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EX-32.1 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93017xex321.htm
EX-32.2 - CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 BY CFO AND TREASURER - SJW GROUPsjw-93017xex322.htm
EX-31.2 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CFO AND TREASURER - SJW GROUPsjw-93017xex312.htm
EX-31.1 - CERTIFICATION PURSUANT TO RULE 13A-14(A)/15D-14(A) BY CHAIRMAN, PRESIDENT & CEO - SJW GROUPsjw-93017xxex311.htm
EX-10.5 - EXHIBIT 10.5 - SJW GROUPsjw-93017xex105.htm
EX-10.4 - EXHIBIT 10.4 - SJW GROUPsjw-93017xex104.htm
EX-10.3 - EXHIBIT 10.3 - SJW GROUPsjw-930017xex103.htm
EX-10.2 - EXHIBIT 10.2 - SJW GROUPsjw-93017xex102.htm
EX-10.1 - EXHIBIT 10.1 - SJW GROUPsjw-93017xex101.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
___________________________________________ 
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
Commission file number 1-8966
SJW Group
(Exact name of registrant as specified in its charter)
 
Delaware
 
77-0066628
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
110 West Taylor Street, San Jose, CA
 
95110
(Address of principal executive offices)
 
(Zip Code)
408-279-7800
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes    No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (check one)
 
Large accelerated filer  
 
Accelerated filer  
 
Non-accelerated filer  
 
Smaller reporting company  
 
 
 
 
(Do not check if a smaller reporting company)
 
 
 
 
Emerging growth company  ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes    No  
APPLICABLE ONLY TO CORPORATE ISSUERS:
As of October 23, 2017, there were 20,520,856 shares of the registrant’s Common Stock outstanding.
 




PART I. FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS

SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in thousands, except share and per share data)
 
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
OPERATING REVENUE
$
124,578

 
112,344

 
$
295,696

 
260,400

OPERATING EXPENSE:
 
 
 
 
 
 
 
Production Expenses:
 
 
 
 
 
 
 
Purchased water
30,833

 
28,681

 
66,938

 
52,863

Power
2,500

 
2,141

 
5,491

 
4,992

Groundwater extraction charges
15,756

 
10,867

 
34,098

 
25,627

Other production expenses
3,874

 
3,311

 
11,040

 
9,815

Total production expenses
52,963

 
45,000

 
117,567

 
93,297

Administrative and general
13,477

 
12,449

 
39,494

 
35,690

Maintenance
4,374

 
4,217

 
12,293

 
12,082

Property taxes and other non-income taxes
3,454

 
3,213

 
10,260

 
9,115

Depreciation and amortization
12,065

 
11,119

 
36,217

 
33,489

Total operating expense
86,333

 
75,998

 
215,831

 
183,673

OPERATING INCOME
38,245

 
36,346

 
79,865

 
76,727

OTHER (EXPENSE) INCOME:
 
 
 
 
 
 
 
Interest on long-term debt
(5,487
)
 
(4,993
)
 
(17,146
)
 
(15,039
)
Mortgage and other interest expense
(54
)
 
(433
)
 
(208
)
 
(1,291
)
Gain on sale of California Water Service Group stock

 

 

 
3,197

Gain on sale of real estate investments

 
124

 
6,903

 
124

Dividend income
18

 
17

 
54

 
70

Other, net
341

 
410

 
1,382

 
869

Income before income taxes
33,063

 
31,471

 
70,850

 
64,657

Provision for income taxes
13,523

 
12,512

 
27,055

 
25,545

NET INCOME BEFORE NONCONTROLLING INTEREST
19,540

 
18,959

 
43,795

 
39,112

Less net income attributable to the noncontrolling interest

 

 
1,896

 

SJW GROUP NET INCOME
19,540

 
18,959

 
41,899

 
39,112

Other comprehensive income, net of tax:
 
 
 
 
 
 
 
Unrealized gain on investment
80

 
(169
)
 
252

 
848

Reclassification adjustment for gain realized on sale of investments

 

 

 
(1,742
)
SJW GROUP COMPREHENSIVE INCOME
$
19,620

 
18,790

 
$
42,151

 
38,218

SJW GROUP EARNINGS PER SHARE
 
 
 
 
 
 
 
Basic
$
0.95

 
0.93

 
$
2.04

 
1.91

Diluted
$
0.94

 
0.92

 
$
2.03

 
1.90

DIVIDENDS PER SHARE
$
0.22

 
0.20

 
$
0.65

 
0.61

WEIGHTED AVERAGE SHARES OUTSTANDING
 
 
 
 
 
 
 
Basic
20,516,172

 
20,451,930

 
20,502,274

 
20,434,494

Diluted
20,697,097

 
20,602,410

 
20,675,479

 
20,580,728


See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

2



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2017
 
December 31,
2016
ASSETS
 
 
 
Utility plant:
 
 
 
Land
$
18,237

 
17,923

Depreciable plant and equipment
1,614,139

 
1,554,016

Construction in progress
111,935

 
70,453

Intangible assets
25,164

 
23,989

 
1,769,475

 
1,666,381

Less accumulated depreciation and amortization
542,890

 
520,018

 
1,226,585

 
1,146,363

Real estate investments
56,224

 
62,193

Less accumulated depreciation and amortization
10,844

 
11,734

 
45,380

 
50,459

CURRENT ASSETS:
 
 
 
Cash and cash equivalents
7,569

 
6,349

Restricted cash

 
19,001

Accounts receivable:
 
 
 
Customers, net of allowances for uncollectible accounts
23,297

 
16,361

Income tax

 
9,796

Other
1,609

 
3,383

Accrued unbilled utility revenue
38,055

 
24,255

Current regulatory assets, net
11,368

 
16,064

Other current assets
5,223

 
4,402

 
87,121

 
99,611

OTHER ASSETS:
 
 
 
Investment in California Water Service Group
3,815

 
3,390

Net regulatory assets, less current portion
140,911

 
135,709

Other
7,758

 
7,844

 
152,484

 
146,943

 
$
1,511,570

 
1,443,376










See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

3



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(in thousands, except share and per share data)
 
 
September 30,
2017
 
December 31,
2016
CAPITALIZATION AND LIABILITIES
 
 
 
CAPITALIZATION:
 
 
 
Stockholders’ equity:
 
 
 
Common stock, $0.001 par value; authorized 36,000,000 shares; issued and outstanding shares 20,520,856 on September 30, 2017 and 20,456,225 on December 31, 2016
$
21

 
21

Additional paid-in capital
83,856

 
81,715

Retained earnings
366,818

 
338,386

Accumulated other comprehensive income
1,776

 
1,524

Total stockholders’ equity
452,471

 
421,646

Long-term debt, less current portion
431,009

 
433,335

 
883,480

 
854,981

CURRENT LIABILITIES:
 
 
 
Line of credit
13,000

 
14,200

Current portion of long-term debt

 
125

Accrued groundwater extraction charges, purchased water and power
21,696

 
10,846

Accounts payable
30,658

 
18,739

Accrued interest
7,247

 
6,309

Accrued property taxes and other non-income taxes
3,635

 
1,681

Accrued payroll
3,695

 
4,696

Non-refundable deposit
3,000

 

Income tax payable
1,917

 

Other current liabilities
8,570

 
6,977

 
93,418

 
63,573

DEFERRED INCOME TAXES
206,343

 
205,203

ADVANCES FOR CONSTRUCTION
84,496

 
84,815

CONTRIBUTIONS IN AID OF CONSTRUCTION
157,448

 
151,576

POSTRETIREMENT BENEFIT PLANS
73,532

 
70,177

OTHER NONCURRENT LIABILITIES
12,853

 
13,051

COMMITMENTS AND CONTINGENCIES

 

 
$
1,511,570

 
1,443,376









See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

4



SJW Group and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
 
Nine months ended September 30,
 
2017
 
2016
OPERATING ACTIVITIES:
 
 
 
Net income before noncontrolling interest
$
43,795

 
39,112

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
37,877

 
34,740

Deferred income taxes
1,283

 
16,755

Share-based compensation
1,633

 
1,316

Gain on sale of real estate investments
(6,903
)
 
(124
)
Gain on sale of California Water Service Group stock

 
(3,197
)
Changes in operating assets and liabilities:
 
 
 
Accounts receivable and accrued unbilled utility revenue
(18,335
)
 
(19,298
)
Accounts payable and other current liabilities
2,215

 
(3,496
)
Accrued groundwater extraction charges, purchased water and power
10,850

 
6,534

Tax payable and receivable, and other accrued taxes
14,228

 
(6,972
)
Postretirement benefits
3,355

 
2,838

Regulatory assets and liability related to balancing and memorandum accounts
(503
)
 
9,239

Other changes, net
(1,528
)
 
(518
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
87,967

 
76,929

INVESTING ACTIVITIES:
 
 
 
Additions to utility plant:
 
 
 
Company-funded
(103,417
)
 
(102,813
)
Contributions in aid of construction
(2,631
)
 
(5,759
)
Additions to real estate investments
(116
)
 
(254
)
Payments for business/asset acquisition and water rights
(1,149
)
 
(1,063
)
Payments to retire utility plant, net of salvage
(2,323
)
 
(1,418
)
Proceeds from sale of real estate investments
11,180

 
124

Proceeds from non-refundable deposit
3,000

 

Proceeds from sale of California Water Service Group stock

 
4,510

Deposit for long-lived asset held-for-sale

 
20,000

NET CASH USED IN INVESTING ACTIVITIES
(95,456
)
 
(86,673
)
FINANCING ACTIVITIES:
 
 
 
Borrowings on line of credit
28,500

 
53,875

Repayments of line of credit
(29,700
)
 
(24,575
)
Repayments of long-term borrowings
(2,717
)
 
(5,143
)
Payment to noncontrolling interest
(1,896
)
 

Dividends paid
(13,380
)
 
(12,419
)
Receipts of advances and contributions in aid of construction
10,486

 
12,032

Refunds of advances for construction
(1,982
)
 
(1,924
)
Other changes, net
397

 
322

NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
(10,292
)
 
22,168

NET CHANGE IN CASH AND CASH EQUIVALENTS
(17,781
)
 
12,424

CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD
25,350

 
5,239

CASH AND CASH EQUIVALENTS, END OF PERIOD
$
7,569

 
17,663

Cash paid during the period for:
 
 
 
Interest
$
18,383

 
18,324

Income taxes
14,552

 
18,072

Supplemental disclosure of non-cash activities:
 
 
 
Increase in accrued payables for construction costs capitalized
11,241

 
10,349

Utility property installed by developers
874

 
5,063





See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5



SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(in thousands, except share and per share data)

Note 1.
General
In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.
The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). The Notes to Consolidated Financial Statements in SJW Group’s 2016 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.
In March 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU affects entities that issue share-based payment awards to their employees. ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, classifications on the statement of cash flows and forfeiture rate calculations. SJW Group adopted this standard as of the first quarter of 2017. ASU 2016-09 requires recognition of excess tax benefits and deficiencies in the income statement, which resulted in the recognition of $500 in income tax benefit for the three months ended March 31, 2017. Prior to adoption, these amounts were recognized as additional paid-in capital. SJW Group did not have any unrecognized excess tax benefits to reclassify upon adoption of this standard. The ASU also requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares when calculating diluted earnings per shares using the treasury stock method. The effect of this change on diluted earnings per share was immaterial. In addition, excess income tax benefits from share-based compensation are now classified as cash flows from operating activities on the consolidated statements of cash flows, prospectively. Further, ASU 2016-09 requires, on a retrospective basis, that employee taxes paid for withheld shares be classified as cash flows from financing activities rather than cash flows from operating activities. As such, the consolidated statements of cash flows for SJW Group for the periods presented have been reclassified to reflect this change. This change resulted in an increase to cash flows from operating activities and a decrease to cash flows from financing activities of $818 and $500 for the nine months ended September 30, 2017 and 2016, respectively. SJW Group has elected to account for actual forfeitures as they occur upon adoption of the new guidance. Management determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore SJW Group did not record an adjustment.
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales.
On May 9, 2016, Governor Brown issued Executive Order B-37-16 to build on existing temporary statewide emergency water restrictions and to establish longer term water conservation measures, including permanent monthly water use reporting, new permanent water use standards in California communities and bans on wasteful water use practices. On May 18, 2016, the State Water Board adopted a new approach to water conservation regulation and replaced its prior percentage reduction-based water conservation standard with a new approach designed to ensure at least a three year supply of available water based on local conditions. On June 14, 2016, the Santa Clara Valley Water District (“SCVWD”) reduced its conservation target from 30% to 20% and also increased the number of allowable outdoor watering days from two to three effective July 1, 2016 through January 31, 2017. On January 24, 2017, and again on June 13, 2017, the SCVWD reaffirmed its call for 20% conservation and restrictions on outdoor watering for ornamental landscapes to no more than three days a week. On April 7, 2017, Governor Brown issued Executive Order B-40-17 which lifted the drought emergency in all California counties except Fresno, Kings, Tulare, and Tuolumne while maintaining water reporting requirements and prohibitions on wasteful practices.  Executive Order B-40-17 also rescinded two emergency proclamations from January and April 2014 and four drought-related executive orders issued in 2014 and 2015. Conservation and restrictions imposed by SCVWD on June 13, 2017 still remain in effect. 
Effective June 15, 2015, San Jose Water Company was authorized by the CPUC to activate Stage 3 of Tariff Rule 14.1 which is a water shortage contingency plan with mandatory water usage reductions and drought surcharges resulting from usage above customer allocations. Tariff Rule 14.1 focuses primarily on restrictions of outdoor watering which accounts for 50% of a typical customer’s water usage. On June 24, 2016, San Jose Water Company filed with the CPUC to amend its water shortage contingency plan with mandatory water usage reductions and drought surcharges to reflect the SCVWD’s call for 20%

6


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


conservation. This request was approved by the CPUC with an effective date of July 1, 2016. The drought surcharges were not recorded as revenue. Rather, they were recorded in a regulatory liability account authorized by the CPUC to track lost revenues resulting from conservation. The amount recorded in the surcharge account was being used to offset future rate increases that would otherwise be necessary to recover lost revenue due to drought conservation efforts. San Jose Water Company suspended its allocation and drought surcharge program provided for in Schedule 14.1, Water Shortage Contingency Plan with Staged Mandatory Reductions and Drought Surcharges on February 1, 2017. At the end of the second quarter of 2017, San Jose Water Company had no balance remaining in the drought surcharge account to offset future rate increases related to drought conservation efforts. The remaining balance as of September 30, 2017 in San Jose Water Companys balancing and memorandum accounts are related to drought surcharges collected outside of the California regulated entity. On June 13, 2017, the SCVWD adopted Resolution 17-43 to encourage making 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. In addition to the SCVWD’s resolution, the mandatory water use restrictions set forth by the State Water Resources Control Board’s Emergency Regulations remain in effect. San Jose Water Company is continually working to maintain compliance with the various drought rules and regulations and is also working with local governments as well as the SCVWD to communicate consistent messages to the public about use restrictions and related matters associated with the recent drought.
Effective March 31, 2014, San Jose Water Company received approval from the CPUC to institute a Mandatory Conservation Revenue Adjustment Memorandum Account. This account was subsequently replaced with a Water Conservation Memorandum Account (“WCMA”). The WCMA allows San Jose Water Company to track lost revenue associated with reduced sales due to drought related water conservation and the associated calls for water use reduction from the SCVWD. San Jose Water Company records the lost revenue captured in the WCMA regulatory accounts once the revenue recognition requirements of FASB ASU Topic 980 - “Regulated Operations,” subtopic 605-25 are met. For further discussion, please see Note 8 and Note 9.
Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with deferred restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”) and shares potentially issuable under the 2014 Employee Stock Purchase Plan (“ESPP”). For the three months ended September 30, 2017 and 2016, 683 and 714 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2017 and 2016, 3,670 and 4,801 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.
A portion of depreciation expense is allocated to administrative and general expense. For the three months ended September 30, 2017 and 2016, the amounts allocated to administrative and general expense were $551 and $416, respectively. For the nine months ended September 30, 2017 and 2016, the amounts allocated to administrative and general expense were $1,660 and $1,251, respectively.
On September 28, 2017, SJW Group announced that its Board of Directors appointed Eric W. Thornburg to serve as President and Chief Executive Officer of SJW Group, effective as of November 6, 2017 (the “Effective Date”). Also on September 28, 2017, SJW Group announced that W. Richard Roth will retire as President and Chief Executive Officer of SJW Group effective as of November 5, 2017. Mr. Roth will continue to serve as Chairman of the Board until the next annual meeting of stockholders. From the Effective Date to December 31, 2017, Mr. Roth will serve as Chief Executive Emeritus of SJW Group and San Jose Water Company. Mr. Thornburg will also serve as the Chief Executive Officer of San Jose Water Company effective as of the Effective Date. For a more detailed discussion of the CEO transition, see SJW Group’s Current Report on Form 8-K filed on September 29, 2017.

Note 2.
Equity Plans
SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on estimated fair value for share-based payment awards. See Note 1 for the effect of the SJW Group’s adoption of ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting” in the first quarter of 2017.

7


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


The Incentive Plan allows SJW Group to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Group. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance shares, or other share-based awards. As of September 30, 2017, the remaining number of shares available under the Incentive Plan was 957,121, and an additional 214,333 shares were issuable under outstanding restricted stock units and deferred restricted stock units. In addition, shares are issued to employees under the company’s ESPP.
Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income, proceeds from the exercise of stock options and similar instruments, and the tax benefit realized from stock options and similar instruments exercised, that were recorded to additional paid-in capital and common stock, by award type, are presented below for the three and nine months ended September 30, 2017 and 2016.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Adjustments to additional paid-in capital and common stock for:
 
 
 
 
 
 
 
Compensation costs charged to income:
 
 
 
 
 
 
 
   ESPP
$
114

 
89

 
$
214

 
168

   Restricted stock and deferred restricted stock
475

 
375

 
1,419

 
1,148

Total compensation costs charged to income
$
589

 
464

 
$
1,633

 
1,316

Excess tax benefits realized from stock issuance:
 
 
 
 
 
 
 
   Restricted stock and deferred restricted stock
$

 
1

 
$

 
203

Total excess tax benefits realized from stock issuance
$

 
1

 
$

 
203

Proceeds from ESPP and similar instruments:
 
 
 
 
 
 
 
   ESPP
$
645

 
503

 
$
1,215

 
954

Total proceeds from the ESPP and similar instruments
$
645

 
503

 
$
1,215

 
954

Stock, Restricted Stock and Deferred Restricted Stock
On January 3, 2017, service based restricted stock units covering an aggregate of 8,564 shares of common stock of SJW Group were granted to certain officers of SJW Group and its subsidiaries. The units vest in three equal successive installments upon completion of each year of service with no dividend equivalent rights. Share-based compensation expense of $52.59 per unit which was based on the award grant date fair value is being recognized over the service period beginning in 2017.
On January 24, 2017, 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 10,744 that will vest based on the actual attainment of specified performance goals measured for the 2017 calendar year and continued service through December 31, 2017. Of such performance-based restricted stock units, units covering 6,639 shares of common stock were granted to a key officer which will only vest on the actual attainment of a specified performance goal and the number of shares issuable under this award is either 0% or 100%. The number of shares issuable under the remaining units, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the share-based compensation expense of $50.24 per unit which was based on the award grant date fair value is being recognized assuming the performance goals will be attained. As of September 30, 2017, management believes that the performance goals will be met.
On January 24, 2017, 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 2,737 that will vest based on the actual attainment of specified performance goals for the 2019 calendar year and continued service through December 31, 2019. The number of shares issuable under the awards, ranging between 0% to 150% of the target number of shares, is based on the level of actual attainment of specified performance goals. The units do not include dividend equivalent rights. The awards have no market conditions and the share-based compensation expense of $48.56 per unit which is based on the award grant date fair value is being recognized assuming the performance goals will be attained. As of September 30, 2017, management believes that the performance goals will be met.

8


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


On April 26, 2017, restricted stock units covering an aggregate of 9,240 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. Share-based compensation expense of $51.13 per unit, which is based on the award grant date fair value, is being recognized over the service period beginning in 2017.
As of September 30, 2017, the total unrecognized compensation costs related to restricted and deferred restricted stock plans was $1,182. This cost is expected to be recognized over a remaining weighted average period of 0.63 years.
Employee Stock Purchase Plan
The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85% of the fair value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock have been reserved for issuance under the ESPP.
After considering estimated employee terminations or withdrawals from the plan before the purchase date, SJW Group’s recorded expenses were $60 and $177 for the three and nine months ended September 30, 2017, respectively, and $51 and $139 for the three and nine months ended September 30, 2016, respectively, related to the ESPP.
The total unrecognized compensation costs related to the semi-annual offering period that ends January 31, 2018 for the ESPP is approximately $92. This cost is expected to be recognized during the fourth quarter of 2017 and first quarter of 2018.

Note 3.
Real Estate Investments
The major components of real estate investments as of September 30, 2017 and December 31, 2016 are as follows: 
 
September 30,
2017
 
December 31,
2016
Land
$
13,262

 
15,218

Buildings and improvements
42,962

 
46,826

Intangibles

 
149

Subtotal
56,224

 
62,193

Less: accumulated depreciation and amortization
10,844

 
11,734

Total
$
45,380

 
50,459

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years.
On April 6, 2017, 444 West Santa Clara Street, L.P. sold 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 $1,156. 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 payment 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.


9


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


Note 4.
Defined Benefit Plan
San Jose Water Company sponsors a noncontributory defined benefit pension plan for its eligible employees. Employees hired before March 31, 2008 are entitled to receive retirement benefits using a formula based on the employee’s three highest years of compensation (whether or not consecutive). For employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based on compensation credits and interest credits for each employee. Officers hired before March 31, 2008 are eligible to receive additional retirement benefits under the Executive Supplemental Retirement Plan, and officers hired on or after March 31, 2008 are eligible to receive additional retirement benefits under the Cash Balance Executive Supplemental Retirement Plan. Both plans are non-qualified plans in which only officers and other designated members of management may participate. San Jose Water Company also provides health care and life insurance benefits for retired employees under the San Jose Water Company Social Welfare Plan. The components of net periodic benefit costs for San Jose Water Company’s pension plan, its Executive Supplemental Retirement Plan, Cash Balance Executive Supplemental Retirement Plan and Social Welfare Plan for the three and nine months ended September 30, 2017 and 2016 are as follows:
 
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Service cost
$
1,307

 
1,244

 
$
3,922

 
3,731

Interest cost
1,912

 
1,871

 
5,735

 
5,613

Other cost
1,101

 
1,104

 
3,304

 
3,313

Expected return on assets
(2,060
)
 
(1,894
)
 
(6,179
)
 
(5,683
)
 
$
2,260

 
2,325

 
$
6,782

 
6,974

The following tables summarize the fair values of plan assets by major categories as of September 30, 2017 and December 31, 2016: 
 
 
 
Fair Value Measurements at September 30, 2017
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
 
$
5,573

 
$
5,573

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
6,189

 
6,151

 
38

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
48,102

 
48,102

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
8,893

 
8,893

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
8,403

 
8,403

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
5,764

 
5,764

 

 

REIT
NAREIT - Equity REIT’S
 
5,953

 

 
5,953

 

Fixed Income (b)
(b)
 
41,953

 

 
41,953

 

Total
 
 
$
130,830

 
$
82,886

 
$
47,944

 
$

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

10


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


 
 
 
Fair Value Measurements at December 31, 2016
 
 
 
 
 
Quoted
Prices in
Active
Markets for
Identical
Assets
 
Significant
Observable
Inputs
 
Significant
Unobservable
Inputs
Asset Category
Benchmark
 
Total
 
(Level 1)
 
(Level 2)
 
(Level 3)
Cash and cash equivalents
 
 
$
10,050

 
$
10,050

 
$

 
$

Actively Managed (a):
 
 
 
 
 
 
 
 
 
All Cap Equity
Russell 3000 Value
 
5,290

 
5,266

 
24

 

U.S. Large Cap Equity
Russell 1000, Russell 1000 Growth, Russell 1000 Value
 
39,534

 
39,534

 

 

U.S. Mid Cap Equity
Russell Mid Cap, Russell Mid Cap Growth, Russell Mid Cap Value
 
7,021

 
7,021

 

 

U.S. Small Cap Equity
Russell 2000, Russell 2000 Growth, Russell 2000 Value
 
6,357

 
6,357

 

 

Non-U.S. Large Cap Equity
MSCI EAFE
 
4,832

 
4,832

 

 

REIT
NAREIT - Equity REIT’S
 
5,663

 

 
5,663

 

Fixed Income (b)
(b)
 
40,514

 

 
40,514

 

Total
 
 
$
119,261

 
$
73,060

 
$
46,201

 
$

The Plan has a current target allocation of 55% invested in a diversified array of equity securities to provide long-term capital appreciation and 45% invested in a diversified array of fixed income securities and cash to provide preservation of capital plus generation of income.
(a)
Actively managed portfolio of securities with the goal to exceed the stated benchmark performance.
(b)
Actively managed portfolio of fixed income securities with the goal to exceed the Barclays 1-5 Year Government/Credit, Barclays Intermediate Government/Credit, and Merrill Lynch Preferred Stock Fixed Rate.
In 2017, San Jose Water Company expects to make required and discretionary cash contributions of up to $7,500 to the pension plans and Social Welfare Plan. For the three and nine months ended September 30, 2017, $1,280 and $2,560, respectively, has been contributed to the pension plans and Social Welfare Plan.

Note 5.
Segment and Non-Tariffed Business Reporting
SJW Group is a holding company with four subsidiaries: (i) San Jose Water Company, a water utility which operates both regulated and non-tariffed businesses, (ii) SJWTX, Inc. which is doing business as Canyon Lake Water Service Company (“CLWSC”), a regulated water utility located in Canyon Lake, Texas, and its consolidated non-tariffed variable interest entity, Acequia Water Supply Corporation, (iii) SJW Land Company and its consolidated variable interest entity, 444 West Santa Clara Street, L.P., which operated a commercial building rental (See Note 3), and (iv) Texas Water Alliance Limited, a non-tariffed water utility operation which has acquired permits and leases necessary to develop a water supply project in Texas (See Note 11). In accordance with FASB ASC Topic 280 – “Segment Reporting,” SJW Group has determined that it has two reportable business segments. The first segment is that of providing water utility and utility-related services to its customers through SJW Group’s subsidiaries, San Jose Water Company, CLWSC, and 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.

11


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


The following tables set forth information relating to SJW Group’s reportable segments and distribution of regulated and non-tariffed business activities within the reportable segments. Certain allocated assets, revenue and expenses have been included in the reportable segment amounts. Other business activity of SJW Group not included in the reportable segments is included in the “All Other” category.
 
For Three Months Ended September 30, 2017
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
120,727

 
2,460

 
1,391

 

 
120,727

 
3,851

 
124,578

Operating expense
83,088

 
1,511

 
875

 
859

 
83,088

 
3,245

 
86,333

Operating income (loss)
37,639

 
949

 
516

 
(859
)
 
37,639

 
606

 
38,245

Net income (loss) before noncontrolling interest
19,866

 
473

 
305

 
(1,104
)
 
19,866

 
(326
)
 
19,540

Depreciation and amortization
11,623

 
143

 
299

 

 
11,623

 
442

 
12,065

Senior note, mortgage and other interest expense
4,999

 

 
(2
)
 
544

 
4,999

 
542

 
5,541

Income tax expense (benefit) in net income
13,242

 
340

 
178

 
(237
)
 
13,242

 
281

 
13,523

Assets
$
1,438,433

 
20,239

 
48,917

 
3,981

 
1,438,433

 
73,137

 
1,511,570

 
For Three Months Ended September 30, 2016
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
108,502

 
2,056

 
1,786

 

 
108,502

 
3,842

 
112,344

Operating expense
73,179

 
1,355

 
1,108

 
356

 
73,179

 
2,819

 
75,998

Operating income (loss)
35,323

 
701

 
678

 
(356
)
 
35,323

 
1,023

 
36,346

Net income (loss) before noncontrolling interest
19,216

 
330

 
239

 
(826
)
 
19,216

 
(257
)
 
18,959

Depreciation and amortization
10,678

 
116

 
325

 

 
10,678

 
441

 
11,119

Senior note, mortgage and other interest expense
4,648

 

 
216

 
562

 
4,648

 
778

 
5,426

Income tax expense (benefit) in net income
12,145

 
247

 
106

 
14

 
12,145

 
367

 
12,512

Assets
$
1,359,419

 
18,092

 
75,909

 
921

 
1,359,419

 
94,922

 
1,454,341

 
For Nine Months Ended September 30, 2017
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
285,781

 
5,634

 
4,281

 

 
285,781

 
9,915

 
295,696

Operating expense
207,026

 
3,565

 
2,765

 
2,475

 
207,026

 
8,805

 
215,831

Operating income (loss)
78,755

 
2,069

 
1,516

 
(2,475
)
 
78,755

 
1,110

 
79,865

Net income (loss) before noncontrolling interest
39,895

 
965

 
5,986

 
(3,051
)
 
39,895

 
3,900

 
43,795

Depreciation and amortization
34,875

 
421

 
921

 

 
34,875

 
1,342

 
36,217

Senior note, mortgage and other interest expense
15,639

 

 
60

 
1,655

 
15,639

 
1,715

 
17,354

Income tax expense (benefit) in net income
24,943

 
713

 
2,294

 
(895
)
 
24,943

 
2,112

 
27,055

Assets
$
1,438,433

 
20,239

 
48,917

 
3,981

 
1,438,433

 
73,137

 
1,511,570


12


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


 
For Nine Months Ended September 30, 2016
 
Water Utility Services
 
Real Estate Services
 
All Other*
 
SJW Group
 
Regulated
 
Non-tariffed
 
Non-tariffed
 
Non-tariffed
 
Regulated
 
Non-tariffed
 
Total
Operating revenue
$
250,389

 
4,802

 
5,209

 

 
250,389

 
10,011

 
260,400

Operating expense
175,967

 
3,275

 
3,161

 
1,270

 
175,967

 
7,706

 
183,673

Operating income (loss)
74,422

 
1,527

 
2,048

 
(1,270
)
 
74,422

 
2,305

 
76,727

Net income (loss) before noncontrolling interest
37,810

 
649

 
670

 
(17
)
 
37,810

 
1,302

 
39,112

Depreciation and amortization
32,027

 
350

 
1,112

 

 
32,027

 
1,462

 
33,489

Senior note, mortgage and other interest expense
13,929

 

 
706

 
1,695

 
13,929

 
2,401

 
16,330

Income tax expense (benefit) in net income
24,122

 
521

 
354

 
548

 
24,122

 
1,423

 
25,545

Assets
$
1,359,419

 
18,092

 
75,909

 
921

 
1,359,419

 
94,922

 
1,454,341

 *    The “All Other” category includes the accounts of SJW Group on a stand-alone basis.

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

Note 7.
Fair Value Measurement
The following instruments are not measured at fair value on SJW Group’s condensed consolidated balance sheets as of September 30, 2017, but require disclosure of their fair values: cash and cash equivalents, accounts receivable and accounts payable. The estimated fair value of such instruments as of September 30, 2017 approximates their carrying value as reported on the condensed consolidated balance sheets. The fair value of such financial instruments are determined using the income approach based on the present value of estimated future cash flows. There have been no changes in valuation technique during the three and nine months ended September 30, 2017. The fair value of these instruments would be categorized as Level 2 in the fair value hierarchy, with the exception of cash and cash equivalents, which would be categorized as Level 1. The fair value of pension plan assets is discussed in Note 4.
The fair value of SJW Group’s long-term debt was approximately $534,075 and $502,446 as of September 30, 2017 and December 31, 2016, respectively, and was determined using a discounted cash flow analysis, based on the current rates for similar financial instruments of the same duration and creditworthiness of the company. The book value of the long-term debt was $431,009 and $433,460 as of September 30, 2017 and December 31, 2016, respectively. The fair value of long-term debt would be categorized as Level 2 in the fair value hierarchy.
As of September 30, 2017 and December 31, 2016, the fair value of the company’s investment in California Water Service Group was $3,815 and $3,390, respectively, and would be categorized as Level 1 of the fair value hierarchy.
 
Note 8.
Regulatory Rate Filings
On January 6, 2017, San Jose Water Company filed Advice Letter No. 501 with the CPUC requesting authorization to implement a sales reconciliation mechanism to better conform to water forecasts authorized in the last general rate case to recorded consumption for the period of October 2015 through September 2016. The CPUC has ordered all Class A and B water utilities that have a five percent or greater divergence between authorized and actual sales during declared drought years to consider requesting a sales reconciliation mechanism to better conform to sale forecasts authorized in the last general rate case to recorded consumption. On May 3, 2017, the CPUC rejected the filing citing the end of a drought and the improved California water supply conditions. On May 10, 2017, San Jose Water Company formally requested the CPUCs review of the rejection. The request for review is still pending before the CPUC.

13


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


As required by the CPUC, on April 3, 2017 San Jose Water Company filed an application requesting authority to increase its authorized Cost of Capital for the period from January 1, 2018 through December 31, 2020. If approved by the CPUC, San Jose Water Company’s annual revenues would increase by approximately $7,550 or about 2.1% in 2018. This request is still pending before the CPUC.
On June 6, 2017, San Jose Water Company filed Advice Letter No. 510 with the CPUC requesting authorization to issue a surcredit totaling $1,794 to refund service charge rate changes as a result of a change in billing practice effective January 1, 2017.  The refund period covers prorated service charge rate changes that occurred from January 1, 2014, through December 31, 2016. On August 11, 2017, the CPUC rejected Advice Letter No. 510 citing the formal complaint filed by some customers and served to San Jose Water Company by the CPUC over the same issue. A pre-hearing conference was held on the formal complaint on September 12, 2017, where the parties agreed to suspend the proceeding.
On September 29, 2017, San Jose Water Company filed Advice Letter No. 512 with the CPUC requesting authorization to re-implement a surcharge to recover the under-collected balance of $11,474 remaining from the 2012 General Rate Case true-up due to the delayed 2012 General Rate Case Application decision. Actual sales were substantially lower than the CPUC authorized sales estimate used to calculate the surcharge amount over the three-year recovery period. San Jose water Company is seeking to recover the remaining under-collected balance. This request is still pending before the CPUC.

Note 9.
Balancing and Memorandum Account Recovery Procedures
San Jose Water Company established balancing accounts for the purpose of tracking the under-collection or over-collection associated with expense changes and the revenue authorized by the CPUC to offset those expense changes. San Jose Water Company also maintains memorandum accounts to track revenue impacts due to catastrophic events, certain unforeseen water quality expenses related to new federal and state water quality standards, energy efficiency, WCMA, drought surcharges, Monterey Water Revenue Adjustment Mechanism, and other approved activities or as directed by the CPUC. 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.
Based on ASC Topic 980-605-25, San Jose Water Company recognized regulatory assets of $3,954 and $11,003 due to lost revenues accumulated in the 2017 WCMA account for the three and nine months ended September 30, 2017, respectively. These regulatory assets were partially offset by a regulatory liability in the amount of $(6) and $6,042 for three and nine months ended September 30, 2017, respectively, created by Tariff Rule 14.1 drought surcharges collected as allowed for in Advice Letter 473A. At the end of the second quarter of 2017, there was no longer a balance of drought surcharges collected to fully offset the 2017 WCMA account. The remaining balance in the drought surcharge account at September 30, 2017 related to amounts collected outside of the California regulated entity. Of the $3,954 and $11,003 recognized in the 2017 WCMA account for the three and nine months ended September 30, 2017, respectively, $4,826 and $6,103 was not covered by drought surcharges and was recognized as revenue for the three and nine months ended September 30, 2017, respectively, less $866 and $1,142, respectively, recorded for reserve which is 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 row shown in the table below.

14


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


 
Three months ended September 30, 2017
 
Three months ended September 30, 2016
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 WCMA*
$
908

 

 
(866
)
 

 
42

 
$
1,563

 
164

 
(1,044
)
 

 
683

2015 WCMA*
2,095

 
(11
)
 
(1,799
)
 

 
285

 
4,747

 
528

 
(1,883
)
 

 
3,392

2016 WCMA

 
55

 

 

 
55

 

 
5,863

 

 
(5,863
)
 

2017 WCMA*
1,001

 
3,954

 

 
6

 
4,961

 

 

 

 

 

All others
4,550

 
144

 

 

 
4,694

 
1,661

 
232

 
176

 

 
2,069

Total memorandum accounts
8,554

 
4,142

 
(2,665
)
 
6

 
10,037

 
7,971

 
6,787

 
(2,751
)
 
(5,863
)
 
6,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts, net assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
7,314

 
2,278

 

 

 
9,592

 
2,641

 
2,420

 
452

 

 
5,513

Drought surcharges
(961
)
 

 

 

 
(961
)
 
(1,716
)
 

 
(10,467
)
 
5,863

 
(6,320
)
Pension
(2,907
)
 
224

 

 

 
(2,683
)
 
(520
)
 
280

 
(1,055
)
 

 
(1,295
)
2012 General Rate Case true-up
15,765

 

 
(4,123
)
 

 
11,642

 
27,740

 

 
(3,850
)
 

 
23,890

2015 General Rate Case true-up
2,411

 

 
(2,297
)
 

 
114

 
8,767

 

 
(1,204
)
 

 
7,563

All others
(1,160
)
 
(94
)
 

 

 
(1,254
)
 
1,101

 
(106
)
 
(523
)
 

 
472

Total balancing accounts
$
20,462

 
2,408

 
(6,420
)
 

 
16,450

 
$
38,013

 
2,594

 
(16,647
)
 
5,863

 
29,823

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
29,016

 
6,550

 
(9,085
)
 
6

 
26,487

 
$
45,984

 
9,381

 
(19,398
)
 

 
35,967


15


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


 
Nine months ended September 30, 2017
 
Nine months ended September 30, 2016
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
Beginning Balance
 
Revenue Increase (Reduction)
 
Refunds (Collections)
 
Surcharge Offset
 
Ending Balance
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Memorandum accounts:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2014 WCMA*
$

 
1,089

 
(1,047
)
 

 
42

 
$
2,944

 
11

 
(2,272
)
 

 
683

2015 WCMA*
1,589

 
2,101

 
(3,405
)
 

 
285

 
5,372

 
431

 
(2,411
)
 

 
3,392

2016 WCMA

 
1,507

 

 
(1,452
)
 
55

 

 
12,624

 

 
(12,624
)
 

2017 WCMA*

 
11,003

 

 
(6,042
)
 
4,961

 

 

 

 

 

All others
2,768

 
1,473

 
453

 

 
4,694

 
594

 
1,298

 
177

 

 
2,069

Total memorandum accounts
4,357

 
17,173

 
(3,999
)
 
(7,494
)

10,037

 
8,910

 
14,364

 
(4,506
)
 
(12,624
)
 
6,144

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balancing accounts, net assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Water supply costs
5,190

 
3,833

 
569

 

 
9,592

 
2,771

 
2,364

 
378

 

 
5,513

Drought surcharges
(7,688
)
 

 
(767
)
 
7,494

 
(961
)
 
(359
)
 

 
(18,585
)
 
12,624

 
(6,320
)
Pension
(2,009
)
 
670

 
(1,344
)
 

 
(2,683
)
 
(552
)
 
840

 
(1,583
)
 

 
(1,295
)
2012 General Rate Case true-up
20,682

 

 
(9,040
)
 

 
11,642

 
33,070

 

 
(9,180
)
 

 
23,890

2015 General Rate Case true-up
5,528

 

 
(5,414
)
 

 
114

 

 
8,767

 
(1,204
)
 

 
7,563

All others
(151
)
 
(540
)
 
(639
)
 
76

 
(1,254
)
 
1,366

 
(332
)
 
(562
)
 

 
472

Total balancing accounts
$
21,552

 
3,963

 
(16,635
)
 
7,570


16,450

 
$
36,296

 
11,639

 
(30,736
)
 
12,624

 
29,823

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total
$
25,909


21,136


(20,634
)

76


26,487

 
$
45,206

 
26,003

 
(35,242
)
 

 
35,967

* As of September 30, 2017, the reserve balance for the 2017 WCMA was $1,142 which has been netted from the balance above. As of September 30, 2016, the reserve balance for the 2014 WCMA and 2015 WCMA was $1,267 and $1,892, respectively, which has been netted from the balances above.
As of September 30, 2017, the total balance in San Jose Water Company’s balancing and memorandum accounts combined, including interest, that has not been recorded into the financial statements was a net under-collection of $3,810. All balancing accounts and memorandum-type accounts not included for recovery or refund in the current general rate case will be reviewed by the CPUC in San Jose Water Company’s next general rate case or at the time an individual account reaches a threshold of 2% of authorized revenue, whichever occurs first.


16


SJW GROUP AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
September 30, 2017
(in thousands, except share and per share data)


Note 10.
Regulatory Assets and Liabilities
Regulatory assets and liabilities are comprised of the following as of September 30, 2017 and December 31, 2016:
 
 
September 30, 2017
 
December 31, 2016
Regulatory assets:
 
 
 
 
Income tax temporary differences, net
 
$
10,139

 
10,139

Postretirement pensions and other medical benefits
 
109,795

 
109,795

Balancing and memorandum accounts, net
 
26,487

 
25,909

Other, net
 
5,858

 
5,930

Total regulatory assets, net in Consolidated Balance Sheets
 
$
152,279

 
151,773

Less: current regulatory asset, net
 
11,368

 
16,064

Total regulatory assets, net, less current portion
 
$
140,911

 
135,709


Note 11.
Texas Water Alliance Limited
On February 22, 2016, SJW Group entered into a purchase and sale agreement (“PSA”) with the Guadalupe-Blanco River Authority (“GBRA”), pursuant to which SJW Group agreed to sell all of its equity interests in its wholly owned subsidiary Texas Water Alliance Limited to GBRA for $31,000 in cash. Pursuant to the PSA, upon closing of the transaction, GBRA will hold back $3,000 (the “Holdback Amount”) in the payment of the total purchase price. Pursuant to an amendment agreement entered into by SJW Group and GBRA on June 22, 2017, (i) if closing occurs, GBRA will pay the Holdback Amount to SJW Group on June 30, 2021 subject to reductions under certain circumstances, and (ii) the $3,000 previously deposited in escrow by GBRA was distributed to SJW Group on June 23, 2017 and was classified as a non-refundable deposit on the consolidated balance sheets as of September 30, 2017 (the “Deposit Amount”). If closing occurs, the Deposit Amount will be credited against the $31,000 purchase price. The PSA is subject to the completion of financing by GBRA to fund the purchase price and other customary closing conditions. While there is no assurance that the closing conditions will be satisfied in a timely manner, or at all, we currently expect to close the transaction during the fourth quarter of 2017.

Note 12.
Legal Proceedings
SJW Group is subject to ordinary routine litigation incidental to its business. There are no pending legal proceedings to which SJW Group or any of its subsidiaries is a party, or to which any of its properties is the subject, that are expected to have a material effect on SJW Group’s business, financial position, results of operations or cash flows.


17



ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollar amounts in thousands, except per share amounts and otherwise noted)
The information in this Item 2 should be read in conjunction with the financial information and the notes thereto included in Item 1 of this Form 10-Q and the consolidated financial statements and notes thereto and the related “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contained in SJW Group’s Annual Report on Form 10-K for the year ended December 31, 2016.
This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Such forward-looking statements are identified by words including “expect,” “estimate,” “anticipate,” “intends,” “seeks,” “plans,” “projects,” “may,” “should,” “will,” and variation of such words, and similar expressions. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict. Therefore, actual results may differ materially and adversely from those expressed in any forward-looking statements. Important factors that could cause or contribute to such differences include, but are not limited to, those discussed in this report and our most recent Form 10-K filed with the Securities and Exchange Commission (the “SEC”) under the item entitled “Risk Factors,” and in other reports SJW Group files with the SEC, specifically the most recent reports on Form 10-Q and Form 8-K, each as it may be amended from time to time. SJW Group undertakes no obligation to update or revise the information contained in this report, including the forward-looking statements, to reflect any event or circumstance that may arise after the date of this report.

General:
SJW Group is a holding company with four subsidiaries: San Jose Water Company, SJW Land Company, SJWTX, Inc., and Texas Water Alliance Limited.
San Jose Water Company, a wholly owned subsidiary of SJW Group, is a public utility in the business of providing water service to approximately 230,000 connections that serve a population of approximately one million people in an area comprising approximately 138 square miles in the metropolitan San Jose, California area.
The principal business of San Jose Water Company consists of the production, purchase, storage, purification, distribution, wholesale and retail sale of water. San Jose Water Company provides water service to customers in portions of the cities of San Jose and Cupertino and in the cities of Campbell, Monte Sereno, Saratoga and the Town of Los Gatos, and adjacent unincorporated territories, all in the County of Santa Clara in the State of California. San Jose Water Company distributes water to customers in accordance with accepted water utility methods which include pumping from storage and gravity feed from high elevation reservoirs. San Jose Water Company also provides non-tariffed services under agreements with municipalities and other utilities. These non-tariffed services include water system operations, maintenance agreements and antenna site leases.
San Jose Water Company has utility property including land held in fee, impounding reservoirs, diversion facilities, wells, distribution storage, and all water facilities, equipment, office buildings and other property necessary to supply its customers. Under Section 851 of the California Public Utilities Code, properties currently used and useful in providing utilities services cannot be disposed of unless California Public Utilities Commission (“CPUC”) approval is obtained.
San Jose Water Company also has approximately 411 acres of nonutility property which has been identified as no longer used and useful in providing utility services. The majority of the properties are located in the hillside areas adjacent to San Jose Water Company’s various watershed properties.
SJWTX, Inc., a wholly owned subsidiary of SJW Group, doing business as Canyon Lake Water Service Company (“CLWSC”), is a public utility in the business of providing water service to approximately 14,000 connections that serve approximately 42,000 people. CLWSC’s service area comprises more than 244 square miles in western Comal County and southern Blanco County in the growing region between San Antonio and Austin, Texas. SJWTX, Inc. has a 25% interest in Acequia Water Supply Corporation (“Acequia”). The water supply corporation has been determined to be a variable interest entity within the scope of ASC Topic 810 with SJWTX, Inc. as the primary beneficiary. As a result, Acequia has been consolidated with SJWTX, Inc.


18



SJW Land Company, a wholly owned subsidiary of SJW Group, owned the following real properties during the nine months ended September 30, 2017:
 
 
 
 
 
 
 
 
% for Nine months ended
September 30, 2017
of SJW Land Company
Description
 
Location
 
Acreage
 
Square Footage
 
Revenue
 
Expense
Commercial building*
 
San Jose, California
 
2
 
28,000
 
4
%
 
6
%
Warehouse building
 
Knoxville, Tennessee
 
30
 
361,500
 
41
%
 
38
%
Commercial building
 
Knoxville, Tennessee
 
15
 
135,000
 
55
%
 
56
%
Undeveloped land and parking lot
 
Knoxville, Tennessee
 
10
 
N/A
 
N/A

 
N/A

Undeveloped land*
 
San Jose, California
 
5
 
N/A
 
N/A

 
N/A

*
See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the sale of 444 West Santa Clara’s, L.P.’s property as well as a San Jose, California undeveloped land property on April 6, 2017.
SJW Land Company owns a 70% limited partnership interest in 444 West Santa Clara Street, L.P. One of the California properties was owned by such partnership. The limited partnership has been determined to be a variable interest entity within the scope of FASB ASC Topic 810 – “Consolidation” with SJW Land Company as the primary beneficiary, and as a result, it has been consolidated with SJW Land Company.
Texas Water Alliance Limited (“TWA”), a wholly owned subsidiary of SJW Group, has acquired permits and leases necessary to develop a water supply project in Texas. On February 22, 2016, we entered into an agreement with Guadalupe Blanco River Authority (“GBRA”), pursuant to which SJW Group agreed to sell all of its equity interest in TWA to GBRA for $31,000. The agreement is subject to the completion of financing by GBRA to fund the purchase price and other customary closing conditions. On June 22, 2017, SJW Group and GBRA entered into an amendment to the agreement and SJW Group received $3,000 previously deposited in escrow by GBRA as a non-refundable deposit. See Note 11 of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion on the pending sale of SJW Group’s equity interest in TWA. While there is no assurance that the closing conditions will be satisfied in a timely manner, or at all, we currently expect to close the transaction during the fourth quarter of 2017.

Business Strategy for Water Utility Services:
SJW Group focuses its business initiatives in three strategic areas:
(1)
Regional regulated water utility operations;
(2)
Regional non-tariffed water utility related services provided in accordance with the guidelines established by the CPUC in California and the PUCT in Texas; and
(3)
Out-of-region water and utility related services.
As part of our pursuit of the above three strategic areas, the company considers from time to time opportunities to acquire businesses and assets. However, SJW Group cannot be certain it will be successful in identifying and consummating any strategic business acquisitions relating to such opportunities. In addition, the execution of our business strategy will expose us to different risks than those associated with the current utility operations. We expect to incur costs in connection with the execution of this strategy and any integration of an acquired business could involve significant costs, the assumption of certain known and unknown liabilities related to the acquired assets, the diversion of management’s time and resources, the potential for a negative impact on SJW Group’s financial position and operating results, entering markets in which SJW Group has no or limited direct prior experience and the potential loss of key employees of any acquired company. Any future acquisition we decide to undertake may also impact our ability to finance our business, affect our compliance with regulatory requirements, and impose additional burdens on our operations. Any businesses we acquire may not achieve sales, customer growth and projected profitability that would justify the investment. Any difficulties we encounter in the integration process, including the integration of controls necessary for internal control and financial reporting, could interfere with our operations, reduce our operating margins and adversely affect our internal controls. SJW Group cannot be certain that any transaction will be successful or that it will not materially harm its operating results or financial condition.
Real Estate Services:
SJW Group’s real estate investment activity is conducted through SJW Land Company. As noted above, SJW Land Company owns undeveloped land and operates commercial buildings in Tennessee. SJW Land Company also owns a limited partnership interest in 444 West Santa Clara Street, L.P. The partnership owned a commercial building in San Jose, California. 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

19



operated. In addition, SJW Land Company sold the undeveloped land located in San Jose, California on April 6, 2017. See Note 3 of Notes to Unaudited Condensed Consolidated Financial Statements for the discussion of the sale transactions.
SJW Land Company manages its income producing and other properties until such time a determination is made to reinvest proceeds from the sale of such properties. SJW Land Company’s real estate investments diversify SJW Group’s asset base.

Critical Accounting Policies:
The discussion and analysis of our financial condition and results of operations is based on the accounting policies used and disclosed in our 2016 consolidated financial statements and accompanying notes that were prepared in accordance with accounting principles generally accepted in the United States of America and included as part of our annual report on Form 10-K for the year ended December 31, 2016 that was filed with the SEC on February 28, 2017.
Our critical accounting policies are described in Management’s Discussion and Analysis of Financial Condition and Results of Operations included in our annual report on Form 10-K for the year ended December 31, 2016. There have been no changes in our critical accounting policies. Our significant accounting policies are described in our notes to the 2016 consolidated financial statements included in our annual report on Form 10-K for the year ended December 31, 2016.

Impact of Recent Accounting Pronouncements:
In May 2014, the FASB issued Accounting Standard Update (“ASU”) 2014-09, “Revenue from Contracts with Customers.” The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. When it becomes effective, the new standard will replace most existing revenue recognition guidance in generally accepted accounting principles. Since the issuance of ASU 2014-09, the FASB also has issued additional ASUs that clarify implementation guidance regarding principal versus agent considerations, licensing, and identifying performance obligations, as well as adding certain additional practical expedients. The new standard can be applied retrospectively to each prior period presented or on a modified retrospective basis with a cumulative effect adjustment to retained earnings on the date of adoption. SJW Group expects to adopt the new revenue standard using the modified retrospective method. The company does not anticipate the ASU will significantly impact the recognition of metered revenue, however consistent with others in the industry the company is still evaluating the impact the ASU will have on its revenue classification and disclosures related to its alternative revenue programs and treatment of contributions in aid of construction. Concurrently, the company will implement ASU 2017-10, “Identifying the Customer in a Service Concession Arrangement.” SJW Group will adopt these standards on January 1, 2018, their required effective date.
In January 2016, the FASB issued ASU 2016-01, “Financial Instruments - Overall” which will significantly change 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 update is effective for SJW Group beginning in the first quarter of the fiscal year ending December 31, 2018. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842),” which supersedes the lease requirements in “Leases (Topic 840).” This ASU requires a lessee to recognize a right-of-use asset and a lease payment liability for most leases in the Consolidated Statement of Financial Position. ASU 2016-02 also makes some changes to lessor accounting and aligns with the new revenue recognition guidance. This ASU will be effective for the company in the first quarter of 2019 and earlier adoption is permitted. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements and related disclosures.
In March 2016, the FASB issued ASU 2016-09, “Improvements to Employee Share-Based Payment Accounting.” This ASU affects entities that issue share-based payment awards to their employees. ASU 2016-09 identifies areas for simplification involving several aspects of accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, classifications on the statement of cash flows and forfeiture rate calculations. SJW Group adopted this standard as of the first quarter of 2017. ASU 2016-09 requires recognition of excess tax benefits and deficiencies in the income statement, which resulted in the recognition of $500 in income tax benefit for the three months ended March 31, 2017. Prior to adoption, these amounts were recognized as additional paid-in capital. SJW Group did not have any unrecognized excess tax benefits to reclassify upon adoption of this standard. The ASU also requires excess tax benefits and deficiencies to be prospectively excluded from assumed future proceeds in the calculation of diluted shares when calculating diluted earnings per shares using the treasury stock method. The effect of this change on diluted earnings per share was immaterial. In addition, excess income tax benefits from share-based compensation are now classified as cash flows from operating activities on the consolidated statements of cash flows, prospectively. Further, ASU 2016-09 requires, on a

20



retrospective basis, that employee taxes paid for withheld shares be classified as cash flows from financing activities rather than cash flows from operating activities. As such, the consolidated statements of cash flows for SJW Group for the periods presented have been reclassified to reflect this change. This change resulted in an increase to cash flows from operating activities and a decrease to cash flows from financing activities of $818 and $500 for the nine months ended September 30, 2017 and 2016, respectively. SJW Group has elected to account for actual forfeitures as they occur upon adoption of the new guidance. Management determined that the cumulative effect adjustment required under the new guidance was immaterial and therefore SJW Group did not record an adjustment.
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. The update will become effective for SJW Group on January 1, 2018, with early adoption permitted as of January 1, 2017. The standard requires modified retrospective transition with a cumulative catch-up adjustment to opening retained earnings in the period of adoption. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements and related disclosures.
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 only allows the service cost component to be eligible for asset capitalization. Employers will present the other components of net periodic benefit costs separately from the line item(s) that includes the service cost and outside of any subtotal of operating income, if one is presented. This ASU will be effective for the company in the first quarter of 2018 and earlier adoption is permitted. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements and related disclosures.

Results of Operations:
Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased rainfall curtail water usage and sales.
See Note 1 of Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of the California drought and political and regulatory activities that have occurred in response to the recent drought conditions.
Overview
SJW Group’s consolidated net income for the three months ended September 30, 2017 was $19,540, an increase of $581, or approximately 3%, from $18,959 for the same period in 2016. SJW Group’s consolidated net income for the nine months ended September 30, 2017 was $41,899, an increase of $2,787, or approximately 7%, from $39,112 for the same period in 2016. The increase in net income for the three months ended September 30, 2017 was primarily due to an increase in operating revenue as a result of higher rates and an increase in usage by customers, offset by a decrease in revenue from the Water Conservation Memorandum Account (“WCMA”) and higher water production expenses. The increase in net income for the nine months ended September 30, 2017 was primarily due to an increase in operating revenue as a result of higher rates, an increase in usage by customers, and recognition of $2,634 in revenue from the WCMA which includes $1,371 from 2016 for a revision to new customer classifications, offset by a decrease of $8,767 in true-up revenue from the decision on the 2015 General Rate Case recorded in the prior year and higher water production expenses. In addition, for the nine months ended September 30, 2017 a gain on the sale of the limited partnership properties and undeveloped land in San Jose, California generated a pre-tax increase of $6,903, reduced by noncontrolling interest’s gain of $1,896, which was offset by the pre-tax gain on sale of California Water Service Group stock of $3,197 recorded in the prior year.



21



Operating Revenue
 
Operating Revenue by Segment
Three months ended September 30,
 
Nine months ended September 30,
 
2017
 
2016
 
2017
 
2016
Water Utility Services
$
123,187

 
110,558

 
$
291,415

 
255,191

Real Estate Services
1,391

 
1,786

 
4,281

 
5,209

 
$
124,578

 
112,344

 
$
295,696

 
260,400