2018
Annual Report
Serving, Protecting, and Delivering
Quality Water & Reliable Service
Dear Shareholders:
It was truly an honor to lead SJW Group in 2018!
I am incredibly proud of our employee team whose dedication to serving our customers and modeling our
core values was on full display.
I have seen first-hand their focus on delivering exceptional customer service, building the SJW Group brand
and delivering value to all of our stakeholders.
In 2018, we announced our intention to acquire and merge with Connecticut Water Service, Inc., the 6th
largest publicly traded water utility in the United States. The combined organization would be the second
largest pure-play water and wastewater utility in the U.S. with the scale and geographic diversity to deliver
significant benefits to customers, communities, employees and shareholders. While the path to complete
this transaction has been challenging, I continue to believe that the transformative combination makes sense
on many levels. Our focus now is to obtain the remaining regulatory approvals necessary to close the
transaction in 2019.
SJW Group (SJW) is also executing and delivering on our core growth strategy to invest in our high-quality
water systems and earn a return on that investment. In 2018, we invested over $136 million to upgrade San
Jose Water’s and SJWTX, Inc.’s infrastructure, replacing aging pipes, storage tanks, and other facilities. In
2019, SJW plans to make another $110 million in infrastructure improvements for its operating utility
customers in California and Texas.
SJWTX, Inc., our Texas subsidiary doing business as Canyon Lake Water Service Company, continues its
impressive track record, growing its customer base by 16% in 2018 through both organic growth and
targeted acquisitions including the Deer Creek Ranch Water System completed last year.
I would also like to acknowledge the teamwork and commitment that went into processing the 2019 General
Rate Case through the California Public Utility Commission (CPUC) for San Jose Water, our flagship utility.
The timely CPUC decision authorized a January 2019 rate increase of 4.55% with additional increases in
January 2020 and 2021. Importantly, it approved investments of $320 million in capital infrastructure over
the three-year period of 2018-2020. These investments allow San Jose Water to continue to deliver
high-quality, reliable water service and drive rate base growth, which is the earnings engine for SJW. Over
the last 10 years, we have invested over $1 billion in our water systems to deliver for our customers and
shareholders alike.
Marking the end of my first full year with SJW, I continue to be astounded by our people and their innovative
spirit. I believe that SJW stands apart and is a true leader in the drinking-water profession because the
people of this organization believe fully in our mission. My colleagues understand and embrace the fact that
the water and service we provide are critically important in the lives of our customers and communities.
Earning their trust every day is a responsibility we willingly accept.
We are equally committed to maintaining the trust you place in us as shareholders. We consider it
imperative to deliver consistent financial performance, high earnings quality, a robust balance sheet and a
strong dividend yield, all built on the foundation of conservative financial management. Additionally, we
have paid a dividend for 75 consecutive years and increased that dividend for 51 consecutive years.
Finally, I want to thank our Board of Directors for their support, leadership and the encouragement they
provided to me and the executive leadership team at SJW Group during 2018.
On behalf of our Board and employees, thank you for placing your trust in SJW Group. We look forward to
another successful year!
Eric W. Thornburg
President, Chief Executive Officer,
and Chairman of the Board
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For the fiscal year ended December 31, 2018
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
Commission file number: 001-8966
SJW GROUP
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
110 West Taylor Street, San Jose, California
(Address of principal executive offices)
77-0066628
(I.R.S. Employer Identification No.)
95110
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, $0.001 par value per share
Name of each exchange on which registered
New York Stock Exchange
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities
Securities registered pursuant to Section 12(g) of the Act: None
Act. Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller
reporting company, or emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,”
and “emerging growth company,” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
Non-accelerated filer
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
As of June 30, 2018, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was
No
approximately $1,212 million based on the closing sale price as reported on the New York Stock Exchange.
Indicate the number of shares outstanding of registrant’s common stock, as of the latest practicable date.
Class
Common Stock, $0.001 par value per share
Outstanding at February 19, 2019
28,427,145
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement relating to the registrant’s Annual Meeting of Stockholders, to be held on April 24, 2019,
are incorporated by reference into Part III of this Form 10-K where indicated.
TABLE OF CONTENTS
PART I
Forward-Looking Statements
Business
Item 1.
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Properties
Item 3.
Item 4. Mine Safety Disclosures
Legal Proceedings
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Item 8.
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9.
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate Governance
Item 11. Executive Compensation
Item 12.
Item 13. Certain Relationships and Related Transactions, and Director Independence
Item 14.
Principal Accountant Fees and Services
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Item 15. Exhibits and Financial Statement Schedules
Exhibit Index
Signatures
PART IV
Page
3
3
12
24
24
25
26
27
28
29
45
46
83
83
84
84
84
84
84
84
85
86
91
Forward-Looking Statements
PART I
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 under Item 1A, “Risk Factors,” and Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations,” and elsewhere, and in other reports and documents SJW Group files with the
Securities and Exchange Commission (the “SEC”), specifically the most recent Form 10-Q and the registration statement on
Form S-3, as amended, and reports on Form 8-K filed with the SEC, each as it may be amended from time to time.
SJW Group undertakes no obligation to update or revise the information contained in this report, including the forward-looking
statements, to reflect any event or circumstance that may arise after the date of this report.
Item 1.
Business
General Development of Business
SJW Group was initially incorporated as SJW Corp. in the state of California on February 8, 1985. SJW Group is a holding
company with four wholly-owned subsidiaries:
•
•
•
•
San Jose Water Company with its headquarters located at 110 West Taylor Street in San Jose, California
95110, was originally incorporated under the laws of the State of California in 1866. As part of a
reorganization on February 8, 1985, San Jose Water Company became a wholly owned subsidiary of SJW
Group. San Jose Water Company is a public utility in the business of providing water service to
approximately 231,000 connections that serve a population of approximately one million people in an area
comprising approximately 139 square miles in the metropolitan San Jose, California area.
SJWTX, Inc. was incorporated in the state of Texas in 2005. SJWTX, Inc. is doing business as Canyon Lake
Water Service Company (“CLWSC”). CLWSC is a public utility in the business of providing water service to
approximately 16,000 connections that serve approximately 49,000 people. CLWSC’s service area comprises
more than 246 square miles in the southern region of the Texas Hill Country in Blanco, Comal, Hays and
Travis counties, the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest
in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be
a variable interest entity within the scope of Financial Accounting Standards Board (“FASB”) Accounting
Standard Codification (“ASC”) Topic 810, “Consolidation” with SJWTX, Inc. as the primary beneficiary. As
a result, Acequia has been consolidated with SJWTX, Inc.
SJW Land Company was incorporated in 1985. SJW Land Company owns undeveloped land and operates
commercial buildings in Tennessee. SJW Land also has a 70% limited partnership interest in 444 West Santa
Clara Street, L.P. The partnership owned a commercial building in California which was sold by the
partnership on April 6, 2017. See Note 1 of “Notes to Consolidated Financial Statements” for discussion of
the sales transaction.
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”). See below for discussion of the SJW Group and CTWS Merger Agreement.
Texas Water Alliance Limited (“TWA”), was previously a wholly owned subsidiary of SJW Group undertaking activities to
develop a water supply project in Texas. On November 16, 2017, SJW Group sold all of its equity interest in TWA to
Guadalupe-Blanco River Authority (“GBRA”) for $31.0 million. See Note 1 of “Notes to Consolidated Financial Statements”
for a more detailed discussion of the sales transaction.
Together, San Jose Water Company, CLWSC and TWA, up to the date of sale in 2017, are referred to as “Water Utility
Services.”
3
SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P. which operated a
commercial building rental, are collectively referred to as “Real Estate Services.”
SJW Group and CTWS Merger (the “Merger”)
On March 14, 2018, SJW Group, Hydro Sub, Inc. entered into an Agreement and Plan of Merger with CTWS to effect a merger
with CTWS in an all-stock transaction. On August 5, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a Second
Amended and Restated Agreement & Plan of Merger (the “Merger Agreement”), which provided, among other things, that SJW
Group will acquire CTWS in an all-cash transaction. Under the terms of the Merger Agreement, each issued and then
outstanding share of common stock of CTWS will be automatically converted into the right to receive an amount in cash equal
to $70.00 per share. The transaction was approved by the boards of directors of both companies and on November 16, 2018 by
CTWS shareholders and is subject to the satisfaction of customary closing conditions and approval by certain regulators.
Under certain circumstances, SJW Group will be obligated to pay a termination fee of $42.5 million to CTWS if the Merger
Agreement is terminated by SJW Group, including without limitation in the event that SJW Group materially breaches its non-
solicitation obligations or SJW Group enters into an alternative acquisition agreement, in each case subject to the terms of the
Merger Agreement, as amended. Pursuant to the terms of the Merger Agreement, SJW Group may be required to reimburse
CTWS up to $5 million of certain fees and expenses (any termination fee payable by SJW Group under the Merger Agreement
would be reduced by such amount) if the Merger Agreement is terminated under certain circumstances. Recent updates related
to the proposed merger include the following:
• On December 3, 2018, the Connecticut Public Utilities Regulatory Authority (“PURA”) issued a proposed final
decision denying the application by SJW Group and CTWS for approval of the proposed merger (“Proposed Final
Decision”). On December 5, 2018, PURA conditionally granted SJW Group’s and CTWS’s motion to suspend the
schedule permitting SJW Group and CTWS to file new evidence that was unavailable before the close of the record in
the proceeding for PURA’s consideration. On December 14, 2018, SJW Group and CTWS filed a motion to reopen
the record and extend the procedural schedule to admit new evidence that was submitted concurrent with the motion
(“Motion to Reopen”). On January 4, 2019, PURA denied the Motion to Reopen concluding that the concessions and
offers of commitments did not constitute new evidence and to the extent that some of the filed material contains “new”
evidence, the material was insufficient to warrant reopening. On January 9, 2019, SJW Group and CTWS withdrew
their application before PURA and issued a joint press release announcing that they are continuing to evaluate their
regulatory approach in connection with the proposed merger, including the possibility of submitting a new application
to PURA. PURA closed the docket without issuing a final decision on January 11, 2019. After a thorough review
conducted by the management and boards of both companies with the support of their respective local Connecticut
regulatory counsel SJW Group and CTWS announced on February 20, 2019 that they intend to file a new merger
approval application with PURA. The new application is expected to be filed during the second quarter of 2019.
• On December 20, 2018, the Maine Public Utilities Commission (“MPUC”) staff issued a stay in the reorganization
proceeding pending resolution of the regulatory filing with PURA. On January 10, 2019, following the withdrawal of
the PURA application, the Maine Water Company notified the MPUC of such withdrawal in a status report. On
January 23, 2019, the Maine Water Company filed notice of its intent to voluntarily withdraw its application without
prejudice, reserving the right to refile at a later date. Later that day, the MPUC acknowledged receipt of the Maine
Water Company’s notice and issued notice closing the docket. After a thorough review conducted by the management
and boards of both companies with the support of their respective local Maine regulatory counsel SJW Group and
CTWS announced on February 20, 2019 that they intend to file a new merger approval application with MPUC. The
new application is expected to be filed during the second quarter of 2019.
• While SJW Group believes that no prior authorization of the California Public Utilities Commission (“CPUC”) is
required for the Merger, the CPUC previously issued an order to investigate the proposed merger, such as whether it is
subject to CPUC approval and its likely impacts within California. The assigned commissioner’s Scoping Memo
issued September 7, 2018 adopted a schedule providing for the CPUC to vote on a proposed decision in December
2018. However, as a result of unexpected delays in the CPUC’s scheduling of a planned public participation hearing,
which was held January 31, 2019, the CPUC is now expected to complete its investigation in the second quarter of
2019.
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. For a description of certain risk factors
relating to the proposed merger, please see Item 1A, “Risk Factors.”
Regulation and Rates
California Regulatory Affairs
San Jose Water Company’s rates, service and other matters affecting its business are subject to regulation by the CPUC.
4
Generally, there are three types of rate adjustments that affect San Jose Water Company’s revenue collection: general rate
adjustments, cost of capital adjustments, and offset rate adjustments. General rate adjustments are authorized in general rate
case decisions, which usually authorize an initial rate adjustment followed by two annual escalation adjustments. General rate
applications are normally filed and processed during the last year covered by the most recent general rate case as required by
the CPUC in order to avoid any gaps in regulatory decisions on general rate adjustments.
Cost of capital adjustments are rate adjustments resulting from the CPUC’s usual tri-annual establishment of a reasonable rate
of return for San Jose Water Company’s capital investments.
The purpose of an offset rate adjustment is to compensate utilities for changes in specific pre-authorized offsettable capital
investments or expenses, primarily for purchased water, groundwater extraction, purchased power and pensions. Pursuant to
Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for each expense item for which
such revenue offsets have been authorized. Memorandum accounts 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 memorandum account for the
Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”). The purpose of balancing and memorandum accounts is to track the under-
collection or over-collection associated with such expense changes.
On November 15, 2017, San Jose Water Company filed Advice Letter No. 513/513A with the CPUC requesting a revenue
increase of $15.7 million, 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 1.4%. 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 captured any changes to the revenue
requirement resulting from the impact of the Tax Act signed into law December 22, 2017. This request became effective on
January 1, 2018.
As required by the CPUC, on April 3, 2017, San Jose Water Company filed an application requesting authority to establish 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 lowered the rate of return from 8.09%
to 7.64% thereby reducing the 2018 revenue requirement by $5.8 million or 1.57% effective January 1, 2018. 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 (“GRC”) with the CPUC
requesting authority for an increase of revenue of $34.3 million, or 9.76%, in 2019, $14.2 million, or 3.70%, in 2020 and $20.6
million, or 5.17%, in 2021. Among other things, the application also included requests to recover $20.7 million from balancing
and memorandum accounts, the establishment of a Water Revenue Adjustment Mechanism and Sales Reconciliation
Mechanism (“WRAM/SRM”), and a shift to greater revenue collection in the service charge. On June 28, 2018, the CPUC
issued an order in the case identifying the issues to be considered, including whether the proposed merger between SJW Group
and CTWS will have any ratemaking impact on the customers of San Jose Water Company (see discussion on the proposed
merger at Note 12 of the “Notes to Consolidated Financial Statements” ). This consideration was subsequently removed from
the GRC to be considered in an Order Instituting Investigation (“OII”) on the proposed merger issued on July 20, 2018, see
below for further discussion. On August 10, 2018, San Jose Water Company and the Office of Ratepayer Advocates filed a
joint motion for partial settlement (“Settlement”) of the GRC with the CPUC, resolving all issues in the GRC with the
exception of authorization of a WRAM/SRM and the recovery of the balance in the Hydro Generation Research, Development
and Demonstration Memorandum Account, such issues being subsequently contested in legal briefs. On October 16, 2018 the
CPUC issued a Proposed Decision adopting the Settlement in part, without any impact on the proposed revenue requirement
outlined in the Settlement, and delaying ruling on the contested issues in order to allow the Settlement rates to become effective
January 1, 2019. On December 4, 2018, the CPUC issued Decision 18-11-025 authorizing new rates for 2019. Accordingly,
San Jose Water Company filed Advice Letter No. 528/528A on December 7, 2018 requesting authorization to increase the
revenue requirement by $16.4 million or 4.55% in 2019. This was approved on December 28, 2018 and new rates became
effective January 1, 2019.
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 became effective January 1, 2018.
5
The CPUC directed its Class A water utilities, including San Jose Water Company, to reflect the changes to the Internal
Revenue Code resulting from the passage of the Tax Act in customer rates. On May 8, 2018, the CPUC directed San Jose
Water Company to file an advice letter to implement a change in water rates to reflect the lower income tax rate provided by the
Tax Act, effective July 1, 2018. On May 23, 2018, San Jose Water Company filed Advice Letter No. 522 in compliance with
the CPUC’s directive. On June 7, 2018, San Jose Water Company filed Advice Letter No. 522A amending the rate change to
reflect a reduction in revenue requirement for 2018 of $14.8 million or 3.89%, with no impact on after tax income. This request
became effective July 1, 2018.
On June 13, 2018, San Jose Water Company filed Advice Letter No. 523 with the CPUC requesting authorization to implement
surcharges to offset the increases to purchased potable water charges, the ground water extraction fee, and purchased recycled
water charges implemented by the Santa Clara Valley Water District (“SCVWD”) and South Bay Water Recycling effective
July 1, 2018. This surcharge will result in a revenue increase of $13.7 million or 3.75%. This request became effective July 1,
2018.
San Jose Water Company filed Advice Letter No. 524 with the CPUC on July 26, 2018, requesting authorization to recover the
2017 capital additions related to the Montevina Water Treatment Plant Upgrade Project. The filing requested a revenue
increase of $3.2 million or 0.83% and became effective August 25, 2018.
On July 20, 2018 the CPUC issued OII No. 18-07-007 concerning SJW Group’s merger with CTWS. In its filing, the CPUC
committed to a schedule that would complete its investigation in a time frame to allow the proposed merger to move forward by
the end of 2018, if appropriate. At a required pre-hearing Conference on August 22, 2018, the CPUC confirmed its
commitment to the schedule and a Scoping Memorandum was subsequently issued on September 7, 2018, which identified
issues to be considered on whether the proposed merger is subject to CPUC approval and its likely impacts within California.
On September 14, 2018, SJW Group and San Jose Water Company submitted joint comments in response to the issues
identified above in accordance with the Scoping Memorandum’s adopted schedule, and reply comments were submitted on
October 19, 2018. A Public Participation Hearing was held on January 31, 2019, with a CPUC decision now expected in the
second quarter of 2019.
In January 2017, a San Jose Water Company customer inquired about the company’s billing practice as it related to the
proration of service charges in billing cycles where a rate change occurred. After reviewing its existing practice as well as
those of other Class A water utilities, San Jose Water Company determined that it was appropriate to modify its existing
practice to prorate service charges similar to the manner in which it prorates quantity charges - that is by applying both the old
and new rates to the portion of the billing cycle for which the rates were in effect. This change was implemented on January
30, 2017, and retroactively applied to January 1, 2017. Subsequently, on May 8, 2017, the CPUC’s Water Division notified San
Jose Water Company that it had violated Public Utilities Code 532 and other CPUC Orders and directed the company to file an
advice letter providing refunds for the period of January 1, 2014, through December 31, 2016. As directed, San Jose Water
Company filed Advice Letter 510 on June 6, 2017, to propose customer refunds in the amount of $1.8 million for the same
period. On June 22, 2017, San Jose Water Company was served with Complaint 17-06-009 regarding its billing practice for
service charge rate changes. On August 11, 2017, the Water Division rejected Advice Letter 510 in light of the CPUC’s
investigation into San Jose Water Company’s past and present billing practice. The billing issue was made a part of San Jose
Water Company’s 2019 GRC proceeding. Testimony was provided by the Office of Ratepayer Advocates (now the Public
Advocates Office or “Cal PA”) on May 23, 2018. On June 8, 2018, the company provided its rebuttal testimony. On August
10, 2018, San Jose Water Company and Cal PA submitted a partial settlement agreement on issues presented in the GRC. Both
the company and Cal PA settled on the billing issue limiting the duration from which to calculate customer refunds from June 1,
2011 through December 31, 2016. Accordingly, San Jose Water Company has provided an additional reserve to cover the
remaining period covered by the settlement. In accordance with Decision 18-11-025 for the GRC, San Jose Water Company
filed Advice Letter No. 530 proposing total refunds of $2.02 million for the period from June 1, 2011 through December 31,
2016. This advice letter became effective February 8, 2019.
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent.
The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate
service charges when increases occurred during a billing period, and whether the company double-billed service charges during
one billing period when allegedly switching from billing such charges in advance to billing in arrears. The OII resulted from a
report by the CPUC’s Consumer Protection and Enforcement Division (“CPED”), dated August 16, 2018, recommending an
investigation into San Jose Water Company’s billing practice. CPED calculated a refund obligation of approximately $2.1
million for the years 2014 to 2016 that had been the subject of San Jose Water Company’s Advice Letter No. 510. CPED
calculated a further refund obligation of approximately $2 million for the years 1987 to 2013. CPED also asserted that the
company double-billed its customers during a billing period when it allegedly converted from billing in advance to billing in
arrears, assumed that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $4.9
million. The OII notes these estimates and identifies the proper refund amount as an issue in the proceeding. The OII also
6
identifies the CPUC’s authority to consider imposing penalties on San Jose Water Company in amounts ranging from $500 to
$50,000 per offense, per day. San Jose Water Company continues to cooperate with the CPUC to resolve these issues. On
October 15, 2018, San Jose Water Company filed a response to the OII with the CPUC, in which the company stated that it
believes it would not be appropriate for the Commission to require refunds extending prior to June 2011, that no double billing
has occurred and that no penalties should be imposed on the company. As a result, the company believes it is only probable
that refunds agreed to in the partial settlement, $2.02 million, in the GRC will be refunded to customers and has provided for
this amount in the accompanying consolidated financial statements. A prehearing conference on the matter was concluded on
January 7, 2019, and a scoping memorandum outlining the remaining part of the proceeding scheduled was issued on February
11, 2019. The scoping memorandum outlined the following issues to be determined: (1) Did San Jose Water Company overbill
its customers for water service during the period from January 1987 to June 2011, (2) If San Jose Water Company overbilled its
customers during the above period, should the Commission fine San Jose Water Company or impose some other form of
penalty on it, and (3) Is this action subject to any statute of limitations including, but not limited to, Section 736 of the Public
Utilities Code? San Jose Water Company is unable to determine an estimate at this time, if any. The CPUC is expected to issue
a final decision in the matter in September of 2019.
Texas Regulatory Affairs
CLWSC is subject to the economic regulation of the Public Utilities Commission of Texas (“PUCT”). The PUCT authorize rate
increases after the filing of an Application for a Rate/Tariff Change. Rate cases may be filed as they become necessary,
provided there is no current rate case outstanding. Further, rate cases may not be filed more frequently than once every 12
months.
As required, CLWSC submitted on July 31, 2018 its Water Pass-Through Charge (“WPC”) true-up report to the PUCT
reflecting a change from $1.15 to $1.13 per thousand gallons. The WPC is the annual filing to change that component of
CLWSC’s water rates for the changes in purchased water costs since the last annual true-up report. This change for 2018
became effective on water bills being prepared as of February 1, 2018.
The PUCT directed CLWSC (as well as other Class A water utilities in Texas) to quantify all of the impacts of the passage of
the Tax Act and make rate adjustments reflecting such impacts on a prospective basis. PUCT Order 47945-36 as amended by
47945-41 directs the water utilities to record a regulatory liability that reflects (1) the difference between the revenues collected
under existing rates and the revenues that would have been collected had the existing rates been set using the recently approved
federal income tax rates; and (2) the balance of excess accumulated deferred federal income taxes that now exists because of
the decrease in the federal income tax rate from 35% to 21%. A rate proposal reflecting these tax changes was submitted for
PUCT’s review on April 19, 2018. CLWSC subsequently amended its filing on April 30, 2018 to update the customer notice,
and to replace estimates with actual information. This filing will return to the ratepayers the difference between the revenues
collected under the existing rates and what water rates would have been using the 21% federal income tax rate now effective
under the Tax Act. The accrued amounts for the period January 25, 2018 through April 30, 2018 were refunded along with the
regular monthly Federal Tax Cut Credit (“FTCC”) on bills prepared during the month of June. The FTCC customer credit will
continue to be reflected on customer bills every month until the implementation of new rates resulting from the next rate case.
CLWSC’s Sale Transfer and Merger application (“STM”) to acquire the Deer Creek Ranch Water Co., LLC’s assets was filed
with the PUCT on December 20, 2017. Notices to customers and surrounding water companies and municipalities were mailed
in January 2018 and on April 3, 2018 and the PUCT filed 47888-12, Order No. 4, approving the transaction between CLWSC
and the Deer Creek Ranch Water Co., LLC to proceed in closing. The acquisition subsequently closed on July 2, 2018. The
required completed transaction report was filed with the PUCT on July 5, 2018, and the Joint Proposed Notice of Approval was
filed with the PUCT on September 17, 2018. The final order transferring the Certificate of Convenience and Necessity, or the
exclusive right to provide water utility service, from Deer Creek Ranch Water Co., LLC to CLWSC was issued on November
29, 2018.
Please also see Item 1A, “Risk Factors,” Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations,” and Note 1 of “Notes to Consolidated Financial Statements.”
Description of Business
General
The principal business of Water Utility Services consists of the production, purchase, storage, purification, distribution,
wholesale, and retail sale of water. San Jose Water Company provides water services to approximately 231,000 connections
that serve approximately one million people residing 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. CLWSC provides water service to approximately 16,000 connections that serve
approximately 49,000 people in a service area comprising more than 246 square miles in the growing region between San
Antonio and Austin, Texas. San Jose Water Company and CLWSC distribute water to customers in accordance with accepted
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water utility methods. SJW Land Company owns an undeveloped real estate property, commercial and warehouse properties in
Tennessee and holds a 70% limited partnership interest in 444 West Santa Clara Street, L.P.
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.
In October 1997, San Jose Water Company commenced operation of the City of Cupertino municipal water system under the
terms of a 25-year lease. The system is adjacent to the San Jose Water Company service area and has approximately 4,600
service connections. Under the terms of the lease, San Jose Water Company paid an upfront $6.8 million concession fee to the
City of Cupertino that is being amortized over the contract term. San Jose Water Company assumed responsibility for all
maintenance and operating costs of the system, while receiving all payments for water service.
Among other things, operating results from the water business fluctuate according to the demand for water, which is often
influenced by seasonal conditions, such as impact of drought, summer temperatures or the amount and timing of precipitation
in Water Utility Services’ service areas. Revenue, production expenses and income are affected by changes in water sales and
the availability of surface water supply. Overhead costs, such as payroll and benefits, depreciation, interest on long-term debt,
and property taxes, remain fairly constant despite variations in the amount of water sold. As a result, earnings are highest in the
higher demand, warm summer months and lowest in the lower demand, cool winter months.
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 SCVWD under the terms of a master contract with SCVWD
expiring in 2051. During non-drought years, purchased water provides approximately 40% to 50% of San Jose Water
Company’s annual production. An additional 40% to 50% of its water supply is pumped from the underground basin which is
subject to a groundwater extraction charge paid to SCVWD. Surface supply, which during a normal rainfall year satisfies about
6% to 8% of San Jose Water Company’s annual water supply needs, provides approximately 1% of its water supply in a dry
year and approximately 14% in a wet year. In dry years, the decrease in water from surface run-off and diversion and the
corresponding increase in purchased and pumped water, increases production expenses substantially.
The pumps and motors at San Jose Water Company’s groundwater production facilities are propelled by electric power. San
Jose Water Company has installed standby power generators at 33 of its strategic water production sites and manages a fleet of
21 portable generators deployed throughout the distribution system for power outages at remaining pumping facilities. In
addition, the commercial office and operations control centers are outfitted with standby power equipment that allow critical
distribution and customer service operations to continue during a power outage. SCVWD has informed San Jose Water
Company that its filter plants, which deliver purchased water to San Jose Water Company, are also equipped with standby
generators. In the event of a power outage, San Jose Water Company believes it will be able to prevent an interruption of
service to customers for a limited period by pumping water using generator power and by using purchased water from
SCVWD.
In 2018, the level of water in the Santa Clara Valley groundwater basin, which is managed by the SCVWD, experienced a
decrease due to: (1) an increase in groundwater pumping by various water retailers in the region, and (2) below normal local
rainfall and natural recharge. As reported by the SCVWD at the end of 2018, the groundwater level in the Santa Clara Plain
was 5 feet lower compared to the same time in 2017, and 19 feet higher than the five-year average. The total groundwater
storage at the end of 2018 was within Stage 1 (Normal) of the SCVWD’s Water Shortage Contingency Plan. On January 1,
2019, SCVWD’s 10 reservoirs were 26% full with 43,133 acre-feet of water in storage. As of December 31, 2018, San Jose
Water Company’s Lake Elsman was 24.8% full with 1,528 acre-feet of water, approximately 55.2% of the five-year seasonal
average. In addition, the rainfall at San Jose Water Company’s Lake Elsman was measured at 9.35 inches for the period from
July 1, 2018 through December 31, 2018, which is 68.6% of the five-year average. Local surface water is a less costly source
of water than groundwater or purchased water and its availability significantly impacts San Jose Water Company’s results of
operations. San Jose Water Company’s Montevina Water Treatment Plant retrofit project was completed in 2018 and resumed
full operations of treating local surface water. San Jose Water Company believes that its various sources of water supply will
be sufficient to meet customer demand in 2019.
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. SCVWD, San Jose Water
Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than
the State Water Board. While the Governor of California declared the drought over on April 7, 2017, the State Water Board
made certain water use restrictions permanent while SCVWD maintained a conservation target at 20%.
On May 31, 2018, Governor Edmund G. Brown signed into law Assembly Bill 1668 and Senate Bill 606. Both bills set an
initial limit for indoor water use of 55 gallons per person per day by 2022 and reduced the limit further to 50 gallons per person
8
per day by 2030. Implementation details remain to be developed as to how local water providers will meet this mandate as well
as to how the CPUC will direct its regulated utilities to comply.
California also faces long-term water supply challenges. San Jose Water Company actively works with SCVWD to meet the
challenges by continuing to educate customers on responsible water use practices and conducting long-range water supply
planning.
SJW Group and San Jose Water Company provide additional information on their websites relating to customer water usage.
The websites are accessible at www.sjwater.com and www.sjwgroup.com. SJW Group intends to update the websites as
appropriate during the period in which the water shortage contingency plan of SCVWD remains in effect. The information on
our websites is not incorporated by reference to or part of this report.
CLWSC’s water supply consists of groundwater from wells and purchased treated and 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. In 2018, CLWSC acquired raw water supply agreements with the Lower Colorado River
Authority (“LCRA”) and West Travis Public Utility Agency (“WTPUA”) expiring in 2053 and 2046, respectively, to provide
for 250 acre-feet of water per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted
periodically by the agencies.
Please also see further discussion under Item 1A, “Risk Factors” and Item 7, “Management’s Discussion and Analysis of
Financial Condition and Results of Operations.”
Franchises
Franchises granted by local jurisdictions permit Water Utility Services to construct, maintain, and operate water distribution
systems within the streets and other public properties of a given jurisdiction. San Jose Water Company holds the necessary
franchises to provide water in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno and
Saratoga, the Town of Los Gatos and the unincorporated areas of Santa Clara County. None of the franchises have a
termination date, other than the franchise for the unincorporated areas of Santa Clara County, which terminates in 2020. The
renewal process is expected to begin in 2019.
CLWSC holds the franchises for water and wastewater services to the City of Bulverde and the City of Spring Branch, which
terminate in 2029 and 2036, respectively. The unincorporated areas that CLWSC serves in Comal, Blanco, Hays, and Travis
Counties do not require water service providers to obtain franchises.
Seasonal Factors
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. Demand for water is generally lower during the
cooler and rainy winter months. Demand increases in the spring when the temperature rises and rain diminishes.
Competition
San Jose Water Company and CLWSC are public utilities regulated by the CPUC and PUCT, respectively, and operate within a
service area approved by the regulators. Statutory laws provide that no other investor-owned public utility may operate in the
public utilities’ service areas without first obtaining from the regulator a certificate of public convenience and necessity. Past
experience shows such a certificate will be issued only after demonstrating that service in such area is inadequate.
California law also provides that whenever a public agency constructs facilities to extend utility service to the service area of a
privately-owned public utility, like San Jose Water Company, such an act constitutes the taking of property and is conditioned
upon payment of just compensation to the private utility.
Under the California law, municipalities, water districts and other public agencies have been authorized to engage in the
ownership and operation of water systems. Such agencies are empowered to condemn properties operated by privately-owned
public utilities upon payment of just compensation and are further authorized to issue bonds (including revenue bonds) for the
purpose of acquiring or constructing water systems. To the company’s knowledge, no municipality, water district or other
public agency has pending any proceeding to condemn any part of its water systems.
Environmental Matters
Water Utility Services’ produces potable water in accordance with all applicable county, state and federal environmental
rules and regulations. Additionally, public utilities are subject to environmental regulation by various other state and local
governmental authorities.
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Water Utility Services is currently in compliance with all of the United States Environmental Protection Agency’s (the “EPA”)
surface water treatment performance standards, drinking water standards for disinfection by-products and primary maximum
contaminant levels. These standards have been adopted and are enforced by the California State Water Board, Division of
Drinking Water and the Texas Commission on Environmental Quality for San Jose Water Company and CLWSC, respectively.
Other state and local environmental regulations apply to our Water Utility Services’ operations and facilities. These regulations
relate primarily to the handling, storage and disposal of hazardous materials and discharges to the environment. San Jose Water
Company began performing hazardous materials site assessments and remediation prior to the construction phase of capital
projects in 2006. The site assessments are performed to remove any legacy materials and to obtain site closures from the Santa
Clara County Department of Environmental Health under its Voluntary Cleanup Program.
San Jose Water Company is a permittee under the National Pollutant Discharge Elimination System Permit (“NPDES”) for
drinking water system discharges to Waters of the United States (“WOTUS”). An unplanned non-compliant discharge under
the NPDES permit took place on September 10, 2017. The event was reported to the San Francisco Bay Regional Water
Control Board and San Jose Water Company was subsequently notified that an enforcement action would be pursued by the
agency. This matter has been resolved by San Jose Water Company agreeing to pay a settlement amount which was immaterial
to the consolidated financial statements.
San Jose Water Company is currently in compliance with all state and local regulations governing hazardous materials, point
and non-point source discharges and the warning provisions of the California Safe Drinking Water and Toxic Enforcement Act
of 1986. Please also see Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of
Operations.”
Employees
As of December 31, 2018, SJW Group had 416 full-time employees, of whom 367 were San Jose Water Company employees
and 49 were CLWSC employees. At San Jose Water Company, 132 were executive, administrative or supervisory personnel,
and 235 were members of unions. On November 8, 2016 and December 1, 2016, San Jose Water Company reached three-year
collective bargaining agreements with the International Union of Operating Engineers, representing certain employees in the
engineering department, and the Utility Workers of America, representing the majority of all employees, respectively, covering
the period from January 1, 2017 through December 31, 2019. The agreements include a 3.5% wage increase in 2017, 3% in
2018 and 4% in 2019 for union workers. Negotiations are expected to begin in the third quarter of 2019 for collective
bargaining agreements for the period from January 1, 2020 through December 31, 2022. As of December 31, 2018, CLWSC
had 49 employees, of whom 11 were exempt and 38 were non-exempt employees. Non-exempt employees are subject to
overtime but are not represented by a union.
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Executive Officers of the Registrant
The following table summarizes the name, age, offices held and business experience for each of our executive officers, as of
February 27, 2019:
Name
Andrew R. Gere
Age
52
Palle L. Jensen
59
James P. Lynch
59
Suzy Papazian
43
Eric W. Thornburg
58
Andrew F. Walters
48
Offices and Experience
San Jose Water Company—President and Chief Operating Officer. Mr. Gere has served
as President since April 2016 and as Chief Operating Officer since April 2015. From 2013 to
April 2015, Mr. Gere was Vice President of Operations. From 2008 to 2013, Mr. Gere was
Chief of Operations. From 2006 to 2008, Mr. Gere was Director of Maintenance. From 2005
to 2006, Mr. Gere was Director of Operations and Water Quality. From 2003 to 2005, Mr.
Gere was Manager of Operations and Water Quality. Mr. Gere has been with San Jose Water
Company since 1995.
San Jose Water Company—Executive Vice President. Mr. Jensen has served as Executive
Vice President for San Jose Water Company since April 2017 and as Senior Vice President of
Regulatory Affairs for SJWTX, Inc. since September 2015. Mr. Jensen served as Senior Vice
President of Regulatory Affairs of San Jose Water Company from October 2011 to April 2017.
From July 2007 to October 2011, Mr. Jensen was Vice President of Regulatory Affairs. From
1995 to July 2007, Mr. Jensen was Director of Regulatory Affairs. Mr. Jensen has been with
San Jose Water Company since 1995.
SJW Group—Chief Financial Officer and Treasurer. Mr. Lynch has served as Chief
Financial Officer and Treasurer since October 2010. He is also Chief Financial Officer and
Treasurer of San Jose Water Company, SJW Land Company, and SJWTX, Inc. Mr. Lynch
served as Chief Financial Officer and Treasurer of Texas Water Alliance Limited from October
2010 until November 16, 2017. Prior to joining the SJW Group, Mr. Lynch was an Audit
Partner with KPMG LLP. Mr. Lynch was with KPMG LLP for 26 years. Mr. Lynch is a
certified public accountant.
SJW Group—General Counsel and Corporate Secretary. Ms. Papazian has served as
General Counsel and Corporate Secretary for SJW Group and San Jose Water Company since
April 2014. From February 2005 to April 2014, Ms. Papazian was Corporate Secretary and
Attorney. She is also Corporate Secretary of SJW Land Company and SJWTX, Inc. From
2009 until 2017, Ms. Papazian served as Secretary of Texas Water Alliance Limited. She was
admitted to the California State Bar in January 2000 and thereafter was an Associate Attorney
at The Corporate Law Group from March 2000 until February 2005.
SJW Group—President, Chief Executive Officer and Chairman of the Board. Mr.
Thornburg has served as President and Chief Executive Officer of SJW Group and SJW Land
Company and Chief Executive Officer of San Jose Water Company and SJWTX, Inc. since
November 6, 2017. He has served as the Chairman of the Board of Directors of SJW Group,
San Jose Water Company, SJW Land Company and SJWTX, Inc. since April 25, 2018. Prior
to joining SJW Group, Mr. Thornburg served as President and Chief Executive Officer of
CTWS since 2006, and Chairman of the Board of CTWS since 2007. Mr. Thornburg served as
President of Missouri-American Water, a subsidiary of American Water Works Corporation
from 2000 to 2004. From July 2004 to January 2006, he served as Central Region Vice
President-External Affairs for American Water Works Corporation.
San Jose Water Company—Chief Administrative Officer. Mr. Walters has served as Chief
Administrative Officer since January 31, 2014. Prior to joining San Jose Water Company, Mr.
Walters was a managing director and a senior acquisitions officer in the Infrastructure
Investments Group of JP Morgan Asset Management from January 2009 to June 2013.
Principal Accounting Officer of the Registrant
The following table summarizes the name, age, offices held and business experience for our principal accounting officer, as of
February 27, 2019:
Name
Wendy L. Avila-
Walker
Age
55
Offices and Experience
SJW Group—Vice President of Finance, Controller and Assistant Treasurer. Ms. Avila-
Walker has served as Vice President of Finance, Controller and Assistant Treasurer of San Jose
Water Company and SJW Group since April 2018. From September 2009 to April 2018, Ms.
Avila-Walker served as Controller of San Jose Water Company and from October 2014 to
April 2018, Ms. Avila-Walker was Controller of SJW Group. From August 2008 to September
2009, Ms. Avila-Walker served as Director of Compliance of San Jose Water Company. From
May 2005 to May 2008, Ms. Avila-Walker served as Director of Reporting and Finance of San
Jose Water Company.
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Available Information
SJW Group’s Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, and
amendments to these reports, are made available free of charge through SJW Group’s website at http://www.sjwgroup.com, as
soon as reasonably practicable, after SJW Group electronically files such material with, or furnish such materials to, the SEC.
The content of SJW Group’s website is not incorporated by reference to or part of this report.
You may obtain electronic copies of our reports filed with the SEC on the SEC internet website at http://www.sec.gov.
Item 1A.
Risk Factors
Investors should carefully consider the following risk factors and warnings before making an investment decision. The risks
described below are not the only ones facing SJW Group and its subsidiaries. Additional risks that SJW Group and its
subsidiaries does not yet know of or that it currently thinks are immaterial may also impair its business operations. If any of the
following risks actually occur, SJW Group and its subsidiaries’ business, operating results or financial condition could be
materially affected. In such case, the trading price of SJW Group’s common stock could decline and you may lose part or all of
your investment. Investors should also refer to the other information set forth in this Annual Report on Form 10-K, including
the consolidated financial statements and the notes thereto.
Risks Related to Our Business
Our business is regulated and may be adversely affected by changes to the regulatory environment.
Our Water Utility Services are regulated public utilities. The operating revenue of San Jose Water Company and CLWSC is
generated primarily from the sale of water at rates authorized by the CPUC and the PUCT, respectively. The CPUC and PUCT
set rates that are intended to provide revenues sufficient to recover normal operating expenses, provide funds for replacement of
water infrastructure and produce a fair and reasonable return on stockholder common equity. Please refer to Part I, Item 1,
“Regulation and Rates” for a discussion of the most recent regulatory proceedings affecting the rates of San Jose Water
Company and CLWSC. Consequently, our revenue and operating results depend substantially upon the rates which the CPUC
and PUCT authorize.
In our applications for rate approvals, we rely upon estimates and forecasts to propose rates for approval by the CPUC or
PUCT. No assurance can be given that our estimates and forecasts will be accurate or that the CPUC or PUCT will agree with
our estimates and forecasts and approve our proposed rates. To the extent our authorized rates may be too low, revenues may
be insufficient to cover Water Utility Services’ operating expenses, capital requirements and SJW Group’s historical dividend
rate. In addition, delays in approving rate increases may negatively affect our operating results and our operating cash flows.
In addition, policies and regulations promulgated by the regulators govern the recovery of capital expenditures, the treatment of
gains from the sale of real utility property, the offset of production and operating costs, the recovery of the cost of debt, the
optimal equity structure, and the financial and operational flexibility to engage in non-tariffed operations. If the regulators
implement policies and regulations that will not allow San Jose Water Company and CLWSC to accomplish some or all of the
items listed above, Water Utility Services’ future operating results may be adversely affected. Further, from time to time, the
commissioners at the CPUC and the PUCT may change. Such changes could lead to changes in policies and regulations and
there can be no assurance that the resulting changes in policies and regulation, if any, will not adversely affect our operating
results or financial condition.
If the CPUC disagrees with our calculation of memorandum and balancing accounts, we may be required to make adjustments
that could adversely affect our results of operations.
Recovery of regulatory assets is subject to adjustment by the regulatory agencies and could impact the operating
results of Water Utility Services.
Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as
permitted by FASB ASC Topic 980—“Regulated Operations.” In accordance with ASC Topic 980, Water Utility Services
record deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and
credits will be recovered in the ratemaking process in a period different from when the costs and credits were incurred. Please
refer to Note 1 of the “Notes to Consolidated Financial Statements” for a summary of net regulatory assets. If the assessment
of the probability of recovery in the ratemaking process is incorrect and the applicable ratemaking body determines that a
deferred cost is not recoverable through future rate increases, the regulatory assets or liabilities would need to be adjusted,
which could have an adverse effect on our results of operations and financial condition.
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Changes in water supply, water supply costs or the mix of water supply could adversely affect the operating
results and business of Water Utility Services.
San Jose Water Company’s supply of water primarily relies upon three main sources: water purchased from SCVWD, surface
water from its Santa Cruz Mountains watershed, and pumped underground water. Changes and variations in quantities from
each of these three sources affect the overall mix of the water supply, thereby affecting the cost of the water supply. If there is
an adverse change to the mix of water supply and San Jose Water Company is not allowed by the CPUC to recover the
additional or increased water supply costs, its operating results may be adversely affected.
SCVWD receives an allotment of water from state and federal water projects. If San Jose Water Company has difficulties
obtaining a high quality water supply from SCVWD due to availability, environmental, legal or other restrictions (see also Part
I, Item 1, “Water Supply”), it may not be able to fully satisfy customer demand in its service area and its operating results and
business may be adversely affected. Additionally, the availability of water from San Jose Water Company’s Santa Cruz
Mountains watershed depends on the weather and fluctuates with each season. In a normal year, surface water supply provides
6% to 8% of the total water supply of the system. In a season with little rainfall, such as the record drought conditions in 2015
and most of 2016, water supply from surface water sources may be low, thereby causing San Jose Water Company to increase
the amount of water purchased from outside sources at a higher cost than surface water, thus increasing water production
expenses. When drought conditions occur, we may be required to rely more heavily on purchased water than surface water,
which would increase our costs and adversely affect our results of operations.
In addition, San Jose Water Company’s ability to use surface water is subject to regulations regarding water quality and volume
limitations. If new regulations are imposed or existing regulations are changed or given new interpretations, the availability of
surface water may be materially reduced. A reduction in surface water could result in the need to procure more costly water
from other sources, thereby increasing overall water production expenses and adversely affecting our operating results.
Because the extraction of water from the groundwater basin and the operation of the water distribution system require a
significant amount of energy, increases in energy prices could increase operating expenses of San Jose Water Company. The
cost of energy is beyond our control and can change unpredictably and substantially based on load supply and demand.
Therefore, San Jose Water Company cannot be certain that it will be able to contain energy costs into the future.
San Jose Water Company continues to utilize Pacific Gas & Electric’s time of use rate schedules to minimize its overall energy
costs primarily for groundwater pumping. Optimization and energy management efficiency are achieved through the
implementation of software applications that control pumps based on demand and cost of energy. An increase in demand or a
reduction in the availability of surface water or import water could result in the need to pump more water during peak hours
which may adversely affect the operating results of San Jose Water Company.
San Jose Water Company has been granted permission by the CPUC to employ certain balancing accounts to track various
water supply expenses and revenues. There is no assurance that the CPUC will allow recovery or refund of these balances
when submitted by San Jose Water Company.
CLWSC’s primary water supply is 6,900 acre-feet of water which is pumped from Canyon Lake at three lake intakes or
delivered as treated water from GBRA’s Western Canyon Pipeline, in accordance with the terms of its contracts with the
GBRA, which are long-term take-or-pay contracts. This supply is supplemented by groundwater pumped from wells. While
the contract provides a committed long-term water supply for future demand, CLWSC customers currently do not use the
volume of water allowed under the contracts which increases the cost of water for existing customers, and there is no assurance
that future demands up to the committed supply volume will occur. Texas faces long-term water supply constraints similar to
California as described above and while current water supply exceeds demand, CLWSC may not be able to obtain adequate
water supply to meet customer demand or may be required to procure more costly water from other sources. (See also Part I,
Item 1, “Water Supply”).
Climate change may also impact water supply. For example, severity of drought conditions may impact the availability of water
to all Water Utility Services and rising sea levels may impact the availability of groundwater available to San Jose Water
Company and CLWSC.
Fluctuations in customer demand for water due to seasonality, restrictions of use, weather, and lifestyle can
adversely affect operating results.
Water Utility Services’ operations are seasonal, thus quarterly fluctuation in results of operations may be significant. Rainfall
and other weather conditions also affect the operations of Water Utility Services. Water consumption typically increases during
the third quarter of each year when weather tends to be warm and dry. In periods of drought, if customers are encouraged or
required to conserve water due to a shortage of water supply or restriction of use, revenue tends to be lower. Similarly, in
unusually wet periods, water supply tends to be higher and customer demand tends to be lower, again resulting in lower
revenues. Furthermore, certain lifestyle choices made by customers can affect demand for water. For example, a significant
13
portion of residential water use is for outside irrigation of lawns and landscaping. If there is a decreased desire by customers to
maintain landscaping for their homes or restrictions are placed on outside irrigation, residential water demand would decrease,
which would result in lower revenues.
Conservation efforts and construction codes, which require the use of low-flow plumbing fixtures, could diminish water
consumption and result in reduced revenue. In addition, in time of drought, water conservation may become a regulatory
requirement that impacts the water usage of our customers. For example, in response to the severe drought in California in
2015 and 2016, the SCVWD extended their call for 30% conservation and restrictions on outdoor watering of ornamental
landscapes two days a week through June 30, 2016. Following the improvement of drought condition in late 2016 and 2017,
the SCVWD reduced its conservation target from 30% to 20% and also increased the number of outdoor watering days from
two to three effective July 1, 2016 through January 31, 2017. On January 24, 2017, the SCVWD maintained their call for 20%
conservation and restrictions on outdoor watering for ornamental landscapes to no more than three days a week, effective
February 1, 2017. On June 13, 2017, the SCVWD adopted Resolution 17-43 to encourage making water conservation a way of
life in California through recommendations on watering schedules and a call for customers to achieve a 20% reduction in water
use as compared to 2013. While the drought has ended SCVWD has maintained a conservation target at 20%. (See also Part I,
Item 1, “Water Supply”).
The implementation of mandatory conservation measures has resulted and is expected to result in lower water usage by our
customers which may adversely affect our results of operation. If the current conservation measures continue, or if new
measures are imposed in response to drought conditions in the future, we may experience fluctuations in the timing of or a
reduction in customer revenue. Furthermore, while the CPUC approved Water Conservation Memorandum Accounts
(“WCMA”) which would allow us to recover revenue reductions due to water conservation activities and certain conservation
related costs, such memorandum accounts are subject to a review and approval process by the CPUC, which can be lengthy,
and there is no assurance that we will be able to recover in a timely manner all or some of the revenue and costs recorded in the
memorandum accounts. If drought conditions ease and the State Water Board and the SCVWD no longer mandate water
conservation, the Company may no longer be allowed to recover revenue lost due to continued conservation activities under the
WCMA account and would therefore be exposed to differences between actual and authorized usage. This could result in lower
revenues.
A contamination event or other decline in source water quality could affect the water supply of Water Utility
Services and therefore adversely affect our business and operating results.
Water Utility Services is required under environmental regulations to comply with water quality requirements. Through water
quality compliance programs, Water Utility Services continually monitors for contamination and pollution of its sources of
water. In addition, a watershed management program provides a proactive approach to minimize potential contamination
activities. There can be no assurance that Water Utility Services will continue to comply with all applicable water quality
requirements. In the event a contamination is detected, Water Utility Services must either commence treatment to remove the
contaminant or procure water from an alternative source. Either of these results may be costly, may increase future capital
expenditures and there can be no assurance that the regulators would approve a rate increase to enable us to recover the costs
arising from such remedies. In addition, we could be held liable for consequences arising from hazardous substances or
contamination in our water supplies or other environmental damages. Our insurance policies may not cover or may not be
sufficient to cover the costs of these claims.
Water Utility Services is subject to litigation risks concerning water quality and contamination.
Although Water Utility Services is not a party to any environmental and product-related lawsuits, there is no guarantee that
such lawsuits will not occur in the future. If Water Utility Services is subject to an environmental or product-related lawsuit,
they might incur significant legal costs and it is uncertain whether it would be able to recover the legal costs from ratepayers or
other third parties. Although Water Utility Services has liability insurance coverage for bodily injury and property damage,
pollution liability is excluded from this coverage and our excess liability coverage. A pollution liability policy is in place, but is
subject to exclusions and limitations. Costs for defense are included within the limit of insurance on the pollution liability
policy. In addition, any complaints or lawsuits against us based on water quality and contamination may receive negative
publicity that can damage our reputation and adversely affect our business and trading price of our common stock.
Water Utility Services is subject to possible litigation or regulatory enforcement action concerning water
discharges to WOTUS.
Regulatory actions and fines related to discharges of water to WOTUS against other water utilities have increased in frequency
in recent years. If Water Utility Services is subject to a litigation or regulatory enforcement action, it might incur significant
costs in fines and restoration efforts, and it is uncertain whether Water Utility Services would be able to recover some or all of
such costs from ratepayers or other third parties. In addition, any litigation or regulatory enforcement action against us
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regarding a water discharge and/or resulting environmental impact may receive negative publicity that can damage our
reputation and adversely affect our business and the trading price of our common stock.
New or more stringent environmental regulations could increase Water Utility Services’ operating costs and
affect its business.
Water Utility Services’ operations are subject to water quality and pollution control regulations issued by the EPA and
environmental laws and regulations administered by the respective states and local regulatory agencies.
New or more stringent environmental and water quality regulations could increase Water Utility Services’ water quality
compliance costs, hamper Water Utility Services’ available water supplies, and increase future capital expenditure.
Under the federal Safe Drinking Water Act, Water Utility Services is subject to regulation by the EPA relating to the quality of
water it sells and treatment techniques it uses to make the water potable. The EPA promulgates nationally applicable standards,
including maximum contaminant levels for drinking water. Additional or more stringent requirements may be adopted by each
state. There can be no assurance that Water Utility Services will be able to continue to comply with all water quality
requirements.
Water Utility Services has implemented monitoring activities and installed specific water treatment improvements in order to
comply with existing maximum contaminant levels and plan for compliance with future drinking water regulations. However,
the EPA and the respective state agencies have continuing authority to issue additional regulations under the Safe Drinking
Water Act. New or more stringent environmental standards could be imposed that will raise Water Utility Services’ operating
costs, including requirements for increased monitoring, additional treatment of underground water supplies, fluoridation of all
supplies, more stringent performance standards for treatment plants and procedures to further reduce levels of disinfection by-
products. There are currently limited regulatory mechanisms and procedures available to us for the recovery of such costs and
there can be no assurance that such costs will be fully recovered and failure to do so may adversely affect our operating results.
The water utility business requires significant capital expenditures that are dependent on our ability to secure
appropriate funding. If SJW Group is unable to generate sufficient operating cash flows and obtain sufficient capital or
if the rates at which we borrow increase, there would be a negative impact on our results of operations.
The water utility business is capital-intensive. Expenditure levels for renewal and modernization of the system will grow at an
increasing rate as components reach the end of their useful lives. SJW Group funds capital expenditures through a variety of
sources, including cash received from operations, funds received from developers as contributions or advances, borrowings
through the lines of credit, and equity or debt financing. We cannot provide any assurance that the historical sources of funds
for capital expenditures will continue to be adequate or that the cost of funds will remain at levels permitting us to earn a
reasonable rate of return. A significant change in any of the funding sources could impair the ability of Water Utility Services
to fund its capital expenditures, which could impact our ability to grow our utility asset base and earnings. Any increase in the
cost of capital through higher interest rates or otherwise could adversely affect our results of operations.
Our ability to raise capital through equity or debt may be affected by the economy and condition of the debt and equity markets.
Disruptions in the capital and credit markets or deteriorations in the strength of financial institutions could adversely affect SJW
Group’s ability to draw on its line of credit, issue long-term debt or sell its equity. In addition, government policies, the state of
the credit markets and other factors could result in increased interest rates, which would increase SJW Group’s cost of capital.
Furthermore, equity financings may result in dilution to our existing stockholders and debt financings may contain covenants
that restrict the actions of SJW Group and its subsidiaries. Our senior note borrowings include certain financial covenants
regarding a maximum debt to equity ratio and an interest coverage requirement. In the event the Company exceeds the
maximum debt to equity ratio or interest coverage requirement, we may be restricted from issuing future debt. In addition, the
pollution control revenue bonds issued on our behalf contain affirmative and negative covenants customary for a loan
agreement relating to revenue bonds, including, among other things, certain disclosure obligations, the tax exempt status of the
interest on the bonds, and limitations and prohibitions on the transfer of projects funded by the loan proceeds and assignment of
the loan agreement. In the event that we violate any of these covenants, an event of default may occur and all amounts due
under such bonds may be called by the Trustee, which would have an adverse effect on our business operations and financial
conditions.
We operate in areas subject to natural disasters or that may be the target of terrorist activities.
We operate in areas that are prone to earthquakes, fires and other natural disasters. A significant seismic event in northern
California, where the majority of our operations are concentrated, or other natural disaster in northern California or Texas could
adversely impact our ability to deliver water to our customers and our costs of operations. A major disaster could damage or
destroy substantial capital assets. Our California and Texas based regulators have historically allowed utilities to establish
catastrophic event memorandum accounts as a possible mechanism to recover costs. However, we can give no assurance that
our regulators, or any other commission would allow any such cost recovery mechanism in the future.
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In light of the potential threats to the nation’s health and security due to terrorist attacks, we have taken steps to increase
security measures at our facilities and heighten employee awareness of threats to our water supply. We have also tightened our
security measures regarding the delivery and handling of certain chemicals used in our business. We have and will continue to
bear increased costs for security precautions to protect our facilities, operations and supplies. These costs may be significant.
While some of these costs are likely to be recovered in the form of higher rates, there can be no assurance that the CPUC and
PUCT will approve a rate increase to recover all or part of such costs and, as a result, our operating results and business may be
adversely affected. Further, despite these tightened security measures, we may not be in a position to control the outcome of
terrorist events should they occur.
A failure of our reservoirs, storage tanks, mains or distribution networks could result in losses and damages that
may adversely affect our financial condition and reputation.
We distribute water through an extensive network of mains and store water in reservoirs and storage tanks located across our
service areas. A substantial portion of Water Utility Services distribution system was constructed during the period from 1945
to 1980. A failure of major mains, reservoirs, or tanks could result in injuries and damage to residential and/or commercial
property for which we may be responsible, in whole or in part. The failure of major mains, reservoirs or tanks may also result
in the need to shut down some facilities or parts of our water distribution network in order to conduct repairs. Such failures and
shutdowns may limit our ability to supply water in sufficient quantities to our customers and to meet the water delivery
requirements prescribed by governmental regulators, which could adversely affect our financial condition, results of operations,
cash flow, liquidity and reputation. Any business interruption or other losses might not be covered by insurance policies or be
recoverable in rates, and such losses may make it difficult for us to secure insurance in the future at acceptable rates.
Water Utility Services rely on information technology and systems that are key to business operations. A system
malfunction, security breach, cyber attacks or other disruptions could compromise our information and expose us to
liability, which could adversely affect business operations.
Information technology is key to the operation of Water Utility Services, including but not limited to payroll, general ledger
activities, outsourced bill preparation and remittance processing, providing customer service and the use of Supervisory Control
and Data Acquisition systems to operate our distribution system. Among other things, system malfunctions, computer viruses
and security breaches could prevent us from operating or monitoring our facilities, billing and collecting cash accurately and
timely analysis of financial results. In addition, we collect, process, and store sensitive data from our customers and
employees, including personally identifiable information, on our networks. Despite our security measures, our information
technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other
disruptions. Any such breach could compromise our networks and the information stored there could be accessed without our
authorization, publicly disclosed, lost or stolen which could result in legal claims or proceedings, violation of privacy laws or
damage to our reputation and customer relationships. Our profitability and cash flow could be affected negatively in the event
these systems do not operate effectively or are breached. In addition, we may not be able to develop or acquire information
technology that is competitive and responsive to the needs of our business, and we may lack sufficient resources to make the
necessary upgrades or replacements of our outdated existing technology to allow us to continue to operate at our current level
of efficiency.
SJW Land Company has real estate holdings that are subject to various business and investment risks.
SJW Land Company owns real estate in two states. The risks in investing directly in real estate vary depending on the
investment strategy and investment objective and include the following:
•
•
•
Liquidity risk—real estate investments are illiquid. The lag time to build or reduce the real estate portfolio is
long.
Obsolescence risk—real estate property is location specific. Location obsolescence can occur due to a
decline of a particular sub-market or neighborhood. Functional obsolescence can also occur from physical
depreciation, wear and tear, and other architectural and physical features which could be curable or incurable.
Market and general economic risks—real estate investment is tied to overall domestic economic growth and,
therefore, carries market risk which cannot be eliminated by diversification. Generally, all property types
benefit from national economic growth, though the benefits range according to local factors, such as local
supply and demand and job creation. Because real estate leases are typically staggered and last for multiple
years, there is generally a delayed effect in the performance of real estate in relation to the overall economy.
This delayed effect can insulate or deteriorate the financial impact to SJW Land Company in a downturn or
an improved economic environment.
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•
Concentration/Credit risk—the risk of a tenant declaring bankruptcy and seeking relief from its contractual
rental obligation could affect the income and the financial results of SJW Land Company. This risk is most
prevalent in a recessionary environment.
Vacancy rates can climb and market rents can be impacted and weakened by general economic forces, therefore affecting
income to SJW Land Company.
The value of real estate can decrease materially due to a deflationary market, decline in rental income, market cycle of supply
and demand, long lag time in real estate development, legislative and governmental actions, environmental concerns, increases
in rates of returns demanded by investors, and fluctuation of interest rates, eroding any unrealized capital appreciation and,
potentially, invested capital.
A decrease in the value of a real estate property or increase in vacancy could result in reduced future cash flows to amounts
below the property’s current carrying value and could result in an impairment charge.
The success of SJW Land Company’s real estate investment strategy depends largely on ongoing local, state and federal land
use development activities and regulations, future economic conditions, the development and fluctuations in the sale of the
undeveloped properties, the ability to identify the developer/potential buyer of the available-for-sale real estate, the timing of
the transaction, favorable tax law, and the ability to maintain and manage portfolio properties. There is no guarantee that we
will be able to execute the strategy successfully and failure to do so may adversely affect our operating results and financial
condition.
There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that they
will be in amounts similar to past dividends.
Dividends on our common stock will only be paid if and when declared by our Board of Directors. Our earnings, financial
condition, capital requirements, applicable regulations and other factors, including the timeliness and adequacy of rate
increases, will determine both our ability to pay dividends on common stock and the amount of the dividends declared by our
Board of Directors. There can be no assurance that we will continue to pay dividends in the future or, if dividends are paid, that
they will be in amounts similar to past dividends.
The price of our common stock may be volatile and may be affected by market conditions beyond our control.
The trading price of our common stock may fluctuate in the future based on a variety of factors, many of which are beyond our
control and unrelated to our financial results. Factors that could cause fluctuations in the trading price of our common stock
include volatility of the general stock market or the utility index, regulatory developments, public announcement of material
development in strategic transactions, including the Merger, general economic conditions and trends, actual or anticipated
changes or fluctuations in our results of operations, actual or anticipated changes in the expectations of investors or securities
analysts, actual or anticipated developments in our competitors’ businesses or the competitive landscape generally, litigation
involving us or our industry, and major catastrophic events or sales of large blocks of our stock. Furthermore, we believe that
stockholders invest in public stocks in part because they seek reliable dividend payments. If there is an over supply of stock of
public utilities in the market relative to demand by such investors, the trading price of our common stock may decrease.
Additionally, if interest rates rise above the dividend yield offered by our common stock, demand for our stock and its trading
price may also decrease.
Our business strategy, which includes acquiring water systems and expanding non-tariffed services, will expose
us to new risks which could have a material adverse effect on our business.
Our business strategy focuses on the following:
(1)
(2)
(3)
Regional regulated water utility operations;
Regional non-tariffed water utility related services provided in accordance with the guidelines established by
the CPUC in California and the PUCT in Texas; and
Out-of-region water and utility related services.
As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and
assets, including the Merger. However, we cannot be certain we will be successful in identifying and consummating any
strategic business combination or acquisitions relating to such opportunities. In addition, the execution of our business strategy
will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection
with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of
certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the
potential for a negative impact on SJW Group’s financial position and operating results, entering markets in which SJW Group
has no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic
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combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance
with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve
sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the
integration process, including the integration of controls necessary for internal control and financial reporting, could interfere
with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that
any transaction will be successful or that it will not materially harm operating results or our financial condition.
We must continue to attract and retain qualified technical and managerial personnel in order to succeed.
Our future success depends largely upon our ability to attract and retain highly skilled technical, operational and financial
managers. There is a significant competition for such personnel in our industry. The loss of the services of any member of our
management team or the inability to hire and retain experienced management personnel could have an adverse effect on our
business, as our management team has knowledge of our industry and customers and would be difficult to replace. We try to
ensure that we offer competitive compensation and benefits as well as opportunities for continued development, and we
continually strive to recruit and train qualified personnel and retain key employees. There can be no assurance, however, that
we will continue to be successful in attracting and retaining the personnel we require to grow and operate profitably.
Adverse investment returns and other factors may increase our pension costs and pension plan funding
requirements.
A substantial number of our employees are covered by a defined benefit pension plan. Our pension costs and the funded status
of the plan are affected by a number of factors including the discount rate, applicable mortality tables, mortality rates of plan
participants, investment returns on plan assets, and pension reform legislation. Any change in such factors could result in an
increase in future pension costs and an increase in our pension liability, requiring an increase in plan contributions which may
adversely affect our financial conditions and results of operations.
Work stoppages and other labor relations matters could adversely affect our business and operating results.
As of December 31, 2018, 235 of our 416 total employees were union employees. Most of our unionized employees are
represented by the Utility Workers of America, except certain employees in the engineering department who are represented by
the International Union of Operating Engineers.
We may experience difficulties and delays in the collective bargaining process to reach suitable agreements with union
employees, particularly in light of increasing healthcare and pension costs. In addition, changes in applicable law and
regulations could have an adverse effect on management’s negotiating position with the unions. Labor actions, work stoppages
or the threat of work stoppages, and our failure to obtain favorable labor contract terms during future negotiations may
adversely affect our business, financial condition, results of operations, cash flows and liquidity.
Our charter documents and Delaware law could prevent a takeover that stockholders consider favorable and
could also make it more difficult for stockholders to influence our policies or may reduce the rights of stockholders.
SJW Group’s Certificate of Incorporation and Bylaws contain provisions that could delay or prevent a change in control of
SJW Group. These provisions could also make it more difficult for our stockholders to elect directors and take other corporate
actions. These provisions include but are not limited to the following:
•
•
•
•
Authorizing Board of Directors to issue “blank check” preferred stock;
Prohibiting cumulative voting in the election of directors;
Limiting the ability of stockholders to call a special meeting of stockholders to only stockholders holding not
less than 20% of outstanding voting power; and
Requiring advance notification of stockholder nomination of directors and proposals.
These provisions may frustrate or prevent any attempts by stockholders of SJW Group to replace or remove its current
management by making it more difficult for stockholders to replace members of the Board of Directors, which is responsible
for appointing the members of management. In addition, the provisions of Section 203 of the Delaware General Corporate Law
(“DGCL”) govern SJW Group. These provisions may prohibit large stockholders, in particular those owning 15% or more of
our outstanding voting stock, from merging or combining with us for a certain period of time without the consent of the Board
of Directors.
Furthermore, SJW Group’s Certificate of Incorporation provides that a state or federal court located within Delaware is the sole
and exclusive forum (unless the company consents in writing to the selection of an alternate forum) for (i) any derivative action
or proceeding brought on behalf of SJW Group, (ii) any action asserting a claim of breach of a fiduciary duty owed by any
director, officer or other employee of SJW Group to the company or its stockholders, (iii) any action asserting a claim arising
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pursuant to any provision of the DGCL, or (iv) any action asserting a claim governed by the internal affairs doctrine. Such
“exclusive forum” provision may limit a stockholder’s ability to bring a claim in a judicial forum that it finds favorable for
disputes with SJW Group or its directors, officers or other employees, which may discourage such lawsuits against us and our
directors, officers and other employees.
Risks Related to the Merger
We may not be able to obtain the necessary regulatory approvals to complete the Merger, and even if such
approval is obtained, regulatory authorities may impose conditions that could have an adverse effect on us.
Completion of the Merger is contingent upon, among other things, the receipt of all required regulatory approvals, including the
approvals of PURA and the MPUC. On December 3, 2018, PURA issued a proposed final decision denying the joint
application by SJW Group and CTWS for the approval of the Merger. On December 14, 2018 SJW Group and CTWS filed a
joint motion with PURA requesting extension of the procedural schedule to reopen the record to consider new evidence
supporting the Merger. On January 4, 2019, PURA denied the motion. On January 9, 2019, SJW Group and CTWS withdrew
our application before PURA and issued a joint press release announcing that we are continuing to evaluate our regulatory
approach in connection with the Merger, including the possibility of submitting a new application to PURA. On January 11,
2019, PURA closed the docket without issuing a final decision. On January 23, 2019, the Maine Water Company, a wholly-
owned subsidiary of CTWS, filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the
right to refile at a later date. After a thorough review conducted by the management and boards of both companies with the
support of their respective local Connecticut and Maine regulatory counsel SJW Group and CTWS announced on February 20,
2019 that they intend to file a new merger approval applications with PURA and MPUC. We expect to incur additional
expenses in connection with the new applications. We also anticipate a delay in the completion of the Merger as a result of the
additional time required for PURA and MPUC to review and issue a decision on the new application, which may take up to 120
days from the date of the filing unless extended. Furthermore, there is no guarantee that PURA and MPUC will approve any
new application on a timely basis or at all, and failure of approval would prevent the completion of the Merger. Any
uncertainty, delay and denial of regulatory approval for the Merger could adversely affect our business, financial conditions and
the price of our stock.
Even if we are able to obtain the necessary regulatory approvals for the Merger, the terms and conditions of such approvals may
impose requirements, limitations or costs, or place restrictions on the conduct of the combined company’s business. We and/or
CTWS may be required to comply with conditions imposed by regulatory entities in connection with the Merger, though the
Merger Agreement provides for certain limitations with respect to the actions that either company is required to take in
connection with such regulatory conditions. There can be no assurance that regulators will not impose conditions, terms,
obligations or restrictions or that such conditions, terms, obligations or restrictions will not have the effect of delaying
completion of the Merger or imposing additional material costs on or materially limiting the revenues of the combined
company following the Merger. Additionally, we cannot provide assurance that any such conditions, terms, obligations or
restrictions will not result in the failure of the conditions to the Merger being satisfied, the Merger being delayed or abandoned,
or the consummation of the Merger on terms different than those contemplated by the Merger Agreement.
Failure to complete the Merger as currently contemplated or at all could negatively impact our stock price,
business operations and financial results.
Completion of the Merger is not assured and is subject to risks, including the risks that approval by governmental entities will
not be obtained or that certain other closing conditions will not be satisfied. If the Merger is not completed, or is completed on
different terms than as contemplated by the Merger Agreement, our ongoing businesses, financial results and stock price may
be adversely affected and we will be subject to several risks, including the following:
having to pay certain significant costs relating to the Merger without receiving the benefits of the Merger,
including, in certain circumstances, payment of a termination fee and an expense reimbursement;
the potential loss of key personnel during the pendency of the Merger as employees may experience
uncertainty about their future roles with the combined company;
reputational harm due to the adverse public perception of any failure to successfully complete the Merger;
having been subject to certain restrictions on the conduct of our business, which may have prevented us from
soliciting or making certain dispositions while the Merger was pending;
our management having focused on the Merger instead of on conducting its day-to-day business and
operational matters and pursuing other opportunities that could have been beneficial to us; and
if the Merger is not completed, we are not obligated to repurchase any or all of the shares issued in our recent
equity offering and such shares may remain outstanding, which could negatively impact our stock price.
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Any delay in the completion of the Merger, any uncertainty about the completion of the Merger on terms other than those
contemplated by the Merger Agreement and any failure to complete the Merger could adversely affect our business, financial
results and stock price.
Any delay in completing the Merger may reduce or eliminate the benefits to be achieved thereunder.
In addition to the required regulatory clearances, the Merger is subject to a number of other conditions beyond our control that
may prevent, delay or otherwise materially adversely affect its completion. We cannot predict whether and when these other
conditions will be satisfied. Furthermore, the requirements for obtaining the required clearances and approvals could delay the
completion of the Merger for a significant period of time or prevent it from occurring. Any delay in completing the 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 Merger is successfully
completed within its expected time frame.
The CPUC has initiated an investigation into the Merger, which may cause delays in or otherwise adversely
affect the Merger, and we may be required to consummate the Merger prior to the CPUC’s issuance of an order with
respect to its investigation.
The CPUC at its July 12, 2018 meeting approved an OII into the Merger. The order includes investigating the CPUC’s authority
over the Merger, whether the Merger is in the public interest; whether the Merger would preserve the CPUC’s jurisdiction over
San Jose Water Company and the CPUC’s capacity to effectively regulate utility operations in the State of California; the effect
of the Merger on our and CTWS’s employees, shareholders, customers, and communities in which they operate and the State of
California; whether the benefits likely exceed any detrimental effects of the Merger; and whether the CPUC should consider
conditions or mitigation measures to prevent any adverse consequences which may result from the Merger, and if so, what
should be those conditions or measures. The order stated that the CPUC planned to substantially complete the inquiry in a
manner sufficiently timely to allow the Merger to go forward by the end of 2018, if appropriate. However, as a result of
unexpected delays in the CPUC’s scheduling of a planned public participation hearing, which was held January 31, 2019, the
CPUC is now expected to complete its investigation in the second quarter of 2019.
We are unable to predict what action, if any, the CPUC will take with respect to the Merger upon the conclusion of the
proceeding initiated by the OII and, therefore, no assurance can be given that such action will not delay or prevent completion
of the Merger or impose costs on us, which costs may be material and may negate some or all of the benefits that we expect as a
result of the Merger. If we or CTWS terminate the Merger Agreement on the grounds that a legal restraint prevents completion
of the Merger, and such restraint arises from, is issued by or is in connection with the CPUC, or the CPUC has imposed terms
or conditions in connection with the Merger that would reasonably be expected to have a material adverse effect on the
combined company, then we will be required to reimburse CTWS’s expenses up to $5 million.
Completion of the CPUC’s investigation is not a condition to the consummation of the Merger. Accordingly, we may be
required to consummate the Merger prior to the CPUC’s issuance of an order with respect to its investigation. In such a
circumstance, we may nevertheless be subject to any terms and conditions imposed on us by such an order and to any
additional costs associated therewith. Such costs may be material and may negate some or all of the benefits that we expect as
a result of the Merger.
The Merger Agreement with CTWS may be terminated in certain circumstances, which would result in the
benefits of the Merger not being realized.
Either we or CTWS may terminate the Merger Agreement under certain circumstances, including, if the Merger has not been
consummated by May 5, 2019 (unless such date is extended automatically to August 5, 2019 or November 5, 2019 pursuant to
the terms of the Merger Agreement). However, this termination right will not be available to a party if such failure of the
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 Merger by the end date, even if we decide not to
terminate the Merger Agreement, we may not be able to prevent CTWS from exercising its right to terminate the Merger
Agreement.
In addition, if the Merger Agreement is terminated under certain circumstances, CTWS may be required to pay SJW Group a
termination fee of $28.1 million. Similarly, if the Merger Agreement is terminated under certain circumstances, we may be
required to pay CTWS a termination fee of $42.5 million or, under certain circumstances, to reimburse CTWS’s expenses up to
$5 million. A termination of the Merger Agreement prior to consummation of the Merger may adversely affect our business
and stock price, and we will not be able to realize the benefits expected from the Merger.
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We have broad discretion in the use of the net proceeds to us from the equity offering and may not use them
effectively.
In December 2018, SJW Group sold an aggregate of 7,762,500 shares of its common stock in an equity offering and received
net proceeds of approximately $412.0 million, after deducting the underwriting discounts and commissions and estimated
offering expenses payable by SJW Group.
SJW Group intends to use the net proceeds from the offering, together with the net proceeds from new debt financing in 2019,
to finance the Merger and to pay related fees and expenses. Pending such use, we may invest the net proceeds in investment-
grade securities, money-market funds, bank deposit accounts or similar short-term investments. To date, the company has
invested the net offering proceeds temporarily in a short-term money market fund. These investments may not yield a
favorable return to our investors. If for any reason the Merger does not close, then SJW Group intends to use the proceeds from
the offering for general corporate purposes, which may include acquisitions, share repurchases or debt repayment. SJW Group
had no obligation to repurchase any of its shares of common stock that were sold in the offering even if the Merger is not
completed.
We cannot specify with any certainty the particular uses of the net proceeds that we received from the equity offering, and we
may spend or invest these proceeds in a way with which our stockholders disagree. The failure by our management to apply
these funds effectively could adversely affect our business and financial condition.
We will take on substantial additional indebtedness to finance the Merger, which will decrease our business
flexibility and increase our borrowing costs.
In the event that the Merger is consummated, in addition to the net proceeds we received from the equity offering, we expect to
finance the remaining portion of the purchase price of the Merger with net proceeds from up to $435.0 million of debt financing
that we may incur (“Debt Financing”), which may include borrowings under a $975.0 million committed bridge facility
(“Bridge Facility”). Subsequent to the completion of the equity offering, the facility commitment was reduced to $563 million.
As a result of the Debt Financing, we will increase our indebtedness substantially as compared to our indebtedness prior to the
Merger, and will have indebtedness that will be substantially greater than our indebtedness prior to the Merger. Any financial
covenants we agree to in connection with such indebtedness and our increased indebtedness and higher debt-to-equity ratio in
comparison to that of our recent historical basis will have the effect, among other things, of reducing our flexibility to respond
to changing business and economic conditions and increasing borrowing costs. In addition, the actual terms and conditions of
such indebtedness may not be favorable to us, and as such, could further increase the cost of the Merger, as well as the overall
burden of such indebtedness upon SJW Group and our business flexibility. Unfavorable terms in the Debt Financing may also
adversely affect our business, financial condition, results of operations and prospects.
We anticipate that the Merger and the related Debt Financing may have an impact on our issuer and issue ratings, potentially in
advance of consummation of the Merger. For example, it is possible that the issuer and issue ratings of certain of our
subsidiaries, and certain of those entities to be acquired in the Merger, could be lowered. SJW has publicly announced an
intention to achieve at least an A- issuer credit rating for the currently unrated SJW Group. We also anticipate that the Debt
Financing may have an initial rating which may be equal to or lower than the potential new SJW Group issuer rating given the
structural subordination of newly incurred unsecured debt in the Debt Financing. We cannot provide any assurances regarding
potential rating agency actions, any changes in outlook from the rating agencies, the timing of any such actions or the level of
any initial ratings or any downgrade.
An adverse judgment in any litigation challenging the Merger may prevent it from becoming effective or from
becoming effective within the expected timeframe.
On June 14, 2018, a putative class-action complaint was filed against the members of the CTWS board of directors, SJW and
Eric W. Thornburg on behalf of CTWS shareholders in the Connecticut Superior Court in the Judicial District of Middlesex
under the caption Dunn v. Benoit, et al., Case No. MMX-CV18-6021536-S (Conn. Super. Ct.). The complaint, as amended on
September 18, 2018, alleges that the members of the CTWS board of directors breached their fiduciary duties owed to CTWS
shareholders in connection with negotiating the Merger and that CTWS’s preliminary proxy statement, filed with the SEC on
August 20, 2018, omits certain material information. The complaint further alleges that SJW Group and Eric W. Thornburg
aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the action seeks to recover
rescissory and other damages and attorneys’ fees and costs.
Also, on June 14, 2018, a near-identical putative class-action complaint was filed against the members of the CTWS board of
directors, SJW and Eric W. Thornburg on behalf of CTWS shareholders in the Connecticut Superior Court in the Judicial
District of Middlesex under the caption Tillotson v. Benoit, et al., Case No. MMX-CV18-6021537-S (Conn. Super. Ct.). The
complaint, as amended on September 20, 2018, alleges that members of the CTWS board of directors breached their fiduciary
duties owed to CTWS shareholders in connection with negotiating the Merger and that CTWS’s preliminary proxy statement,
filed with the SEC on August 20, 2018, omits certain material information. The complaint further alleges that SJW Group and
21
Eric W. Thornburg aided and abetted the alleged breaches by the CTWS board of directors. Among other remedies, the action
seeks to recover recissory and other damages and attorneys’ fees and costs.
The parties to the above lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of additional
disclosures by CTWS. Pursuant to the agreements to settle these lawsuits, the plaintiffs have reserved the right to seek a
mootness fee from CTWS. The parties moved to stay proceedings, other than fee-related proceedings, until such time as the
transaction closes, and the court has granted the parties’ motion to stay. Pursuant to the agreement in principle to settle the
litigation, the complaints will be dismissed at such time as the transaction closes.
Additional complaints have been filed in connection with the Merger but neither SJW nor any of its officers or directors are
named as defendants therein. On October 5, 2018, a complaint was filed against CTWS and members of the CTWS board of
directors on behalf of a putative CTWS stockholder in the United States District Court for the District of Connecticut under the
caption Assad v. Connecticut Water Service, Inc., Case No. 3:18-cv-01664 (D. Conn.). The complaint alleges that the
preliminary proxy statement issued in connection with the Merger omitted material information in violation of Sections 14(a)
and 20(a) of the Securities Exchange Act of 1934, as amended. Among other remedies, the action seeks an order (1) enjoining
the defendants from consummating or closing on the Merger; (2) rescinding the Merger or awarding rescissory damages; (3)
directing the defendants to disseminate a corrective proxy statement; (4) declaring that the defendants have violated Sections
14(a) and/or 20(a) of the 1934 Act, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs.
Also, on October 5, 2018, a near-identical putative class-action complaint was filed against CTWS and the members of the
CTWS board of directors on behalf of CTWS stockholders in the United States District Court for the District of Connecticut
under the caption Paskowitz v. Connecticut Water Service, Inc., Case No. 3:18-cv-01663 (D. Conn.). The complaint alleges
that CTWS’s preliminary proxy statement issued in connection with the Merger omitted material information in violation of
Sections 14(a) and 20(a) of the Securities Exchange Act of 1934. Among other remedies, the action seeks an order (1)
enjoining the defendants from consummating or closing on the Merger; rescinding the Merger or awarding rescissory damages;
(3) directing the defendants to disseminate a corrective proxy statement; (4) declaring that the defendants have violated
Sections 14(a) and/or 20(a) of the 1934 Act, as well as Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees
and costs.
While we believe that the lawsuits are without merit and that the disclosures in CTWS’s preliminary proxy statement comply
fully with applicable law, in order to avoid the expense and distraction of litigation, the parties to each of the above-referenced
actions entered into agreements in principle to settle and release all claims that were or could have been alleged by the plaintiffs
in all of those actions. The settlements provide for the dismissal of the actions subject to, among other things, the
supplementation of the preliminary proxy statement with certain additional disclosures.
On November 20, 2018, the plaintiffs filed a brief in support of an opening mootness fee demand of $1.5 million for alleged
benefits the plaintiffs believe their lawsuit created for CTWS. CTWS intends to vigorously oppose this demand.
It is possible that SJW stockholders or CTWS shareholders may file additional lawsuits challenging the Merger or the other
transactions contemplated by the Merger Agreement, which may name SJW, the SJW board of directors, CTWS and/or the
CTWS board of directors as defendants. The outcome of such lawsuits cannot be assured, including the amount of costs
associated with defending these claims or any other liabilities that may be incurred in connection with the litigation of these
claims. Whether or not any plaintiff’s claim is successful, this type of litigation may result in significant costs and divert
management’s attention and resources, which could adversely affect the operation of SJW’s and CTWS’s business.
One of the conditions to the closing of the Merger is the absence of any law or order, decree or judgment by a court, arbitrator
or other governmental entity that prevents, makes illegal or prohibits the consummation of the Merger or the other transactions
contemplated by the Merger Agreement. Consequently, if SJW stockholders or CTWS shareholders file additional lawsuits
challenging the Merger or the other transactions contemplated by the Merger Agreement, and a settlement or other resolution is
not reached in such lawsuits and the plaintiffs secure injunctive or other relief prohibiting, delaying or otherwise adversely
affecting the parties’ ability to complete the Merger, then such injunctive or other relief may prevent the Merger from becoming
effective within the expected time frame or at all.
Uncertainties associated within the combined company after the Merger may cause a loss of management
personnel and other key employees which could adversely affect the future business and operations of the combined
company.
SJW and CTWS are dependent on the experience and industry knowledge of their respective officers and other key employees
to execute their business plans. The combined company’s success after the Merger will depend in part upon the ability of SJW
and CTWS to retain key management personnel and other key employees. Current and prospective employees of SJW and
CTWS may experience uncertainty about their roles within the combined company following the Merger, which may have an
adverse effect on the ability of each of SJW and CTWS to attract or retain key management and other key personnel.
Accordingly, no assurance can be given that the combined company will be able to attract or retain key management personnel
22
and other key employees of SJW and CTWS to the same extent that SJW and CTWS have previously been able to attract or
retain their own employees. A failure by SJW, CTWS or, following the completion of the Merger, the combined company to
attract, retain and motivate executives and other key employees during the period prior to or after the completion of the Merger
could have a negative impact on their respective businesses.
Completion of the Merger may trigger change in control or other provisions in certain agreements to which
CTWS is a party, which may have an adverse impact on the combined company’s business and results of operations.
The completion of the Merger may trigger change in control and other provisions in certain agreements to which CTWS is a
party. If we and CTWS are unable to negotiate waivers of those provisions, the counterparties may exercise their rights and
remedies under the agreements, potentially terminating the agreements or seeking monetary damages. Even if we and CTWS
are able to negotiate waivers, the counterparties may require a fee for such waivers or seek to renegotiate the agreements on
terms less favorable to CTWS or the combined company. Any of the foregoing or similar developments may have an adverse
impact on the combined company’s business and results of operations.
We may not have discovered undisclosed liabilities of CTWS during our due diligence process.
In the course of the due diligence review of CTWS that we conducted prior to the execution of the Merger Agreement, we may
not have discovered, or may have been unable to quantify, undisclosed liabilities of CTWS and its subsidiaries, and our
stockholders may not be indemnified for any of these liabilities. Examples of such undisclosed liabilities may include, but are
not limited to, pending or threatened litigation or regulatory matters. Any such undisclosed liabilities could have an adverse
effect on our business, results of operations, financial condition and cash flows and on the value of our common stock
following the completion of the Merger.
Risks Related to SJW Group and CTWS as a Combined Company if the Merger is Completed
The combined company is expected to incur substantial expenses related to the Merger and the integration of
SJW Group and CTWS.
If the Merger is completed, the combined company would be expected to incur substantial expenses in connection with the
Merger and the integration of SJW Group and CTWS. There will be a large number of processes, policies, procedures,
operations, technologies and systems at each company that must be integrated, including accounting and finance, payroll,
revenue management, commercial operations, risk management and employee benefits. While SJW Group and CTWS have
assumed that a certain level of expenses would be incurred, there are many factors beyond our control that could affect the total
amount or the timing of the integration expenses. Moreover, many of the expenses that will be incurred are, by their nature,
difficult to estimate accurately. These expenses could, particularly in the near term, exceed the benefits that the combined
company expects to achieve from the elimination of duplicative public company and other related costs expected from the
transaction. These integration expenses likely will result in the combined company taking significant charges against earnings
following the completion of the Merger, and the amount and timing of such charges are uncertain at present. Substantial
expenses related to the transaction, including fees payable to the companies’ advisors, will also be borne by SJW Group and
CTWS even if the Merger is not completed.
The Merger will result in changes to the board of directors that may affect the strategy and operations of the
combined company.
In connection with the consummation of the Merger, we expect that the board of directors of the combined company will be
expanded to create additional seats to be filled by CTWS directors to be selected by SJW Group. This new composition of the
board of directors may affect the combined company’s business strategy and operating decisions following the completion of
the Merger.
The Merger will combine two companies that are currently affected by developments in the water utility
industry, including changes in regulation. A failure to adapt to the changing regulatory environment after the Merger
could adversely affect the stability of the combined company’s earnings.
Because SJW Group, CTWS and their respective subsidiaries are regulated in the United States at the federal level and, in the
case of SJW Group, in California and Texas, and, in the case of CTWS, Connecticut and Maine, the two companies have been
and will continue to be affected by legislative and regulatory developments. After the Merger, the combined company and/or
its subsidiaries will be subject in the United States to federal regulation as well as to extensive state regulation in the states in
which the combined company will operate. The costs and burdens associated with complying with these regulatory
jurisdictions may have an adverse effect on the combined company. Moreover, potential legislative or regulatory changes may
create greater risks to the stability of the combined company’s earnings generally.
23
The combined company’s dividend policy is subject to the discretion of its board of directors and may be limited
by the combined company’s credit agreements and limitations under the Delaware law.
Although it is currently anticipated that the combined company will pay a regular quarterly dividend following the completion
of the Merger, any such determination to pay dividends will be at the discretion of the board of directors of the combined
company and will be dependent on then-existing conditions, including the company’s financial conditions, earnings, legal
requirements, including limitations under Delaware law, restrictions in the combined company’s credit agreements that limit its
ability to pay dividends to stockholders and other factors the board of directors of the combined company deems relevant. The
board of directors of the combined company may, in its sole discretion, change the amount or frequency of dividends or
discontinue the payment of dividends entirely. For those reasons, you may not be able to rely on dividends to receive a return
on your investment. Accordingly, realization of a gain on your shares of the combined company common stock received in the
Merger may depend on the appreciation of the price of the combined company common stock, which may never occur.
The financing arrangements that we will enter into in connection with the Merger may, under certain
circumstances, contain restrictions and limitations that could significantly impact the combined company’s ability to
operate its business.
We intend to incur additional indebtedness in connection with the Merger. We expect that the agreements governing the
indebtedness incurred in connection with the Merger may contain covenants that could impose significant operating and
financial limitations and restrictions on the combined company following the Merger, including restrictions on the ability to
enter particular transactions and engage in other activities that we may believe will be advisable or necessary for the combined
company’s business.
Various risks, uncertainties and events beyond the combined company’s control could affect its ability to comply with the
covenants contained in its debt agreements. Failure to comply with any of the covenants in its existing or future financing
agreements could result in a default under those agreements and under other agreements containing cross-default provisions. A
default would permit lenders to accelerate the maturity of indebtedness under these agreements and to foreclose upon any
collateral securing such indebtedness. Under certain circumstances, the combined company might not have sufficient funds or
other resources to satisfy all of its obligations. In addition, the limitations imposed by financing agreements on the combined
company’s ability to incur additional indebtedness and to take other actions might significantly impair its ability to obtain other
financing.
Item 1B.
Unresolved Staff Comments
None.
Item 2.
Properties
The properties of San Jose Water Company consist of a unified water production system located in the County of Santa Clara in
the State of California. In general, the property is comprised of franchise rights, water rights, necessary rights-of-way,
approximately 7,000 acres of land held in fee (which is primarily non-developable watershed), impounding reservoirs with a
capacity of approximately 2.256 billion gallons, 2,470 miles of transmission and distribution mains, distribution storage of
approximately 237 million gallons, wells, boosting facilities, diversions, surface water treatment plants, equipment, office
buildings and other property necessary to provide water service to its customers.
San Jose Water Company maintains all of its properties in good operating condition in accordance with customary practice for a
water utility. San Jose Water Company’s groundwater pumping stations have a production capacity of approximately
182 million gallons per day and the present capacity for taking purchased water is approximately 109 million gallons per day.
The surface water collection system has a physical delivery capacity of approximately 35 million gallons per day. During 2018,
a maximum and average of 139 million gallons and 97 million gallons of water per day, respectively, were delivered to the
system.
CLWSC maintains a service area that covers approximately 246 square miles located in the southern region of the Texas hill
country in Blanco, Comal, Hays and Travis counties. The majority of the service area surrounds an 8,200 surface acre reservoir
(Canyon Lake). CLWSC production wells have the ability to pump a combined 3.55 billion gallons annually. CLWSC has
contracts for 2 billion gallons of untreated surface water and 235 million gallons of treated surface water from the GBRA
annually. CLWSC owns and operates three surface water treatment plants with a combined production capacity of 9 million
gallons per day. CLWSC has 635 miles of transmission and distribution mains and maintains 61 storage tanks with a total
storage capacity of 7.6 million gallons. CLWSC owns and operates three wastewater treatment plants with a combined capacity
of 95,000 gallons per day.
24
Water Utility Services hold all of its principal properties in fee simple, subject to current tax and assessment liens, rights-of-
way, easements, and certain minor defects in title which do not materially affect their use.
As of December 31, 2018, SJW Land Company owns approximately 55 acres of property in the state of Tennessee. SJW Land
Company also owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. SJW Land Company consolidates
its limited partnership interest in 444 West Santa Clara Street, L.P. as a variable interest entity within the scope of ASC Topic
810. On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interests in the commercial building and land the
partnership owned and operated. See also Note 1 of “Notes to Consolidated Financial Statements”.
The following table is a summary of SJW Land Company properties described previously:
Description
Warehouse building ............................. Knoxville, Tennessee
Commercial building ........................... Knoxville, Tennessee
Undeveloped land and parking lot....... Knoxville, Tennessee
Location
Acreage
Square Footage
361,500
135,000
N/A
30
15
10
% for Year Ended
December 31, 2018
of SJW Land Company
Revenue
Expense
44%
56%
N/A
41%
59%
N/A
Item 3.
Legal Proceedings
Class Action Suits Related to the Merger
On June 14, 2018, certain shareholders of CTWS filed two nearly identical class-action complaints in Connecticut state court
against the CTWS board of directors, SJW Group, Eric W. Thornburg, Chairman, President and Chief Executive Officer of SJW
Group, and CTWS. The complaints, as amended on September 18, 2018 and September 20, 2018, allege that the CTWS board
breached its fiduciary duties in connection with the Merger, that CTWS’s preliminary proxy statement, filed with the SEC on
August 20, 2018, omits certain material information and that SJW Group and Mr. Thornburg aided and abetted the alleged
breaches by the CTWS board of directors. Among other remedies, the actions seek to recover rescissory and other damages and
attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit and intends to vigorously
defend this litigation. The parties to the lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of
additional disclosures by CTWS. Pursuant to the agreements to settle the lawsuits, the plaintiffs have reserved the right to seek
a mootness fee from CTWS. The parties moved to stay proceedings, other than fee-related proceedings, until such time as the
transaction closes, and the court has granted the parties’ motion to stay. Pursuant to the agreement in principle to settle the
litigation, the complaints will be dismissed at such time as the transaction closes. On November 20, 2018, the plaintiffs filed an
opening brief in support of their fee application. SJW Group has determined that the likelihood of loss related to these class-
action complaints is remote.
Additional complaints have been filed in connection with the Merger but neither SJW Group nor any of its officers or directors
are named as defendants therein. On October 5, 2018, certain shareholders of CTWS filed two complaints, one individually
and the other as a putative class action, in the United States District Court for the District of Connecticut against CTWS, the
CTWS board of directors and the Merger. The complaints allege that the preliminary proxy statement issued in connection with
the Merger omitted material information in violation of Section 14(a) and 20(a) of the Securities Exchange Act of 1934.
Among other remedies, the actions seek an order (1) enjoining the defendants from consummating or closing on the Merger; (2)
rescinding the Merger or awarding rescissory damages; (3) directing the defendants to disseminate a corrective proxy statement;
(4) declaring that the defendants have violated Section 14(a) and/or 20(a) of the Securities Exchange Act of 1934, as well as
Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in these
complaints are without merit.
Billing Practice OII with CPUC
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent.
The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate
service charges when increases occurred during a billing period, and whether the company double-billed service charges during
one billing period when allegedly switching from billing such charges in advance to billing in arrears. By a decision adopted
November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged
overcharging issue for the period since June 2011 by requiring refunds to customers totaling $2.02 million. That amount will
be refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective January 13, 2019, and is
provided for in the accompanying consolidated financial statements. See discussion on the matter in Note 1, “Regulatory Rate
Filings.” The CPUC investigation pursuant to OII No. 18-09-003 may result in liability for San Jose Water Company in
25
addition to the $2.02 million being credited to customers pursuant to the CPUC’s November 29, 2018 decision. Such additional
liability could result from a possible CPUC requirement that refunds or penalties be paid based on alleged over-billing prior to
June 1, 2011. A reasonable estimate of the potential loss amount, if any, cannot be made at this time.
SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which
SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a
material effect on SJW Group’s business, financial position, results of operations or cash flows.
Item 4.
None.
Mine Safety Disclosures
26
Item 5.
yy
Market for Registrant’s Common Equity
, Related Stockholder Matters and Issuer Purchases of Equity
Securities
’’
Market Information
PARPP
TRR II
W
SJW Group’
there were 343 record holders of SJW Group’
W
s common stock.
s common stock is traded on the New York Stock Exchange under the symbol “SJW”.
YY
As of December 31, 2018,
Five-YearYY Performance Graph
r
The following performance graph compares the changes in the cumulative stockholder return on SJW Group’
with the cumulative total return on a Water Utility Index and the Standard & Poor
December 31, 2018. The comparison assumes $100 was invested on December 31, 2013 in SJW Group’
each of the foregoing indices and assumes reinvestment of dividends.
s common stock
’s 500 Index during the last five years ended
s common stock and in
WW
W
W
F
COMPARISON OF
PP
FIVE
YEAR CUMULATIVE
AA
TOTALTT RETURN
L
P
Among SJW GrW oup, a WaterWW Utility Index and the S&P
r
500 Index
S
R
A
L
L
O
D
300
250
200
150
100
50
2013
2014
2015
2016
2017
2018
YEARS
SJW Group
Water Utility Index
S&P 500 Index
The following descriptive data of the performance graph is supplied in accordance with Rule 304(d) of Regulation S-T
(numbers represent U.S. dollars ($)):
SJW Group
W
........................................................
Water Utility Index ...........................................
S&P 500 Index
P
..................................................
100
100
100
111
123
114
105
139
115
202
170
129
235
217
157
209
223
150
2013
2014
2015
2016
2017
2018
WW
The Water Utility Index is the 9 water company
performance graph and related information shall not be deemed “soliciting material” or to be “filed” with the SEC, nor shall
such information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange
Act of 1934, each as amended, except to the extent that the company specifically incorporates it by reference into such filing.
WW
Water Utility Index prepared by
go Securities, LLC. The above
WW
Wells Far
27
Item 6.
Selected Financial Data
FIVE YEAR FINANCIAL AND STATISTICAL REVIEW
SJW Group and Subsidiaries
2018
2017
2016
2015
2014
397,699
389,225
339,706
305,082
319,668
CONSOLIDATED RESULTS OF OPERATIONS
(in thousands)
Operating revenue........................................................................... $
Operating expense:
Purchased water ...........................................................................
Power............................................................................................
Groundwater extraction charges ..................................................
Other production expenses...........................................................
Administrative and general ..........................................................
Maintenance .................................................................................
Property taxes and other non-income taxes .................................
Depreciation and amortization .....................................................
Merger related expenses...............................................................
Total operating expense ..........................................................
Operating income............................................................................
Interest expense, other income and expense...................................
Income before income taxes ...........................................................
Provision for income taxes .............................................................
Net income before noncontrolling interest .....................................
Less net income attributable to the noncontrolling interest............
SJW Group net income ................................................................... $
Dividends paid ................................................................................ $
CONSOLIDATED PER SHARE DATA
Earnings per share - diluted ............................................................
Dividends paid ................................................................................
Book value per common share........................................................
97,378
6,180
46,770
18,398
48,933
18,414
14,975
54,601
18,610
324,259
73,440
(24,608)
48,832
10,065
38,767
—
38,767
23,074
1.82
1.12
31.31
CONSOLIDATED BALANCE SHEET (in thousands)
Utility plant and intangible assets................................................... $ 1,935,911
Less accumulated depreciation and amortization ...........................
607,090
86,456
7,295
47,817
16,571
48,940
18,361
13,642
48,292
—
72,971
6,102
32,088
14,470
41,529
18,361
12,123
44,625
—
61,089
6,121
31,240
13,606
40,388
15,926
11,667
40,740
—
47,280
9,865
53,678
13,035
36,280
15,226
11,086
37,905
—
287,374
101,851
242,269
97,437
220,777
84,305
224,355
95,313
(5,358)
(11,056)
(23,151)
(18,536)
96,493
35,393
61,100
1,896
59,204
21,332
2.86
1.04
22.57
86,381
33,542
52,839
—
52,839
16,559
2.57
0.81
20.61
61,154
23,272
37,882
—
37,882
15,885
1.85
0.78
18.83
76,777
24,971
51,806
—
51,806
15,177
2.54
0.75
17.75
1,792,323
1,666,381
1,524,422
1,413,151
553,059
520,018
487,659
450,137
963,014
62,201
Net utility plant .......................................................................
1,328,821
1,239,264
1,146,363
1,036,763
Net real estate investment ...............................................................
44,009
45,081
50,459
61,434
Total assets......................................................................................
1,956,389
1,458,001
1,443,376
1,337,325
1,269,304
Capitalization:
Stockholders’ equity.....................................................................
889,312
Long-term debt, less current portion............................................
431,424
Total capitalization.................................................................. $ 1,320,736
OTHER STATISTICS—WATER UTILITY SERVICES
Average revenue per connection (in thousands)............................. $
Investment in gross utility plant per connection (in thousands) ..... $
Connections at year-end..................................................................
Miles of main at year-end ...............................................................
Water production (million gallons).................................................
Maximum daily production (million gallons).................................
463,209
431,092
894,301
1,594
7,340
421,646
433,335
854,981
1,402
6,874
383,783
377,187
760,970
1,263
6,311
360,155
384,365
744,520
1,328
5,869
1,609
7,832
247,267
244,133
242,421
241,555
240,773
3,091
40,053
149
3,082
38,584
148
3,069
35,847
136
3,031
36,535
130
2,939
44,649
173
Population served (estimate)...........................................................
1,114,200
1,100,200
1,092,600
1,089,000
1,085,000
28
Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
(Dollar amounts in thousands, except where otherwise noted)
Description of Business
SJW Group is a publicly traded company and is a holding company with four subsidiaries:
San Jose Water Company, a wholly owned subsidiary, is a public utility in the business of providing water service to
approximately 231,000 connections that serve a population of approximately one million people in an area comprising
approximately 139 square miles in the metropolitan San Jose, California area.
SJWTX, Inc., a wholly owned subsidiary of SJW Group, doing business as Canyon Lake Water Service Company, is a public
utility in the business of providing water service to approximately 16,000 connections that serve approximately 49,000 people.
CLWSC’s service area comprises more than 246 square miles in Blanco, Comal, Hays and Travis County in the growing region
between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation. Acequia has
been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary
beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.
SJW Land Company, a wholly owned subsidiary of SJW Group, owns undeveloped land in the states of California and
Tennessee, owns and operates commercial buildings in Tennessee and has a 70% limited partnership interest in 444 West Santa
Clara Street, L.P. 444 West Santa Clara Street, L.P. has been determined to be a variable interest entity within the scope of ASC
Topic 810 with SJW Land Company as the primary beneficiary. As a result, 444 West Santa Clara Street L.P. has been
consolidated with SJW Land Company. On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interests in the
commercial building and land the partnership owned and operated. In addition, SJW Land Company sold certain undeveloped
land located in San Jose, California on April 6, 2017.
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 CTWS. See Item 1. Business above for discussion of the
SJW Group and CTWS Merger Agreement.
TWA, formerly a wholly owned subsidiary of SJW Group, was undertaking activities that were necessary to develop a water
supply project in Texas. On November 16, 2017, SJW Group sold all of its equity interest in TWA to GBRA for $31.0 million.
Business Strategy for Water Utility Services
SJW Group focuses its business initiatives in three strategic areas:
(1)
(2)
Regional regulated water utility operations;
Regional non-tariffed water utility related services provided in accordance with the guidelines established by
the CPUC in California and the PUCT in Texas; and
(3)
Out-of-region water and utility related services.
Regional Regulated Activities
SJW Group’s regulated utility operation is conducted through San Jose Water Company and CLWSC. SJW Group plans and
applies a diligent and disciplined approach to maintaining and improving its water system infrastructures and also seeks to
acquire regulated water systems adjacent to or near its existing service territory.
The United States water utility industry is largely fragmented and is dominated by municipal-owned water systems. The water
industry is regulated, and provides a life-sustaining product. This makes water utilities subject to lower business cycle risks
than non-tariffed industries.
Regional Non-tariffed Activities
Operating in accordance with guidelines established by the CPUC, San Jose Water Company provides non-tariffed services,
such as water system operations, maintenance agreements and antenna site leases under agreements with municipalities and
other utilities. CLWSC provides non-tariffed wholesale water service to adjacent utilities.
San Jose Water Company also seeks appropriate non-tariffed business opportunities that complement its existing operations or
that allow it to extend its core competencies beyond existing operations. San Jose Water Company seeks opportunities to fully
utilize its capabilities and existing capacity by providing services to other regional water systems, which also will benefit its
existing regional customers.
29
Out-of-Region Opportunities
SJW Group also from time to time pursues opportunities to participate in out-of-region water and utility related services,
particularly regulated water businesses. SJW Group evaluates out-of-region and out-of-state opportunities that meet SJW
Group’s risk and return profile.
The factors SJW Group considers in evaluating such opportunities include:
•
•
•
•
•
•
•
Potential profitability;
Regulatory environment;
Additional growth opportunities within the region;
Water supply, water quality and environmental issues;
Capital requirements;
General economic conditions; and
Synergy potential.
As part of our pursuit of the above three strategic areas, we consider from time to time opportunities to acquire businesses and
assets, including the Merger. However, we cannot be certain we will be successful in identifying and consummating any
strategic business combination or acquisitions relating to such opportunities. In addition, the execution of our business strategy
will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection
with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of
certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the
potential for a negative impact on SJW Group’s financial position and operating results, entering markets in which SJW Group
has no or limited direct prior experience and the potential loss of key employees of any acquired company. Any strategic
combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance
with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve
sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the
integration process, including the integration of controls necessary for internal control and financial reporting, could interfere
with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that
any transaction will be successful or that it will not materially harm operating results or our financial condition.
Real Estate Services
SJW Group’s real estate investment activity is conducted through SJW Land Company. SJW Land Company owns
undeveloped land in Tennessee and owns 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. On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interests in the commercial building and land the
partnership owned and operated. In addition, SJW Land Company sold the undeveloped land located in San Jose, California on
April 6, 2017. SJW Land Company manages its remaining acquired income producing and other properties until such time a
determination is made to reinvest proceeds from sale of such properties. SJW Land Company’s real estate investments
diversify SJW Group’s asset base.
Critical Accounting Policies
SJW Group has identified accounting policies delineated below as the policies critical to its business operations and the
understanding of the results of operations. The preparation of consolidated financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial
statements and revenues and expenses during the reporting period. SJW Group bases its estimates on historical experience and
other assumptions that are believed to be reasonable under the circumstances. For a detailed discussion on the application of
these and other accounting policies, see Note 1 of “Notes to Consolidated Financial Statements.” SJW Group’s critical
accounting policies are as follows:
Balancing and Memorandum Accounts
The purpose of a balancing account is to track the under-collection or over-collection associated with expense changes and the
revenue authorized by the CPUC to offset those expense changes. Pursuant to Section 792.5 of the California Public Utilities
Code, a balancing account must be maintained for expense items for which revenue offsets have been authorized.
Balancing accounts are currently being maintained for the following items: purchased water, purchased power, groundwater
extraction charges, pensions, and general rate case true-ups. The amount in the water production balancing accounts varies
30
with the seasonality of the water utility business such that, during the summer months when the demand for water is at its peak,
the account tends to reflect an under-collection, while during the winter months when demand for water is relatively lower, the
account tends to reflect an over-collection. The pension balancing account is intended to capture the difference between actual
pension expense and the amount approved in rates by the CPUC. The general rate case true-up accounts are a result of revenue
shortfalls authorized for collection by the CPUC due to delayed rate case decisions.
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 memorandum account for the
Tax Act. The drought surcharge memorandum account tracks monies received from drought surcharges. The amount collected
will offset future surcharges that would be necessary to recover lost revenue due to drought conservation efforts. The Monterey
Water Revenue Adjustment Mechanism tracks the difference between the revenue received for actual metered sales through the
tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a uniform rate would
have been in effect.
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. 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.
It is typical for the CPUC to incorporate any over-collected and/or under-collected balances in balancing or memorandum
accounts into customer rates at the time rate decisions are made as part of the Company’s general rate case proceedings by
assessing temporary surcredits and/or surcharges. In the case where the Company’s balancing or memorandum-type accounts
that have been authorized by the CPUC reach certain thresholds or have termination dates, the Company can request the CPUC
to recognize the amounts in customer rates prior to the next regular general rate case proceeding by filing an advice letter.
Recognition of Regulatory Assets and Liabilities
Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as
permitted by ASC Topic 980. In accordance with ASC Topic 980, Water Utility Services, to the extent applicable, records
deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits
will be recognized in the ratemaking process in a period different from when the costs and credits are incurred. Accounting for
such costs and credits is based on management’s judgment and prior historical ratemaking practices, and it occurs when
management determines that it is probable that these costs and credits will be recognized in the future revenue of Water Utility
Services through the ratemaking process. The regulatory assets and liabilities recorded by Water Utility Services, in particular,
San Jose Water Company, primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting
purposes, balancing and memorandum accounts, postretirement pension benefits, medical costs, accrued benefits for vacation
and asset retirement obligations that have not been passed through in rates. The Company adjusts the related asset and
liabilities for these items through its regulatory asset and liability accounts at year-end, except for certain postretirement benefit
costs and balancing and memorandum accounts which are adjusted monthly. The disallowance of any asset in future
ratemaking, including deferred regulatory assets, would require San Jose Water Company to immediately recognize the impact
of the costs for financial reporting purposes. No disallowances were recognized during the years ending December 31, 2018,
2017 or 2016.
Factors Affecting Our Results of Operations
SJW Group’s financial condition and results of operations are influenced by a variety of factors including the following:
•
•
•
•
Economic utility regulation;
Infrastructure investment;
Compliance with environmental, health and safety standards;
Production expenses;
31
•
•
•
•
Customer growth;
Water usage per customer;
Weather conditions, seasonality and sources of water supply; and
Merger and acquisition activities, if any.
Economic Utility Regulation
Water Utility Services is generally subject to economic regulation by CPUC and PUCT overseeing public utilities. Regulatory
policies vary from state to state and may change over time. In addition, there may be regulatory lag between the time a capital
investment is made, a consumption decrease occurs, or an operating expense increases and when those items are adjusted in
utility rates.
San Jose Water Company employs a forward-looking test year and has been authorized to use several mechanisms to mitigate
risks faced due to regulatory lag and new and changing legislation, policies and regulation. These include 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 memorandum account for the Tax Act. Rate recovery for the balances in these memorandum
accounts is generally allowed in a subsequent general rate case. San Jose Water Company also maintains balancing accounts to
track changes in purchased water, purchased power, groundwater extraction charges and pension costs for later rate recovery.
Regulatory risk is mitigated in California by use of a forward-looking test year which allows the return on and return of utility
plant on a forecasted basis as it is placed in service, and in some cases interim rate relief is allowed in the event of regulatory
lag.
Pursuant to Texas regulation, CLWSC employs a historical test year. To address regulatory risk due to regulatory lag and
changing legislation policies and regulations, rate cases may be filed as necessary in Texas, provided there is no current rate
case outstanding. Further, rate cases may not be filed more frequently than once every 12 months.
Infrastructure Investment
The water utility business is capital-intensive. In 2018 and 2017, Company-funded capital improvements were $135,973 and
$141,213, respectively, for additions to, or replacements of, property, plant and equipment for our Water Utility Services. We
plan to spend approximately $109,894 in 2019 and $699,228 over the next five years for capital improvements, subject to
CPUC and PUCT approval. SJW Group funds these expenditures through a variety of sources, including cash received from
operations, debt and equity issuances and borrowings. SJW Group relies upon a line of credit, which will expire on June 1,
2021, to fund capital expenditures in the short term and has historically issued long-term debt to refinance our short-term debt.
While our ability to obtain financing will continue to be a key risk, we believe that based on our 2018 activities, we will have
access to the external funding sources necessary to implement our on-going capital investment programs in the future.
Compliance with Environmental, Health and Safety Standards
Water Utility Services’ operations are subject to water quality and pollution control regulations issued by the EPA and
environmental laws and regulations administered by the respective states and local regulatory agencies. Under the federal Safe
Drinking Water Act, Water Utility Services is subject to regulation by the EPA of the quality of water it sells and treatment
techniques it uses to make the water potable. The EPA promulgates nationally applicable standards, including maximum
contaminant levels for drinking water. Water Utility Services has implemented monitoring activities and installed specific
water treatment improvements enabling it to comply with existing maximum contaminant levels and plan for compliance with
future drinking water regulations. However, the EPA and the respective state agencies have continuing authority to issue
additional regulations under the Safe Drinking Water Act. SJW Group incur substantial costs associated with compliance with
environmental, health and safety and water quality regulation to which our Water Utility Services is subject.
Environmental, health and safety and water quality regulations are complex and change frequently, and the overall trend has
been that they have become more stringent over time. It is possible that new or more stringent environmental standards and
water quality regulations could be imposed that will increase Water Utility Services’ water quality compliance costs, hamper
Water Utility Services’ available water supplies, and increase future capital expenditures. Future drinking water regulations
may require increased monitoring, additional treatment of underground water supplies, fluoridation of all supplies, more
stringent performance standards for treatment plants and procedures to further reduce levels of disinfection by-products. In the
past, Water Utility Services has generally been able to recover expenses associated with compliance related to environmental,
health and safety standards, but future recoveries could be affected by regulatory lag and the corresponding uncertainties
surrounding rate recovery.
32
Production Expenses
Water Utility Services’ operations require significant production inputs which result in substantial production expenses. These
expenses include power, which is used to operate pumps and other equipment, purchased water and groundwater extraction
charges. For 2018, production expenses accounted for approximately 55% of our total operating expenses excluding merger
related expenses. Price increases associated with these production inputs would adversely impact our results of operations until
rate relief is granted.
Customer Growth
Customer growth in our Water Utility Services is driven by: (i) organic population growth within our authorized service areas
and (ii) the addition of new customers to our regulated customer base by acquiring regulated water systems adjacent to or near
our existing service territories. During 2018, 2017 and 2016, we had capitalized cash outflows of $2,496, $1,149 and $1,070,
respectively, for acquisitions and water rights which we believe will allow SJW Group to expand our regulated customer base.
In addition, we had $18.6 million in merger related costs reflected in our consolidated statements of comprehensive income
related to the Merger. Before entering new regulated markets, we evaluate the regulatory environment to ensure that we will
have the opportunity to achieve an appropriate rate of return on our investment while maintaining our high standards for
quality, reliability and compliance with environmental, health and safety and water quality standards.
Water Usage Per Customer
Fluctuations in customer demand for water could be due to seasonality, restrictions of use, weather or lifestyle choices, all of
which could affect Water Utility Services’ results of operations. San Jose Water Company residential usage increased 3.8%
from 2017 to 2018 and increased 8.1% from 2016 to 2017. San Jose Water Company business usage increased 3.0% and 2.7%
from 2017 to 2018 and from 2016 to 2017, respectively. In addition, 2018 residential and business usage was 11.9% and 6.6%,
respectively, lower than the amount authorized in our 2016-2018 general rate case. Residential usage and business usage in
2017 was 15.2% and 9.4%, respectively, which was lower than the amount authorized in our 2016-2018 general rate case.
CLWSC residential and business usage decreased 3.5% from 2017 to 2018 and increased 8% from 2016 to 2017.
Weather Conditions, Seasonality and Sources of Water Supply
Our ability to meet the existing and future water demands of our customers depends on an adequate supply of water. Drought,
governmental restrictions, overuse of sources of water, the protection of threatened species or habitats or other factors may limit
the availability of ground and surface water. Also, customer usage of water is affected by weather conditions, in particular
during the warmer months. Our water systems experience higher demand in the summer due to the warmer temperatures and
increased usage by customers for outside irrigation of lawns and landscaping. In periods of drought, if customers are
encouraged or required to conserve water due to a shortage of supply or restriction of use, revenue tends to be lower. Water use
restrictions may be imposed at a regional or state level and may affect our service areas regardless of our readiness to meet
unrestricted customer demands. Similarly, in unusually wet periods, water supply tends to be higher and customer demand
tends to be lower, again resulting in lower revenues.
From 2014 to 2016, California was in a severe drought. In response to the drought, the State Water Board imposed mandatory
water use restrictions and conservation targets. SCVWD, San Jose Water Company’s principal water supplier, also mandated
water use restrictions along with conservation targets at levels higher than the State Water Board. While the Governor of
California declared the drought over on April 7, 2017, the State Water Board made certain water use restrictions permanent
while SCVWD maintained a conservation target at 20%.
On May 31, 2018, Governor Edmund G. Brown signed into law Assembly Bill 1668 and Senate Bill 606. Both bills set an
initial limit for indoor water use of 55 gallons per person per day by 2022 and reduced the limit further to 50 gallons per person
per day by 2030. Implementation details remain to be developed as to how local water providers will meet this mandate as well
as to how the CPUC will direct its regulated utilities to comply.
San Jose Water Company believes that its various sources of water supply, which consists of groundwater from wells, surface
water from watershed run-off and diversion, reclaimed water, and imported water purchased from the SCVWD, will be
sufficient to meet customer demand for 2019. In addition, San Jose Water Company actively works with the SCVWD to
address California’s long-term water supply challenges by continuing to educate customers on responsible water use practices
and to conduct long-range water supply planning. CLWSC believes that they will be able to meet customer demand for 2019
with their water supply which consists of groundwater from wells and purchased treated and raw water from the GBRA.
Merger and Acquisition Activities
From time to time there may be opportunities to acquire businesses and assets. We cannot be certain we will be successful in
identifying and consummating any strategic business combination or acquisitions relating to such opportunities. We expect to
33
incur costs in connection with the execution of this pursuit 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. Any strategic
combination or acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance
with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve
sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the
integration process, including the integration of controls necessary for internal control and financial reporting, could interfere
with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that
any transaction will be successful or that it will not materially harm operating results or our financial condition. During the
year ended December 31, 2018, SJW Group spent $18.6 million on merger costs related to the Merger.
Results of Operations
Among other things, 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. 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 Item 1, “Business” for a discussion of the California drought and political and regulatory activities.
Overview
SJW Group’s consolidated net income for the year ended December 31, 2018 was $38,767, compared to $59,204 for the same
period in 2017. This represents a decrease of $20,437 or 35%, from 2017. The decrease in net income was primarily due to
costs incurred related to the proposed merger with CTWS, the sale of real estate properties and TWA equity interest in 2017 that
did not recur in 2018, an increase in production expenses due to higher usage and higher per unit costs for purchased water,
ground water extraction and energy charges, and higher depreciation expenses due to assets placed in service in 2017, partially
offset by an increase in operating revenue. The increase in operating revenue was primarily due to an increase in rates and
higher usage, offset by changes in certain balancing and memorandum accounts.
Operating Revenue
Operating revenue by segment was as follows:
Operating Revenue
Water Utility Services................................................................................ $
Real Estate Services ..................................................................................
392,217
5,482
$
397,699
383,523
5,702
389,225
332,989
6,717
339,706
2018
2017
2016
34
The change in consolidated operating revenues was due to the following factors:
2018 vs. 2017
Increase/(decrease)
2017 vs. 2016
Increase/(decrease)
Water Utility Services:
Consumption changes................................................ $
Increase in customers ................................................
Rate increases ............................................................
Recycled ....................................................................
Balancing and memorandum accounts:
Cost recovery recorded prior year ........................
2016 WCMA revision to new customer
classification ..............................................................
2015 General Rate Case true-up...........................
Water Conservation Memorandum Account ........
Tax Act..................................................................
All other ................................................................
Real Estate Services.....................................................
$
2018 vs. 2017
7,376
2,298
17,516
789
(3,864)
(1,371)
—
(5,462)
(7,431)
(1,157)
(220)
8,474
2 % $
— %
4 %
— %
(1)%
— %
— %
(1)%
(2)%
— %
— %
2 % $
15,416
1,169
41,137
515
—
—
(8,767)
179
—
885
(1,015)
49,519
5 %
— %
13 %
— %
— %
— %
(3)%
— %
— %
— %
— %
15 %
The revenue increase consists of $8,694 from Water Utility Services offset by a decrease of $220 from Real Estate Services.
The revenue increase for Water Utility Services is primarily due to an increase in rates which resulted in $17,516 of additional
revenue and an increase of $7,376 due to higher water usage. The Company also recognized an increase due to new customers
and recycled water sales. These increases were partially offset by decreases in revenue recognized from certain balancing and
memorandum accounts, which include a decrease of $7,431 as a result of the Tax Act, $5,462 decrease in WCMA, and $3,864
decrease in cost recovery recorded in the prior year.
The revenue decrease for Real Estate Services was primarily the result of lower rental income due to the sale in 2017 of SJW
Land Company’s limited partnership properties in San Jose.
2017 vs. 2016
The revenue increase consists of $50,534 from Water Utility Services offset by a decrease of $1,015 from Real Estate Services.
The revenue increase for Water Utility Services is primarily due to an increase in rates as approved in 2017 which resulted in
$41,137 of additional revenue. The Company also recognized a net increase of $15,416 due to increased water usage. These
increases were partially offset by a decrease of $8,767 in true-up revenue resulting from the decision on the 2015 General Rate
Case recognized in 2016. In addition, new customers, recycled water sales, and certain balancing and memorandum accounts
also contributed to the increase.
The revenue decrease for Real Estate Services was primarily the result of lower rental income due to the sale of SJW Land
Company’s Arizona property and the sale of the limited partnership properties in San Jose.
35
Water Utility Services’ Operating Revenue and Customer Counts
The following tables present operating revenues and number of customers by customer group of Water Utility Services:
Operating Revenue by Customer Group
Residential and business............................................................................ $
Industrial....................................................................................................
Public authorities .......................................................................................
Others ........................................................................................................
Balancing and memorandum accounts......................................................
2018
2017
2016
356,535
331,835
278,943
2,215
18,049
12,519
2,899
1,987
16,448
11,066
22,187
1,519
13,422
9,218
29,887
$
392,217
383,523
332,989
Number of Customers
Residential and business............................................................................
241,253
238,231
236,689
2018
2017
2016
Industrial....................................................................................................
Public authorities .......................................................................................
Others ........................................................................................................
76
1,343
4,595
75
1,349
4,478
76
1,360
4,296
247,267
244,133
242,421
Operating Expense
Operating expense by segment was as follows:
Operating Expense
Water Utility Services................................................................................ $
Real Estate Services ..................................................................................
All Other....................................................................................................
299,548
3,539
21,172
$
324,259
280,916
3,688
2,770
287,374
236,395
4,074
1,800
242,269
2018
2017
2016
36
The change in consolidated operating expenses was due to the following factors:
2018 vs. 2017
Increase/(decrease)
2017 vs. 2016
Increase/(decrease)
Water production expenses:
Change in surface water supply................................. $
Change in usage and new customers .........................
Purchased water and groundwater extraction charge
and energy price increase ..........................................
Balance and memorandum account cost recovery ....
Total water production expenses..................................
Administrative and general ..........................................
Balance and memorandum account cost recovery.......
Maintenance.................................................................
Property taxes and other non-income taxes .................
Depreciation and amortization.....................................
Merger related expenses ..............................................
$
Sources of Water Supply
(7,998)
5,077
14,931
(1,423)
10,587
1,215
(1,222)
53
1,333
6,309
18,610
36,885
(3)% $
2 %
6 %
— %
5 %
— %
— %
— %
— %
2 %
6 %
5,880
9,618
17,010
—
32,508
7,411
—
—
1,519
3,667
—
13 % $
45,105
2%
4%
7%
—%
13%
3%
—%
—%
1%
2%
—%
19%
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 SCVWD under the terms of a master contract with SCVWD
expiring in 2051. Surface water, which is the least expensive water supply, is sourced from San Jose Water Company’s 7,000
acre of watershed in the Santa Cruz mountains. 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 rates 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 rate increase.
CLWSC’s water supply consists of groundwater from wells and purchased treated and 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.
The following table presents the sources of water supply for Water Utility Services:
Purchased water.........................................................................................
Groundwater ..............................................................................................
Surface water .............................................................................................
Reclaimed water ........................................................................................
Average water production expense per MG .............................................. $
Source of Water Supply
2018
2017
2016
(million gallons) (MG)
24,110
12,507
2,674
762
40,053
4,213
22,913
14,444
620
607
38,584
4,063
21,474
11,271
2,465
637
35,847
3,468
Water production in 2018 for Water Utility Services increased 1,469 million gallons from 2017. Water production in 2017 for
Water Utility Services increased 2,737 million gallons from 2016. The changes are primarily attributable to changes in
consumption by customers and are consistent with the changes in the related water production expenses.
The contract water rates for San Jose Water Company are determined by SCVWD. These rates are adjusted periodically and
coincide with SCVWD’s fiscal year, which ends on June 30. The contract water rate for SCVWD’s fiscal years 2018, 2017 and
2016 was $4.3, $3.9 and $3.6 per million gallons, respectively. The contractual cost of the groundwater extraction charge for
water pumped from the ground basin was $3.9, $3.6, and $3.3 per million gallons for SCVWD’s fiscal years 2019, 2018, and
2017, respectively.
37
Unaccounted-for water for 2018 and 2017 approximated 7.6% and 8.5%, respectively, as a percentage of production. The
unaccounted-for water estimate is based on the results of past experience and the impact of flows through the system, partially
offset by Water Utility Services’ main replacements and lost water reduction programs.
The various components of operating expenses are discussed below.
Water production expenses
2018 vs. 2017
Water production expenses increased $14,931 due to higher per unit costs paid for purchased water, groundwater extraction and
energy charges, and $5,077 due to an increase in customer usage, offset by a decrease of $7,998 due to an increase in the use of
available surface water in 2018 compared to 2017 and a decrease of $1,423 in the balancing and memorandum accounts.
Effective July 2018, SCVWD increased the unit price of purchased water by approximately 9% and the groundwater extraction
charge by approximately 10%.
2017 vs. 2016
Water production expenses increased $17,010 due to higher per unit costs paid for purchased water, groundwater extraction and
energy charges, $9,618 due to an increase in customer usage and $5,880 due to an decrease in the use of available surface water
in 2017 compared to 2016. Effective July 2017, SCVWD increased the unit price of purchased water by approximately 9% and
the groundwater extraction charge by approximately 10%.
Administrative and General Expense
Administrative and general expenses include payroll related to administrative and general functions, all employee benefits
charged to expense accounts, insurance expenses, legal fees, regulatory utility commissions’ expenses, expenses associated with
being a public company, and general corporate expenses.
2018 vs. 2017
Administrative and general expense decreased $7 in 2018, or less than 1%, in comparison to 2017. The decrease consisted
primarily of: (1) $606 in cost recoveries other than pension costs through balance and memorandum accounts, (2) $509
decrease in legal fees, and (3) $327 decrease in salaries and wages, partially offset by, (4) $593 increase in group insurance
costs, (5) $428 increase in contracted work primarily related to the recycled water retrofit program, (6) $401 increase in rate
case expenses, and (7) $13 increase in miscellaneous expenses.
2017 vs. 2016
Administrative and general expense increased $7,411 in 2017, or 18%, in comparison to 2016. The increase consisted primarily
of: (1) $3,290 increase in salaries and wages, (2) $1,427 increase in regulatory fees as a result of increased revenue, (3) $1,433
due to an increase in contracted work primarily related to the recycled water retrofit program and executive recruitment, (4)
$521 increase in salary deferral contribution and other employee benefits, (5) $304 increase in software maintenance contracts,
(6) $227 increase in board of director fees, and (7) $209 increase in miscellaneous expenses.
Maintenance Expense
Maintenance expense increased $53 in 2018, or less than 1%, in comparison to 2017, and remained flat in 2017, or less than
1%, in comparison to 2016. The increase in 2018 consisted primarily of: (1) $520 increase in salaries and wages, and (2) $57
increase in miscellaneous expenses, partially offset by (3) $524 decrease in contracted work as a result of increased capitalized
projects. The activity in 2017 consisted primarily of: (1) a $1,346 decrease in uninsured losses due to the reserve recorded in
2016 for an obsolete work order, offset by (2) an increase of $808 in contracted work primarily related to station clean-up and
disposal services, (3) $328 increase in fleet repairs and maintenance expenses, and (4) $189 increase in salaries and wages.
Property Taxes and Other Non-income Taxes
Property taxes and other non-income taxes for 2018 and 2017 increased $1,333 and $1,519 from prior years, respectively. The
increases were primarily a result of increased utility plant. The increase in 2017 also included $427 in Delaware franchise tax
as a result of reincorporation that occurred in November 2016. SJW Group anticipates increases in 2019 for property taxes and
other non-income taxes due to increases in utility plant.
38
Depreciation and Amortization
Depreciation and amortization expense increased $6,309 in 2018, or 13%, in comparison to 2017, and increased $3,667 in
2017, or 8%, in comparison to 2016. The increase in both years was due to increases in utility plant. SJW Group anticipates
increases in 2019 for depreciation expense due to increases in utility plant.
Other Income and Expense
The change in other (expense) income in 2018 compared to 2017 was primarily due to a $12,501 pre-tax gain on sale of the
equity interests in TWA and a pre-tax gain of $6,903, reduced by the noncontrolling interest’s gain of $1,896, on the sale of
limited partnership properties and undeveloped land in San Jose, California recorded in the prior year.
The change in other (expense) income in 2017 compared to 2016 was primarily due to a $12,501 pre-tax gain on sale of the
equity interests in TWA and a pre-tax gain of $6,903, reduced by the noncontrolling interest’s gain of $1,896, on the sale of
limited partnership properties and undeveloped land in San Jose, California, compared to the $3,197 pre-tax gain on the sale of
159,151 shares of California Water Service Group and the $9,981 pre-tax gain on the sale of SJW Land Company’s Arizona
property recorded in the prior year.
SJW Group’s consolidated weighted-average cost of long-term debt, including the mortgages and the amortization of debt
issuance costs, was 6.0% for the years ended December 31, 2018 and 2017 and 2016.
Provision for Income Taxes
Income tax expense for 2018 was $10,065, compared to $35,393 in 2017. The effective consolidated income tax rate was 21%
for 2018, 37% for 2017 and 39% for 2016. The decrease in income tax expense was primarily due to a lower tax rate and lower
pre-tax income.
The federal statutory income tax rate decreased from 35% to 21% effective January 1, 2018 thus reducing the income tax
expense and the effective consolidated income tax rate in 2018. The reversal of excess deferred taxes of $1,383 for the
regulated entity San Jose Water Company also contributed to the decrease in the effective consolidated income tax rate in 2018.
The benefit of the reversal of excess deferred taxes for the year 2018 flowed back to the customers through the tax
memorandum account.
The CPUC has directed San Jose Water Company to establish a memorandum account to capture all of the impacts of the Tax
Act including the benefit of the reduction in the federal statutory income tax rate from 35% to 21% on its regulated revenue
requirement. The 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. As per Advice Letter No. 522A filed with CPUC, the benefit
of the reduction in the federal statutory income tax rate from 35% to 21% were reflected in the customer bills effective July 1,
2018. The tax memorandum account only includes the benefit of the reduction in the federal statutory income tax rate through
June 30, 2018. The other impacts of the Tax Act were recorded in the tax memorandum account for the entire year.
Accordingly, San Jose Water Company recorded $6,504 liability in the tax memorandum account for the year ended December
31, 2018. CLWSC refunded the accrued amounts for the period January 25, 2018, through April 30, 2018, in the second quarter
of 2018. The FTCC continues to be reflected on customer bills every month starting from May 1, 2018 until the
implementation of new rates resulting from the next rate case.
SJW Group expects the Internal Revenue Service to issue guidance in future periods that will determine the final disposition of
the excess deferred taxes and other impacts of the Tax Act. At this time, the Company has applied a reasonable interpretation of
the Tax Act. Future clarification of the Tax Act may change the estimated amounts.
On August 15, 2018, SJW Group received notification that the Texas Comptroller of Public Accounts completed its audit of the
Texas Franchise Tax Report for the report year 2015 and has no changes.
Please refer to Note 5, “Income Taxes,” of Notes to Consolidated Financial Statements for a reconciliation of actual to expected
income tax expense.
Other Comprehensive (Loss) Income
The change in other comprehensive income in 2018 was due to a change in accounting for the fair value of 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. Other comprehensive income in 2017 was $679, net of tax, due to a change in the market value of
our investment in California Water Service Group. The investment in California Water Service Group was sold in 2018.
39
Liquidity and Capital Resources
Water Utility Services’ business derives the majority of its revenue directly from residential and business customers. Water
Utility Services bills the majority of its customers’ on a bi-monthly basis. Payments from customers are impacted by the
general economic conditions in the areas where SJW Group operates. Payment delinquencies are mitigated by service
interruptions due to non-payment. Because California is a high cost of living state, it is possible that Californians may migrate
to other states with a lower cost-of-living. As of December 31, 2018, the change in the number of customers has been minimal
and write-offs for uncollectible accounts have been less than 1% of total revenue, unchanged from the prior year. Management
believes it can continue to collect its accounts receivable balances at its historical collection rate.
Funds collected from Water Utility Services’ customers are used to pay for water production expenses, in addition to costs
associated with general operations. Funds were also generated from borrowings. From these amounts, SJW Group paid cash
dividends of approximately $23,074 and funded its 2018 working capital and capital expenditure program.
SJW Group also obtained funds through the issuance of common stock in December of 2018 to finance our proposed merger of
CTWS and to pay related fees and expenses. If for any reason the proposed merger does not close, then SJW Group expect to
use those funds for general corporate purposes, which may include acquisitions, share repurchases or debt repayment but we do
not have any obligation to repurchase any or all of our shares of common stock sold in the offering. SJW Group has invested
the excess funds in a a short-term money market fund which is managed by a reputable financial institution. See Note 2 of
“Notes to Consolidated Financial Statements” for discussion of the equity offering.
The condition of the capital and credit markets or the strength of financial institutions could impact SJW Group’s ability to
draw on its line of credit, issue long-term debt, sell its equity or earn interest income. In addition, government policies, the state
of the credit markets and other factors could result in increased interest rates, which would increase SJW Group’s cost of
capital. While our ability to obtain financing will continue to be a key risk, we believe that based on our 2018 activities, we
will have access to the external funding sources necessary to implement our on-going capital investment programs in the future.
In 2018, the common dividends declared and paid on SJW Group’s common stock represented 60% of net income. Dividends
have been paid on SJW Group’s and its predecessor’s common stock for 301 consecutive quarters and the annual dividend
amount has increased in each of the last 51 years. While historically SJW Group has generally paid dividends equal to
approximately 50% to 60% of its net income, SJW Group cannot guarantee that this trend will continue in the future.
Cash Flow from Operations
In 2018, SJW Group generated cash flow from operations of approximately $91,343 compared to $101,112 in 2017 and
$114,571 in 2016. 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 on the sale of assets, and changes in
working capital items. Cash flow from operations decrease in 2018 by approximately $9,800. The decrease was primarily due
to a combination of the following factors: (1) a decrease in the collection of the balancing and memorandum accounts of
$5,500, (2) a decrease in accrued groundwater extraction charges, purchased water and power of $4,200, and (3) general
working capital and net income, adjusted for non-cash items decreased by $3,700, offset by an increase of a net collection of
taxes receivable was $3,600 more than in prior year. Cash flow from operations decreased in 2017 by approximately $13,500.
The decrease was primarily due to a combination of the following factors: (1) a decrease in the collection of the balancing and
memorandum accounts of $20,300, and (2) other noncurrent assets and noncurrent liabilities from less damage reserves and
deferred tax adjustments of $4,700, offset by a decrease of (1) collections of previously billed and accrued receivables by
$3,700, (2) payments of amounts previously invoiced and accrued, which increased by $3,200, (3) net collection of taxes
receivable by $2,800, and (4) general working capital and net income, adjusted for non-cash items, which increased by $1,800.
Cash Flow from Investing Activities
In 2018, SJW Group used approximately $136,000 of cash for Company funded capital expenditures, $8,500 for developer
funded capital expenditures, $3,900 in utility plant retirement costs, $2,500 for water service asset acquisitions, and $100 for
real estate investments related to leasehold improvement additions for the properties located in Knoxville, Tennessee. These
uses were offset by cash proceeds of $4,100 from the sale of our remaining shares in our investment in California Water Service
Group stock. In 2017, SJW Group used approximately $141,200 of cash for Company funded capital expenditures, $7,900 for
developer funded capital expenditures, $3,400 in utility plant retirement costs, $1,100 for acquisitions and rights to provide
water service, and $100 for real estate investments related to leasehold improvement additions for the properties located in
Knoxville, Tennessee. These uses were offset by cash proceeds of $28,600 from the sale of our equity interests in TWA, and
$11,200 from the sale of real estate investments owned by SJW Land Company and 444 West Santa Clara Street, L.P.
40
Water Utility Services budgeted capital expenditures for 2019, excluding capital expenditures financed by customer
contributions and advances is as follows:
Budgeted Capital
Expenditures
2019
Water treatment ....................................................................................................................... $
Source of supply......................................................................................................................
Reservoirs and tanks ...............................................................................................................
Pump stations and equipment .................................................................................................
Equipment and other ...............................................................................................................
Distribution system .................................................................................................................
2,145
8,147
17,501
2,056
14,010
66,035
2%
7%
16%
2%
13%
60%
$
109,894
100%
The 2019 capital expenditures budget is concentrated in main replacements. Included in the distribution system budgeted
capital expenditures of $66,035 is approximately $42,170 that is planned to be spent to replace Water Utility Services’ pipes and
mains.
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 $699,228 in capital expenditures. 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 at an increasing rate 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 year ended December 31, 2018 increased by approximately $473,000 from the
same period in the prior year, primarily as a result of cash proceeds from the issuance of SJW Group’s common stock and an
increase in the amount of net borrowings on our lines of credit, partially offset by an increase in net other changes for equity
plan payments, broker fees and debt issuance costs, an increase in dividends paid to stockholders, and a decrease in
contributions in aid of construction in the current year. SJW Group’s cash management policy includes the issuance of long-
term debt to pay down borrowings on our lines of credit. As such, when long-term borrowings are high, borrowings on our line
of credit tend to be low and when long-term borrowings are low, borrowings on our line of credit tend to be high.
SJW Group, SJW Land Company, SJWTX, Inc. and San Jose Water Company have unsecured bank lines of credit totaling
$145,000 as of December 31, 2018. Drawdowns on our lines of credit are restricted by our funded debt not exceeding a percent
of total capitalization as defined in our debt covenants. SJW Group expects to periodically draw down on its lines of credit as
dictated by our funding needs and subsequently repay such borrowings with cash from operations and issuance of long-term
debt or equity. See also “Sources of Capital—Water Utility Services and SJW Group and its Subsidiaries” below.
Sources of Capital
Water Utility Services
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 obtain external financing. The level of future earnings and the related
cash flow from operations is dependent, in large part, on 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 47% debt and 53% equity. As of December 31, 2018, San Jose Water Company’s long-term debt and equity
were approximately 44% and 56%, respectively. The average borrowing rate of San Jose Water Company’s long-term debt was
6.2% as of December 31, 2018.
41
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 and the issuance of equity, all of which will be consistent with
the regulator’s guidelines.
San Jose Water Company has outstanding $250,000 of unsecured senior notes as of December 31, 2018. The senior note
agreements of San Jose Water Company 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. As of December 31,
2018, San Jose Water Company was not restricted from issuing future indebtedness as a result of these terms and conditions.
San Jose Water Company also has obligations pursuant to loan agreements with the California Pollution Control Financing
Activity (“CPCFA”) supporting $120,000 in aggregate principal amount of CPCFA revenue bonds outstanding as of
December 31, 2018. The loan agreements contain affirmative and negative covenants customary for loan agreements relating
to revenue bonds, containing, among other things, certain disclosure obligations, the tax exempt status of the interest on the
bonds and limitations, and prohibitions on the transfer of projects funded by the loan proceeds and assignment of the loan
agreements. As of December 31, 2018, San Jose Water Company was in compliance with all such covenants.
SJWTX, Inc. has an outstanding $15,000 senior note as of December 31, 2018. The 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 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 December 31, 2018, SJWTX, Inc. and SJW Group were not restricted
from issuing future indebtedness as a result of these terms and conditions.
As of December 31, 2018, the SJW Group and its subsidiaries are in compliance with all of their debt covenants.
SJW Group and its Subsidiaries
SJW Group and its subsidiaries consolidated long-term and short-term debt was 37% of total capitalization as of December 31,
2018. Management believes that SJW Group is capable of obtaining future long-term capital to fund regulated and non-tariffed
growth opportunities and capital expenditure requirements.
SJW Group has outstanding a $50,000 unsecured senior note as of December 31, 2018. The senior note 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. As of December 31, 2018, SJW Group was not restricted from
issuing future indebtedness as a result of these terms and conditions.
On June 1, 2016, San Jose Water Company entered into a $125,000 Credit Agreement (the “Credit Agreement”) with JPMorgan
Chase Bank, N.A., as the lender (the “Lender”). The Credit Agreement provides an unsecured credit facility with a letter of
credit sublimit of $10,000. Proceeds of borrowings under the Credit Agreement may be used to refinance existing debt, for
working capital, and for general corporate purposes. The Credit Agreement has a maturity date of June 1, 2021.
The Credit Agreement contains customary representations, warranties and events of default, as well as certain restrictive
covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments,
restricted payments, asset sales, and fundamental changes. The Credit Agreement also includes certain financial covenants that
require the Company to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio.
On June 1, 2016, SJW Group and SJW Land Company (collectively, the “Borrowers”), entered into a $15,000 credit agreement
with the Lender (the “SJW Group Credit Agreement”), which provides an unsecured credit facility to the Borrowers with a
letter of credit sublimit of $5,000. The SJW Group Credit Agreement matures on June 1, 2021. Borrowings under the SJW
Group Credit Agreement bear interest under the same terms and conditions as those in the Credit Agreement.
In addition, on June 1, 2016, SJW Group, as guarantor, and SJWTX, Inc. (the “Borrower”), entered into a $5,000 credit
agreement with the Lender (the “SJWTX Credit Agreement”), which provides an unsecured credit facility to the Borrower with
a letter of credit sublimit of $1,000. The SJWTX Credit Agreement matures on June 1, 2021.
As of December 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 December 31, 2018, SJW Group and its subsidiaries had available unused short-term
42
bank lines of credit of $45,000. 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 2.9% as of December 31, 2018. The SJW Group and
SJWTX, Inc. unsecured bank line of credit has 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
December 31, 2018, SJW Group and SJWTX, Inc. were in compliance with all covenants. San Jose Water Company’s
unsecured bank lines of credit have 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 December 31, 2018, San Jose Water Company was in compliance with all covenants.
On November 28, 2018, SJW Group entered into an underwriting agreement with J.P. Morgan Securities LLC, Barclays Capital
Inc., RBC Capital Markets, LLC and UBS Securities LLC, as representatives of the several underwriters (the “Underwriters”),
pursuant to which SJW Group sold to the Underwriters an aggregate of 6,750,000 shares of SJW Group’s common stock, par
value $0.001 per share (the “Firm Shares”), in an underwritten public offering. Pursuant to the underwriting agreement, SJW
Group granted the Underwriters a 30-day option to purchase up to an additional 1,012,500 shares of its common stock (the
“Option Shares”), which was exercised in full on December 3, 2018. The offering of the Firm Shares closed on December 3,
2018 and the offering of the Option Shares closed on December 5, 2018.
SJW Group received net proceeds of approximately $358,256 from the sale of the Firm Shares and received additional net
proceeds of approximately $53,738 from the sale of the Option Shares, in each case after deducting the underwriting discounts
and commissions and estimated offering expenses payable by SJW Group. SJW intends to use the net proceeds from the
offering, together with the net proceeds from new debt financing in 2019, to finance the Merger and to pay related fees and
expenses. Pending such use, we may invest the net offering proceeds in investment-grade securities, money-market funds, bank
deposit accounts or similar short-term investments. To date, the company has invested the net proceeds temporarily in a short-
term money market fund. These investments may not yield a favorable return to our investors. If for any reason the Merger
does not close, then SJW Group intends to use the proceeds from the offering for general corporate purposes, which may
include acquisitions, share repurchases or debt repayment. SJW Group does not have any obligation to repurchase any or all of
its shares of common stock sold in the offering even if the Merger is not completed.
SJW Group has received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank
PLC, Royal Bank of Canada and UBS AG, Stamford Branch to provide a senior unsecured bridge loan facility of up to $975
million in the event that SJW Group is unable to secure other financing for the Merger at or prior to the time the Merger is
completed. Upon completion of our December 2018 issuance of common stock, the facility commitment was reduced to $563
million. The financing commitments include customary conditions to funding. As of December 31, 2018, the merger was not
completed and no amount has been extended under the facility.
Off-Balance Sheet Arrangement/Contractual Obligations
SJW Group has no significant contractual obligations not fully recorded on its Consolidated Balance Sheet or not fully
disclosed in the Notes to Consolidated Financial Statements.
SJW Group’s contractual obligations and commitments as of December 31, 2018 are as follows:
Total
Less than
1 Year
Senior notes, Water Utility Services................................... $ 265,000
Advances for construction, San Jose Water Company (1) .
65,335
California Pollution Control Financing Authority
Revenue Bonds, San Jose Water Company........................
120,000
Senior note, SJW Group.....................................................
50,000
Total contractual cash obligation........................................ $ 500,335
Total interest on contractual obligations ............................ $ 382,547
—
2,818
—
—
2,818
25,485
Contractual Obligations Due in
1-3
Years
10,000
5,636
—
50,000
65,636
48,779
3-5
Years
20,000
5,624
—
—
25,624
42,155
After
5 Years
235,000
51,257
120,000
—
406,257
266,128
___________________________________
(1) As of December 31, 2018, advances for construction was $80,610 of which $15,275 was related to non-refundable advances for construction.
In regards to uncertain tax positions, we are unable to predict the timing of tax settlements as tax audits can involve complex
issues and the resolution of those issues may span multiple years, particularly if subject to negotiation or litigation. For further
discussion on uncertain tax positions, please see Note 5 of “Notes to Consolidated Financial Statements.”
43
San Jose Water Company purchases water from SCVWD under terms of a master contract expiring in 2051. Delivery
schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms
of the master contract with SCVWD. For the years ended December 31, 2018, 2017 and 2016, San Jose Water Company
purchased from SCVWD 19,477 million gallons ($80,243), 20,172 million gallons ($76,106) and 18,241 million gallons
($61,645), respectively, of contract water. In accordance with the reduction of treated water deliveries approved by the SCVWD
Board of Directors on June 13, 2017, the contractual delivery schedule was reduced by 10% through June 30, 2018. On June
13, 2017, SCVWD Board of Directors approved treated water deliveries reflecting the contractual delivery schedule reduced by
10% through June 30, 2019. Based on current prices and estimated deliveries, San Jose Water Company is committed to
purchase from SCVWD a minimum of 90% of the reduced delivery schedule, or 19,775 million gallons ($84,296) of water at
the current contract water rate of $4.3 per million gallons in the year ending December 31, 2019. Additionally, San Jose Water
Company purchases non-contract water from SCVWD on an “as needed” basis if the water supply is available. The contract
water rates for San Jose Water Company are determined by SCVWD. These rates are adjusted periodically and coincide with
SCVWD’s fiscal year, which ends on June 30. The contract water rate for SCVWD’s fiscal years 2018, 2017 and 2016 was
$4.3, $3.9 and $3.6 per million gallons, respectively.
San Jose Water Company also pumps water from the local groundwater basin. There are no delivery schedules or contractual
obligations associated with the purchase of groundwater. SCVWD determines the groundwater extraction charge and it is
applied on a per unit basis. In addition to the SCVWD groundwater extraction charge, San Jose Water Company also incurs
power costs to pump the groundwater from the basin.
San Jose Water Company sponsors a noncontributory defined benefit pension plan and provides health care and life insurance
benefits for retired employees. In 2018, San Jose Water Company contributed $8,502 and $629 to the pension plan and other
postretirement benefit plan, respectively. In 2019, San Jose Water Company expects to make required and discretionary cash
contributions of up to $8,411 to the pension plan and other postretirement benefit plan. The amount of required contributions
for years thereafter is not actuarially determinable.
San Jose Water Company’s other benefit obligations include employees’ and directors’ postretirement benefits, an Executive
Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan, Special Deferral Election Plan and
Deferral Election Program for non-employee directors. Under these benefit plans, San Jose Water Company is committed to
pay approximately $1,596 annually to former officers and directors. Future payments may fluctuate depending on the life span
of the retirees and as current officers and executives retire.
CLWSC has long-term contracts with the GBRA. The agreements expire in 2037, 2040, 2044 and 2050. The agreements,
which are take-or-pay contracts, provide CLWSC with 6,900 acre-feet per year of water supply from Canyon Lake. The water
rate may be adjusted by GBRA at any time, provided GBRA gives CLWSC a 60-day written notice on the proposed adjustment.
In 2018, CLWSC acquired raw water supply agreements with the LCRA and WTPUA expiring in 2053 and 2046, respectively,
for 250 acre-feet of water per each agreement per year from Lake Austin and the Colorado River, respectively, at prices that
may be adjusted periodically by the agencies.
444 West Santa Clara Street, L.P.
SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P., a real estate limited
partnership. A real estate development firm owns the remaining 30% limited partnership interest. A commercial building was
constructed on the property of 444 West Santa Clara Street, L.P. and was leased to an international real estate firm. SJW Land
Company consolidates its limited partnership interest in 444 West Santa Clara Street, L.P. as a variable interest entity within the
scope of ASC Topic 810. On January 10, 2017, 444 West Santa Clara Street, L.P. entered into a purchase and sale agreement
for the sale of all of its interests in the commercial building and land the partnership owns and operates for a purchase price of
$11,000. The sales transaction closed on April 6, 2017 and SJW Land Company and the noncontrolling interest recognized a
pre-tax gain on sale of real estate investments of $4,427 and $1,896, respectively.
Impact of Recent Accounting Pronouncements
In February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842),” as amended, which
supersedes the lease requirements in “Leases (Topic 840).” This ASU generally requires lessees to recognize operating and
financing lease liabilities and corresponding right-of-use assets on the Consolidated Balance Sheets and to provide enhanced
disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. ASU 2016-02
also makes some changes to lessor accounting and aligns with the new revenue recognition guidance. We will adopt the new
standard effective January 1, 2019 on a modified retrospective basis and will not restate comparative periods. We will also
elect the package of practical expedients permitted under the transition guidance and combine lease and non-lease components.
In addition, we will keep leases with an initial term of 12 months or less off the Consolidated Balance Sheets and recognize the
44
associated lease payments in the Consolidated Statements of Comprehensive Income on a straight-line basis over the lease
term. We do not expect the new standard to have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General
(Subtopic 715-20: Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which aims to
improve the overall usefulness of disclosure to financial statement users and reduce unnecessary costs to companies when
preparing defined benefit plan disclosures. This update is effective for SJW Group beginning in the first quarter of the fiscal
year ending December 31, 2021. Retrospective adoption is required and early adoption is permitted. Management is currently
evaluating the effect that the new standard will have on disclosures.
Item 7A.
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 the Company’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, mortality rates of plan participants, investment returns on plan assets, and pension reform legislation.
SJW Group has no derivative financial instruments, financial instruments with significant off-balance sheet risks, or financial
instruments with concentrations of credit risk.
45
Item 8.
Financial Statements and Supplementary Data
Report of Independent Registered Public Accounting Firm
The Stockholders and Board of Directors
SJW Group:
Opinions on the Consolidated Financial Statements and Internal Control Over Financial Reporting
We have audited the accompanying consolidated balance sheets of SJW Group and subsidiaries (the Company) as of December 31, 2018 and
2017, and the related consolidated statements of comprehensive income, changes in stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31, 2018, and the related notes and financial statement schedule II (collectively, the consolidated
financial statements). We also have audited SJW Group’s internal control over financial reporting as of December 31, 2018, based on criteria
established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company
as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the three-year period ended
December 31, 2017, in conformity with U.S. generally accepted accounting principles. Also in our opinion, SJW Group maintained, in all
material respects, effective internal control over financial reporting as of December 31, 2018, based on criteria established in Internal Control -
Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Basis for Opinions
The Company’s management is responsible for these consolidated financial statements and for maintaining effective internal control over financial
reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s
Report on Internal Control over Financial Reporting appearing in Item 9A. Our responsibility is to express an opinion on the Company’s
consolidated financial statements, and an opinion on SJW Group’s internal control over financial reporting based on our audits. We are a public
accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and
Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and
whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated
financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining,
on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated
financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control
based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in
reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance
that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition
of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or
that the degree of compliance with the policies or procedures may deteriorate.
We have served as the Company’s auditor since 1933.
/s/ KPMG LLP
San Francisco, California
February 27, 2019
46
SJW Group and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share data)
December 31,
2018
2017
Assets
Utility plant:
Land ...................................................................................................................................... $
Depreciable plant and equipment .........................................................................................
Construction in progress .......................................................................................................
Intangible assets....................................................................................................................
Less accumulated depreciation and amortization .................................................................
Real estate investments .........................................................................................................
Less accumulated depreciation and amortization ...................................................................
Current assets:
Cash and cash equivalents:
Cash..................................................................................................................................
Money market fund..........................................................................................................
Accounts receivable:
Customers, net of allowances for uncollectible accounts of $272 and $190 in 2018
and 2017, respectively .....................................................................................................
Income tax........................................................................................................................
Other ................................................................................................................................
Accrued unbilled utility revenue ..........................................................................................
Current regulatory assets, net ...............................................................................................
Other current assets...............................................................................................................
Other assets:
Investment in California Water Service Group.....................................................................
Net regulatory assets, less current portion............................................................................
Other .....................................................................................................................................
18,296
1,833,051
68,765
15,799
1,935,911
607,090
1,328,821
56,336
12,327
44,009
8,722
412,000
19,154
1,888
1,203
27,974
26,910
4,871
502,722
—
76,715
4,122
80,837
$
1,956,389
17,831
1,714,228
45,851
14,413
1,792,323
553,059
1,239,264
56,213
11,132
45,081
7,799
—
17,305
7,981
1,118
27,905
—
4,750
66,858
4,535
99,554
2,709
106,798
1,458,001
See Accompanying Notes to Consolidated Financial Statements.
47
SJW Group and Subsidiaries
CONSOLIDATED BALANCE SHEETS (Continued)
(in thousands, except share and per share data)
Capitalization and Liabilities
Capitalization:
Stockholders’ equity:
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and
outstanding 28,404,316 shares in 2018 and 20,520,856 shares in 2017 ......................... $
Additional paid-in capital ................................................................................................
Retained earnings ............................................................................................................
Accumulated other comprehensive income.....................................................................
Total stockholders’ equity ....................................................................................................
Long-term debt, less current portion ....................................................................................
Current liabilities:
Lines of credit.......................................................................................................................
Accrued groundwater extraction charges, purchased water and power ...............................
Accounts payable .................................................................................................................
Accrued interest....................................................................................................................
Accrued property taxes and other non-income taxes ...........................................................
Accrued payroll ....................................................................................................................
Other current liabilities.........................................................................................................
Deferred income taxes ..........................................................................................................
Advances for construction ...................................................................................................
Contributions in aid of construction ...................................................................................
Postretirement benefit plans ................................................................................................
Regulatory liability ...............................................................................................................
Other noncurrent liabilities .................................................................................................
Commitments and contingencies.........................................................................................
December 31,
2018
2017
28
495,366
393,918
—
889,312
431,424
1,320,736
100,000
13,694
24,937
7,132
1,926
7,181
9,115
163,985
79,651
80,610
168,243
70,490
59,149
13,525
21
84,866
376,119
2,203
463,209
431,092
894,301
25,000
14,382
22,960
6,869
1,904
6,011
7,926
85,052
85,795
83,695
160,830
72,841
62,476
13,011
—
1,956,389
$
—
1,458,001
See Accompanying Notes to Consolidated Financial Statements.
48
SJW Group and Subsidiaries
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31 (in thousands, except share and per share data)
Operating revenue ................................................................................... $
Operating expense:
Production Expenses:
2018
2017
2016
397,699
389,225
339,706
Purchased water..................................................................................
Power..................................................................................................
Groundwater extraction charges.........................................................
Other production expenses .................................................................
97,378
6,180
46,770
18,398
86,456
7,295
47,817
16,571
72,971
6,102
32,088
14,470
Total production expenses.......................................................................
168,726
158,139
125,631
Administrative and general .....................................................................
Maintenance ............................................................................................
Property taxes and other non-income taxes ............................................
Depreciation and amortization ................................................................
Merger related expenses..........................................................................
Total operating expense ...................................................................
Operating income ....................................................................................
Other (expense) income:
Interest on long-term debt, mortgage and other interest expense ...........
Pension non-service cost .........................................................................
Unrealized loss on California Water Service Group stock......................
Gain on sale of California Water Service Group stock ...........................
Gain on sale of equity interests in Texas Water Alliance Limited and
utility property.........................................................................................
Gain on sale of real estate investments ...................................................
Other, net.................................................................................................
Income before income taxes ...................................................................
Provision for income taxes......................................................................
Net income before noncontrolling interest .....................................
Less net income attributable to the noncontrolling interest
SJW Group net income
Other comprehensive income:
48,933
18,414
14,975
54,601
18,610
324,259
73,440
(24,332)
(2,356)
(527)
104
9
—
2,494
48,832
10,065
38,767
—
$
38,767
Unrealized income on investment, net of taxes of $466 in 2017 and
$657 in 2016............................................................................................
Reclassification adjustment for gain realized on investment, net of
taxes of $1,198 in 2016 ...........................................................................
—
—
48,940
18,361
13,642
48,292
—
287,374
101,851
(22,929)
(3,772)
—
—
12,499
6,903
1,941
96,493
35,393
61,100
1,896
59,204
679
—
SJW Group comprehensive income ........................................... $
38,767
59,883
SJW Group earnings per share
—Basic.................................................................................................... $
—Diluted................................................................................................. $
1.83
1.82
2.89
2.86
Weighted average shares outstanding
41,529
18,361
12,123
44,625
—
242,269
97,437
(21,838)
(4,321)
—
3,197
—
10,419
1,487
86,381
33,542
52,839
—
52,839
955
(1,742)
52,052
2.59
2.57
—Basic....................................................................................................
—Diluted.................................................................................................
21,214,277
21,332,387
20,506,960
20,685,118
20,439,957
20,588,973
See Accompanying Notes to Consolidated Financial Statements.
49
SJW Group and Subsidiaries
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands, except share and per share data)
Common Stock
Number of
Shares
Amount
Balances, December 31, 2015 ...............
20,381,949
Net income ...........................................
Unrealized income on investment, net
of tax effect of $657 .............................
Reclassification adjustment for gain
realized on investment, net of tax
effect of $1,198 ....................................
Share-based compensation...................
Issuance of restricted and deferred
stock units ............................................
Employee stock purchase plan.............
Dividends paid ($0.81 per share) .........
—
—
—
—
44,062
30,214
—
Balances, December 31, 2016 ...............
20,456,225
Net income ...........................................
Distribution to noncontrolling interest.
Unrealized income on investment, net
of tax effect of $466 .............................
Share-based compensation...................
Issuance of restricted and deferred
stock units ............................................
Employee stock purchase plan.............
Dividends paid ($1.04 per share) .........
—
—
—
—
36,888
27,743
—
Balances, December 31, 2017 ...............
20,520,856
Net income ...........................................
Cumulative effect of change in
accounting principle, net of tax effect
of $1,507 .............................................
Share-based compensation...................
Issuance of restricted and deferred
stock units ............................................
Employee stock purchase plan.............
—
—
—
95,053
25,907
Common stock issued ..........................
7,762,500
Dividends paid ($1.12 per share) .........
—
Balances, December 31, 2018 ...............
28,404,316
21
—
—
—
—
—
—
—
21
—
—
—
—
—
—
—
21
—
—
—
—
—
7
—
28
Additional
Paid-in
Capital
79,231
—
—
—
1,691
(161)
954
—
81,715
—
—
—
Retained
Earnings
302,220
52,839
—
—
(114)
—
—
(16,559)
338,386
59,204
—
—
2,643
(139)
(707)
1,215
—
—
—
(21,332)
84,866
—
—
2,117
(4,057)
1,371
411,069
—
495,366
376,119
38,767
2,203
(97)
—
—
—
(23,074)
393,918
Accumulated
Other
Comprehensive
Income
Noncontrolling
Interest
Total
Stockholders’
Equity
2,311
—
955
(1,742)
—
—
—
—
1,524
—
—
679
—
—
—
—
2,203
—
(2,203)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
1,896
(1,896)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
383,783
52,839
955
(1,742)
1,577
(161)
954
(16,559)
421,646
61,100
(1,896)
679
2,504
(707)
1,215
(21,332)
463,209
38,767
—
2,020
(4,057)
1,371
411,076
(23,074)
889,312
See Accompanying Notes to Consolidated Financial Statements.
50
SJW Group and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31 (in thousands)
2018
2017
2016
Operating activities:
Net income before noncontrolling interest .......................................................................... $
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization ......................................................................................
Deferred income taxes...................................................................................................
Share-based compensation ............................................................................................
Unrealized loss on California Water Service Group stock............................................
Gain on sale of California Water Service Group stock .................................................
Gain on sale of real estate investments .........................................................................
Gain on sale of Texas Water Alliance Limited and utility property ..............................
Changes in operating assets and liabilities:
Accounts receivable and accrued unbilled utility revenue ............................................
Accounts payable and other current liabilities ..............................................................
Accrued groundwater extraction charges, purchased water and power ........................
Tax receivable and accrued taxes ..................................................................................
Postretirement benefits ..................................................................................................
Regulatory asset related to balancing and memorandum accounts ...............................
Other noncurrent assets and noncurrent liabilities ........................................................
Other changes, net .........................................................................................................
Net cash provided by operating activities ..........................................................................
Investing activities:
Additions to utility plant:
Company-funded ...........................................................................................................
Contributions in aid of construction..............................................................................
Additions to real estate investment .....................................................................................
Payments for business/asset acquisition and water rights ...................................................
Cost to retire utility plant, net of salvage ............................................................................
Proceeds from sale of California Water Service Group stock
Proceeds from sale of Texas Water Alliance Limited and utility property
Proceeds from sale of real estate investments .....................................................................
Net cash used in investing activities....................................................................................
Financing activities:
Borrowings from lines of credit ..........................................................................................
Repayments of lines of credit..............................................................................................
Long-term borrowings.........................................................................................................
Long-term borrowings held as restricted cash ....................................................................
Repayments of long-term borrowings.................................................................................
Dividends paid.....................................................................................................................
Receipts of advances and contributions in aid of construction ...........................................
Refunds of advances for construction .................................................................................
Issuance of common stock, net of issuance costs................................................................
Other changes, net ...............................................................................................................
Net cash provided by (used in) financing activities ...........................................................
Net change in cash, cash equivalents and restricted cash.................................................
Cash and cash equivalents, beginning of year ...................................................................
Cash, cash equivalents and restricted cash, end of year ................................................... $
Cash paid during the year for:
Interest ................................................................................................................................. $
Income taxes........................................................................................................................ $
Supplemental disclosure of non-cash activities:
Increase in accrued payables for construction costs capitalized ......................................... $
Utility property installed by developers .............................................................................. $
Reconciliation to Consolidated Balance Sheets: ................................................................
Cash and cash equivalents................................................................................................... $
Restricted cash..................................................................................................................... $
Cash, cash equivalents and restricted cash, end of year ................................................... $
38,767
56,907
(9,486)
2,117
527
(104)
—
—
(2,003)
2,130
(688)
5,841
203
(6,488)
1,923
1,697
91,343
(135,973)
(8,454)
(123)
(2,496)
(3,909)
4,112
—
—
(146,843)
76,000
(1,000)
—
—
—
(23,074)
10,890
(2,700)
411,385
(3,078)
468,423
412,923
7,799
420,722
27,038
13,750
340
1,747
420,722
—
420,722
See Accompanying Notes to Consolidated Financial Statements.
51
61,100
52,839
50,501
(436)
2,643
—
—
(6,903)
(12,499)
(1,702)
2,888
3,536
2,164
(769)
(979)
741
827
101,112
(141,213)
(7,842)
(116)
(1,149)
(3,356)
—
28,623
11,179
(113,874)
56,500
(45,700)
—
—
(2,717)
(21,332)
12,581
(2,622)
—
(1,499)
(4,789)
(17,551)
25,350
7,799
25,254
34,052
2,700
3,723
7,799
—
7,799
46,295
4,803
1,691
—
(3,197)
(10,419)
—
(5,377)
(337)
3,683
(680)
(349)
19,297
5,468
854
114,571
(129,134)
(13,086)
(328)
(1,070)
(3,361)
4,509
—
20,341
(122,129)
62,075
(82,475)
50,999
19,001
(16,599)
(16,559)
14,366
(2,522)
—
(617)
27,669
20,111
5,239
25,350
23,962
27,517
3,696
9,614
6,349
19,001
25,350
SJW GROUP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years ended December 31, 2018, 2017 and 2016
(Dollars in thousands, except share and per share data)
Note 1.
Summary of Significant Accounting Policies
The accompanying consolidated financial statements include the accounts of SJW Group, its wholly owned subsidiaries, and
two variable interest entities in which two SJW Group subsidiaries are the primary beneficiaries. All intercompany transactions
and balances have been eliminated in consolidation.
SJW Group’s principal subsidiary, San Jose Water Company, is a regulated California water utility providing water service to
approximately one million people in the greater metropolitan San Jose area. San Jose Water Company’s accounting policies
comply with the applicable uniform system of accounts prescribed by the California Public Utilities Commission (“CPUC”)
and conform to generally accepted accounting principles for rate-regulated public utilities. Approximately 91% of San Jose
Water Company’s revenues are derived from the sale of water to residential and business customers.
SJWTX, Inc., a wholly owned subsidiary of SJW Group, is incorporated in the State of Texas and is doing business as Canyon
Lake Water Service Company (“CLWSC”). CLWSC is a public utility in the business of providing water service to
approximately 49,000 people. CLWSC’s service area comprises more than 246 square miles in the southern region of the Texas
Hill Country in Blanco, Comal, Hays and Travis counties, the growing region between San Antonio and Austin, Texas.
SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation. Acequia has been determined to be a variable interest
entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been
consolidated with SJWTX, Inc.
SJW Land Company owns a commercial property, an undeveloped real estate property, and a warehouse property in the state of
Tennessee. In September 1999, SJW Land Company contributed real property for a 70% limited partnership interest in 444
West Santa Clara Street, L.P. A commercial building was constructed on the partnership property and was leased to an
unrelated international real estate firm under a long-term lease. 444 West Santa Clara Street, L.P. has been determined to be a
variable interest entity within the scope of ASC Topic 810 with SJW Land Company as the primary beneficiary. As a result,
444 West Santa Clara Street L.P. has been consolidated with SJW Land Company. The consolidated financial statements of
SJW Group at December 31, 2018 and 2017 include the operating results of 444 West Santa Clara Street, L.P. Intercompany
balances and transactions have been eliminated. Results of operations and balances of the non-controlling interest are not
material to the consolidated financial statements (see Note 1, “Real Estate Investments”).
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”). See Note 12
for a discussion of the SJW Group and CTWS Merger Agreement.
Texas Water Alliance Limited (“TWA”), formerly a wholly owned subsidiary of SJW Group, was undertaking activities that
were necessary to develop a water supply project in Texas. On February 22, 2016, SJW Group entered into a Purchase and Sale
Agreement with the Guadalupe-Blanco River Authority (“GBRA”) pursuant to which SJW Group agreed to sell all of its equity
interests in TWA to GBRA for $31,000 in cash. The sales transaction closed on November 16, 2017. As provided in the sale
agreement, GBRA held back $3,000 (“Holdback Amount“) from the payment of the purchase price at the closing, which
amount will be paid to SJW Group on June 30, 2021, subject to reduction under certain conditions. The transaction resulted in
a pre-tax gain on sale of utility property of $12,501, excluding the Holdback Amount.
Recently Adopted Accounting Principles
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”)
2014-09, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which
the entity expects to be entitled in exchange for those goods or services. The new standard replaced most existing revenue
recognition guidance in generally accepted accounting principles. The updated guidance also requires additional disclosures
regarding the nature, timing and uncertainty of revenue transactions. SJW Group adopted the new revenue standard on January
1, 2018, using the modified retrospective method, and determined that no adjustment to the opening balance of retained
earnings was necessary for contracts with remaining obligations as of the effective date. In addition, SJW Group applied the
“right to invoice” practical expedient. The adoption of the new standard requires certain changes to the recognition of
balancing and memorandum account revenue and related costs (See Note 1, “Balancing and Memorandum Accounts”).
However, the changes did not have a material impact on our consolidated results of operations, financial position, or cash
flows. Concurrently, the company implemented ASU 2017-10, “Identifying the Customer in a Service Concession
Arrangement.” Upon adoption of ASU 2017-10, the service concession fee paid to the City of Cupertino was determined to be
52
an up-front payment and accordingly will be amortized as a reduction to future revenue as opposed to amortized as an expense
on SJW Group’s Consolidated Statements of Comprehensive Income.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall” which changes the recognition of changes
in fair value of financial liabilities when the fair value option is elected. In addition, the standard requires equity investments to
be measured at fair value with changes in fair value recognized in net income instead of through other comprehensive income.
The updated guidance affected the accounting for the company’s equity investment in California Water Service Group stock
classified as an available-for-sale security. The new standard became effective for SJW Group beginning in the first quarter of
the fiscal year ending December 31, 2018. Prior to adoption of ASU 2016-01, SJW Group recognized changes in fair value of
its equity investment in California Water Service Group stock through other comprehensive income or loss on the statement of
comprehensive income. Upon adoption on January 1, 2018, SJW Group began recording the change in fair value of its equity
investment in other income and expense. In addition, the ASU stated that entities should apply the new standard by means of a
cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. As such, SJW Group
recorded a cumulative-effect adjustment of $2,203 to beginning retained earnings to eliminate the cumulative change in fair
value of its equity investment, net of tax from accumulated other comprehensive income. Subsequent to the adoption of ASU
2016-01, SJW Group sold its investment in California Water Service Group stock. See below in Note 1, “Investment in
California Water Service Group” for further discussion.
In October 2016, the FASB issued ASU 2016-16, “Intra-Entity Transfers of Assets Other Than Inventory,” which modifies
existing guidance and is intended to reduce diversity in practice with respect to accounting for the income tax consequences of
intra-entity transfers of assets. The ASU requires that the current and deferred income tax consequences of intra-entity transfers
of assets be immediately recognized. Prior guidance allowed the entities to defer the consolidated tax consequences of an
intercompany transfer of an asset other than inventory to a future period and amortize those tax consequences over time. SJW
Group adopted ASU 2016-16 effective January 1, 2018. Upon adoption of ASU 2016-16, SJW Group did not record an
unamortized tax expense. As a result, the company did not record a cumulative catch-up adjustments upon adoption of this
ASU.
In March 2017, the FASB issued ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and Net Periodic
Postretirement Benefit Costs,” which requires employers to present the service cost component of the net periodic benefit cost
in the same income statement line item as other employee compensation costs arising from services rendered during the period.
The standard provides that only the service cost component of net periodic pension costs is eligible for asset capitalization.
Companies should present the other components of net periodic benefit costs separately from the line items that include the
service cost and outside of any subtotal of operating income, if one is presented. ASU 2017-07 requires retrospective
presentation in the income statement of the service cost component and the other components of net periodic cost and net
periodic postretirement benefit cost and prospective presentation from date of adoption for the capitalization in assets of only
the service cost component of net periodic cost and net periodic postretirement benefit cost. SJW Group adopted ASU 2017-07
effective January 1, 2018. As such, the consolidated statements of comprehensive income for the periods presented have been
reclassified to reflect the retrospective changes. See Note 9, “Benefit Plans” for further discussion.
Use of Estimates
The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Utility Plant
The cost of additions, replacements and betterments to utility plant is capitalized. The amount of interest capitalized in 2018,
2017 and 2016 was $2,856, $2,807 and $2,188, respectively. Construction in progress was $68,765 and $45,851 at
December 31, 2018 and 2017, respectively.
The major components of depreciable plant and equipment as of December 31, 2018 and 2017 are as follows:
Equipment ............................................................................................................................... $
Transmission and distribution .................................................................................................
Office buildings and other structures ......................................................................................
2018
335,358
1,375,821
121,872
Total depreciable plant and equipment ................................................................................. $
1,833,051
2017
307,938
1,295,690
110,600
1,714,228
53
Depreciation is computed using the straight-line method over the estimated remaining service lives of groups of assets, ranging
from 5 to 75 years. The estimated service lives of depreciable plant and equipment are as follows:
Equipment.............................................................................................................................................................
Transmission and distribution plant......................................................................................................................
Office buildings and other structures....................................................................................................................
Useful Lives
5 to 35 years
35 to 75 years
7 to 50 years
For the years 2018, 2017 and 2016, depreciation expense as a percent of the beginning of the year balance of depreciable plant
was approximately 3.6%, 3.6% and 3.5%, respectively. A portion of depreciation expense was allocated to administrative and
general expense. For the years 2018, 2017 and 2016, the amounts allocated to administrative and general expense were $2,306,
$2,209 and $1,670, respectively. Depreciation expense for utility plant for the years ended December 31, 2018, 2017 and 2016
was $53,031, $46,456 and $42,659, respectively. The cost of utility plant retired, including retirement costs (less salvage), is
charged to accumulated depreciation and no gain or loss is recognized.
Utility Plant Intangible Assets
All intangible assets are recorded at cost and are amortized using the straight-line method over the estimated useful life of the
asset, ranging from 5 to 70 years (see Note 6, “Intangible Assets”).
Real Estate Investments
Real estate investments are recorded at cost and consist primarily of land and buildings. Net gains and losses from the sale of
real estate investments are recorded as a component of other (expense) income in the Consolidated Statements of
Comprehensive Income. Nonutility property in Water Utility Services is also classified in real estate investments and not
separately disclosed on the balance sheet based on the immateriality of the amount. Nonutility property is property that is
neither used nor useful in providing water utility services to customers and is excluded from the rate base for rate-setting
purposes. San Jose Water Company recognizes gain/loss on disposition of nonutility property in accordance with CPUC Code
Section 790, whereby the net proceeds are reinvested back into property that is useful in providing water utility services to
customers. There is no depreciation associated with nonutility property as it is all land. The major components of real estate
investments as of December 31, 2018 and 2017 are as follows:
Land ........................................................................................................................................ $
Buildings and improvements ..................................................................................................
Total real estate investment.............................................................................................. $
2018
2017
13,262
43,074
56,336
13,262
42,951
56,213
Depreciation on buildings and improvements for real estate investments is computed using the straight-line method over the
estimated useful lives of the assets, ranging from 7 to 39 years.
On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interests in the commercial building and land the partnership
owned and operated for $11,000. 444 West Santa Clara Street, L.P. recognized a pre-tax gain on sale of real estate investments
of $6,323, after selling expenses of $1,157. SJW Land Company holds a 70% limited interest in 444 West Santa Clara Street,
L.P. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on sale of real estate investments
of $4,427 and $1,896, respectively, on the transaction. In addition, SJW Land Company sold undeveloped land located in San
Jose, California for $1,350 on April 6, 2017. SJW Land Company recognized a pre-tax gain on sale of real estate investments
of $580 on the transaction, after selling expenses of $14.
In 2015, SJW Land Company was notified by the Arizona Department of Transportation that in order to achieve their goals of
developing a new freeway extension, they, in conjunction with the Federal Highway Commission, would be exercising their
powers of eminent domain for SJW Land Company’s warehouse building located in Phoenix, Arizona. On September 8, 2016,
SJW Land Company sold the Arizona warehouse building and received a settlement value of $20,000. Title to the property
transferred on October 13, 2016 upon the recording of the court’s Final Order of Condemnation. SJW Group recognized a pre-
tax gain on sale of real estate investments in the fourth quarter of 2016 of $9,981, after selling expenses of $112.
54
Real estate investments include $56,090 and $55,966 as of December 31, 2018 and 2017, respectively, of assets that are leased
or available for lease. The following schedule shows the future minimum rental payments to be received from third parties
under operating leases that have remaining noncancelable lease terms in excess of one year as of December 31, 2018:
Year ending December 31:
2019 ...................................................................................................................................................................... $
2020 ......................................................................................................................................................................
2021 ......................................................................................................................................................................
2022 ......................................................................................................................................................................
2023 ......................................................................................................................................................................
Thereafter..............................................................................................................................................................
Rental Revenue
4,432
4,513
2,644
1,184
1,198
5,565
Impairment of Long-Lived Assets
In accordance with the requirements of FASB ASC Topic 360—“Property, Plant and Equipment,” the long-lived assets of
SJW Group are reviewed for impairment when changes in circumstances or events require adjustments to the carrying values of
the assets. When such changes in circumstances or events occur, the company assesses recoverability by determining whether
the carrying value of such assets will be recovered through the undiscounted expected future cash flows. To the extent an
impairment exists, the asset is written down to its estimated fair value with a corresponding charge to operations in the period in
which the impairment is identified. Long-lived assets consist primarily of utility plant in service, real estate investments,
intangible assets, and regulatory assets. In addition, the company tests unamortized intangible assets, which primarily relate to
water rights, at least annually or more frequently if events or changes in circumstances indicate that the asset may be impaired.
SJW Group first performs a qualitative assessment to determine whether it is necessary to perform the quantitative impairment
test. In assessing the qualitative factors, SJW Group considers the impact of these key factors: change in industry and
competitive environment, financial performance, and other relevant Company-specific events. If SJW Group determines that as
a result of the qualitative assessment it is more likely than not (> 50% likelihood) that the fair value is less than carrying
amount, then a quantitative test is performed. No impairments occurred during 2018, 2017 or 2016.
Cash and Cash Equivalents
Cash and cash equivalents primarily consist of cash on deposit with banks and investments in a money market fund with
maturities of three months or less from the date of purchase.
Financial Instruments
The following instruments are not measured at fair value on the company’s consolidated balance sheets but require disclosure
of fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such
instruments approximates their carrying value as reported on the 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. The fair
value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash
equivalents, which would be categorized as Level 1. The fair value of investment in California Water Service Group Stock is
discussed in Note 1, long-term debt in Note 4 and pension plan assets in Note 9.
Financial instruments that are potentially subject to concentration of credit risk is primarily cash and cash equivalents which
primarily consists of a short-term money market fund. The money market fund is managed by a reputable financial institution.
Investment in California Water Service Group
SJW Group’s investment in California Water Service Group was accounted for under FASB ASC Topic 320—“Investments—
Debt and Equity Securities,” as an available-for-sale marketable security. The investment was recorded on the Consolidated
Balance Sheet at its quoted market price with the change in unrealized gain or loss reported, net of tax, as a component of other
expense (income) with the adoption of ASU 2016-01 on January 1, 2018. Prior to adoption, the changes in unrealized gain or
loss, net of tax, were reported as a component of other comprehensive income.
As of December 31, 2018, SJW Group held no remaining shares of California Water Service Group.
During the year ended December 31, 2018, SJW Group sold 100,000 shares of California Water Service Group for $4,112
before fees of $9. SJW Group recognized a gain on the sale of the stock of approximately $104 and tax expense of
approximately $29 for a net gain of $75.
55
During the year ended December 31, 2016, SJW Group sold 159,151 shares of California Water Service Group for $4,510
before fees of $20. SJW Group recognized a gain on the sale of the stock of approximately $3,197 and tax expense of
approximately $1,303 for a net gain of $1,894. The unrealized holding gain associated with the shares sold in 2016 was
reclassified out of accumulated other comprehensive income was $1,742 and was based on the fair value of the stock as of the
date of the transaction.
As of December 31, 2018 and 2017, fair value of the SJW Group’s investment in California Water Service Group was $0 and
$4,535, respectively, and was categorized as Level 1 of the fair value hierarchy.
Regulatory Rate Filings
California Regulatory Affairs
San Jose Water Company’s rates, service and other matters affecting its business are subject to regulation by the CPUC.
Generally, there are three types of rate adjustments that affect San Jose Water Company’s revenue collection: general rate
adjustments, cost of capital adjustments, and offset rate adjustments. General rate adjustments are authorized in general rate
case decisions, which usually authorize an initial rate adjustment followed by two annual escalation adjustments. General rate
applications are normally filed and processed during the last year covered by the most recent general rate case as required by
the CPUC in order to avoid any gaps in regulatory decisions on general rate adjustments.
Cost of capital adjustments are rate adjustments resulting from the CPUC’s usual tri-annual establishment of a reasonable rate
of return for San Jose Water Company’s capital investments.
The purpose of an offset rate adjustment is to compensate utilities for changes in specific pre-authorized offsettable capital
investments or expenses, primarily for purchased water, groundwater extraction, purchased power and pensions. Pursuant to
Section 792.5 of the California Public Utilities Code, a balancing account must be maintained for each expense item for which
such revenue offsets have been authorized. Memorandum accounts 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 memorandum account for the
Tax Cuts and Jobs Act (H.R. 1) (the “Tax Act”). The purpose of a balancing and memorandum account is to track the under-
collection or over-collection associated with such expense changes.
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.
As required by the CPUC, on April 3, 2017, San Jose Water Company filed an application requesting authority to establish 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% effective January 1, 2018. 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 (“GRC”) with the CPUC
requesting authority for an increase of revenue of $34,288, or 9.76%, in 2019, $14,232, or 3.70%, in 2020 and $20,582, or
5.17%, in 2021. Among other things, the application also includes requests to recover $20,725 from balancing and
memorandum accounts, the establishment of a Water Revenue Adjustment Mechanism and Sales Reconciliation Mechanism
(“WRAM/SRM”), and a shift to greater revenue collection in the service charge. On June 28, 2018, the CPUC issued an order
in the case identifying the issues to be considered, including whether the proposed merger between SJW Group and
Connecticut Water Service, Inc. will have any ratemaking impact on the customers of San Jose Water Company (see discussion
on the proposed merger at Note 12). This consideration was subsequently removed from the GRC to be considered in an Order
Instituting Investigation (“OII”) on the proposed merger issued on July 20, 2018, see below for further discussion. On August
10, 2018, San Jose Water Company and the Office of Ratepayer Advocates filed a joint motion for partial settlement
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(“Settlement”) of the GRC with the CPUC, resolving all issues in the GRC with the exception of authorization of a WRAM/
SRM and the recovery of the balance in the Hydro Generation Research, Development and Demonstration Memorandum
Account, such issues being subsequently contested in legal briefs. On October 16, 2018 the CPUC issued a Proposed Decision
adopting the Settlement in part, without any impact on the proposed revenue requirement outlined in the Settlement, and
delaying ruling on the contested issues in order to allow the Settlement rates to become effective January 1, 2019. On
December 4, 2018, the CPUC issued Decision 18-11-025 authorizing new rates for 2019. Accordingly, San Jose Water
Company filed Advice Letter No. 528/528A on December 7, 2018 requesting authorization to increase revenue requirement by
$16,378 or 4.55% in 2019. This was approved on December 28, 2018 and new rates became effective January 1, 2019.
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 CPUC directed its Class A water utilities, including San Jose Water Company, to reflect the changes to the Internal
Revenue Code resulting from the passage of the Tax Act in customer rates. On May 8, 2018, the CPUC directed San Jose
Water Company to file an advice letter to implement a change in water rates to reflect the lower income tax rate provided by the
Tax Act, effective July 1, 2018. On May 23, 2018, San Jose Water Company filed Advice Letter No. 522 in compliance with
the CPUC’s directive. On June 7, 2018, San Jose Water Company filed Advice Letter No. 522A amending the rate change to
reflect a reduction in revenue requirement for 2018 of $14,801 or 3.89%, with no impact on after tax income. This request
became effective July 1, 2018.
On June 13, 2018, San Jose Water Company filed Advice Letter No. 523 with the CPUC requesting authorization to implement
surcharges to offset the increases to purchased potable water charges, the ground water extraction fee, and purchased recycled
water charges implemented by the Santa Clara Valley Water District (“SCVWD”) and South Bay Water Recycling effective
July 1, 2018. The increases amount to a revenue increase of $13,732 or 3.75%. This request became effective July 1, 2018.
San Jose Water Company filed Advice Letter No. 524 with the CPUC on July 26, 2018, requesting authorization to recover the
2017 capital additions related to the Montevina Water Treatment Plant Upgrade Project. The filing requested a revenue
increase of $3,155 or 0.83% and became effective August 25, 2018.
On July 20, 2018 the CPUC issued OII No. 18-07-007 concerning SJW Group’s merger with Connecticut Water Service, Inc.
In its filing, the CPUC committed to a schedule that would complete its investigation in a time frame to allow the proposed
merger to move forward by the end of 2018, if appropriate. At a required pre-hearing Conference on August 22, 2018, the
CPUC confirmed its commitment to the schedule and a Scoping Memorandum was subsequently issued on September 7, 2018,
which identified issues to be considered on whether the proposed merger is subject to CPUC approval and its likely impacts
within California. On September 14, 2018, SJW Group and San Jose Water Company submitted joint comments in response to
the issues identified above in accordance with the Scoping Memorandum’s adopted schedule, and reply comments were
submitted on October 19, 2018. A Public Participation Hearing was held on January 31, 2019, with a CPUC decision now
expected in the second quarter of 2019.
In January 2017, a San Jose Water Company customer inquired about the company’s billing practice as it related to the
proration of service charges in billing cycles where a rate change occurred. After reviewing its existing practice as well as
those of other Class A water utilities, San Jose Water Company determined that it was appropriate to modify its existing
practice to prorate service charges similar to the manner in which it prorates quantity charges - that is by applying both the old
and new rates to the portion of the billing cycle for which the rates were in effect. This change was implemented on January
30, 2017, and retroactively applied to January 1, 2017. Subsequently, on May 8, 2017, the CPUC’s Water Division notified San
Jose Water Company that it had violated Public Utilities Code 532 and other CPUC Orders and directed the company to file an
advice letter providing refunds for the period of January 1, 2014, through December 31, 2016. As directed, San Jose Water
Company filed Advice Letter 510 on June 6, 2017, to propose customer refunds in the amount of $1,794 for the same period.
On June 22, 2017, San Jose Water Company was served with Complaint 17-06-009 regarding its billing practice for service
charge rate changes. On August 11, 2017, the Water Division rejected Advice Letter 510 in light of the CPUC’s investigation
into San Jose Water Company’s past and present billing practice. The billing issue was made a part of San Jose Water
Company’s current GRC proceeding. Testimony was provided by the Office of Ratepayer Advocates (now the Public
Advocates Office or “Cal PA”) on May 23, 2018. On June 8, 2018, the company provided its rebuttal testimony. On August
10, 2018, San Jose Water Company and Cal PA submitted a partial settlement agreement on issues presented in the GRC. Both
the company and Cal PA settled on the billing issue limiting the duration from which to calculate customer refunds from June 1,
2011 through December 31, 2016. Accordingly, San Jose Water Company has provided an additional reserve to cover the
remaining period covered by the settlement. In accordance with Decision 18-11-025 for the GRC, San Jose Water Company
filed Advice Letter No. 530 proposing total refunds of $2,020 for the period from June 1, 2011 through December 31, 2016.
This advice letter became effective February 8, 2019.
57
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent.
The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate
service charges when increases occurred during a billing period, and whether the company double-billed service charges during
one billing period when allegedly switching from billing such charges in advance to billing in arrears. The OII resulted from a
report by the CPUC’s Consumer Protection and Enforcement Division (“CPED”), dated August 16, 2018, recommending an
investigation into San Jose Water Company’s billing practice. CPED calculated a refund obligation of approximately $2,061
for the years 2014 to 2016 that had been the subject of San Jose Water Company’s Advice Letter 510. CPED calculated a
further refund obligation of approximately $1,990 for the years 1987 to 2013. CPED also asserted that the company double-
billed its customers during a billing period when it allegedly converted from billing in advance to billing in arrears, assumed
that such double-billing occurred in January 2011, and calculated a refund obligation of approximately $4,935. The OII notes
these estimates and identifies the proper refund amount as an issue in the proceeding. The OII also identifies the CPUC’s
authority to consider imposing penalties on San Jose Water Company in amounts ranging from five hundred dollars to fifty
thousand dollars per offense, per day. San Jose Water Company continues to cooperate with the CPUC to resolve these issues.
On October 15, 2018, San Jose Water Company filed a response to the OII with the CPUC, in which the company stated that it
believes it would not be appropriate for the Commission to require refunds extending prior to June 2011, that no double billing
has occurred and that no penalties should be imposed on the company. The company believes it is only probable that refunds
agreed to in the partial settlement, $2,020, in the GRC will be refunded to customers and has provided for this amount in the
accompanying consolidated financial statements. A prehearing conference on the matter was concluded on January 7, 2019,
and a scoping memorandum outlining the remaining part of the proceeding scheduled was issued on February 11, 2019. The
scoping memorandum outlined the following issues to be determined: (1) Did San Jose Water Company overbill its customers
for water service during the period from January 1987 to June 2011, (2) If San Jose Water Company overbilled its customers
during the above period, should the Commission fine San Jose Water Company or impose some other form of penalty on it, and
(3) Is this action subject to any statute of limitations including, but not limited to, Section 736 of the Public Utilities Code? San
Jose Water Company is unable to determine an estimate at this time, if any. The CPUC is expected to issue a final decision in
the matter in September of 2019.
Texas Regulatory Affairs
CLWSC is subject to the economic regulation of the Public Utilities Commission of Texas (“PUCT”). The PUCT authorize rate
increases after the filing of an Application for a Rate/Tariff Change. Rate cases may be filed as they become necessary,
provided there is no current rate case outstanding. Further, rate cases may not be filed more frequently than once every 12
months.
As required, CLWSC submitted on July 31, 2018 its Water Pass-Through Charge (“WPC”) true-up report to the PUCT
reflecting a change from $1.15 to $1.13 per thousand gallons. The WPC is the annual filing to change that amount of CLWSC’s
water rates for changes in purchased water costs since the last annual true-up report. The change for 2018 became effective on
water bills being prepared as of February 1, 2018.
The PUCT directed CLWSC (as well as other Class A water utilities in Texas) to quantify all of the impacts of the passage of
the Tax Act and make rate adjustments reflecting such impacts on a prospective basis. PUCT Order 47945-36 as amended by
Order 47945-41 requires the water utilities to record a regulatory liability that reflects (1) the difference between the revenues
collected under existing rates and the revenues that would have been collected had the existing rates been set using the recently
approved federal income tax rates; and (2) the balance of excess accumulated deferred federal income taxes that now exists
because of the decrease in the federal income tax rate from 35% to 21%. A rate proposal reflecting these tax changes was
submitted for PUCT’s review on April 19, 2018.
CLWSC subsequently amended its filing on April 30, 2018 to update the customer notice, and to replace estimates for April
with recorded April 2018 information. This filing will return to the ratepayers the difference between the revenues collected
under the existing rates and what water rates would have been using the 21% federal income tax rate now effective under the
Tax Act. The accrued amounts for the period January 25, 2018 through April 30, 2018 were refunded along with the regular
monthly Federal Tax Cut Credit (“FTCC”) on bills prepared during the month of June. The FTCC customer credit will
continue to be reflected on customer bills every month until the implementation of new rates resulting from the next rate case.
This credit reduced water revenue by $927 in 2018 with no impact on after tax income.
CLWSC’s Sale Transfer and Merger application (“STM”) to acquire the Deer Creek Ranch Water Co., LLC’s assets was filed
with the PUCT on December 20, 2017. Notices to customers and surrounding water companies and municipalities were mailed
in January 2018 and on April 3, 2018 and the PUCT filed 47888-12, Order No. 4, approving the transaction between CLWSC
and the Deer Creek Ranch Water Co., LLC to proceed in closing. The acquisition subsequently closed on July 2, 2018. The
required completed transaction report was filed with the PUCT on July 5, 2018, and the Joint Proposed Notice of Approval was
filed with the PUCT on September 17, 2018. The final order transferring the Certificate of Convenience and Necessity, or the
58
exclusive right to provide water utility service, from Deer Creek Ranch Water Co., LLC to CLWSC was issued on November
29, 2018.
Balancing and Memorandum Accounts
For California, the CPUC has established a balancing account mechanism 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 memorandum account for the
Tax Act.
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.
Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $9,386 due to lost revenues
accumulated in the 2018 WCMA account for the year ended December 31, 2018. As of December 31, 2018, there was no
reserve recorded to offset the 2018 WCMA. The amounts have been reflected in the 2018 WCMA balance shown in the table
below.
San Jose Water Company recognized regulatory assets of $1,182 due to lost revenues accumulated in the 2017 WCMA account
which represented the relief of the prior year reserve of $1,169 and interest earned on the balance during the year ended
December 31, 2018. The prior year reserve represented the estimated amount that may not be collected within the 24-month
period defined in the guidance. These amounts have been recorded in the 2017 WCMA balance shown in the table below for
the year ended December 31, 2018. As of December 31, 2018, there was no reserve balance netted from the balance below.
A cost of capital memorandum account was approved by the CPUC on March 14, 2018. The account tracks the difference
between current water rates and the lower rates adopted in the cost of capital decision issued on March 22, 2018. San Jose
Water Company recorded a regulatory liability of $1,379 in the cost of capital memorandum account for the year ended
December 31, 2018 with a corresponding reduction to revenue. The amount has been reflected in the 2018 cost of capital
memorandum account balance shown in the table below.
The CPUC directed San Jose Water Company to establish a memorandum account to capture 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
ratepayers. The benefits associated with regulatory activities is expected to flow back to customers as directed by the CPUC,
with no impact to net income. Per Advice Letter 522A filed with the CPUC, the benefit of the reduction in the federal statutory
income tax rate from 35% to 21% were reflected in the customer bills effective July 1, 2018. As such, the tax memorandum
account only includes the benefit of the reduction in the federal statutory income tax rate through June 30, 2018. The other
impacts of the Tax Act were recorded in the tax memorandum account for the entire year. Accordingly, San Jose Water
Company recorded a regulatory liability of $6,504 in the tax memorandum account for the for the year ended December 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.
59
San Jose Water Company met the recognition requirements for certain of its balancing and memorandum accounts and certain
amounts subject to balancing and memorandum accounts and recorded revenue and regulatory assets as follows:
For the year ended December 31, 2018
Beginning
Balance
Regulatory
Asset
Increase
(Decrease)
Refunds
(Collections)
Adjustments
Surcharge
Offset and
Other
Ending
Balance
Revenue accounts:
2014 - 2016 WCMA..........................................................
2017 WCMA.....................................................................
2018 WCMA.....................................................................
2012 General Rate Case true-up .......................................
2015 General Rate Case true-up .......................................
Cost of capital memorandum accounts .............................
Tax memorandum account................................................
All others...........................................................................
Total revenue accounts......................................................... $
Cost-recovery accounts:
Water supply costs ............................................................
Pension..............................................................................
All others...........................................................................
Total cost-recovery accounts................................................ $
191
6,489
—
11,319
115
(144)
—
3,735
21,705
8,679
(2,459)
—
6,220
Total ..................................................................................... $
27,925
(116)
1,182
9,386
—
—
(1,379)
(6,504)
1,258
3,827
939
614
1,090
2,643
6,470
4
—
—
9
3
—
—
1
17
(1)
2
—
1
18
—
—
—
—
—
—
—
—
—
—
—
—
—
—
79
7,671
9,386
11,328
118
(1,523)
(6,504)
4,994
25,549
9,617
(1,843)
1,090
8,864
34,413
For the year ended December 31, 2017
Beginning
Balance
Regulatory
Asset
Increase
(Decrease)
Refunds
(Collections)
Adjustments
Surcharge
Offset and
Other
Ending
Balance
Revenue accounts:
2014 - 2016 WCMA.........................................................
2017 WCMA ....................................................................
2012 General Rate Case true-up.......................................
2015 General Rate Case true-up.......................................
Cost of capital memorandum accounts ............................
Drought surcharges...........................................................
Cost-recovery accounts ....................................................
All others ..........................................................................
1,589
—
20,682
5,528
(817)
(7,688)
3,181
3,434
4,758
12,530
—
—
—
—
3,815
1,084
(4,704)
—
(9,363)
(5,413)
673
(765)
(776)
(858)
Total..................................................................................... $
25,909
22,187
(21,206)
(1,452)
(6,041)
—
—
—
8,453
—
75
1,035
191
6,489
11,319
115
(144)
—
6,220
3,735
27,925
60
For the year ended December 31, 2016
Beginning
Balance
Regulatory
Asset
Increase
(Decrease)
Refunds
(Collections)
Adjustments
Surcharge
Offset and
Other
Ending
Balance
Revenue accounts:
2014 - 2016 WCMA.........................................................
2012 General Rate Case true-up.......................................
2015 General Rate Case true-up.......................................
Cost of capital memorandum accounts ............................
Drought surcharges...........................................................
Cost-recovery accounts ....................................................
All others ..........................................................................
8,316
33,070
—
(1,440)
(359)
2,219
3,400
17,107
—
8,767
3
—
2,740
1,270
(7,126)
(12,388)
(3,239)
620
(24,037)
(1,778)
(1,236)
Total..................................................................................... $
45,206
29,887
(49,184)
(16,708)
—
—
—
16,708
—
—
—
1,589
20,682
5,528
(817)
(7,688)
3,181
3,434
25,909
As of December 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 $1,573.
On December 28, 2018, San Jose Water Company’s GRC with the CPUC was approved with new rates effective on January 1,
2019. As part of the GRC decision, $27,045 of balancing and memorandum accounts were also approved for recovery over a
12-month period at $0.5894 per CCF surcharge effective on January 1, 2019.
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.
Regulatory Assets and Liabilities
Generally accepted accounting principles for water utilities include the recognition of regulatory assets and liabilities as
permitted by ASC Topic 980. In accordance with ASC Topic 980, Water Utility Services, to the extent applicable, records
deferred costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that these costs and credits
will be recognized in the ratemaking process in a period different from when the costs and credits are incurred. Accounting for
such costs and credits is based on management’s judgment and prior historical ratemaking practices, and it occurs when
management determines that it is probable that these costs and credits will be recognized in the future revenue of Water Utility
Services through the ratemaking process. The regulatory assets and liabilities recorded by Water Utility Services, in particular,
San Jose Water Company, primarily relate to the recognition of deferred income taxes for ratemaking versus tax accounting
purposes, balancing and memorandum accounts, postretirement pension benefits, medical costs, accrued benefits for vacation
and asset retirement obligations that have not yet been passed through in rates. The Company adjusts the related asset and
liabilities for these items through its regulatory asset and liability accounts at year-end, except for certain postretirement benefit
costs and balancing and memorandum accounts which are adjusted monthly. The Company expects to recover regulatory assets
related to plant depreciation income tax temporary differences over the average lives of the plant assets of between 5 to 75
years.
Rate-regulated enterprises are required to charge a regulatory asset to earnings if and when that asset no longer meets the
criteria for being recorded as a regulatory asset. San Jose Water Company continually evaluates the recoverability of regulatory
assets by assessing whether the amortization of the balance over the remaining life can be recovered through expected and
undiscounted future cash flows.
61
Regulatory assets and liabilities are comprised of the following as of December 31:
2018
2017
Regulatory assets:
Postretirement pensions and other medical benefits ............................................................ $
Balancing and memorandum accounts, net..........................................................................
Other, net ..............................................................................................................................
Total regulatory assets, net in Consolidated Balance Sheets.................................................. $
Less: current regulatory asset, net ..........................................................................................
Total regulatory assets, net, less current portion..................................................................... $
66,233
$
34,413
2,979
103,625
26,910
76,715
Regulatory liability:
Income tax temporary differences, net ................................................................................. $
Total regulatory liability in Consolidated Balance Sheets...................................................... $
59,149
59,149
68,556
27,925
3,073
99,554
—
99,554
62,476
62,476
Income Taxes
On December 22, 2017, the Tax Act was signed into law. Among other things, the Tax Act lowers the corporate tax rate to 21%
from the maximum rate of 35%, effective for tax years including or commencing January 1, 2018. See also Note 5, “Income
Taxes”.
Income taxes are accounted for using the asset and liability method. Deferred tax assets and liabilities are recognized for the
effect of temporary differences between financial and tax reporting. Deferred tax assets and liabilities are measured using
current tax rates in effect. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the period
that includes the enactment date.
To the extent permitted by the CPUC, investment tax credits resulting from utility plant additions are deferred and amortized
over the estimated useful lives of the related property.
Advances for Construction and Contributions in Aid of Construction
In California, advances for construction received after 1981 are refunded ratably over 40 years. Estimated refunds for the next
five years and thereafter are shown below:
2019 .................................................................................................................................................................... $
2020 ....................................................................................................................................................................
2021 ....................................................................................................................................................................
2022 ....................................................................................................................................................................
2023 ....................................................................................................................................................................
Thereafter............................................................................................................................................................
Estimated Refunds
2,818
2,818
2,818
2,818
2,806
51,257
As of December 31, 2018, advances for construction was $80,610 of which $15,275 was related to non-refundable advances for
construction.
Contributions in aid of construction represent funds received from developers that are not refundable under applicable
regulations. Depreciation applicable to utility plant constructed with these contributions is charged to contributions in aid of
construction.
Customer advances and contributions in aid of construction received subsequent to 1986 and prior to June 12, 1996 generally
must be included in federal taxable income. Taxes paid relating to advances and contributions are recorded as deferred tax
assets for financial reporting purposes and are amortized over 40 years for advances and over the tax depreciable life of the
related asset for contributions. Receipts subsequent to June 12, 1996 are generally exempt from federal taxable income, unless
specifically prescribed under treasury regulations.
Advances and contributions received subsequent to 1991 and prior to 1997 are included in California state taxable income.
62
Asset Retirement Obligation
SJW Group’s asset retirement obligation is recorded as a liability included in other non-current liabilities. It reflects principally
the retirement costs of wells and other anticipated clean-up costs, which by law, must be remediated upon retirement.
Retirement costs have historically been recovered through rates at the time of retirement. As a result, the liability is offset by a
regulatory asset.
As of December 31, 2018 and 2017, the asset retirement obligation is as follows:
Retirement obligation.............................................................................................................. $
Discount rate ...........................................................................................................................
Regulatory asset, present value, recorded as a liability .......................................................... $
4,803
6%
942
5,231
6%
1,184
2018
2017
Revenue
On January 1, 2018, SJW Group adopted FASB Accounting Standards Codification (“ASC”) Topic 606 - “Revenue from
Contracts with Customers.” In accordance with Topic 606, management has determined that the company has principally four
categories of revenues. The first category, revenue from contracts with customers, represents metered revenue of Water Utility
Services which includes billings to customers based on meter readings plus an estimate of water used between the customers’
last meter reading and the end of the accounting period. SJW Group satisfies its performance obligation upon delivery of water
to the customer at which time the customer consumes the benefits provided by the company. The customer is typically billed
on a bi-monthly basis after water delivery has occurred. The customer is charged both a service charge which is based upon
meter size and covers a portion of the fixed costs of furnishing water to the customer and a consumption charge based on actual
water usage. Unbilled revenue from the last meter reading date to the end of the accounting period is estimated based on the
most recent usage patterns, production records and the effective tariff rates. As the company has the right to bill for services
that it has provided, SJW Group estimates the dollar value of deliveries during the unbilled period and recognizes the associated
revenue. Actual results could differ from those estimates, which may result in an adjustment to revenue when billed in a
subsequent period. The second category, rental income, represents lease rental income from SJW Land Company tenants. The
tenants pay monthly in accordance with lease agreements and SJW Group recognizes the income ratably over the lease term as
this is the most representative of the pattern in which the benefit is expected to be derived from SJW Group’s underlying asset.
The third and fourth revenue categories are other balancing and memorandum accounts and alternative revenue programs.
Both are scoped out of Topic 606 and are accounted for under FASB ASC Topic 980 - “Regulated Operations.” Balancing and
memorandum accounts are recognized by San Jose Water Company when it is probable that future recovery of previously
incurred costs or future refunds that are to be credited to customers will occur through the ratemaking process. In addition, in
the case of special revenue programs such as the 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. SCVWD, San Jose Water
Company’s principal water supplier, also mandated water use restrictions along with conservation targets at levels higher than
the State Water Board. While the Governor of California declared the drought over on April 7, 2017, the State Water Board
made certain water use restrictions permanent while SCVWD maintained a conservation target at 20%.
On May 31, 2018, Governor Edmund G. Brown signed into law Assembly Bill 1668 and Senate Bill 606. Both bills set an
initial limit for indoor water use of 55 gallons per person per day by 2022 and reduced the limit further to 50 gallons per person
per day by 2030. Implementation details remain to be developed as to how local water providers will meet this mandate as well
as to how the CPUC will direct its regulated utilities to comply.
To encourage conservation, San Jose Water Company received approval from the CPUC to implement a Mandatory
Conservation Revenue Adjustment Memorandum Account in 2014. This account was subsequently replaced with a WCMA.
The WCMA allows San Jose Water Company to track lost revenue, net of related water costs, associated with reduced sales due
to water conservation and associated calls for water use reductions. San Jose Water Company records the lost revenue captured
63
in the WCMA regulatory accounts once the revenue recognition requirements of FASB ASC Topic 980 - “Regulated
Operations,” subtopic 605-25 are met. For further discussion, please see “Balancing and Memorandum Accounts” in Note 1.
The major streams of revenue for SJW Group are as follows:
Revenue from contracts with customers ...................................................
Alternative revenue programs, net - WCMA............................................
Other balancing and memorandum accounts revenue, net (1)..................
Rental income ...........................................................................................
2018
2017
2016
389,302
10,456
(7,541)
5,482
397,699
$
$
381,777
12,584
(10,838)
5,702
389,225
328,249
9,981
(5,241)
6,717
339,706
___________________________________
(1) For year ended December 31, 2018, $2,643 of amounts related to cost-recovery balancing accounts which upon adoption of Topic 606 are recorded as
capitalized costs rather than revenue until recovery is approved by the CPUC. Prior to adoption of Topic 606, these amounts were recorded as revenue. For
further discussion, please see “Balancing and Memorandum Accounts” above.
Revenue also includes a surcharge collected from regulated customers that is paid to the CPUC. This surcharge is recorded
both in operating revenues and administrative and general expenses. For the years ended December 31, 2018, 2017 and 2016,
the surcharge was $5,013, $5,017 and $3,770, respectively.
Share-Based Payment
SJW Group calculates the fair value of restricted stock awards based on the grant date fair market value of the company’s stock
price reduced by the present value of the dividends expected to be declared on outstanding shares.
SJW Group utilizes the Monte Carlo valuation model, which requires the use of subjective assumptions, to compute the fair
value of market-vesting restricted stock units.
The compensation cost charged to income is recognized on a straight-line basis over the requisite service period, which is the
vesting period. Forfeitures are accounted for as they occur.
Maintenance Expense
Planned major maintenance projects are charged to expense as incurred.
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 year. The two-class method in computing basic earnings per share is not used because
the number of participating securities as defined in FASB ASC Topic 260—“Earnings Per Share” is not significant. The two-
class method is an earnings allocation formula that determines earnings per share for each class of common stock and
participating security. 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 and shares potentially
issuable under the Employee Stock Purchase Plans. Restricted common stock units of 5,551, 4,474 and 6,689 as of
December 31, 2018, 2017 and 2016, respectively, were excluded from the dilutive earnings per share calculation as their effect
would have been anti-dilutive.
Note 2.
Capitalization
SJW Group is authorized to issue 36,000,000 shares of common stock of $0.001 par value per share. At December 31, 2018
and 2017, 28,404,316 and 20,520,856, respectively, shares of common stock were issued and outstanding.
At December 31, 2018 and 2017, 1,000,000 shares of preferred stock of $0.001 par value per share were authorized for SJW
Group. At December 31, 2018 and 2017, no shares of preferred stock were issued or outstanding.
On November 28, 2018, SJW Group entered into an underwriting agreement with J.P. Morgan Securities LLC, Barclays Capital
Inc., RBC Capital Markets, LLC and UBS Securities LLC, as representatives of the several underwriters (the “Underwriters”),
pursuant to which SJW Group sold to the Underwriters an aggregate of 6,750,000 shares of SJW Group’s common stock, par
value $0.001 per share (the “Firm Shares”), in an underwritten public offering. Pursuant to the underwriting agreement, SJW
Group granted the Underwriters a 30-day option to purchase up to an additional 1,012,500 shares of its common stock (the
“Option Shares”), which was exercised in full on December 3, 2018. The offering of the Firm Shares closed on December 3,
2018 and the offering of the Option Shares on December 5, 2018.
64
SJW Group received net proceeds of approximately $358,256 from the sale of the Firm Shares and received additional net
proceeds of approximately $53,738 from the sale of the Option Shares, in each case after deducting the underwriting discounts
and commissions and estimated offering expenses payable by SJW Group. SJW Group intends to use the net proceeds from the
offering, together with the net offering proceeds from new debt financing in 2019, to finance the proposed merger of CTWS
and to pay related fees and expenses. See Note 12 for a discussion on the proposed CTWS merger. Pending such use, the
company has invested the net proceeds temporarily in a short-term money market fund. The offering is not conditioned on the
consummation of the proposed merger. If for any reason the proposed merger of CTWS does not close, then SJW Group
intends to use the proceeds from the offering for general corporate purposes, which may include acquisitions, share repurchases
or debt repayment. SJW Group will not have any obligation to repurchase any or all of its shares of common stock sold in the
offering.
Note 3.
Lines of Credit
San Jose Water Company entered into a $125,000 credit agreement (the “Credit Agreement”) with JPMorgan Chase Bank,
N.A., as the lender (the “Lender”) on June 1, 2016. The Credit Agreement provides an unsecured credit facility with a letter of
credit sublimit of $10,000. Proceeds of borrowings under the Credit Agreement may be used to refinance existing debt, for
working capital, and for general corporate purposes. The Credit Agreement has a maturity date of June 1, 2021.
The Credit Agreement contains customary representations, warranties and events of default, as well as certain restrictive
covenants customary for facilities of this type, including restrictions on indebtedness, liens, acquisitions and investments,
restricted payments, asset sales, and fundamental changes. The Credit Agreement also includes certain financial covenants that
require the Company to maintain a maximum funded debt to capitalization ratio and a minimum interest coverage ratio.
SJW Group and SJW Land Company (collectively, the “Borrowers”), entered into a $15,000 credit agreement with the Lender
(the “SJW Group Credit Agreement”) on June 1, 2016, which provides an unsecured credit facility to the Borrowers with a
letter of credit sublimit of $5,000. The SJW Group Credit Agreement matures on June 1, 2021. Borrowings under the SJW
Group Credit Agreement bear interest under the same terms and conditions as those in the Credit Agreement.
In addition, on June 1, 2016, SJW Group, as guarantor, and SJWTX, Inc. (the “Borrower”), entered into a $5,000 credit
agreement with the Lender (the “SJWTX Credit Agreement”), which provides an unsecured credit facility to the Borrower with
a letter of credit sublimit of $1,000. The SJWTX Credit Agreement matures on June 1, 2021.
As of December 31, 2018 and 2017, SJW Group had outstanding balances on the lines of credit of $100,000 and $25,000,
respectively.
Cost of borrowing on the lines of credit averaged 2.94% and 2.27% as of December 31, 2018 and 2017, respectively.
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 December 31, 2018, SJW Group and SJWTX, Inc. were in compliance with all covenants.
San Jose Water Company’s unsecured bank lines of credit have 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 December 31, 2018, San Jose Water Company was in compliance
with all covenants.
SJW Group has received a financing commitment letter from lenders, including JPMorgan Chase Bank, N.A., Barclays Bank
PLC, Royal Bank of Canada and UBS AG, Stamford Branch to provide a senior unsecured bridge loan facility of up to
$975,000 in the event that SJW Group is unable to secure other financing for the Merger at or prior to the time the Merger is
completed. Upon completion of our December 2018 issuance of common stock, the facility commitment was reduced to
$563,000. The financing commitments include customary conditions to funding. As of December 31, 2018, the merger was not
completed and no amount has been extended under the facility.
65
Note 4.
Long-Term Debt
Long-term debt as of December 31 was as follows:
Description
Senior notes, San Jose Water Company:
Series A 8.58%........................................................................................
Series B 7.37% .......................................................................................
Series C 9.45% .......................................................................................
Series D 7.15% .......................................................................................
Series E 6.81%........................................................................................
Series F 7.20%........................................................................................
Series G 5.93% .......................................................................................
Series H 5.71% .......................................................................................
Series I 5.93%.........................................................................................
Series J 6.54% ........................................................................................
Series K 6.75% .......................................................................................
Series L 5.14%........................................................................................
SJWTX, Inc. Series A 6.27%.....................................................................
SJW Group Series A 4.35%.......................................................................
Total senior notes...........................................................................
California Pollution Control Financing Authority Revenue Bonds
5.10%, San Jose Water Company..............................................................
California Pollution Control Financing Authority Revenue Bonds
4.75%, San Jose Water Company ..............................................................
Total debt.................................................................................................
Less:
Unamortized debt issuance costs related to debt above........................
Current portion......................................................................................
Total long-term debt, less current portion ...............................................
Due Date
2018
2017
2022
2024
2020
2026
2028
2031
2033
2037
2037
2024
2039
2044
2036
2021
2040
2046
$
20,000
30,000
10,000
15,000
15,000
20,000
20,000
20,000
20,000
10,000
20,000
50,000
15,000
50,000
20,000
30,000
10,000
15,000
15,000
20,000
20,000
20,000
20,000
10,000
20,000
50,000
15,000
50,000
$
315,000
315,000
50,000
50,000
70,000
435,000
3,576
—
431,424
$
$
70,000
435,000
3,908
—
431,092
Senior notes held by institutional investors are unsecured obligations of SJW Group, San Jose Water Company and SJWTX,
Inc. and require interest-only payments until maturity. To minimize issuance costs, the companies’ debt has primarily been
placed privately.
The senior note agreements of San Jose Water Company generally have terms and conditions that restrict the 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. As of
December 31, 2018, San Jose Water Company was not restricted from issuing future indebtedness as a result of these terms and
conditions.
The senior note agreement of SJWTX, Inc. 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 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
December 31, 2018, SJWTX, Inc. and SJW Group were not restricted from issuing future indebtedness as a result of these
terms and conditions.
The senior note agreement of SJW Group 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. As of
December 31, 2018, SJW Group was not restricted from issuing future indebtedness as a result of these terms and conditions.
66
San Jose Water Company has obligations pursuant to loan agreements with the California Pollution Control Financing Activity
(“CPCFA”) totaling $120,000 in aggregate principal amounts of CPCFA revenue bonds outstanding as of December 31, 2018.
The loan agreements contain affirmative and negative covenants customary for loan agreements relating to revenue bonds,
containing, among other things, certain disclosure obligations, the tax exempt status of the interest on the bonds and limitations,
and prohibitions on the transfer of projects funded by the loan proceeds and assignment of the loan agreements. As of
December 31, 2018, San Jose Water Company was in compliance with all such covenants.
The fair value of long-term debt as of December 31, 2018 and 2017 was approximately $490,148 and $537,646, 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 fair value of long-term debt would be categorized as Level 2 of the
fair value hierarchy.
Note 5.
Income Taxes
The components of income tax expense were:
Current:
Federal..................................................................................................... $
State.........................................................................................................
Deferred:
Federal.....................................................................................................
State.........................................................................................................
$
2018
2017
2016
14,485
5,066
(7,702)
(1,784)
10,065
29,377
6,452
(1,174)
738
35,393
21,651
7,088
6,119
(1,316)
33,542
The following table reconciles income tax expense to the amount computed by applying the federal statutory rate to income
before income taxes of $48,832, $96,493 and $86,381 in 2018, 2017 and 2016:
“Expected” federal income tax.................................................................. $
Increase (decrease) in taxes attributable to:
State taxes, net of federal income tax benefit .........................................
Dividend received deduction ..................................................................
Uncertain tax positions............................................................................
Tangible Property Regulations................................................................
Tax reform - rate change impact on deferred taxes.................................
Reversal of excess deferred taxes recognized in regulatory liability......
Stock-based compensation ......................................................................
Noncontrolling interest income...............................................................
Other items, net .......................................................................................
$
2018
2017
2016
10,255
33,773
30,233
3,420
(4)
24
(899)
—
(1,383)
(1,602)
—
254
10,065
4,986
(18)
12
(1,159)
(2,357)
—
(552)
(664)
1,372
35,393
4,874
(21)
16
(1,184)
—
—
—
—
(376)
33,542
67
The components of the net deferred tax liability as of December 31 was as follows:
2018
2017
Deferred tax assets:
Advances and contributions.................................................................................................. $
Unamortized investment tax credit.......................................................................................
Pensions and postretirement benefits....................................................................................
California franchise tax.........................................................................................................
Merger related expenses .......................................................................................................
Tax related net regulatory liability........................................................................................
Other .....................................................................................................................................
Total deferred tax assets.......................................................................................................... $
Deferred tax liabilities:
Utility plant........................................................................................................................... $
Pension and postretirement benefits .....................................................................................
Investment in California Water Service Group stock ...........................................................
Deferred gain and other-property related..............................................................................
Debt reacquisition costs........................................................................................................
Other .....................................................................................................................................
Total deferred tax liabilities .................................................................................................... $
Net deferred tax liabilities....................................................................................................... $
14,592
418
20,439
981
4,527
16,212
3,336
60,505
114,731
18,534
—
5,753
170
968
140,156
79,651
12,036
441
21,807
1,278
—
17,166
3,440
56,168
114,695
19,184
1,199
5,640
204
1,041
141,963
85,795
Management evaluates the realizability of deferred tax assets based on all available evidence, both positive and negative. The
realization of deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods in which
the deferred tax assets are expected to reverse. Based on all available evidence, management believes it is more likely than not
that SJW Group will realize the benefits of these deferred tax assets.
The change in the net deferred tax liabilities of $6,144 in 2018 included non-cash items of $3,342 primarily consisting of
regulatory assets and liabilities relating to income tax temporary differences.
The total amount of unrecognized tax benefits, before the impact of deductions for state taxes, excluding interest and penalties
was $1,411 and $1,359 as of December 31, 2018 and 2017, respectively. The amount of tax benefits, net of any federal benefits
for state taxes and inclusive of interest that would impact the effective rate, if recognized, is approximately $70 and $46 as of
December 31, 2018 and 2017, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
Balance at beginning of year ..................................................................... $
Increase related to tax positions taken during a prior year, including
interest .......................................................................................................
Reductions related to tax positions taken in a prior year, including
interest .......................................................................................................
Balance at end of year ............................................................................... $
2018
2017
2016
1,307
$
1,132
$
75
—
1,382
$
185
(10)
1,307
$
755
397
(20)
1,132
SJW Group’s policy is to classify interest and penalties associated with unrecognized tax benefits, if any, in tax expense.
Accrued interest expense, net of the benefit of tax deductions which would be available on the payment of such interest, is
approximately $70 as of December 31, 2018. SJW Group has not accrued any penalties for unrecognized tax benefits. The
amount of interest recognized in 2018 was an expense of $24.
SJW Group does not foresee material changes to its gross uncertain tax liability due to the lapse of the statute of limitations
within the next 12 months following December 31, 2018.
On August 15, 2018, SJW Group received notification that the Texas Comptroller of Public Accounts completed its audit of the
Texas Franchise Tax Report for the report year 2015 and has no changes.
68
SJW Group applied the accounting method changes required to comply with the Tangible Property Regulations starting with the
2014 tax returns. The 2018 federal and state repairs and maintenance deduction under the new methodology was $12,873,
resulting in an estimated $2,703 federal deferred tax liability and a state income tax benefit of $899.
The 2017 federal and state repairs and maintenance deduction under the new methodology was $20,168, resulting in an
estimated $7,059 federal deferred tax liability and a state income tax benefit of $1,159.
On December 22, 2017 the Tax Act was signed into law. The Tax Act includes a number of changes in existing tax law
impacting businesses including, among other things, a reduction in the corporate income tax rate from 35% to 21%. The rate
reduction was effective on January 1, 2018.
In accordance with generally accepted accounting principles, SJW Group recorded the revaluation of deferred taxes and related
impacts using the new corporate tax rate in its December 31, 2017 consolidated financial statements. The amounts recorded
were based on information known and reasonable estimates used as of December 31, 2017. As such, SJW Group recorded this
estimate as a provisional amount. SJW Group recorded a tax benefit of $2,357 related to the deferred taxes revaluation
impacting non-regulated operations due to the tax rate reduction. However, for regulated operations governed by state public
utility commissions, the lower tax rate benefits are expected to flow back to customers under current normalization rules and
agreed-upon methods with the commissions. The revaluation of deferred tax assets and liabilities of the regulated operations
resulted in a decrease in net deferred tax liabilities of $83,666 which was recorded as a regulatory liability in 2017.
SJW Group completed its accounting for the tax effects of tax reform in fourth quarter of 2018. An additional tax expense of
$67 and a reduction of $455 in regulatory liability was recorded.
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. As per Advice Letter No. 522A filed with CPUC, the benefit
of the reduction in the federal statutory income tax rate from 35% to 21% were reflected in the customer bills effective July 1,
2018. The tax memorandum account only includes the benefit of the reduction in the federal statutory income tax rate through
June 30, 2018. The other impacts of the Tax Act were recorded in the tax memorandum account for the entire year.
Accordingly, San Jose Water Company recorded $6,504 liability in the tax memorandum account for the year ended December
31, 2018. CLWSC refunded the accrued amounts for the period January 25, 2018, through April 30, 2018, in the second quarter
of 2018. The FTCC will continue to be reflected on customer bills every month starting from May 1, 2018 until the
implementation of new rates resulting from the next rate case.
SJW Group expects the Internal Revenue Service to issue guidance in future periods that will determine the final disposition of
the excess deferred taxes and other impacts of the Tax Act. At this time, the Company has applied a reasonable interpretation of
the Tax Act. Future clarification of the Tax Act may change the amounts estimated.
SJW Group files U.S. federal income tax returns and income tax returns in various states. SJW Group is no longer subject to
tax examination for fiscal years prior to 2015 for federal purposes and 2014 for state purposes. The open tax years for the
jurisdictions in which SJW Group files are as follows:
Jurisdiction
Federal ..................................................................................................................................................................
California ..............................................................................................................................................................
Arizona .................................................................................................................................................................
Tennessee..............................................................................................................................................................
Texas .....................................................................................................................................................................
Years Open
2015 - 2017
2014 - 2017
2014 - 2016
2015 - 2017
2014 - 2017
Note 6.
Intangible Assets
Intangible assets consist of a concession fee paid to the City of Cupertino of $6,800 for operating the City of Cupertino
municipal water system and other intangibles of $8,999 as of December 31, 2018. Other intangibles consists of $4,128 which
was paid for service area and water rights related to CLWSC, $3,831 for infrastructure related to the Cupertino service
concession arrangement and $1,040 incurred in conjunction with SCVWD water contracts related to the operation of San Jose
69
Water Company. All intangible assets are recorded at cost and all are being amortized using the straight-line method over the
legal or estimated economic life of the asset ranging from 5 to 70 years.
Amortization expense for the intangible assets was $647, $616 and $530 for the years ended December 31, 2018, 2017 and
2016, respectively. Amortization expense for 2019 through 2023 is anticipated to be $647 per year.
The costs of intangible assets as of December 31, 2018 and 2017 are as follows:
Concession fees....................................................................................................................... $
Other intangibles .....................................................................................................................
Intangible assets ......................................................................................................................
Less: Accumulated amortization
Concession fees ....................................................................................................................
Other intangibles...................................................................................................................
Net intangible assets................................................................................................................ $
6,800
8,999
15,799
5,780
2,960
7,059
6,800
7,613
14,413
5,508
2,585
6,320
2018
2017
Note 7.
Commitments
San Jose Water Company purchases water from SCVWD under terms of a master contract expiring in 2051. Delivery
schedules for purchased water are based on a contract year beginning July 1, and are negotiated every three years under terms
of the master contract with SCVWD. For the years ended December 31, 2018, 2017 and 2016, San Jose Water Company
purchased from SCVWD 19,477 million gallons ($80,243), 20,172 million gallons ($76,106) and 18,241 million gallons
($61,645), respectively, of contract water. In accordance with the reduction of treated water deliveries approved by the
SCVWD Board of Directors on June 13, 2017, the contractual delivery schedule was reduced by 10% through June 30, 2018.
On June 13, 2017, SCVWD Board of Directors approved treated water deliveries reflecting the contractual delivery schedule
reduced by 10% through June 30, 2019. Based on current prices and estimated deliveries, San Jose Water Company is
committed to purchase from SCVWD a minimum of 90% of the reduced delivery schedule, or 19,775 million gallons ($84,296)
of water at the current contract water rate of $4.3 per million gallons in the year ending December 31, 2019. Additionally, San
Jose Water Company purchases non-contract water from SCVWD on an “as needed” basis if the water supply is available.
In 1997, San Jose Water Company entered into a 25-year contract agreement with the City of Cupertino to operate the City’s
municipal water system. San Jose Water Company paid a one-time, upfront concession fee of $6,800 to the City of Cupertino
which is amortized over the contract term. Under the terms of the contract agreement, San Jose Water Company assumed
responsibility for maintenance and operating costs, while receiving all payments for water service. Water service rates are
generally subject to approval by the Cupertino City Council.
CLWSC has long-term contracts with the GBRA. The terms of the agreements expire in 2037, 2040, 2044 and 2050. The
agreements, which are take-or-pay contracts, provide CLWSC with 6,900 acre-feet per year of water supply from Canyon Lake.
The water rate may be adjusted by GBRA at any time, provided they give CLWSC a 60-day written notice on the proposed
adjustment. In 2018, CLWSC acquired raw water supply agreements with the Lower Colorado River Authority (“LCRA”) and
West Travis Public Utility Agency (“WTPUA”) expiring in 2053 and 2046, respectively, for 250 acre-feet of water under each
agreement per year from Lake Austin and the Colorado River, respectively, at prices that may be adjusted periodically by the
agencies.
As of December 31, 2018, San Jose Water Company had 367 employees, of whom 132 were executive, administrative or
supervisory personnel, and of whom 235 were members of unions. In November 2016, San Jose Water Company reached
three-year collective bargaining agreements with the Utility Workers of America, representing the majority of all employees,
and the International Union of Operating Engineers, representing certain employees in the engineering department, covering the
period from January 1, 2017 through December 31, 2019. The agreements include a 3.5% wage increase in 2017, 3% in 2018
and 4% in 2019 for union workers as well as increases in medical co-pays and employee cost-sharing. Negotiations are
expected to begin in the third quarter of 2019 for collective bargaining agreements for the period from January 1, 2020 through
December 31, 2022.
70
Note 8.
Contingencies
Class Action Suits Related to the Merger
On June 14, 2018, certain shareholders of CTWS filed two nearly identical class-action complaints in Connecticut state court
against the CTWS board of directors, SJW Group, Eric W. Thornburg, Chairman, President and Chief Executive Officer of SJW
Group, and CTWS. The complaints, as amended on September 18, 2018 and September 20, 2018, allege that the CTWS board
breached its fiduciary duties in connection with the Merger, that CTWS’s preliminary proxy statement, filed with the SEC on
August 20, 2018, omits certain material information and that SJW Group and Mr. Thornburg aided and abetted the alleged
breaches by the CTWS board of directors. Among other remedies, the actions seek to recover rescissory and other damages and
attorney’s fees and costs. SJW Group believes the claims in these complaints are without merit and intends to vigorously
defend this litigation. The parties to the lawsuits have agreed in principle to settle the lawsuits in exchange for the issuance of
additional disclosures by CTWS. Pursuant to the agreements to settle the lawsuits, the plaintiffs have reserved the right to seek
a mootness fee from CTWS. The parties moved to stay proceedings, other than fee-related proceedings, until such time as the
transaction closes, and the court has granted the parties’ motion to stay. Pursuant to the agreement in principle to settle the
litigation, the complaints will be dismissed at such time as the transaction closes. On November 20, 2018, the plaintiffs filed an
opening brief in support of their fee application. SJW Group has determined that the likelihood of loss related to these class-
action complaints is remote.
Additional complaints have been filed in connection with the Merger but neither SJW Group nor any of its officers or directors
are named as defendants therein. On October 5, 2018, certain shareholders of CTWS filed two complaints, one individually
and the other as a putative class action, in the United States District Court for the District of Connecticut against CTWS, the
CTWS board of directors and the Merger. The complaints allege that the preliminary proxy statement issued in connection with
the Merger omitted material information in violation of Section 14(a) and 20(a) of the Securities Exchange Act of 1934.
Among other remedies, the actions seek an order (1) enjoining the defendants from consummating or closing on the Merger; (2)
rescinding the Merger or awarding rescissory damages; (3) directing the defendants to disseminate a corrective proxy statement;
(4) declaring that the defendants have violated Section 14(a) and/or 20(a) of the Securities Exchange Act of 1934, as well as
Rule 14a-9 promulgated thereunder; and (5) awarding attorney’s fees and costs. SJW Group believes the claims in these
complaints are without merit.
Billing Practice OII with CPUC
On September 14, 2018, the CPUC issued OII No. 18-09-003 to which San Jose Water Company was named as Respondent.
The OII will determine whether the company unlawfully overcharged customers over a 30-year period by failing to pro-rate
service charges when increases occurred during a billing period, and whether the company double-billed service charges during
one billing period when allegedly switching from billing such charges in advance to billing in arrears. By a decision adopted
November 29, 2018, in San Jose Water Company’s then-pending GRC, the CPUC approved a settlement to resolve the alleged
overcharging issue for the period since June 2011 by requiring refunds to customers totaling $2,020. That amount will be
refunded to customers pursuant to San Jose Water Company’s Advice Letter No. 530, effective January 13, 2019, and is
provided for in the accompanying consolidated financial statements. See discussion on the matter in Note 1, “Regulatory Rate
Filings.” The CPUC investigation pursuant to OII No. 18-09-003 may result in liability for San Jose Water Company in
addition to the $2,020 being credited to customers pursuant to the CPUC’s November 29, 2018 decision. Such additional
liability could result from a possible CPUC requirement that refunds or penalties be paid based on alleged over-billing prior to
June 1, 2011. A reasonable estimate of the potential loss amount, if any, cannot be made at this time.
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.
Note 9.
Benefit Plans
Pension Plans
San Jose Water Company sponsors a noncontributory defined benefit pension plan (the “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 upon compensation credits and interest credits for each employee.
The Pension Plan is administered by a committee that is composed of an equal number of company and union representatives
(the “Committee”). The Committee has retained an investment consultant, Wells Fargo Advisors Financial Network, LLC, to
assist it with, among other things, asset allocation strategy, investment policy advice, performance monitoring, and investment
manager due diligence. Individual investment decisions have been delegated by the Committee to the investment managers
71
who are monitored by the investment consultant. Investment guidelines provided in the Investment Policy Statement require
that at least 25% of plan assets be invested in fixed income securities. As of December 31, 2018, the plan assets consist of
approximately 34% bonds, 6% cash equivalents, and 60% equities. Furthermore, equities are to be diversified by industry
groups and selected to achieve a balance of long-term growth and income combined with a goal of long-term preservation of
capital. Except as provided for in the prospectus of any co-mingled investments, investment managers may not invest in
commodities and futures contracts, private placements, options, letter stock, speculative securities, nor may they hold more than
5% of assets of any one private corporation. Except as provided for in the prospectus of any co-mingled investments, fixed
income assets may only be invested in bonds, commercial paper, and money market funds with acceptable ratings by Moody’s
or Standard & Poor’s as defined by the Investment Policy Statement. The investment managers’ performance is reviewed
regularly by the investment consultant who provides semi-annual reports to the Committee for review.
Plan assets are marked to market at each measurement date, resulting in unrealized actuarial gains or losses. Unrealized
actuarial gains and losses on pension assets are amortized over the expected future working lifetime of participants of 12.91
years for actuarial expense calculation purposes. Market losses in 2017 increased pension expense by approximately $1,388 in
2018 and market gains in 2016 decreased pension expense by approximately $200 in 2017.
For the past 10 years, the plan has achieved a 8.49% return on its investments while the applicable benchmark was 8.54% for
the same period. The applicable benchmark is a weighted-average of returns for those benchmarks shown in the table below.
For the past five years, the investment managers, following the required investment guidelines, achieved a 5% return on their
investments, while the applicable benchmark was 5.16% for the same period.
Generally, it is expected of the investment managers that the performance of the assets held in the Pension Plan, computed on a
total annual rate of return basis, should meet or exceed specific performance standards over a three-to-five-year period and/or
full market cycle. These standards include specific absolute and risk-adjusted performance standards over a three-to-five-year
period and/or full market cycle.
San Jose Water Company calculates the market-related value of the defined benefit pension plan assets, which is defined under
FASB ASC Topic 715—“Compensation—Retirement Benefits” as a balance used to calculate the expected return on plan
assets, using fair value. The fair value is based on quoted prices in active markets for identical assets and significant observable
inputs.
Officers hired before March 31, 2008 are eligible to receive additional retirement benefits under San Jose Water Company’s
Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008 are eligible to receive additional
retirement benefits under San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan. Both of the plans
are non-qualified plans in which only officers and other designated members of management may participate. The annual cost
of the plans has been included in the determination of the net periodic benefit cost shown below. The plans, which are
unfunded, had a projected benefit obligation of $25,380 and $24,832 as of December 31, 2018 and 2017, respectively, and net
periodic pension cost of $2,905, $2,186 and $1,729 for 2018, 2017 and 2016, respectively.
Other Postretirement Benefits
In addition to providing pension and savings benefits, 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 plan is a flat dollar plan which is
unaffected by variations in health care costs.
Flexible Spending Plan
Effective February 1, 2004, San Jose Water Company established a Flexible Spending Account for its employees for the
purpose of providing eligible employees with the opportunity to choose from among the fringe benefits available under the
plan. The flexible spending plan is intended to qualify as a cafeteria plan under the provisions of the Internal Revenue Code
Section 125. The flexible spending plan allows employees to save pre-tax income in a Health Care Spending Account
(“HCSA”) and/or a Dependent Care Spending Account (“DCSA”) to help defray the cost of out-of-pocket medical and
dependent care expenses. The annual maximum limit under the HCSA and DCSA plans is $2.5 and $5, respectively.
Deferral Plan
San Jose Water Company sponsors a salary deferral plan that allows employees to defer and contribute a portion of their
earnings to the plan. Contributions, not to exceed set limits, are matched by San Jose Water Company. San Jose Water
Company contributions were $1,465, $1,585 and $1,242 in 2018, 2017 and 2016, respectively.
72
Special Deferral Election Plan and Deferral Election Program
SJW Group maintains a Special Deferral Election Plan allowing certain executives and a Deferral Election Program allowing
non-employee directors to defer a portion of their earnings each year and to realize an investment return on those funds during
the deferral period. Executives and non-employee directors have to make an election on the deferral and distribution method of
the deferrals before services are rendered. Executives and non-employee directors had deferred $4,244, $4,528 and $4,250
under the plans as of December 31, 2018, 2017 and 2016, respectively.
Assumptions Utilized on Actuarial Calculations
Net periodic cost for the defined benefit plans and other postretirement benefits was calculated using the following weighted-
average assumptions:
Discount rate ..........................................................................
Expected return on plan assets ...............................................
Rate of compensation increase ...............................................
Pension Benefits
Other Benefits
2018
%
3.52
7.00
4.00
2017
%
4.04
7.00
4.00
2016
%
4.24
7.00
4.00
2018
%
3.45
7.00
N/A
2017
%
3.93
7.00
N/A
2016
%
4.10
7.00
N/A
The expected rate of return on plan assets was determined based on a review of historical returns, both for the Pension Plan and
for medium- to large-sized defined benefit pension funds with similar asset allocations. This review generated separate
expected returns for each asset class. These expected future returns were then blended based on the Pension Plan’s target asset
allocation.
Benefit obligations for the defined benefit plans and other postretirement benefits were calculated using the following
weighted-average assumptions as of December 31:
Discount rate ................................................................
Rate of compensation increase.....................................
Pension Benefits
Other Benefits
2018
%
4.16
4.00
2017
%
3.52
4.00
2018
%
4.09
N/A
2017
%
3.45
N/A
San Jose Water Company utilized each plan’s projected benefit stream in conjunction with the Citigroup Pension Discount
Curve in determining the discount rate used in calculating the pension and other postretirement benefits liabilities at the
measurement date.
In 2018 and 2017, San Jose Water Company adopted the newly issued MP-2018 and MP-2017, respectively, Mortality
Improvement Scales to determine mortality assumptions. The tables and scales reflect increasing life expectancies of
participants in the United States. See also “Reconciliation of Funded Status” below.
Net Periodic Pension Costs
Net periodic costs for the defined benefit plans and other postretirement benefits for the years ended December 31 was as
follows:
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
Components of net periodic benefit cost
Service cost .................................................... $
Interest cost ....................................................
Expected return on assets ...............................
Amortization of prior service cost..................
Recognized actuarial loss ...............................
Net periodic benefit cost ................................ $
5,790
6,879
(9,255)
51
3,986
7,451
4,699
6,993
(7,888)
94
3,844
7,742
4,447
$
6,830
(7,288)
376
3,527
616
627
(450)
197
321
529
634
(376)
198
273
527
655
(292)
197
316
7,892
$
1,311
1,258
1,403
73
Effective January 1, 2018, SJW Group adopted ASU 2017-07, “Improving the Presentation of Net Periodic Pension Cost and
Net Periodic Postretirement Benefit Costs.” The new standard requires retrospective presentation in the income statement of
the service cost component and the other components of net periodic pension cost and net periodic postretirement benefit cost
and prospective presentation from date of adoption for the capitalization in assets of only the service cost component of net
periodic pension cost and net periodic postretirement benefit cost. The components of net periodic benefit cost have been
recorded in the consolidated statements of comprehensive income as follows:
Net periodic benefit cost recorded on income
statement
Other production expenses ............................
Administrative and general expense..............
Maintenance expense.....................................
Pension non-service costs..............................
Reconciliation of Funded Status
Pension Benefits
Other Benefits
2018
2017
2016
2018
2017
2016
1,534
3,249
1,007
1,661
7,451
$
1,231
2,632
836
3,043
7,742
1,165
2,490
792
3,445
163
346
107
695
139
296
94
729
138
295
94
876
7,892
$
1,311
1,258
1,403
For the defined benefit plans and other postretirement benefits, the benefit obligation is the projected benefit obligation and the
accumulated benefit obligation, respectively. The projected benefit obligations and the funded status of San Jose Water
Company’s defined benefit pension and other postretirement plans as of December 31 were as follows:
Pension Benefits
Other Benefits
2018
2017
2018
2017
Change in benefit obligation
Benefit obligation at beginning of year ..................... $
Service cost................................................................
Interest cost................................................................
Actuarial (gain)/loss ..................................................
Implicit rate subsidy ..................................................
Benefits paid..............................................................
Benefit obligation at end of year ............................... $
Change in plan assets
Fair value of assets at beginning of year ................... $
Actual return on plan assets.......................................
Employer contributions .............................................
Benefits paid..............................................................
Fair value of plan assets at end of year......................
Funded status at end of year ...................................... $
196,207
5,790
6,879
(14,447)
—
(6,552)
187,877
133,360
(7,700)
8,502
(6,552)
127,610
(60,267)
174,097
$
4,699
6,993
16,552
—
(6,134)
196,207
113,895
$
$
17,298
8,301
(6,134)
133,360
(62,847) $
18,003
616
627
(988)
(207)
(562)
17,489
6,804
(262)
629
(1,322)
5,849
(11,640)
16,461
529
634
1,124
(196)
(549)
18,003
5,366
736
702
—
6,804
(11,199)
The amounts recognized on the balance sheet as of December 31 were as follows:
Current liabilities ......................................................... $
Noncurrent liabilities ...................................................
$
Pension Benefits
Other Benefits
2018
2017
2018
2017
1,323
58,944
60,267
1,099
61,748
62,847
$
$
94
11,546
11,640
86
11,113
11,199
74
San Jose Water Company recorded a regulatory asset on the projected benefit obligation of the postretirement benefit plans as
follows:
Funded status of obligation ..................................................................................................... $
Accrued benefit cost................................................................................................................
Regulatory asset, amount to be recovered in future rates ....................................................... $
71,907
(5,674)
66,233
74,046
(5,490)
68,556
2018
2017
Plan Assets
Plan assets as of December 31 were as follows:
Pension Benefits
Other Benefits
2018
2017
2018
2017
Fair value of assets at end of year:
Debt securities.............................................................. $
Equity securities...........................................................
Cash and equivalents....................................................
42,654
33%
77,053
60%
7,903
6%
42,784
$
2,200
32%
83,352
63%
7,224
5%
38%
3,416
58%
233
4%
Total ............................................................................. $
127,610
133,360
$
5,849
1,710
25%
4,111
60%
983
14%
6,804
The following tables summarize the fair values of plan assets by major categories as of December 31, 2018 and 2017:
Fair Value Measurements at December 31, 2018
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Benchmark
Total
$
8,136
$
8,136
$
— $
Asset Category
Cash and cash equivalents .......
Actively Managed (a):
All Cap Equity.......................
Russell 3000 Value
5,670
5,632
U.S. Large Cap Equity...........
U.S. Mid Cap Equity .............
U.S. Small Cap Equity...........
Russell 1000, Russell 1000
Growth, Russell 1000 Value
Russell Mid Cap,
Russell Mid Cap Growth,
Russell Mid Cap Value
Russell 2000, Russell 2000
Growth, Russell 2000 Value,
Russell 2500
Non-U.S. Large Cap Equity ..
MSCI EAFE
REIT ......................................
NAREIT—Equity REIT’s
Fixed Income (b)......................
Total ..................................
(b)
47,040
47,040
8,372
8,372
8,528
4,969
5,889
44,855
8,528
4,969
—
—
38
—
—
—
—
5,889
44,855
$ 133,459
$
82,677
$
50,782
$
___________________________________
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 to provide preservation of capital plus generation of income.
(a)
(b)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
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.
75
—
—
—
—
—
—
—
—
—
Fair Value Measurements at December 31, 2017
Quoted
Prices in
Active
Markets for
Identical
Assets
(Level 1)
Significant
Observable
Inputs
(Level 2)
Significant
Unobservable
Inputs
(Level 3)
Benchmark
Total
$
8,207
$
8,207
$
— $
Asset Category
Cash and cash equivalents .......
Actively Managed (a):
—
—
—
—
—
—
—
—
—
All Cap Equity.......................
Russell 3000 Value
6,413
6,376
U.S. Large Cap Equity...........
U.S. Mid Cap Equity .............
U.S. Small Cap Equity...........
Russell 1000, Russell 1000
Growth, Russell 1000 Value
Russell Mid Cap,
Russell Mid Cap Growth,
Russell Mid Cap Value
Russell 2000, Russell 2000
Growth, Russell 2000 Value
Non-U.S. Large Cap Equity ..
MSCI EAFE
REIT ......................................
Fixed Income (b)......................
Total ..................................
NAREIT—Equity REIT’s
(b)
50,351
50,351
9,358
8,725
5,973
6,143
44,994
9,358
8,725
5,973
—
—
37
—
—
—
—
6,143
44,994
$ 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 to provide preservation of capital plus generation of income.
(a)
(b)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
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 2019, San Jose Water Company expects to make required and discretionary cash contributions of up to $8,411 to the pension
plan and other postretirement benefit plan.
Benefits expected to be paid in the next five years and in the aggregate for the five years thereafter are:
2019.................................................................................................................................... $
2020....................................................................................................................................
2021....................................................................................................................................
2022....................................................................................................................................
2023....................................................................................................................................
2024 - 2027 ........................................................................................................................
7,235
$
7,550
8,013
8,419
8,886
50,695
851
852
903
951
992
5,366
Pension Plan
Other Postretirement
Benefit Plan
Note 10.
Equity Plans
Common Stock
SJW Group has a Long-Term Stock Incentive Plan (the “Plan”), which has 1,800,000 shares of common stock reserved for
issuance. The Plan was initially adopted by the Board of Directors on March 6, 2002. On January 30, 2013, the amended and
restated Plan was adopted by the Board and became effective on April 24, 2013. The Plan was subsequently amended and the
amended and restated Plan was adopted by the Board on July 29, 2015.
The 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.
A participant in the Plan generally may not receive Plan awards covering an aggregate of more than 600,000 shares of common
stock in any calendar year. Additionally, awards granted under the Plan may be conditioned upon the attainment of specified
Company performance goals. The types of awards included in the Plan are restricted stock awards, restricted stock units,
76
performance shares, or other share-based awards. In addition, shares are issued to employees under the Employee Stock
Purchase Plan (“ESPP”) that was approved by SJW Group stockholders.
As of December 31, 2018, 2017 and 2016, 793,811, 628,546 and 576,074 shares have been issued pursuant to the Plan, and
124,275, 228,885 and 229,972 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted
stock units for the years ended 2018, 2017 and 2016, respectively. The remaining shares available for issuance under the Plan
are 881,914 as of December 31, 2018. The compensation costs charged to income is 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 are recorded to additional paid-in capital and
common stock, by award type, are presented below for the years ended December 31:
2018
2017
2016
Compensation costs charged to income:
ESPP........................................................................................................ $
Restricted stock and deferred restricted stock.........................................
Total compensation costs charged to income ............................................ $
Proceeds from the exercise of stock options and similar instruments:
ESPP........................................................................................................
Total proceeds from the exercise of stock options and similar
instruments ................................................................................................ $
Excess tax benefits realized from share options exercised and stock
issuance:
Restricted stock and deferred restricted stock.........................................
Total excess tax benefits realized from share options exercised and
stock issuance ............................................................................................ $
Restricted Stock and Deferred Restricted Stock
242
1,875
2,117
1,371
1,371
—
—
214
2,429
2,643
1,215
1,215
—
—
168
1,523
1,691
954
954
203
203
Under SJW Group’s Amended and Restated Deferred Restricted Stock Program (the “Deferred Restricted Stock Program”),
SJW Group granted deferred restricted stock units to non-employee Board members. This program was amended effective
January 1, 2008. As a result of that amendment, no new awards of deferred restricted stock units will be made under the
Deferred Restricted Stock Program with respect to Board service after December 31, 2007.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an
aggregate target number of SJW Group’s shares of common stock equal to 4,081 that will vest based on the actual attainment of
specified performance goals measured for the 2018 calendar year and continued service through December 31, 2018. The
number of shares issuable under such units, ranging between 0% to 150% of the target number of shares, is based on the level
of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no
market conditions and the stock-based compensation expense of $58.02 per unit which was based on the award grant date fair
value is being recognized assuming the performance goals will be attained. As of December 31, 2018, the specified
performance goals and service requirement were met by the officers and 150% of the target number of shares is expected to
vest on February 25, 2019 and issued on February 28, 2019 upon approval of the Executive Compensation Committee of the
Board on February 25, 2019.
On January 30, 2018, certain officers of SJW Group were granted performance-based restricted stock units covering an
aggregate target number of SJW Group’s shares of common stock equal to 5,259 that will vest based on the actual attainment of
specified performance goals for the 2020 calendar year and continued service through December 31, 2020. The number of
shares issuable under the awards, ranging between 0% to 150% of the target number of shares, is based on the level of actual
attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market
conditions and the stock-based compensation expense of $55.89 per unit which is based on the award grant date fair value is
being recognized assuming the performance goals will be attained. As of December 31, 2018, the forecast determines a
potential payout of the specified performance goals and service requirement between 50% and 100% of the target number of
shares to vest in 2021.
77
On January 30, 2018, performance-based restricted stock units were granted to a key officer of SJW Group covering a target
number of shares of SJW Group’s common stock equal to 6,342 that will vest based on continued service and attainment of
specified performance goals over the period from January 1, 2018, to December 31, 2020. The number of shares issuable under
the award, ranging between 0% and 200% of the target number of shares, is based on the level of actual attainment of specified
performance goals. These units do not include dividend equivalent rights. The fair value of the performance-based restricted
stock award was estimated utilizing the Monte Carlo valuation model, using the fair value of SJW Group’s common stock with
the effect of market conditions and no dividend yield on the date of grant, and assumes the performance goals will be attained.
Stock-based compensation expense is recognized at $63.85 per unit. If such goals are not met and requisite service is not
rendered, no compensation cost will be recognized and any recognized compensation cost will be reversed.
On April 25, 2018, restricted stock units covering an aggregate of 7,385 shares of common stock of SJW Group were granted to
the non-employee board members of SJW Group. The units vest upon continuous board service through the day immediately
preceding the date of the next annual stockholder meeting with no dividend equivalent rights. Stock-based compensation
expense of $55.80 per unit, which is based on the award grant date fair value, is being recognized over the service period
beginning in 2018.
A summary of SJW Group’s restricted and deferred restricted stock awards as of December 31, 2018, and changes during the
year ended December 31, 2018, are presented below:
Outstanding as of January 1, 2018 ..........................................................................................
Issued ....................................................................................................................................
Exercised...............................................................................................................................
Forfeited or expired ..............................................................................................................
Outstanding as of December 31, 2018 ....................................................................................
Shares vested as of December 31, 2018..................................................................................
Units
190,496
$
58,211
$
(143,614) $
— $
105,093
45,912
$
$
Weighted-
Average Grant-
Date Fair Value
27.81
50.29
28.41
—
37.73
16.46
A summary of the status of SJW Group’s nonvested restricted and deferred restricted stock awards as of December 31, 2018,
and changes during the year ended December 31, 2018, are presented below:
Nonvested as of January 1, 2018 ............................................................................................
Granted .................................................................................................................................
Vested....................................................................................................................................
Forfeited................................................................................................................................
Nonvested as of December 31, 2018 ......................................................................................
Units
87,483
$
$
58,211
(86,513) $
— $
59,181
$
Weighted-
Average Grant-
Date Fair Value
40.89
50.29
35.99
—
54.67
As of December 31, 2018, the total unrecognized compensation costs related to restricted and deferred restricted stock plans
amounted to $1,801. This cost is expected to be recognized over a weighted-average period of 1.20 years.
Dividend Equivalent Rights
Under the Plan, certain holders of restricted stock and deferred restricted stock awards may have the right to receive dividend
equivalent rights (“DERs”) each time a dividend is paid on common stock after the grant date. Stock compensation on DERs is
recognized as a liability and recorded against retained earnings on the date dividends are issued.
The Deferred Restricted Stock and Deferral Election Programs for non-employee Board members were amended effective
January 1, 2008, to allow the DERs’ with respect to the deferred shares to remain in effect only through December 31, 2017.
Accordingly, the last DERs’ conversion into deferred restricted stock units under such programs occured on the first business
day in January 2018. Previously, no such time limitation was placed in the Deferred Restricted Stock and Deferral Election
Program.
As of December 31, 2018, 2017 and 2016, a cumulative of 79,478, 77,034 and 74,403 dividend equivalent rights were
converted, since inception, to deferred restricted stock awards, respectively. For the years ended December 31, 2018, 2017 and
2016, $97, $139 and $114, respectively, related to dividend equivalent rights were recorded against retained earnings and were
accrued as a liability.
78
Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85% of the fair value of shares on the
purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase
of shares of common stock, subject to certain restrictions. A total of 400,000 shares of SJW Group’s common stock have been
reserved for issuance under the ESPP.
As of December 31, 2018, the ESPP had eight purchase intervals since its inception. For the year ended December 31, 2018,
2017 and 2016, a total of 25,907, 27,743 and 30,214 shares, respectively, were issued under the ESPP. The plan has no look-
back provisions. For the years ended December 31, 2018, 2017 and 2016, cash received from employees towards the ESPP
amounted to $1,523, $1,282 and $1,060, respectively.
For the years ended December 31, 2018, 2017 and 2016, SJW Group’s recorded expenses were $265, $229 and $185 related to
the ESPP.
The total unrecognized compensation costs related to the semi-annual offering period that ended January 31, 2019 for the ESPP
is approximately $111. This cost is expected to be recognized during the first quarter of 2019.
Note 11.
Segment and Non-Tariffed Businesses Reporting
SJW Group is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility operation with both
regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company, a
regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water
Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P.,
which operated commercial building rentals, and (iv) Hydro Sub, Inc. a Connecticut corporation that was formed on March 9,
2018 for the sole purpose of effecting the SJW Group and CTWS merger (see discussion on the proposed merger at Note 12).
In November 2017, SJW Group sold its equity interest in its wholly-owned subsidiary TWA, a non-tariffed water utility
operation that was undertaking activities that developed 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, Canyon Lake Water Service Company and, up to the date of the sale, 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.
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.
Water Utility Services
Operating revenue .......................
Operating expense.......................
Operating income (loss) ..............
Net income (loss) ........................
Depreciation and amortization ....
Senior note and other interest
expense........................................
Regulated
384,639
294,536
90,103
53,181
53,067
22,157
Income tax expense (benefit) in
net income ...................................
14,826
Assets .......................................... 1,492,954
For year ended December 31, 2018
Real
Estate
Services
Non-
tariffed
5,482
3,539
1,943
885
1,196
All Other (1)
Non-
tariffed
—
21,172
(21,172)
(17,147)
—
SJW Group
Non-
tariffed
13,060
29,723
(16,663)
(14,414)
1,534
Regulated
384,639
294,536
90,103
53,181
53,067
Total
397,699
324,259
73,440
38,767
54,601
Non-
tariffed
7,578
5,012
2,566
1,848
338
—
—
2,175
22,157
2,175
24,332
719
4,489
903
46,517
(6,383)
412,429
14,826
1,492,954
(4,761)
463,435
10,065
1,956,389
79
Operating revenue .......................
Operating expense.......................
Operating income (loss) ..............
Net income before
noncontrolling interest ................
Depreciation and amortization ....
Senior note, mortgage and other
interest expense ...........................
Regulated
376,104
276,061
100,043
47,736
46,500
20,670
Income tax expense in net
income .........................................
30,127
Assets .......................................... 1,406,221
Water Utility Services
For year ended December 31, 2017
Real
Estate
Services
Non-
tariffed
All Other (1)
Non-
tariffed
5,702
3,688
2,014
8,089
1,220
—
2,770
(2,770)
4,138
—
SJW Group
Non-
tariffed
13,121
11,313
1,808
13,364
1,792
Regulated
376,104
276,061
100,043
47,736
46,500
Total
389,225
287,374
101,851
61,100
48,292
Non-
tariffed
7,419
4,855
2,564
1,137
572
—
60
2,199
20,670
2,259
22,929
993
4,471
644
47,668
3,629
(359)
30,127
5,266
35,393
1,406,221
51,780
1,458,001
Water Utility Services
Regulated
326,547
232,138
94,409
45,594
42,709
18,667
Non-
tariffed
6,442
4,257
2,185
954
480
—
For year ended December 31, 2016
Real
Estate
Services
Non-
tariffed
6,717
4,074
2,643
7,406
1,436
All Other (1)
Non-
tariffed
—
1,800
(1,800)
(1,115)
—
SJW Group
Non-
tariffed
13,159
10,131
3,028
7,245
1,916
Regulated
326,547
232,138
94,409
45,594
42,709
Total
339,706
242,269
97,437
52,839
44,625
912
2,259
18,667
3,171
21,838
Operating revenue .......................
Operating expense.......................
Operating income (loss) ..............
Net income (loss) ........................
Depreciation and amortization ....
Senior note, mortgage and other
interest expense ...........................
Income tax expense in net
income .........................................
27,902
Assets .......................................... 1,368,886
____________________
(1)
Hydro Sub, Inc. had no recorded revenue or expenses and as of December 31, 2018, held no assets and incurred no liabilities. For the years ended,
December 31, 2017 and 2016, the “All Other” category includes the accounts of SJW Group on a stand-alone basis.
The “All Other” category includes the accounts of SJW Group and Hydro Sub, Inc. on a stand-alone basis. For the year ended December 31, 2018,
1,368,886
1,443,376
17,794
27,902
33,542
54,818
74,490
4,235
5,640
1,878
750
655
Note 12.
SJW Group and CTWS Merger (the “Merger”)
On March 14, 2018, SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group and
CTWS entered into an Agreement and Plan of Merger to merge the two companies, SJW Group and CTWS, in an all-stock
transaction. On August 5, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a Second Amended and Restated
Agreement & Plan of Merger (the “Merger Agreement”), which among other things, changed the merger to an all-cash
transaction. Under the terms of the Merger Agreement, Hydro Sub, Inc. will merge with and into CTWS, with CTWS surviving
the Merger as a wholly-owned subsidiary of SJW Group. Subject to the terms and conditions of the Merger Agreement, at the
time at which the Merger becomes effective (the “Effective Time”), each share of common stock, without par value, of CTWS
(“CTWS Common Share”), other than CTWS Common Shares directly or indirectly owned by SJW Group, Hydro Sub, Inc.,
CTWS or any of their respective subsidiaries (in each case, other than any CTWS Common Shares held on behalf of third
parties), issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $70.00 per
share in cash (without interest and less any applicable withholding taxes).
The transaction was approved by the boards of directors of both companies and by CTWS shareholders. Consummation of the
Merger is subject to customary conditions, including, without limitation: approval by CTWS shareholders (which has been
80
obtained); approval by certain regulators; the absence of any law or judgment prohibiting the consummation of the Merger; the
accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers); each party’s
performance in all material respects of its obligations contained in the Merger Agreement; and the absence of any material
adverse effect on SJW Group or CTWS since the date of the Merger Agreement, which has not been ameliorated or cured.
On December 3, 2018, the Connecticut Public Utilities Regulatory Authority (“PURA”) issued a proposed final decision
denying the application by SJW Group and CTWS for approval of the proposed merger (“Proposed Final Decision”). On
December 5, 2018, PURA conditionally granted SJW Group’s and CTWS’s motion to suspend the schedule permitting SJW
Group and CTWS to file new evidence that was unavailable before the close of the record in the proceeding for PURA’s
consideration. On December 14, 2018, SJW Group and CTWS filed a motion to reopen the record and extend the procedural
schedule to admit new evidence that was submitted concurrent with the motion (“Motion to Reopen”). On January 4, 2019,
PURA denied the Motion to Reopen concluding that the concessions and offers of commitments did not constitute new
evidence and to the extent that some of the filed material contains “new” evidence, the material was insufficient to warrant
reopening. On January 9, 2019, SJW Group and CTWS withdrew their application before PURA and issued a joint press
release announcing that they are continuing to evaluate their regulatory approach in connection with the proposed merger,
including the possibility of submitting a new application to PURA. PURA closed the docket without issuing a final decision on
January 11, 2019. After a thorough review conducted by the management and boards of both companies with the support of
their respective local Connecticut regulatory counsel SJW Group and CTWS announced on February 20, 2019 that they intend
to file a new merger approval application with PURA. The new application is expected to be filed during the second quarter of
2019.
On December 20, 2018, the Maine Public Utilities Commission (“MPUC”) staff issued a stay in the reorganization proceeding
pending resolution of the regulatory filing in Connecticut. On January 10, 2019, following the withdrawal of the PURA
application, the Maine Water Company notified the MPUC of such withdrawal in a status report. On January 23, 2019, the
Maine Water Company filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the right to
refile at a later date. Later that day, the MPUC acknowledged receipt of the Maine Water Company’s notice and issued notice
closing the docket. After a thorough review conducted by the management and boards of both companies with the support of
their respective local Maine regulatory counsel SJW Group and CTWS announced on February 20, 2019 that they intend to file
a new merger approval application with MPUC. The new application is expected to be filed during the second quarter of 2019.
There is no guarantee that all of the closing conditions and approvals will be satisfied, and the failure to complete the Merger
may adversely affect the financial conditions and results of operations of SJW Group. For a description of certain risk factors
related to the Merger, please see Item 1A, “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, 2018.
Note 13.
Unaudited Quarterly Financial Data
Summarized quarterly financial data is as follows:
Operating revenue........................................................ $
Operating income.........................................................
SJW Group net income ................................................
Comprehensive income................................................
Earnings per share:
—Basic ......................................................................
—Diluted ...................................................................
Market price range of stock:
—High .......................................................................
—Low........................................................................
Dividend per share .......................................................
March
June
September
December
2018 Quarter Ended
99,086
22,799
12,871
12,871
0.63
0.62
68.15
51.68
0.28
124,853
25,828
15,788
15,788
0.77
0.76
67.29
56.12
0.28
98,718
17,482
8,823
8,823
0.38
0.38
65.31
52.63
0.28
75,042
7,331
1,285
1,285
0.06
0.06
63.47
51.96
0.28
81
March
June
September
December
2017 Quarter Ended
Operating revenue........................................................ $
Operating income.........................................................
SJW Group net income ................................................
Comprehensive income................................................
Earnings per share:
—Basic ......................................................................
—Diluted ...................................................................
Market price range of stock:
—High .......................................................................
—Low........................................................................
Dividend per share .......................................................
69,045
10,833
3,671
3,787
0.18
0.18
55.30
46.13
0.22
102,073
30,787
18,688
18,744
0.91
0.90
53.00
45.74
0.22
124,578
38,245
19,540
19,620
0.95
0.94
57.43
48.46
0.22
93,529
18,214
17,305
17,732
0.84
0.84
68.13
57.60
0.38
82
SJW Group
FINANCIAL STATEMENT SCHEDULE
VALUATION AND QUALIFYING ACCOUNTS AND RESERVES
Years ended December 31, 2018, 2017 and 2016
(in thousands)
Schedule II
Description
Allowance for doubtful accounts:
Balance, beginning of period .................................................................. $
Charged to expense .................................................................................
Accounts written off................................................................................
Recoveries of accounts written off..........................................................
Balance, end of period ............................................................................ $
Reserve for litigation and claims:
Balance, beginning of period .................................................................. $
Charged to expense .................................................................................
Revision to accrual, due to settlements ...................................................
Payments .................................................................................................
Balance, end of period ............................................................................ $
2018
2017
2016
190
430
(650)
302
272
1,892
480
1
(192)
2,181
200
399
(675)
266
190
2,105
528
(245)
(496)
1,892
200
504
(681)
177
200
263
2,186
(19)
(325)
2,105
Item 9.
None.
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Item 9A.
Controls and Procedures
Evaluation of Disclosure Control 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.
Management’s Report on Internal Control over Financial Reporting
SJW Group’s management is responsible for establishing and maintaining an adequate internal control structure over financial
reporting and for an assessment of the effectiveness of internal control over financial reporting, as such items are defined in
Rule 13a-15(f) and 15d-15(f) under the Exchange Act.
Management has utilized the criteria established in “Internal Control-Integrated Framework (2013)” issued by the Committee of
Sponsoring Organizations of the Treadway Commission to evaluate the effectiveness of internal control over financial
reporting.
SJW Group’s management has performed an assessment of the effectiveness of internal control over financial reporting as of
December 31, 2018. Based on this assessment, management has concluded SJW Group’s internal control over financial
reporting as of December 31, 2018 was effective.
83
Our independent registered public accounting firm, KPMG LLP, has issued an auditors’ report on the effectiveness of our
internal control over financial reporting, which is included in Item 8 of this report.
Changes in Internal Controls
There has been no change in internal control over financial reporting during the fourth fiscal quarter of 2018 that has materially
affected, or is reasonably likely to materially affect, the internal controls over financial reporting of SJW Group.
Item 9B.
Other Information
SJW Group intends to 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 content of SJW Group’s website is not
incorporated by reference to or part of this report.
PART III
Item 10.
Directors, Executive Officers and Corporate Governance
The information required by this item is contained in part under the caption “Officers of the Registrant” in Part I, Item 1, of this
report, and in SJW Group’s Proxy Statement for its 2019 Annual Meeting of Stockholders to be held on April 24, 2019 (the
“2019 Proxy Statement”) under the captions “Proposal 1—Election of Directors” and “Section 16(a) Beneficial Ownership
Reporting Compliance,” and is incorporated herein by reference.
Code of Ethics
SJW Group has adopted a code of ethics that applies to SJW Group’s Chief Executive Officer, Chief Financial Officer,
Controller and all other officers. The text of the code of ethics is available, free of charge, at the Company’s website at
http://www.sjwgroup.com. SJW Group intends to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding an
amendment to, or a waiver from, a provision of its code of ethics by posting such information on its website.
Corporate Governance Policies and Board Committee Charters
The Corporate Governance Policies and the charters for the board committees—the Audit Committee, Executive Compensation
Committee, Nominating & Governance Committee, Sustainability Committee, and Finance Committee—are available at the
Company’s website at http://www.sjwgroup.com. Stockholders may also request a free hard copy of the Corporate Governance
Policies and the charters from the following address and phone number:
SJW Group
110 West Taylor Street
San Jose, CA 95110
Attn: Corporate Secretary
Phone: 800-250-5147
Item 11.
Executive Compensation
The information required by this item is contained in the 2019 Proxy Statement under the captions “Compensation of
Directors,” “Executive Compensation and Related Information,” “Compensation Committee Interlocks and Insider
Participation,” and “Committee Reports” and is incorporated herein by reference.
Item 12.
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item is contained in the 2019 Proxy Statement under the captions “Security Ownership of
Certain Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans” and
is incorporated herein by reference.
Item 13.
Certain Relationships and Related Transactions, and Director Independence
The information required by this item is contained in the 2019 Proxy Statement under the caption “Certain Relationships and
Related Transactions” and “Independent Directors” and is incorporated herein by reference.
Item 14.
Principal Accountant Fees and Services
The information required by this item is contained in the 2019 Proxy Statement under the caption “Principal Independent
Accountants’ Fees and Services” and is incorporated herein by reference.
84
Item 15.
Exhibits and Financial Statement Schedules
PART IV
(a)(1) Financial Statements
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Comprehensive Income for the Years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Changes in Stockholders’ Equity for the Years ended December 31, 2018, 2017 and
2016
Consolidated Statements of Cash Flows for the Years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
(a)(2) Financial Statement Schedule
Valuation and Qualifying Accounts and Reserves, Years ended December 31, 2018, 2017 and 2016
Page
46
47
49
50
51
52
83
All other schedules are omitted as the required information is inapplicable or the information is presented in the consolidated
financial statements or related notes.
(a)(3) Exhibits required to be filed by Item 601 of Regulation S-K.
See Exhibit Index located immediately following this Item 15.
The exhibits filed herewith are attached hereto (except as noted) and those indicated on the Exhibit Index, which are not filed
herewith, were previously filed with the Securities and Exchange Commission as indicated.
85
Exhibit No.
Description
EXHIBIT INDEX
1.1
2.1
2.2
2.3
3.1
3.2
3.3
3.4
4.1
4.2
4.3
4.4
4.5
10.1
10.2
10.3
Underwriting Agreement, dated as of November 28, 2018. Incorporated by reference to Exhibit 1.1 to Form
8-K filed on December 3, 2018.
Agreement and Plan of Merger, dated as of March 14, 2018, by and among SJW Group, Hydro Sub, Inc. and
Connecticut Water Service, Inc. Incorporated by reference as Exhibit 2.1 to Form 8-K filed on March 15,
2018.
Amended and Restated Agreement and Plan of Merger, dated as of May 30, 2018, by and among SJW Group,
Hydro Sub, Inc. and Connecticut Water Service, Inc. Incorporated by reference as Exhibit 2.1 to Form 8-K
filed on May 31, 2018.
Second Amended and Restated Agreement and Plan of Merger, dated as of August 5, 2018, by and among
SJW Group, Hydro Sub, Inc. and Connecticut Water Service, Inc. Incorporated by reference as Exhibit 2.1 to
Form 8-K filed on August 6, 2018. (3)
Certificate of Incorporation of SJW Group. Incorporated by reference to Exhibit 3.1 to Form 8-K filed on
November 15, 2016.
Certificate of Amendment of the Certificate of Incorporation of SJW Group. Incorporated by reference to
Exhibit 3.3 to Form 8-K filed on November 15, 2016.
Bylaws of SJW Group. Incorporated by reference to Exhibit 3.2 to Form 8-K filed on November 15, 2016.
Amended and Restated Bylaws of SJW Group effective as of January 25, 2017. Incorporated by reference to
Exhibit 3.1 to the Form 8-K filed on January 26, 2017.
Instruments Defining the Rights of Security Holders, including Indentures: No current issue of the
registrant’s long-term debt exceeds 10 percent of its total assets. SJW Group hereby agrees to furnish upon
request to the Commission a copy of each instrument defining the rights of holders of unregistered senior and
subordinated debt of the Company.
Form of Common Stock Certificate of SJW Group. Incorporated by reference to Exhibit 4.1 to Form 8-K
filed on November 15, 2016.
Indenture dated as of June 1, 2010 between San Jose Water Company and Wells Fargo Bank, National
Association. Incorporated by reference to Exhibit 4.1 to Form 10-Q for the quarter ended June 30, 2010.
Indenture dated as of December 1, 2016, by and between California Pollution Control Financing Authority
and The Bank of New York Mellon Trust Company, N.A. relating to the Bond. SJW Group agrees to furnish
to the Commission upon request a copy of such agreement which it has elected not to file under the
provisions of Regulation S-K 601(b)(4)(iii).
4.35% Senior Notes due June 30, 2021. SJW Group agrees to furnish a copy of such Senior Notes to the
Commission upon request.
Water Supply Contract dated January 27, 1981, between San Jose Water Works and the Santa Clara Valley
Water District, as amended. Incorporated by reference to Exhibit 10.1 to Form 10-K for the year ended
December 31, 2001.
Limited Partnership Agreement of 444 West Santa Clara Street, L.P., entered into as of September 2, 1999,
between SJW Land Company and Toeniskoetter & Breeding, Inc. Development. Incorporated by reference to
Exhibit 10.18 to Form 10-Q for the quarter ended September 30, 1999.
Grantor Trust Agreement by and between San Jose Water Company and Wells Fargo Bank, National
Association dated November 2, 2012. Incorporated by reference as Exhibit 10.4 to Form 10-K for the year
ended December 31, 2012.
86
10.4
10.5
10.6
10.7
10.8
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
Fourth Amendment to Credit Agreement, dated June 1, 2016, between San Jose Water Company and Wells
Fargo Bank, National Association. Incorporated by reference to Exhibit 10.2 to Form 8-K filed on June 3,
2016.
Credit Agreement, dated June 1, 2016, between San Jose Water Company and JPMorgan Chase Bank, N.A.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on June 3, 2016.
First Amendment to Credit Agreement, dated January 12, 2018, between San Jose Water Company and JP
Morgan Chase Bank, N.A. Incorporated by reference to Exhibit 10.7 to Form 10-Q for the quarter ended
March 31, 2018.
Loan Agreement dated as of June 1, 2010 between the California Pollution Control Financing Authority and
San Jose Water Company. Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended
June 30, 2010.
Loan Agreement dated as of December 1, 2016 between the California Pollution Control Financing Authority
and San Jose Water Company. Incorporated by reference to Exhibit 10.7 to Form 10-K for the year ended
December 31, 2016.
Bond Purchase agreement dated June 9, 2010 among Goldman, Sachs & Co., the Treasurer of the State of
California and the California Pollution Control Financing Authority and approved by San Jose Water
Company. Incorporated by reference to Exhibit 10.4 to Form 10-Q for the quarter ended June 30, 2010.
Bond Purchase Contract dated December 15, 2016 among Morgan Stanley & Co. LLC, RBC Capital
Markets, LLC, the Treasurer of the State of California and the California Pollution Control Financing
Authority and approved by San Jose Water Company. Incorporated by reference to Exhibit 10.9 to Form 10-
K for the year ended December 31, 2016.
Note Agreement between SJW Corp. and the Prudential Insurance Company of America, dated June 30,
2011. Incorporated by reference as Exhibit 10.3 to Form 8-K filed on July 7, 2011.
Note Agreement between San Jose Water Company and John Hancock Life Insurance Company (U.S.A.) and
its affiliate, dated January 24, 2014. Incorporated by reference as Exhibit 10.1 to Form 8-K filed on January
29, 2014.
Form of Letter Amendment to SJW Corp. Director Pension Plan. Incorporated by reference as Exhibit 10.25
to Form 10-K for the year ended December 31, 2007. (2)
San Jose Water Company Executive Supplemental Retirement Plan, as amended and restated effective
January 1, 2012. Incorporated by reference as Exhibit 10.20 to Form 10-K for the year ended December 31,
2011. (2)
The First Amendment to the Executive Supplemental Retirement Plan effective November 15, 2016.
Incorporated by reference to Exhibit 10.14 to the Form 10-K for the year ended December 31, 2016. (2)
San Jose Water Company Cash Balance Executive Supplemental Retirement Plan as amended and restated
effective January 1, 2012. Incorporated by reference as Exhibit 10.23 to Form 10-K for the year ended
December 31, 2011. (2)
First Amendment to San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan
effective as of October 30, 2013. Incorporated by reference as Exhibit 10.15 to Form 10-K for the year ended
December 31, 2013. (2)
Second Amendment to San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan
effective as of January 31, 2014. Incorporated by reference as Exhibit 10.2 to Form 8-K filed on January 30,
2014. (2)
Third Amendment to San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan
effective November 15, 2016. Incorporated by reference to Exhibit 10.18 to Form 10-K for the year ended
December 31, 2016. (2)
87
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
Fourth Amendment to San Jose Water Company’s Cash Balance Executive Supplemental Retirement Plan
effective November 6, 2017. Incorporated by reference to Exhibit 10.5 to the Form 10-Q for the quarter
ended September 30, 2017. (2)
Fifth Amendment to the San Jose Water Company Cash Balance Executive Supplemental Retirement Plan
effective October 24, 2018. (1)(2)
SJW Corp. Long-Term Incentive Plan, as amended and restated on January 30, 2013 effective as of April 24,
2013. Incorporated by reference as Exhibit 10.2 to Form 10-Q filed for the quarter ended June 30, 2013. (2)
SJW Corp. Long-Term Incentive Plan, as amended and restated on July 29, 2015. Incorporated by reference
as Exhibit 10.1 to Form 10-Q filed for the quarter ended September 30, 2015. (2)
First Amendment to the SJW Group Long-Term Incentive Plan dated November 15, 2016. Incorporated by
reference to Exhibit 10.21 to Form 10-K for the year ended December 31, 2016. (2)
Employment Agreement of Mr. Eric W. Thornburg dated September 26, 2017, together with Exhibit A (Form
of Restricted Stock Unit Issuance Agreement - Initial Time-Based Grant), Exhibit B (Form of Restricted
Stock Issuance Agreement - Special Time-Based Grant), and Exhibit C (Form of Confidential Settlement
Agreement and Release). Incorporated by reference to Exhibit 10.3 to Form 10-Q for the quarter ended
September 30, 2017. (2)
CEO Transition Agreement of Mr. Roth dated September 26, 2017. Incorporated by reference to Exhibit 10.4
to Form 10-Q for the quarter ended September 30, 2017. (2)
Offer Letter to Mr. James P. Lynch dated September 22, 2010 and accepted September 27, 2010.
Incorporated by reference to Exhibit 10.1 to Form 8-K filed on October 1, 2010. (2)
Offer Letter to Mr. Andrew F. Walters. Incorporated by reference as Exhibit 10.1 to Form 8-K filed on
January 30, 2014. (2)
Offer Letter to Mr. Andrew R. Gere dated April 30, 2015. Incorporated by reference as Exhibit 10.1 to the
Form 10-Q filed for the quarter ended June 30, 2015. (2)
Offer Letter to Mr. Andrew R. Gere dated March 14, 2016. Incorporated by reference to Exhibit 10.2 to
Form 10-Q for the quarter ending March 31, 2016. (2)
Standard Form of SJW Group Stock Option Agreement. Incorporated by reference to Exhibit 10.31 to Form
10-K for the year ended December 31, 2016. (2)
SJW Corp. Executive Officer Short-Term Incentive Plan, as amended and restated on January 30, 2013
effective as of April 24, 2013. Incorporated by reference as Exhibit 10.1 to Form 10-Q for the quarter ended
June 30, 2013. (2)
First Amendment to the Executive Officer Short-Term Incentive Plan dated November 15, 2016.
Incorporated by reference as Exhibit 10.33 to Form 10-K for the year ended December 31, 2016. (2)
SJW Corp. Executive Severance Plan, as amended and restated, effective January 1, 2010 and amended
effective October 26, 2010. Incorporated by reference as Exhibit 10.23 to Form 10-K for the year ended
December 31, 2010. (2)
First Amendment to the Executive Severance Plan dated November 15, 2016. Incorporated by reference as
Exhibit 10.35 to Form 10-K for the year ended December 31, 2016. (2)
Second Amendment to the Executive Severance Plan dated July 26, 2017. Incorporated by reference as
Exhibit 10.1 to Form 10-Q for the quarter ended September 30, 2017. (2)
Third Amendment to the Executive Severance Plan effective November 6, 2017. Incorporated by reference
as Exhibit 10.2 to Form 10-Q for the quarter ended September 30, 2017. (2)
San Jose Water Company Special Deferral Election Plan, as amended and restated, effective January 1, 2013.
Incorporated by reference as Exhibit 10.36 to Form 10-K for the year ended December 31, 2012. (2)
88
10.39
10.40
10.41
10.42
10.43
10.44
10.45
10.46
10.47
10.48
10.49
10.50
10.51
10.52
10.53
10.54
10.55
10.56
10.57
First Amendment to the Special Deferral Election Plan effective November 15, 2016. Incorporated by
reference as Exhibit 10.37 to Form 10-K for the year ended December 31, 2016. (2)
SJW Corp. Amended and Restated Deferred Restricted Stock Program, effective January 1, 2008.
Incorporated by reference as Exhibit 10.1 to Form 10-Q for the quarter ended March 31, 2008. (2)
First Amendment to the Amended and Restated Deferred Restricted Stock Program dated November 15,
2016. Incorporated by reference as Exhibit 10.39 to Form 10-K for the year ended December 31, 2016. (2)
SJW Corp. Deferral Election Program for Non-Employee Board Members, as amended and restated effective
October 30, 2013. Incorporated by reference as Exhibit 10.32 to Form 10-K for the year ended December 31,
2013. (2)
First Amendment to the Deferral Election Program for Non-Employee Board Members dated November 15,
2016. Incorporated by reference as Exhibit 10.41 to Form 10-K for the year ended December 31, 2016. (2)
Form of SJW Group Restricted Stock Unit Award Agreement for Non-Employee Board Members.
Incorporated by reference as Exhibit 10.1 to Form 10-Q for the quarter ended June 30, 2017. (2)
Formulaic Equity Award Program for Non-Employee Board Members. Incorporated by reference as Exhibit
10.34 to Form 10-K for the year ended December 31, 2013. (2)
First Amendment to the Formulaic Equity Award Program for Non-Employee Board Members dated October
26, 2016. Incorporated by reference as Exhibit 10.44 to Form 10-K for the year ended December 31, 2016.
(2)
Second Amendment to the Formulaic Equity Award Program for Non-Employee Board Members dated
November 15, 2016. Incorporated by reference as Exhibit 10.45 to Form 10-K for the year ended December
31, 2016. (2)
Third Amendment to the Formulaic Equity Award Program for Non-employee Board members dated October
24, 2018. (1)(2)
SJW Group Director Compensation and Expense Reimbursement Policies effective as of January 31, 2018.
Incorporated by reference to Exhibit 10.53 to Form 10-K for the year ended December 31, 2017. (2)
SJW Group Director Compensation and Expense Reimbursement Policies effective as January 1, 2019. (1)(2)
Deferred Restricted Stock Award Agreement, amended and restated, as of October 22, 2008 for Non-
Employee Board Members. Incorporated by reference as Exhibit 10.21 to Form 10-K for the year ended
December 31, 2008. (2)
Form of Chief Executive Officer SJW Group Restricted Stock Unit Issuance Agreement (TSR Goals).
Incorporated by reference to Exhibit 10.55 to Form 10-K for the year ended December 31, 2017. (2)
Form of SJW Group Restricted Stock Unit Issuance Agreement. Incorporated by reference as Exhibit 10.52 to
Form 10-K for the year ended December 31, 2016. (2)
Form of SJW Group Restricted Stock Unit Issuance Agreement (1-year ROE Goal). Incorporated by
reference as Exhibit 10.54 to Form 10-K for the year ended December 31, 2016. (2)
Form of SJW Group Restricted Stock Unit Issuance Agreement (EPS Goal). Incorporated by reference as
Exhibit 10.55 to Form 10-K for the year ended December 31, 2016. (2)
Form of Director and Officer Indemnification Agreement between SJW Group and its officers and Board
members. Incorporated by reference to Exhibit 10.1 to Form 8-K filed on November 15, 2016. (2)
Voting and Support Agreement, dated as of March 14, 2018, by and between SJW Group and George Edward
Moss Revocable Trust dated August 18, 1982, as amended and restated March 11, 2016. Incorporated by
reference as Exhibit 10.1 to Form 8-K filed on March 15, 2018.
89
10.58
10.59
21.1
23.1
31.1
31.2
32.1
32.2
Voting and Support Agreement, dated as of March 14, 2018, by and between SJW Group, Non-Exempt
Bypass Trust created under the Roscoe Moss Jr. Revocable Trust dated March 14, 1982 and Exempt Bypass
Trust created under the Roscoe Moss Jr. Revocable Trust dated March 14, 1982. Incorporated by reference as
Exhibit 10.2 to Form 8-K filed on March 15, 2018.
Voting and Support Agreement, dated as of March 14, 2018, by and between SJW Group and Robert A. Van
Valer. Incorporated by reference as Exhibit 10.3 to Form 8-K filed on March 15, 2018.
Subsidiaries of SJW Group. (1)
Consent of Independent Registered Public Accounting Firm. (1)
Certification Pursuant to Rule 13a-14(a)/15d-14(a) by President and Chief Executive Officer. (1)
Certification Pursuant to Rule 13a-14(a)/15d-14(a) by Chief Financial Officer and Treasurer. (1)
Certification Pursuant to 18 U.S.C. Section 1350 by President and Chief Executive Officer, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
Certification Pursuant to 18 U.S.C. Section 1350 by Chief Financial Officer and Treasurer, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (1)
101.INS
XBRL Instance Document
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.
(2) Management contract or compensatory plan or agreement.
(3) Pursuant to Item 601(b)(2) of Regulation S-K, certain exhibits and schedules have been omitted. The
registrant hereby agrees to furnish supplementally a copy of any omitted exhibit or schedule to the SEC
upon request.
90
Pursuant to the requirements of Section 13 or 15(d) 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.
SIGNATURES
Date: February 27, 2019
By
/s/ Eric W. Thornburg
SJW Group
ERIC W. THORNBURG,
President, Chief Executive Officer and
Chairman of the Board
(Principal executive officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on the dates indicated.
Date: February 27, 2019
Date: February 27, 2019
By
By
/s/ Eric W. Thornburg
ERIC W. THORNBURG,
President, Chief Executive Officer and
Chairman of the Board
(Principal executive officer)
/s/ James P. Lynch
JAMES P. LYNCH,
Chief Financial Officer and Treasurer
(Principal financial officer)
Date: February 27, 2019
By
/s/ Wendy Avila-Walker
WENDY AVILA-WALKER,
Vice President of Finance, Controller
and Assistant Treasurer
(Principal accounting officer)
91
Date: February 27, 2019
Date: February 27, 2019
Date: February 27, 2019
Date: February 27, 2019
Date: February 27, 2019
Date: February 27, 2019
Date: February 27, 2019
By
By
By
By
By
By
By
/s/ Katharine Armstrong
KATHARINE ARMSTRONG,
Member, Board of Directors
/s/ Walter J. Bishop
WALTER J. BISHOP,
Member, Board of Directors
/s/ Douglas R. King
DOUGLAS R. KING,
Member, Board of Directors
/s/ Gregory P. Landis
GREGORY P. LANDIS,
Member, Board of Directors
/s/ Debra C. Man
DEBRA C. MAN,
Member, Board of Directors
/s/ Daniel B. More
DANIEL B. MORE,
Member, Board of Directors
/s/ Robert A. Van Valer
ROBERT A. VAN VALER,
Member, Board of Directors
92
Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
The Board of Directors
SJW Group:
We consent to the incorporation by reference in the registration statements (Nos. 333-105010 and
333-195796) on Form S-8 and registration statement on Form S-3 (No. 333-228548) of SJW Group of our
report dated February 27, 2019, with respect to the consolidated balance sheets of SJW Group as of
December 31, 2018 and 2017, and the related consolidated statements of comprehensive income, changes
in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31,
2018, and the related notes and financial statement schedule II (collectively, the “consolidated financial
statements”), and the effectiveness of internal control over financial reporting as of December 31, 2018,
which report appears in the December 31, 2018 annual report on Form 10-K of SJW Group.
San Francisco, California
February 27, 2019
/s/ KPMG LLP
CERTIFICATIONS
Exhibit 31.1
I, Eric W. Thornburg, certify that:
1. I have reviewed this Annual Report on Form 10-K of SJW Group (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 27, 2019
/s/ Eric W. Thornburg
ERIC W. THORNBURG
Chairman, President and Chief Executive Officer
(Principal executive officer)
CERTIFICATIONS
Exhibit 31.2
I, James P. Lynch, certify that:
1. I have reviewed this Annual Report on Form 10-K of SJW Group (the “registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not
misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly
present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the
periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be
designed under our supervision, to ensure that material information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being
prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial
reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report
our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred
during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control
over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons
performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over
financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and
report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant
role in the registrant’s internal control over financial reporting.
Date: February 27, 2019
/s/ James P. Lynch
JAMES P. LYNCH
Chief Financial Officer and Treasurer
(Principal financial officer)
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.1
In connection with the Annual Report of SJW Group (the “Company”) on Form 10-K for the year ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Eric W. Thornburg, President,
Chief Executive Officer and Chariman of the Board of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge on the date hereof:
(1)
(2)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ Eric W. Thornburg
ERIC W. THORNBURG
Chairman, President and Chief Executive Officer
(Principal executive officer)
February 27, 2019
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 32.2
In connection with the Annual Report of SJW Group (the “Company”) on Form 10-K for the year ended December 31,
2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, James P. Lynch, Chief
Financial Officer and Treasurer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge on the date hereof:
(1)
(2)
the Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of
1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and
results of operations of the Company.
/s/ James P. Lynch
JAMES P. LYNCH
Chief Financial Officer and Treasurer
(Principal financial officer)
February 27, 2019
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FINANCIAL HIGHLIGHTS
SJW Group and subsidiaries
15.2
10.2
13.1
13.4
6.8
1.12
1.04
0.75
0.78
0.81
2.89
2.56
2.59
1.86
1.83
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
4
1
0
2
5
1
0
2
6
1
0
2
7
1
0
2
8
1
0
2
Rate of return on average equity (%)
Dividends paid per share ($)
Basic earnings per share ($)
STOCKHOLDERS' CALENDAR
Schedule of anticipated dividend declaration, record, and payment dates for 2019
DECLARATION DATES
RECORD DATES
PAYMENT DATES
January 30
April 24
July 24
October 30
February 11
May 6
August 5
November 11
March 1
June 3
September 3
December 2
TRANSFER AGENT (for inquiries and changes in stockholder accounts)
American Stock Transfer & Trust Company, LLC
Shareholder Services Division
6201 15th Avenue, Brooklyn, NY 11219
Telephone: (800) 937-5449
Website: www.astfinancial.com
ANNUAL MEETING
The Annual Meeting of Stockholders of SJW Group is scheduled for Wednesday, April 24, 2019, at 9:00
AM in the Corporation's principal office at 110 W. Taylor Street, San Jose, California 95110.
Website: www.sjwgroup.com
General Office: (408) 918-7231
Investor Relations: (800) 250-5147
DIRECTORS
Katharine Armstrong, Chairman of the Advisory Board, Natural Resources Solutions
Walter J. Bishop, Principal, Walter Bishop Consulting
Douglas R. King, Retired Audit Partner, Ernst & Young LLP
Gregory P. Landis, Counsel, Yarmuth LLP
Debra C. Man, Retired Assistant General Manager and Chief Operating Officer, The Metropolitan Water
District of Southern California
Daniel B. More, Retired Managing Director and Global Head of Utility Mergers & Acquisitions,
Morgan Stanley
Eric W. Thornburg, Chairman, President and Chief Executive Officer, SJW Group
Robert A. Van Valer, President, Roscoe Moss Manufacturing Company
Trusted professionals delivering exceptional quality water and service to customers and
communities while protecting the environment and providing a fair return to shareholders.
Mission
To serve customers, communities, employees, shareholders, and the environment at world class levels.
Vision
Integrity | Respect | Service | Compassion | Trust | Teamwork | Transparency
Our Values