SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER~~JUNE 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”)~~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, the State Water Resources Control Board (the “State Water Board”) imposed mandatory water use restrictions and conservation targets. The Santa Clara Valley Water District (“SCVWD”), San Jose Water Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than the State Water Board. While the Governor of California declared the drought over on April 7, 2017, the State Water Board made certain water use restrictions ~~permanent while~~permanent. Further, SCVWD has maintained a conservation target atof 20%.

~~On May 31,~~ 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)

June 30, 2019

(in thousands, except share and per share data)

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



	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019			2018
Revenue from contracts with customers	$	104,299		98,443		$	183,227		174,312
Alternative revenue programs, net - WCMA	(327		)	3,933		(2,306		)	3,601
Other balancing and memorandum accounts revenue, net	(2,376		)	(4,611	)	(3,009		)	(6,447	)
Rental income	1,369			1,321		2,735			2,662
	$	102,965		99,086		$	180,647		174,128

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~~June 30, 2019 and 2018, 2,217 and ~~2017, 306 and 683~~2,094 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2019 and 2018, 9,634 and ~~2017, 3,562 and 3,670~~3,256 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~~June 30, ~~2018~~2019 and ~~2017,~~2018, the amounts allocated to administrative and general expense were ~~$575~~$673 and ~~$551,~~$572, respectively. For the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, and ~~2017,~~2018, the amounts allocated to administrative and general expense were ~~$1,728~~$1,330 and ~~$1,660,~~$1,150, 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~~June 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~~June 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~~six months ended ~~September~~June 30, ~~2018~~,2019, and ~~2017~~.2018.



	Three months ended June 30,			Six months ended June 30,
	2019		2018	2019		2018
Adjustments to additional paid-in capital and common stock for:
Compensation costs charged to income:
ESPP	$	—	—	$	143	115
Restricted stock and deferred restricted stock	718		392	1,461		764
Total compensation costs charged to income	$	718	392	$	1,604	879
ESPP proceeds	$	—	—	$	811	653

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 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)

June 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~~June 30, ~~2018,~~2019, the total unrecognized compensation costs related to restricted and deferred restricted stock plans ~~was $2,180.~~amounted to $4,138. This cost is expected to be recognized over a ~~remaining weighted average~~weighted-average period of ~~1.45~~1.42 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 ~~$66~~$65 and ~~$198~~$141 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively, and ~~$60~~$62 and ~~$177~~$132 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2018, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends ~~January~~July 31, 2019, for the ESPP is approximately ~~$117.~~$25. This cost is expected to be recognized during the ~~fourth quarter of 2018 and first~~third quarter of 2019.


Note 3.	Real Estate Investments

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



	June 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	12,925		12,327
Total	$	43,548	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. Substantially all of the real estate investments relate to assets that are currently subject to operating leases.

On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its ~~interests~~interest in the commercial building and land the partnership owned and ~~operated~~operated. In connection with this sale, the partnership was required to deposit $750 into an escrow account for ~~$11,000. 444 West Santa Clara Street, L.P. recognized~~estimated repairs to the creek next to the land the partnership sold. On April 22, 2019, all creek repairs were completed and a ~~pre-tax gain on sale~~reimbursement of ~~real estate investments of $6,323, after selling expenses of $1,157.~~$745 was provided to the partnership. SJW Land Company holds a 70% limited interest in 444 West Santa Clara Street, L.P. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on ~~sale~~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 Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008, are eligible to receive additional retirement benefits under the Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management may participate. San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~September~~June 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~~six months ended ~~September~~June 30, ~~2018~~,2019, and ~~2017~~2018 are as follows:



	Three months ended June 30,					Six months ended June 30,
	2019			2018		2019			2018
Service cost	$	1,479		1,607		$	2,958		3,203
Interest cost	2,113			1,876		4,225			3,753
Other cost	1,117			1,145		2,235			2,278
Expected return on assets	(2,310		)	(2,426	)	(4,619		)	(4,853	)
	$	2,399		2,202		$	4,799		4,381

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 June 30,			Six months ended June 30,
	2019		2018	2019		2018
Other production expenses	$	370	426	$	740	849
Administrative and general expense	851		902	1,689		1,797
Maintenance expense	271		279	542		557
Pension non-service costs	907		595	1,828		1,178
	$	2,399	2,202	$	4,799	4,381

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~~June 30, ~~2018,~~2019, and December 31, ~~2017:~~2018:


		Fair Value Measurements at September 30, 2018									Fair Value Measurements at June 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	$	—	$	—	—	$	7,723	$	7,723	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	6,613		6,572		41		—		Russell 3000 Value	6,461		6,426		35		—
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	57,375		57,375		—		—
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	10,202		10,202		—		—
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	10,385		10,385		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	5,881		5,881		—		—		MSCI EAFE	5,767		5,767		—		—
REIT	NAREIT - Equity REIT’S	6,346		—		6,346		—		NAREIT - Equity REIT’S	7,137		—		7,137		—
Fixed Income (b)	(b)	46,528		—		46,528		—		(b)	47,489		—		47,489		—
Total		$	145,031	$	92,116	$	52,915	$	—		$	152,539	$	97,878	$	54,661	$	—

~~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 (the “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 (the “Notes”) 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.


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~~June 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~~June 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~~six months ended ~~September~~June 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~~$592,728 and ~~$537,840~~$490,148 as of ~~September~~June 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~~$510,859 and ~~$431,092~~$431,424 as of ~~September~~June 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~~June 30, ~~2018,~~2019, and December 31, ~~2017,~~2018, the ~~fair value of the company’s investment~~company 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~~six months ended ~~September~~June 30, 2018, SJW Group recognized an unrealized gain of $0$140 and an unrealized loss of $527 ~~respectively,~~ due to the change in fair value of the company’s investment in California Water Service Group. During the ~~third quarter of~~six months ended June 30, 2018, SJW Group sold ~~all~~17,660 shares of ~~the company’s remaining investment~~

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

California Water Service Group ~~which is discussed in Note 11.~~for $714, before fees of $2. SJW Group recognized a loss on the sale of the stock of approximately $87 and tax benefit of approximately $24, for a net loss of $63.


Note 8.	Regulatory Rate Filings

California Regulatory Affairs

On January 4, 2018, San Jose Water Company filed General Rate Case Application No. 18-01-004 (“GRC”) with the CPUC requesting authority for an increase of revenue of $34,288, or 9.76%, in 2019, $14,232, or 3.70%, in 2020 and $20,582, or 5.17%, in 2021. Among other things, the application also ~~includes~~included requests to recover $20,725 from balancing and memorandum accounts, the establishment of a Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism (“WRAM/SRM”), and a shift to greater revenue collection in the service charge. On June 28, 2018, the CPUC issued an order in the case identifying the issues to be considered, including whether the proposed merger between SJW Group and Connecticut Water Service, Inc. will have any ratemaking impact on the customers of San Jose Water Company (see discussion on the proposed merger at Note 12). This consideration was subsequently removed from the GRC to be considered in an Order Instituting Investigation (“OII”) on the proposed merger issued on July 20, 2018, see below for further discussion. On August 10, 2018, San Jose Water Company and the Office of Ratepayer Advocates filed a joint motion for partial settlement (“Settlement”) of the GRC with the CPUC, resolving all issues in the GRC with the exception of authorization of a WRAM/SRM and the recovery of the balance in the Hydro Generation Research, Development and Demonstration Memorandum Account, such issues being subsequently contested in legal briefs. On October 16, 2018, the CPUC issued a Proposed Decision adopting the Settlement in part, without any impact on the proposed revenue requirement outlined in the Settlement, and delaying ruling on the contested issues in order to allow the Settlement rates to become effective January 1, 2019. ~~Comments on the Proposed Decision are due on November 5, 2018. New rates resulting from the GRC, if approved, are expected to become effective January 1, 2019.~~

~~The CPUC directed its Class A water utilities, including San Jose Water Company, to reflect the changes to the Internal Revenue Code resulting from the passage of the Tax Act in customer rates.~~ On ~~May 8,~~December 4, 2018, the CPUC ~~directed San Jose Water Company to file an advice letter to implement a change in water~~issued Decision 18-11-025 authorizing new rates ~~to reflect the lower income tax rate provided by the Tax Act, effective July 1, 2018. On May 23, 2018,~~for 2019. Accordingly, San Jose Water Company filed Advice Letter No. ~~522~~528/528A on December 7, 2018, requesting authorization to increase revenue requirement by $16,378 or 4.55% in ~~compliance with~~2019 and to implement surcharges to recover $27,045 of under-collections from memorandum and balancing accounts. This was approved on December 28, 2018, and new rates became effective January 1, 2019.

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2018~~

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

~~the CPUC’s directive.~~ On June ~~7, 2018,~~19, 2019, the CPUC issued its final decision resolving the remaining issues in the GRC. Decision 19-06-010 denied the WRAM/SRM and authorized the recovery of the Hydro Generation Research, Development and Demonstration Memorandum Account balance of $1,243. San Jose Water Company ~~filed Advice Letter No. 522A amending the rate change~~is required to ~~reflect~~file a ~~reduction in revenue requirement for 2018~~Tier 3 advice letter to recover this amount via a surcharge over a three-year period. Tier 3 advice letters typically require a higher level 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,review and ~~purchased recycled water charges implemented~~formal resolution by the ~~Santa Clara Valley Water District and South Bay Water Recycling effective July 1, 2018.~~Commissioners for approval. The ~~increases amount~~CPUC is expected to issue a ~~revenue increase~~decision in the third quarter 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 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 aA 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 Connecticut Water Service, Inc. jointly filed a ~~commission decision in the matter in December of 2018.~~new merger application with PURA.

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~~$1,794 for the same period. On June 22, 2017, San Jose Water Company was served with Complaint 17-06-009 regarding its billing practice for service charge rate changes. On August 11, 2017, the Water Division rejected Advice Letter 510 in light of the CPUC’s investigation into San Jose Water Company’s past and present billing practice. The billing issue was made a part of San Jose Water Company’s ~~current~~ GRC proceeding. Testimony was provided by the Office of Ratepayer Advocates (now the Public Advocates Office

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

or “Cal PA”) on May 23, 2018. On June 8, 2018, the company provided its rebuttal testimony. On August 10, 2018, San Jose Water Company and Cal PA submitted a partial settlement agreement on issues presented in the GRC. Both the company and Cal PA settled on the billing issue limiting the duration from which to calculate customer refunds from June 1, 2011, through December 31, 2016. Accordingly, San Jose Water Company ~~has~~ provided an additional reserve to cover the remaining period covered by the settlement. 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 began on March 11, 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. The Complainant filed an appeal with the CPUC to dispute the dismissal. This appeal is still pending before the 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. The OII resulted from a report by the CPUC’s Consumer Protection and Enforcement Division (“CPED”), dated August 16, 2018, recommending an investigation into San Jose Water Company’s billing practice. CPED calculated a refund obligation of approximately $2,061 for the years 2014 to 2016 that had been the subject of San Jose Water Company’s Advice Letter 510. CPED calculated a further refund obligation of approximately $1,990 for the years 1987 to 2013. CPED also asserted that the company double-billed its customers during a billing period when it allegedly converted from billing in advance to billing in arrears, assumed that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $4,935. The OII notes these estimates and identifies the proper refund amount as an issue in the proceeding. The OII also identifies the CPUC’s authority to consider imposing penalties on San Jose Water Company in amounts ranging from five hundred dollars to fifty thousand dollars per offense, per day. ~~San Jose Water Company continues to cooperate with the CPUC to resolve these issues.~~ On October 15, 2018, San Jose Water Company filed a response to the OII with the CPUC, in which the company stated that it

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2018~~

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

believes it would not be appropriate for the Commission to require refunds extending prior to June 2011, that no double billing has occurred and that no penalties should be imposed on the company. ~~As a result,~~The company believed its potential loss was limited to the ~~company believes it is only probable that refunds~~refund amount agreed to in the partial GRC settlement ~~with Cal PA will be~~of $2,020. Such amount was refunded to customers through Advice Letter No. 530 which was effective February 8, 2019. A prehearing conference on the matter was concluded on January 7, 2019, and a scoping memorandum outlining the remaining part of the proceeding scheduled was issued on February 11, 2019. The scoping memorandum outlined the following issues to be determined: (1) Did San Jose Water Company overbill its customers for water service during the period from January 1987 to June 2011, (2) If San Jose Water Company overbilled its customers during the above period, should the Commission fine San Jose Water Company or impose some other form of penalty on it, and (3) Is this action subject to any statute of limitations including, but not limited to, Section 736 of the Public Utilities Code. On March 8, 2019, the assigned CPUC commissioner issued a scoping ruling in the OII confirming the scope determined at the prehearing conference. On March 18, 2019, witnesses for CPED and for the customer group Water Rate Advocates for Transparency, Equity, and Sustainability (“WRATES”) submitted testimony in the OII. The CPED witness updated their refund calculation to approximately $1,847 for the years 1987 to 2011. The WRATES witnesses supported refunds both for those years and for the alleged double-billing but did not propose specific refund amounts. Both CPED and WRATES witnesses supported imposition of a penalty. San Jose Water Company submitted its rebuttal testimony on April 8, 2019, challenging the claim that any overcharging had occurred and that additional customer refunds or credits were appropriate. San Jose Water Company’s rebuttal testimony corrected an error in CPED’s calculation, indicating that if refunds or credits were required they should not exceed $1,757 for the years 1987 to 2011. In sur-rebuttal testimony, CPED accepted that correction. An evidentiary hearing was held on June 3, 2019. 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 customer credits, consisting of $1,757 for refunds during the period from 1987 to 2011 and an additional $350 in 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 third quarter of 2019.

On February 28, 2019, San Jose Water Company filed Advice Letter No. 531 with the CPUC requesting to adjust the Utilities Reimbursement Account User Fees as directed by CPUC Resolution M-4839. The reimbursement fee was reduced from 1.40% to 1.23%. This request was approved and the new fee became effective on April 1, 2019.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

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.

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 general 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 not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges, if any. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.

Based on ASC Topic 980-605-25, San Jose Water Company recognized a regulatory assets of ~~$4,660~~$1,320 and ~~$8,070~~$568 due to lost revenues accumulated in the ~~2018~~2019 WCMA account for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, respectively. ~~For~~Of the $1,320 and $568 recognized in the 2019 WCMA account for the three and ~~nine~~six months ended ~~September~~June 30, ~~2018, the 2018 WCMA account was offset by~~2019, respectively, a reserve ~~in the amount~~ of ~~$596 and $1,003, respectively,~~$11 was recorded 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 2019 WCMA balance shown in the table below.

San Jose Water Company recognized a regulatory assets of $4,118 and $3,410 due to lost revenues accumulated in the 2018 WCMA account for the three and six months ended June 30, 2018, respectively. Of the $4,118 and $3,410 recognized in the 2018 WCMA account for the three and six months ended June 30, 2018, respectively, a reserve of $407 was recorded which is the estimated amount that will not be collected within the 24-month period, as required by the guidance. Activity for the three and six months ended June 30, 2019, represents interest and reserve activity on the accumulated balance. For the three and six

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

months ended June 30, 2019, a reserve of $94 and $174, respectively, was recorded. The amounts have been reflected in the 2018 WCMA balance shown in the table below.

~~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$198 and ~~$1,371~~$1,363 in the cost of capital memorandum account for the three and ~~nine~~six months ended ~~September~~June 30, 2018, ~~respectively,~~ with a corresponding reduction to revenue. Activity for the three and six months ended June 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~~$4,563 and ~~$5,955~~$5,496 in the tax memorandum account for the three and ~~nine~~six months ended ~~September~~June 30, 2018, respectively, with a corresponding reduction to revenue. Activity for the three and six months ended June 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 June 30, 2019									Three months ended June 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*	$	6,912		—		(1,597	)	5,315		$	7,055		220		2	7,277
2018 WCMA*	8,997			(39	)	—		8,958		(708		)	3,711		—	3,003
2019 WCMA*	(752		)	1,309		—		557		—			—		—	—
2012 General Rate Case true-up	10,152			—		(2,421	)	7,731		11,320			—		4	11,324
Cost of capital memorandum account	(1,532		)	(8	)	—		(1,540	)	(1,309		)	(198	)	—	(1,507	)
Tax memorandum account	(6,545		)	(40	)	—		(6,585	)	(933		)	(4,563	)	—	(5,496	)
All others	6,249			2,031		(1,088	)	7,192		4,251			422		2	4,675
Total revenue accounts	$	23,481		3,253		(5,106	)	21,628		$	19,676		(408	)	8	19,276
Cost-recovery accounts:
Water supply costs	8,217			(1,058	)	(1,247	)	5,912		8,197			1,190		—	9,387
Pension	(1,237		)	199		805		(233	)	(2,298		)	161		—	(2,137	)
All others	1,015			3		(148	)	870		—			—		—	—
Total cost-recovery accounts	$	7,995		(856	)	(590	)	6,549		$	5,899		1,351		—	7,250

Total	$	31,476		2,397		(5,696	)	28,177		$	25,575		943		8	26,526

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~September~~June 30, ~~2018~~2019

(in thousands, except share and per share data)


	Three months ended September 30, 2018									Three months ended September 30, 2017									Six months ended June 30, 2019									Six months ended June 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		—		(2,435	)	5,315		$	6,679		596		2	7,277
2018 WCMA*	3,003			4,064		—	—	7,067		—			—	—		—	—		9,386			(428	)	—		8,958		—			3,003		—	3,003
2019 WCMA*																			—			557		—		557		—			—		—	—
2012 General Rate Case true-up	11,324			—		2	—	11,326		15,765			—	(4,123	)	—	11,642		11,328			96		(3,693	)	7,731		11,320			—		4	11,324
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		)	(17	)	—		(1,540	)	(144		)	(1,363	)	—	(1,507	)
Tax memorandum account	(5,496		)	(459	)	—	—	(5,955	)	—			—	—		—	—		(6,504		)	(81	)	—		(6,585	)	—			(5,496	)	—	(5,496	)
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			3,738		(1,658	)	7,192		3,851			822		2	4,675
Total revenue accounts	$	19,276		3,691		4	—	22,971		$	29,016		6,550	(9,085	)	6	26,487		$	25,549		3,865		(7,786	)	21,628		$	21,706		(2,438	)	8	19,276
Cost-recovery accounts:
Water supply costs	9,387			2,366		—	—	11,753		—			—	—		—	—		9,617			(1,803	)	(1,902	)	5,912		8,679			708		—	9,387
Pension	(2,137		)	161		—	—	(1,976	)	—			—	—		—	—		(1,843		)	383		1,227		(233	)	(2,459		)	322		—	(2,137	)
All others																			1,090			6		(226	)	870		—			—		—	—
Total cost-recovery accounts	$	7,250		2,527		—	—	9,777		$	—		—	—		—	—		$	8,864		(1,414	)	(901	)	6,549		$	6,220		1,030		—	7,250

Total	$	26,526		6,218		4	—	32,748		$	29,016		6,550	(9,085	)	6	26,487		$	34,413		2,451		(8,687	)	28,177		$	27,926		(1,408	)	8	26,526

~~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~~June 30, ~~2018~~2019, and December 31, ~~2017:~~2018:



	June 30, 2019		December 31, 2018
Regulatory assets:
Postretirement pensions and other medical benefits	$	66,233	66,233
Balancing and memorandum accounts, net	28,177		34,413
Other, net	3,240		2,979
Total regulatory assets, net in Consolidated Balance Sheets	97,650		103,625
Less: current regulatory asset, net	15,904		26,910
Total regulatory assets, net, less current portion	$	81,746	76,715

Regulatory liability:
Income tax temporary differences, net	$	57,901	59,149
Total regulatory liability in Consolidated Balance Sheets	$	57,901	59,149

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

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 CTWSentered into an Agreement and Plan of Merger to merge the two companies, SJW Group and CTWS, in an all-stock ~~transaction.~~transaction (the “Merger”). On August 5, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a Second Amended and Restated Agreement & Plan of Merger ~~(the~~(as amended, the “Merger Agreement”), which among other things, changed the ~~merger~~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.~~companies and by CTWS shareholders. Consummation of the Merger is subject to customary conditions, including, without limitation: approval by CTWS ~~shareholders;~~shareholders (which has been obtained); 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.

On December 3, 2018, PURA issued a proposed final decision denying the application by SJW Group and CTWS for approval of the Merger. On December 5, 2018, PURA conditionally granted SJW Group’s and CTWS’s motion to suspend the schedule permitting SJW Group and CTWS to file new evidence that was unavailable before the close of the record in the proceeding for PURA’s consideration. On December 14, 2018, SJW Group and CTWS filed a motion to reopen the record and extend the procedural schedule to admit new evidence that was submitted concurrent with the motion (“Motion to Reopen”). On January 4, 2019, PURA denied the Motion to Reopen concluding that the concessions and offers of commitments did not constitute new evidence and to the extent that some of the filed material contains “new” evidence, the material was insufficient to warrant reopening. On January 9, 2019, SJW Group and CTWS withdrew their application before PURA. PURA closed the docket without issuing a final decision on January 11, 2019. After a thorough review conducted by the management and boards of both companies with the support of their respective local Connecticut regulatory counsel, on April 3, 2019, SJW Group and CTWS filed a new application with PURA for approval of the Merger.

In support of the new application, SJW Group has made certain regulatory commitments, which are subject to PURA approval, that are designed to demonstrate that the Merger is in the public interest, including many which go beyond those included in the previous application. In this regard, the new application includes a commitment for CTWS’s Connecticut utilities not to file a general rate case for new base rates to become effective prior to January 1, 2021, as well as a provision for a bill credit for customers. In addition, SJW Group has committed that CTWS’s Connecticut utilities will not seek recovery, in rates, of the merger premium or other costs incurred in connection with the Merger. With respect to current CTWS's Connecticut employees, the new application provides that there will be no layoffs as a result of the Merger and that, for at least three years following completion of the Merger, CTWS’s Connecticut utilities will maintain their current combined staffing levels. To enhance the independence and local control of CTWS and its Connecticut utilities, the new application provides that each of their boards of directors will have a majority of independent directors and a majority of directors who reside in New England. SJW Group has also committed to 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 current affiliates, including the creation of a special purpose entity to hold SJW Group’s interest in CTWS. In addition, the new application provides that CTWS and its Connecticut utilities will be subject to a limitation on dividends in the event of certain credit rating downgrades or if payment of a dividend could result in CTWS being unable to maintain its weighted average consolidated equity ratio at or above a specified minimum. Additional commitments cover maintenance of Connecticut Water’s headquarters in Connecticut, environmental measures, operational matters, customer service and additional measures to support local control. On July 3, 2019, SJW Group and CTWS entered into a settlement with the Department of Energy and Environmental Protection and the Office of Consumer Counsel which modifies and adds commitments that will provide additional, direct long-term customer and environmental benefits, enhance local control and provide supplemental financial protections to customers. The revised commitments include converting to a one-time credit from a credit paid out over a one-year period, the addition of a customer credit provided to customers over a ten-year period, additional customer protections, numerous environmental commitments that have been enhanced or added and the addition of a

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

most favored nations clause with respect to Maine. Such most favored nations provision would guarantee that any additional commitments made by SJW Group and CTWS to the Maine Public Utilities Commission (“MPUC”) in connection with the Merger application would also be included in the PURA commitments in Connecticut. PURA has scheduled a hearing on July 26, 2019, to review the application and is expected to issue a final decision by September 4, 2019.

On December 20, 2018, the MPUC staff issued a stay in the reorganization proceeding pending resolution of the regulatory filing in Connecticut. On January 10, 2019, following the withdrawal of the PURA application, the Maine Water Company notified the MPUC of such withdrawal in a status report. On January 23, 2019, the Maine Water Company filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the right to refile at a later date. Later that day, the MPUC acknowledged receipt of the Maine Water Company’s notice and issued notice closing the docket. After a thorough review conducted by the management and boards of both companies with the support of their respective local Maine regulatory counsel, SJW Group and CTWS announced on February 20, 2019, that they intended to file for merger approval with MPUC during the second quarter of 2019. On May 3, 2019 Maine Water Company filed a new application for MPUC approval of the Merger. The application is consistent with the PURA application and Maine Water Company has agreed to regulatory commitments similar and proportional to those made in the PURA application, where applicable. Since May 3, 2019 the parties have engaged in discovery and preliminary settlement negotiations. The Maine Office of Public Advocate has retained a consultant to review the Merger; his testimony was filed on July 10, 2019.

In addition, because the prior clearance of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) was due to expire on April 27, 2019, SJW Group withdrew its prior HSR filing and refiled for clearance under the HSR Act on April 4, 2019. The Federal Trade Commission’s Premerger Notification Office granted early termination of the new HSR Act waiting period on April 15, 2019, extending the expiration to April, 15, 2020.

There is no guarantee that all of the closing conditions and approvals will be satisfied, and the failure to complete the ~~proposed merger~~Merger may adversely affect the financial ~~conditions~~condition and results of operations of SJW Group.

~~CTWS previously received an unsolicited proposal from Eversource Energy. The CTWS board~~ For a description 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 oppositioncertain risk factors related to the ~~proposed merger. Eversource Energy has not revised its preliminary proxy statement~~Merger, please see Part II, “Risk Factors” in ~~connection with~~SJW Group’s Form 10-Q in which these notes to financial statements are included, as well as Item 1A, “Risk Factors” in SJW Group’s Form 10-K for the ~~revised all-cash Merger, and it is unclear what additional actions~~year ended December 31, 2018.

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2018~~

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

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


Note ~~13.~~12.	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 as the 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 the stay was to continue until May 29, 2019. On May 29, 2019, the court granted the parties’ motion to continue the stay and such stay was further extended until September 11, 2019. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed at such time when the transaction closes. SJW Group ~~cannot determine~~has determined that the likelihood ~~that liability exists on the part~~ of ~~SJW Group or Mr. Thornburg and we are unable~~loss related to ~~provide a reasonable estimate of potential loss, if any.~~these class-action complaints is remote.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

June 30, 2019

(in thousands, except share and per share data)

(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~~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.

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 customer credits, consisting of $1,757 for refunds during the period from 1987 to 2011 and an additional $350 in 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 ~~not accrued any amounts.~~recorded the $2,100 customer credit expense as an offset to revenues in the accompanying 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 once invested. The Agreement is subject to final approval by the CPUC which is expected in the third quarter of 2019.

SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows.


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, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”) under the items entitled “Risk Factors,” and in other reports SJW Group files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Group undertakes no obligation to update or revise the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:

SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company, SJWTX, Inc., SJW Land Company, and Hydro Sub, Inc.

San Jose Water Company is a public utility in the business of providing water service to approximately 231,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.

The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements, and antenna site leases.

San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained.

San Jose Water Company also has approximately 411 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to San Jose Water Company’s various watershed properties.

SJWTX, Inc., doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately ~~15,800~~17,000 connections that serve approximately ~~48,000~~51,000 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~~six months ended ~~September~~June 30, ~~2018:~~2019:


				% for Nine months ended September 30, 2018 of SJW Land Company							% for Six months ended June 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	45	%	39	%
Commercial building	Knoxville, Tennessee	15	135,000	56	%	59	%	Knoxville, Tennessee	15	135,000	55	%	61	%
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 SJW Group, is a Connecticut corporation that was formed on March 9, 2018, for the sole purpose of effecting the proposed merger of SJW Group and Connecticut Water Service, Inc. (“CTWS”) (the “Merger”). On March 14, 2018, SJW Group, Hydro Sub, Inc. and CTWSentered into an Agreement and Plan of Merger for SJW Group to effect a merger with ~~regard to the merger,~~CTWS 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~~(as amended, the “Merger Agreement”), which provided, among other things, that SJW Group will acquire CTWS in an all-cash transaction. Under the terms of the Merger Agreement, at the closing of the Merger, each issued and then outstanding share of common stock of CTWS will be automatically converted into the right to receive an amount in cash equal to $70.00 per share. The transaction ~~which is expected to close during the first quarter of 2019,~~ was approved by the boards of directors of both companies and on November 16, 2018 by CTWS shareholders and is subject to the satisfaction of customary closing conditions and approval by certain ~~regulators and CTWS shareholders.~~regulators. Under certain circumstances, SJW Group will be obligated to pay a termination fee of ~~$42,500~~$42.5 million 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.~~Agreement. Pursuant to the terms of the Merger Agreement, SJW Group may be required to reimburse CTWS up to ~~$5,000~~$5 million 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~~Merger include the following:

On December 3, 2018, the Connecticut Public Utilities Regulatory Authority (“PURA”) issued a proposed final decision denying the application by SJW Group and CTWS ~~previously received an unsolicited proposal from Eversource Energy on April~~for approval of the Merger. On December 5, 2018, ~~which was revised on July 2, 2018. The CTWS board of directors has determined that~~PURA conditionally granted SJW Group’s and CTWS’s motion to suspend the proposal was neither a superior proposal nor reasonably likely to lead to a 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 Eversource Energy may take to further its proposal.

~~On August 17, 2018, California Water Service Group, which had previously launched an unsolicited tender offer to acquire all outstanding shares of~~schedule permitting SJW Group ~~announced~~and CTWS to file new evidence that ~~it had abandoned such offer.~~

was unavailable before the close of the record in the proceeding for PURA’s consideration. On ~~August 17 and August 20,~~December 14, 2018, SJW Group and CTWS filed a ~~supplemental application,~~motion to reopen the record and ~~updated testimony and exhibits,~~extend the procedural schedule to admit new evidence that was submitted concurrent with the motion (“Motion to Reopen”). On January 4, 2019, PURA denied the Motion to Reopen, concluding that the concessions and offers of commitments did not constitute new evidence and to the extent that some of the filed material contained “new” evidence, the material was insufficient to warrant reopening. On January 9, 2019, SJW Group and CTWS withdrew their application before PURA . PURA closed the docket without issuing a final decision on January 11, 2019. After a thorough review conducted by the management and boards of both companies with the support of their respective local Connecticut ~~Public Utilities Regulatory Authority (“PURA”),~~regulatory counsel, on April 3, 2019, SJW Group and CTWS filed a new application with PURA for approval of the Merger.

In support of the new application, SJW Group has made certain regulatory commitments, which are subject to ~~reflect~~PURA approval, that are designed to demonstrate that the ~~revised terms~~Merger is in the public interest, including many which go beyond those included in the previous application. In this regard, the new application includes a commitment for CTWS’s Connecticut utilities not to file a general rate case for new base rates to become effective prior to January 1, 2021, as well as to provide a bill credit for customers for CTWS’s Connecticut utilities. In addition, SJW Group has committed that CTWS’s Connecticut utilities will not seek recovery in rates, of the merger premium or other costs incurred in connection with the Merger. With respect to current CTWS's Connecticut employees, the new application provides that there will be no layoffs as a result of the Merger ~~Agreement. The PURA found~~and that, for at least three years following completion of the ~~revised materials warranted~~Merger, CTWS’s Connecticut utilities will maintain their current combined staffing levels. To enhance the ~~commencement~~independence and local control of CTWS and its Connecticut utilities, the new application provides that each of their boards of directors will have a majority of independent directors and a majority of directors who reside in New England. SJW Group has also committed to 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 current affiliates, including the creation of a special purpose entity to hold SJW Group’s interest in CTWS. In addition, the new ~~120-day statutory timeframe~~application provides that CTWS and ~~updated~~its Connecticut utilities will be subject to a limitation on dividends in the ~~deadline for~~event of certain credit rating downgrades or if payment of a dividend could result in CTWS being unable to maintain its weighted average consolidated equity ratio at or above a specified minimum. Additional commitments cover maintenance of Connecticut Water’s headquarters in Connecticut, environmental measures, operational matters, customer service and additional measures to support local control. On July 3, 2019, SJW Group and CTWS entered into a settlement with the Department of Energy and Environmental Protection and the Office of Consumer Counsel which modifies and adds commitments that will provide additional, direct long-term customer and environmental benefits, enhance local control and provide supplemental financial protections to customers. The revised commitments include converting to a one-time credit from a credit paid out over a one-year period, the addition of a customer credit provided to customers over a ten-year period, additional customer protections, numerous environmental commitments that have been enhanced or added and the addition of a most favored nations clause with respect to Maine. PURA has scheduled a hearing on July 26, 2019 to review the settlement and is expected to issue a final ~~ruling on the merger to December 17, 2018.~~decision by September 4, 2019.

On ~~September 10,~~December 20, 2018, the Maine Public Utilities Commission (“MPUC”) staff issued a ~~procedural order setting forth~~stay in the reorganization proceeding pending resolution of the regulatory filing with PURA. On January 10, 2019, following the withdrawal of the PURA application, the Maine Water Company notified the MPUC of such withdrawal in a ~~full case schedule~~status report. On January 23, 2019, the Maine Water Company filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the right to refile at a later date. Later that day, the MPUC acknowledged receipt of the Maine Water Company’s notice and ~~tentatively scheduling~~issued notice closing the ~~MPUC’s deliberations~~docket. After a thorough review conducted by the management and boards of both companies with the support of their respective local Maine regulatory counsel, SJW Group and CTWS announced on February 20, 2019, that they intended to file for merger approval with MPUC during the second quarter of 2019. On May 3, 2019, Maine Water Company filed a new application for the MPUC approval of the Merger. The application is consistent with the PURA Application and Maine Water Company has agreed to regulatory commitments similar and proportional to those made in the PURA application. Since May 3, 2019, the parties have engaged in discovery and preliminary settlement negotiations. On July 10, 2019, the Maine Office of Public Advocate (“OPA”) filed direct testimony stating that the Merger as proposed did not meet the statutory criteria for approval, but the OPA also noted that it might support (or not oppose) the Merger application if the Merger were subject to certain conditions, including significant protections to insulate ratepayers from financial risk associated with the Merger. The OPA further indicated that they would continue to work with the parties on conditional approval, and the OPA has continued to engage in settlement discussions. A final date for resolution of the Maine proceeding has not been set, but the parties have discussed concluding the case ~~for January 8, 2019.~~no later than September.

On October 4, 2018, CTWS and SJW Group filed a joint application to obtain Federal Communications Commission (“FCC”) approval for the transfer of control of FCC licensee Connecticut Water Company from CTWS to SJW Group as a result of the proposed merger. Connecticut Water Company holds seventeen active FCC spectrum licenses for private land mobile licenses and microwave, multiple address system licenses to undertake regulated activities and use regulated equipment in connection with its operation as a state-regulated water company and public service company. The FCC approved the joint application by CTWS and SJW Group to transfer control of Connecticut Water Company on October 15, 2018.

~~In addition, while~~While SJW Group believes that no prior authorization of the ~~CPUC~~California Public Utilities Commission (“CPUC”) is required for the Merger, the CPUC previously issued an ~~order~~Order Instituting Investigation (“OII”) to investigate the ~~proposed merger, such as~~Merger, to consider whether it is subject to CPUC approval and its likely impacts within California. The assigned commissioner’s Scoping Memo issued September 7, 2018, had adopted a schedule providing for the CPUC to vote on a proposed decision in December 2018. 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 initially delayed. On March 4, 2019, the presiding administrative law judge suspended the CPUC investigation until a final decision is issued by PURA. We are unable to predict what action, if any, the CPUC will take with respect to the Merger upon the conclusion of the OII proceeding and the impact of any such action to the timing, completion or benefits of the Merger. For a further description of certain risk factors relating to the Merger, please see the section beginning “The CPUC has initiated an investigation into the Merger…” in Item 1A, “Risk Factors” in SJW Group’s Form 10-Q for the quarter ended June 30, 2019.

There is no guarantee that the ~~proposed merger~~Merger will be completed, and the failure to complete the proposed merger may adversely affect the financial ~~conditions~~condition and results of operations of the company. For a description of certain risk factors relating to the ~~proposed merger,~~Merger, please see Item 1A, “Risk Factors” in SJW Group’s Form 10-Q for the quarter ended ~~September~~June 30, ~~2018.~~

Texas Water Alliance Limited (“TWA”) was previously a wholly-owned subsidiary of SJW Group undertaking activities necessary to develop a water supply project in Texas. On November 16, 2017, SJW Group sold all of its equity interests in TWA to Guadalupe-Blanco River Authority.

2019.

Business Strategy for Water Utility Services:

SJW Group focuses its business initiatives in three strategic areas:


(1)	Regional regulated water utility operations;


(2)	Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California and the Public Utilities Commission of Texas (“PUCT”) in Texas; and


(3)	Out-of-region water and utility related services.

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 Merger. 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.~~

On January 1, 2018, SJW Group adopted FASB 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 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.

2018.

New Accounting Pronouncements:

In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” which supersedes the lease requirements in “Leases (Topic 840).” 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 be effective for the company in the first quarter of 2019 and earlier adoption is permitted. In JulyAugust 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 adjustment2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20: “Disclosure Framework - Changes to the ~~opening balance~~Disclosure Requirements for Defined Benefit Plans,” which aims to improve the overall usefulness of ~~retained earnings in~~disclosure to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. This update is effective for SJW Group during 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, ityear ending December 31, 2020. Retrospective adoption 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.~~early adoption is permitted. 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.

Overview

SJW Group’s consolidated net income for the three months ended ~~September~~June 30, ~~2018~~2019, was ~~$15,788, a decrease~~$13,538, an increase of ~~$3,752,~~$667, or approximately ~~19%~~5%, from ~~$19,540~~$12,871 for the same period in ~~2017.~~2018. SJW Group’s consolidated net income for the ~~nine~~six months ended ~~September~~June 30, ~~2018,~~2019, was ~~$29,944, a decrease~~$19,411, an increase of ~~$11,955,~~$5,255, or approximately ~~29%~~37%, from ~~$41,899~~$14,156 for the same period in

~~2017.~~ 2018. The ~~decrease~~increase in net income for the three months ended ~~September~~June 30, ~~2018,~~2019, was primarily due to an increase in operating revenue as a result of higher customer water rates and the net recognition of certain balancing and memorandum accounts, an increase in interest income earned on the money market fund investment, and a decrease in costs incurred related to ~~the~~our proposed merger with ~~CTWS,~~CTWS. These items were offset by an increase in ~~water~~ production expenses due to ~~higher usage and~~ higher per unit costs for purchased water, groundwater extraction and energy charges, an increase in general and ~~higher~~administrative expenses, and an increase in depreciation expenses due to assets placed in service in ~~2017.~~2018, The ~~decrease~~increase in net income for the ~~nine~~six months ended ~~September~~June 30, ~~2018~~2019, was primarily due to an increase in operating revenue as a result of higher customer water rates and net recognition of certain balancing and memorandum accounts, a decrease in production expenses due to an increase in the use of available surface water, an increase in interest income earned on the proceeds from the equity offering in December 2018, and a decrease in costs incurred related to the proposed merger with CTWS, ~~an increase in water production expenses, sale of real estate properties in 2017 that did not recur in 2018, and higher depreciation expenses, partially~~ offset by an increase in ~~operating revenue. The increase in operating revenue was primarily due to~~general and administrative expenses, and an increase in ~~cumulative water rate changes and higher usage, partially offset by a decrease~~depreciation expenses due to assets placed in ~~net recognition of certain balancing and memorandum accounts.~~service in 2018.

Operating Revenue


	Operating Revenue by Segment						Operating Revenue by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended June 30,			Six months ended June 30,
	2018		2017	2018		2017	2019		2018	2019		2018
Water Utility Services	$	123,412	123,187	$	294,878	291,415	$	101,596	97,765	$	177,912	171,466
Real Estate Services	1,441		1,391	4,103		4,281	1,369		1,321	2,735		2,662
	$	124,853	124,578	$	298,981	295,696	$	102,965	99,086	$	180,647	174,128


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~~second 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 as the 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 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. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed at such time as the transaction closes. SJW Group ~~cannot determine~~has determined that the likelihood ~~that liability exists on the part~~ of ~~SJW Group or Mr. Thornburg and we are unable~~loss related to ~~provide a reasonable estimate of potential loss, if any.~~these class-action complaints is remote.

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.

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 customer credits, consisting of $1.7 million for refunds during the period from 1987 to 2011 and an additional $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 has recorded the $2.1 million customer credit expense as an offset to revenues in the accompanying June 30, 2019, Condensed Consolidated Statements of Comprehensive Income. 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 third quarter of 2019.


ITEM 1A.	RISK FACTORS

The following discusses certain risk factors relating to the proposed merger with CTWS and does not include all of the risk factors associated with the proposed merger and the combined company after the proposed 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 three months ended March 31, 2019.

~~Our proposed merger with CTWS is subject~~Risks Related to the Merger

We may not be able to obtain the necessary regulatory approvals to complete the Merger, and even if such approval ~~of the shareholders of CTWS, and to the receipt of approvals from~~is obtained, 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.~~us.

Completion of the ~~proposed merger~~Merger is contingent upon, among other things, the receipt of all required regulatory approvals, including the approvals of ~~the Connecticut Public Utilities Regulatory Authority~~PURA and the MPUC. On December 3, 2018, PURA issued a proposed final decision denying the joint application by SJW Group and CTWS for the approval of the Merger. On January 9, 2019, SJW Group and CTWS withdrew our application before PURA and, on January 11, 2019, PURA closed the docket without issuing a final decision. On January 23, 2019, the Maine Water Company (“MWC”), a wholly-owned subsidiary of CTWS, filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the right to refile at a later date. On April 3, 2019, SJW Group and CTWS filed a new application with PURA for approval of the proposed Merger. On July 3, 2019, SJW Group and CTWS entered into a settlement with the Department of Energy and Environmental Protection and the Office of Consumer Counsel which modifies and adds commitments that will provide additional, direct long-term customer and environmental benefits, enhance local control and provide supplemental financial protections to customers. PURA has scheduled a hearing on July 26, 2019 to review the settlement and is expected to issue a final decision by September 4, 2019. In Maine, MWC filed a new application, dated May 3, 2019, for MPUC approval of the Merger. Since May 3, 2019 the parties to the Maine case have proceeded along two tracks: a litigation track, and a settlement track. With regard to the settlement track, the parties have held two meetings with a third scheduled for July 22, 2019. On the litigation track, MWC has filed direct testimony and responded to discovery requests. On July 10, 2019, the Maine Office of Public ~~Utilities Commission.~~Advocate (“OPA”) filed direct testimony stating that the Merger as proposed did not meet the statutory criteria for approval, but the OPA also noted that it might support (or not oppose) the Merger application if the Merger were subject to certain conditions, including significant protections to insulate ratepayers from financial risk associated with the Merger. The OPA further indicated that they would continue to work with the parties on conditional approval, and the OPA has continued to engage in settlement discussions. A final date for resolution of the Maine proceeding has not been set, but the parties have discussed concluding the case no later than September. We expect to incur additional expenses in connection with the new applications. Furthermore, there is no guarantee that PURA and MPUC will approve any new application on a timely basis or at all, and failure to obtain approval would prevent the completion of the Merger. Any uncertainty, delay or denial of regulatory approval for the Merger could adversely affect our business, financial condition and stock price.

~~The~~Even if we are able to obtain the necessary regulatory approvals for the Merger, the terms and conditions of such approvals may impose requirements, limitations or costs, or place restrictions on the conduct of the combined company’s business. ~~The merger agreement may require SJW Group~~We and/or CTWS may be required to comply with conditions imposed by regulatory entities ~~and,~~ in connection with the Merger, though the Merger Agreement provides for certain ~~circumstances,~~limitations with respect to the actions that either company ~~may refuse~~is required to ~~close the proposed merger on the basis of~~take in connection with such regulatory ~~conditions imposed.~~conditions. 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~~Merger or imposing additional material costs on or materially limiting the revenues and profitability of the combined company following the ~~proposed merger.~~Merger. Additionally, ~~neither SJW Group nor CTWS can~~we cannot provide assurance that any such conditions, terms, obligations or restrictions will not result in the ~~delay or abandonment~~failure of the ~~proposed merger,~~conditions to the Merger being satisfied, the Merger being delayed or abandoned, or the consummation of the ~~proposed merger~~Merger on terms different than those contemplated by the ~~merger agreement. In addition,~~Merger Agreement.

Failure to complete the ~~proposed merger requires~~Merger as currently contemplated or at all could negatively impact our stock price, business operations and financial results.

Completion of the Merger is not assured and is subject to risks, including risks that 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~~governmental entities will not be ~~completed, which will have an adverse effect on SJW Group’s stock price and financial conditions.~~

~~The CPUC has initiated an investigation into the proposed merger, which may cause delays in~~obtained or ~~otherwise adversely affect completion of the merger.~~

The CPUC at its July 12, 2018 meeting approved an Order Instituting Investigation (“OII”) into our proposed merger with CTWS. The order includes investigating the CPUC’s authority over the proposed merger, whether the proposed merger is in the public interest, whether the proposed merger would preserve the CPUC’s jurisdiction over San Jose Water Company and the CPUC’s capacity to effectively regulate utility operations in the State of California, the effect of the proposed merger on SJW Group’s and CTWS’s employees, shareholders, subscribers, communities in which they operate and the State of California, whether the benefits likely exceed any detrimental effects of the proposed merger, and whether the CPUC should consider conditions or mitigation measures to prevent any adverse consequences which may result from the proposed merger, and if so, what should be those conditions or measures. The order states that the CPUC plans to substantially complete the inquiry in a manner sufficiently timely to allow the merger to go forward by the end of 2018, if appropriate. SJW Group is unable to predict what action, if any, the CPUC will take with respect to the proposed merger upon the conclusion of the OII and, therefore, no assurance can be given that such action will not introduce additional 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~~delayed or that certain other closing conditions will not be ~~completed.~~

~~SJW Group intends to finance~~satisfied. If the ~~proposed merger with equity and/~~Merger is not completed, or ~~debt financing, existing cash balances~~is completed on different terms than as contemplated by the Merger Agreement, our ongoing businesses, financial results and ~~cash flow from operations,~~stock price may be adversely affected and ~~there is no guarantee that SJW Group~~we will be ~~able~~subject to ~~secure such financing~~several risks, including the following:

having to pay certain significant costs relating to the Merger without receiving the benefits of the 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 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 ~~merger. In addition, SJW Group has received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Royal Bank~~Merger;

our management having focused on the Merger instead of ~~Canada~~on conducting its day-to-day business and ~~UBS AG, Stamford Branch~~operational matters and pursuing other opportunities that could have been beneficial to ~~provide a senior unsecured bridge loan facility of up~~us; and

if the Merger is not completed, we are not obligated to ~~$975 million in the event that SJW Group is unable to secure other financing for the merger at~~repurchase any or ~~prior to the time the merger is completed. However, such commitments include customary conditions to funding, including, without limitation:~~

~~closing~~all of the ~~proposed bridge loan facility on or before a specified expiration date;~~shares issued in our recent equity offering and such shares may remain outstanding, which could negatively impact our stock price.

~~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;~~

Any delay in the completion of the ~~merger in accordance with~~Merger, any uncertainty about the ~~terms and conditions~~completion of the ~~merger agreement;~~

~~no amendments~~Merger on terms other than those contemplated by the Merger Agreement and any failure to complete the ~~merger agreements that material~~Merger could 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, 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, financial ~~conditions~~results and stock price.

~~SJW Group will take on substantial additional indebtedness to finance the merger, which will decrease SJW Group’s business flexibility and increase its borrowing costs.~~

If SJW Group finances the proposed merger with debt financing, SJW Group will increase its indebtedness substantially as compared to its 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 the increased indebtedness and higher debt-to-equity ratio of SJW Group in comparison to that of SJW Group on a recent historical basis will have the effect, among other things, of reducing the flexibility of SJW Group to respond to changing business and economic conditions and increasing borrowing costs. In addition, the actual terms and conditions of such indebtedness may not be favorable to SJW Group, and as such, could further increase the cost of the acquisition 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~~Merger may reduce or eliminate the benefits to be achieved thereunder.

In addition to the required regulatory clearances, the ~~proposed merger~~Merger is subject to a number of other conditions beyond ~~SJW Group’s~~our 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 delay the completion of the ~~proposed merger~~Merger for a significant period of time or prevent it from occurring. Any delay in completing the ~~proposed merger~~Merger could cause the combined company not to ~~not~~ realize, or to be delayed in realizing, some or all of the benefits expected to result from elimination of duplicative public company and other related costs that we expect to achieve if the ~~proposed merger~~Merger is successfully completed within its expected time frame.

~~Failure~~The CPUC has initiated an investigation into the Merger, which may cause delays in or otherwise adversely affect the Merger, and we may be required to consummate the Merger prior to the CPUC’s issuance of an order with respect to its investigation.

The CPUC at its July 12, 2018 meeting approved an OII into the Merger. The order includes investigating the CPUC’s authority over the Merger, whether the Merger is in the public interest; whether the Merger would preserve the CPUC’s jurisdiction over San Jose Water Company and the CPUC’s capacity to effectively regulate utility operations in the State of California; the effect of the Merger on our and CTWS’s employees, shareholders, customers and communities in which they operate and the State of California; whether the benefits likely exceed any detrimental effects of the Merger; and whether the CPUC should consider conditions or mitigation measures to prevent any adverse consequences which may result from the Merger, and if so, what should be those conditions or measures. The order had stated that the CPUC planned to substantially complete the inquiry in a manner sufficiently timely to allow the Merger to go forward by the end of 2018, if appropriate. 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 ~~merger~~decision was delayed. On March 4, 2019, the presiding administrative law judge suspended the CPUC investigation until there has been a final decision by PURA.

We are unable to predict what action, if any, the CPUC will take with respect to the Merger upon the conclusion of the OII proceeding and, therefore, no assurance can be given that such action will not delay or prevent completion of the Merger or impose costs on us, which costs may be material and may negate some or all of the benefits that we expect as ~~currently contemplated~~a result of the Merger. If we or ~~at all could negatively impact~~CTWS terminate the ~~stock prices, business operations~~Merger Agreement on the grounds that a legal restraint prevents completion of the Merger, and ~~financial results of SJW Group.~~such restraint arises from, is issued by or is in connection with the CPUC decision, or the CPUC has imposed terms or conditions in connection with the Merger that would reasonably be expected to have a material adverse effect on the combined company, then we will be required to reimburse CTWS’s expenses up to $5 million.

Completion of the ~~proposed merger~~CPUC’s investigation is not ~~assured and is subject~~a condition to ~~risks, including~~ the ~~risks that approval~~consummation of the ~~transactions by shareholders~~Merger. Based on the CPUC’s current suspended status of ~~CTWS or by governmental entities will not~~the investigation, it is unlikely that its investigation would be ~~obtained or that certain other closing conditions will not be satisfied. If~~completed prior to the ~~proposed merger is not completed, or is completed on different terms than as contemplated by the merger agreement, the ongoing businesses and financial results of SJW Group~~final PURA decision. Accordingly, we may be ~~adversely affected and SJW Group will~~required to consummate the Merger prior to the CPUC’s issuance of an order with respect to its investigation. In such a circumstance, we may nevertheless be subject to ~~several risks, including the following:~~

~~having~~any terms and conditions imposed on us by such an order and to ~~pay certain significant~~any additional costs ~~relating to the proposed merger without receiving~~associated therewith. Such costs may be material and may reduce some or all of the benefits that we expect as a result 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 merger could adversely affect the business, financial results and stock price of SJW Group.Merger.

The ~~merger agreement~~Merger Agreement with CTWS may be terminated in certain circumstances, which would result in the benefits of the ~~merger~~Merger not being realized.

Either ~~SJW Group~~we or CTWS may terminate the ~~merger agreement~~Merger Agreement under certain circumstances, including, if the ~~proposed merger~~Merger has not been consummated by ~~May~~August 5, 2019, (unless such date is extended automatically to ~~August~~November 5, 2019, pursuant to the terms of the ~~merger agreement)~~Merger Agreement). ~~However, this~~We currently expect the August 5, 2019 date to be automatically extended to November 5, 2019 pursuant to the terms of the Merger Agreement. This termination right will not be available to a party if such failure of the ~~proposed merger~~Merger to occur on or before such ~~date~~dates is the result of a material breach of any representation, warranty, covenant or agreement of the ~~merger agreement~~

Merger Agreement by such party. If we are not able to complete the ~~proposed merger~~Merger by the ~~end~~relevant date, even if we decide not to terminate the ~~merger agreement,~~Merger Agreement, we may not be able to prevent CTWS from exercising its right to terminate the ~~merger agreement.~~Merger Agreement.

In addition, if the ~~merger agreement~~Merger Agreement is terminated under certain circumstances, CTWS may be required to pay ~~a termination fee to~~ SJW Group of $28.1 million or reimburse SJW Group’s 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 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 thea termination fee of $28.1 ~~million (less the amount of expenses reimbursed) in certain circumstances.~~million. Similarly, if the ~~merger agreement~~Merger Agreement is terminated under certain circumstances, ~~then SJW Group will~~we may be required to pay CTWS a termination fee of $42.5 million or, under certain circumstances, 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.~~million. A termination of the ~~merger agreement will~~Merger Agreement prior to consummation of the Merger may adversely affect our business and stock price, and we ~~will not be able to realize~~would incur significant expenses without realizing the benefits expected from the ~~merger.~~Merger.

We have broad discretion in the use of the net proceeds to us from the equity offering and may not use them effectively.

In December 2018, SJW Group sold an aggregate of 7,762,500 shares of its common stock in an equity offering and received net proceeds of approximately $412.0 million, after deducting the underwriting discounts and commissions and estimated offering expenses payable by SJW Group.

SJW Group intends to use 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. Pending such use, we may invest the net proceeds in investment-grade securities, money-market funds, bank deposit accounts or similar short-term investments. To date, the company has invested the net offering proceeds temporarily in a short-term money market fund. These investments may not yield a favorable return to our investors. If for any reason the Merger does not close, then SJW Group intends to use the proceeds from the offering for general corporate purposes, which may include acquisitions, share repurchases or debt repayment. SJW Group has no obligation to repurchase any of its shares of common stock that were sold in the offering even if the Merger is not completed.

We cannot specify with any certainty the particular uses of the net proceeds that we received from the equity offering, and we may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply these funds effectively could adversely affect our business, financial condition and stock price.

We will take on substantial additional indebtedness to finance the Merger, which will decrease our business flexibility and increase our borrowing costs.

In addition to the net proceeds we received from the equity offering, we expect to finance the remaining portion of the purchase price of the Merger with net proceeds from up to $435.0 million of debt financing that we may incur (“Debt Financing”), which may include borrowings under a $975.0 million committed bridge facility (“Bridge Facility”). Subsequent to the completion of the equity offering, the facility commitment under the Bridge Facility was reduced to $563 million. As a result of the Debt Financing, we will increase our indebtedness substantially as compared to our indebtedness prior to the Merger. Any financial covenants we agree to in connection with such indebtedness and our increased indebtedness and higher debt-to-equity ratio in comparison to that of our recent historical basis will have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing borrowing costs. In addition, the actual terms and conditions of such indebtedness may not be favorable to us, and as such, could further increase the cost of the Merger, as well as the overall burden of such indebtedness upon SJW Group and our business flexibility. Unfavorable terms in the Debt Financing may also adversely affect our business, financial condition, results of operations and prospects.

We anticipate that the Merger and the related Debt Financing may have an impact on our issuer and issue ratings, potentially in advance of consummation of the Merger. For example, it is possible that the issuer and issue ratings of certain of our subsidiaries, including San Jose Water Company and certain of those entities to be acquired in the Merger, could be lowered. SJW Group has publicly announced an intention to achieve at least an A- issuer credit rating for the currently unrated SJW Group. We also anticipate that the Debt Financing may have an initial rating which may be equal to or lower than the potential new SJW Group issuer rating given the structural subordination of newly incurred unsecured debt in the Debt Financing. We cannot provide any assurances regarding potential rating agency actions, any changes in outlook from the rating agencies, the timing of any such actions or the level of any initial ratings or any downgrade.

An adverse judgment in any litigation challenging the ~~merger~~Merger may prevent ~~the merger~~it 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 rescissory and other damages and attorneys’ fees and costs. ~~The defendants believe this lawsuit is without merit and intend to defend vigorously against these allegations.~~

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 ~~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 recissory and other damages and attorneys’ fees and costs.

The ~~defendants~~parties to 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 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 as the transaction closes, and the court granted the parties’ motion to stay on November 14, 2018. 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 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. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed at such time as the Merger closes.

On November 20, 2018, the plaintiffs in Connecticut Superior Court filed a brief in support of an opening mootness fee demand of $1.5 million for alleged benefits the plaintiffs believe their lawsuit created for CTWS. CTWS intends to vigorously oppose this ~~lawsuit is without merit and intend to defend vigorously against these allegations.~~demand.

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, a complaint was filed against CTWS and ~~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.~~1934, as amended. 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~~CTWS’s 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.

While we believe that the lawsuits are without merit and that the disclosures in CTWS’s preliminary proxy statement comply fully with applicable law, in order to avoid the expense and distraction of litigation, the parties to each of the above-referenced actions entered into agreements in principle to settle and release all claims that were or could have been alleged by the plaintiffs in all of those actions. The settlements provide for the dismissal of the actions subject to, among other things, CTWS making certain disclosures, which CTWS included in the definitive proxy statement in connection with the Merger. There is no guarantee that the settlement agreement will be approved by the court or executed by the parties, and failure to do so will prolong the litigation and adversely affect the operation of SJW Group ~~believes the claims in this complaint are without merit.~~and CTWS’s business.

It is possible that SJW Group stockholders or CTWS shareholders may file additional lawsuits challenging the ~~merger~~Merger or the other transactions contemplated by the ~~merger agreement,~~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 closing of the ~~merger~~Merger is the absence of any law or order, decree or judgment by a court, arbitrator or other governmental entity that prevents, makes illegal or prohibits the consummation of the ~~merger~~Merger or the other transactions

contemplated by the Merger Agreement. Consequently, if SJW Group stockholders or CTWS shareholders file additional lawsuits challenging the Merger or the other transactions contemplated by the ~~merger agreement. Consequently, if~~Merger Agreement, and a settlement or other resolution is not reached in ~~the~~such lawsuits ~~referenced above~~ and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely affecting the parties’ ability to complete the ~~merger,~~Merger, then such injunctive or other relief may prevent the ~~merger~~Merger from becoming effective within the expected time frame or at all.

Completion of the Merger may trigger 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 ~~merger agreement contains~~completion of the Merger may trigger change in control and other provisions ~~that could discourage~~in certain agreements to which CTWS is a ~~potential competing acquiror~~party. If we and CTWS are unable to negotiate waivers of ~~either SJW Group~~those provisions, the counterparties may exercise their rights and remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we and CTWS 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 CTWS or 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 indemnified for any of these liabilities. Examples of such undisclosed liabilities may include, but are not limited to, pending or threatened litigation or regulatory matters. Any such undisclosed liabilities could ~~result in any competing proposal being at a lower price than it might otherwise be. However, potential competing acquirors could negatively impact~~have an adverse effect on our business, results of operations, financial condition and cash flows and on the value of our stock following the completion ~~and timing~~ of the ~~proposed transaction and result in disruption and expense for both~~Merger.

Risks Related to SJW Group and ~~CTWS.~~CTWS as a Combined Company if the Merger is Completed

~~Other than in connection with~~Uncertainties associated within the ~~45-day go-shop period,~~combined company after the Merger may cause a loss of management personnel and other key employees which ~~concluded at 11:59 p.m. Eastern time on July 14, 2018,~~could adversely affect the ~~merger agreement contains “no shop” provisions that, subject to limited exceptions, restrict each of SJW Group’s~~future business 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~~operations of the ~~merger~~combined company.

SJW Group and CTWS are dependent on the experience and industry knowledge of their respective officers and other key employees to execute their business plans. The combined company’s success after the Merger will depend in ~~response to any competing acquisition proposals before~~part upon the board of directors of the company that has received 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 portionability of SJW Group orand 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 realized in the proposed merger or might result in a potential third-party acquiror proposing to pay a lower price to the stockholders than it might otherwise have proposed to pay because of the added expense 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 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 Energy has not revised its preliminary proxy statement in connection with the revised all-cash Merger,retain key management personnel and it is unclear what additional actions 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 sharesother key employees. Current and prospective employees of SJW Group ~~announced that it had abandoned such offer. Even if ultimately unsuccessful, actions taken by these or other third parties could disrupt~~and CTWS may experience uncertainty about their roles within the ~~business~~combined company following the Merger, which may have an adverse effect on the ability of each of SJW Group and CTWS ~~could cause~~to attract or retain key management and other key personnel. Accordingly, no assurance can be given that the combined company will be able to attract or retain key management personnel and other key employees of SJW Group and CTWS to the same extent that SJW Group and CTWS have previously been able to attract or retain their own employees. A failure by SJW Group, CTWS or, following the completion of the Merger, the combined company to attract, retain and motivate executives and other key employees during the period prior to or after the completion of the Merger could have a negative impact on their respective businesses.

The combined company is expected to incur substantial ~~expense,~~expenses related to the Merger and the integration of SJW Group and CTWS.

If the Merger is completed, the combined company would be expected to incur substantial expenses in connection with the Merger and the integration of SJW Group and CTWS. There will be 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 SJW Group and CTWS have assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could ~~negatively impact~~affect the ~~expected~~total amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature, difficult to estimate accurately. These 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 expected from the transaction. These integration expenses likely will result in the combined company taking significant charges against earnings following the completion of the Merger, and the amount and timing of such charges are uncertain at present. Substantial expenses related to the transaction, including fees payable to the companies’ advisors, will also be borne by SJW Group and CTWS even if the Merger is not completed.

The Merger will result in changes to the board of directors that may affect the strategy and operations of the combined company.

In connection with the consummation of the ~~proposed merger.~~ Merger, we expect that the board of directors of the combined company will be expanded to create additional seats to be filled by CTWS directors to be selected by SJW Group. This new composition of the

board of directors may affect the combined company’s business strategy and operating decisions following the completion of the Merger.

In ~~addition, there is a~~connection with seeking regulatory approval for the Merger, SJW Group has committed to certain “ring-fencing” measures which, if implemented, will enhance CTWS’s separateness from SJW Group and may limit SJW Group’s ability to influence the management and policies of CTWS (beyond the limitations included in other existing governance mechanisms).

Pursuant to the agreements related to the Merger and commitments made by SJW Group as part of the application for PURA approval of the Merger, SJW Group has committed to 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 may change as a result of ~~actions taken by~~further development of the PURA proceeding and would become effective upon the closing of the Merger.

In order to satisfy the ring-fencing commitments, SJW Group will form 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”) will adopt 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 intracompany loans to satisfy the debt or contractual obligations of any Non-CTWS Entity, including any indebtedness or other ~~third parties, shareholders~~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 resulting from the Merger. Similar provisions have been proposed in the Maine proceeding with MPUC.

This ring-fenced structure would also subject SJW Group and the CTWS Entities to certain governance, operational and financial 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 will 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, the financial condition, results of operations and prospects of the combined company may be materially adversely affected.

The Merger will combine two companies that are affected by developments in the water utility industry, including changes in regulation. A failure to adapt to the changing regulatory environment after the Merger could adversely affect the stability of the combined company’s earnings.

Because SJW Group, CTWS and their respective subsidiaries are regulated in the United States at the federal level and, in the case of SJW Group, in California and Texas, and, in the case of CTWS, Connecticut and Maine, the two companies have been and will continue to be affected by legislative and regulatory developments. After the Merger, the combined company and/or its subsidiaries will be subject in the United States to federal regulation as well as to extensive state regulation in the states in which the combined company will operate. The costs, burdens and complexities associated with complying with these regulatory jurisdictions may ~~vote against~~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’s dividend policy is subject to the discretion of our board of directors and may be limited by legal and contractual requirements.

Although it is currently anticipated that SJW Group will pay a regular quarterly dividend following the completion of the Merger, any such determination to pay dividends will be at the discretion of our board of directors following the completion of the Merger and will be dependent on then-existing conditions, including SJW Group’s 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, in our new application to PURA for approval of the Merger, the CTWS Entities may be limited from paying dividends to us in certain circumstances. Similar provisions have been proposed ~~merger at their special meeting~~in the Maine proceeding with MPUC. Any inability of our subsidiaries to pay us dividends may have a material and adverse effect on our ability to pay dividends.

The financing arrangements that ~~consequently,~~we will enter into in connection with the ~~required shareholder approval~~Merger may, under certain circumstances, contain restrictions and limitations that could significantly impact the combined company’s ability to operate its business.

We intend to incur additional indebtedness in connection with the Merger. We expect that the agreements governing the indebtedness incurred in connection with the Merger may contain covenants that could impose significant operating and financial limitations and restrictions on the combined company following the Merger, 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. Various risks, uncertainties and events beyond the combined company’s control could affect its ability to comply with the covenants contained in its debt agreements. Failure to comply with any of the covenants in its existing or future financing 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, the combined company might not ~~be obtained.~~have sufficient funds or other resources to satisfy all of its obligations. In addition, the limitations imposed by financing agreements on the combined company’s ability to incur additional indebtedness and to take other actions might significantly impair its ability to obtain other financing.


ITEM 5.	OTHER INFORMATION

On ~~October~~July 24, ~~2018,~~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~~September 3, ~~2018,~~2019, to stockholders of record as of the close of business on ~~November~~August 5, ~~2018.~~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~~3.1		~~Second Amended and Restated Agreement and Plan~~Certificate of ~~Merger, dated as~~Amendment of ~~August 5, 2018, by and among~~Certificate of Incorporation of SJW ~~Group, Hydro Sub, Inc. and Connecticut Water Service, Inc.~~Group. Incorporated by reference asto Exhibit ~~2.1~~3.1 to Form 8-K filed on ~~August 6, 2018.~~April 25, 2019.

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)

101.INS		XBRL Instance Document - the instance document does not appear in the interactive data file because its XBRL tags are embedded within the inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Label Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document


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

3942



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)



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


	Three months ended September 30,					Nine months ended September 30,					Three months ended June 30,					Six months ended June 30,
	2018			2017		2018			2017		2019			2018		2019			2018
REVENUE	$	124,853		124,578		$	298,981		295,696		$	102,965		99,086		$	180,647		174,128
OPERATING EXPENSE:
Production Expenses:
Purchased water	33,545			30,833		72,673			66,938		26,381			23,712		40,043			39,128
Power	1,882			2,500		4,774			5,491		1,493			1,624		2,653			2,892
Groundwater extraction charges	14,890			15,756		34,341			34,098		9,100			9,919		15,963			19,451
Other production expenses	4,836			4,216		13,674			12,067		5,159			4,626		10,258			8,838
Total production expenses	55,153			53,305		125,462			118,594		42,133			39,881		68,917			70,309
Administrative and general	12,752			11,949		36,278			34,909		13,408			11,958		25,699			23,526
Maintenance	4,980			4,607		14,036			12,991		4,729			4,596		9,054			9,056
Property taxes and other non-income taxes	4,016			3,454		11,332			10,260		3,848			3,450		7,976			7,316
Depreciation and amortization	13,682			12,065		40,921			36,217		15,101			13,656		30,246			27,239
Merger related expenses	8,442			—		14,994			—		1,775			2,746		4,376			6,552
Total operating expense	99,025			85,380		243,023			212,971		80,994			76,287		146,268			143,998
OPERATING INCOME	25,828			39,198		55,958			82,725		21,971			22,799		34,379			30,130
OTHER (EXPENSE) INCOME:
Interest on long-term debt and other interest expense	(6,077		)	(5,541	)	(18,213		)	(17,354	)	(6,714		)	(6,084	)	(12,505		)	(12,136	)
Pension non-service cost	(589		)	(953	)	(1,767		)	(2,860	)	(907		)	(595	)	(1,828		)	(1,178	)
Unrealized loss on California Water Service Group stock	—			—		(527		)	—
Gain on sale of California Water Service Group stock	191			—		104			—
Unrealized gain (loss) on California Water Service Group stock											—			140		—			(527	)
Interest income on money market fund											2,342			—		4,174			—
Gain on sale of real estate investments	—			—		—			6,903		745			—		745			—
Other, net	538			359		1,980			1,436		517			679		907			1,355
Income before income taxes	19,891			33,063		37,535			70,850		17,954			16,939		25,872			17,644
Provision for income taxes	4,103			13,523		7,591			27,055		4,192			4,068		6,237			3,488
NET INCOME BEFORE NONCONTROLLING INTEREST	15,788			19,540		29,944			43,795		13,762			12,871		19,635			14,156
Less net income attributable to the noncontrolling interest	—			—		—			1,896		224			—		224			—
SJW GROUP NET INCOME	15,788			19,540		29,944			41,899		13,538			12,871		19,411			14,156
Other comprehensive income, net of tax:
Unrealized gain on investment	—			80		—			252
SJW GROUP COMPREHENSIVE INCOME	$	15,788		19,620		$	29,944		42,151		$	13,538		12,871		$	19,411		14,156
SJW GROUP EARNINGS PER SHARE
Basic	$	0.77		0.95		$	1.45		2.04		$	0.48		0.63		$	0.68		0.69
Diluted	$	0.76		0.94		$	1.45		2.03		$	0.47		0.62		$	0.68		0.68
DIVIDENDS PER SHARE	$	0.28		0.22		$	0.84		0.65		$	0.30		0.28		$	0.60		0.56
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	20,626,654			20,516,172		20,593,570			20,502,274		28,440,221			20,592,014		28,431,764			20,576,757
Diluted	20,732,040			20,697,097		20,721,970			20,675,479		28,526,022			20,732,127		28,516,927			20,716,665


	September 30, 2018		December 31, 2017	June 30, 2019		December 31, 2018
ASSETS
Utility plant:
Land	$	18,300	17,831	$	18,303	18,296
Depreciable plant and equipment	1,783,654		1,714,228	1,870,156		1,833,051
Construction in progress	79,475		45,851	100,350		68,765
Intangible assets	15,748		14,413	15,799		15,799
	1,897,177		1,792,323	2,004,608		1,935,911
Less accumulated depreciation and amortization	593,916		553,059	635,005		607,090
	1,303,261		1,239,264	1,369,603		1,328,821
Real estate investments	56,336		56,213	56,473		56,336
Less accumulated depreciation and amortization	12,029		11,132	12,925		12,327
	44,307		45,081	43,548		44,009
CURRENT ASSETS:
Cash and cash equivalents	13,327		7,799
Cash and cash equivalents:
Cash				9,849		8,722
Money market fund				412,000		412,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts	22,595		17,305	24,350		19,154
Income tax	—		7,981	1,397		1,888
Other	826		1,118	2,456		1,203
Accrued unbilled utility revenue	38,097		27,905	32,800		27,974
Current regulatory assets, net				15,904		26,910
Other current assets	5,522		4,750	5,163		4,871
	80,367		66,858	503,919		502,722
OTHER ASSETS:
Investment in California Water Service Group	—		4,535
Net regulatory assets, less current portion	104,670		99,554	81,746		76,715
Other	4,263		2,709	4,834		4,122
	108,933		106,798	86,580		80,837
	$	1,536,868	1,458,001	$	2,003,650	1,956,389



	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


(a)	Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.


(b)	Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.



		Fair Value Measurements at December 31, 2017
				Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
Asset Category	Benchmark	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	—	$	8,207	$	8,207	$	—	$	—
Actively Managed (a):
All Cap Equity	Russell 3000 Value	6,413		6,376		37		—
U.S. Large Cap Equity	Russell 1000, Russell 1000 Growth, Russell 1000 Value	50,351		50,351		—		—
U.S. Mid Cap Equity	Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value	9,358		9,358		—		—
U.S. Small Cap Equity	Russell 2000, Russell 2000 Growth, Russell 2000 Value	8,725		8,725		—		—
Non-U.S. Large Cap Equity	MSCI EAFE	5,973		5,973		—		—
REIT	NAREIT - Equity REIT’S	6,143		—		6,143		—
Fixed Income (b)	(b)	44,994		—		44,994		—
Total		$	140,164	$	88,990	$	51,174	$	—



	For Three Months Ended September 30, 2018
	Water Utility Services			Real Estate Services	All Other*		SJW Group
	Regulated		Non-tariffed	Non-tariffed	Non-tariffed		Regulated	Non-tariffed		Total
Operating revenue	$	121,009	2,403	1,441	—		121,009	3,844		124,853
Operating expense	87,230		1,623	934	9,238		87,230	11,795		99,025
Operating income (loss)	33,779		780	507	(9,238	)	33,779	(7,951	)	25,828
Net income (loss) before noncontrolling interest	22,333		561	359	(7,465	)	22,333	(6,545	)	15,788
Depreciation and amortization	13,298		85	299	—		13,298	384		13,682
Senior note and other interest expense	5,534		—	—	543		5,534	543		6,077
Income tax expense (benefit) in net income	5,910		218	113	(2,138	)	5,910	(1,807	)	4,103
Assets	$	1,480,726	4,577	47,469	4,096		1,480,726	56,142		1,536,868



	For Three Months Ended June 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	$	99,773	1,823	1,369	—		99,773	3,192		102,965
Operating expense	75,564		1,356	1,008	3,066		75,564	5,430		80,994
Operating income (loss)	24,209		467	361	(3,066	)	24,209	(2,238	)	21,971
Net income (loss)	13,662		336	662	(1,122	)	13,662	(124	)	13,538
Depreciation and amortization	14,698		105	298	—		14,698	403		15,101
Senior note and other interest expense	6,170		—	—	544		6,170	544		6,714
Income tax expense (benefit) in net income	4,154		130	220	(312	)	4,154	38		4,192
Assets	$	1,537,404	6,149	46,510	413,587		1,537,404	466,246		2,003,650



	For Three Months Ended June 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	$	95,798	1,967	1,321	—		95,798	3,288		99,086
Operating expense	70,642		1,278	891	3,476		70,642	5,645		76,287
Operating income (loss)	25,156		689	430	(3,476	)	25,156	(2,357	)	22,799
Net income (loss)	15,022		497	296	(2,944	)	15,022	(2,151	)	12,871
Depreciation and amortization	13,272		85	299	—		13,272	384		13,656
Senior note, mortgage and other interest expense	5,540		—	—	544		5,540	544		6,084
Income tax expense (benefit) in net income	4,650		193	92	(867	)	4,650	(582	)	4,068
Assets	$	1,449,714	3,768	46,756	(117	)	1,449,714	50,407		1,500,121


	For Three Months Ended September 30, 2017											For Six Months Ended June 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	$	174,920	2,992	2,735	—		174,920	5,727		180,647
Operating expense	82,135		1,511	875		859		82,135	3,245		85,380	136,149		2,197	1,899	6,023		136,149	10,119		146,268
Operating income (loss)	38,592		949	516		(859	)	38,592	606		39,198	38,771		795	836	(6,023	)	38,771	(4,392	)	34,379
Net income (loss) before noncontrolling interest	19,866		473	305		(1,104	)	19,866	(326	)	19,540
Net income (loss)												19,762		572	980	(1,903	)	19,762	(351	)	19,411
Depreciation and amortization	11,623		143	299		—		11,623	442		12,065	29,447		202	597	—		29,447	799		30,246
Senior note, mortgage and other interest expense	4,999		—	(2	)	544		4,999	542		5,541
Senior note and other interest expense												11,390		—	—	1,115		11,390	1,115		12,505
Income tax expense (benefit) in net income	13,242		340	178		(237	)	13,242	281		13,523	6,230		222	350	(565	)	6,230	7		6,237
Assets	$	1,438,433	20,239	48,917		3,981		1,438,433	73,137		1,511,570	$	1,537,404	6,149	46,510	413,587		1,537,404	466,246		2,003,650



	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 Six Months Ended June 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	$	168,151	3,315	2,662	—		168,151	5,977		174,128
Operating expense	132,343		2,166	1,740	7,749		132,343	11,655		143,998
Operating income (loss)	35,808		1,149	922	(7,749	)	35,808	(5,678	)	30,130
Net income (loss)	19,817		828	652	(7,141	)	19,817	(5,661	)	14,156
Depreciation and amortization	26,473		168	598	—		26,473	766		27,239
Senior note and other interest expense	11,048		—	—	1,088		11,048	1,088		12,136
Income tax expense (benefit) in net income	5,142		322	186	(2,162	)	5,142	(1,654	)	3,488
Assets	$	1,449,714	3,768	46,756	(117	)	1,449,714	50,407		1,500,121



	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



	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


	Three months ended September 30, 2018 vs. 2017					Nine months ended September 30, 2018 vs. 2017					Three months ended June 30, 2019 vs. 2018					Six months ended June 30, 2019 vs. 2018
	Increase/(decrease)					Increase/(decrease)					Increase/(decrease)					Increase/(decrease)
Water Utility Services:
Consumption changes	$	(752	)	(1	)%	$	7,359		2	%	$	(2,170	)	(2	)%	$	(6,023	)	(4	)%
Increase in customers	1,003			1	%	1,795			—	%	855			1	%	1,655			1	%
Rate increases	3,123			3	%	14,901			5	%	3,624			4	%	6,741			4	%
OII customer rate credits											(2,100		)	(2	)%	(2,100		)	(1	)%
Balancing and memorandum accounts:
WCMA	195			—	%	(6,538		)	(2	)%
Cost recovery recorded prior year	(2,504		)	(2	)%	(4,179		)	(1	)%
2016 WCMA revision to new customer classification	—			—	%	(1,371		)	—	%
Tax Act	(750		)	(1	)%	(6,661		)	(2	)%
All other	(90		)	—	%	(1,842		)	(1	)%
Water Conservation Memorandum Account (“WCMA”)											(2,661		)	(3	)%	(3,470		)	(2	)%
Cost of capital memorandum account											190			—	%	1,346			1	%
Tax memorandum account											4,523			4	%	5,415			3	%
Tax regulatory liability - Texas											(37		)	—	%	(130		)	—	%
All others											1,607			2	%	3,012			2	%
Real Estate Services	50			—	%	(179		)	—	%	48			—	%	73			—	%
	$	275		—	%	$	3,285		1	%	$	3,879		4	%	$	6,519		4	%


	Operating Expense by Segment						Operating Expense by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended June 30,			Six months ended June 30,
	2018		2017	2018		2017	2019		2018	2019		2018
Water Utility Services	$	88,853	83,646	$	223,362	207,731	$	76,920	71,920	$	138,346	134,509
Real Estate Services	934		875	2,674		2,765	1,008		891	1,899		1,740
All Other	9,238		859	16,987		2,475	3,066		3,476	6,023		7,749
	$	99,025	85,380	$	243,023	212,971	$	80,994	76,287	$	146,268	143,998


	Three months ended September 30,		Increase/ (decrease)		% of Total Change			Nine months ended September 30,						Increase/ (decrease)			% of Total Change		Three months ended June 30,					Increase/ (decrease)		% of Total Change		Six months ended June 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	%	5,941		6,402	Increase/ (decrease)		(461	)	(4	)%	9,103	10,258		(1,155	)	(6	)%
Groundwater	3,922	4,582	(660	)	(5	)%		9,574			10,479			(905	)		(3	)%	2,402			2,874		(472	)	(4	)%	4,235		5,652	(1,417	)	(8	)%
Surface water	339	87	252		2	%		2,043			563			1,480			5	%	1,885			1,167		718		7	%	3,462		1,704	1,758		10	%
Reclaimed water	325	233	92		1	%		576			454			122			—	%	179			181		(2	)	—	%	224		251	(27	)	—	%
	12,920	12,813	107		1	%		30,785			29,437			1,348			4	%	10,407			10,624		(217	)	(1	)%	17,024		17,865	(841	)	(4	)%

~~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