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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-33118xex321.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CFO AND TREASURER - SJW GROUPsjw-33118xex322.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CFO AND TREASURER - SJW GROUPsjw-33118xex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-33118xex311.htm
EX-10.7 - EXHIBIT 10.7 - SJW GROUPsjw-33118xex107.htm


 
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 March 31, 2018
Commission file number 1-8966
SJW Group
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0066628
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
110 West Taylor Street, San Jose, CA
 
95110
(Address of principal executive offices)
 
(Zip Code)
408-279-7800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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. (check one)
 
Large accelerated filer  
 
Accelerated filer  
 
Non-accelerated filer  
 
Smaller reporting company  
 
 
 
 
(Do not check if a 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  
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of May 4, 2018, there were 20,594,486 shares of the registrant’s Common Stock outstanding.
 




PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
 
 
Three months ended March 31,
 
2018
 
2017
REVENUE
$
75,042

 
69,045

OPERATING EXPENSE:
 
 
 
Production Expenses:
 
 
 
Purchased water
15,416

 
13,924

Power
1,268

 
1,287

Groundwater extraction charges
9,532

 
7,410

Other production expenses
4,212

 
3,859

Total production expenses
30,428

 
26,480

Administrative and general
11,568

 
11,149

Maintenance
4,460

 
3,898

Property taxes and other non-income taxes
3,866

 
3,695

Depreciation and amortization
13,583

 
12,119

Merger related expenses
3,806

 

Total operating expense
67,711

 
57,341

OPERATING INCOME
7,331

 
11,704

OTHER (EXPENSE) INCOME:
 
 
 
Interest on long-term debt and other interest expense
(6,052
)
 
(6,057
)
Pension non-service cost
(583
)
 
(871
)
Unrealized loss on California Water Service Group stock
(667
)
 

Other, net
676

 
463

Income before income taxes
705

 
5,239

Provision for income taxes
(580
)
 
1,568

SJW GROUP NET INCOME
1,285

 
3,671

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

 
116

SJW GROUP COMPREHENSIVE INCOME
$
1,285

 
3,787

SJW GROUP EARNINGS PER SHARE
 
 
 
Basic
$
0.06

 
0.18

Diluted
$
0.06

 
0.18

DIVIDENDS PER SHARE
$
0.28

 
0.22

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
Basic
20,561,329

 
20,485,968

Diluted
20,701,031

 
20,655,239






See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
March 31,
2018
 
December 31,
2017
ASSETS
 
 
 
Utility plant:
 
 
 
Land
$
17,831

 
17,831

Depreciable plant and equipment
1,733,449

 
1,714,228

Construction in progress
54,933

 
45,851

Intangible assets
15,567

 
14,413

 
1,821,780

 
1,792,323

Less accumulated depreciation and amortization
566,844

 
553,059

 
1,254,936

 
1,239,264

Real estate investments
56,213

 
56,213

Less accumulated depreciation and amortization
11,431

 
11,132

 
44,782

 
45,081

CURRENT ASSETS:
 
 
 
Cash and cash equivalents
6,954

 
7,799

Accounts receivable:
 
 
 
Customers, net of allowances for uncollectible accounts
18,326

 
17,305

Income tax
7,072

 
7,981

Other
1,578

 
1,118

Accrued unbilled utility revenue
22,608

 
27,905

Other current assets
4,522

 
4,750

 
61,060

 
66,858

OTHER ASSETS:
 
 
 
Investment in California Water Service Group
3,067

 
4,535

Net regulatory assets, less current portion
97,293

 
99,554

Other
2,736

 
2,709

 
103,096

 
106,798

 
$
1,463,874

 
1,458,001












See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
March 31,
2018
 
December 31,
2017
CAPITALIZATION AND LIABILITIES
 
 
 
CAPITALIZATION:
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and outstanding shares 20,585,136 on March 31, 2018 and 20,520,856 on December 31, 2017
$
21

 
21

Additional paid-in capital
83,986

 
84,866

Retained earnings
373,823

 
376,119

Accumulated other comprehensive income

 
2,203

Total stockholders’ equity
457,830

 
463,209

Long-term debt, less current portion
431,175

 
431,092

 
889,005

 
894,301

CURRENT LIABILITIES:
 
 
 
Line of credit
39,000

 
25,000

Accrued groundwater extraction charges, purchased water and power
11,692

 
14,382

Accounts payable
22,482

 
22,960

Accrued interest
7,400

 
6,869

Accrued property taxes and other non-income taxes
2,780

 
1,904

Accrued payroll
3,620

 
6,011

Other current liabilities
8,386

 
7,926

 
95,360

 
85,052

DEFERRED INCOME TAXES
84,442

 
85,795

ADVANCES FOR CONSTRUCTION
82,611

 
83,695

CONTRIBUTIONS IN AID OF CONSTRUCTION
162,443

 
160,830

POSTRETIREMENT BENEFIT PLANS
74,735

 
72,841

REGULATORY LIABILITY
62,205

 
62,476

OTHER NONCURRENT LIABILITIES
13,073

 
13,011

COMMITMENTS AND CONTINGENCIES

 

 
$
1,463,874

 
1,458,001












See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Three months ended March 31,
 
2018
 
2017
OPERATING ACTIVITIES:
 
 
 
Net income
$
1,285

 
3,671

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
14,160

 
12,646

Deferred income taxes
(1,383
)
 
1,595

Share-based compensation
487

 
586

Unrealized loss on California Water Service Group stock
667

 

Loss on sale of California Water Service Group stock
87

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable and accrued unbilled utility revenue
4,530

 
6,015

Accounts payable and other current liabilities
784

 
557

Accrued groundwater extraction charges, purchased water and power
(2,690
)
 
(454
)
Tax payable and receivable, and other accrued taxes
2,465

 
1,090

Postretirement benefits
1,894

 
1,915

Regulatory assets and liability related to balancing and memorandum accounts
2,350

 
1,917

Other changes, net
(2,054
)
 
(1,296
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
22,582

 
28,242

INVESTING ACTIVITIES:
 
 
 
Additions to utility plant:
 
 
 
Company-funded
(28,961
)
 
(27,745
)
Contributions in aid of construction
(1,468
)
 
(1,646
)
Additions to real estate investments

 
(62
)
Payments to retire utility plant, net of salvage
(1,134
)
 
(397
)
Payments for business/asset acquisition and water rights

 
(1,101
)
NET CASH USED IN INVESTING ACTIVITIES
(31,563
)
 
(30,951
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
14,000

 

Repayments of line of credit

 
(14,200
)
Repayments of long-term borrowings

 
(32
)
Dividends paid
(5,754
)
 
(4,456
)
Receipts of advances and contributions in aid of construction
2,148

 
3,924

Refunds of advances for construction
(537
)
 
(532
)
Other changes, net
(1,721
)
 
(245
)
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
8,136

 
(15,541
)
NET CHANGE IN CASH AND CASH EQUIVALENTS
(845
)
 
(18,250
)
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
7,799

 
25,350

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
6,954

 
7,100

Cash paid during the period for:
 
 
 
Interest
$
6,042

 
6,044

Income taxes
85

 

Supplemental disclosure of non-cash activities:
 
 
 
Change in accrued payables for construction costs capitalized
(790
)
 
1,634

Utility property installed by developers
590

 
243

RECONCILIATION TO CONSOLIDATED BALANCE SHEETS:
 
 
 
Cash and cash equivalents
6,954

 
7,092

Restricted cash

 
8

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, END OF PERIOD
$
6,954

 
7,100





See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5



SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2018
(in thousands, except share and per share data)

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

6


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


presentation in the income statement of the service cost component and the other components of net periodic cost and net periodic postretirement benefit cost and prospective presentation from date of adoption for the capitalization in assets of only the service cost component of net periodic cost and net periodic postretirement benefit cost. SJW Group adopted ASU 2017-07 effective January 1, 2018. As such, the consolidated statements of comprehensive income for the periods presented have been reclassified to reflect the retrospective changes. See Note 4 of “Defined Benefit Plan” for further discussion.
Revenue
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales.
On January 1, 2018, SJW Group adopted FASB ASC Topic 606 - “Revenue from Contracts with Customers.” In accordance with Topic 606, management has determined that the company has four categories of revenues. The first category, revenue from contracts with customers, represents metered revenue of Water Utility Services which includes billings to customers based on meter readings plus an estimate of water used between the customers' last meter reading and the end of the accounting period. SJW Group satisfies its performance obligation upon delivery of water to the customer at which time the customer consumes the benefits provided by the company. The customer is typically billed on a bi-monthly basis after water delivery has occurred. The customer is charged both a service charge which is based upon meter size and covers a portion of the fixed costs of furnishing water to the customer and a consumption charge based on actual water usage. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. As the company has the right to bill for services that it has provided, SJW Group estimates the dollar value of deliveries during the unbilled period and recognizes the associated revenue. Actual results could differ from those estimates, which may result in an adjustment to revenue when billed in a subsequent period. The second category, rental income, represents lease rental income from SJW Land Company tenants. The tenants pay monthly in accordance with lease agreements and SJW Group recognizes the income ratably over the lease term as this is the most representative of the pattern in which the benefit is expected to be derived from SJW Group’s underlying asset. The third and fourth revenue categories are other balancing and memorandum accounts and alternative revenue programs. Both are scoped out of Topic 606 and are accounted for under FASB ASC Topic 980 - “Regulated Operations.” Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the Water Conservation Memorandum Account (“WCMA”), San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.
From 2014 to 2016, California was in a severe drought. In response to the drought, the State Water Resources Control Board (the “State Water Board”) imposed mandatory water use restrictions and conservation targets. The Santa Clara Valley Water District (“SCVWD”), San Jose Water Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than the State Water Board. While the Governor of California declared the drought over on April 7, 2017, certain water use restrictions remain in place as well a conservation target by SCVWD at 20%.
To encourage conservation, San Jose Water Company received approval from the CPUC to institute a Mandatory Conservation Revenue Adjustment Memorandum Account in 2014. This account was subsequently replaced with a WCMA. The WCMA allows San Jose Water Company to track lost revenue, net of related water costs, associated with reduced sales due to water conservation and associated calls for water use reductions. San Jose Water Company records the lost revenue captured in the WCMA regulatory accounts once the revenue recognition requirements of FASB ASU Topic 980 - “Regulated Operations,” subtopic 605-25 are met. For further discussion, please see Note 8 and Note 9.

7


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


The major streams of revenue for SJW Group are as follows:
 
Three months ended March 31,
 
2018
 
2017
Revenue from contracts with customers
$
75,869

 
68,567

Alternative revenue programs, net - WCMA
(332
)
 
2,276

Other balancing and memorandum accounts revenue, net *
(1,836
)
 
(3,361
)
Rental income
1,341

 
1,563

 
$
75,042

 
69,045

*    The amount reflected for three months ended March 31, 2018, excludes a further reduction of $321 to revenue related to cost-recovery balancing accounts which upon adoption of Topic 606 are recorded as capitalized costs until recovery is approved by the CPUC. During 2017, prior to adoption of Topic 606, these amounts were recorded to revenue. For further discussion, please see Note 9.
Income Taxes
On December 22, 2017, the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”) was signed into law. Among other things, the Tax Act permanently lowers the corporate statutory tax rate to 21% from the previous maximum rate of 35%, effective for tax years including or commencing January 1, 2018. See Note 8 and 9, for discussion on the effect of the Tax Act on SJW Group’s regulatory activities.
Earnings per Share
Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with deferred restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”) and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended March 31, 2018, and 2017, 1,162 and 2,006 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 March 31, 2018, and 2017, the amounts allocated to administrative and general expense were $577 and $527, respectively.

Note 2.
Equity Plans
SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on estimated fair value for share-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 March 31, 2018, the remaining number of shares available under the Incentive Plan was 890,179, and an additional 191,547 shares were issuable under outstanding restricted stock units and deferred restricted stock units. In addition, shares are issued to employees under the company’s ESPP.

8


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income, proceeds from the exercise of stock options and similar instruments, and the tax benefit realized from stock options and similar instruments exercised, that were recorded to additional paid-in capital and common stock, by award type, are presented below for the three months ended March 31, 2018, and 2017.
 
Three months ended March 31,
 
2018
 
2017
Adjustments to additional paid-in capital and common stock for:
 
 
 
Compensation costs charged to income:
 
 
 
   ESPP
$
115

 
100

   Restricted stock and deferred restricted stock
372

 
486

Total compensation costs charged to income
$
487

 
586

Proceeds from ESPP
$
653

 
570

Stock, Restricted Stock and Deferred Restricted Stock
On January 2, 2018, service based restricted stock units covering an aggregate of 12,296 shares of common stock of SJW Group were granted to certain officers of SJW Group and its subsidiaries. The units vest in three equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense of $60.22 per unit which was based on the award grant date fair value is being recognized over the service period beginning in 2018.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an aggregate target number of SJW Group’s shares of common stock equal to 4,081 that will vest based on the actual attainment of specified performance goals measured for the 2018 calendar year and continued service through December 31, 2018. The number of shares issuable under such units, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the share-based compensation expense of $58.02 per unit which was based on the award grant date fair value is being recognized assuming the performance goals will be attained. As of March 31, 2018, management believes it is probable that the performance goals will be met.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an aggregate target number of SJW Group’s shares of common stock equal to 5,259 that will vest based on the actual attainment of specified performance goals for the 2020 calendar year and continued service through December 31, 2020. The number of shares issuable under the awards, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the share-based compensation expense of $55.89 per unit which is based on the award grant date fair value is being recognized assuming the performance goals will be attained. As of March 31, 2018, management believes that it is probable performance goals will be met.
On January 30, 2018, performance-based restricted stock units were granted to an officer of SJW Group covering a target number of shares of SJW Group’s common stock equal to 6,342 that will vest based on continued service and attainment of specified performance goals over the period from January 1, 2018, to December 31, 2020. The number of shares issuable under the award, ranging between 0% and 200% of the target number of shares, is based on the level of actual attainment of specified performance goals. These units do not include dividend equivalent rights. The fair value of the performance-based restricted awards was estimated utilizing the Monte Carlo valuation model, using the fair value of SJW Group’s common stock with the effect of market condition and no dividend yield on the date of grant, and assumes the performance goals will be attained. Share-based compensation expense is recognized at $63.85 per unit. If such goals are not met and requisite service is not rendered, no compensation cost will be recognized and any recognized compensation cost will be reversed.
As of March 31, 2018, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $2,394. This cost is expected to be recognized over a remaining weighted average period of 1.50 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

9


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock were reserved for issuance under the ESPP.
SJW Group’s recorded expenses were $53 and $63 for the three months ended March 31, 2018, and 2017, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends July 31, 2018, for the ESPP is approximately $107. This cost is expected to be recognized during the second and third quarters of 2018.

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

 
13,262

Buildings and improvements
42,951

 
42,951

Subtotal
56,213

 
56,213

Less: accumulated depreciation and amortization
11,431

 
11,132

Total
$
44,782

 
45,081

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years.

Note 4.
Defined Benefit Plan
San Jose Water Company sponsors a noncontributory defined benefit pension plan for its eligible employees. Employees hired before March 31, 2008, are entitled to receive retirement benefits using a formula based on the employee’s three highest years of compensation (whether or not consecutive). For employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based on compensation credits and interest credits for each employee. Officers hired before March 31, 2008, are eligible to receive additional retirement benefits under the Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008, are eligible to receive additional retirement benefits under the Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management may participate. San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan. The components of net periodic benefit costs for San Jose Water Company’s pension plan, its Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and Social Welfare Plan for the three months ended March 31, 2018, and 2017 are as follows:
 
Three months ended March 31,
 
2018

2017
Service cost
$
1,596

 
1,330

Interest cost
1,877

 
1,903

Other cost
1,133

 
1,038

Expected return on assets
(2,427
)
 
(2,070
)
 
$
2,179

 
2,201


10


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


Effective January 1, 2018, SJW Group adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Costs.” The new standard requires retrospective presentation in the income statement of the service cost component and the other components of net periodic cost and net periodic postretirement benefit cost and prospective presentation from date of adoption for the capitalization in assets of only the service cost component of net periodic cost and net periodic postretirement benefit cost. As of March 31, 2017, utility plant included $128 of capitalized pension non-service cost. The components of net periodic benefit cost have been recorded in the consolidated statements of comprehensive income as follows:
 
Three months ended March 31,
 
2018
 
2017
Other production expenses
$
423

 
348

Administrative and general expense
895

 
745

Maintenance expense
278

 
237

Pension non-service costs
583

 
871

 
$
2,179

 
2,201

The following tables summarize the fair values of plan assets by major categories as of March 31, 2018, and December 31, 2017: 
 
 
 
Fair Value Measurements at March 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
 
 
$
5,928

 
$
5,928

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
6,190

 
6,151

 
39

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
50,495

 
50,495

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
9,376

 
9,376

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
9,306

 
9,306

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
5,949

 
5,949

 

 

REIT
NAREIT - Equity REIT’S
 
5,864

 

 
5,864

 

Fixed Income (b)
(b)
 
44,873

 

 
44,873

 

Total
 
 
$
137,981

 
$
87,205

 
$
50,776

 
$

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

11


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


 
 
 
Fair Value Measurements at December 31, 2017
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
 
$
8,207

 
$
8,207

 
$

 
$

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

 
6,376

 
37

 

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

 
50,351

 

 

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

 
9,358

 

 

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

 
8,725

 

 

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

 
5,973

 

 

REIT
NAREIT - Equity REIT’S
 
6,143

 

 
6,143

 

Fixed Income (b)
(b)
 
44,994

 

 
44,994

 

Total
 
 
$
140,164

 
$
88,990

 
$
51,174

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities and cash to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.
In 2018, San Jose Water Company expects to make required and discretionary cash contributions of up to $7,450 to the pension plans and Social Welfare Plan. For the three months ended March 31, 2018, there have been no contributions to the pension plans and Social Welfare Plan.

Note 5.
Segment and Non-Tariffed Business Reporting
SJW Group is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility which operates both regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated a commercial building rental that was sold in April 2017, and (iv) Hydro Sub, Inc is a Connecticut corporation that was formed on March 9, 2018 for the sole purpose of effecting the SJW Group and Connecticut Water Service, Inc. (“CTWS”) proposed merger (see discussion on the proposed merger at Note 12). In November 2017, SJW Group sold all its equity interest in Texas Water Alliance Limited, a non-tariffed water utility operation which had acquired permits and leases necessary to develop a water supply project in Texas. In accordance with FASB ASC Topic 280 – “Segment Reporting,” SJW Group has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, San Jose Water Company, CLWSC, and up to November 2017 Texas Water Alliance Limited, together referred to as “Water Utility Services.” The second segment is property management and investment activity conducted by SJW Land Company, referred to as “Real Estate Services.”
SJW Group’s reportable segments have been determined based on information used by the chief operating decision maker. SJW Group’s chief operating decision maker includes the Chairman, President and Chief Executive Officer, and his senior staff. The senior staff reviews financial information presented on a consolidated basis that is accompanied by disaggregated information about operating revenue, net income and total assets, by subsidiaries.

12


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and 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, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
For Three Months Ended March 31, 2018
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
72,353

 
1,348

 
1,341

 

 
72,353

 
2,689

 
75,042

Operating expense
61,701

 
888

 
849

 
4,273

 
61,701

 
6,010

 
67,711

Operating income (loss)
10,652

 
460

 
492

 
(4,273
)
 
10,652

 
(3,321
)
 
7,331

Net income (loss)
4,795

 
331

 
356

 
(4,197
)
 
4,795

 
(3,510
)
 
1,285

Depreciation and amortization
13,201

 
83

 
299

 

 
13,201

 
382

 
13,583

Senior note, mortgage and other interest expense
5,508

 

 

 
544

 
5,508

 
544

 
6,052

Income tax expense (benefit) in net income
492

 
129

 
94

 
(1,295
)
 
492

 
(1,072
)
 
(580
)
Assets
$
1,413,300

 
3,690

 
47,380

 
(496
)
 
1,413,300

 
50,574

 
1,463,874

 
For Three Months Ended March 31, 2017
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
66,218

 
1,264

 
1,563

 

 
66,218

 
2,827

 
69,045

Operating expense
54,750

 
831

 
948

 
812

 
54,750

 
2,591

 
57,341

Operating income (loss)
11,468

 
433

 
615

 
(812
)
 
11,468

 
236

 
11,704

Net income (loss)
3,949

 
172

 
360

 
(810
)
 
3,949

 
(278
)
 
3,671

Depreciation and amortization
11,660

 
136

 
323

 

 
11,660

 
459

 
12,119

Senior note, mortgage and other interest expense
5,425

 

 
65

 
567

 
5,425

 
632

 
6,057

Income tax expense (benefit) in net income
1,793

 
137

 
128

 
(490
)
 
1,793

 
(225
)
 
1,568

Assets
$
1,360,599

 
18,247

 
54,269

 
2,662

 
1,360,599

 
75,178

 
1,435,777

 *    The “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the three months ended March 31, 2018, Hydro Sub, Inc. had recorded no revenue or expenses and as of March 31, 2018, held no assets or incurred no liabilities. For the three months ended March 31, 2017, the “All Other” category includes the accounts of SJW Group on a stand-alone basis.

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

Note 7.
Fair Value Measurement
The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of March 31, 2018, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of March 31, 2018, approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value 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 technique during the three months ended March 31, 2018. The fair value of these instruments would be categorized as Level 2 in the fair value

13


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of pension plan assets is discussed in Note 4.
The fair value of SJW Group’s long-term debt was approximately $512,151 and $537,840 as of March 31, 2018, and December 31, 2017, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of the long-term debt was $431,175 and $431,092 as of March 31, 2018, and December 31, 2017, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
As of March 31, 2018, and December 31, 2017, the fair value of the company’s investment in California Water Service Group was $3,067 and $4,535, respectively, and would be categorized as Level 1 of the fair value hierarchy. For the three months ended March 31, 2018, SJW Group recognized an unrealized loss of $667 due to the change in fair value of the company’s investment in California Water Service Group.
 
Note 8.
Regulatory Rate Filings
On November 15, 2017, San Jose Water Company filed Advice Letter No. 513/513A with the CPUC requesting a revenue increase of $15,670, or 4.22%, for the 2018 escalation year included in the 2015 General Rate Case. This request was approved and the new rates became effective on January 1, 2018.
On November 29, 2017, San Jose Water Company filed Advice Letter No. 514 with the CPUC requesting to adjust the Utilities Reimbursement Account User Fees as directed by CPUC Resolution M-4832. The reimbursement fee was reduced from 1.44% to 1.40%. This request was approved and the new fee became effective on January 1, 2018.
San Jose Water Company filed Advice Letter No. 515 on December 28, 2017, with the CPUC requesting authorization to establish the 2018 Tax Accounting Memorandum Account. This memorandum account will capture any changes to revenue requirement resulting from the impact of the Tax Act signed into law December 22, 2017. This request became effective on January 1, 2018.
On January 6, 2017, San Jose Water Company filed Advice Letter No. 501 with the CPUC requesting authorization to implement a sales reconciliation mechanism to better conform to water forecasts authorized in the last general rate case to recorded consumption for the period of October 2015 through September 2016. The CPUC ordered all Class A and B water utilities that have a five percent or greater divergence between authorized and actual sales during declared drought years to consider requesting a sales reconciliation mechanism to better conform to sale forecasts authorized in the last general rate case to recorded consumption. On May 3, 2017, the CPUC rejected the filing citing the end of a drought and the improved California water supply conditions. On May 10, 2017, San Jose Water Company formally requested the CPUCs review of the rejection. On August 25, 2017, the CPUC’s Water Division released Proposed Resolution W-5150 affirming its rejection of Advice Letter No. 501. On September 20, 2017, Revision 1 to Proposed Resolution W-5150 was released by the Water Division. A revised resolution, Proposed Resolution W-5153, was circulated on December 8, 2017, for comment and also affirmed the rejection of Advice Letter No. 501. Subsequently, the resolution to reject Advice Letter No. 501 was approved by CPUC on January 11, 2018.
As required by the CPUC, on April 3, 2017, San Jose Water Company filed an application requesting authority to increase its authorized Cost of Capital for the period from January 1, 2018 through December 31, 2020. On March 22, 2018, the CPUC approved a new cost of capital for San Jose Water Company in Decision 18-03-035 that lowers the rate of return from 8.09% to 7.64% thereby reducing the 2018 revenue requirement by $5,843 or 1.57%. On March 22, 2018, San Jose Water Company filed Advice Letter No. 518 with the CPUC requesting authorization to adjust water rates to reflect the decision effective March 22, 2018.
On January 4, 2018, San Jose Water Company filed General Rate Case Application No. 18-01-004 requesting authority for an increase of revenue of $34,288, or 9.76%, in 2019, $14,232, or 3.70%, in 2020 and $20,582, or 5.17%, in 2021. The application also includes requests to recover $20,725 from balancing and memorandum accounts, the establishment of a Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism, and a shift to greater revenue collection in the service charge. The application is a year-long review process and new rates, if approved, are expected to be effective January 1, 2019.

14


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


On March 14, 2018, San Jose Water Company filed Advice Letter No. 517 to update its Cost of Capital Memorandum Account, which tracks the difference between current water rates and those adopted in Decision 18-03-035. This was approved on April 4, 2018.
On March 23, 2018, San Jose Water Company filed Advice Letter No. 519 with the CPUC requesting authorization to update the Rule 15 income tax provisions as a result of the recent changes to the federal tax laws.  This advice letter has no impact on water rates and was effective January 1, 2018.
The Public Utilities Commission of Texas (“PUCT”) has directed CLWSC (as well as other Class A water utilities in Texas) to quantify all of the impacts of the Tax Act and make rate adjustments reflecting these impacts on a prospective basis. PUCT Order 47945-36 as amended by 47945-41 orders the water utilities to record a regulatory liability that reflects (1) the difference between the revenues collected under existing rates and the revenues that would have been collected had the existing rates been set using the recently approved federal income tax rates; and (2) the balance of excess accumulated deferred federal income taxes that now exists because of the decrease in the federal income tax rate from 35% to 21%. A rate proposal reflecting these tax changes was submitted for PUCT review on April 19, 2018. If adopted as proposed, the revenue requirement for CLWSC will be reduced by about $745 for 2018, with new rates becoming effective for billings on or about May 1, 2018. As of March 31, 2018, CLWSC has recorded a Tax Act regulatory liability in the amount of $139.
On May 4, 2018, SJW Group and CTWS filed with the Connecticut Public Utilities Regulatory Authority and the Maine Public Utilities Commission applications for the approval of the proposed merger (see discussion on the proposed merger at Note 12).

Note 9.
Balancing and Memorandum Accounts
San Jose Water Company has established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, water conservation, water tariffs, and other approved activities or as directed by the CPUC, such as the Tax Act memorandum account.
Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the WCMA, San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges, if any. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.
Based on ASC Topic 980-605-25, San Jose Water Company recognized a regulatory liability of $708 due to excess revenues accumulated in the 2018 WCMA account for the three months ended March 31, 2018. Since the balance represents an amount due to customers, San Jose Water Company recorded a regulatory liability for the amount with a corresponding reduction to revenues. The amount has been reflected in the 2018 WCMA balance shown in the table below.
Cost of capital memorandum account was approved by the CPUC on March 14, 2018. The account tracks the difference between current water rates and the lower rates adopted in the cost of capital decision on March 22, 2018. San Jose Water Company recorded a regulatory liability of $1,165 in the cost of capital memorandum account for the three months ended March 31, 2018 with a corresponding reduction to revenue. The amount has 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 $933 in the tax

15


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


memorandum account for the three months ended March 31, 2018, with a corresponding reduction to revenue. The amount has been reflected in the tax memorandum account balance shown in the table below.
San Jose Water Company re-evaluated the accounting for cost-recovery balancing and memorandum accounts under the new revenue recognition guidance, ASU 2014-09, “Revenue from Contracts with Customers.” Prior to adoption, San Jose Water Company recorded cost-recovery accounts as a component of revenue. Upon adoption of ASU 2014-09, San Jose Water Company began recording such balances as capitalized costs until recovery is approved by the CPUC. The change is reflected in the cost-recovery balancing and memorandum accounts as shown in the table below.
 
Three months ended March 31, 2018
 
Three months ended March 31, 2017
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Regulatory Asset Increase (Decrease)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014-2016 WCMA
$
190

 
79

 
1

 

 
270

 
$
1,589

 
1,448

 
(1,232
)
 
(1,407
)
 
398

2017 WCMA*
6,489

 
296

 

 

 
6,785

 

 
2,060

 

 
(2,060
)
 

2018 WCMA

 
(708
)
 

 

 
(708
)
 

 

 

 

 

2012 General Rate Case true-up
11,319

 

 
1

 

 
11,320

 
20,682

 

 
(2,258
)
 

 
18,424

2015 General Rate Case true-up
115

 

 

 

 
115

 
5,528

 

 
(1,431
)
 

 
4,097

Cost of capital memorandum account
(144
)
 
(1,165
)
 

 

 
(1,309
)
 
(817
)
 

 
358

 

 
(459
)
Tax memorandum account

 
(933
)
 

 

 
(933
)
 

 

 

 

 

Drought surcharges

 

 

 

 

 
(7,688
)
 

 
(833
)
 
3,467

 
(5,054
)
Water supply costs

 

 

 

 

 
5,190

 
197

 
297

 

 
5,684

Pension

 

 

 

 

 
(2,009
)
 
173

 
(703
)
 

 
(2,539
)
All others
3,736

 
400

 

 

 
4,136

 
3,434

 
457

 
(451
)
 
76

 
3,516

Total revenue accounts:
$
21,705

 
(2,031
)
 
2

 

 
19,676

 
$
25,909

 
4,335

 
(6,253
)
 
76

 
24,067

Cost-recovery accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
8,679

 
(482
)
 

 

 
8,197

 

 

 

 

 

Pension
(2,459
)
 
161

 

 

 
(2,298
)
 

 

 

 

 

Total cost-recovery accounts
$
6,220

 
(321
)
 

 

 
5,899

 
$

 

 

 

 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
27,925

 
(2,352
)
 
2

 

 
25,575

 
$
25,909

 
4,335

 
(6,253
)
 
76

 
24,067

* As of March 31, 2018 and 2017, the reserve balance for the 2017 WCMA was $1,022 and $0, which has been netted from the balance above.
As of March 31, 2018, the total balance in San Jose Water Company’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $3,910. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company’s next general rate case or at the time an individual account reaches a threshold of 2% of authorized revenue, whichever occurs first.


16


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


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

 
68,556

Balancing and memorandum accounts, net
 
25,575

 
27,925

Other, net
 
3,162

 
3,073

Total regulatory assets, net in Consolidated Balance Sheets
 
$
97,293

 
99,554

 
 
 
 
 
Regulatory liability:
 
 
 
 
Income tax temporary differences, net
 
$
62,205

 
62,476

Total regulatory liability in Consolidated Balance Sheets
 
$
62,205

 
62,476


Note 11.
California Water Service Group Stock
During the quarter ended March 31, 2018, SJW Group sold 17,660 shares of California Water Service Group for $716, before fees of $2. SJW Group recognized a loss on the sale of the stock of approximately $87 and tax benefit of approximately $24, for a net loss of $63. The proceeds of the sale was recorded as a receivable on SJW Group’s Consolidated Balance Sheets as of March 31, 2018. As of March 31, 2018, SJW Group held 82,340 shares of California Water Service Group. The company classifies its investment in California Water Service Group as available for sale. The stock is carried at the quoted market price with the changes in gain or loss reported as a component of other expense (income) on the Consolidated Statements of Comprehensive Income.

Note 12.
SJW Group and CTWS Merger Agreement
On March 14, 2018, SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group and CTWS entered into an Agreement and Plan of Merger in an all-stock transaction (the “Merger Agreement”). Under the terms of the agreement, Hydro Sub, Inc. will merge with and into CTWS (the “Merger”), with CTWS surviving the Merger as a wholly-owned subsidiary of the company. Subject to the terms and conditions of the Merger Agreement, at the time at which the Merger becomes effective (the “Effective Time”), each share of common stock, without par value, of CTWS (each, a “CTWS Common Share”), other than CTWS Common Shares directly or indirectly owned by the company, Merger Sub, CTWS or any of their respective subsidiaries (in each case, other than any CTWS Common Shares held on behalf of third parties), issued and outstanding immediately prior to the Effective Time will be converted into the right to receive 1.1375 shares of common stock of SJW Group, par value $0.001.
The transaction, which is expected to close during the fourth quarter of 2018, has been unanimously approved by the Boards of Directors of both companies. Consummation of the Merger is subject to customary conditions, including, without limitation: approval by SJW Group's stockholders and CTWS stockholders, approval by certain regulators, the listing on the New York Stock Exchange of Company Common Shares to be issued as consideration in the Merger; the absence of any law or judgment prohibiting the consummation of the Merger or the Charter Amendment; the effectiveness of the registration statement on Form S-4; the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers); each party’s performance in all material respects of its obligations contained in the Merger Agreement; the absence of any material adverse effect on the company or CTWS since the date of the Merger Agreement, which has not been ameliorated or cured; and the receipt by each party of customary opinions from counsel to the effect that the Merger will qualify as a reorganization for U.S. federal income tax purposes. There is no guarantee that all of the closing conditions and approvals will be satisfied, and the failure to complete the proposed merger may adversely affect the financial conditions and results of operations of SJW Group.


17


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
March 31, 2018
(in thousands, except share and per share data)


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.

18



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts and otherwise noted)
The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2017.
This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Such forward-looking statements are identified by words including “expect,” “estimate,” “anticipate,” “intends,” “seeks,” “plans,” “projects,” “may,” “should,” “will,” and variation of such words, and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”) under the item entitled “Risk Factors,” and in other reports SJW Group files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Group undertakes no obligation to update or revise the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:
SJW Group is a holding company with four wholly-owned subsidiaries: San Jose Water Company, SJWTX, Inc. and SJW Land Company and Hydro Sub, Inc.
San Jose Water Company, a subsidiary of SJW Group, is a public utility in the business of providing water service to approximately 230,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.
The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements and antenna site leases.
San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained.
San Jose Water Company also has approximately 411 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to San Jose Water Company’s various watershed properties.
SJWTX, Inc., a wholly owned subsidiary of SJW Group, doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately 14,400 connections that serve approximately 43,000 people. CLWSC’s service area comprises more than 246 square miles in western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.


19



SJW Land Company, a wholly owned subsidiary of SJW Group, owned the following real properties during the three months ended March 31, 2018:
 
 
 
 
 
 
 
 
% for Three months ended
March 31, 2018
of SJW Land Company
Description
 
Location
 
Acreage
 
Square Footage
 
Revenue
 
Expense
Warehouse building
 
Knoxville, Tennessee
 
30
 
361,500
 
43
%
 
42
%
Commercial building
 
Knoxville, Tennessee
 
15
 
135,000
 
57
%
 
58
%
Undeveloped land and parking lot
 
Knoxville, Tennessee
 
10
 
N/A
 
N/A

 
N/A

SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. which operated a California commercial property that was sold in the second quarter of 2017. The limited partnership has been determined to be a variable interest entity within the scope of FASB ASC Topic 810 – “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, it has been consolidated with SJW Land Company.
Texas Water Alliance Limited (“TWA”) was previously a wholly owned subsidiary of SJW Group undertaking activities necessary to develop a water supply project in Texas. On November 16, 2017, SJW Group sold all of its equity interests in TWA to Guadalupe-Blanco River Authority.
Hydro Sub, Inc., a wholly-owned subsidiary of SJW Group is a Connecticut corporation that was formed on March 9, 2018, for the sole purpose of effecting the proposed merger of SJW Group and Connecticut Water Service, Inc. (“CTWS”). On March 14, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a merger agreement in an all-stock transaction. The transaction, which is expected to close during the fourth quarter of 2018, has been unanimously approved by the Boards of Directors of both companies and is subject to the satisfaction of customary closing conditions and approval by certain regulators, SJW Group's stockholders and CTWS stockholders. Under certain circumstances, SJW Group will be obligated to pay a termination fee of $42,500 to CTWS if the merger agreement is terminated, including without limitation in the event that SJW Group materially breaches its non-solicitation obligations, the SJW Group board makes an adverse recommendation change to SJW Group stockholders, SJW Group enters into an alternative acquisition agreement or SJW Group stockholders fail to approve of either the issuance of shares of SJW Group common stock to CTWS shareholders pursuant to the merger or the adoption of the SJW Group certificate of incorporation amendment, in each case subject to the terms of the merger agreement. In addition, pursuant to the terms of the merger agreement, SJW Group may also be required to reimburse CTWS up to $5,000 of certain fees and expenses if either SJW Group or CTWS terminates the merger agreement due to a failure to obtain the necessary SJW Group stockholder approval. On April 4, 2018, SJW Group received an unsolicited proposal from California Water Service Group regarding the acquisition of all of the outstanding shares of SJW Group common stock. On April 5, 2018, CTWS received and unsolicited proposal from Eversource Energy regarding the acquisition of all of the outstanding shares of CTWS common stock. Each of SJW Group and CTWS has determined that the unsolicited proposal that it had received was neither a superior proposal nor reasonably likely to lead to a superior proposal. There is no guarantee that the proposed merger will be completed, and the failure to complete the proposed merger may adversely affect the financial conditions and results of operations of the company. On May 4, 2018, SJW Group and CTWS filed with the Connecticut Public Utilities Regulatory Authority and the Maine Public Utilities Commission applications for the approval of the proposed merger.

Business Strategy for Water Utility Services:
SJW Group focuses its business initiatives in three strategic areas:
(1)
Regional regulated water utility operations;
(2)
Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California and the Public Utilities Commission of Texas (“PUCT”) in Texas; and
(3)
Out-of-region water and utility related services.
As part of our pursuit of the above three strategic areas, the company considers from time to time opportunities to acquire businesses and assets. As noted above the company entered into an Agreement and Plan of Merger with Connecticut Water Service, Inc. entered upon on March 14, 2018 (See Note 12, “Notes to Unaudited Consolidated Financial Statements”). However, SJW Group cannot be certain it will be successful in identifying and consummating any strategic business 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

20



limited direct prior experience and the potential loss of key employees of any acquired company. Any future acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm its operating results or 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 a commercial building in San Jose, California that was sold in the second quarter of 2017.
SJW Land Company manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. SJW Land Company’s real estate investments diversify SJW Group’s asset base.

Critical Accounting Policies:
The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2017 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2017, that was filed with the SEC on February 27, 2018.
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2017. There have been no changes in our critical accounting policies except as indicated below. Our significant accounting policies are described in our notes to the 2017 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2017.
On January 1, 2018, SJW Group adopted FASB ASC Topic 606 - “Revenue from Contracts with Customers.” In accordance with Topic 606, management has determined that the company has four categories of revenues. The first category, revenue from contracts with customers, represents metered revenue of Water Utility Services which includes billings to customers based on meter readings plus an estimate of water used between the customers' last meter reading and the end of the accounting period. SJW Group satisfies its performance obligation upon delivery of water to the customer at which time the customer consumes the benefits provided by the company. The customer is typically billed on a bi-monthly basis after water delivery has occurred. The customer is charged both a service charge which is based upon meter size and covers a portion of the fixed costs of furnishing water to the customer and a consumption charge based on actual water usage. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the most recent usage patterns, production records and the effective tariff rates. As the company has the right to bill for services that it has provided, SJW Group estimates the dollar value of deliveries during the unbilled period and recognizes the associated revenue. Actual results could differ from those estimates, which may result in an adjustment to revenue when billed in a subsequent period. The second category, rental income, represents lease rental income from SJW Land Company tenants. The tenants pay monthly in accordance with lease agreements and SJW Group recognizes the income ratably over the lease term as this is the most representative of the pattern in which the benefit is expected to be derived from SJW Group’s underlying asset. The third and fourth revenue categories are other balancing and memorandum accounts and alternative revenue programs. Both are scoped out of Topic 606 and are accounted for under FASB ASC Topic 980 - “Regulated Operations.” Balancing and memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in the case of special revenue programs such as the Water Conservation Memorandum Account (“WCMA”), San Jose Water Company follows the requirements of ASC Topic 980-605-25, “Alternative Revenue Programs” in determining revenue recognition, including the requirement that such revenues will be collected within 24 months of the year-end in which the revenue is recorded. A reserve is recorded for amounts SJW Group estimates will not be collected within the 24-month period. This reserve is based on an estimate of actual usage over the recovery period, offset by applicable drought surcharges. In assessing the probability criteria for balancing and memorandum accounts between general rate cases, San Jose Water Company considers evidence that may exist prior to CPUC authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition criteria. Such evidence may include regulatory rules and decisions, past practices, and other facts and circumstances that would indicate that recovery or refund is probable. When such evidence provides sufficient support, the balances are recorded in SJW Group’s financial statements.


21



Impact of Recent Accounting Pronouncements:
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the lease requirements in “Leases (Topic 840).” This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the Consolidated Statement of Financial Position. ASU 2016-02 also makes some changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will be effective for the company in the first quarter of 2019 and earlier adoption is permitted. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements and related disclosures.

Results of Operations:
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales.
See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and political and regulatory activities that have occurred in response to drought conditions.
Overview
SJW Group’s consolidated net income for the three months ended March 31, 2018, was $1,285, a decrease of $2,386, or approximately 65%, from $3,671 recognized for the same period in 2017. The decrease in net income for the three months ended March 31, 2018, was primarily due to an increase in water production expenses and incurred costs related to the proposed merger with CTWS, partially offset by an increase in operating revenue. Net income includes approximately $2,700 of merger related costs. The increase in operating revenue was primarily due to increased customer usage and higher rates partially offset by the net recognition of certain balancing and memorandum accounts. The net decrease in balancing and memorandum accounts revenue was primarily due to $1,165 related to the outcome of our cost of capital proceeding, $933 related to the implementation of the Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”), and $2,470 in lower revenue recorded in our WCMA, $1,371 related to a redistribution of certain customer accounts between residential and business customers for the year ended December 31, 2016, recorded in the first quarter of 2017.
Operating Revenue
 
Operating Revenue by Segment
Three months ended March 31,
 
2018
 
2017
Water Utility Services
$
73,701

 
67,482

Real Estate Services
1,341

 
1,563

 
$
75,042

 
69,045

The change in consolidated operating revenues was due to the following factors:
 
Three months ended
 March 31,
2018 vs. 2017
Increase/(decrease)
Water Utility Services:
 
 
 
Consumption changes
$
6,273

 
9
 %
Increase in customers
377

 
1
 %
Rate increases
6,074

 
9
 %
Balancing and memorandum accounts:


 
 
WCMA
(2,470
)
 
(4
)%
Cost recovery recorded prior year
(41
)
 
 %
2016 WCMA revision to new customer classification
(1,371
)
 
(2
)%
All other
(2,624
)
 
(4
)%
Real Estate Services
(221
)
 
 %
 
$
5,997

 
9
 %

22



Operating Expense
 
Operating Expense by Segment
Three months ended March 31,
 
2018
 
2017
Water Utility Services
$
62,589

 
55,581

Real Estate Services
849

 
948

All Other
4,273

 
812

 
$
67,711

 
57,341

The change in consolidated operating expenses was due to the following factors:
 
Three months ended
March 31,
2018 vs. 2017
Increase/(decrease)
Water production expenses:
 
 
 
Change in surface water use
$
(1,355
)
 
(3
)%
Change in usage and new customers
2,549

 
4
 %
Purchased water and groundwater extraction charge and energy price increase
2,272

 
4
 %
Balancing and memorandum accounts cost recovery
482

 
1
 %
Total water production expenses
3,948

 
6
 %
Administrative and general
580

 
1
 %
Balance and memorandum account cost recovery
(161
)
 
 %
Maintenance
562

 
1
 %
Property taxes and other non-income taxes
171

 
 %
Depreciation and amortization
1,464

 
3
 %
Merger related expenses
3,806

 
7
 %
 
$
10,370

 
18
 %
Sources of Water Supply
San Jose Water Company’s water supply consists of groundwater from wells, surface water from watershed run-off and diversion, reclaimed water, and imported water purchased from the Santa Clara Valley Water District (“SCVWD”) under the terms of a master contract with SCVWD expiring in 2051. Surface water is the least expensive source of water. Changes and variations in quantities from each of these sources affect the overall mix of the water supply, thereby affecting the cost of the water supply. In addition, the water rate for purchased water and the groundwater extraction charge may be increased by the SCVWD at any time. If an increase occurs, then San Jose Water Company would file an advice letter with the CPUC seeking authorization to increase revenues to offset the cost increase.
CLWSC’s water supply consists of groundwater from wells and purchased treated and untreated raw water from the Guadalupe-Blanco River Authority (“GBRA”). CLWSC has long-term agreements with the 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. Production wells located in a Comal Trinity Groundwater Conservation District, a regulated portion of the Trinity aquifer, are required to submit groundwater pump tax based upon usage.
The following table presents the change in sources of water supply, in million gallons, for Water Utility Services:
 
Three months ended March 31,
 
Increase/
(decrease)
 
% of Total Change
2018
 
2017
 
Purchased water
3,856

 
3,909

 
(53
)
 
%
Groundwater
2,778

 
2,398

 
380

 
6
%
Surface water
537

 
181

 
356

 
5
%
Reclaimed water
70

 
47

 
23

 
%
 
7,241

 
6,535

 
706

 
11
%
The changes in the source of supply mix were consistent with the changes in the water production expenses.

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Unaccounted-for water on a 12-month-to-date basis for March 31, 2018, and 2017 approximated 7.6% and 8.7%, respectively, as a percentage of total production. The decrease in unaccounted-for water is primarily due to decreased water loss as a result of higher flows through the system from reduced conservation activities, combined with Water Utility Services’ main replacements and lost water reduction programs.
Water Production Expenses
The increase in water production expenses for the three months ended March 31, 2018, compared to the same period in 2017, was primarily attributable to an increase in usage and higher per unit costs for purchased water, groundwater extraction and energy charges. Effective July 1, 2017, SCVWD increased the unit price of purchased water by approximately 9% and the groundwater extraction charge by approximately 10%. The increase was offset by a decrease in costs due to an increase in the use of available surface water supply.
Other Operating Expenses
Operating expenses, excluding water production expenses, increased $6,422 for the three months ended March 31, 2018 compared to the same period in 2017. The increase was primarily attributable to an increase of $3,806 in merger related expenses for the company’s proposed merger with CTWS, an increase of $1,464 in depreciation and amortization expense due to increases in utility plant, an increase of $562 in maintenance expenses due to annual wage increases and paving costs as a result of increased leak repairs, an increase of $419 in administrative and general expenses primarily due to increases in contracted work related to the recycled water retrofit program and cost of capital and rate case filing expenses, and an increase in property and other non-income taxes of $171.
Other (Expense) Income
For the three months ended March 31, 2018, compared to the same period in 2017, the change in other (expense) income was primarily due to an unrealized loss of $667 due to the change in fair value of the company’s investment in California Water Service Group in the quarter.
Provision for Income Taxes
For the three months ended March 31, 2018, compared to the same period in 2017, income tax expense decreased $2,148. The decrease in income tax expense is primarily due to a lower pre-tax income. The effective consolidated income tax rates were (82%) and 30% for the three months ended March 31, 2018, and March 31, 2017, respectively. The negative effective tax rate is due to low income before taxes generating a tax expense of $159, offset by recognition of excess tax benefits of $747 relating to share-based payment awards recognized through the income statement for the three months ended March 31, 2018. SJW Group does not reasonably expect that the recognition of excess tax benefits will have a material impact on the anticipated effective consolidated income tax rate for the year ended December 31, 2018.
The CPUC has directed San Jose Water Company to establish a memorandum account to capture all of the impacts of the Tax Act including the benefit of the reduction in the federal statutory income tax rate from 35% to 21% on its regulated revenue requirement. The CPUC has indicated that the net benefit from implementing the new law should ultimately be passed on to customers. The PUCT has directed water utilities to record as a regulatory liability the difference between the revenues collected under existing rates and the revenue that would have been collected had the existing rates been set using the new federal statutory income tax rate. The benefits associated with regulatory activities is expected to flow back to customers as directed by the CPUC and PUCT, with no impact to net income. Accordingly, San Jose Water Company recorded a $933 liability in the tax memorandum account during the first quarter of 2018. CLWSC recorded $139 as a regulatory liability during the first quarter of 2018.
SJW Group is currently undergoing an audit by the Texas Comptroller of Public Accounts for Texas Franchise Tax Report for the report year 2015.
Other Comprehensive Income (Loss)
The change in other comprehensive income (loss) for the three months ended March 31, 2018, compared to the same period in 2017 was due to a change of accounting of the fair value for the company’s investment in California Water Service Group as a result of the adoption of ASU 2016-01, “Financial Instruments - Overall” effective January 1, 2018.
Water Supply
On April 1, 2018, SCVWD’s 10 reservoirs were approximately 40% full with 67,627 acre-feet of water in storage, which is 61% of twenty-year average for this date. As reported by the SCVWD, there were 7.36 inches of rainfall in San Jose for the current rainfall season that commenced on July 1, 2017. Rainfall at San Jose Water Company’s Lake Elsman was measured at 28.97 inches for the current rainfall season, which is approximately 69% of the five-year average. Under normal hydrologic conditions, state and federal water allocations represent approximately 40% of the SCVWD’s total annual supply. As of April

24



1, 2018, the SCVWD reported that allocations from the state and federal water project are approximately 20% and 70%, respectively, of amounts requested in 2018. SCVWD also reported that the managed groundwater recharge from January to March in the Santa Clara Plain was 208% of the five-year average. The groundwater level in the Santa Clara Plain is approximately 46 feet higher than a year ago in March and 27 feet higher than the five-year average. According to SCVWD, the projected total groundwater storage at the end of 2018 is expected to fall within the normal stage of the SCVWD’s Water Shortage Contingency Plan.
On April 1, 2018, San Jose Water Company’s Lake Elsman contained 6,193, acre-feet of water, of which approximately 5,733 acre-feet can be utilized. Local surface water is a less costly source of water than groundwater or purchased water and its availability significantly impacts San Jose Water Company’s results of operations. San Jose Water Company will utilize surface water and additional water from its portfolio of groundwater supplies to supplement imported water from the SCVWD. The Montevina Surface Water Treatment Plant is currently operational, while final work on the retrofit project continues and is expected to be completed in the second quarter of 2018. San Jose Water Company’s smaller Saratoga Water Treatment Plant was fully operational during the first quarter of 2018. San Jose Water Company believes that its various water supply sources will be sufficient to meet customer demand through the remainder of 2018.
See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and ongoing political and regulatory activities related to conservation.
SJW Group and San Jose Water Company provide additional information on their web sites relating to ongoing water conservation measures taken or to be taken in response to the recent drought conditions in California, including information on customer water usage. The web sites are accessible at www.sjwater.com and www.sjwgroup.com. SJW Group intends to update the web sites as appropriate during the period in which the water shortage contingency plan of SCVWD remains 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.
CLWSC’s water supply consists of groundwater from wells and purchased treated and untreated raw water from the GBRA. CLWSC has long-term agreements with the 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.  
Regulation and Rates
Almost all of the operating revenue of San Jose Water Company results from the sale of water at rates authorized by the CPUC. The CPUC sets rates that are intended to provide revenue sufficient to recover operating expenses and the opportunity to achieve a specified return on common equity. The timing of rate decisions could have an impact on the results of operations.
See Note 8 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the regulatory activities that have occurred during the year.

Liquidity:
Cash Flow from Operating Activities
During the three months ended March 31, 2018, SJW Group generated cash flows from operations of approximately $22,600, compared to $28,200 for the same period in 2017. Cash flow from operations is primarily generated by net income from revenue producing activities, adjusted for non-cash expenses for depreciation and amortization, deferred income taxes, gains or losses on the sale of assets, and changes in working capital items. Cash flow from operations decreased by approximately $5,600. This decrease was the result of a combination of the following factors: (1) net income adjusted for non-cash items decreased by $3,200, (2) a decrease in accrued groundwater extraction charges, purchased water and power of $2,200, (3) collections of previously billed and accrued receivables decreased $1,500, offset by (4) a general working capital increase of $1,300.
As of March 31, 2018, Water Utility Services’ write-offs for uncollectible accounts represent less than 1% of its total revenue, unchanged from March 31, 2017. Management believes it will continue to collect its accounts receivable balances at its historical collection rate.
In connection with the proposed merger with CTWS, the company incurred fees during the first quarter of 2018 of approximately $3,806. SJW Group anticipates incurring additional merger related fees through the anticipated close of the transaction in the fourth quarter of 2018 which will negatively impact operating cash flows.

25



Cash Flow from Investing Activities
During the three months ended March 31, 2018, SJW Group used cash flows in investing activities of approximately $31,600, compared to $31,000 for the same period in 2017. SJW Group used approximately: (1) $29,000 of cash for company-funded capital expenditures, (2) $1,500 for developer-funded capital expenditures, and (3) $1,100 in utility plant retirement costs.
Water Utility Services’ budgeted capital expenditures for 2018, exclusive of capital expenditures financed by customer contributions and advances, are approximately $120,000. As of March 31, 2018, approximately $29,000 or 24% of the $120,000 has been spent.
Water Utility Services’ capital expenditures are incurred in connection with normal upgrading and expansion of existing facilities and to comply with environmental regulations. Over the next five years, Water Utility Services expects to incur approximately $760,820 in capital expenditures, which includes replacement of pipes and mains, and maintaining water systems. A significant portion of this amount is subject to future CPUC and PUCT approval. Capital expenditures have the effect of increasing utility plant rate base on which Water Utility Services earns a return. Water Utility Services actual capital expenditures may vary from their projections due to changes in the expected demand for services, weather patterns, actions by governmental agencies, and general economic conditions. Total additions to utility plant normally exceed Company-financed additions as a result of new facilities construction funded with advances from developers and contributions in aid of construction.
A substantial portion of San Jose Water Company’s distribution system was constructed during the period from 1945 to 1980. Expenditure levels for renewal and modernization of this part of the system will grow as these components reach the end of their useful lives. In most cases, 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 three months ended March 31, 2018, increased by approximately $23,700 from the same period in the prior year, primarily as a result of (1) an increase in net borrowings on our lines of credit of $28,200, offset by (2) a $1,300 increase in payments for equity plans.

Sources of Capital:
San Jose Water Company’s ability to finance future construction programs and sustain dividend payments depends on its ability to maintain or increase internally generated funds and attract external financing. The level of future earnings and the related cash flow from operations is dependent, in large part, upon the timing and outcome of regulatory proceedings.
San Jose Water Company’s financing activity is designed to achieve a capital structure consistent with regulatory guidelines of approximately 49% debt and 51% equity. As of March 31, 2018, San Jose Water Company’s funded debt and equity were approximately 46% and 54%, 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 or the sale of all or part of our investment in California Water Service Group, all of which will be consistent with the regulator’s 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-calendar-month 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 March 31, 2018.
SJW Group’s unsecured senior note agreement has terms and conditions that restrict SJW Group from issuing additional funded debt if: (1) the funded consolidated debt would exceed 66-2/3% of total capitalization, and (2) the minimum net worth of SJW Group becomes less than $175,000 plus 30% of Water Utility Services cumulative net income, since June 30, 2011. SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions at March 31, 2018.
San Jose Water Company’s loan agreements with the California Pollution Control Financing Authority contain affirmative and negative covenants customary for loan agreements relating to revenue bonds, including, among other things, complying with certain disclosure obligations and covenants relating to the tax exempt status of the interest on the bonds and limitations and prohibitions relating to the transfer of the projects funded by the loan proceeds and the assignment of the loan agreement. As of March 31, 2018, San Jose Water Company was in compliance with all such covenants.
SJWTX, Inc.’s unsecured senior note agreement has terms and conditions that restrict SJWTX, Inc. from issuing additional funded debt if: (1) the funded debt would exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-calendar-month period would be less than 175% of interest charges. In addition, SJW Group is a

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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 March 31, 2018, SJWTX, Inc. and SJW Group were not restricted from issuing future indebtedness as a result of these terms and conditions.
As of March 31, 2018, SJW Group and its subsidiaries had unsecured bank lines of credit, allowing aggregate short-term borrowings of up to $145,000, of which $15,000 was available to SJW Group and SJW Land Company under a single line of credit, $5,000 was available to SJWTX, Inc. under a second line of credit, and $125,000 was available to San Jose Water Company under a third line of credit. At March 31, 2018, SJW Group and its subsidiaries had available unused short-term bank lines of credit totaling $106,000. These lines of credit bear interest at variable rates and expire on June 1, 2021. The cost of borrowing on SJW Group’s short-term credit facilities has averaged 2.66% as of March 31, 2018. The SJW Group and SJWTX, Inc. unsecured bank lines of credit have the following affirmative covenants calculated with the financial statements of SJW Group, on a consolidated basis: (1) the funded debt cannot exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-calendar-month period cannot be less than 175% of interest charges. As of March 31, 2018, SJW Group and SJWTX, Inc. were in compliance with all covenants. San Jose Water Company’s unsecured bank line of credit has the following affirmative covenants: (1) the funded debt cannot exceed 66-2/3% of total capitalization, and (2) net income available for interest charges for the trailing 12-calendar-month period cannot be less than 175% of interest charges. As of March 31, 2018, San Jose Water Company was in compliance with all covenants.

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, pension plan asset 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 variable rate lines of credit. San Jose Water Company sponsors a noncontributory pension plan for its employees. Pension costs and the funded status of the plan are affected by a number of factors including the discount rate and investment returns on plan assets. SJW Group also owned 82,340 shares of common stock of California Water Service Group as of March 31, 2018, which is listed on the New York Stock Exchange, and is therefore exposed to the risk of fluctuations and changes in equity prices.
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 first fiscal quarter of 2018 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
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.


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ITEM 1A.
RISK FACTORS
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, 2017, and our other public filings, which could materially affect our business, financial condition or future results. Other than the risk factor listed and referenced to below, there have been no material changes from risk factors previously disclosed in “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, 2017.
The following discusses certain risk factors relating to the proposed merger with CTWS and does not include all of the risk factors associated with the proposed merger and the combined company after the proposed merger. For additional and more detailed discussions of risks relating to the proposed merger and the combined company, please see the Registration Statement on Form S-4 filed by SJW Group on April 25, 2018, including but not limited to, the section entitled “Risk Factors” in such Registration Statement.
Our proposed merger with CTWS is subject to the receipt of consents and clearances from regulatory authorities that may impose conditions that could have an adverse effect on SJW Group or, if not obtained, could prevent completion of the proposed merger.
Completion of the proposed merger is contingent upon, among other things, the receipt of all required regulatory approvals, which consist of filings with the SEC, compliance with and filings under the Hart Scott-Rodino Antitrust Improvements Act, filing and acceptance of the certificate of merger with the Secretary of the State of the State of Connecticut and appropriate documents with the states having jurisdictions over SJW Group and CTWS, filings and approvals under the securities or “blue sky” laws of various states, filing and acceptance of the SJW Group certificate of incorporation amendment with the Secretary of State of the State of Delaware, authorization from the New York Stock Exchange for the listing of the shares of SJW common stock to be issued as merger consideration, pre-approvals of license transfers by the Federal Communications Commission compliance with the Delaware General Corporation Law and the Connecticut Business Corporation Act, and consents required by the Connecticut Public Utilities Regulatory Authority and the Maine Public Utilities Commission. Furthermore, before the proposed merger may be completed, applicable waiting periods must expire or terminate under antitrust and competition laws.
The terms and conditions of the approvals that are granted by such governmental entities and regulatory authorities may impose requirements, limitations, costs, or place restrictions on the conduct of the combined company’s business. The merger agreement may require SJW Group and/or CTWS to comply with conditions imposed by regulatory entities and, in certain circumstances, either company may refuse to close the proposed merger on the basis of regulatory conditions imposed. There can be no assurance that regulators will not impose conditions, terms, obligations or restrictions or that such conditions, terms, obligations or restrictions will not have the effect of delaying completion of the proposed merger or imposing additional material costs on or materially limiting the revenues of the combined company following the proposed merger. Additionally, neither SJW Group nor CTWS can provide assurance that any such conditions, terms, obligations or restrictions will not result in the delay or abandonment of the proposed merger, or the consummation of the proposed merger on terms different than those contemplated by the merger agreement. In addition the proposed merger requires the approval by the stockholders of SJW Group and CTWS, and there is no guarantee that such approval will be obtained. If the stockholders of either company do not approve the proposed merger, the proposed merger will not be completed, which will have an adverse effect on SJW Group’s stock price and financial conditions.
Any delay in completing the proposed merger may reduce or eliminate the benefits to be achieved thereunder.
In addition to the required regulatory clearances, the proposed merger is subject to a number of other conditions beyond SJW Group’s control that may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the completion of the proposed merger for a significant period of time or prevent it from occurring. Any delay in completing the proposed merger could cause the combined company to not realize, or to be delayed in realizing, some or all of the benefits expected to result from elimination of duplicative public company and other related costs that we expect to achieve if the proposed merger is successfully completed within its expected time frame.
Failure to complete the proposed merger as currently contemplated or at all could negatively impact the stock prices, business operations and financial results of SJW Group.
Completion of the proposed merger is not assured and is subject to risks, including the risks that approval of the transactions by shareholders of SJW Group and CTWS or by governmental entities will not be obtained or that certain other closing conditions will not be satisfied. If the proposed merger is not completed, or is completed on different terms than as contemplated by the merger agreement, the ongoing businesses and financial results of SJW Group may be adversely affected and SJW Group will be subject to several risks, including the following:

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having to pay certain significant costs relating to the proposed merger without receiving the benefits of the proposed merger, including, in certain circumstances, payment of a termination fee and an expense reimbursement;
the potential loss of key personnel during the pendency of the proposed merger as employees may experience uncertainty about their future roles with the combined company;
reputational harm due to the adverse public perception of any failure to successfully complete the proposed merger;
having been subject to certain restrictions on the conduct of its businesses, in the case of SJW Group, which may have prevented SJW Group from making certain acquisitions or dispositions or pursuing certain business opportunities while the proposed merger was pending; and
SJW Group’s management having focused on the proposed merger instead of on conducting its day-to-day business and operational matters and pursuing other opportunities that could have been beneficial to the companies.
Any delay in the completion of the proposed merger, any uncertainty about the completion of the proposed merger on terms other than those contemplated by the merger agreement and any failure to complete the proposed merger could adversely affect the business, financial results and stock price of SJW Group.
If the proposed merger is not consummated by the end date, SJW Group or CTWS may terminate the merger agreement in certain circumstances.
Either SJW Group or CTWS may terminate the merger agreement under certain circumstances, including, if the proposed merger has not been consummated by March 14, 2019 (unless such date is extended automatically to June 14, 2019 pursuant to the terms of the merger agreement). However, this termination right will not be available to a party if such failure of the proposed merger to occur on or before such date is the result of a material breach of any representation, warranty, covenant or agreement of the merger agreement by such party. If we are not able to complete the proposed merger by the end date, even if we decide not to terminate the merger agreement, we may not be able to prevent CTWS from exercising its right to terminate the merger agreement.
The merger agreement contains provisions that could discourage a potential competing acquiror of either SJW Group or CTWS, or could result in any competing proposal being at a lower price than it might otherwise be. However, potential competing acquirors could negatively impact the completion and timing of the proposed transaction and result in disruption and expense for both SJW Group and CTWS.
The merger agreement contains “no shop” provisions that, subject to limited exceptions, restrict each of SJW Group’s and CTWS’s ability to solicit, initiate, knowingly encourage or knowing facilitate any takeover proposal. In addition, the other party has an opportunity to offer to modify the terms of the merger in response to any competing acquisition proposals before the board of directors of the company that has received a third-party proposal may withdraw or qualify its recommendation with respect to the merger. These provisions could discourage a potential third-party acquiror that might have an interest in acquiring all or a significant portion of SJW Group or CTWS from considering or proposing the acquisition, even if it were prepared to pay consideration with a higher per share cash or market value than the market value proposed to be received or realized in the proposed merger or might result in a potential third-party acquiror proposing to pay a lower price to the stockholders than it might otherwise have proposed to pay because of the added expense of the $42.5 million or $28.1 million termination fee, as applicable, that may become payable in certain circumstances.
SJW Group and CTWS have each received unsolicited proposals and each of the companies’ board of directors have determined that the respective proposals were neither superior proposals nor reasonably likely to lead to superior proposals. It is unclear what additional actions these third parties may take to further their proposals. Even if ultimately unsuccessful, actions taken by these or other third parties could disrupt the business of each SJW Group and CTWS, could cause SJW and CTWS to incur substantial expense, and could negatively impact the expected timing of the consummation of the merger. In addition, there is a risk that, as a result of actions taken by these or other third parties, shareholders of SJW Group or CTWS may vote against the proposals at their respective special meetings and that, consequently, the required shareholder approvals may not be obtained.

ITEM 5.
OTHER INFORMATION
On April 25, 2018, the Board of Directors of SJW Group declared the regular quarterly dividend of $0.28 per share of common stock. The dividend will be paid on June 1, 2018, to stockholders of record as of the close of business on May 7, 2018.
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.


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ITEM 6.
EXHIBITS
Exhibit
Number
  
Description
 
 
 
2.1
 
 
 
 
10.1
 
 
 
 
10.2
 
 
 
 
10.3
 
 
 
 
10.4
 
 
 
 
10.5
 
 
 
 
10.6
 
 
 
 
10.7
 
 
 
 
31.1
  
 
 
 
31.2
  
 
 
 
32.1
  
 
 
 
32.2
  
 
 
 
101.INS
 
XBRL Instance Document
 
 
 
101.SCH
 
XBRL Taxonomy Extension Schema Document
 
 
 
101.CAL
 
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
 
101.DEF
 
XBRL Taxonomy Extension Definition Linkbase Document
 
 
 
101.LAB
 
XBRL Taxonomy Extension Label Linkbase Document
 
 
 
101.PRE
 
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
 
  
(1)
Filed currently herewith.


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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:
May 8, 2018
By:
 
/s/ JAMES P. LYNCH
 
 
 
 
James P. Lynch
 
 
 
 
Chief Financial Officer and Treasurer
(Principal financial officer)


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