UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

Commission file number 1-8966

SJW GROUP

(Exact name of registrant as specified in its charter)



Delaware			77-0066628
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

110 West Taylor Street,	San Jose,	CA	95110
(Address of principal executive offices)			(Zip Code)

(408) 279-7800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Non-accelerated filer ☐

Accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of ~~October 28, 2019,~~April 29, 2020, there were ~~28,456,490~~28,507,411 shares of the registrant’s Common Stock outstanding.

FORWARD-LOOKING STATEMENTS

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. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “strategy,” or “anticipates,” or the negative of those words or other comparable terminology. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.

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

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

changes in demand for water and other services;

the impact of Coronavirus (“COVID-19”) pandemic on our business operation and financial results;

unanticipated weather conditions and changes in seasonality;

climate change and the effects thereof;

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

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

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

~~litigation, including litigation relating to the Merger;~~

~~changes in demand for water and other products and services;~~

~~unanticipated weather conditions and changes in seasonality;~~

~~climate change and the effects thereof;~~

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

unexpected costs, charges or expenses resulting from the ~~Merger;~~Merger or otherwise;

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

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

catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, hurricanes, terrorist acts, physical attacks, cyber-attacks, or other similar occurrences;

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

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

legislative and general market and economic developments.

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

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands, except share and per share data)


	Three months ended September 30,					Nine months ended September 30,					Three months ended March 31,
	2019			2018		2019			2018		2020			2019
REVENUE	$	113,997		124,853		$	294,644		298,981		$	115,754		77,682
OPERATING EXPENSE:
Production Expenses:
Purchased water	35,583			33,545		75,626			72,673		15,934			13,662
Power	2,294			1,882		4,947			4,774		2,725			1,160
Groundwater extraction charges	13,182			14,890		29,145			34,341		15,028			6,863
Other production expenses	5,295			4,836		15,553			13,674		10,093			5,099
Total production expenses	56,354			55,153		125,271			125,462		43,780			26,784
Administrative and general	14,712			12,752		40,411			36,278		21,262			12,291
Maintenance	4,923			4,980		13,977			14,036		6,086			4,325
Property taxes and other non-income taxes	4,065			4,016		12,041			11,332		7,463			4,128
Depreciation and amortization	15,122			13,682		45,368			40,921		21,382			15,145
Merger related expenses	1,737			8,442		6,113			14,994		354			2,601
Total operating expense	96,913			99,025		243,181			243,023		100,327			65,274
OPERATING INCOME	17,084			25,828		51,463			55,958		15,427			12,408
OTHER (EXPENSE) INCOME:
Interest on long-term debt and other interest expense	(6,588		)	(6,077	)	(19,093		)	(18,213	)	(13,284		)	(5,791	)
Pension non-service cost	(921		)	(589	)	(2,749		)	(1,767	)	(45		)	(921	)
Unrealized loss on California Water Service Group stock	—			—		—			(527	)
Interest income on money market fund	2,165			—		6,339			—		—			1,832
Gain on sale of California Water Service Group stock	—			191		—			104
Gain on sale of real estate investments	—			—		745			—
Other, net	303			538		1,210			1,980		757			390
Income before income taxes	12,043			19,891		37,915			37,535		2,855			7,918
Provision for income taxes	2,565			4,103		8,802			7,591		438			2,045
NET INCOME BEFORE NONCONTROLLING INTEREST	9,478			15,788		29,113			29,944
Less net income attributable to the noncontrolling interest	—			—		224			—
SJW GROUP NET INCOME	9,478			15,788		28,889			29,944		2,417			5,873
Other comprehensive income, net of tax:
Unrealized loss on investment, net of tax benefit of $50 in 2020											(135		)	—
SJW GROUP COMPREHENSIVE INCOME	$	9,478		15,788		$	28,889		29,944		$	2,282		5,873
SJW GROUP EARNINGS PER SHARE
Basic	$	0.33		0.77		$	1.02		1.45		$	0.08		0.21
Diluted	$	0.33		0.76		$	1.01		1.45		$	0.08		0.21
DIVIDENDS PER SHARE	$	0.30		0.28		$	0.90		0.84		$	0.32		0.30
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	28,451,811			20,626,654		28,438,521			20,593,570		28,489,357			28,423,214
Diluted	28,549,928			20,732,040		28,528,002			20,721,970		28,674,221			28,507,738

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)

September 30,
2019 December 31,
2018
ASSETS
Utility plant:
Land $ 18,286
18,296
Depreciable plant and equipment 1,897,117
1,833,051
Construction in progress 109,245
68,765
Intangible assets 15,799
15,799
2,040,447
1,935,911
Less accumulated depreciation and amortization 647,841
607,090
1,392,606
1,328,821
Real estate investments 56,473
56,336
Less accumulated depreciation and amortization 13,224
12,327
43,249
44,009
CURRENT ASSETS:
Cash and cash equivalents:
Cash 12,702
8,722
Money market fund 412,000
412,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts 27,965
19,154
Income tax 63
1,888
Other 2,719
1,203
Accrued unbilled utility revenue 38,200
27,974
Current regulatory assets, net 7,493
26,910
Other current assets 6,672
4,871
507,814
502,722
OTHER ASSETS:
Net regulatory assets, less current portion 73,780
76,715
Other 4,933
4,122
78,713
80,837
$ 2,022,382
1,956,389



	March 31, 2020		December 31, 2019
ASSETS
Utility plant:
Land	$	34,697	34,395
Depreciable plant and equipment	3,014,589		2,988,454
Construction in progress	126,365		112,232
Intangible assets	32,775		33,424
	3,208,426		3,168,505
Less accumulated depreciation and amortization	983,481		962,019
	2,224,945		2,206,486
Real estate investments	57,954		57,699
Less accumulated depreciation and amortization	13,899		13,597
	44,055		44,102
CURRENT ASSETS:
Cash and cash equivalents:
Cash	28,273		12,944
Restricted cash	—		5,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts	34,710		36,305
Income tax	7,097		8,837
Other	2,036		2,833
Accrued unbilled utility revenue	36,996		40,102
Current regulatory assets, net	6,129		6,472
Other current assets	13,577		9,553
	128,818		122,046
OTHER ASSETS:
Net regulatory assets, less current portion	126,149		113,945
Investments	13,400		12,928
Goodwill	628,287		628,287
Other	8,644		4,676
	776,480		759,836
	$	3,174,298	3,132,470

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)

September 30,
2019 December 31,
2018
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Stockholders’ equity:
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and outstanding shares 28,456,490 on September 30, 2019 and 28,404,316 on December 31, 2018 $ 28
28
Additional paid-in capital 499,377
495,366
Retained earnings 397,259
393,918
Total stockholders’ equity 896,664
889,312
Long-term debt, less current portion 511,076
431,424
1,407,740
1,320,736
CURRENT LIABILITIES:
Line of credit 62,000
100,000
Accrued groundwater extraction charges, purchased water and power 22,749
13,694
Accounts payable 28,193
24,937
Accrued interest 9,220
7,132
Accrued property taxes and other non-income taxes 4,220
1,926
Accrued payroll 5,011
7,181
Other current liabilities 12,914
9,115
144,307
163,985
DEFERRED INCOME TAXES 72,798
79,651
ADVANCES FOR CONSTRUCTION 84,564
80,610
CONTRIBUTIONS IN AID OF CONSTRUCTION 170,390
168,243
POSTRETIREMENT BENEFIT PLANS 73,004
70,490
REGULATORY LIABILITY 56,936
59,149
OTHER NONCURRENT LIABILITIES 12,643
13,525
COMMITMENTS AND CONTINGENCIES —
—
$ 2,022,382
1,956,389



	March 31, 2020			December 31, 2019
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Stockholders’ equity:
Common stock, $0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 28,497,841 on March 31, 2020 and 28,456,508 on December 31, 2019	$	28		28
Additional paid-in capital	507,075			506,639
Retained earnings	376,447			383,191
Accumulated other comprehensive (loss) income	(9		)	126
Total stockholders’ equity	883,541			889,984
Long-term debt, less current portion	1,316,996			1,283,597
	2,200,537			2,173,581
CURRENT LIABILITIES:
Line of credit	131,402			117,209
Current portion of long-term debt	22,311			22,272
Accrued groundwater extraction charges, purchased water and power	12,919			17,211
Accounts payable	25,214			34,886
Accrued interest	18,516			13,140
Accrued property taxes and other non-income taxes	3,545			2,039
Accrued payroll	9,105			11,570
Other current liabilities	15,392			16,240
	238,404			234,567
DEFERRED INCOME TAXES	194,823			195,598
ADVANCES FOR CONSTRUCTION	117,596			112,339
CONTRIBUTIONS IN AID OF CONSTRUCTION	287,802			286,035
POSTRETIREMENT BENEFIT PLANS	111,272			108,044
OTHER NONCURRENT LIABILITIES	23,864			22,306
COMMITMENTS AND CONTINGENCIES	—			—
	$	3,174,298		3,132,470

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)

Common Stock
Additional
Paid-in
Capital

Retained
Earnings

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

~~See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.~~

~~SJW Group and Subsidiaries~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY~~

~~(UNAUDITED)~~

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



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders’ Equity
BALANCES, December 31, 2019	28,456,508	$	28	$	506,639		$	383,191		$	126		$	889,984
Net income	—	—		—			2,417			—			2,417
Unrealized loss on investment, net of tax benefit of $50	—	—		—			—			(135		)	(135		)
Share-based compensation	—	—		251			(43		)	—			208
Issuance of restricted and deferred stock units	25,781	—		(785		)	—			—			(785		)
Employee stock purchase plan	15,552	—		970			—			—			970
Dividends paid ($0.32 per share)	—	—		—			(9,118		)	—			(9,118		)
BALANCES, March 31, 2020	28,497,841	28		507,075			376,447			(9		)	883,541

Common Stock
Additional
Paid-in
Capital

Retained
Earnings

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



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Total Stockholders’ Equity
BALANCES, December 31, 2018	28,404,316	$	28	$	495,366		$	393,918		$	—	$	889,312
Net income	—	—		—			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

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW Group and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)


	Nine months ended September 30,					Three months ended March 31,
	2019			2018		2020			2019
OPERATING ACTIVITIES:
Net income before noncontrolling interest	$	29,113		29,944
Net income						$	2,417		5,873
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	47,363			42,649		22,482			15,803
Deferred income taxes	(7,214		)	(5,445	)	(344		)	(1,014	)
Stock-based compensation	2,556			1,383		251			886
Gain on sale of real estate investments	(745		)	—
Loss on sale of utility property	20			—
Unrealized loss on California Water Service Group stock	—			527
Loss on sale of California Water Service Group stock	—			(104	)
Changes in operating assets and liabilities:
Accounts receivable and accrued unbilled utility revenue	(20,553		)	(15,190	)	5,498			6,093
Accounts payable and other current liabilities	4,166			3,493		(8,755		)	456
Accrued groundwater extraction charges, purchased water and power	9,055			8,474		(4,292		)	(6,723	)
Tax payable and receivable, and other accrued taxes	4,471			12,482		1,875			4,851
Postretirement benefits	2,514			3,036		2,445			1,723
Regulatory assets and liability related to balancing and memorandum accounts	22,789			(4,822	)	(10,158		)	2,937
Up-front service concession payment						(5,000		)	—
Other changes, net	(2,258		)	(2,716	)	1,510			(5,692	)
NET CASH PROVIDED BY OPERATING ACTIVITIES	91,277			73,711		7,929			25,193
INVESTING ACTIVITIES:
Additions to utility plant:
Company-funded	(101,120		)	(97,753	)	(38,314		)	(29,575	)
Contributions in aid of construction	(10,040		)	(5,908	)	(3,629		)	(3,273	)
Additions to real estate investments	(137		)	(123	)	(255		)	—
Payments to retire utility plant, net of salvage	(4,374		)	(3,789	)	(271		)	(1,525	)
Proceeds from sale of real estate investments	745			—
Payments for business/asset acquisition	—			(2,496	)
Proceeds from sale of utility property	150			—
Proceeds from sale of California Water Service Group stock	—			4,112
NET CASH USED IN INVESTING ACTIVITIES	(114,776		)	(105,957	)	(42,469		)	(34,373	)
FINANCING ACTIVITIES:
Borrowings on line of credit	73,000			52,000		47,424			38,000
Repayments of line of credit	(111,000		)	(1,000	)	(33,231		)	(106,000	)
Long-term borrowings	80,000			—		35,000			80,000
Payment to noncontrolling interest	(224		)	—
Repayments of long-term borrowings						(1,171		)	—
Debt issuance and broker fee costs	(1,157		)	—		—			(222	)
Dividends paid	(25,596		)	(17,297	)	(9,118		)	(8,529	)
Receipts of advances and contributions in aid of construction	13,373			8,968		6,416			4,835
Refunds of advances for construction	(2,295		)	(2,075	)	(557		)	(555	)
Other changes, net	1,378			(2,822	)	106			592
NET CASH PROVIDED BY FINANCING ACTIVITIES	27,479			37,774		44,869			8,121
NET CHANGE IN CASH AND CASH EQUIVALENTS	3,980			5,528		10,329			(1,059	)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD	420,722			7,799		17,944			420,722
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	424,702		13,327		$	28,273		419,663
Cash paid during the period for:

Cash paid (received) during the period for:
Interest	$	19,821		19,705		$	9,373		6,304
Income taxes	16,286			5,145		(50		)	—
Supplemental disclosure of non-cash activities:
Change in accrued payables for construction costs capitalized	505			1,221		(2,601		)	(2,884	)
Utility property installed by developers	(109		)	567		3,076			(168	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

~~SEPTEMBER 30, 2019~~MARCH 31, 2020

(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 ~~2018~~2019 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In ~~February~~June 2016, the FASB issued ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial ~~Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),~~Instruments,” ~~as amended, which supersedes the lease requirements in “Leases (Topic 840).”~~and subsequent amendments. Topic 326 requires measurement and recognition of expected credit losses for financial assets held. This ASU generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the Consolidated Balance Sheets and to provide enhanced disclosures surrounding the amount, 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 recognition guidance.was effective for SJW Group adopted the new standard effective January 1, 2019, on a modified retrospective basis and did not restate comparative periods. SJW Group also elected the package of practical expedients permitted under the transition guidance and combined lease and non-lease components. In addition, SJW Group kept leases with an initial term of 12 months or less off the Consolidated Balance Sheets and recognized the associated lease payments in the ~~Consolidated Statements~~first quarter of ~~Comprehensive Income on a straight-line basis over the lease term.~~fiscal 2020. The adoption of ~~this standard~~ASU 2016-13 did not have a material impact on ~~SJW Group’s~~our consolidated financial 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~~precipitation curtail water usage and sales.

In response to the drought from 2014 to 2016 in California, the State Water Resources Control Board (the “State Water Board”) imposed mandatory water use restrictions and conservation targets. The Santa Clara Valley Water District (“Valley Water”), San Jose Water Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than the State Water Board. While the Governor of California declared the drought over on April 7, 2017, the State Water Board made certain water use restrictions permanent. Further, Valley Water has maintained a conservation target of 20% compared to 2013 water usage. In 2018, Governor Edmund G. Brown signed into law Assembly Bill 1668 and Senate Bill 606. Both bills set an initial limit for indoor water use of 55 gallons per person per day by 2022 and reduced the limit further to 50 gallons per person per day by 2030. Implementation details remain to be developed as to how local water providers will meet this mandate as well as to how the California Public Utilities Commission (“CPUC”) will direct its regulated utilities to comply.

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

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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


	Three months ended September 30,					Nine months ended September 30,					Three months ended March 31,
	2019			2018		2019			2018		2020		2019
Revenue from contracts with customers	$	130,777		120,007		$	314,003		294,319		$	105,136	78,926
Alternative revenue programs, net - WCMA	(11,912		)	4,193		(14,218		)	7,794
Alternative revenue programs, net											504		(1,979	)
Other balancing and memorandum accounts revenue, net	(6,221		)	(788	)	(9,229		)	(7,235	)	8,744		(631	)
Rental income	1,353			1,441		4,088			4,103		1,370		1,366
	$	113,997		124,853		$	294,644		298,981		$	115,754	77,682

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 restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”) and under the performance stock plans assumed through the business combination with Connecticut Water Service, Inc. (“CTWS”) and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended ~~September 30,~~March 31, 2020 and 2019, 17,573 and 2018, 524 and 306 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2019 and 2018, 10,158 and 3,5627,417 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.

Utility Plant Depreciation

A portion of depreciation expense is allocated to administrative and general expense. For the three months ended ~~September 30,~~March 31, 2020, and 2019, ~~and 2018,~~ the amounts allocated to administrative and general expense were ~~$663~~$1,098 and ~~$575, respectively. For the nine months ended September 30, 2019, and 2018, the amounts allocated to administrative and general expense were $1,995 and $1,728,~~$657, respectively.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)


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 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 shares, or other share-based awards. As of ~~September 30, 2019, 157,063~~March 31, 2020, 184,130 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units and an additional ~~823,597~~759,976 shares are available for award issuances under the Incentive Plan. In addition, shares are issued to employees under the company’s ESPP.

In connection with the merger with CTWS on October 9, 2019, SJW ~~GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

~~(in thousands, except~~Group assumed outstanding awards of restricted stock units and deferred share units under the following stock plans: CTWS 2014 Performance Stock Program, CTWS 2004 Performance Stock Program and ~~per share data)~~

CTWS 1994 Performance Stock Program (collectively, the “CTWS Plan”). As of March 31, 2020, approximately 101,647 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units under the CTWS Plan.

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 and proceeds from the exercise of any restricted stock ~~options~~ and similar instruments ~~and the tax benefit realized from any stock options and similar instruments exercised,~~ that are recorded to additional paid-in capital and common stock, by award type, are presented below for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, and ~~2018.~~2019.


	Three months ended September 30,			Nine months ended September 30,			Three months ended March 31,
	2019		2018	2019		2018	2020		2019
Adjustments to additional paid-in capital and common stock for:
Compensation costs charged to income:
ESPP	$	140	127	$	283	242	$	171	143
Restricted stock and deferred restricted stock	812		377	2,273		1,141	80		743
Total compensation costs charged to income	$	952	504	$	2,556	1,383	$	251	886
ESPP proceeds	$	792	718	$	1,603	1,371	$	970	811

Stock, Restricted Stock and Deferred Restricted Stock

~~On January 2,~~For the three months ended March 31, 2020 and 2019, SJW Group granted under the Incentive Plan 28,367 and 17,451, respectively, three year service-based restricted stock units covering an aggregate of 17,451 shares of common stock of SJW Group were granted to certain officers of SJW Group and its subsidiaries. The units vest in 3 equal successive installments upon completion of each year of serviceawards with ~~no dividend equivalent rights. Share-based compensation expense of $51.28 per unit which was based on the award~~a weighted-average grant date fair value ~~is being recognized over the service period beginning in 2019.~~of $65.89 and $51.28, respectively, per unit.

~~On January 29, 2019, certain officers of SJW Group were granted performance-based~~Performance-based and market-based restricted stock awards granted for the three months ended March 31, 2020 and 2019 were 24,581 and 30,401 target units ~~covering an aggregate target number~~with a weighted-average grant date fair value of ~~SJW Group’s shares of common stock equal to 9,882 that will vest based on the~~$73.85 and $60.46 respectively, per unit. Based upon actual attainment ~~of specified performance goals measured in two separate tranches over the period from January 1, 2019,~~relative 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, 2019, and December 31, 2020, respectively. The~~performance metric, the number of shares issuable ~~under such units, ranging~~can range 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 $57.12 and $55.97 per unit for each of the two tranches which was based on the award grant date fair values are being recognized assuming the performance goals will be attained.

~~On January 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 9,043 that will vest based on the actual attainment of specified performance goals over the period from January 1, 2019, to December 31, 2021 and continued service through December 31, 2021. 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 $54.84 per unit which was based on the award grant date fair value is being recognized assuming the performance goals will be attained.

On January 29, 2019, performance-based restricted stock units were granted to certain officers of SJW Group covering a target number of shares of SJW Group’s common stock equal to 9,437 that will vest based on continued service and attainment of specified performance goals over the period from January 1, 2019, to December 31, 2021. The number of shares issuable under the award, rangingor 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-basedmarket-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 $70.47 per unit. If such goals are not met, no compensation cost will be recognized and any recognized compensation cost will be reversed.

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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

As of ~~September 30, 2019,~~March 31, 2020, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to ~~$3,466.~~$6,113. This cost is expected to be recognized over a weighted-average period of ~~1.17~~2.33 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 have been reserved for issuance under the ESPP.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)

SJW Group’s recorded expenses were ~~$82~~$86 and ~~$223~~$76 for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, ~~respectively, and $66 and $198 for the three and nine months ended September 30, 2018, respectively,~~ related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends ~~January~~July 31, 2020, for the ESPP is approximately ~~$134.~~$102. This cost is expected to be recognized during the ~~fourth quarter of 2019~~second and ~~first quarter~~third quarters of 2020.


Note 3.	Real Estate Investments

The major components of real estate investments as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, are as follows:


	September 30, 2019		December 31, 2018	March 31, 2020		December 31, 2019
Land	$	13,262	13,262	$	14,168	14,168
Buildings and improvements	43,211		43,074	43,786		43,531
Subtotal	56,473		56,336	57,954		57,699
Less: accumulated depreciation and amortization	13,224		12,327	13,899		13,597
Total	$	43,249	44,009	$	44,055	44,102

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.

SJW Land Company holds a 70% limited interest in 444 West Santa Clara Street, L.P. On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interest in the commercial building and land the partnership owned and operated. In connection with this sale, the partnership was required to deposit $750 into an escrow account for estimated repairs to the creek next to the land the partnership sold. On April 22, 2019, all creek repairs were completed and a reimbursement of $745 was provided to the partnership. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on the creek reimbursement of $521 and $224, respectively, on the transaction.


Note 4.	Defined Benefit Plan

~~San Jose Water Company sponsors a~~SJW Group maintains noncontributory defined benefit ~~retirement plan~~pension plans for its eligible employees. ~~Employees~~SJWC and CTWS employees hired before March 31, 2008, and January 1, 2009, respectively, are entitled to ~~receive retirement~~ benefits ~~using a formula~~under the pension plans based on the employee’s ~~three highest~~ years of ~~compensation (whether or not consecutive).~~service and compensation. Certain employees hired before March 1, 2012, and covered by a plan merged into the CTWS plan in 2013 are also entitled to benefit based on the employee’s years of service and compensation. For SJWC employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based onupon compensation credits and interest credits for each employee. ~~Officers~~CTWS employees hired on or after January 1, 2009, are entitled to an additional 1.5% of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans.

In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009, for CTWS are eligible to receive additional retirement benefits under ~~San Jose Water Company’s Executive Supplemental Retirement Plan,~~the supplemental executive retirement plans and ~~officers~~retirement contracts. SJWC’s senior management hired on or after March 31, 2008, are eligible to receive additional retirement benefits under ~~the San Jose Water Company’s~~SJWC’s Cash Balance Executive Supplemental Retirement Plan. Both of the plans are non-qualified plans in which only ~~officers~~senior management and other designated members of management ~~of San Jose Water Company~~ may participate. ~~San Jose Water Company~~SJW Group also provides health care and life insurance benefits for retired employees under employer-sponsored postretirement benefits other than pension plans.

The components of net periodic benefit costs for the ~~San Jose Water Company Social Welfare Plan.~~defined benefit plans and other postretirement benefits for the three months ended March 31, 2020, and 2019 are as follows:



	Three months ended March 31,
	2020			2019
Service cost	$	2,443		1,479
Interest cost	2,904			2,112
Other cost	1,499			1,118
Expected return on assets	(4,120		)	(2,309	)
	$	2,726		2,400

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~September 30, 2019~~March 31, 2020

(in thousands, except share and per share data)

The components of net periodic benefit costs for San Jose Water Company’s retirement plan, its Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and Social Welfare Plan for the three and nine months ended September 30, 2019, and 2018 are as follows:

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

~~The components of net periodic benefit cost have been recorded in the consolidated statements of comprehensive income as follows:~~

Three months ended September 30, Nine months ended September 30,
2019 2018 2019 2018
Other production expenses $ 370
424
$ 1,110
1,273
Administrative and general expense 837
898
2,526
2,695
Maintenance expense 271
279
813
836
Pension non-service costs 921
589
2,749
1,767
$ 2,399
2,190
$ 7,198
6,571

The following tables summarize the fair values of plan assets by major categories as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018:~~2019:

Fair Value Measurements at September 30, 2019

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 — $ 7,884
$ 7,884
$ —
$ —
Actively Managed (a):
All Cap Equity Russell 3000 Value 6,667
6,667
—
—
U.S. Large Cap Equity Russell 1000, Russell 1000 Growth, Russell 1000 Value 53,141
53,141
—
—
U.S. Mid Cap Equity Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value 10,179
10,179
—
—
U.S. Small Cap Equity Russell 2000, Russell 2000 Growth, Russell 2000 Value 10,373
10,373
—
—
Non-U.S. Large Cap Equity MSCI EAFE 5,638
5,638
—
—
REIT NAREIT - Equity REIT’S 7,779
—
7,779
—
Fixed Income (b) (b) 53,331
—
53,331
—
Total $ 154,992
$ 93,882
$ 61,110
$ —



	Fair Value Measurements at March 31, 2020
			Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
Asset Category	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	6,115	$	6,115	$	—	$	—
Equity securities (a)	122,326		116,326		6,000		—
Fixed income (b)	92,218		28,516		63,702		—
Total	$	220,659	$	150,957	$	69,702	$	—

~~The Plan has a current target allocation of~~ ~~55%~~ ~~invested in a diversified array of equity securities to provide long-term capital appreciation and~~ ~~45%~~ ~~invested in a diversified array of fixed income securities and cash to provide preservation of capital plus generation of income.~~


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



	Fair Value Measurements at December 31, 2019
			Quoted Prices in Active Markets for Identical Assets		Significant Observable Inputs		Significant Unobservable Inputs
Asset Category	Total		(Level 1)		(Level 2)		(Level 3)
Cash and cash equivalents	$	11,801	$	11,801	$	—	$	—
Equity securities (a)	157,050		149,265		7,785		—
Fixed income (b)	91,896		31,686		60,210		—
Total	$	260,747	$	192,752	$	67,995	$	—

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

Fair Value Measurements at December 31, 2018

Quoted
Prices in
Active
Markets for
Identical
Assets

Significant
Observable
Inputs

Significant
Unobservable
Inputs
Asset Category Benchmark Total (Level 1) (Level 2) (Level 3)
Cash and cash equivalents — $ 8,136
$ 8,136
$ —
$ —
Actively Managed (a):
All Cap Equity Russell 3000 Value 5,670
5,632
38
—
U.S. Large Cap Equity Russell 1000, Russell 1000 Growth, Russell 1000 Value 47,040
47,040
—
—
U.S. Mid Cap Equity Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value 8,372
8,372
—
—
U.S. Small Cap Equity Russell 2000, Russell 2000 Growth, Russell 2000 Value 8,528
8,528
—
—
Non-U.S. Large Cap Equity MSCI EAFE 4,969
4,969
—
—
REIT NAREIT - Equity REIT’S 5,889
—
5,889
—
Fixed Income (b) (b) 44,855
—
44,855
—
Total $ 133,459
$ 82,677
$ 50,782
$ —


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

In ~~2019, San Jose Water Company~~2020, SJW Group expects to make required and discretionary cash contributions of up to ~~$8,337~~$9,238 to the pension plans and Social Welfare Plan. For the three ~~and nine~~ months ended ~~September 30, 2019, San Jose Water Company~~March 31, 2020, SJW Group has made ~~$3,854~~0 contributions to such plans.


Note 5.	Segment and Non-Tariffed Business Reporting

~~As of September 30, 2019,~~ SJW Group is a holding company with 4 subsidiaries: (i) ~~San Jose Water Company,~~SJWC, a water utility operation with both regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated commercial building rentals, and (iv) ~~Hydro Sub, Inc., a Connecticut corporation that was formed on March 9, 2018 for the sole purpose~~as of ~~effecting the SJW Group and Connecticut Water Service, Inc. (“CTWS”) merger and subsequently dissolved following the completion of the merger on~~ October 9, 2019, ~~(see discussion in Note 12, “Subsequent Events”~~SJWNE LLC a holding company for CTWS and its subsidiaries, The Connecticut Water Company (“Connecticut Water”)., The Maine Water Company (“Maine Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”), New England Water Utility Services (“NEWUS”), Inc. and Chester Realty, Inc. In accordance with FASB ASC Topic 280 - “Segment Reporting,” The chief operating decision maker of SJW Group has determined that it has 2 reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, ~~San Jose~~SJWC, Connecticut Water, ~~Company~~CLWSC, Maine Water, HVWC, Avon Water, and ~~CLWSC,~~NEWUS together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company and Chester Realty, Inc., referred to as “Real Estate Services.”

SJW Group’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Group’s chief operating decision maker includes the Chairman, President and Chief Executive Officer, and his ~~senior~~executive staff. ~~The senior staff reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income~~

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and ~~total assets, by subsidiaries.~~per share data)

The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, such as goodwill, and revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category.

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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

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


	For Nine Months Ended September 30, 2019										For Three Months Ended March 31, 2020
	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	$	285,138	5,418	4,088	—		285,138	9,506		294,644	$	111,367	3,017	1,370	—		111,367	4,387		115,754
Operating expense	226,073		3,833	2,834	10,441		226,073	17,108		243,181	96,017		1,361	831	2,118		96,017	4,310		100,327
Operating income (loss)	59,065		1,585	1,254	(10,441	)	59,065	(7,602	)	51,463	15,350		1,656	539	(2,118	)	15,350	77		15,427
Net income (loss)	30,726		1,127	1,284	(4,248	)	30,726	(1,837	)	28,889	5,828		1,470	388	(5,269	)	5,828	(3,411	)	2,417
Depreciation and amortization	44,159		313	896	—		44,159	1,209		45,368	20,749		108	302	223		20,749	633		21,382
Senior note and other interest expense	17,434		—	—	1,659		17,434	1,659		19,093	8,174		—	—	5,110		8,174	5,110		13,284
Income tax expense (benefit) in net income	9,142		438	445	(1,223	)	9,142	(340	)	8,802	1,202		470	132	(1,366	)	1,202	(764	)	438
Assets	$	1,556,049	5,899	46,160	414,274		1,556,049	466,333		2,022,382	$	3,054,474	9,170	46,436	64,218		3,054,474	119,824		3,174,298

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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


	For Nine Months Ended September 30, 2018										For Three Months Ended March 31, 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	$	289,160	5,718	4,103	—		289,160	9,821		298,981	$	75,147	1,169	1,366	—		75,147	2,535		77,682
Operating expense	219,573		3,789	2,674	16,987		219,573	23,450		243,023	60,585		841	891	2,957		60,585	4,689		65,274
Operating income (loss)	69,587		1,929	1,429	(16,987	)	69,587	(13,629	)	55,958	14,562		328	475	(2,957	)	14,562	(2,154	)	12,408
Net income (loss)	42,150		1,389	1,011	(14,606	)	42,150	(12,206	)	29,944	6,100		236	318	(781	)	6,100	(227	)	5,873
Depreciation and amortization	39,771		253	897	—		39,771	1,150		40,921	14,749		97	299	—		14,749	396		15,145
Senior note and other interest expense	16,582		—	—	1,631		16,582	1,631		18,213	5,220		—	—	571		5,220	571		5,791
Income tax expense (benefit) in net income	11,052		540	299	(4,300	)	11,052	(3,461	)	7,591	2,076		92	130	(253	)	2,076	(31	)	2,045
Assets	$	1,480,726	4,577	47,469	4,096		1,480,726	56,142		1,536,868	$	1,492,643	5,825	46,862	413,477		1,492,643	466,164		1,958,807

* The “All Other” category for the three months ended March 31, 2020, includes the accounts of SJW Group, SJWNE LLC and CTWS on a stand-alone basis. For the three months ended March 31, 2019, the “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2019, ~~and 2018,~~ Hydro Sub, Inc. had no recorded revenue or expenses and as of ~~September 30,~~March 31, 2019 ~~and 2018,~~ held no assets and has incurred no liabilities. Hydro Sub. Inc. was a subsidiary created solely to facilitate the merger with CTWS and was dissolved following the completion of merger in October 2019.


Note 6.	Long-Term Liabilities and Bank Borrowings

SJW Group’s contractual obligations and commitments include senior notes, bank term loans, revenue bonds, state revolving fund loans, mortgages, and other obligations. ~~San Jose~~ Water ~~Company, a subsidiary of SJW Group, has~~Utility Services have received advance deposit payments from its customers on certain construction ~~projects. Refunds~~projects and the refunds of the advance deposit payments constitute an obligation ~~of San Jose Water Company solely.~~to the respective subsidiaries.

On March ~~28, 2019, San Jose~~12, 2020 Connecticut Water ~~Company~~ entered into a note purchase agreement with ~~certain affiliates of MetLife, Inc., Brighthouse Financial, Inc. and New York Life Insurance (collectively~~ the ~~“Purchasers”),~~purchasers listed in the agreement, pursuant to which ~~the company~~Connecticut Water sold an aggregate principal amount of ~~$80,000~~$35,000 of its ~~4.29%~~3.51% Senior Notes, ~~Series M (“Series M Notes”) to the Purchasers.~~due March 12, 2050. The ~~Series M Notes~~notes are unsecured obligations of ~~San Jose Water Company, due on April 1, 2049.~~Connecticut Water. Interest is payable semi-annually in arrears on ~~April 1st~~March 12th and ~~October 1st~~September 12th of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, Connecticut Water is required to comply with certain customary affirmative and negative covenants for as long as the ~~Series M Notes~~notes are outstanding. The ~~Series M Notes~~notes are also subject to customary events of default, the occurrence of which may

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)

result in all of the ~~Series M Notes~~notes then outstanding becoming immediately due and payable. The notes have terms and conditions that restrict Connecticut Water from issuing additional debt or paying a dividend to CTWS if such debt or distribution would trigger an event of default. The senior note agreement also requires Connecticut Water to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio at each fiscal quarter end of no less than three-to-one. As of March 31, 2020, Connecticut Water was in compliance with all financial ratio and operational covenants under this agreement. The closing occurred simultaneously with the signing of the note purchase agreement.

On December 19, 2019, Maine Water issued $5,000 of Series S First Mortgage Bonds to the Maine Municipal Bond Bank through the State Safe Drinking Water Revolving Loan Fund. The Series S bonds mature on October 1, 2039 and carry 1% interest. The Series S First Mortgage Bond covenants are the same as all other First Mortgage Bonds. The proceeds were held as restricted cash by a trustee to be used for pre-approved projects primarily related to preliminary engineering and design work of a water treatment plant in Maine’s Biddeford and Saco division. Proceeds were held by a trustee for the bond and until conditions were met. On February 3, 2020 and March 11, 2020, the trustee released proceeds of $4,114 and $886, respectively, from the bond. The associated bond indentures and loan agreements contain customary affirmative and negative covenants, including a prohibition on the issuance of indebtedness secured by assets or revenue of Maine Water where the lien is senior to the lien of the bond trustee under the above bonds except as permitted by the bond indentures and related loan and security agreements, a requirement to maintain a debt to capitalization ratio of not more than 65%, required compliance with various financial and operational covenants, and a provision for maturity acceleration upon the occurrence of stated events of default.


Note 7.	Fair Value Measurement

The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of ~~September 30, 2019,~~March 31, 2020, but require disclosure of their fair values: cash and cash equivalents, a money market fund, accounts receivable and accounts payable. The estimated fair value of such instruments as of ~~September 30, 2019,~~March 31, 2020, approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value ~~was~~of such financial instruments are determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation techniques during the three ~~and nine~~ months ended ~~September 30, 2019.~~March 31, 2020. 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.

SJW Group has investments in company owned life insurance which are valued at cash surrender value of the policies as reported by the insurer. These contracts are based principally on a referenced pool of investment funds that actively redeem shares, are observable and measurable, and are presented in “Investments” on SJW Group’s consolidated balance sheets. As of March 31, 2020, the value of the company owned life insurance was $7,207 of which $3,650 was related to assets to fund CTWS’s supplemental retirement plan agreements. As of December 31, 2019, the value of the company owned life insurance was $7,086 of which $3,829 was related to assets to fund CTWS’s supplemental retirement plan agreements. In addition to life insurance contracts, CTWS’s supplemental retirement plan agreements are also funded with a Rabbi Trust.

The following tables summarize the fair values of the Rabbi Trust investment assets to fund CTWS’s additional retirement benefits under the supplemental executive retirement plans and retirement contracts by major categories as of March 31, 2020, and December 31, 2019:



			Fair Value Measurements at March 31, 2020
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Money market funds	$	132	132	—	—
Mutual funds	1,802		1,802	—	—
Fixed income	672		672	—	—
Total	$	2,606	2,606	—	—

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)



			Fair Value Measurements at December 31, 2019
Asset Category	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)	Significant Observable Inputs (Level 2)	Significant Unobservable Inputs (Level 3)
Money market funds	$	20	20	—	—
Mutual funds	834		834	—	—
Fixed income	2,329		2,329	—	—
Total	$	3,183	3,183	—	—

The fair value of SJW Group’s long-term debt was approximately ~~$641,395~~$1,417,613 and ~~$490,148~~$1,396,205 as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, 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 ~~$511,076~~$1,339,307 and ~~$431,424~~$1,305,869 as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.

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

As of September 30, 2019, and December 31, 2018, SJW Group no longer held any equity investments in California Water Service Group which was categorized as Level 1 of the fair value hierarchy. For the three and nine months ended September 30, 2018, SJW Group recognized an unrealized gain of $0 and an unrealized loss of $527 due to the change in fair

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

value of the company’s investment in California Water Service Group. During the 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.


Note 8.	Regulatory Rate Filings

California Regulatory Affairs

On June 19, 2019, the CPUC issued its final decision resolving the remaining issues in San Jose Water Company’s General Rate Case Application No. 18-01-004 (“GRC”). Decision 19-06-010 denied the establishment of a Water Revenue Adjustment Mechanism and Sales reconciliation Mechanism 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. 534 on August 1, 2019, to recover this amount via a surcharge over a three-year period. The CPUC rejected the advice letter on October 10, 2019, citing an error and recommended a correction and a new filing for recovery. San Jose Water Company anticipates correcting the record and filing a new advice letter for recovery in the fourth quarter of 2019.

On July 20, 2018, the CPUC issued an Order Instituting Investigation (“OII”) No. 18-07-007 concerning SJW Group’s then proposed merger with CTWS. A Scoping Memorandum was issued on September 7, 2018, which identified the issues to be considered in the proceeding as to whether the proposed merger is subject to CPUC approval and to evaluate the merger’s likely impacts within California. On September 14, 2018, SJW Group and ~~San Jose Water Company~~SJWC submitted joint comments in response to the issues identified in accordance with the Scoping Memorandum’s adopted schedule, and reply comments were submitted on October 19, 2018. A Public Participation Hearing was held on January 31, 2019. On March 4, 2019, the CPUC suspended this proceeding due to SJW Group’s announcement of its intention to file a new merger approval application with the Connecticut Public Utilities Regulatory Authority (“PURA”). On April 3, 2019, SJW Group and CTWS jointly filed a new merger application with PURA. After securing the required approvals from both PURA and ~~Maine Public Utilities Commission,~~the MPUC, SJW Group announced the close of the merger on October 9, 2019, and notified the CPUC accordingly.

~~In January 2017, a San Jose Water Company customer inquired about~~ As of March 31, 2020, the company’s billing practice as it related to the proration of service charges in billing cycles where a rate change occurred. On June 22, 2017, San Jose Water Company was served with Complaint 17-06-009 regarding its billing practice for service charge rate changes. The billing issue was made a part of San Jose Water Company’s GRC proceeding and a settlement agreement was reachedOII is still pending with the Office of Ratepayer Advocates (now the Public Advocates Office) on May 23, 2018, limiting the duration from which to calculate customer refunds from June 1, 2011, through December 31, 2016. Accordingly, San Jose Water Company provided an additional reserve to cover the remaining period covered by the settlement. In accordance with Decision 18-11-025 for the GRC, San Jose Water Company filed Advice Letter No. 530 proposing total refunds of $2,020 for the period from June 1, 2011 through December 31, 2016. This advice letter became effective February 8, 2019, and refunds were completed by mid-May 2019. On April 22, 2019, the CPUC dismissed Complaint 17-07-009 citing the relief provided in Advice Letter No. 530 and the current OII on this matter (see below for further discussion). The Complainant filed an appeal with the CPUC to dispute the dismissal. This appeal was rejected and the Complaint was dismissed via CPUC Decision No. 19-09-040 on September 24, 2019.CPUC.

On September 14, 2018, the CPUC issued OII No. 18-09-003 to which ~~San Jose Water Company~~SJWC 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~~SJWC’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~~SJWC’s Advice Letter No. 510. CPED calculated a further refund obligation of approximately $1,990 for the years 1987 to 2013. CPED also asserted that the company double-billed its customers during a billing period when it allegedly converted from billing in advance to billing in arrears, assumed that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $4,935. The OII notes these estimates and identifies the proper refund amount as an issue in the proceeding. The OII also identifies the CPUC’s authority to consider imposing penalties on ~~San Jose Water Company~~SJWC in amounts ranging from ~~500 dollars~~$0.5 to ~~50000 dollars~~$50 per offense, per day. On July 24, 2019, ~~San Jose Water Company~~SJWC and CPED jointly filed a motion for CPUC approval of a Settlement Agreement (“Agreement”) over ~~San Jose Water Company’s~~SJWC’s past customer billing practices. The

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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 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 iswas subject to final approval by the CPUC. A CPUC ~~which is expected~~Presiding Officer’s Decision approved the Agreement in December 2019, but an appeal was filed in January 2020 by a group of SJWC customers. A final CPUC decision approving the ~~fourth quarter of 2019.~~Agreement and dismissing the appeal was approved on February 27, 2020, and concluded this proceeding. Advice Letter No. 545 was filed on March 13, 2020, requesting authorization to provide refunds to customers. For a typical residential customer with a 3/4-inch meter, the one-time refund will be $5.52 dollars. This advice letter was approved effective April 12, 2020, and SJWC began issuing refunds shortly thereafter.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)

On ~~March 29,~~June 19, 2019, ~~San Jose Water Company~~the CPUC issued its final decision resolving the remaining issues in SJWC’s GRC. Decision 19-06-010 denied the establishment of a WRAM/SRM and authorized the recovery of the Hydro Generation Research, Development and Demonstration Memorandum Account balance of $1,243. SJWC filed Advice Letter No. ~~532 with the CPUC requesting authorization~~534 on August 1, 2019, to recover this amount via a surcharge over a three-year period. The CPUC rejected the ~~$9,020 balance in its WCMA for the period of January 1, 2018, through December 31, 2018. This~~ advice letter on October 10, 2019, citing an error and recommended a correction and a new filing for recovery. SJWC filed to correct the record and received the CPUC’s decision on April 10, 2020. Advice Letter 548 was filed on April 24, 2020, requesting recovery of $1,224 via a 36-month surcharge. The adjustment in the memorandum account balance reflected project costs incurred after September 30, 2016, which are not allowable per Decision 19-06-010. This request is pending before the CPUC.

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

~~San Jose Water Company~~SJWC filed Advice Letter No. 537 with the CPUC requesting authorization to refund the balance in its 2018 Tax Accounting Memorandum Account as required by the GRC decision on October 18, 2019. On December 3, 2019, Advice Letter 537-A was filed to refund the balance via a one-time surcredit. For a typical residential customer with a 3/4-inch meter, the one-time refund will be ~~$1.74~~$20.84 dollars per ~~month for 12 months or until the balance is amortized.~~customer. This advice letter ~~is pending before~~was approved effective January 21, 2020, and refunds to customers began on January 27, 2020.

SJWC filed Advice Letter No. 541 on November 20, 2019, with the CPUC requesting authorization to increase its revenue requirement by $8,600 or 2.28% in 2020 for the first escalation year authorized in our 2018 General Rate Case Decision 18-011-025 which established rates for 2019, 2020, and 2021. This advice letter was approved on December 26, 2019, and new rates became effective January 1, 2020.

On December 6, 2019, SJWC filed Application No. 19-12-002 with the CPUC requesting approval for cost recovery to deploy Advanced Metering Infrastructure throughout its service area. The application seeks revenue increases of $2,315 or 0.61% in 2021, $3,960 or 1.04% in 2022, and $2,510 or 0.65% in 2023, and $341 or 0.09% in 2024 based on current rates in effect. A decision from the CPUC is ~~expected~~anticipated in the fourth quarter of 2020.

On January 22, 2020, SJWC, along with three other California water utilities, filed a joint request for a one-year deferment on the Cost of Capital filings which would otherwise be due on May 1, 2020. Postponing the filing one year would alleviate administrative processing costs on the utilities as well as the CPUC staff, and provide relief for both CPUC and utility resources already strained by numerous other proceedings. The request is conditioned on no changes to the current Water Cost of Capital Mechanism in place during the one-year deferment. On March 11, 2020, the CPUC approved the request.

On March 19, 2020, SJWC filed Advice Letter 546 to extend customer protections listed in the company’s Disaster Relief Customer Protections and Outreach Plan as required by the CPUC in response to the Coronavirus (“COVID-19”) pandemic. The filing also activated SJWC’s Catastrophic Event Memorandum Account (“CEMA”) to track costs related to the company’s response which include labor and materials, anticipated increase in bad debt from the suspension of shutoffs for non-payment, waived deposits and reconnection fees, and divergence from actual versus authorized usage. The customer protections and CEMA were approved effective March 4, 2020. SJWC anticipates requesting recovery of the COVID-19 pandemic response costs in a future GRC or other filings.

Connecticut Regulatory Affairs

As of March 31, 2020, Water Infrastructure Conservation Adjustment (“WICA”) surcharges for Connecticut Water and Avon Water were 3.24% and 9.31%, respectively. HVWC does not currently have an approved WICA surcharge. On January 28, 2020, Connecticut Water filed a WICA application representing an additional 2.6% surcharge, for a cumulative WICA surcharge of 5.84%. Additionally, on February 7, 2020, Connecticut Water filed its annual WICA reconciliation which called for a 0.09% reduction of the WICA surcharge. On March 25, 2020, Connecticut Public Utilities Regulatory Authority (“PURA”) approved a net cumulative 5.75% surcharge for Connecticut Water which became effective ~~date of January~~on customers’ bills on April 1, 2020.

On March 3, 2020, the Company filed an application, Docket No. 20-03-04, with PURA to merger Avon Water and HVWC with and into Connecticut Water. The application is to streamline borrowings, regulatory filings and internal administrative tasks associated with maintaining separate corporate entities.

On March 12, 2020, PURA issued Docket No. 20-03-15 to establish a State of Emergency Utility Shut-off Moratorium for the COVID-19 pandemic. The moratorium ordered regulated utility companies to refrain from terminating utility service to residential customers, except for safety reasons until May 1, 2020, or until such other time as determined by the PURA. In the same docket, PURA further directed the public service companies to maintain a detailed record of costs incurred and revenues lost as a result of implementing its orders in the docket and may establish a regulatory asset to track incurred costs.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)

Texas Regulatory Affairs

As required, CLWSC submitted on January 27, 2020, its Water Pass-Through Charge (“WPC”) true-up report for the Canyon Lake area systems 2019 purchased water costs. The WPC is the annual filing to change the component of CLWSC’s water rates for changes in purchased water costs since the last annual true-up report. Two WPC true-up reports were filed to report 2019 costs. The changes in the purchased water costs for the Deer Creek Ranch water system resulted in a decrease in the usage charge from $2.19 dollars to $2.02 dollars per thousand gallons, and an increase in the monthly base charge of $3.04 dollars per residential account. These Deer Creek Ranch rate changes became effective October 1, 2019. The 2019 WPC true-up report for the water systems located in the Canyon Lake area resulted in a reduction of the WPC usage rate from $1.05 dollars to $0.95 dollars per thousand gallons which became effective on February 1, 2020. The WPC filings for Deer Creek Ranch and the Canyon Lake area were approved by the Public Utilities Commission of Texas (“PUCT”) ~~directed~~and a new tariff with the WPC rates has been issued.

In connection with the disaster declaration in Texas, the PUCT issued Order No. 50664-106 and Accounting Order No. 50664-108 that are effective during the COVID-19 pandemic. CLWSC ~~(as well as other Class A water utilities in Texas)~~has responded to ~~quantify all~~these orders by stopping disconnections for nonpayment of ~~the impacts of the passage of the Tax Cuts~~utility bills, 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 requires the water~~not charging fees for late payment. The orders also instructs utilities to record the incremental costs and lost revenues from theCOVID-19 pandemic in a regulatory ~~liability that reflects (1)~~tracking account for recovery in future rates.

Maine Regulatory Affairs

On December 20, 2019, Maine Water filed for a general a rate increase for their Skowhegan Division seeking approximately $221, or 14.7%, in additional revenue with the ~~difference~~Maine Public Utilities Commission (“MPUC”). A final decision from the MPUC is expected in the second quarter of 2020. On January 20, 2020, Maine Water filed Water Infrastructure Surcharge (“WISC”) applications with the MPUC in four divisions requesting an increase between ~~the revenues collected under existing rates~~1.76% and 3.00%, representing approximately $371 in additional revenues. The WISC applications were approved on February 26, 2020 and the ~~revenues that would have been collected had~~surcharges became effective March 1, 2020.

On March 16, 2020, MPUC issued an emergency moratorium on utility disconnection activities in connection to the ~~existing~~COVID-19 pandemic. The moratorium directed public utility companies not to engage in any disconnection activities including disconnection notices for all classes of customers until further notice from MPUC. Maine Water is tracking COVID-19 related costs for potential future recovery in 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%charged to ~~21%. A rate proposal reflecting these tax changes was submitted for PUCT~~’~~s review on April 19, 2018.~~customers.


Note 9.	Balancing and Memorandum Accounts

~~San Jose Water Company~~SJWC 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~~SJWC 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 accounts.~~CPUC.

Balancing and memorandum accounts are recognized by ~~San Jose Water Company~~SJWC 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~~Conservation Memorandum Account (“WCMA”) and Water Revenue Adjustment (“WRA”), SJWC and CTWS follow the requirements of ASC Topic ~~980-605-25, “Alternative~~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 ~~that do~~SJW Group estimates will not ~~meet~~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 ~~established in ASC Topic 980-605-25. For other~~for balancing and memorandum accounts ~~San Jose Water Company~~between general rate cases, SJWC 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 consolidated financial statements.

On October 4, 2019 the CPUC issued two proposed decisions for Advice Letter No. 532, which was filed for the recovery of the 2018 WCMA balance. The first proposed resolution was an approval for the collection of the 2018 WCMA balance and the second proposed resolution denied recovery. Both proposed decisions are expected to be presented to the CPUC decision meeting on November 7, 2019. Due to the conflicting proposed decisions, San Jose Water Company believes it no longer meets the probability criteria under ASC Topic 980-605-25 for the 2018 WCMA and has fully reserved the balance as of

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~September 30, 2019~~March 31, 2020

(in thousands, except share and per share data)

~~September 30, 2019. San Jose Water Company~~On December 19, 2019, the CPUC denied the recovery of the 2018 WCMA in Advice Letter No. 532 and no longer approved the tracking of WCMA balances. Due to the decision, SJWC believes WCMA tracking no longer meets the probability criteria under ASC Topic 980-605-25. For the three months ended March 31, 2019, SJWC recognized a regulatory ~~assets~~liability of ~~$4,660 and $8,070~~$752 due to ~~lost revenues~~sales in excess of authorized usage accumulated in the 2019 WCMA account. Since the balance represents an amount due to customers, SJWC recorded a regulatory liability for the amount with a corresponding reduction to revenues. SJWC also recognized a regulatory liability of $309 due to sales in excess of authorized usage accumulated in the 2018 WCMA account for the three ~~and nine~~ months ended ~~September 30, 2018, respectively.~~

March 31, 2019 based on ASC Topic 980-605-25. As of March 31, 2019, a ~~result~~reserve of $80 was recorded which is the ~~current status of~~estimated amount that would not be collected within the ~~CPUC filing for the 2018 WCMA above, San Jose Water Company also fully reserved the 2019 WCMA~~24-month period, as ~~of September 30, 2019.~~

~~Cost of capital memorandum account was approved~~required by the ~~CPUC on March 14, 2018.~~guidance. The account tracks the difference between current water rates and the lower rates adopted in the cost of capital decision on March 22, 2018. San Jose Water Company recorded a regulatory liability of $8 and $1,371 in the cost of capital memorandum account for the three and nine months ended September 30, 2018, with a corresponding reduction to revenue. Activity for the three and nine months ended September 30, 2019, respectively, represents interest activity on the accumulated balance. The amount hasamounts have been reflected in the ~~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 $4592018 WCMA and $5,955 in the tax memorandum account for the three and nine months ended September 30, 2018, respectively, with a corresponding reduction to revenue. Activity for the three and nine months ended September 30, 2019 ~~represents interest activity on the accumulated balance. The amount has been reflected in the tax memorandum account balance~~WCMA balances shown in the table below.

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

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

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



	Three months ended March 31, 2020									Three months ended March 31, 2019
	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	$	708		—		(43	)	665		$	7,750		—		(838	)	6,912
2018 WCMA	—			—		—		—		9,386			(389	)	—		8,997
2019 WCMA	—			—		—		—		—			(752	)	—		(752	)
2012 General Rate Case true-up	752			—		—		752		11,328			95		(1,271	)	10,152
Cost of capital memorandum account	(1,553		)	(5	)	—		(1,558	)	(1,523		)	(9	)	—		(1,532	)
Tax memorandum account	(6,643		)	(3	)	6,978		332		(6,504		)	(41	)	—		(6,545	)
All others	4,796			1,765		(94	)	6,467		5,112			1,707		(570	)	6,249
Total revenue accounts	$	(1,940	)	1,757		6,841		6,658		$	25,549		611		(2,679	)	23,481
Cost-recovery accounts:
Water supply costs	4,328			767		(34	)	5,061		9,617			(745	)	(655	)	8,217
Pension	2,449			415		22		2,886		(1,843		)	184		422		(1,237	)
All others	446			1		(4	)	443		1,090			3		(78	)	1,015
Total cost-recovery accounts	$	7,223		1,183		(16	)	8,390		$	8,864		(558	)	(311	)	7,995

Total	$	5,283		2,940		6,825		15,048		$	34,413		53		(2,990	)	31,476

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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

Revenue accounts:
2014-2017 WCMA* $ 7,750
—
(4,832 ) 2,918
$ 6,679
723
4
7,406
2018 WCMA* 9,386
(9,386 ) —
—
—
7,067
—
7,067
2019 WCMA* —
—
—
—
—
—
—
—
2012 General Rate Case true-up 11,328
95
(7,324 ) 4,099
11,320
—
6
11,326
Cost of capital memorandum account (1,523 ) (24 ) —
(1,547 ) (144 ) (1,371 ) —
(1,515 )
Tax memorandum account (6,504 ) (114 ) —
(6,618 ) —
(5,955 ) —
(5,955 )
All others 5,112
4,019
(3,288 ) 5,843
3,851
787
4
4,642
Total revenue accounts $ 25,549
(5,410 ) (15,444 ) 4,695
$ 21,706
1,251
14
22,971
Cost-recovery accounts:
Water supply costs 9,617
(754 ) (3,773 ) 5,090
8,679
3,074
—
11,753
Pension (1,843 ) 582
2,435
1,174
(2,459 ) 482
1
(1,976 )
All others 1,090
8
(449 ) 649
—
—
—
—
Total cost-recovery accounts $ 8,864
(164 ) (1,787 ) 6,913
$ 6,220
3,556
1
9,777

Total $ 34,413
(5,574 ) (17,231 ) 11,608
$ 27,926
4,807
15
32,748

* As of September 30, 2019, the 2019 WCMA and 2018 WCMA balances were reserved in full. As of September 30, 2018, the reserve balances for the 2018 WCMA was $1,003 which has been included in the balance above. As of September 30, 2018, the reserve balance for the 2017 WCMA was $985 which has been included in the balance above.

As of ~~September 30, 2019,~~March 31, 2020, the total balance in ~~San Jose Water Company’s~~SJWC’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of ~~$1,183.~~$1,780. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in ~~San Jose Water Company’s~~SJWC’s next general rate case or at the time an individual account balance reaches a threshold of 2% of authorized revenue, whichever occurs first.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)


Note 10.	Regulatory Assets and Liabilities

Regulatory assets and liabilities are comprised of the following as of ~~September 30, 2019,~~March 31, 2020, and December 31, ~~2018:~~2019:


	September 30, 2019		December 31, 2018	March 31, 2020		December 31, 2019
Regulatory assets:
Income tax temporary differences, net				$	4,829	2,433
Postretirement pensions and other medical benefits	$	66,233	66,233	75,434		73,525
Business combinations debt premium, net				24,385		25,020
Balancing and memorandum accounts, net	11,608		34,413	15,048		5,283
Water Revenue Adjustment (“WRA”)				5,648		9,108
Other, net	3,432		2,979	6,934		5,048
Total regulatory assets, net in Consolidated Balance Sheets	81,273		103,625	132,278		120,417
Less: current regulatory asset, net	7,493		26,910	6,129		6,472
Total regulatory assets, net, less current portion	$	73,780	76,715	$	126,149	113,945

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


Note 11.	Business Combination

On October 9, 2019, SJW Group completed its previously announced acquisition of CTWS pursuant to the terms of the Second Amended and Restated Agreement and Plan of Merger, dated as of August 5, 2018, by and among SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group, and CTWS. CTWS provides water service to approximately 138,000 connections that serve a population of approximately 480,000 people in 80 municipalities throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut. In addition, CTWS has a real estate company in Connecticut which provides property management services.

SJW Group acquired all of the outstanding stock of CTWS for $70.00 per share in cash (without interest and less any applicable withholding taxes). The total cash purchase price was approximately $838,476, less cash received of $3,011, and approximately $6,384 related to outstanding awards of restricted stock units and deferred share units assumed in connection with the merger. SJW Group financed the acquisition with net proceeds from its December 2018 sale of 7,762,000 shares of common stock of approximately $411,077, and the October 2019 issuance of $427,398 in new fixed rate term loans. SJW Group raised an additional $18,463 in the debt financing to partially finance transaction costs incurred in connection with the CTWS acquisition. Along with the acquisition debt financing, SJW Group raised $60,000 of new proceeds used to partially refinance certain CTWS short-term borrowings on its existing lines of credit after the CTWS acquisition closed.

Management estimated the preliminary fair values of net tangible and intangible assets acquired and the excess of the consideration transferred over the aggregate of such fair values was recorded as goodwill. The preliminary value of the acquired deferred tax assets and deferred tax liabilities are based on a preliminary analysis, and our estimates and assumptions are subject to change within the measurement period (up to one year from the acquisition date). In addition, management is still gathering information necessary to complete the recognition and measurement of the opening balance sheet.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

~~September 30, 2019~~March 31, 2020

(in thousands, except share and per share data)

The following table summarizes the estimated preliminary fair value of assets acquired and liabilities assumed as of March 31, 2020.



	Fair Value
Assets acquired:
Utility plant, net	$	750,703
Nonutility plant	848
Current assets	42,673
Investments	12,489
Regulatory assets and deferred charges, less current portion	83,132
Other intangible assets	17,181
Other assets	2,592
Goodwill	626,523
Total assets acquired	1,536,141
Liabilities assumed:
Long-term debt	281,009
Current liabilities, including maturities of long-term debt	125,772
Deferred income taxes	107,789
Postretirement benefit plans	31,789
Contributions in aid of construction and construction advances	137,327
Other long-term liabilities	10,607
Total liabilities assumed	694,293
Assumed equity	$	841,848

Other intangible assets primarily consists of customer relationships.

The goodwill balance is primarily attributable to assembled workforce and diversification of markets both from a geographic and regulatory perspective. We do not expect the goodwill recognized in connection with the transaction will be deductible for income tax purposes.

Goodwill is not amortized but is tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not, reduce the fair value of a reporting unit below its carrying amount. SJW Group first performs a qualitative assessment to determine whether it is necessary to perform the quantitative impairment test. In assessing the qualitative factors, SJW Group considers the impact of these key factors: change in industry and competitive environment, financial performance, macroeconomic conditions, and other relevant Company-specific events. If SJW Group determines that as a result of the qualitative assessment it is more likely than not (> 50% likelihood) that the fair value is less than carrying amount, then a quantitative test is performed.


~~Note 11.~~	~~Legal Proceedings~~

~~Class Action Suits Related to the Merger~~

On June 14, 2018, certain shareholders of CTWS filed two nearly identical class-action complaints in Connecticut state court against the CTWS board of directors, SJW Group, Eric W. Thornburg, Chairman, President and Chief Executive Officer of SJW Group, and CTWS. The complaints, as amended on September 18, 2018 and September 20, 2018, allege that the CTWS board breached its fiduciary duties in connection with the Merger, that CTWS’s preliminary proxy statement, filed with the SEC on August 20, 2018, omits certain material information and that SJW Group and Mr. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the actions seek to recover rescissory and other damages and attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit and intends to vigorously defend this litigation. 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. On September 19, 2019, the court granted the parties’ motion to continue the stay and ordered that the stay be continued until November 11, 2019. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed now that the transaction has closed.

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. The complaints allege that the preliminary proxy statement issued in connection with the merger omitted material information in violation of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the 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 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. CTWS has entered into an agreement in principle to settle and release all claims that were or could have been alleged by the plaintiffs. The settlements provide for the dismissal of the actions subject to, among other things, CTWS making certain additional disclosures, which CTWS included in the definitive proxy statement in connection with the merger. The complaints filed in the U.S. District Court for the District of Connecticut were voluntarily dismissed without prejudice on May 14, 2019.

~~Billing Practice OII with CPUC~~

On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent. The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate service charges when increases occurred during a billing period, and whether the company double-billed service charges during one billing period when allegedly switching from billing such charges in advance to billing in arrears. By a decision adopted November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged overcharging issue for the period since June 2011 by requiring customer credits to customers totaling $2,020. That amount was refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective February 8, 2019. See discussion on the matter in Note 8, “Regulatory Rate Filings.” On July 24, 2019, San Jose Water Company and CPED jointly filed a motion for CPUC approval of a Settlement Agreement (“Agreement”) over San Jose Water Company’s past customer billing practices. The Agreement requires the company to pay approximately $2,100 in additional customer refunds, consisting of $1,757 for refunds during the period from 1987 to 2011 and $350 in customer credits to low income water customers, and invest $5,000 in utility plant that is not allowed an investment return or rate recovery. San Jose Water Company recorded the $2,100 customer credit expense as an offset to revenues during the second quarter of 2019. The $5,000 commitment to invest in utility plant will be recognized as plant in service on the company’s financial statements once invested. The Agreement is subject to final approval by the CPUC which is expected in the fourth quarter of 2019.

~~SJW GROUP AND SUBSIDIARIES~~

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

~~September 30, 2019~~

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

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


Note 12.	Subsequent Events

On ~~October 8, 2019,~~April 24, 2020, SJW Group and SJW Land Company entered into a ~~note purchase~~Termination and Payoff agreement with JPMorgan Chase Bank, N.A. as the ~~purchasers listed~~lender (the “Lender”) to terminate the SJW Group and SJW Land $15,000 credit agreement, effective as of April 29, 2020.

On May 11, 2020, the SJWC entered into a Second Amendment (the “Second Amendment”) to the SJWC’s existing $125,000 credit agreement, dated as of June 1, 2016, with the Lender, as amended by the First Amendment, dated January 12, 2018 (collectively, the “Existing SJWC Credit Agreement”), with the Lender. The Second Amendment amends the Existing SJWC Credit Agreement to, among other things, increase the total commitment by $15,000, from $125,000 to $140,000.

On May 11, 2020, SJWC entered into a $50,000 credit agreement (the “New SJWC Credit Agreement”) with the Lender. Proceeds of borrowings under the New SJWC Credit Agreement may be used to refinance existing debt, for working capital, and for general corporate purposes. The New SJWC Credit Agreement has a maturity date of November 11, 2020.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

March 31, 2020

(in thousands, except share and per share data)

Borrowings under the New SJWC Credit Agreement bear interest at either the Alternate Base Rate (“ABR”) or the LIBOR (as defined in the ~~agreement, pursuant~~New SJWC Credit Agreement) rate. ABR borrowings (which are borrowings bearing interest at a rate determined by reference to the ABR) will bear interest at a rate per annum equal to (i) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5%, and (c) the adjusted LIBOR rate for a one-month interest period on such day plus 1% plus (ii) the Applicable Rate (as defined in the New SJWC Credit Agreement), which SJW Group sold an aggregate principal amount of $310,000 of its 3.05% Senior Notes, Series 2019A, due November 1, 2029, $75,000 of its 3.15% Senior Notes, Series 2019B, due November 1, 2031, and $125,000 of its 3.53% Senior Notes, Series 2019C, due November 1, 2039. The notes are unsecured obligationsis determined based on a pricing grid that is dependent upon the credit rating of the ~~Company. Interest is payable semi-annually~~company as determined by either S&P or Moody’s. Eurodollar borrowings under the New SJWC Credit Agreement will bear interest at a rate per annum equal to (i) the adjusted LIBOR rate for the interest period in ~~arrears on May 1st and November 1st of each year.~~ effect plus (ii) the Applicable Rate.

The ~~note purchase agreement~~New SJWC Credit Agreement contains customary representations, warranties and warranties. Under the note purchase agreement, SJW Group is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. The New SJWC Credit Agreement also includes certain financial covenants that require the ~~occurrence of which may result in all of~~company to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio and to limit the ~~notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement.~~

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

balance.


Note 13.	Legal Proceedings

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, ~~2018.~~2019.

This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors. For more information about such forward-looking statements, including some of the factors that may affect our actual results, please see our disclosures under “Forward-Looking Statements,” and elsewhere in this Form 10-Q, including Item 1A under “Risk Factors.”

General:

~~As of September 30, 2019,~~ SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company (“SJWC”), SJWNE LLC as of October 9, 2019, SJWTX, Inc., and SJW Land Company, and Hydro Sub, Inc, a Connecticut corporation that was formed on March 9, 2018 for the sole purpose of effecting the SJW Group and Connecticut Water Service, Inc. (“CTWS”) merger and subsequently dissolved following the completion of the merger on October 9, 2019.Company.

~~San Jose Water Company~~SJWC is a public utility in the business of providing water service to approximately ~~231,000~~232,000 connections that serve a population of approximately one million people in an area comprising approximately 139 square miles in the metropolitan San Jose, California area.

The principal business of ~~San Jose Water Company~~SJWC consists of the production, purchase, storage, purification, distribution, wholesale, and retail sale of water. ~~San Jose Water Company~~SJWC 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~~SJWC 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~~SJWC 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~~SJWC 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~~SJWC 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~~SJWC’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 ~~17,500~~18,000 connections that serve approximately ~~52,000~~54,000 people. CLWSC’s service area comprises more than 246 square miles in the southern region of the Texas Hill Country in Blanco, Comal, Hays and Travis counties, the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.

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

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

owns undeveloped land and operates commercial buildings in Tennessee. SJW Land Company also 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, has been consolidated with SJW Land Company.

~~On October 9, 2019, SJW Group completed the merger transaction with CTWS,~~Connecticut Water Service, Inc. (“CTWS”), headquartered in Connecticut, is a holding company ~~whose subsidiaries are primarily public~~for water utilities companies providing water service to approximately 138,000 ~~service~~ connections that serve a population of approximately ~~450,000~~480,000 people in 80 municipalities ~~with a service area of approximately 269 square miles~~ throughout Connecticut and Maine and more than 3,000 wastewater connections in Southbury, Connecticut. As part of the merger transaction between SJW Group and CTWS on October 9, 2019, CTWS became a wholly-owned subsidiary of SJWNE LLC which is a wholly-owned subsidiary of SJW Group. The ~~total purchase price was $838,476~~subsidiaries held by CTWS that provide utility water

services are The Connecticut Water Company (“Connecticut Water”), The Heritage Village Water Company (“HVWC”), The Avon Water Company (“Avon Water”) and The Maine Water Company (“Maine Water”). The remaining two subsidiaries are Chester Realty, Inc., a real estate company in ~~cash~~Connecticut, and New England Water Utility Services, Inc. (“NEWUS”), which provides contract water and sewer operations and other water related services.

CTWS also offers Linebacker, an optional service line protection program offered by CTWS to eligible residential customers through NEWUS in Connecticut and Maine Water in Maine covering the ~~purchase price allocation~~cost of repairs for leaking or broken water service lines which provide drinking water to a customer’s home. For customers who enroll in this program, CTWS will repair or replace a leaking or broken water service line and related equipment. Additionally, NEWUS offers expanded coverage to Connecticut Water customers for failure of in-home plumbing, sewer and septic drainage lines and implemented modified terms and conditions with limitations on certain coverages.

The properties of CTWS consist of land, easements, rights (including water rights), buildings, reservoirs, standpipes, dams, wells, supply lines, water treatment plants, pumping plants, transmission and distribution mains and other facilities and equipment used for the ~~business combination consisted~~collection, purification, storage and distribution of ~~primarily acquired utility plant~~water throughout Connecticut and ~~assumed liabilities. Due~~Maine. In certain cases, Connecticut Water and Maine Water are or may be a party to limited contractual arrangements for the ~~timing~~provision of water supply from neighboring utilities.

SJW Land Company owned the ~~business combination and~~following real properties during the ~~complexities involved~~three months ended March 31, 2020:



				% for Three months ended March 31, 2020 of SJW Land Company
Description	Location	Acreage	Square Footage	Revenue		Expense
Warehouse building	Knoxville, Tennessee	30	361,500	48	%	40	%
Commercial building	Knoxville, Tennessee	15	135,000	52	%	60	%
Undeveloped land and parking lot	Knoxville, Tennessee	10	N/A	N/A		N/A
Undeveloped land	San Jose, California	103	N/A	N/A		N/A

As of March 31, 2020, Chester Realty, Inc. owns less than 100 acres of property in ~~determining fair value~~the State of ~~assets acquired, SJW Group has not yet completed the purchase price allocation.~~Connecticut.

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, the Public Utilities Regulatory Authority in Connecticut (“PURA”), the Public Utilities Commission of Texas (“PUCT”) in Texas, and the Maine Public Utilities Commission (“MPUC”) in Maine; and


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

As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and assets, including the recent CTWS merger which closed on October 9, 2019. However, we cannot be certain we 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 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 strategic combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm operating results or our financial condition.

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~~had 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. Chester Realty, Inc. owns and operates land and commercial buildings in the State of Connecticut. Chester Realty, Inc. manages its income producing and other properties until such time a determination is made to reinvest proceeds from sale of such properties. SJW Land Company and Chester Realty, Inc.’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 ~~2018~~2019 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, ~~2018,~~2019, that was filed with the SEC on ~~February 27, 2019.~~March 2, 2020.

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, ~~2018.~~2019. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the ~~2018~~2019 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, ~~2018.~~2019.

New Accounting Pronouncements:

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20: “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which aims to improve the overall usefulness of 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~~Group’s Form 10-K for the year ending December 31, 2020. Retrospective adoption is required and early adoption is permitted. Management is currently evaluating the effect that the new standard will have on its 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.~~

Overview

SJW Group’s consolidated net income for the three months ended ~~September 30, 2019,~~March 31, 2020, was ~~$9,478,~~$2,417, a decrease of ~~$6,310~~$3,456, or approximately ~~40%~~59%, from ~~$15,788~~$5,873 for the same period in ~~2018. SJW Group’s consolidated net income for the nine months ended September 30, 2019, was $28,889, a decrease of $1,055, or approximately 4%, from $29,944 for the same period in 2018.~~2019. The decrease in net income for the three months ended ~~September 30, 2019,~~March 31, 2020, was primarily due to ~~a decrease in operating revenue as a result of a reserve established against amounts recorded in our 2018 and 2019 Water Conservation Memorandum Accounts (“WCMA”), partially offset by~~ an increase in interest income earned on the money market fund investment, and a decrease in costs related to our merger with CTWS. The decrease in net income for the nine months ended September 30, 2019, was primarilyproduction expenses at SJWC due to a decrease in operating revenue as a result of a reserve established against amounts recorded in our 2018 and 2019 WCMA and a decrease in usage, partially offset by 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 and an increase in customer usage, and an increase in interest on long-term debt used to acquire SJWNE LLC and issuance of SJWC’s Series M note. These increases were partially offset by the addition of net income ~~earned on invested proceeds~~ from ~~our equity offering~~the company’s new SJWNE LLC utility operations, and customer usage and rate increases at SJWC.an increase in ~~December 2018, and a decrease in costs related to our merger with CTWS.~~operating revenue.

Operating Revenue


	Operating Revenue by Segment						Operating Revenue by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended March 31,
	2019		2018	2019		2018	2020		2019
Water Utility Services	$	112,644	123,412	$	290,556	294,878	$	114,384	76,316
Real Estate Services	1,353		1,441	4,088		4,103	1,370		1,366
	$	113,997	124,853	$	294,644	298,981	$	115,754	77,682

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


	Three months ended September 30, 2019 vs. 2018					Nine months ended September 30, 2019 vs. 2018					Three months ended March 31, 2020 vs. 2019
	Increase/(decrease)					Increase/(decrease)					Increase/(decrease)
Water Utility Services:
Consumption changes	$	20		—	%	$	(6,003	)	(2	)%	$	6,029		7	%
Increase in customers	896			1	%	2,551			1	%	425			1	%
Rate increases	1,273			1	%	8,014			3	%	3,508			5	%
OII customer rate credits	(7		)	—	%	(2,107		)	(1	)%
Balancing and memorandum accounts:
Water Conservation Memorandum Account (“WCMA”)	(13,707		)	(11	)%	(17,178		)	(6	)%	1,140			2	%
Cost of capital memorandum account	1			—	%	1,347			1	%
Tax memorandum account	426			—	%	5,841			2	%
Tax regulatory liability - Texas	16			—	%	(114		)	—	%
All others	314			—	%	3,327			1	%	(438		)	(1	)%
SJWNE LLC											27,404			35	%
Real Estate Services	(88		)	—	%	(15		)	—	%	4			—	%
	$	(10,856	)	(9	)%	$	(4,337	)	(1	)%	$	38,072		49	%

Operating Expense


	Operating Expense by Segment						Operating Expense by Segment
	Three months ended September 30,			Nine months ended September 30,			Three months ended March 31,
	2019		2018	2019		2018	2020		2019
Water Utility Services	$	91,560	88,853	$	229,906	223,362	$	97,378	61,426
Real Estate Services	935		934	2,834		2,674	831		891
All Other	4,418		9,238	10,441		16,987	2,118		2,957
	$	96,913	99,025	$	243,181	243,023	$	100,327	65,274

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


	Three months ended September 30, 2019 vs. 2018					Nine months ended September 30, 2019 vs. 2018					Three months ended March 31, 2020 vs. 2019
	Increase/(decrease)					Increase/(decrease)					Increase/(decrease)
Water production expenses:
Change in surface water use	$	(4,631	)	(5	)%	$	(11,929	)	(5	)%	$	5,437		8	%
Change in usage and new customers	656			1	%	(2,309		)	(1	)%	5,292			8	%
Purchased water and groundwater extraction charge and energy price increase	3,860			4	%	10,222			4	%	1,523			2	%
Balancing and memorandum accounts cost recovery	1,316			1	%	3,825			2	%	(1,512		)	(2	)%
SJWNE LLC											6,256			10	%
Total water production expenses	1,201			1	%	(191		)	—	%	16,996			26	%
Administrative and general	1,998			2	%	4,231			1	%	9,202			14	%
Balance and memorandum account cost recovery	(38		)	—	%	(98		)	—	%	(231		)	—	%
Maintenance	(57		)	—	%	(59		)	—	%	1,761			2	%
Property taxes and other non-income taxes	49			—	%	709			—	%	3,335			5	%
Depreciation and amortization	1,440			2	%	4,447			2	%	6,237			10	%
Merger related expenses	(6,705		)	(7	)%	(8,881		)	(3	)%	(2,247		)	(3	)%
	$	(2,112	)	(2	)%	$	158		—	%	$	35,053		54	%

Sources of Water Supply

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

The Connecticut water utility services’ infrastructure consists of 65 noncontiguous water systems in the State of Connecticut. These systems, in total, consist of approximately 1,800 miles of water main and reservoir storage capacity of 2.4

billion gallons. The dependable yield from our 235 active wells and 18 surface water supplies is approximately 65 million gallons per day. Water sources vary among the individual systems, but overall approximately 80% of the total dependable yield comes from surface water supplies and 20% from wells.

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

Maine Water’s infrastructure consists of 12 noncontiguous water systems in the State of Maine. These systems, in total, consists of approximately 500 miles of water main and reservoir storage capacity of 7.0 billion gallons. The dependable yield from our 14 active wells and 7 surface water supplies is approximately 120 million gallons per day. Water sources vary among the individual systems, but overall approximately 80% of the total dependable yield comes from surface water supplies and 20% from wells.

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


	Three months ended September 30,		Increase/ (decrease)			% of Total Change			Nine months ended September 30,						Increase/ (decrease)			% of Total Change		Three months ended March 31,					Increase/ (decrease)		% of Total Change
	2019	2018				% of Total Change		2019			2018			2020				% of Total Change			2019				Increase/ (decrease)		% of Total Change
Purchased water	7,977	8,334	Increase/ (decrease)	(357	)		(3	)%		17,080			18,592		Increase/ (decrease)		(1,512	)		(5	)%	3,635		3,162		473			7	%
Groundwater	3,472	3,922	(450	)		(3	)%		7,706			9,574			(1,868	)		(6	)%	4,345			1,832		2,513		38	%
Surface water	1,369	339	1,030			8	%		4,831			2,043			2,788			9	%	2,051			1,577		474		7	%
Reclaimed water	313	325	(12	)		—	%		537			576			(39	)		—	%	86			45		41		1	%
	13,131	12,920	211			2	%		30,154			30,785			(631	)		(2	)%	10,117			6,616		3,501		53	%

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

~~Unaccounted-for~~SJWC’s unaccounted-for water on a 12-month-to-date basis for ~~September 30,~~March 31, 2020, and 2019 approximated 8.0% and ~~2018 approximated 8.3% and 7.8%~~6.6%, respectively, as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially offset by ~~Water Utility Services’~~SJWC’s main replacements and lost water reduction programs.

CTWS’s unaccounted-for water on an acquisition-to-date basis for the period ending March 31, 2020 was approximately 16.1% as a percentage of total production. The unaccounted-for water estimate is based on the results of past experience and the impact of flows through CTWS’s systems, unadjusted for any required system flushing, partially offset by WICA and WISC main replacement programs and lost water reduction initiatives.

Water Production Expenses

The change in water production expenses for the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same ~~periods~~period in ~~2018,~~2019, was primarily attributable to ~~increased~~the new SJWNE LLC operations, a decrease in the use of surface water, ~~offset by~~an increase in customer usage and higher per unit costs for purchased water, groundwater extraction and energy charges, ~~and~~offset by a decrease in cost-recovery balancing and memorandum accounts. Effective July 1, 2019, Valley Water increased the unit price of purchased water by approximately 6.1% and the groundwater extraction charge by approximately 6.6%. An increase in usage also contributed to the increase in water production expenses for the three months ended September 30, 2019. For the nine months ended September 30, 2019, the increase of water production expenses were offset by a decrease in usage.

Other Operating Expenses

Operating expenses, excluding water production expenses, ~~decreased $3,313~~increased $18,057 for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period in 2018. The decrease was primarily attributable to a decrease of $6,705 in merger related expenses incurred in connection with the company’s merger with CTWS, offset by an increase of $1,960 in administrative and general expenses primarily due to integration costs for the merger with CTWS and annual wage increases, and an increase of $1,440 in depreciation and amortization expense due to increases in utility plant.

~~Operating expenses, excluding water production expenses, increased $349 for the nine months ended September 30, 2019, compared to the same period in 2018.~~2019. The increase was primarily attributable to an increase of ~~$4,133~~$15,951 due to the new SJWNE LLC operations, and increases of $1,533 in administrative and general expenses primarily due to ~~integration costs for the merger with CTWS, annual wage increases~~legal and ~~maintenance agreements, an increase of $4,447~~accounting fees, $1,106 in depreciation and amortization expense due to increases in utility plant, and an increase ~~in property~~of COVID-19 related reserves and ~~other non-income taxes~~expenses of ~~$709 primarily due to an increase in utility plant additions and annual assessments,~~$555, partially offset by a decrease ~~of $8,881~~ in merger related expenses ~~incurred in connection with~~due to the ~~company’s~~completion of the merger with CTWS.

Other (Expense) Income

For the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same periods in ~~2018,~~2019, the change in other (expense) income was primarily due to an increase in interest on long-term debt as a result of the issuance of SJW Group’s Series 2019A, B and C

notes and SJWC’s Series M note. In addition, interest income ~~earned on~~decreased due to use of previously invested money market funds for the ~~invested proceeds from our equity offering in December 2018.~~merger with CTWS.

Provision for Income Taxes

For the three ~~and nine~~ months ended ~~September 30, 2019,~~March 31, 2020, compared to the same period in ~~2018,~~2019, income tax expense decreased ~~$1,538 and increased $1,211, respectively.~~$1,607. The decrease in income tax expense of ~~$1,538~~$1,607 is primarily due to a lower pre-tax income in the three months ended ~~September 30, 2019. The increase in income tax expenses of $1,211 is primarily due to higher excess~~March 31, 2020 and the flow-through tax benefits ~~recorded in 2018.~~of certain CTWS tax attributes. The effective consolidated income tax rates ~~was 21%~~were 15% and 26% for the three months ended March 31, 2020 and 2019, respectively.

~~September 30, 2019~~On March 27, 2020, the Coronavirus Aid, Relief, and ~~2018, and 23% and 20% for~~Economic Security (“CARES”) Act was signed into law. The CARES Act includes, among other items, measures concerning income taxes. Many of the ~~nine months ended September 30, 2019, and 2018, respectively. The lower effective tax rate for the nine months ended September 30, 2018 was due~~CARES Act’s requirements are subject to ~~recognition of excess tax benefits of $1,443 relating to stock-based compensation. In comparison, the excess tax benefits recognized for the nine months ended September 30, 2019 was $64.~~

further clarification. The Company has ~~recognized a deferred~~considered the income tax ~~asset for~~provisions of the ~~transaction costs associated with the merger with CTWS which was consummated on October 9, 2019. Accordingly, the deferred tax asset for the transaction costs will be written off to earnings~~CARES Act in the ~~fourth~~first quarter of ~~2019. The estimated amount of write-off is $5,679. The actual write-off may differ from the estimate as the company is currently analyzing the tax deductibility of certain transaction costs.~~2020.

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

California Water Supply

On ~~October~~April 1, ~~2019,~~2020, Valley Water’s 10 reservoirs were approximately ~~42%~~35% of total capacity with ~~70,102~~58,563 acre-feet of water in storage, which is ~~88%~~56% of the twenty-year average for this date. As reported by the Valley Water, there was ~~0.16~~7.24 inches of rainfall in San Jose during the current annual rainfall season that commenced on July 1, ~~2019.~~2019, that included one of the driest February’s on record. Rainfall at ~~San Jose Water Company’s~~SJWC’s Lake Elsman was measured at ~~0.16~~23.78 inches during the current rainfall season. Under normal hydrologic conditions, state and federal water allocations represent approximately 40% of the Valley Water’s total annual water supply. As of ~~October~~April 1, ~~2019,~~2020, the Valley Water reported that allocations from the state and federal water project are approximately ~~75%~~15% and ~~100%~~65%, respectively, of amounts requested in ~~2019.~~2020. Valley Water also reported that the managed groundwater recharge from January to ~~September~~March in the Santa Clara Plain was ~~77%~~121% of the five-year average. The groundwater level in the Santa Clara Plain is approximately ~~one foot higher~~four feet lower than a year ago in ~~September~~February and 18nine feet higher than the five-year average. The groundwater level in the Santa Clara Plain was not measured in March due to the COVID-19 shelter in place order. According to Valley Water, the projected total groundwater storage at the end of ~~2019~~2020 is expected to fall within the normal stage of the Valley Water’s Water Shortage Contingency Plan.

On ~~October~~April 1, ~~2019, San Jose Water Company’s~~2020, SJWC’s Lake Elsman contained ~~1,553~~1,384 acre-feet of water, of which approximately ~~1,093~~924 acre-feet can be utilized for treatment. This Lake Elsman volume represents 50% of the five-year average. Local surface water is a less costly source of water than groundwater or purchased water and its availability significantly impacts ~~San Jose Water Company’s~~SJWC’s results of operations. ~~San Jose Water Company~~SJWC will utilize surface water and additional water from its portfolio of groundwater supplies to supplement imported water from the Valley Water. Production from the Montevina Surface Water Treatment Plant through the ~~third~~first quarter was ~~4,429~~334 million gallons, which is ~~377%~~46% of the five-year average. Production at ~~San Jose Water Company’s~~SJWC’s smaller Saratoga Water Treatment Plant through the ~~third~~first quarter was ~~402~~48 million gallons, which is ~~212%~~48% of the five-year average. ~~Saratoga Water Treatment Plant was taken out of service during the third quarter due to lack of run-off from Saratoga Creek and remains offline. San Jose Water Company~~SJWC believes that its various water supply sources will be sufficient to meet customer demand through the remainder of ~~2019.~~

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

San Jose Water Company provides additional information on its web site, www.sjwater.com, relating to ongoing water conservation measures taken in California, including information on customer water usage. San Jose Water Company intends to update the web site as appropriate during the period in which the water use restrictions and calls for conservation from state and local authorities remain in effect. The information on our web sites is not a part of and should not be considered incorporated by reference into this Form 10-Q.2020.

Regulation and Rates

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

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

Liquidity:

Cash Flow from Operating Activities

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, SJW Group generated cash flows from operations of approximately ~~$91,300,~~$7,900, compared to ~~$73,700~~$25,200 for the same period in ~~2018.~~2019. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations ~~increased~~decreased by approximately ~~$17,600.~~$17,300. This ~~increase~~decrease was the result of a combination of the following factors: (1) ~~increase~~decrease in collection in balancing and memorandum accounts of ~~$27,600,~~$13,100, (2) payments of amounts previously invoiced and accrued, which ~~$9,648 related to~~increased by $9,200, (3) an up-front payment of $5,000 for renewal of the ~~reserve established~~Cupertino service concession agreement, offset by (4) an increase of $5,100

in interest accruals for new debt and debt acquired by the ~~2018~~merger with CTWS., and ~~2019 WCMA, (2)~~(5) general working capital and net income, adjusted for non-cash items increased by ~~$3,300, offset by (3) decrease in net payments of taxes payable by $8,000, and (4) decrease in collections of previously billed and accrued receivables by $5,300.~~$4,900.

As of ~~September 30, 2019,~~March 31, 2020, Water Utility Services’ write-offs for uncollectible accounts represent less than 1% of its total revenue, unchanged from ~~September 30, 2018.~~March 31, 2019. In March 2020, the regulated utilities commissions of the respective states we operate in have made executive orders suspending water service disconnections due to non-payment from customers in light of the current stay-at-home orders, quarantines and similar governmental restrictions for the global COVID-19 pandemic. Management believes ~~it will continue to collect~~that the historical collection rate for its accounts receivable ~~balances at its historical collection rate.~~

~~In connection with~~will decrease during the ~~proposed merger with CTWS, SJW Group incurred professional fees of $1,737~~COVID-19 pandemic and ~~$6,113 for the three and nine months ended September 30, 2019, respectively. SJW Group anticipates incurring additional merger related expenses~~although any financial impact is currently tracked to be filed through the ~~close of~~rate-making process, there is no guarantee that such recovery will be approved by the ~~transaction in the amount of approximately $12,179 which will negatively impact fourth quarter operating cash flows.~~respective regulatory utility commissions.

Cash Flow from Investing Activities

During the ~~nine~~three months ended ~~September 30, 2019,~~March 31, 2020, SJW Group used cash flows in investing activities of approximately ~~$114,800,~~$42,500, compared to ~~$106,000~~$34,400 for the same period in ~~2018.~~2019. SJW Group used approximately: (1) ~~$101,100~~$38,300 of cash for company-funded capital expenditures, (2) ~~$10,000~~$3,600 for developer-funded capital expenditures, and (3) ~~$4,400~~$300 in utility plant retirement costs.

Water Utility Services’ budgeted capital expenditures for ~~2019,~~2020, exclusive of capital expenditures financed by customer contributions and advances, are approximately ~~$131,000.~~$225,800. As of ~~September 30, 2019,~~March 31, 2020, approximately ~~$101,100~~$38,300 or ~~77%~~17% of the ~~$131,000~~$225,800 has been spent.

Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, ~~San Jose Water Company’s and CLWSC’s~~ Water Utility Services expect to incur approximately ~~$699,228~~$1.2 billion in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future CPUC, ~~and~~PURA, PUCT or MPUC approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction.

~~A substantial portion of San Jose~~The Water ~~Company’s~~Utility Services’ distribution ~~system was~~systems were constructed during the period from ~~1945 to 1980.~~the early 1900’s through today. Expenditure levels for renewal and modernization ~~of this part of~~will occur as the ~~system will grow as these~~ components reach the end of their useful lives. In most cases, ~~the~~ replacement cost will significantly exceed the original installation cost of the retired assets due to increases in the costs of goods and services and increased regulation.

Cash Flow from Financing Activities

Net cash provided by financing activities for the ~~nine~~three months ended ~~September 30, 2019, decreased~~March 31, 2020, increased by approximately ~~$10,300~~$36,700 from the same period in the prior year, primarily as a result of (1) ~~a decrease~~an increase in net borrowings on our lines of credit of ~~$89,000,~~$82,200, and (2) ~~a $8,300 increase in dividends paid, offset by (3) net proceeds of $78,800 from new long-term debt, (4) $4,100~~$1,500 increase in net cash receipts from advances and contributions in aid of construction, ~~and (5) an increase~~offset by (3) a decrease in net proceeds from ~~other changes~~new long-term debt of ~~$4,100 primarily due to less taxes paid related to net share settlement of stock-based compensation awards.~~$45,000.

Sources of Capital:

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

San Jose Water Company’s financing activity is designed to achieve a capital structure consistent with our CPUC authorized structure of approximately 47% debt and 53% equity. As of September 30, 2019, San Jose Water Company’s funded debt and equity were approximately 49% and 51%, respectively.

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

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

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

SJW Group’s unsecured senior note ~~agreement~~agreements has terms and conditions that restrict SJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $175,000 plus 30% of Water Utility Services cumulative net income, since June 30, 2011. SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions at ~~September 30, 2019.~~March 31, 2020.

~~On October 8, 2019,~~SJWC’s financing activity is designed to achieve a capital structure consistent with our CPUC authorized structure of approximately 47% debt and 53% equity. As of March 31, 2020, SJWC’s funded debt and equity were approximately 49% and 51%, respectively.

Funding for SJWC’s future capital expenditure program is expected to be provided primarily through internally-generated funds, the ~~SJW Group entered into a note purchase agreement with~~issuance of new long-term debt, the ~~purchasers listed in the agreement, pursuant to which SJW Group sold an aggregate principal amount~~issuance of $310 million of its 3.05% Senior Notes, Series 2019A, due November 1, 2029, $75 million of its 3.15% Senior Notes, Series 2019B, due November 1, 2031, and $125 million of its 3.53% Senior Notes, Series 2019C, due November 1, 2039. The notes are unsecured obligations of the Company. Interest is payable semi-annually in arrears on May 1st and November 1st of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, SJW Group is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrenceequity, all of which ~~may~~will be consistent with regulator guidelines.

SJWC’s unsecured senior note agreements generally have terms and conditions that restrict SJWC from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. SJWC was not restricted from issuing future indebtedness as a result ~~in all~~ of ~~the notes then outstanding becoming immediately due~~these terms and ~~payable. The closing occurred simultaneously with the signing of the note purchase agreement. SJW Group used~~ ~~$427,399~~ ~~of the net proceeds from the notes, together with $411,077 of net proceeds from the equity offering in December 2018, to finance the Merger and to pay certain related fees and expenses.~~conditions at March 31, 2020.

~~San Jose Water Company’s~~

SJWC’s loan agreements with the California Pollution Control Financing Authority contain affirmative and negative covenants customary for loan agreements relating to revenue bonds, including, among other things, complying with certain disclosure obligations and covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of the projects funded by the loan proceeds and the assignment of the loan agreement. As of ~~September 30, 2019, San Jose Water Company~~March 31, 2020, SJWC was in compliance with all such covenants.

CTWS has outstanding term loans with a commercial bank and under the master loan agreement, CTWS is required to comply with certain financial ratio and operational covenants. The most restrictive of these covenants is to maintain a consolidated (CTWS and its subsidiaries) debt to capitalization ratio of not more than 60%. As of March 31, 2020, CTWS was in compliance with all covenants under the master loan agreement.

Connecticut Water has outstanding term loans with a commercial bank and under its master loan agreement, Connecticut Water is required to comply with financial and operational covenants substantially identical to those found in CTWS’s master loan agreement. Connecticut Water is required to maintain a debt to capitalization ratio of not more than 60%. As of March 31, 2020, Connecticut Water was in compliance with all covenants under its master loan agreement.

Connecticut Water has tax exempt and taxable Water Facilities Revenue Bonds issued through Connecticut Innovations (formerly the Connecticut Development Authority). The bond indentures and loan agreements contain customary affirmative and negative covenants and require compliance with financial and operational covenants, and also provide for the acceleration of the Revenue Bonds upon the occurrence of stated events of default. As of March 31, 2020, Connecticut Water was in compliance with all covenants of the bond indentures and loan agreements.

On March 12, 2020 Connecticut Water entered into a note purchase agreement with the purchasers listed in the agreement, pursuant to which Connecticut Water sold an aggregate principal amount of $35,000 of its 3.51% Senior Notes, due March 12, 2050. The notes are unsecured obligations of Connecticut Water. Interest is payable semi-annually in arrears on March 12th and September 12th of each year. The note purchase agreement contains customary representations and warranties. Under the note purchase agreement, Connecticut Water is required to comply with certain customary affirmative and negative covenants for as long as the notes are outstanding. The notes are also subject to customary events of default, the occurrence of which may result in all of the notes then outstanding becoming immediately due and payable. The closing occurred simultaneously with the signing of the note purchase agreement.

Connecticut Water’s unsecured senior notes have terms and conditions that restrict Connecticut Water from issuing additional debt or paying a dividend to CTWS if such debt or distribution would trigger an event of default. The senior note agreements also requires Connecticut Water to maintain a debt to capitalization ratio of not more than 60% and an interest coverage ratio at each fiscal quarter end of no less than three-to-one. As of March 31, 2020, Connecticut Water was in compliance with all financial ratio and operational covenants under this agreement.

SJWTX, Inc.’s unsecured senior note agreement has terms and conditions that restrict SJWTX, Inc. from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period would be less than 175% of interest charges. In addition, SJW Group is a guarantor of SJWTX, Inc.’s senior note which has terms and conditions that restrict SJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $125,000 plus 30% of Water Utility Services cumulative net income, since December 31, 2005. As of ~~September 30, 2019,~~March 31, 2020, SJWTX, Inc. and SJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions.

Maine Water has First Mortgage Bonds issued to the Maine Municipal Bond Bank through the State Safe Drinking Water Revolving Loan Fund and First Mortgage Bonds issued to One America. The associated bond indentures and loan agreements contain customary affirmative and negative covenants, including a prohibition on the issuance of indebtedness secured by assets or revenue of Maine Water where the lien is senior to the lien of the bond trustee under the above bonds except as permitted by the bond indentures and related loan and security agreements, a requirement to maintain a debt to capitalization ratio of not more than 65%, required compliance with various financial and operational covenants, and a provision for maturity acceleration upon the occurrence of stated events of default. As of ~~September 30, 2019,~~March 31, 2020, Maine Water was in compliance with all covenants in its bond indentures and related loan agreements.

Maine Water has outstanding term loans with a commercial bank and under its master loan agreement. Maine Water is required to comply with financial and operational covenants substantially identical to those found in CTWS and Connecticut Water’s master loan agreements. Maine is required to maintain a debt to capitalization ratio of not more than 60%. As of March 31, 2020, Maine Water was in compliance with all covenants under its master loan agreement.

HVWC has a term loan with a commercial bank, due in 2034. The loan is secured by real property owned by HVWC. The loan agreement restricts HVWC’s ability to incur additional debt and requires compliance with a funded debt to capitalization covenant and other operational covenants. As of March 31, 2020, HVWC was in compliance with all covenants of the loan.

Avon Water has a mortgage loan that is due in 2033. The loan agreement (1) generally restricts the ability of Avon Water to incur additional debt or make dividend payments other than in the ordinary course of business, and (2) requires submission of periodic financial reports as part of loan covenants. As of March 31, 2020, Avon Water was in compliance with all covenants of the loan.

As of March 31, 2020, SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to ~~$145,000,~~$235,000, of which $15,000 was available to SJW Group and SJW Land Company under a single line of credit, $5,000 was available to SJWTX, Inc. under a second line of credit, ~~and~~ $125,000 was available to ~~San Jose Water Company~~SJWC under a third line of ~~credit.~~credit, and $15,000 and $75,000 under a fourth and fifth, respectively, lines of credit was available to CTWS. At ~~September 30, 2019,~~March 31, 2020, SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling ~~$83,000.~~$103,598. The lines of credit bear interest at variable ~~rates~~rates. On April 24, 2020, SJW Group terminated the $15,000 joint unsecured bank line of credit held by SJW Group and SJW Land Company effective April 29, 2020. On May 11, 2020, SJWC amended its $125,000 unsecured line of credit to increase the lending commitment $15,000 to $140,000. In addition, on May 11, 2020, SJWC entered into an additional unsecured line of credit allowing borrowings of up to $50,000 during a six month period. The $140,000 and $50,000 lines of credit of SJWC expire on June 1, 2021 and November 11, 2020, respectively. The line of credit for SJWTX, Inc. expires on June 1, 2021. The lines of credit for CTWS expire July 1, 2020 and December 14, 2023. During ~~2019,~~2020, the cost of borrowing on SJW Group’s short-term credit facilities has averaged ~~3.23%~~2.91%. ~~The~~All of SJW Group’s and subsidiaries lines of credit contain customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. All of the lines of credit also include certain financial covenants that require the borrower and, in some cases SJW Group, to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio. As of March 31, 2020, SJW Group and SJWTX, Inc. unsecured bank lines of credit have the following affirmative covenants calculated with the financial statements of SJW Group, on a consolidated basis: (1) the funded debt cannot exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-month-calendar period cannot be less than 175% of interest charges. As of September 30, 2019, SJW Group and SJWTX, Inc.its subsidiaries were in compliance with all ~~covenants. San Jose Water Company’s unsecured bank line~~covenants on their lines of credit.

The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to draw on its lines of credit, ~~has~~issue long-term debt, sell its equity or earn interest income. In addition, government policies, the ~~following affirmative covenants: (1)~~state of the ~~funded debt cannot exceed 66-2/3% of total~~

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

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

~~Funding for~~rates, which would increase SJW Group’s ~~all-cash merger with CTWS which closed~~cost of capital. While our ability to obtain financing will continue to be a key risk, we believe that based on ~~October 9, 2019 was provided through proceeds from~~our 2020 activities, we will have access to the company’s equity offering in December 2018 and the debt financing in October 2019, existing cash balances and cash flow from operations. SJW Group had received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank PLC, Royal Bank of Canada and UBS AG, Stamford Branchexternal funding sources necessary to ~~provide a senior unsecured bridge loan facility of up to $975 million~~implement our on-going capital investment programs in the event that SJW Group was unable to secure other financing for the merger at or prior to the time the merger is completed. Subsequent to the net proceeds received by SJW Group from the public offering of common stock in 2018, the facility commitment was reduced to $563 million. ~~On October 9, 2019, the senior unsecured bridge loan facility was terminated. SJW Group did not draw down any fund from the loan facility.~~

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


ITEM 3.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

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


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~~first fiscal quarter of ~~2019~~2020 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. 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. On September 19, 2019, the court granted the parties’ motion to continue the stay and ordered that the stay be continued until November 11, 2019. Pursuant to the agreement in principle to settle the litigation, the complaints will be dismissed now that the merger transaction closed on October 9, 2019.

Additional complaints have been filed in connection with the Merger but neither SJW Group nor any of its officers or directors are named as defendants therein. On October 5, 2018, certain shareholders of CTWS filed two complaints, one individually and the other as a putative class action, in each case, in the United States District Court for the District of Connecticut against CTWS and the CTWS board of directors. The complaints allege that the preliminary proxy statement issued in connection with the Merger omitted material information in violation of Section 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the actions seek an order (1) enjoining the defendants from consummating or closing on the Merger; (2) rescinding the Merger or awarding rescissory damages; (3) directing the defendants to disseminate a corrective proxy statement; (4) declaring that the defendants have violated Section 14(a) and/or 20(a) of the Securities Exchange Act of 1934, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit. CTWS has entered into an agreement in principle to settle and release all claims that were or could have been alleged by the plaintiffs. The settlements provide for the dismissal of the actions subject to, among other things, CTWS making certain additional disclosures, which CTWS included in the definitive proxy statement in connection with the Merger. The complaints filed in the U.S. District Court for the District of Connecticut were voluntarily dismissed without prejudice on May 14, 2019.

~~Billing Practice OII with CPUC~~

On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent. The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate service charges when increases occurred during a billing period, and whether the company double-billed service charges during one billing period when allegedly switching from billing such charges in advance to billing in arrears. By a decision adopted November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged overcharging issue for the period since June 2011 by requiring refunds to customers totaling $2.02 million. That amount was refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective February 8, 2019. See discussion on the matter in Note 8, “Regulatory Rate Filings.” On July 24, 2019, San Jose Water Company and CPED jointly filed a motion with CPUC approval of a Settlement Agreement (“Agreement”) over San Jose Water Company’s past customer billing practices. The Agreement requires the company to pay approximately $2.1 million in additional customer refunds, consisting of $1.7 million for refunds during the period from 1987 to 2011 and $0.4 million in customer credits to low income water customers, and invest $5 million in utility plant that is not allowed an investment return or rate recovery. San Jose Water Company recorded the $2.1 million customer credit expense as an offset to revenues during the second quarter of 2019. The $5 million commitment to invest in utility plant will be recognized as plant in service on the company’s financial statements once invested. The Agreement is subject to final approval by the CPUC which is expected in the fourth quarter of 2019.

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


ITEM 1A.	RISK FACTORS

The following discusses certain risk factors relating to the merger consummated with CTWS on October 9, 2019 (the “Merger”) and does not include all of the risk factors associated with the Merger and the combined company after the 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, ~~2018~~2019 and our other public filings, which could materially affect our business, financial condition or future results. Other than the risk 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, ~~2018 and SJW Group’s Form 10-Q for the quarterly period ended June 30,~~ 2019.

~~Risks Related to the Combined Company Following Closing of the Merger~~

The CPUC has initiated an investigation to review the Merger, which may impose costs or certain conditions on us, but the Merger was consummated 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 preserves the CPUC’s jurisdiction over San Jose Water Company and the CPUC’s capacity to effectively regulate utility operations in the State of California; 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 decision was delayed. On March 4, 2019, the presiding administrative law judge suspended the CPUC investigation until a final decision was reached by PURA. We notified the CPUC on September 11, 2019 of the PURA Decision adopted September 4, 2019, in Docket 19-04-02, and on September 24, 2019, we provided notice to the CPUC of PURA’s letter approval of the Revised Settlement Agreement on September 15, 2019.

Completion of the CPUC’s investigation was not a condition to the consummation of the Merger. We are unable to predict what action, if any, the CPUC will take with respect to the Merger upon the conclusion of the OII proceeding. Such actions may impose significant costs and conditions on us, which may have an adverse effect on our business operation and financial conditions, and may negate some or all of the benefits that we expect as a result of the Merger.

~~We incurred substantial additional indebtedness to finance the Merger, and this additional indebtedness may reduce our business and operational flexibility and increase our borrowing costs.~~

~~To finance the Merger, we incurred an aggregate of $510 million of additional indebtedness, a substantial increase compared to our indebtedness prior to the Merger.~~ Our increased indebtedness and higher debt-to-equity ratio in comparison to that of our recent historical basis may have the effect, among other things, of: reducing our flexibility to respond to changing business, industry and economic conditions; increasing borrowing costs; placing us at a competitive disadvantage relative to other companies in our industry with less debt; potentially have an adverse affect our issuer and issue ratings; requiring additional cash flow to be used to service debt instead of for other purposes; and potentially impairing our ability to obtain other financing.

~~In addition, the terms and conditions of such indebtedness, including financial covenants and restrictive covenants, may reduce our business flexibility and adversely affect our~~ business, financial condition, and results of operations ~~and prospects. The agreements governing~~may be negatively impacted by the ~~indebtedness incurred in connection~~COVID-19 pandemic.

We are subject to risks related to the global pandemic associated with the ~~Merger contain covenants that impose significant operating~~coronavirus (“COVID-19”). COVID-19 has spread to all 50 states in the U.S. and ~~financial limitations~~the President has declared the COVID-19 pandemic a national emergency. Numerous governmental jurisdictions, including the States of California, Connecticut, Maine and Texas where we maintain our water utility operations, have imposed “shelter-in-place” orders, quarantines, executive orders and similar governmental orders and restrictions for their residents to control the spread of COVID-19. Such orders or restrictions have resulted in business closures, work stoppages, slowdowns and delays in commercial activities, unprecedented and widespread unemployment, travel restrictions and cancellation of events, among other effects, thereby negatively impacting our suppliers, employees and offices, among others.

In California, Governor Gavin Newsom signed an executive order suspending water service disconnections due to non-payment by customers retroactive to March 4, 2020 and until further notice. In Connecticut and Maine, in accordance with PURA and MPUC moratorium rulings on ~~us, including restrictions~~March 12, 2020 and March 16, 2020, respectively, we have halted shutoff for nonpayment. PUCT in Texas also ordered on March 13, 2020 public utilities to suspend water service disconnections and late fees charged to customers. These and other events associated with the COVID-19 pandemic will reduce the incentive and ability of our residential and commercial customers to ~~enter particular transactions and engage in other activities that we may believe will be advisable~~pay their water services bills on time, if at all, which would negatively impact our result of operations. Furthermore, a significant portion of our revenue is derived from water usage by commercial customers. As many of these customers have suspended or ~~necessary for the combined company’s business. In addition, failure~~terminated their business operations to comply with ~~any of the covenants in our existing~~government orders, their water usage may decline significantly or future debt agreements could result in a default under those agreements and under other existing agreements containing cross-default provisions. A default would permit lenders to accelerate the maturity of indebtedness under these agreements and to foreclose upon any collateral securing such indebtedness. Under certain circumstances, we may not have sufficient funds or other resources to satisfy all of our obligations under our indebtedness, including principal and interest payments, which, if not cured, may cause an event of default.

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

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

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

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

In the course of the due diligence review of CTWS that we conducted prior to the execution of the Merger Agreement, we may not have discovered, or may have been unable to quantify, undisclosed liabilities of CTWS and its subsidiaries, and our stockholders may not be 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 have an adverse effect the business, results of operations, financial condition and cash flows of the combined company and on the value of our stock following the completion of the Merger.

~~Uncertainties associated within the combined company may cause a loss of management personnel and other key employees~~cease, which could adversely affect ~~the future business~~our revenue. Connecticut Water and ~~operations~~Heritage Village have an approved regulatory mechanism for a water revenue adjustment that provides for recovery of the ~~combined company.~~

~~The combined companies are dependent on~~companies’ authorized annual revenues through a customer surcharge or credit that mitigates the ~~experience and industry knowledge~~impact of reduced usage but will not cover losses for non-payment or bad debt. Furthermore, while we expect to recover some of the ~~officers~~revenue loss and other key employees to execute their business plans, and its success will depend in part upon its ability to retain key management personnel and other key employees. Current and prospective employees ofcosts through the combined company may experience uncertainty about their roles, including following the closing of the Merger, which may have an adverse effect on the ability of each of the combined company to attract or retain key management and other key personnel. Accordingly,rate-making process, there is no ~~assurance can be given~~guarantee that ~~the combined company~~such recovery will be able to attract or retain key management personnel and other key employees to the same extent that SJW Group and CTWS were previously able to attract or retain their own employees before the Merger. A failureapproved by the ~~combined company to attract, retain and motivate executives and other key employees after the completion of the Merger could have~~regulated utility authorities in a ~~negative impact on its businesses.~~timely manner, or at all.

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

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

SJW Group has committed to certain “ring-fencing” measures which will enhance CTWS’s separateness from SJW Group, which 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 and MPUC approval of the Merger, SJW Group has instituted certain “ring-fencing” measures to enhance CTWS’s separateness from SJW Group and to mitigate the risk that CTWS would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting SJW Group or its non-ring-fenced affiliates. These commitments became effective upon the closing of the Merger.

In order to satisfy the ring-fencing commitments, SJW Group formed SJWNE, LLC a wholly-owned special purpose entity (“SPE”) to own the capital stock of CTWS, and the SPE, CTWS and their subsidiaries (collectively, the “CTWS Entities”) adopted certain measures designed to enhance their separateness from SJW Group, with the intention of mitigating the effects on the CTWS Entities of any bankruptcy of SJW Group and its affiliates other than the CTWS Entities (collectively, the “Non-CTWS Entities”). As a result of these ring-fencing measures, in certain situations, SJW Group will be restricted in its ability to access assets of the CTWS Entities as dividends or intracompany loans to satisfy the debt or contractual obligations of any Non-CTWS Entity, including any indebtedness or other contractual obligations of SJW Group. In addition, the ring-fencing structure may negatively impact SJW Group’s ability to achieve certain benefits, including synergies and economies of scale to reduce operating costs of the combined entity, that it anticipates will result from the Merger.

This ring-fencing structure also subjects 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 have considerable autonomy and, as described in our commitments, have a duty to act in the best interest of the CTWS Entities consistent with the ring-fencing structure and applicable law, which may be contrary to SJW Group’s best interests or be in opposition to SJW Group’s preferred strategic direction for the CTWS Entities. To the extent they take actions that are not in SJW Group’s interests, our financial condition, results of operations and prospects may be materially adversely affected.

The combined company is and will be affected by developments in the water utility industry, including changes in regulation. A failure to adapt to the changing regulatory environment could adversely affect the stability of the combined company’s earnings.

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

~~SJW Group~~’~~s dividend policy is subject to the discretion of our board of directors and may be limited by legal and contractual requirements.~~

We anticipate to continue to pay a regular quarterly dividend now that the Merger is completed, though any such determination to pay dividends will be at the discretion of our board of directors and will be dependent on then-existing conditions, including our financial condition, earnings, legal requirements, including limitations under Delaware law, restrictions in our credit agreements and other debt instruments that limit our ability to pay dividends to stockholders and other factors the board of directors deems relevant. The board of directors of the combined company may, in its sole discretion, change the amount or frequency of dividends or discontinue the payment of dividends entirely. In addition, our subsidiaries may be subject to restrictions on their ability to pay dividends to us, including under state law, pursuant to regulatory commitments and under their credit agreements and other debt instruments. In this regard, the CTWS Entities are limited from paying dividends to us in certain circumstances under PURA regulatory commitments. Any inability of our subsidiaries to pay us dividends may have a material and adverse effect on our ability to pay dividends to our stockholders.

~~We expect to incur additional costs and expenses in connection with remaining litigation items arising from the Merger with CTWS.~~

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 and that CTWS’s preliminary proxy statement, filed with the SEC on

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

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

The 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.

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 demand. We expect to incur additional costs and expenses in connection with the lawsuits, including the opposition against the fee demand, and such lawsuits may distract our management from the day-to-day operation of the combined company.

~~SJW Group Water Utility Services~~ are subject to the following risks ~~after closing~~resulting from the COVID-19 pandemic and related events:

the financial impact of the ~~Merger:~~

•

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

•

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

•

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

•

~~Environmental Regulations~~ ~~- We are subject to regulations concerning the flow of water in Connecticut’s rivers and streams, which could adversely affect our business. As promulgated, the regulations~~COVID-19 pandemic may require that certain downstream releases be made from seven of Connecticut Waters’ eighteen active reservoirs following the adoption of stream classifications by the Department of Energy and Environmental Protection, or DEEP. Currently, downstream releases are made at two locations. No groundwater supply wells are affected by the regulations.

DEEP has finalized stream classifications in two areas of the state where Connecticut Water maintains and operates sources of supply. Other areas of the state, including areas where Connecticut Water operates, remain to be classified. Although significantly and favorably modified from prior versions, the regulations still have the potential to lower safe yield, raise capital and operating expenses and adversely affect revenues and earnings. Because they affect only a subset of CTWS’s supplies and allow for releases to be scaled back in response to drought events, the overall impact is anticipated to be manageable. Although there can be no assurance PURA would approve rate increases to enable us to ~~recover all~~reassess the goodwill recorded by SJW Group following the completion of our merger with CTWS in October 2019, and such ~~costs, legislation passed~~reassessment may result in ~~2013 allows for~~ a ~~surcharge~~future significant or material impairment of our goodwill asset;

we may encounter difficulties and disruptions in communication and coordination among our employees, partners, customers and others, which may reduce our productivity and interfere with our normal operations;

our existing and planned infrastructure improvement projects may be interrupted or delayed by COVID-19 government orders or restrictions or supply shortages, which may negatively impact our ability to ~~recover~~maintain our infrastructure and provide reliable services to customers. In addition, this may reduce our expenditures on capital ~~improvement costs necessary to achieve compliance with~~improvements, which may in turn impact the ~~regulations.~~rate decisions by CPUC, PURA, PUCT and MPUC.

~~We will also be subject to~~widespread COVID-19 disease could impact the ~~State~~health of ~~Maine’s regulations that govern~~our employees and management team, which may disrupt our business operations; and

a recession, stock market correction, or debt market disruptions resulting from the ~~flow~~spread of ~~water in rivers and streams and also govern lake levels on great ponds. Maine regulations govern any activity that alters the~~COVID-19 could materially affect our business, our results of operations, our cash flow, or level of classified state waters. Maine Water operates five water systems that use surface waters governed by these regulations. For public water systems, Maine regulations allow the Maine Department of Environmental Protection, or MDEP, to impose site specific conditions in locations where Maine’s water quality classifications are not being met. Any conditions proposed on a water withdrawal by a public water system must consider the provisions of any legislative charter, the watershed protection benefits provided by the utility and the ~~financial viability~~value of ~~the utility. Further, any conditions~~our common stock, which may make it more difficult for us to access capital in equity and debt markets.

~~imposed must~~The ultimate impact of the COVID-19 pandemic is highly uncertain and subject to change. We cannot predict when this pandemic will end and when related governmental orders and restrictions will be ~~accommodated by the existing MPUC approved rate schedule for the utility~~eased or lifted, and ~~may not, in and of themselves, cause a utility to request a rate increase from their customers. To date, the MDEP has not imposed~~ any ~~withdrawal conditions on any public water system in Maine.~~

In particular, Maine Water relies on legislatively granted water rights in order to serve customers. In some instances, these rights were granted to predecessor water companies specially chartered by the Maine Legislature many decades ago, with those entities later having been merged into Maine Water. The legislation incorporating these predecessor water companies did not address whether chartered rights may be transferred to another entity without special legislative action. The Maine Business Corporation Act generally provides that property and contract rights of a merged corporation are vested in the survivor corporation without reversionextension or ~~impairment. In the MPUC proceedings that approved the mergers~~prolonged implementation of these ~~Maine Water predecessor companies,~~measures will further adversely affect our business and financial results. Even after such orders and restrictions are eased or lifted, the ~~survivorship~~severe economic impact on the jurisdictions and areas in which we operate may last for an extended period of ~~water rights was not contested,~~time and ~~Maine Water has not sought specific legislation~~continue to ~~reaffirm the transfer of chartered rights granted~~adversely affect our business, and there is no guarantee that we will be able to ~~predecessor water companies.~~act quickly to return to our normal operations.

•

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


ITEM 5.	OTHER INFORMATION

Quarterly Dividend

On ~~October 30, 2019,~~April 29, 2020, the Board of Directors of SJW Group declared the regular quarterly dividend of ~~$0.30~~$0.32 per share of common stock. The dividend will be paid on ~~December 2, 2019,~~June 1, 2020, to stockholders of record as of the close of business on May 11, 2020.

Credit Agreements with JPMorgan Chase Bank, N.A.

On May 11, 2020, the SJWC entered into a Second Amendment (the “Second Amendment”) to the SJWC’s existing $125 million credit agreement, dated as of June 1, 2016, with the JPMorgan Chase Bank, N.A. (the “Lender”), as amended by the First Amendment, dated January 12, 2018 (collectively, the “Existing SJWC Credit Agreement”), with the Lender. The Second Amendment amends the Existing SJWC Credit Agreement to, among other things, increase the total commitment by $15 million, from $125 million to $140 million.

On May 11, 2020, SJWC entered into a $50 million credit agreement (the “New SJWC Credit Agreement”) with the Lender. Proceeds of borrowings under the New SJWC Credit Agreement may be used to refinance existing debt, for working capital, and for general corporate purposes. The New SJWC Credit Agreement has a maturity date of November 11, ~~2019.~~2020.

Borrowings under the New SJWC Credit Agreement bear interest at either the Alternate Base Rate (“ABR”) or the LIBOR (as defined in the New SJWC Credit Agreement) rate. ABR borrowings (which are borrowings bearing interest at a rate determined by reference to the ABR) will bear interest at a rate per annum equal to (i) the greatest of (a) the prime rate in effect on such day, (b) the federal funds effective rate on such day plus 0.5%, and (c) the adjusted LIBOR rate for a one-month interest period on such day plus 1% plus (ii) the Applicable Rate (as defined in the New SJWC Credit Agreement), which is determined based on a pricing grid that is dependent upon the credit rating of the company as determined by either S&P or Moody’s. Eurodollar borrowings under the New SJWC Credit Agreement will bear interest at a rate per annum equal to (i) the adjusted LIBOR rate for the interest period in effect plus (ii) the Applicable Rate.

The New SJWC Credit Agreement contains customary representations, warranties and events of default, as well as certain restrictive covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments, restricted payments, asset sales, and fundamental changes. The New SJWC Credit Agreement also includes certain financial covenants that require the company to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio and to limit the company’s maximum consolidated cash balance.

The foregoing description of the New SJWC Credit Agreement and the Second Amendment and the transactions contemplated thereby is qualified in its entirety by reference to the full text of the New SJWC Credit Agreement and Second Amendment, copies of which are filed as Exhibit 10.1 and Exhibit 10.2, respectively, to this Form 10-Q and incorporated herein by reference.

Information Web Sites

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

10.1		Credit Agreement, dated May 11, 2020, between San Jose Water Company and JPMorgan Chase Bank, N.A. (1)

10.2		Second Amendment to Credit Agreement, dated May 11, 2020, between San Jose Water Company and JPMorgan Chase Bank, N.A. (1)

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

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

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

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

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(1)	Filed currently herewith.

SIGNATURES

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



			SJW GROUP

DATE:	~~November 1, 2019~~May 11, 2020	By:	/s/ JAMES P. LYNCH
			James P. Lynch
			Chief Financial Officer and Treasurer (Principal financial officer)

3933



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

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

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



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

Revenue accounts:
2014-2017 WCMA*	$	7,750		—		(4,832	)	2,918		$	6,679		723		4	7,406
2018 WCMA*	9,386			(9,386	)	—		—		—			7,067		—	7,067
2019 WCMA*	—			—		—		—		—			—		—	—
2012 General Rate Case true-up	11,328			95		(7,324	)	4,099		11,320			—		6	11,326
Cost of capital memorandum account	(1,523		)	(24	)	—		(1,547	)	(144		)	(1,371	)	—	(1,515	)
Tax memorandum account	(6,504		)	(114	)	—		(6,618	)	—			(5,955	)	—	(5,955	)
All others	5,112			4,019		(3,288	)	5,843		3,851			787		4	4,642
Total revenue accounts	$	25,549		(5,410	)	(15,444	)	4,695		$	21,706		1,251		14	22,971
Cost-recovery accounts:
Water supply costs	9,617			(754	)	(3,773	)	5,090		8,679			3,074		—	11,753
Pension	(1,843		)	582		2,435		1,174		(2,459		)	482		1	(1,976	)
All others	1,090			8		(449	)	649		—			—		—	—
Total cost-recovery accounts	$	8,864		(164	)	(1,787	)	6,913		$	6,220		3,556		1	9,777

Total	$	34,413		(5,574	)	(17,231	)	11,608		$	27,926		4,807		15	32,748