SJW Group and CTWS Merger Agreement

6 Months Ended

Jun. 30, 2019

Business Combinations [Abstract]

SJW GROUP AND CTWS MERGER AGREEMENT

SJW Group and CTWS Merger

On March 14, 2018, SJW Group, Hydro Sub, Inc., a Connecticut corporation and a wholly-owned subsidiary of SJW Group and CTWS entered into an Agreement and Plan of Merger to merge the two companies, SJW Group and CTWS, in an all-stock transaction (the “Merger”). On August 5, 2018, SJW Group, Hydro Sub, Inc. and CTWS entered into a Second Amended and Restated Agreement & Plan of Merger (as amended, the “Merger Agreement”), which among other things, changed the Merger to an all-cash transaction. Under the terms of the Merger Agreement, Hydro Sub, Inc. will merge with and into CTWS, with CTWS surviving the Merger as a wholly-owned subsidiary of SJW Group. Subject to the terms and conditions of the Merger Agreement, at the time at which the Merger becomes effective (the “Effective Time”), each share of common stock, without par value, of CTWS (“CTWS Common Share”), other than CTWS Common Shares directly or indirectly owned by SJW Group, Hydro Sub, Inc., CTWS or any of their respective subsidiaries (in each case, other than any CTWS Common Shares held on behalf of third parties), issued and outstanding immediately prior to the Effective Time will be converted into the right to receive $70.00 per share in cash (without interest and less any applicable withholding taxes).

The transaction was approved by the boards of directors of both companies and by CTWS shareholders. Consummation of the Merger is subject to customary conditions, including, without limitation: approval by CTWS shareholders (which has been obtained); approval by certain regulators; the absence of any law or judgment prohibiting the consummation of the Merger; the accuracy of the representations and warranties of the parties (subject to customary materiality qualifiers); each party’s performance in all material respects of its obligations contained in the Merger Agreement; and the absence of any material adverse effect on CTWS since the date of the Merger Agreement, which has not been ameliorated or cured.

On December 3, 2018, PURA issued a proposed final decision denying the application by SJW Group and CTWS for approval of the Merger. On December 5, 2018, PURA conditionally granted SJW Group’s and CTWS’s motion to suspend the schedule permitting SJW Group and CTWS to file new evidence that was unavailable before the close of the record in the proceeding for PURA’s consideration. On December 14, 2018, SJW Group and CTWS filed a motion to reopen the record and extend the procedural schedule to admit new evidence that was submitted concurrent with the motion (“Motion to Reopen”). On January 4, 2019, PURA denied the Motion to Reopen concluding that the concessions and offers of commitments did not constitute new evidence and to the extent that some of the filed material contains “new” evidence, the material was insufficient to warrant reopening. On January 9, 2019, SJW Group and CTWS withdrew their application before PURA. PURA closed the docket without issuing a final decision on January 11, 2019. After a thorough review conducted by the management and boards of both companies with the support of their respective local Connecticut regulatory counsel, on April 3, 2019, SJW Group and CTWS filed a new application with PURA for approval of the Merger.

In support of the new application, SJW Group has made certain regulatory commitments, which are subject to PURA approval, that are designed to demonstrate that the Merger is in the public interest, including many which go beyond those included in the previous application. In this regard, the new application includes a commitment for CTWS’s Connecticut utilities not to file a general rate case for new base rates to become effective prior to January 1, 2021, as well as a provision for a bill credit for customers. In addition, SJW Group has committed that CTWS’s Connecticut utilities will not seek recovery, in rates, of the merger premium or other costs incurred in connection with the Merger. With respect to current CTWS's Connecticut employees, the new application provides that there will be no layoffs as a result of the Merger and that, for at least three years following completion of the Merger, CTWS’s Connecticut utilities will maintain their current combined staffing levels. To enhance the independence and local control of CTWS and its Connecticut utilities, the new application provides that each of their boards of directors will have a majority of independent directors and a majority of directors who reside in New England. SJW Group has also committed to certain “ring-fencing” measures to enhance CTWS’s separateness from SJW Group and to mitigate the risk that CTWS would be negatively impacted in the event of a bankruptcy or other adverse financial developments affecting SJW Group or its current affiliates, including the creation of a special purpose entity to hold SJW Group’s interest in CTWS. In addition, the new application provides that CTWS and its Connecticut utilities will be subject to a limitation on dividends in the event of certain credit rating downgrades or if payment of a dividend could result in CTWS being unable to maintain its weighted average consolidated equity ratio at or above a specified minimum. Additional commitments cover maintenance of Connecticut Water’s headquarters in Connecticut, environmental measures, operational matters, customer service and additional measures to support local control. On July 3, 2019, SJW Group and CTWS entered into a settlement with the Department of Energy and Environmental Protection and the Office of Consumer Counsel which modifies and adds commitments that will provide additional, direct long-term customer and environmental benefits, enhance local control and provide supplemental financial protections to customers. The revised commitments include converting to a one-time credit from a credit paid out over a one-year period, the addition of a customer credit provided to customers over a ten-year period, additional customer protections, numerous environmental commitments that have been enhanced or added and the addition of a

most favored nations clause with respect to Maine. Such most favored nations provision would guarantee that any additional commitments made by SJW Group and CTWS to the Maine Public Utilities Commission (“MPUC”) in connection with the Merger application would also be included in the PURA commitments in Connecticut. PURA has scheduled a hearing on July 26, 2019, to review the application and is expected to issue a final decision by September 4, 2019.

On December 20, 2018, the MPUC staff issued a stay in the reorganization proceeding pending resolution of the regulatory filing in Connecticut. On January 10, 2019, following the withdrawal of the PURA application, the Maine Water Company notified the MPUC of such withdrawal in a status report. On January 23, 2019, the Maine Water Company filed notice of its intent to voluntarily withdraw its application without prejudice, reserving the right to refile at a later date. Later that day, the MPUC acknowledged receipt of the Maine Water Company’s notice and issued notice closing the docket. After a thorough review conducted by the management and boards of both companies with the support of their respective local Maine regulatory counsel, SJW Group and CTWS announced on February 20, 2019, that they intended to file for merger approval with MPUC during the second quarter of 2019. On May 3, 2019 Maine Water Company filed a new application for MPUC approval of the Merger. The application is consistent with the PURA application and Maine Water Company has agreed to regulatory commitments similar and proportional to those made in the PURA application, where applicable. Since May 3, 2019 the parties have engaged in discovery and preliminary settlement negotiations. The Maine Office of Public Advocate has retained a consultant to review the Merger; his testimony was filed on July 10, 2019.

In addition, because the prior clearance of the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”) was due to expire on April 27, 2019, SJW Group withdrew its prior HSR filing and refiled for clearance under the HSR Act on April 4, 2019. The Federal Trade Commission’s Premerger Notification Office granted early termination of the new HSR Act waiting period on April 15, 2019, extending the expiration to April, 15, 2020.

There is no guarantee that all of the closing conditions and approvals will be satisfied, and the failure to complete the Merger may adversely affect the financial condition and results of operations of SJW Group. For a description of certain risk factors related to the Merger, please see Part II, “Risk Factors” in SJW Group’s Form 10-Q in which these notes to financial statements are included, as well as Item 1A, “Risk Factors” in SJW Group’s Form 10-K for the year ended December 31, 2018.