SJW : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

(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:
SJWC, 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.
SJWNE LLC, a wholly-owned subsidiary of SJW Group. On October 9, 2019, CTWS
became a wholly-owned subsidiary of SJWNE LLC. CTWS is a holding company whose
subsidiaries are primarily public utilities providing water service to
approximately 137,000 service connections that serve a population of
approximately 480,000 people in 80 municipalities with a service area of
approximately 269 square miles throughout Connecticut and Maine and 3,000
wastewater connections in Southbury, Connecticut.
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 18,000 connections that serve approximately
54,000 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. In 2017, 444 West Santa Clara
Street, L.P. sold all of its interests in the commercial building and land the
partnership owned and operated and SJW Land Company also sold certain
undeveloped land located in San Jose, California.
TWA, formerly a wholly owned subsidiary of SJW Group, was undertaking activities
that were necessary to develop a water supply project in Texas. In 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) 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,
            PURA in Connecticut, PUCT in Texas, and MPUC in Maine; and

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

Regional Regulated Activities
SJW Group's regulated utility operation is conducted through SJWC, Connecticut
Water, HVWC, Avon Water, CLWSC and Maine Water. 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. CTWS also provides regulated wastewater
services through HVWC.
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, SJWC 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 and non-tariffed wastewater services. CTWS provides non-tariffed
services, such as water system operations and maintenance agreements under
agreements with municipalities and other utilities. Additionally, CTWS offers
Linebacker, an optional service line protection program offered by CTWS to
eligible residential customers through NEWUS in Connecticut and Maine Water in
Maine covering the cost of repairs for leaking or broken water service lines
which provide drinking water to a customer's home. For customers who enroll in
this program,

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CTWS will repair or replace a leaking or broken water service line, curb box,
curb box cover, meter pit, meter pit cover, meter pit valve plus in-home water
main shut off valve before the meter. Additionally, NEWUS offers expanded
coverage to Connecticut Water customers for failure of in-home plumbing, sewer
and septic drainage lines and implemented modified terms and conditions with
limitations on certain coverages.
SJW Group also seeks appropriate non-tariffed business opportunities that
complement its existing operations or that allow it to extend its core
competencies beyond existing operations. SJW Group 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.
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, for example the merger
with CTWS. 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 and Chester Realty, Inc. 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. In
2017, 444 West Santa Clara Street, L.P. sold all of its interests in the
commercial building and land the partnership owned and operated and SJW Land
Company sold the undeveloped land located in San Jose, California. 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. Chester Realty, Inc. owns and operates land and commercial buildings
in the State of Connecticut. Chester Realty, Inc. manages its income producing
and other properties until such time a determination is made to reinvest
proceeds from sale of such properties. SJW Land Company and Chester Realty,
Inc.'s real estate investments diversify SJW Group's asset base.

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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 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.
SJWC also maintains memorandum accounts to track revenue impacts due to
catastrophic events, certain unforeseen water quality expenses related to new
federal and state water quality standards, energy efficiency, water
conservation, water tariffs, and other approved activities or as directed by the
CPUC. 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 SJWC when it is probable
that future recovery of previously incurred costs or future refunds that are to
be credited to customers will occur through the ratemaking process. In addition,
in the case of special revenue programs such as the WCMA, SJWC 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, SJWC considers evidence that may exist prior to CPUC
authorization that would satisfy ASC Topic 980 subtopic 340-25 recognition
criteria. Such evidence may include regulatory rules and decisions, past
practices, and other facts and circumstances that would indicate that recovery
or refund is probable. When such evidence provides sufficient support, the
balances are recorded in SJW Group's 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 SJWC's general rate case
proceedings by assessing temporary surcredits and/or surcharges. In the case
where SJWC's balancing or memorandum-type accounts that have been authorized by
the CPUC reach certain thresholds or have termination dates, SJWC 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 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

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regulatory assets, would require SJWC to immediately recognize the impact of the
costs for financial reporting purposes. In December 2019, CPUC denied SJWC's
request in Advice Letter No. 532 to recover the 2018 balances of WCMA and was
ordered to remove the WCMA accounts from the preliminary statement book. As a
result of the decision, SJWC wrote off the total 2018 WCMA balance of $9.4
million and $0.6 million recorded in its 2019 WCMA memorandum accounts. (See
also Note 1, "Summary of Accounting Principles" in the consolidated financial
statements). No other disallowances were recognized during the years ending
December 31, 2019 and 2018.
Business Combinations
SJW Group applies the provisions of ASC Topic 805-"Business Combinations" for
the purchase accounting related to the merger with CTWS on October 9, 2019.
Topic 805 requires SJW Group to recognize separately from goodwill the assets
acquired and the liabilities assumed at the acquisition date fair values.
Goodwill as of the acquisition date is measured as the excess of consideration
transferred over the net of the acquisition date fair values of the assets
acquired and the liabilities assumed. While SJW Group uses our best estimates
and assumptions to accurately value assets acquired and liabilities assumed at
the acquisition date, our estimates are inherently uncertain and subject to
refinement. As a result, during the measurement period, which may be up to one
year from the acquisition date, we record adjustments to the assets acquired and
liabilities assumed with the corresponding offset to goodwill. Upon the
conclusion of the measurement period or final determination of the values of
assets acquired or liabilities assumed, whichever comes first, any subsequent
adjustments are recorded to our Consolidated Statements of Comprehensive Income.
Accounting for business combinations requires SJW Group to make significant
estimates and assumptions, especially at the acquisition date, including
estimates for intangible assets, contractual obligations assumed and
pre-acquisition contingencies. Although SJW Group believes that the assumptions
and estimates we make are reasonable and appropriate, they are based in part on
historical experience and information obtained from CTWS's management and are
inherently uncertain. Events and circumstances may occur that may affect the
accuracy or validity of such assumptions, estimates or actual results. The
purchase price allocation process requires management to make significant
estimates and assumptions with respect to intangible assets. Although SJW Group
believes the assumptions and estimates made are reasonable, they are based in
part on historical experience, market conditions and information obtained from
management of the acquired companies and are inherently uncertain. Examples of
critical estimates in valuing certain of the intangible assets we have acquired
or may acquire in the future include, but are not limited to: future expected
cash flows from services; historical and expected customer attrition rates and
anticipated growth in revenue from acquired customers; the expected use of the
acquired assets; and discount rates. As of December 31, 2019, the preliminary
value of the acquired deferred tax assets and deferred tax liabilities are based
on a preliminary analysis, and our estimates and assumptions are subject to
change within the measurement period (up to one year from the acquisition date).
In addition, management is still evaluating CTWS's acquisition accounting in the
opening balance sheet.
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;


• 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 the Regulators 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. SJWC 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.

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Rate recovery for the balances in these memorandum accounts is generally allowed
in a subsequent general rate case. SJWC 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 Connecticut regulations, Connecticut Water, Avon Water and HVWC
employ 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 Connecticut. Additionally, to mitigate regulatory lag for pipeline
replacement and conservation related projects, the Connecticut State Legislature
has approved of WICA that allows for a surcharge to be added to customer bills
semi-annually for certain eligible pre-approved projects.
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.
Pursuant to Maine regulations, Maine Water 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 Maine. Additionally, to
mitigate regulatory lag for all infrastructure replacements (except meters), the
Maine State Legislature has approved of WISC that allows for a surcharge to be
added to customer bills semi-annually for certain pre-approved projects.
Infrastructure Investment
The water utility business is capital-intensive. In 2019 and 2018,
company-funded capital improvements were $164,325 and $135,973, respectively,
for additions to, or replacements of, property, plant and equipment for our
Water Utility Services. We plan to spend approximately $225,869 in 2020 and
$1,188,360 over the next five years for capital improvements, subject to CPUC,
PURA, PUCT, and MPUC approval. SJW Group funds these expenditures through a
variety of sources, including earnings received from operations, debt and equity
issuances and borrowings. SJW Group relies upon lines of credit 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 2019 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. Water Utility Services incur
substantial costs associated with compliance with environmental, health and
safety and water quality regulation to which our water services are 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
have 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.
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 2019, production expenses accounted for approximately
51% 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.

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Customer Growth
Customer growth in our water 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 2019, 2018
and 2017, we had capitalized cash outflows of $835,465, $2,496 and $1,149,
respectively, for business acquisitions and water rights which we believe will
allow SJW Group to expand our regulated customer base. In addition, we had
$15,768 and $18,610 in merger related costs reflected in our consolidated
statements of comprehensive income related to the Merger in 2019 and 2018,
respectively. 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. SJWC residential usage decreased
0.8% from 2018 to 2019 and increased 3.8% from 2017 to 2018. SJWC business usage
decreased 1.0% and increased 3.0% from 2018 to 2019 and from 2017 to 2018,
respectively. In addition, 2019 residential and business usage was 0.4% and
3.94% lower, respectively, than the amount authorized in our 2019-2021 general
rate case. Residential usage and business usage in 2018 was 11.9% and 6.6%,
respectively, lower than the amount authorized in our 2016-2018 general rate
case. CLWSC residential and business usage increased 2.1% from 2018 to 2019 and
decreased 3.5% from 2017 to 2018. From the date of merger, October 9, 2019, to
December 31, 2019, CTWS residential and business usage per cubic feet was 16.59
and 57.72, respectively. With the availability of the WRA in Connecticut that
allows for recovery of authorized revenues, decreases in consumption year to
year do not present the same financial risk as had historically been the case.
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.
SJWC 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 purchased imported water, will be sufficient to meet
customer demand for 2020. In addition, SJWC actively works with Valley Water 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. Connecticut Water and Maine Water believes that they will be
able to meet customer demand for 2020 with their water supply which consists of
groundwater from wells, surface water in reservoirs and purchased treated by
neighboring water utilities. CLWSC believes that it will be able to meet
customer demand for 2020 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 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 years
ended December 31, 2019 and 2018, SJW Group spent $15,768 and $18,610,
respectively, on merger costs related to the merger with CTWS which was
completed on October 9, 2019.


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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 SJW Group's general business and
regulatory activities.
Overview
SJW Group's consolidated net income for the year ended December 31, 2019 was
$23,403, compared to $38,767 for the same period in 2018. This represents a
decrease of $15,364 or 40%, from 2018. The decrease in net income was primarily
due to costs incurred related to integration with the new operations in CTWS, 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 2018, partially offset
by an increase in operating revenue and decrease in costs due to the increased
use of surface water. The increase in operating revenue was primarily due to an
increase of $21,660 from the new CTWS operations following the completion of the
merger on October 9, 2019, an increase in authorized rates, and net recognition
of certain balancing and memorandum accounts, offset by a write-off of revenue
related to amounts recorded in our 2019 WCMA and 2018 WCMA.
Operating Revenue
Operating revenue by segment was as follows:
                               Operating Revenue

                          2019        2018       2017

Water Utility Services $ 415,085 392,217 383,523 Real Estate Services 5,397 5,482 5,702

$ 420,482    397,699    389,225

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

                                          2019 vs. 2018                      2018 vs. 2017
                                       Increase/(decrease)                Increase/(decrease)
Water Utility Services:
Consumption changes              $     (1,813 )              -  %   $      7,376                2  %
Increase in customers                   2,673                1  %          2,298                -  %
Rate increases                         13,877                3  %         17,516                4  %
OII customer rate credits              (2,107 )              -  %              -                -  %
Recycled                                  403                -  %            789                -  %
Balancing and memorandum
accounts:
   Cost recovery recorded prior
year                                        -                -  %         (3,864 )             (1 )%
2016 WCMA revision to new
customer classification                     -                -  %         (1,371 )              -  %
   Cost of capital memorandum
account                                 1,349                -  %         (1,379 )              -  %
   Water Conservation Memorandum
Account                               (19,841 )             (5 )%         (5,462 )             (1 )%
   Tax Act                              6,366                2  %         (6,504 )             (2 )%
   All other                              301                -  %           (705 )              -  %
Revenue from acquisition of
SJWNE LLC                              21,660                5  %              -                -  %
Real Estate Services                      (85 )              -  %           (220 )              -  %
                                 $     22,783                6  %   $      8,474                2  %



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2019 vs. 2018
The revenue increase consists of $22,868 from Water Utility Services offset by a
decrease of $85 from Real Estate Services.
The revenue increase for Water Utility Services is primarily due to the merger
with CTWS which generated an increase of $21,660, an increase in authorized
rates which resulted in $13,877 of additional revenue, and an increase of $2,673
due to new customers. These increases were partially offset by a net decrease in
revenue recognized from certain balancing and memorandum accounts, which
included a decrease of $19,841 in WCMA, partially offset by increases of $6,366
from the Tax Act and $1,349 in the Cost of Capital Memorandum Account.
2018 vs. 2017
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 a revenue increase
due to new customers of $2,298. These increases were partially offset by
decreases in revenue recognized from certain balancing and memorandum accounts,
which included a decrease of $6,504 as a result of the Tax Act, a $5,462
decrease in the WCMA, a $3,864 decrease in cost recovery recorded in the prior
year, a $1,379 decrease in the Cost of Capital Memorandum Account, and a $1,371
decrease due to the 2016 WCMA revision to new customer classification.
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

                                     2019         2018       2017
Residential and business          $ 384,448     356,535    331,835
Industrial                            2,514       2,215      1,987
Public authorities                   17,892      18,049     16,448
Others                               18,157      12,519     11,066

Balancing and memorandum accounts (7,926 ) 2,899 22,187

$ 415,085     392,217    383,523


                              Number of Customers

                           2019       2018       2017
Residential and business 370,074    241,253    238,231
Industrial                   596         76         75
Public authorities         2,398      1,343      1,349
Others                    13,539      4,595      4,478
                         386,607    247,267    244,133


Operating Expense
Operating expense by segment was as follows:
                               Operating Expense

                          2019        2018       2017
Water Utility Services $ 334,963    299,548    280,916
Real Estate Services       3,751      3,539      3,688
All Other                 24,289     21,172      2,770
                       $ 363,003    324,259    287,374




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

                                          2019 vs. 2018                      2018 vs. 2017
                                       Increase/(decrease)                Increase/(decrease)
Water production expenses:
Change in surface water supply   $     (11,348 )            (4 )%   $     (7,998 )             (3 )%
Change in usage and new
customers                                 (795 )             -  %          5,077                2  %
Purchased water and groundwater
extraction charge and energy
price increase                          12,125               4  %         14,931                6  %
Balance and memorandum account
cost recovery                            1,211               -  %         (1,423 )              -  %
Production expenses related to
acquisition of SJWNE LLC                 5,850               2  %              -                -  %
Total water production expenses          7,043               2  %         10,587                5  %
Administrative and general              16,891               5  %          1,215                -  %
Balance and memorandum account
cost recovery                              477               -  %         (1,222 )              -  %
Maintenance                              2,091               1  %             53                -  %
Property taxes and other
non-income taxes                         4,093               1  %          1,333                -  %
Depreciation and amortization           10,991               4  %          6,309                2  %
Merger related expenses                 (2,842 )            (1 )%         18,610                6  %
                                 $      38,744              12  %   $     36,885               13  %


Sources of Water Supply
SJWC's water supply consists of groundwater from wells, surface water from
watershed run-off and diversion, reclaimed water, and imported water purchased
from Valley Water under the terms of a master contract with Valley Water
expiring in 2051. Surface water, which is the least expensive water supply, is
sourced from SJWC'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 Valley Water at any time. If an increase occurs, then
SJWC would file an advice letter with the CPUC seeking authorization to increase
revenues to offset the rate increase.
The Connecticut water utility services' infrastructure consisted of 65
noncontiguous water systems in the State of Connecticut. These systems, in
total, consist of approximately 1,800 miles of water main and reservoir storage
capacity of 2.4 billion gallons. The safe, dependable yield from our 235 active
wells and 18 surface water supplies is approximately 65 million gallons per
day. Water sources vary among the individual systems, but overall approximately
80% of the total dependable yield comes from surface water supplies and 20% from
wells.
CLWSC's water supply consists of groundwater from wells and purchased treated
and 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.
Maine Water's infrastructure consisted of 12 noncontiguous water systems in the
State of Maine. These systems, in total, consists of approximately 500 miles of
water main and reservoir storage capacity of 7.0 billion gallons. The safe,
dependable yield from our 14 active wells and 7 surface water supplies is
approximately 120 million gallons per day. Water sources vary among the
individual systems, but overall approximately 80% of the total dependable yield
comes from surface water supplies and 20% from wells.

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The following table presents the sources of water supply for water utility
services:
                                            Source of Water Supply
                                           2019       2018      2017
                                            (million gallons) (MG)
Purchased water                            22,385    24,110    22,913
Groundwater                                12,038    12,507    14,444
Surface water                               7,061     2,674       620
Reclaimed water                               732       762       607
                                           42,216    40,053    38,584

Average water production expense per MG $ 4,162 4,213 4,063

Water production in 2019 for water utility services increased 2,163 million
gallons from 2018. Water production in 2018 for water utility services increased
1,469 million gallons from 2017. 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 SJWC are determined by Valley Water. These rates
are adjusted periodically and coincide with Valley Water's fiscal year, which
ends on June 30. The contract water rate for Valley Water's fiscal years 2019,
2018 and 2017 was $4.5, $4.3 and $3.9 per million gallons, respectively. The
contractual cost of the groundwater extraction charge for water pumped from the
ground basin was $4.2, $3.9, and $3.6 per million gallons for Valley Water's
fiscal years 2020, 2019, and 2018, respectively. Unaccounted-for water for 2019
and 2018 approximated 7.2% and 7.0%, 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
SJWC's main replacements and lost water reduction programs.
Connecticut Water has an agreement with the South Central Connecticut Regional
Water Authority ("RWA") to purchase water from RWA. The agreement was signed in
April 2006 and became effective upon the receipt of all regulatory approvals in
2008 and will remain in effect for a minimum of fifty years upon becoming
effective. Connecticut Water will pay RWA $75 per year as part of a capacity
agreement, for a total of 14 years, starting on the effective date of the
agreement. In addition, Connecticut Water is able, but under no obligation, to
purchase up to one million gallons of water per day at the then current
wholesale rates per the agreement. Connecticut Water has an agreement with The
Metropolitan District ("MDC") to purchase water from MDC to serve the Unionville
system. The agreement became effective on October 6, 2000 and has a term of
fifty years beginning May 19, 2003, the date the water supply facilities related
to the agreement were placed in service. Connecticut Water has agreed to
purchase 283 million gallons of water annually from MDC.
Maine Water has an agreement with the Kennebec Water District for potable water
service. The agreement was extended and became effective on November 7, 2015 for
a new term of 5 years. Maine Water guarantees a minimum consumption of 60
million gallons of water annually. Water sales to Maine Water are billed at a
flat rate per gallon plus the monthly minimum tariff rate for a 4-inch metered
service.
The various components of operating expenses are discussed below.
Water production expenses
2019 vs. 2018
Water production expenses increased $12,125 due to higher per unit costs paid
for purchased water, groundwater extraction and energy charges, $5,850 due to
the new CTWS operations and $1,211 due to changes in water production balancing
and memorandum accounts, offset by decreases of $11,348 due to an increase in
the use of available surface water in 2019 compared to 2018, and $795 due to a
decrease in customer usage. Effective July 2019, Valley Water increased the unit
price of purchased water by approximately 6.1% and the groundwater extraction
charge by approximately 6.6%.
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, Valley Water increased the unit price of purchased water by approximately
9% and the groundwater extraction charge by approximately 10%.

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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.
2019 vs. 2018
Administrative and general expense increased $17,368 in 2019, or 5%, in
comparison to 2018. The increase consisted primarily of: (1) $7,295 due to the
new CTWS operations, (2) $4,860 increase in integration costs related to the
merger, (3) $1,539 increase in accounting and legal fees, (4) $1,491 increase in
contracted work primarily related to the recycled water retrofit program, social
media outreach, accounting services and customer service strategy, (5) $677
increase in salaries and wages, and (6) $605 in cost recoveries other than
pension costs through balance and memorandum accounts.
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, and
(2) $509 decrease in legal fees, partially offset by, (3) $593 increase in group
insurance costs, (4) $428 increase in contracted work primarily related to the
recycled water retrofit program, and (5) $401 increase in rate case expenses.
Maintenance Expense
Maintenance expense increased $2,091 in 2019, or 1%, in comparison to 2018, and
increased $53 in 2018, or less than 1%, in comparison to 2017. The increase in
2019 consisted primarily of $1,128 increase due to the new CTWS operations. The
increase in 2018 consisted primarily of: (1) $520 increase in salaries and
wages, partially offset by (2) a $524 decrease in contracted work as a result of
increased capitalized projects.
Property Taxes and Other Non-income Taxes
Property taxes and other non-income taxes for 2019 and 2018 increased $4,093 and
$1,333 from prior years, respectively. The increases were primarily a result of
increased utility plant. The increase in 2019 also included $3,096 due to the
new CTWS operations. SJW Group anticipates increases in 2020 for property taxes
and other non-income taxes due to increases in utility plant.
Depreciation and Amortization
Depreciation and amortization expense increased $10,991 in 2019, or 4%, in
comparison to 2018, and increased $6,309 in 2018, or 2%, in comparison to 2017.
The increase were primarily due to increases in utility plant. The increase in
2019 also included an increase of $4,903 due to the new CTWS operations. 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 2019 compared to 2018 was primarily due
an increase in interest on long-term debt as a result the issuance of SJWC's
Series M note and SJW Group's Series 2019A, B & C notes. In addition, interest
income increased due to the invested proceeds from our equity offering in
December 2018. The new CTWS operations generated an increase of $2,025 in
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 of $1,896, on the sale
of our limited partnership's properties and undeveloped land in San Jose,
California 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 4.4%, 6.0% and 6.0%
for the years ended December 31, 2019 and 2018 and 2017.
Provision for Income Taxes
Income tax expense for 2019 was $8,454, compared to $10,065 in 2018. The
effective consolidated income tax rate was 26% for 2019, 21% for 2018 and 37%
for 2017. The decrease in income tax expense was primarily due due to lower
pre-tax income and flow-through deductions which were partially offset by the
write-off of non-deductible merger costs.
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.

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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 2019 was primarily due to the change in the benefit obligation for Connecticut Water's supplemental executive retirement agreements as a result of a decrease in the discount rate. 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.

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. As of December 31, 2019, the change in allowance for doubtful
accounts was due to the increased number of customers from the merger with CTWS.
Write-offs for uncollectible accounts remain less than 1% of total revenue
consistent 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 $34,134 and funded its 2019 working capital and
capital expenditure programs.
SJW Group also obtained funds through the issuance of common stock in December
of 2018 to partially finance our merger with CTWS and to pay related fees and
expenses. Pending close of the merger on October 9, 2019, SJW Group had invested
the funds raised in a short-term money market fund which was managed by a
reputable financial institution. See Note 2 of "Notes to Consolidated Financial
Statements" for a discussion of the equity offering. The remaining funding for
the all-cash merger with CTWS was provided through proceeds from a debt
financing in October 2019, existing cash balances and cash flows from
operations. See Note 4 of "Notes to Consolidated Financial Statements" for
discussion on the debt financing activities of SJW Group.
The condition of the capital and credit markets or the strength of financial
institutions could impact SJW Group's ability to draw on its lines of credit,
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 2019 activities, we will have access to the
external funding sources necessary to implement our on-going capital investment
programs in the future. On October 16, 2019, Standard & Poor's Ratings Service
initiated coverage on SJW Group assigning a company rating of A-, with a stable
outlook and affirming its company rating of SJWC of A, with a stable outlook.
In addition, on October 14, 2019, S&P affirmed its ratings of CTWS and
Connecticut Water of A- with a stable outlook.
In 2019, the common dividends declared and paid on SJW Group's common stock
represented 146% of net income. Dividends have been paid on SJW Group's and its
predecessor's common stock for 305 consecutive quarters and the annual dividend
amount has increased in each of the last 52 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 2019, SJW Group generated cash flow from operations of approximately $130,005
compared to $91,343 in 2018 and $101,112 in 2017. Cash flow from operations is
primarily generated by net income from revenue producing activities, adjusted
for non-cash expenses for depreciation and amortization, deferred income taxes,
gains on the sale of assets, and changes in working capital items. Cash flow
from operations increased in 2019 by approximately $38,700. The increase was
primarily due to a combination of the following factors: (1) an increase in the
collection of the balancing and memorandum accounts of $37,300, (2) an increase
in accrued groundwater extraction charges, purchased water and power of $3,600,
and (3) general working capital and net income, adjusted for non-cash items
increased by $9,700, offset by (4) net collection of taxes receivable which was
$11,900 less than in prior year. Cash flow from operations decreased 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 (4)
an increase of a net collection of taxes receivable which was $3,600 more than
in prior year.

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Cash Flow from Investing Activities
In 2019, SJW Group used approximately $164,300 of cash for Company funded
capital expenditures, $13,600 for developer funded capital expenditures, $5,000
in utility plant retirement costs, $835,500 for the purchase of CTWS, 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 $745 from the sale of real estate investments and utility property.
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 remaining shares of California Water
Service Group stock.
Water Utility Services budgeted capital expenditures for 2020, excluding capital
expenditures financed by customer contributions and advances is as follows:
                              Budgeted Capital
                                Expenditures
                                    2020
Water treatment             $     27,124     12 %
Source of supply                   7,016      3 %
Reservoirs and tanks              39,770     18 %
Pump stations and equipment        6,953      3 %
Equipment and other               21,773      9 %
Distribution system              123,233     55 %
                            $    225,869    100 %

The 2020 capital expenditures budget is concentrated in main replacements. Included in the distribution system budgeted capital expenditures of $123,233 is approximately $59,763 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 $1,188,360 in capital expenditures. A significant portion of this amount is subject to future approval from the Regulators. 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 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.

The Water Utility Services' distribution systems were constructed during the
period from the early 1900's through today. Expenditure levels for renewal and
modernization will occur as the 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, 2019
increased by approximately $16,600 from the same period in the prior year,
primarily as a result of cash proceeds from long-term debt issued in current
year and increase in receipts of advances and contributions in aid of
construction, partially offset by the the proceeds from the prior year issuance
of SJW Group's common stock, a decrease in the amount of net borrowings on our
lines of credit, a decrease in net other changes for equity plan payments,
broker fees and debt issuance costs, and an increase in dividends paid to
stockholders. 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., SJWC and CTWS have unsecured bank
lines of credit totaling $255,000 as of December 31, 2019. 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" below.

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Sources of Capital
SJW Group's regulated operations 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 through the issuance of
new long-term debt or issuance of equity. 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.
SJWC'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, 2019, SJWC's long-term debt and equity were approximately 48% and
52%, respectively. The average borrowing rate of SJWC's long-term debt was 5.9%
as of December 31, 2019.
SJWC has outstanding $330,000 of unsecured senior notes as of December 31, 2019.
The senior note agreements of SJWC generally have terms and conditions that
restrict SJWC from issuing additional funded debt if: (1) the funded debt would
exceed 66-2/3% of total capitalization, and (2) net income available for
interest charges for the trailing 12-calendar-month period would be less than
175% of interest charges. As of December 31, 2019, SJWC was not restricted from
issuing future indebtedness as a result of these terms and conditions.
SJWC 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, 2019. 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, 2019, SJWC
was in compliance with all such covenants.
SJWTX, Inc. has an outstanding $15,000 senior note as of December 31, 2019. 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, 2019, SJWTX, Inc. and SJW Group were not
restricted from issuing future indebtedness as a result of these terms and
conditions.
SJW Group has outstanding a $560,000 unsecured senior notes as of December 31,
2019. The senior notes have 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, (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, and (3) 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, 2019, SJW Group was not restricted from issuing future
indebtedness as a result of these terms and conditions.
CTWS has outstanding term loans with a commercial bank in an aggregate amount of
$23,935 as of December 31, 2019. Under the master loan agreement, CTWS is
required to comply with certain financial ratio and operational covenants. The
most restrictive of these covenants is to maintain a consolidated (CTWS and its
subsidiaries) debt to capitalization ratio of not more than 60%. As of December
31, 2019, CTWS was in compliance with all covenants under the master loan
agreement.
Connecticut Water has outstanding term loans with a commercial bank in an
aggregate amount of $119,090 as of December 31, 2019. Under its master loan
agreement, Connecticut Water is required to comply with financial and
operational covenants substantially identical to those found in CTWS' master
loan agreement. Connecticut Water is required to maintain a debt to
capitalization ratio of not more than 60%. As of December 31, 2019, Connecticut
Water was in compliance with all covenants under its master loan agreement.
Connecticut Water has outstanding $44,556 of tax exempt and taxable Water
Facilities Revenue Bonds issued through Connecticut Innovations (formerly the
Connecticut Development Authority). The bond indentures and loan agreements
contain customary affirmative and negative covenants and require compliance with
financial and operational covenants, and also provide for the acceleration of
the Revenue Bonds upon the occurrence of stated events of default. As of
December 31, 2019, Connecticut Water was in compliance with all covenants of the
bond indentures and loan agreements.
Connecticut Water has a $35,000 unsecured senior note that has terms and
conditions that restrict Connecticut Water from issuing additional debt or
paying a dividend to CTWS if such debt or distribution would trigger an event of
default. The senior note agreement also requires Connecticut Water to maintain a
debt to capitalization ratio of not more than 60%. As of December 31, 2019,
Connecticut Water was in compliance with all financial ratio and operational
covenants under this agreement.

                                       43

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Maine Water has outstanding $16,032 of First Mortgage Bonds issued to the Maine
Municipal Bond Bank through the State Safe Drinking Water Revolving Loan Fund
and $4,500 of First Mortgage Bonds issued to One America. The associated bond
indentures and loan agreements contain customary affirmative and negative
covenants, including a prohibition on the issuance of indebtedness secured by
assets or revenue of Maine Water where the lien is senior to the lien of the
bond trustee under the above bonds except as permitted by the bond indentures
and related loan and security agreements, a requirement to maintain a debt to
capitalization ratio of not more than 65%, required compliance with various
financial and operational covenants, and a provision for maturity acceleration
upon the occurrence of stated events of default. As of December 31, 2019, Maine
Water was in compliance with all covenants in its bond indentures and related
loan agreements.
Maine Water has outstanding term loans with a commercial bank in an aggregate
amount of $17,500 as of December 31, 2019. Under its master loan agreement,
Maine Water is required to comply with financial and operational covenants
substantially identical to those found in CTWS and Connecticut Water's master
loan agreements. Maine is required to maintain a debt to capitalization ratio of
not more than 60%. As of December 31, 2019, Maine Water was in compliance with
all covenant under its master loan agreement.
HVWC has a term loan with a commercial bank, due in 2034. The loan bears
interest at a rate of 4.75% with monthly payments of principal and interest of
$31. The loan is secured by real property owned by HVWC. The loan agreement
restricts HVWC's ability to incur additional debt and requires compliance with a
funded debt to capitalization covenant and other operational covenants. As of
December 31, 2019, HVWC was in compliance with all covenants of the loan.
Avon Water has a mortgage loan that is due in 2033. This loan amortizes over 20
years and carries a fixed interest rate of 3.05% with monthly principal and
interest payments of $22. The loan agreement (1) generally restricts the ability
of Avon Water to incur additional debt or make dividend payments other than in
the ordinary course of business, and (2) requires submission of periodic
financial reports as part of loan covenants. As of December 31, 2019, Avon Water
was in compliance with all covenants of the loan.
As of December 31, 2019, SJW Group and its subsidiaries are in compliance with
all of their debt covenants.
On June 1, 2016, SJWC 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.
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.
On June 29, 2009, CTWS entered into a $15,000 credit agreement with CoBank, ACB,
which matures on July 1, 2020. Borrowings under this credit agreement bear
interest at 3.54%. CTWS maintains an additional credit agreement of $95,000 with
RBS Citizens, N.A., which will be reduced to $75,000 on March 1, 2020, with a
final maturity on December 14, 2023. Borrowings under this credit agreement bear
interest at the daily LIBOR rate, plus 100 basis points as of December 31, 2019.
All of SJW Group's and subsidiaries lines of credit contain customary
representations, warranties and events of default, as well as certain
restrictive covenants customary for facilities of this type, including
restrictions on indebtedness, liens, acquisitions and investments, restricted
payments, asset sales, and fundamental changes. All of the lines of credit also
include certain financial covenants that require the Company to maintain a
maximum funded debt to capitalization ratio and a minimum interest coverage
ratio.
As of December 31, 2019, SJW Group and its subsidiaries had unsecured bank lines
of credit, allowing aggregate short-term borrowings of up to $255,000. At
December 31, 2019, the total amount available under these lines of credits was
$137,791. The cost of borrowing on SJW Group's short-term credit facilities has
averaged 3.73% as of December 31, 2019. As of December 31, 2019, SJW Group and
its subsidiaries were in compliance with all covenants on their lines of credit.
In December 2018, SJW Group received net proceeds of approximately $358,256 from
the sale of 6,750,000 shares of common stock in a public offering pursuant to an
effective shelf registration and received net proceeds of approximately $53,738
from the sale of an additional 1,012,500 shares of common stock, in each case
after deducting the underwriting discounts and commissions and estimated
offering expenses payable by SJW Group. Prior to the close of the merger with
CTWS, the company invested the net offering proceeds in money-market funds.

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Funding for SJW Group's all-cash merger with CTWS which closed on October 9, 2019 was provided through proceeds from the company's equity offering in December 2018 and the debt financing in October 2019, existing cash balances and cash flow from operations. SJW Group had previously 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 was unable to secure other financing for the merger at or prior to the time the merger is completed. Subsequent to the net proceeds received by SJW Group from the public offering of common stock in 2018, the facility commitment was reduced to $563 million. On October 9, 2019, the commitment was terminated in connection with the closing of the merger and no amount was funded under such commitment. 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, 2019 are as follows:

                                                              Contractual Obligations Due in
                                                      Less than       1-3         3-5         After
                                         Total         1 Year        Years       Years       5 Years

Senior notes, Water Utility Services $ 384,500 10,900 21,800 41,800 310,000 Bank term loans, Water Utility Services

                                 140,754         8,180      15,184       4,928       112,462
Advances for construction, SJWC (1)       63,978         2,890       5,780       5,677        49,631
California Pollution Control
Financing Authority Revenue Bonds,
SJWC                                     120,000             -           -           -       120,000
Connecticut Innovations Revenue
Bonds, Connecticut Water                  44,556             -      22,506           -        22,050
State revolving fund loans, Maine
Water                                     16,032         1,325       2,724       2,608         9,375
Senior notes, SJW Group                  560,000             -      50,000           -       510,000
Bank term loans, CTWS                     23,935         1,759       3,741       4,059        14,376
Mortgage loan, Avon Water                  2,809           179         376         400         1,854

Total contractual cash obligation $ 1,356,564 25,233 122,111 59,472 1,149,748 Total interest on contractual obligations

$   681,831        52,380      96,677      87,563       445,211

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(1) As of December 31, 2019, advances for construction was $112,339 of which $21,463 was related to non-refundable advances for construction and $26,898 was related to advances which are refundable based on service connections made. 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." SJWC purchases water from Valley Water 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 Valley Water. For the years ended December 31, 2019, 2018 and 2017, SJWC purchased from Valley Water 21,862 million gallons ($96,285), 21,345 million gallons ($87,702) and 20,857 million gallons ($78,703), respectively, of contract water. On June 13, 2017, Valley Water 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, SJWC is committed to purchase from Valley Water a minimum of 90% of the reduced delivery schedule, or 19,794 million gallons ($89,539) of water at the current contract water rate of $4.5 per million gallons in the year ending December 31, 2020. Additionally, SJWC purchases non-contract water from Valley Water on an "as needed" basis if the water supply is available. The contract water rates for SJWC are determined by Valley Water. These rates are adjusted periodically and coincide with Valley Water's fiscal year, which ends on June 30. The contract water rate for Valley Water's fiscal years 2019, 2018 and 2017 was $4.5, $4.3 and $3.9 per million gallons, respectively. SJWC also pumps water from the local groundwater basin. There are no delivery schedules or contractual obligations associated with the purchase of groundwater. Valley Water determines the groundwater extraction charge and it is applied on a per unit basis. In addition to the Valley Water groundwater extraction charge, SJWC also incurs power costs to pump the groundwater from the basin.

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Connecticut Water has an agreement with the South Central Connecticut RWA to
purchase water from RWA. The agreement was signed in April 2006 and became
effective upon the receipt of all regulatory approvals in 2008 and will remain
in effect for a minimum of fifty years upon becoming effective. Connecticut
Water will pay RWA seventy-five dollars per year as part of a capacity
agreement, for a total of 14 years, starting on the effective date of the
agreement. In addition, Connecticut Water has the option, but is under no
obligation, to purchase up to one million gallons of water per day at the then
current wholesale rates per the agreement ($2.621 per million gallons as of
December 31, 2019). Connecticut Water has an agreement with the MDC to purchase
water from MDC to serve the Unionville system. The agreement became effective on
October 6, 2000 and has a term of fifty years beginning May 19, 2003, the date
the water supply facilities related to the agreement were placed in service.
Connecticut Water has agreed to purchase 283 million gallons of water annually
from MDC. The rate charged by the MDC at December 31, 2019 were $3.50 per
hundred cubic feet.
Maine Water has an agreement with the Kennebec Water District for potable water
service. The agreement was extended and became effective on November 7, 2015 for
a new term of 5 years. Maine Water guarantees a minimum consumption of 60
million gallons of water annually. Water sales to Maine Water are billed at a
flat rate of $5 per year plus the monthly minimum tariff rate of $1.51 per
hundred cubic feet for a 4-inch metered service as of December 31, 2019.
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.
SJWC and CTWS sponsor noncontributory defined benefit pension plans and provide
health care and life insurance benefits for retired employees. In 2019, SJW
Group contributed $9,476 and $738 to the pension plan and other postretirement
benefit plan, respectively. CTWS had no contributions for the period from the
merger date, October 9, 2019, to December 31, 2019. In 2020, SJWC and CTWS
expect to make required and discretionary cash contributions of up to $8,404 to
the pension plans and other postretirement benefit plans. The amount of required
contributions for years thereafter is not actuarially determinable.
SJWC'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,
SJWC is committed to pay approximately $1,591 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.
CTWS's other benefit obligations include employees' postretirement benefits,
supplemental executive retirement agreements and deferred compensation
agreements and plan. Future payments may fluctuate depending on the contribution
rates of employees into the deferred compensation plan and the life span of the
retirees and as current officers and executives retire. Under these benefit
plans, CTWS is committed to pay approximately $952 annually to former officers
and directors.
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 June 2016, the FASB issued ASU 2016-13, "Financial Instruments - Credit
Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," and
subsequent amendments. Topic 326 requires measurement and recognition of
expected credit losses for financial assets held. This is effective for SJW
Group in the first quarter of fiscal 2020, and adoption is not expected 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 is effective for SJW Group during the year ending December
31, 2020.

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Retrospective adoption is required and early adoption is permitted. Management is currently evaluating the effect that the new standard will have on its defined benefit plan disclosures. On December 2019, the FASB issued ASU 2019-12, "Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes." The decisions reflected in the ASU update specific areas of Topic 740, Income Taxes, to reduce complexity while maintaining or improving the usefulness of the information provided to users of financial statements. The amendments in ASU 2019-12 are effective for fiscal years beginning after December 15, 2020 and early adoption is permitted. SJW Group does not plan on early adoption and is in the early stages of analyzing the impact of the amendments. The amendments to changes in reporting related to foreign equity method investments and foreign subsidiaries are not anticipated to apply to SJW Group. Amendments to changes in reporting taxes not based on income (such as equity or capital) and changes in tax laws during interim periods are to be further analyzed as applicable. Management is currently evaluating the effect that the new standard will have on its consolidated financial statements.

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