.R. 1) (the “Tax Act”). At this time, the ~~Company~~company has applied a reasonable interpretation of the Tax Act, although future clarification of the Tax Act and regulatory decisions may change the ~~amounts estimated.~~

On August 15, 2018, SJW Group received notification that the Texas Comptroller of Public Accounts completed its audit of Texas Franchise Tax Report for the report year 2015 and has no changes as per the audit.

~~Other Comprehensive Income (Loss)~~

On October 1, ~~2018, SCVWD’s~~2019, Valley Water’s 10 reservoirs were approximately ~~33%~~42% of total capacity with ~~55,399~~70,102 acre-feet of water in storage, which is ~~68%~~88% of the twenty-year average for this date. As reported by the ~~SCVWD,~~Valley Water, there was ~~no measurable~~0.16 inches of rainfall in San Jose during the current annual rainfall season that commenced on July 1, ~~2018.~~2019. Rainfall at San Jose Water Company’s Lake Elsman was measured at ~~zero~~0.16 inches during the current rainfall season. Under normal hydrologic conditions, state and federal water allocations represent approximately 40% of the ~~SCVWD’s~~Valley Water’s total annual water supply. As of October 1, ~~2018,~~2019, the ~~SCVWD~~Valley Water reported that allocations from the state and federal water project are approximately ~~35%~~75% and ~~75%~~100%, respectively, of amounts requested in ~~2018. SCVWD~~2019. Valley Water also reported that the managed groundwater recharge from January to September in the Santa Clara Plain was ~~157%~~77% of the five-year average. The groundwater level in the Santa Clara Plain is approximately ~~2 feet lower~~one foot higher than a year ago in September and 2218 feet higher than the five-year average. According to ~~SCVWD,~~Valley Water, the projected total groundwater storage at the end of ~~2018~~2019 is expected to fall within the normal stage of the ~~SCVWD’s~~Valley Water’s Water Shortage Contingency Plan.

On October 1, ~~2018,~~2019, San Jose Water Company’s Lake Elsman contained ~~3,149~~1,553 acre-feet of water, of which approximately ~~2,689~~1,093 acre-feet can be utilized for treatment. Local surface water is a less costly source of water than groundwater or purchased water and its availability significantly impacts San Jose Water Company’s results of operations. San Jose Water Company will utilize surface water and additional water from its portfolio of groundwater supplies to supplement imported water from the ~~SCVWD.~~Valley Water. Production from the Montevina Surface Water Treatment Plant inthrough the third quarter was ~~impacted by the Ostwald Intake pipeline replacement project. The temporary bypass pipeline limited the intake to 3~~4,429 million gallons, ~~per day for the 10 week duration~~which is 377% of the ~~project.~~five-year average. Production at San Jose Water Company’s smaller Saratoga Water Treatment Plant through the third quarter was 402 million gallons, which is 212% of the five-year average. Saratoga Water Treatment Plant was taken out of service atduring the ~~end of the second~~third quarter due to lack of run-off from Saratoga Creek and remains offline. San Jose Water Company believes that its various water supply sources will be sufficient to meet customer demand through the remainder of ~~2018.~~2019.

See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and ongoing political and regulatory activities related to conservation.

~~SJW Group and~~ San Jose Water Company ~~provide~~provides additional information on ~~their~~its web ~~sites~~site, www.sjwater.com, relating to ongoing water conservation measures taken ~~or to be taken in response to the recent drought conditions~~ in California, including information on customer water usage. ~~The web sites are accessible at www.sjwater.com and www.sjwgroup.com. SJW Group~~San Jose Water Company intends to update the web ~~sites~~site as appropriate during the period in which the water ~~shortage contingency plan of SCVWD remains~~use restrictions and calls for conservation from state and local authorities remain in effect. The information on our web sites is not a part of and should not be considered incorporated by reference into this Form 10-Q.

Regulation and Rates

Almost all of the operating revenue of ~~San Jose Water Company~~SJW Group results from the sale of water at rates authorized by the ~~CPUC.~~subsidiaries’ respective state utilities commissions. The ~~CPUC sets~~state utilities commissions set rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations.

See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of ~~the~~ regulatory activities that have occurred during the ~~year.~~

Cash Flow from Operating Activities

During the nine months ended September 30, ~~2018,~~2019, SJW Group generated cash flows from operations of approximately ~~$73,700,~~$91,300, compared to ~~$88,000~~$73,700 for the same period in ~~2017.~~2018. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations ~~decreased~~increased by approximately ~~$14,300.~~$17,600. This ~~decrease~~increase was the result of a combination of the following factors: (1) ~~a decrease~~increase in ~~the~~ collection ~~of the~~in balancing and memorandum accounts of ~~$4,300,~~$27,600, of which $9,648 related to the reserve established for the 2018 and 2019 WCMA, (2) ~~a decrease in accrued groundwater extraction charges, purchased water~~general working capital and ~~power of $2,400, (3) decrease in net collection of taxes receivable by $1,800, (3)~~ net income, adjusted for non-cash items ~~decreased~~increased by ~~$8,700,~~$3,300, offset by (3) decrease in net payments of taxes payable by $8,000, and (4) ~~a general working capital increase~~decrease in collections of ~~$2,900.~~previously billed and accrued receivables by $5,300.

As of September 30, ~~2018,~~2019, Water Utility Services’ write-offs for uncollectible accounts represent less than 1% of its total revenue, unchanged from September 30, ~~2017.~~2018. Management believes it will continue to collect its accounts receivable balances at its historical collection rate.

In connection with the proposed merger with CTWS, ~~the company~~SJW Group incurred professional fees of ~~approximately $8,442~~$1,737 and ~~$14,994~~$6,113 for the three and nine months ended September 30, ~~2018.~~2019, respectively. SJW Group anticipates incurring additional merger related ~~fees~~expenses through the ~~anticipated~~ close of the transaction in the ~~first quarter~~amount of ~~2019~~approximately $12,179 which will negatively impact fourth quarter operating cash flows.

Cash Flow from Investing Activities

During the nine months ended September 30, ~~2018,~~2019, SJW Group used cash flows in investing activities of approximately ~~$106,000,~~$114,800, compared to ~~$95,500~~$106,000 for the same period in ~~2017.~~2018. SJW Group used approximately: (1) ~~$97,800~~$101,100 of cash for company-funded capital expenditures, (2) ~~$5,900~~$10,000 for developer-funded capital expenditures, and (3) ~~$3,800~~$4,400 in utility plant retirement ~~costs, (4) $2,500 in payments for business/asset acquisition, and (5) $100 for additions to nonutility property, offset by (6) $4,100 proceeds from the sale of California Water Service Group stock.~~costs.

Water Utility Services’ budgeted capital expenditures for ~~2018,~~2019, exclusive of capital expenditures financed by customer contributions and advances, are approximately ~~$120,000.~~$131,000. As of September 30, ~~2018,~~2019, approximately ~~$97,800~~$101,100 or ~~82%~~77% of the ~~$120,000~~$131,000 has been spent.

Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, San Jose Water Company’s and CLWSC’s Water Utility Services ~~expects~~expect to incur approximately ~~$760,820~~$699,228 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future CPUC and PUCT approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction.

A substantial portion of San Jose Water Company’s distribution system was constructed during the period from 1945 to 1980. Expenditure levels for renewal and modernization of this part of the system will grow as these components reach the end of their useful lives. In most cases, the replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services and increased regulation.

Cash Flow from Financing Activities

Net cash provided by financing activities for the nine months ended September 30, ~~2018, increased~~2019, decreased by approximately ~~$48,100~~$10,300 from the same period in the prior year, primarily as a result of (1) ~~an increase~~a decrease in net borrowings on our lines of credit of ~~$52,200,~~$89,000, (2) a ~~decrease of $2,700 for payments on long-term borrowings, and (3) a decrease of $1,900 in payments made to noncontrolling interest, offset by (4) a $3,900~~$8,300 increase in dividends paid, ~~(5) an~~offset by (3) net proceeds of $78,800 from new long-term debt, (4) $4,100 increase ~~of $3,200~~ in net ~~other changes for equity plan payments, broker fee payments, and incurred costs related to future common stock issuance activity, and (6) decrease of $1,600 in net~~cash receipts offrom advances and contributions in aid of ~~construction.~~

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

Funding for San Jose Water Company’s future capital expenditure program is expected to be provided primarily through internally-generated funds, the issuance of new long-term debt, the issuance of equity securities, all of which will be consistent with ~~the regulator’s~~regulator guidelines.

San Jose Water Company’s unsecured senior note agreements generally have terms and conditions that restrict San Jose Water Company from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. San Jose Water Company was not restricted from issuing future indebtedness as a result of these terms and conditions at September 30, ~~2018.~~2019.

On March 28, 2019, San Jose Water Company entered into a note purchase agreement with certain affiliates of MetLife, Inc., Brighthouse Financial, Inc. and New York Life Insurance (collectively the “Purchasers”), pursuant to which the company sold an aggregate principal amount of $80,000 of its 4.29% Senior Notes, Series M to the Purchasers. The notes are unsecured obligations of San Jose Water Company, due on April 1, 2049. Interest is payable semi-annually in arrears on April 1st and October 1st of each year. The note purchase agreement contains customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement. As of September 30, 2019, San Jose Water Company was in compliance with all such covenants.

SJW Group’s unsecured senior note agreement has terms and conditions that restrict SJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $175,000 plus 30% of Water Utility Services cumulative net income, since June 30, 2011. SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions at September 30, ~~2018.~~2019.

On October 8, 2019, the SJW Group entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which SJW Group sold an aggregate principal amount of $310 million of its 3.05% Senior Notes, Series 2019A, due November 1, 2029, $75 million of its 3.15% Senior Notes, Series 2019B, due November 1, 2031, and $125 million of its 3.53% Senior Notes, Series 2019C, due November 1, 2039. The notes are unsecured obligations of the Company. Interest is payable semi-annually in arrears on May 1st and November 1st of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, SJW Group is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement. SJW Group used $427,399 of the net proceeds from the notes, together with $411,077 of net proceeds from the equity offering in December 2018, to finance the Merger and to pay certain related fees and expenses.

San Jose Water Company’s loan agreements with the California Pollution Control Financing Authority contain affirmative and negative covenants customary for loan agreements relating to revenue bonds, including, among other things, complying with certain disclosure obligations and covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of the projects funded by the loan proceeds and the assignment of the loan agreement. As of September 30, ~~2018,~~2019, San Jose Water Company was in compliance with all such covenants.

SJWTX, Inc.’s unsecured senior note agreement has terms and conditions that restrict SJWTX, Inc. from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. In addition, SJW Group is a guarantor of SJWTX, Inc.’s senior note which has terms and conditions that restrict SJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $125,000 plus 30% of Water Utility Services cumulative net income, since December 31, 2005. As of September 30, ~~2018,~~2019, SJWTX, Inc. and SJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions.

As of September 30, ~~2018,~~2019, SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to $145,000, of which $15,000 was available to SJW Group and SJW Land Company under a single line of credit, $5,000 was available to SJWTX, Inc. under a second line of credit, and $125,000 was available to San Jose Water Company under a third line of credit. At September 30, ~~2018,~~2019, SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling ~~$69,000. These~~$83,000. The lines of credit bear interest at variable rates and expire on June 1, 2021. During ~~2018,~~2019, the cost of borrowing on SJW Group’s short-term credit facilities has averaged ~~2.81%~~3.23%. The SJW Group and SJWTX, Inc. unsecured bank lines of credit have the following affirmative covenants calculated with the financial statements of SJW Group, on a consolidated basis: (1) the funded debt cannot exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period cannot be less than 175% of interest charges. As of September 30, ~~2018,~~2019, SJW Group and SJWTX, Inc. were in compliance with all covenants. San Jose Water Company’s unsecured bank line of credit has the following affirmative covenants: (1) the funded debt cannot exceed 66-2/3% of total

capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period cannot be less than 175% of interest charges. As of September 30, ~~2018,~~2019, San Jose Water Company was in compliance with all covenants.

SJW Group received net proceeds of approximately $358,256 from the sale of 6,750,500 shares of common stock in a public offering pursuant to an effective shelf registration in December 2018 and received net proceeds of approximately $53,738 from the sale of an additional 1,012,500 shares of common stock, in each case after deducting the underwriting discounts and commissions and estimated offering expenses payable by SJW Group. SJW Group used the net proceeds from the offering, together with the net proceeds from new debt financing in 2019, to finance the Merger and to pay related fees and expenses. Prior to such use, the company invested the net offering proceeds in money-market funds.

Funding for SJW Group’s ~~proposed~~ all-cash merger with CTWS ~~is expected to be~~which closed on October 9, 2019 was provided through proceeds from the company’s equity ~~and/or~~offering in December 2018 and the debt financing in October 2019, existing cash balances and cash flow from operations. ~~In addition,~~ SJW Group ~~has~~had received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Royal Bank of Canada and UBS AG, Stamford Branch to provide a senior unsecured bridge loan facility of up to $975 million in the event that SJW Group iswas unable to secure other financing for the merger at or prior to the time the merger is ~~completed; however, such commitments include customary conditions~~completed. Subsequent to ~~funding. There is no guarantee that all~~the net proceeds received by SJW Group from the public offering of ~~theses funding conditions will be satisfied for funding~~common stock in 2018, the facility commitment was reduced to ~~occur.~~$563 million. On October 9, 2019, the senior unsecured bridge loan facility was terminated. SJW Group did not draw down any fund from the loan facility.

On October 16, 2019, Standard & Poor’s Ratings Service initiated coverage on SJW Group assigning a company rating of A-, with a stable outlook and affirming its company rating of San Jose Water Company of A, with a stable outlook. In addition, on October 14, 2019, S&P affirmed its ratings of CTWS and Connecticut Water Company of A- with a stable outlook.


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

SJW Group is subject to market risks in the normal course of business, including changes in interest rates and pension plan asset ~~values, and equity prices.~~values. The exposure to changes in interest rates can result from the issuance of debt and short-term funds obtained through SJW Group’s variable rate lines of credit. San Jose Water Company sponsors a noncontributory pension plan for its employees. Pension costs and the funded status of the plan are affected by a number of factors including the discount rate and investment returns on plan assets.

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


ITEM 4.	CONTROLS AND PROCEDURES

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

There has been no change in internal control over financial reporting during the third fiscal quarter of ~~2018~~2019 that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting of SJW Group.

PART II. OTHER INFORMATION


ITEM 1.	LEGAL PROCEEDINGS

Class Action Suits Related to the Merger

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~~The parties to the lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of additional disclosures by CTWS. Pursuant to the agreements to settle the lawsuits, the plaintiffs have reserved the right to seek a mootness fee from CTWS. The parties moved to stay proceedings, other than fee-related proceedings, until such time ~~SJW Group cannot determine~~as the ~~likelihood~~transaction closes, and the court granted the parties’ motion to stay on November 14, 2018. On November 20, 2018, the plaintiffs filed an opening brief in support of their fee application. The stay of proceedings expired on February 28, 2019. On March 1, 2019, the court granted the parties’ motion to continue the stay and ordered that ~~liability exists~~the stay was to continue until May 29, 2019. On May 29, 2019, the court granted the parties’ motion to continue the stay and ordered that the stay be continued until September 11, 2019. On September 19, 2019, the court granted the parties’ motion to continue the stay and ordered that the stay be continued until November 11, 2019. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed now that the merger transaction closed on ~~the part of SJW Group or Mr. Thornburg and we are unable to provide a reasonable estimate of potential loss, if any.~~October 9, 2019.

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 each case, in the United States District Court for the District of Connecticut against CTWS and the CTWS board of ~~directors and the Merger.~~directors. 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. CTWS has entered into an agreement in principle to settle and release all claims that were or could have been alleged by the plaintiffs. The settlements provide for the dismissal of the actions subject to, among other things, CTWS making certain additional disclosures, which CTWS included in the definitive proxy statement in connection with the Merger. The complaints filed in the U.S. District Court for the District of Connecticut were voluntarily dismissed without prejudice on May 14, 2019.

Billing Practice OII with CPUC

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. By a decision adopted November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged overcharging issue for the period since June 2011 by requiring refunds to customers totaling $2.02 million. That amount was refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective February 8, 2019. See discussion on the matter in Note 8, “Regulatory Rate Filings.” On July 24, 2019, San Jose Water Company and CPED jointly filed a motion with CPUC approval of a Settlement Agreement (“Agreement”) over San Jose Water Company’s past customer billing practices. The Agreement requires the company to pay approximately $2.1 million in additional customer refunds, consisting of $1.7 million for refunds during the period from 1987 to 2011 and $0.4 million in customer credits to low income water customers, and invest $5 million in utility plant that is not allowed an investment return or rate recovery. San Jose Water Company recorded the $2.1 million customer credit expense as an offset to revenues during the second quarter of 2019. The $5 million commitment to invest in utility plant will be recognized as plant in service on the company’s financial statements once invested. The Agreement is subject to final approval by the CPUC which is expected in the fourth quarter of 2019.

SJW Group is subject to ordinary routine litigation incidental to its business. ~~There~~Except as set forth above, 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.


ITEM 1A.	RISK FACTORS

The following discusses certain risk factors relating to the ~~proposed~~ merger consummated with CTWS on October 9, 2019 (the “Merger”) and does not include all of the risk factors associated with the ~~proposed merger~~Merger and the combined company after the ~~proposed merger.~~Merger. In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, ~~2017, SJW Group’s Form 10-Q for the quarter ended June 30,~~ 2018 and our other public filings, which could materially affect our business, financial condition or future results. Other than the risk ~~factor~~factors listed and referenced below, there have been no material changes from risk factors previously disclosed in “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, ~~2017.~~2018 and SJW Group’s Form 10-Q for the quarterly period ended June 30, 2019.

~~Our proposed merger with CTWS is subject~~Risks Related to the ~~approval~~Combined Company Following Closing of the shareholders of CTWS, and to the receipt of approvals from regulatory authorities that may impose conditions that could have an adverse effect on SJW Group or, if not obtained, could prevent completion of the proposed merger.

Completion of the proposed merger is contingent upon, among other things, the receipt of all required regulatory approvals, including the approvals of the Connecticut Public Utilities Regulatory Authority and the Maine Public Utilities Commission.

The terms and conditions of such approvals may impose requirements, limitations, costs, or place restrictions on the conduct of the combined company’s business. The merger agreement may require SJW Group and/or CTWS to comply with conditions imposed by regulatory entities and, in certain circumstances, either company may refuse to close the proposed merger on the basis of regulatory conditions imposed. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions or that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the proposed merger or imposing additional material costs on or materially limiting the revenues of the combined company following the proposed merger. Additionally, neither SJW Group nor CTWS can provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the proposed merger, or the consummation of the proposed merger on terms different than those contemplated by the merger agreement. In addition, the proposed merger requires the approval by the shareholders of CTWS, and there is no guarantee that such approval will be obtained. If the shareholders of CTWS do not approve the proposed merger, the proposed merger will not be completed, which will have an adverse effect on SJW Group’s stock price and financial conditions.Merger

The CPUC has initiated an investigation ~~into~~to review the ~~proposed merger,~~Merger, which may ~~cause delays in~~impose costs or ~~otherwise adversely affect completion~~certain conditions on us, but the Merger was consummated prior to the CPUC’s issuance of ~~the merger.~~an order with respect to its investigation.

The CPUC at its July 12, 2018 meeting approved an ~~Order Instituting Investigation (“OII”)~~OII into ~~our proposed merger with CTWS.~~the Merger. The order includes investigating the CPUC’s authority over the ~~proposed merger,~~Merger, whether the ~~proposed merger~~Merger is in the public ~~interest,~~interest; whether the ~~proposed merger would preserve~~Merger preserves the CPUC’s jurisdiction over San Jose Water Company and the CPUC’s capacity to effectively regulate utility operations in the State of ~~California,~~California; the effect of the ~~proposed merger~~Merger on ~~SJW Group’s~~our and CTWS’s employees, shareholders, ~~subscribers,~~customers and communities in which they operate and the State of ~~California,~~California; whether the benefits likely exceed any detrimental effects of the ~~proposed merger,~~Merger; and whether the CPUC should consider conditions or mitigation measures to prevent any adverse consequences which may result from the ~~proposed merger,~~Merger, and if so, what should be those conditions or measures. The order ~~states~~had stated that the CPUC ~~plans~~planned to substantially complete the inquiry in a manner sufficiently timely to allow the ~~merger~~Merger to go forward by the end of 2018, if appropriate. ~~SJW Group is~~However, as a result of unexpected delays in the CPUC’s scheduling of a planned public participation hearing, which was held January 31, 2019, issuance of a proposed decision was delayed. On March 4, 2019, the presiding administrative law judge suspended the CPUC investigation until a final decision was reached by PURA. We notified the CPUC on September 11, 2019 of the PURA Decision adopted September 4, 2019, in Docket 19-04-02, and on September 24, 2019, we provided notice to the CPUC of PURA’s letter approval of the Revised Settlement Agreement on September 15, 2019.

Completion of the CPUC’s investigation was not a condition to the consummation of the Merger. We are unable to predict what action, if any, the CPUC will take with respect to the ~~proposed merger~~Merger upon the conclusion of the OII ~~and, therefore, no assurance can be given that such action will not introduce additional~~proceeding. Such actions may impose significant costs or cause delays with respect to the proposed merger. In the event that merger agreement is terminated by either SJW Group or CTWS on the grounds that the closing condition providing for the absence of a legal restraint is not satisfied and the legal restraint giving rise to such non-satisfaction arises from, is issued by or is in connection with the CPUC or the CPUC restraint closing condition is not satisfied, then SJW Group will be required to reimburse CTWS’s expenses up to $5 million.

~~If SJW Group is unable to secure financing sufficient to cover the cash consideration for the merger, the merger will not be completed.~~

SJW Group intends to finance the proposed merger with equity and/or debt financing, existing cash balances and cash flow from operations, and there is no guarantee that SJW Group will be able to secure such financing to complete the merger. In addition, SJW Group has received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Royal Bank of Canada and UBS AG, Stamford Branch to provide a senior unsecured bridge loan facility of up to $975 million in the event that SJW Group is unable to secure other financing for the merger at or prior to the time the merger is completed. However, such commitments include customary conditions to funding, including, without limitation:

~~closing of the proposed bridge loan facility on or before a specified expiration date;~~

~~no fact, circumstance, effect, change, event or development that would reasonably be expected to cause material adverse effect on CTWS;~~

~~the execution and delivery of definitive documentation and customary closing documents;~~

~~the completion of the merger in accordance with the terms~~ and conditions ~~of the merger agreement;~~

~~no amendments to the merger agreements that material adversely affect lenders without consent of the lenders;~~

~~the payment of required fees and expenses in accordance with the financing commitment letter;~~

~~the delivery of certain financial statements in accordance with the financing commitment letter; and~~

~~a fifteen consecutive business day marketing period to secure financing.~~

There is no guarantee that all of these closing conditions will be satisfied for funding to occur. In the event that the proposed bridge loan facility is not available, the merger agreement requires that SJW Group obtain substitute financing,on us, which may not be available on acceptable terms, in a timely manner or at all. If SJW Group is not able to obtain substitute financing to consummate the merger, SJW Group could be in breach of the merger agreement and may be required to pay significant damages to CTWS or be compelled to specifically perform our obligations to consummate the merger, which will have an adverse effect on our business operation and financial conditions, and ~~stock price.~~may negate some or all of the benefits that we expect as a result of the Merger.

~~SJW Group will take on~~We incurred substantial additional indebtedness to finance the ~~merger, which will decrease SJW Group’s~~Merger, and this additional indebtedness may reduce our business and operational flexibility and increase ~~its~~our borrowing costs.

~~If SJW Group finances~~To finance the ~~proposed merger with debt financing, SJW Group will~~Merger, we incurred an aggregate of $510 million of additional indebtedness, a substantial increase ~~its indebtedness substantially as~~ compared to ~~its~~our indebtedness prior to the merger (up to by approximately $975 million if the merger is fully debt financed), and will have indebtedness that will be substantially greater than its indebtedness prior to the merger. Any financial covenants agreed to by SJW Group in connection with such indebtedness and theMerger. Our increased indebtedness and higher debt-to-equity ratio ~~of SJW Group~~ in comparison to that of ~~SJW Group on a~~our recent historical basis ~~will~~may have the effect, among other things, ofof: reducing ~~the~~our flexibility ~~of SJW Group~~ to respond to changing business, industry and economic ~~conditions and~~conditions; increasing borrowing ~~costs.~~ costs; placing us at a competitive disadvantage relative to other companies in our industry with less debt; potentially have an adverse affect our issuer and issue ratings; requiring additional cash flow to be used to service debt instead of for other purposes; and potentially impairing our ability to obtain other financing.

In addition, the ~~actual~~ terms and conditions of such indebtedness, including financial covenants and restrictive covenants, may reduce our business flexibility and adversely affect our business, financial condition, results of operations and prospects. The agreements governing the indebtedness incurred in connection with the Merger contain covenants that impose significant operating and financial limitations and restrictions on us, including restrictions on the ability to enter particular transactions and engage in other activities that we may believe will be advisable or necessary for the combined company’s business. In addition, failure to comply with any of the covenants in our existing or future debt agreements could result in a default under those agreements and under other existing agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of indebtedness under these agreements and to foreclose upon any collateral securing such indebtedness. Under certain circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations under our indebtedness, including principal and interest payments, which, if not cured, may cause an event of default.

Completion of the Merger may have triggered change in control or other provisions in certain agreements to which CTWS is a party, which may have an adverse impact on the combined company’s business and results of operations.

The completion of the Merger may have trigged change in control and other provisions in certain agreements to which CTWS is a party. If we are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we are able to negotiate

waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on terms less favorable to the combined company. Any of the foregoing or similar developments may have an adverse impact on the combined company’s business and results of operations.

We may not have discovered undisclosed liabilities of CTWS during our due diligence process.

In the course of the due diligence review of CTWS that we conducted prior to the execution of the Merger Agreement, we may not have discovered, or may have been unable to quantify, undisclosed liabilities of CTWS and its subsidiaries, and our stockholders may not be ~~favorable~~indemnified for any of these liabilities. Examples of such undisclosed liabilities may include, but are not limited to, ~~SJW Group,~~pending or threatened litigation or regulatory matters. Any such undisclosed liabilities could have an adverse effect the business, results of operations, financial condition and ~~as such, could further increase the cost~~cash flows of the ~~acquisition~~combined company and on the value of CTWS, as well as the overall burden of such indebtedness upon SJW Group and SJW Group’s business flexibility. Unfavorable debt financing terms may also adversely affect SJW Group’s financial results.

~~Any delay in completing the proposed merger may reduce or eliminate the benefits to be achieved thereunder.~~

In addition to the required regulatory clearances, the proposed merger is subject to a number of other conditions beyond SJW Group’s control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delayour stock following the completion of the ~~proposed merger for~~Merger.

Uncertainties associated within the combined company may cause a ~~significant period~~loss of ~~time or prevent it from occurring. Any delay~~management personnel and other key employees which could adversely affect the future business and operations of the combined company.

The combined companies are dependent on the experience and industry knowledge of the officers and other key employees to execute their business plans, and its success will depend in ~~completing~~part upon its ability to retain key management personnel and other key employees. Current and prospective employees of the ~~proposed merger could cause~~combined company may experience uncertainty about their roles, including following the closing of the Merger, which may have an adverse effect on the ability of each of the combined company to ~~not realize,~~attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will be able to ~~be delayed in realizing, some~~attract or ~~all~~retain key management personnel and other key employees to the same extent that SJW Group and CTWS were previously able to attract or retain their own employees before the Merger. A failure by the combined company to attract, retain and motivate executives and other key employees after the completion of the ~~benefits~~Merger could have a negative impact on its businesses.

The combined company is expected to incur additional costs in connection with the CTWS merger, including costs to complete the transaction and integrate SJW Group and CTWS.

The combined company has incurred, and is expected to incur additional, substantial expenses in connection with completing the CTWS merger and integrating SJW Group and CTWS. Close of the CTWS merger, which occurred on October 9, 2019, will result in additional legal, regulatory, and consulting fees. In addition, there is a large number of processes, policies, procedures, operations, technologies and systems at each company that must be integrated, including accounting and finance, payroll, revenue management, commercial operations, risk management and employee benefits. While we assumed that a certain level of merger and integration expenses would be incurred, there are many factors beyond our control that could affect the total amount or the timing of such expenses, and we may encounter unexpected difficulties and challenges that would require us to incur additional expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. In addition, integration expenses could, particularly in the near term, exceed the benefits that the combined company expects to achieve from the elimination of duplicative public company and other related costs ~~that we expect~~expected from the transaction. These merger and integration expenses likely will result in the combined company taking significant charges against earnings and the amount and timing of such charges are uncertain at present.

SJW Group has committed to ~~achieve if~~certain “ring-fencing” measures which will enhance CTWS’s separateness from SJW Group, which may limit SJW Group’s ability to influence the ~~proposed merger is successfully completed within its expected time frame.~~management and policies of CTWS (beyond the limitations included in other existing governance mechanisms).

~~Failure~~Pursuant to ~~complete~~ the ~~proposed merger~~agreements related to the Merger and commitments made by SJW Group as ~~currently contemplated or at all could negatively impact the stock prices, business operations and financial results of SJW Group.~~

~~Completion~~part of the ~~proposed merger is not assured~~application for PURA and ~~is subject to risks, including the risks that~~MPUC approval of the ~~transactions by shareholders~~Merger, SJW Group has instituted certain “ring-fencing” measures to enhance CTWS’s separateness from SJW Group and to mitigate the risk that CTWS would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting SJW Group or its non-ring-fenced affiliates. These commitments became effective upon the closing of the Merger.

In order to satisfy the ring-fencing commitments, SJW Group formed SJWNE, LLC a wholly-owned special purpose entity (“SPE”) to own the capital stock of CTWS, and the SPE, CTWS and their subsidiaries (collectively, the “CTWS Entities”) adopted certain measures designed to enhance their separateness from SJW Group, with the intention of mitigating the effects on the CTWS Entities of any bankruptcy of SJW Group and its affiliates other than the CTWS Entities (collectively, the “Non-CTWS Entities”). As a result of these ring-fencing measures, in certain situations, SJW Group will be restricted in its ability to access assets of the CTWS Entities as dividends or ~~by governmental entities~~intracompany loans to satisfy the debt or contractual obligations of any Non-CTWS Entity, including any indebtedness or other contractual obligations of SJW Group. In addition, the ring-fencing structure may negatively impact SJW Group’s ability to achieve certain benefits, including synergies and economies of scale to reduce operating costs of the combined entity, that it anticipates will ~~not be obtained or that~~result from the Merger.

This ring-fencing structure also subjects SJW Group and the CTWS Entities to certain ~~other closing conditions will not be satisfied. If the proposed merger is not completed, or is completed on different terms than as contemplated by the merger agreement, the ongoing businesses~~governance, operational and financial ~~results~~restrictions following the closing of the Merger. Accordingly, SJW Group may be restricted in its ability to direct the management, policies and operations of the CTWS Entities, including the deployment or disposition of their respective assets, declarations of dividends, strategic planning and other important corporate issues. Further, the CTWS Entities’ directors have considerable autonomy and, as described in our commitments, have a duty to act in the best interest of the CTWS Entities consistent with the ring-fencing structure and applicable law, which may be contrary to SJW Group’s best interests or be in opposition to SJW Group’s preferred strategic direction for the CTWS Entities. To the extent they take actions that are not in SJW Group’s interests, our financial condition, results of operations and prospects may be materially adversely ~~affected~~affected.

The combined company is and ~~SJW Group~~ will be ~~subject~~affected by developments in the water utility industry, including changes in regulation. A failure to ~~several risks, including the following:~~

~~having to pay certain significant costs relating~~adapt to the ~~proposed merger without receiving the benefits of the proposed merger, including, in certain circumstances, payment of a termination fee and an expense reimbursement;~~

~~the potential loss of key personnel during the pendency of the proposed merger as employees may experience uncertainty about their future roles with the combined company;~~

~~reputational harm due to the adverse public perception of any failure to successfully complete the proposed merger;~~

having been subject to certain restrictions on the conduct of its businesses, in the case of SJW Group, which may have prevented SJW Group from soliciting or making certain dispositions while the proposed merger was pending; and

SJW Group’s management having focused on the proposed merger instead of on conducting its day-to-day business and operational matters and pursuing other opportunities that could have been beneficial to the companies.

Any delay in the completion of the proposed merger, any uncertainty about the completion of the proposed merger on terms other than those contemplated by the merger agreement and any failure to complete the proposed mergerchanging regulatory environment could adversely affect the ~~business, financial results~~stability of the combined company’s earnings.

Because the combined company and ~~stock price~~its subsidiaries are regulated in the United States at the federal level and in California, Texas, Connecticut and Maine, it is and will continue to be affected by legislative and regulatory developments. The combined company and/or its subsidiaries are now subject in the United States to federal regulation as well as to extensive state regulation in the states in which the combined company operates. The costs, burdens and complexities associated with complying with these regulatory jurisdictions may have an adverse effect on the combined company. Moreover, potential legislative or regulatory changes may create greater risks to the stability of the combined company’s earnings generally.

SJW ~~Group.~~

~~The merger agreement with CTWS~~Group’s dividend policy is subject to the discretion of our board of directors and may be ~~terminated~~limited by legal and contractual requirements.

We anticipate to continue to pay a regular quarterly dividend now that the Merger is completed, though any such determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition, earnings, legal requirements, including limitations under Delaware law, restrictions in our credit agreements and other debt instruments that limit our ability to pay dividends to stockholders and other factors the board of directors deems relevant. The board of directors of the combined company may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, our subsidiaries may be subject to restrictions on their ability to pay dividends to us, including under state law, pursuant to regulatory commitments and under their credit agreements and other debt instruments. In this regard, the CTWS Entities are limited from paying dividends to us in certain circumstances ~~which would result in the benefits~~under PURA regulatory commitments. Any inability of ~~the merger not being realized.~~

~~Either SJW Group or CTWS~~our subsidiaries to pay us dividends may terminate the merger agreement under certain circumstances, including, if the proposed merger has not been consummated by May 5, 2019 (unless such date is extended automatically to August 5, 2019 pursuant to the terms of the merger agreement). However, this termination right will not be available to a party if such failure of the proposed merger to occur on or before such date is the result ofhave a material breach of any representation, warranty, covenant or agreement of the merger agreement by such party. If we are not able to complete the proposed merger by the end date, even if we decide not to terminate the merger agreement, we may not be able to prevent CTWS from exercising its right to terminate the merger agreement.

~~In addition, if the merger agreement is terminated under certain circumstances, CTWS may be required~~and adverse effect on our ability to pay ~~a termination fee~~dividends to ~~SJW Group of $28.1 million or reimburse SJW Group’s~~our stockholders.

We expect to incur additional costs and expenses ~~up to $5 million. CTWS may not be able to obtain the approval of the CTWS shareholders required to consummate the merger, including~~ in ~~particular because some of the CTWS shareholders may be persuaded to vote against approval of the merger agreement in the case that Eversource Energy continues to take actions to solicit proxies~~connection with remaining litigation items arising from the CTWS shareholders in opposition to the merger. If the CTWS shareholders fail to approve the merger, then the merger agreement will be terminated and CTWS will be required to reimburse SJW Group’s expenses up to $5 million and may also be required to pay to SJW Group the termination fee of $28.1 million (less the amount of expenses reimbursed) in certain circumstances. Similarly, if the merger agreement is terminated under certain circumstances then SJW Group will be required to reimburse CTWS’s expenses up to $5 million and may also be required to pay to CTWS the termination fee of $42.5 million (less the amount of expenses reimbursed) in certain circumstances. A termination of the merger agreement will adversely affect our business and stock price, and we will not be able to realize the benefits expected from the merger.Merger with CTWS.

~~An adverse judgment in any litigation challenging the merger may prevent the merger from becoming effective or from becoming effective within the expected timeframe.~~

On June 14, 2018, a putative class-action complaint was filed against the members of the CTWS board of directors, SJW Group and Eric W. Thornburg on behalf of CTWS shareholders in the Connecticut Superior Court in the Judicial District of Middlesex under the caption Dunn v. Benoit, et al., Case No. MMX-CV18-6021536-S (Conn. Super. Ct.). The complaint, as amended on September 18, 2018, alleges that the members of the CTWS board of directors breached their fiduciary duties owed to CTWS shareholders in connection with negotiating the ~~merger~~Merger and that CTWS’s preliminary proxy statement, filed with the SEC on

August 20, 2018, omits certain material information. The complaint further alleges that SJW Group and Eric W. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the action seeks to recover attorneys’ fees and costs.

Also, on June 14, 2018, a near-identical putative class-action complaint was filed against the members of the CTWS board of directors, SJW Group and Eric W. Thornburg on behalf of CTWS shareholders in the Connecticut Superior Court in the Judicial District of Middlesex under the caption Tillotson v. Benoit, et al., Case No. MMX-CV18-6021537-S (Conn. Super. Ct.). The complaint, as amended on September 20, 2018, alleges that members of the CTWS board of directors breached their fiduciary duties owed to CTWS shareholders in connection with negotiating the Merger and that CTWS’s preliminary proxy statement, filed with the SEC on August 20, 2018, omits certain material information. The complaint further alleges that SJW Group and Eric W. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the action seeks to recover ~~rescissory and other damages and~~ attorneys’ fees and costs.

The ~~defendants believe this lawsuit is without merit and intend~~parties to ~~defend vigorously against~~the above lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of additional disclosures by CTWS. Pursuant to the agreements to settle these ~~allegations.~~lawsuits, the plaintiffs have reserved the right to seek a mootness fee from CTWS.

~~Also, on June 14,~~On November 20, 2018, ~~a near-identical putative class-action complaint was filed against~~ the ~~members of the CTWS board of directors, SJW Group and Eric W. Thornburg on behalf of CTWS shareholders~~plaintiffs in ~~the~~ Connecticut Superior Court filed a brief in support of an opening mootness fee demand of $1.5 million for alleged benefits the ~~Judicial District of Middlesex under the caption~~ ~~Tillotson v. Benoit, et al.,~~ ~~Case No. MMX-CV18-6021537-S (Conn. Super. Ct.). The complaint, as amended on September 20, 2018, alleges that the members of the~~plaintiffs believe their lawsuit created for CTWS. CTWS ~~board of directors breached their fiduciary duties owed~~intends to ~~CTWS shareholders in connection with negotiating the merger~~vigorously oppose

this demand. We expect to incur additional costs and that CTWS’s preliminary proxy statement, filed with the SEC on August 20, 2018, omits certain material information. The complaint further alleges that SJW Group and Eric W. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the action seeks to recover recissory and other damages and attorneys’ fees and costs. The defendants believe this lawsuit is without merit and intend to defend vigorously against these allegations.

~~Additional complaints have been filed~~expenses in connection with the ~~Merger but neither~~ lawsuits, including the opposition against the fee demand, and such lawsuits may distract our management from the day-to-day operation of the combined company.

SJW Group ~~nor any of its officers or directors~~Water Utility Services are ~~named as defendants therein. On October 5, 2018, a complaint was filed against CTWS and~~subject to the members of the CTWS board of directors on behalf of a putative CTWS stockholder in the United States District Court for the District of Connecticut under the caption Assad v. Connecticut Water Service, Inc., Case No. 3:18-cv-01664 (D. Conn.). The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the action seeks 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 Sections 14(a) and/or 20(a) of the 1934 Act, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in this complaint are without merit. Also, on October 5, 2018, a near-identical putative class-action complaint was filed against CTWS and the members of the CTWS board of directors on behalf of CTWS stockholders in

the United States District Court for the District of Connecticut under the caption Paskowitz v. Connecticut Water Service, Inc., Case No. 3:18-cv-01663 (D. Conn.). The complaint alleges that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the action seeks 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 Sections 14(a) and/or 20(a) of the 1934 Act, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in this complaint are without merit.

It is possible that SJW stockholders or CTWS shareholders may file additional lawsuits challenging the merger or the other transactions contemplated by the merger agreement, which may name SJW Group, the SJW Group board of directors, CTWS and/or the CTWS board of directors as defendants. The outcome of such lawsuits cannot be assured, including the amount of costs associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these claims. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert management’s attention and resources, which could adversely affect the operation of SJW Group’s and CTWS’s business.

~~One of the conditions to the~~following risks after closing of the ~~merger is the absence of any law or order, decree or judgment by a court, arbitrator or other governmental entity that makes illegal or prohibits the consummation~~Merger:

•

Water Supply -We are subject to regulations concerning the flow of water in Connecticut’s rivers and streams, as well as the State of Maine’s regulations that govern the flow of water in rivers and streams and also govern lake levels on great ponds. Maine Water Company (“Maine Water”) relies on legislatively granted water rights in order to serve customers. In some instances, these rights were granted to predecessor water companies specially chartered by the Maine Legislature many decades ago, with those entities later having been merged into Maine Water. The legislation incorporating these predecessor water companies did not address whether chartered rights may be transferred to another entity without special legislative action. The Maine Business Corporation Act generally provides that property and contract rights of a merged corporation are vested in the survivor corporation without reversion or impairment. In the MPUC proceedings that approved the mergers of these Maine Water predecessor companies, the survivorship of water rights was not contested, and Maine Water has not sought specific legislation to reaffirm the transfer of chartered rights granted to predecessor water companies

•

Customer Demand - Similar to San Jose Water Company and CLWSC, CTWS has also been impacted by increased water conservation, as well as the use of more efficient household fixtures and appliances among residential users. There has been a trend of declining per customer residential water usage in Connecticut and Maine over the last several years. CTWS’s regulated business in Maine and at Avon Water Company are heavily dependent on revenue generated from rates it charges to its residential customers for the volume of water they use. The rate CTWS charges for its water is regulated by the MPUC in Maine and PURA in Connecticut, and CTWS may not unilaterally adjust its rates to reflect changes in demand. Declining volume of residential water usage may have a negative impact on our operating revenues in the future if regulators do not reflect any usage declines in the rate setting design process. Although the legislatures in Maine and Connecticut have provided enabling legislation for water utilities to implement revenue adjustment mechanisms to allow for recovery of authorized rates where conservation has occurred and consumption has declined and such a mechanism has been approved by PURA for Connecticut Water Company (“Connecticut Water”) and Heritage Valley Water Company (“HVWC”), this mechanism has yet to be implemented at Avon Water or Maine Water.

•

Water Supply Contamination - CTWS’s wastewater operations, wastewater collection and treatment and septage pumping and sludge hauling also involve various unique risks that could impact our company. If collection or treatment systems operated by HVWC fail or do not operate properly, or if there is a spill, untreated or partially treated wastewater could discharge onto property or into nearby streams and rivers, causing various damages and injuries, including environmental damage. These risks are most acute during periods of substantial rainfall or flooding, which are the main causes of wastewater overflow and system failure. Liabilities resulting from such damages and injuries could harm our business, financial condition, and results of operations.

•

Environmental Regulations - We are subject to regulations concerning the flow of water in Connecticut’s rivers and streams, which could adversely affect our business. As promulgated, the regulations may require that certain downstream releases be made from seven of Connecticut Waters’ eighteen active reservoirs following the adoption of stream classifications by the Department of Energy and Environmental Protection, or DEEP. Currently, downstream releases are made at two locations. No groundwater supply wells are affected by the regulations.

DEEP has finalized stream classifications in two areas of the ~~merger or the other transactions contemplated by the merger agreement. Consequently, if a settlement or other resolution is not reached in the lawsuits referenced above~~state where Connecticut Water maintains and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting the parties’ ability to complete the merger, then such injunctive or other relief may prevent the merger from becoming effective within the expected time frame or at all.

~~The merger agreement contains provisions that could discourage a potential competing acquiror~~operates sources of either SJW Group or CTWS, or could result in any competing proposal being at a lower price than it might otherwise be. However, potential competing acquirors could negatively impact the completion and timingsupply. Other areas of the ~~proposed transaction~~state, including areas where Connecticut Water operates, remain to be classified. Although significantly and ~~result in disruption~~favorably modified from prior versions, the regulations still have the potential to lower safe yield, raise capital and ~~expense~~operating expenses and adversely affect revenues and earnings. Because they affect only a subset of CTWS’s supplies and allow for ~~both SJW Group and CTWS.~~

~~Other than in connection with the 45-day go-shop period, which concluded at 11:59 p.m. Eastern time on July 14, 2018, the merger agreement contains “no shop” provisions that, subject~~releases to limited exceptions, restrict each of SJW Group’s and CTWS’s ability to solicit, initiate, knowingly encourage or knowing facilitate any takeover proposal. In addition, the other party has an opportunity to offer to modify the terms of the mergerbe scaled back in response to drought events, the overall impact is anticipated to be manageable. Although there can be no assurance PURA would approve rate increases to enable us to recover all such costs, legislation passed in 2013 allows for a surcharge to recover capital improvement costs necessary to achieve compliance with the regulations.

We will also be subject to the State of Maine’s regulations that govern the flow of water in rivers and streams and also govern lake levels on great ponds. Maine regulations govern any ~~competing acquisition proposals before~~activity that alters the ~~board~~flow or level of ~~directors~~classified state waters. Maine Water operates five water systems that use surface waters governed by these regulations. For public water systems, Maine regulations allow the Maine Department of Environmental Protection, or MDEP, to impose site specific conditions in locations where Maine’s water quality classifications are not being met. Any conditions proposed on a water withdrawal by a public water system must consider the provisions of any legislative charter, the watershed protection benefits provided by the utility and the financial viability of the ~~company~~utility. Further, any conditions

imposed must be accommodated by the existing MPUC approved rate schedule for the utility and may not, in and of themselves, cause a utility to request a rate increase from their customers. To date, the MDEP has not imposed any withdrawal conditions on any public water system in Maine.

In particular, Maine Water relies on legislatively granted water rights in order to serve customers. In some instances, these rights were granted to predecessor water companies specially chartered by the Maine Legislature many decades ago, with those entities later having been merged into Maine Water. The legislation incorporating these predecessor water companies did not address whether chartered rights may be transferred to another entity without special legislative action. The Maine Business Corporation Act generally provides that ~~has received~~property and contract rights of a third-party proposal may withdraw or qualify its recommendation with respect to the merger. These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of SJW Group or CTWS from considering or proposing the acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realizedmerged corporation are vested in the ~~proposed merger~~survivor corporation without reversion or ~~might result in a potential third-party acquiror proposing to pay a lower price to~~impairment. In the ~~stockholders than it might otherwise have proposed to pay because~~MPUC proceedings that approved the mergers of these Maine Water predecessor companies, the ~~added expense~~survivorship of ~~the $42.5 million or $28.1 million termination fee, as applicable, that may become payable in certain circumstances.~~

~~CTWS previously received an unsolicited proposal from Eversource Energy. While the CTWS board of directors has determined that the proposal~~water rights was neither a superior proposal nor reasonably likely to lead to a superior proposal, Eversource Energy filed on April 27, 2018, a preliminary proxy statement to solicit proxies in opposition to the proposed merger. Eversource Energynot contested, and Maine Water has not ~~revised its preliminary proxy statement in connection with~~sought specific legislation to reaffirm the ~~revised all-cash Merger, and it is unclear what additional actions Eversource Energy may take~~transfer of chartered rights granted 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. Even if ultimately unsuccessful, actions taken by these or other third parties could disrupt the business of each of SJW Group and CTWS, could cause SJW Group and CTWS to incur substantial expense, and could negatively impact the expected timing of the consummation of the proposed merger. In addition, there is a risk that, as a result of actions taken by these or other third parties, shareholders of CTWS may vote against the proposed merger at their special meeting and that, consequently, the required shareholder approval may not be obtained.predecessor water companies.

•

Reservoirs, Storage Tanks, Mains or Distribution Networks - We also own and operate numerous dams throughout Connecticut and Maine, and a failure of such dams could result in losses and damages that may adversely affect our financial condition and reputation. In addition, CTWS operates a number of water and wastewater systems under operation and maintenance contracts that we assumed with the consummation of the Merger. Pursuant to these contracts, such systems are operated according to the standards set forth in the applicable contract, and it is generally the responsibility of the owner of the system to undertake capital improvements. We may not be able to convince the owner to make needed improvements in order to maintain compliance with applicable regulations. Although violations and fines incurred by water and wastewater systems may be the responsibility of the owner of the system under these contracts, those non-compliance events may reflect poorly on us as the operator of the system and harm our reputation, and in some cases, may result in liability to the same extent as if we were the owner.


ITEM 5.	OTHER INFORMATION

On October ~~24, 2018,~~30, 2019, the Board of Directors of SJW Group declared the regular quarterly dividend of ~~$0.28~~$0.30 per share of common stock. The dividend will be paid on December ~~3, 2018,~~2, 2019, to stockholders of record as of the close of business on November ~~5, 2018.~~11, 2019.

SJW Group post information about the operating and financial performance of SJW Group and its subsidiaries on its web sites at www.sjwater.com and www.sjwgroup.com from time to time. The information on our web sites is not a part of and should not be considered incorporated by reference into this Form 10-Q.


ITEM 6.	EXHIBITS



Exhibit Number		Description

~~2.1~~		Second Amended and Restated Agreement and Plan of Merger, dated as of August 5, 2018, by and among SJW Group, Hydro Sub, Inc. and Connecticut Water Service, Inc. Incorporated by reference as Exhibit 2.1 to Form 8-K filed on August 6, 2018.

31.1		Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chairman, President and Chief Executive Officer. (1)

31.2		Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer and Treasurer. (1)

32.1		Certification Pursuant to 18 U.S.C. Section 1350 by Chairman, President and Chief Executive Officer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

32.2		Certification Pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer and Treasurer, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)

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(1)	Filed currently herewith.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



			SJW GROUP

DATE:	~~October 26, 2018~~November 1, 2019	By:	/s/ JAMES P. LYNCH
			James P. Lynch
			Chief Financial Officer and Treasurer (Principal financial officer)



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SJW	New York Stock Exchange LLC


	September 30, 2018		December 31, 2017	September 30, 2019		December 31, 2018
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
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and outstanding shares 28,456,490 on September 30, 2019 and 28,404,316 on December 31, 2018				$	28	28
Additional paid-in capital	84,045		84,866	499,377		495,366
Retained earnings	390,891		376,119	397,259		393,918
Accumulated other comprehensive income	—		2,203
Total stockholders’ equity	474,957		463,209	896,664		889,312
Long-term debt, less current portion	431,341		431,092	511,076		431,424
	906,298		894,301	1,407,740		1,320,736
CURRENT LIABILITIES:
Line of credit	76,000		25,000	62,000		100,000
Accrued groundwater extraction charges, purchased water and power	22,856		14,382	22,749		13,694
Accounts payable	26,956		22,960	28,193		24,937
Accrued interest	7,402		6,869	9,220		7,132
Accrued property taxes and other non-income taxes	4,056		1,904	4,220		1,926
Accrued payroll	4,568		6,011	5,011		7,181
Income tax payable	1,340		—
Other current liabilities	8,502		7,926	12,914		9,115
	151,680		85,052	144,307		163,985
DEFERRED INCOME TAXES	80,901		85,795	72,798		79,651
ADVANCES FOR CONSTRUCTION	80,124		83,695	84,564		80,610
CONTRIBUTIONS IN AID OF CONSTRUCTION	167,769		160,830	170,390		168,243
POSTRETIREMENT BENEFIT PLANS	75,877		72,841	73,004		70,490
REGULATORY LIABILITY	60,650		62,476	56,936		59,149
OTHER NONCURRENT LIABILITIES	13,569		13,011	12,643		13,525
COMMITMENTS AND CONTINGENCIES	—		—	—		—
	$	1,536,868	1,458,001	$	2,022,382	1,956,389



	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


	Three months ended September 30, 2018 vs. 2017					Nine months ended September 30, 2018 vs. 2017					Three months ended September 30, 2019 vs. 2018					Nine months ended September 30, 2019 vs. 2018
	Increase/(decrease)					Increase/(decrease)					Increase/(decrease)					Increase/(decrease)
Water production expenses:
Change in surface water use	$	(1,039	)	(1	)%	$	(5,678	)	(3	)%	$	(4,631	)	(5	)%	$	(11,929	)	(5	)%
Change in usage and new customers	338			—	%	4,621			2	%	656			1	%	(2,309		)	(1	)%
Purchased water and groundwater extraction charge and energy price increase	4,915			6	%	10,999			5	%	3,860			4	%	10,222			4	%
Balancing and memorandum accounts cost recovery	(2,366		)	(3	)%	(3,074		)	(1	)%	1,316			1	%	3,825			2	%
Total water production expenses	1,848			2	%	6,868			3	%	1,201			1	%	(191		)	—	%
Administrative and general	964			1	%	1,853			1	%	1,998			2	%	4,231			1	%
Balance and memorandum account cost recovery	(161		)	—	%	(484		)	—	%	(38		)	—	%	(98		)	—	%
Maintenance	373			—	%	1,045			—	%	(57		)	—	%	(59		)	—	%
Property taxes and other non-income taxes	562			1	%	1,072			1	%	49			—	%	709			—	%
Depreciation and amortization	1,617			2	%	4,704			2	%	1,440			2	%	4,447			2	%
Merger related expenses	8,442			10	%	14,994			7	%	(6,705		)	(7	)%	(8,881		)	(3	)%
	$	13,645		16	%	$	30,052		14	%	$	(2,112	)	(2	)%	$	158		—	%


	Three months ended September 30,		Increase/ (decrease)		% of Total Change			Nine months ended September 30,						Increase/ (decrease)			% of Total Change		Three months ended September 30,					Increase/ (decrease)		% of Total Change		Nine months ended September 30,			Increase/ (decrease)		% of Total Change
	2018	2017			% of Total Change		2018			2017			2019				% of Total Change			2018			2019			% of Total Change		2018			Increase/ (decrease)		% of Total Change
Purchased water	8,334	7,911	Increase/ (decrease)	423		3	%		18,592			17,941		Increase/ (decrease)		651			2	%	7,977		8,334	Increase/ (decrease)		(357	)	(3	)%	17,080	18,592		(1,512	)	(5	)%
Groundwater	3,922	4,582	(660	)	(5	)%		9,574			10,479			(905	)		(3	)%	3,472			3,922		(450	)	(3	)%	7,706		9,574	(1,868	)	(6	)%
Surface water	339	87	252		2	%		2,043			563			1,480			5	%	1,369			339		1,030		8	%	4,831		2,043	2,788		9	%
Reclaimed water	325	233	92		1	%		576			454			122			—	%	313			325		(12	)	—	%	537		576	(39	)	—	%
	12,920	12,813	107		1	%		30,785			29,437			1,348			4	%	13,131			12,920		211		2	%	30,154		30,785	(631	)	(2	)%


(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.


	For Three Months Ended September 30, 2017											For Nine Months Ended September 30, 2019
	Water Utility Services			Real Estate Services		All Other*		SJW Group				Water Utility Services			Real Estate Services	All Other*		SJW Group
	Regulated		Non-tariffed	Non-tariffed		Non-tariffed		Regulated	Non-tariffed		Total	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	$	285,138	5,418	4,088	—		285,138	9,506		294,644
Operating expense	82,135		1,511	875		859		82,135	3,245		85,380	226,073		3,833	2,834	10,441		226,073	17,108		243,181
Operating income (loss)	38,592		949	516		(859	)	38,592	606		39,198	59,065		1,585	1,254	(10,441	)	59,065	(7,602	)	51,463
Net income (loss) before noncontrolling interest	19,866		473	305		(1,104	)	19,866	(326	)	19,540
Net income (loss)												30,726		1,127	1,284	(4,248	)	30,726	(1,837	)	28,889
Depreciation and amortization	11,623		143	299		—		11,623	442		12,065	44,159		313	896	—		44,159	1,209		45,368
Senior note, mortgage and other interest expense	4,999		—	(2	)	544		4,999	542		5,541
Senior note and other interest expense												17,434		—	—	1,659		17,434	1,659		19,093
Income tax expense (benefit) in net income	13,242		340	178		(237	)	13,242	281		13,523	9,142		438	445	(1,223	)	9,142	(340	)	8,802
Assets	$	1,438,433	20,239	48,917		3,981		1,438,433	73,137		1,511,570	$	1,556,049	5,899	46,160	414,274		1,556,049	466,333		2,022,382



	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



	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


(2)	Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California, ~~and~~the Public Utilities Regulatory Authority in Connecticut (“PURA”), the Public Utilities Commission of Texas (“PUCT”) in ~~Texas;~~Texas, and the Maine Public Utilities Commission (“MPUC”) in Maine; and


	Operating Revenue by Segment						Operating Revenue by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended September 30,			Nine months ended September 30,
	2018		2017	2018		2017	2019		2018	2019		2018
Water Utility Services	$	123,412	123,187	$	294,878	291,415	$	112,644	123,412	$	290,556	294,878
Real Estate Services	1,441		1,391	4,103		4,281	1,353		1,441	4,088		4,103
	$	124,853	124,578	$	298,981	295,696	$	113,997	124,853	$	294,644	298,981


	Operating Expense by Segment						Operating Expense by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended September 30,			Nine months ended September 30,
	2018		2017	2018		2017	2019		2018	2019		2018
Water Utility Services	$	88,853	83,646	$	223,362	207,731	$	91,560	88,853	$	229,906	223,362
Real Estate Services	934		875	2,674		2,765	935		934	2,834		2,674
All Other	9,238		859	16,987		2,475	4,418		9,238	10,441		16,987
	$	99,025	85,380	$	243,023	212,971	$	96,913	99,025	$	243,181	243,023

~~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