Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

___________________________________________

FORM 10-Q

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

Commission file number 1-8966

SJW GROUP

(Exact name of registrant as specified in its charter)



Delaware			77-0066628
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

110 West Taylor Street,	San Jose,	CA	95110
(Address of principal executive offices)			(Zip Code)

(408) 279-7800

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.001 per share	SJW	New York Stock Exchange LLC

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☒ Non-accelerated filer ☐

Accelerated filer ☐ Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No x

APPLICABLE ONLY TO CORPORATE ISSUERS:

As of October 28, 2020, there were 28,556,228 shares of the registrant’s Common Stock outstanding.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of the federal securities laws relating to future events and future results of SJW Group and its subsidiaries that are based on current expectations, estimates, forecasts, and projections about SJW Group and its subsidiaries and the industries in which SJW Group and its subsidiaries operate and the beliefs and assumptions of the management of SJW Group. Some of these forward-looking statements can be identified by the use of forward-looking words such as “believes,” “expects,” “may,” “will,” “should,” “seeks,” “approximately,” “intends,” “plans,” “estimates,” “projects,” “strategy,” or “anticipates,” or the negative of those words or other comparable terminology. These forward-looking statements are only predictions and are subject to risks, uncertainties and assumptions that are difficult to predict.

The accuracy of such statements is subject to a number of risks, uncertainties and assumptions including, but not limited to, the following factors:


•	the effect of water, utility, environmental and other governmental policies and regulations, including actions concerning rates, authorized return on equity, authorized capital structures, capital expenditures and other decisions;


•	changes in demand for water and other services;


•	the impact of the Coronavirus (“COVID-19”) pandemic on our business operation and financial results;


•	unanticipated weather conditions and changes in seasonality;


•	climate change and the effects thereof;


•	the risk that the benefits expected from the merger of SJW Group and Connecticut Water Service, Inc. will not be realized;


•	the risk that the integration of Connecticut Water Service, Inc. will be more difficult, time-consuming or expensive than anticipated;


•	unexpected costs, charges or expenses;


•	our ability to successfully evaluate investments in new business and growth initiatives;


•	the risk of work stoppages, strikes and other labor-related actions;


•	catastrophic events such as fires, earthquakes, explosions, floods, ice storms, tornadoes, hurricanes, terrorist acts, physical attacks, cyber-attacks, or other similar occurrences;


•	changes in general economic, political, business and financial market conditions;


•	the ability to obtain financing on favorable terms, which can be affected by various factors, including credit ratings, changes in interest rates, compliance with regulatory requirements, compliance with the terms and conditions of our outstanding indebtedness and general stock and debt market conditions; and


•	legislative and general market and economic developments.

Results for a quarter are not indicative of results for a full year due to seasonality and other factors. In addition, actual results are subject to other risks and uncertainties that relate more broadly to our overall business, including those more fully described in our filings with the SEC, including our most recent reports on Form 10-K, Form 10-Q and Form 8-K. Forward-looking statements are not guarantees of performance, and speak only as of the date made, and we undertake no obligation to update or revise any forward-looking statements except as required by law.

PART I. FINANCIAL INFORMATION


ITEM 1.	FINANCIAL STATEMENTS

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in thousands, except share and per share data)



	Three months ended September 30,					Nine months ended September 30,
	2020			2019		2020			2019
REVENUE	$	165,863		113,997		$	428,826		294,644
OPERATING EXPENSE:
Production Expenses:
Purchased water	35,130			35,583		76,953			75,626
Power	3,994			2,294		10,145			4,947
Groundwater extraction charges	20,471			13,182		54,082			29,145
Other production expenses	10,092			5,295		30,465			15,553
Total production expenses	69,687			56,354		171,645			125,271
Administrative and general	19,529			14,712		58,917			40,411
Maintenance	4,550			4,923		15,970			13,977
Property taxes and other non-income taxes	7,797			4,065		22,362			12,041
Depreciation and amortization	22,417			15,122		66,552			45,368
Merger related expenses	—			1,737		—			6,113
Total operating expense	123,980			96,913		335,446			243,181
OPERATING INCOME	41,883			17,084		93,380			51,463
OTHER (EXPENSE) INCOME:
Interest on long-term debt and other interest expense	(13,174		)	(6,588	)	(39,638		)	(19,093	)
Pension non-service cost	(218		)	(921	)	(270		)	(2,749	)
Interest income on money market fund	—			2,165		—			6,339
Gain on sale of real estate investments	1,050			—		1,050			745
Other, net	1,130			303		2,935			1,210
Income before income taxes	30,671			12,043		57,457			37,915
Provision for income taxes	4,578			2,565		9,226			8,802
NET INCOME BEFORE NONCONTROLLING INTEREST	26,093			9,478		48,231			29,113
Less net income attributable to the noncontrolling interest	—			—		—			224
SJW GROUP NET INCOME	26,093			9,478		48,231			28,889
Other comprehensive income (loss), net	76			—		(49		)	—
SJW GROUP COMPREHENSIVE INCOME	$	26,169		9,478		$	48,182		28,889
SJW GROUP EARNINGS PER SHARE
Basic	$	0.91		0.33		$	1.69		1.02
Diluted	$	0.91		0.33		$	1.68		1.01
DIVIDENDS PER SHARE	$	0.32		0.30		$	0.96		0.90
WEIGHTED AVERAGE SHARES OUTSTANDING
Basic	28,533,907			28,451,811		28,510,489			28,438,521
Diluted	28,703,343			28,549,928		28,687,012			28,528,002

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)



	September 30, 2020		December 31, 2019
ASSETS
Utility plant:
Land	$	34,938	34,395
Depreciable plant and equipment	3,117,413		2,988,454
Construction in progress	117,546		112,232
Intangible assets	35,274		33,424
	3,305,171		3,168,505
Less accumulated depreciation and amortization	1,023,677		962,019
	2,281,494		2,206,486
Real estate investments	58,085		57,699
Less accumulated depreciation and amortization	14,493		13,597
	43,592		44,102
CURRENT ASSETS:
Cash and cash equivalents:
Cash	20,211		12,944
Restricted cash	—		5,000
Accounts receivable:
Customers, net of allowances for uncollectible accounts	51,374		36,305
Income tax	2,222		8,837
Other	2,828		2,833
Accrued unbilled utility revenue	57,418		40,102
Current regulatory assets, net	4,758		6,472
Other current assets	16,091		9,553
	154,902		122,046
OTHER ASSETS:
Net regulatory assets, less current portion	132,216		113,945
Investments	13,629		12,928
Goodwill	627,036		628,287
Other	6,845		4,676
	779,726		759,836
	$	3,259,714	3,132,470

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(in thousands, except share and per share data)



	September 30, 2020		December 31, 2019
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Stockholders’ equity:
Common stock, $0.001 par value; authorized 70,000,000 shares; issued and outstanding shares 28,552,177 on September 30, 2020 and 28,456,508 on December 31, 2019	$	29	28
Additional paid-in capital	509,031		506,639
Retained earnings	403,923		383,191
Accumulated other comprehensive income	78		126
Total stockholders’ equity	913,061		889,984
Long-term debt, less current portion	1,307,612		1,283,597
	2,220,673		2,173,581
CURRENT LIABILITIES:
Line of credit	125,803		117,209
Current portion of long-term debt	71,943		22,272
Accrued groundwater extraction charges, purchased water and power	27,607		17,211
Accounts payable	33,759		34,886
Accrued interest	17,586		13,140
Accrued payroll	10,599		11,570
Other current liabilities	18,101		18,279
	305,398		234,567
DEFERRED INCOME TAXES	186,952		195,598
ADVANCES FOR CONSTRUCTION	123,043		112,339
CONTRIBUTIONS IN AID OF CONSTRUCTION	291,482		286,035
POSTRETIREMENT BENEFIT PLANS	107,129		108,044
OTHER NONCURRENT LIABILITIES	25,037		22,306
COMMITMENTS AND CONTINGENCIES	—		—
	$	3,259,714	3,132,470

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interest		Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income			Noncontrolling Interest		Total Stockholders’ Equity
BALANCES, December 31, 2019	28,456,508	$	28	$	506,639		$	383,191		$	126		$	—	$	889,984
Net income	—	—		—			2,417			—			—		2,417
Unrealized loss on investment, net of tax benefit of $50	—	—		—			—			(135		)	—		(135		)
Share-based compensation	—	—		251			(43		)	—			—		208
Issuance of restricted and deferred stock units	25,781	—		(785		)	—			—			—		(785		)
Employee stock purchase plan	15,552	—		970			—			—			—		970
Dividends paid ($0.32 per share)	—	—		—			(9,118		)	—			—		(9,118		)
BALANCES, March 31, 2020	28,497,841	28		507,075			376,447			(9		)	—		883,541
Net income	—	—		—			19,721			—			—		19,721
Unrealized gain on investment, net of tax of $4	—	—		—			—			10			—		10
Share-based compensation	—	—		1,009			(43		)	—			—		966
Issuance of restricted and deferred stock units	18,864	1		14			—			—			—		15
Dividends paid ($0.32 per share)	—	—		—			(9,122		)	—			—		(9,122		)
BALANCES, June 30, 2020	28,516,705	$	29	$	508,098		$	387,003		$	1		$	—	$	895,131
Net income	—	—		—			26,093			—			—		26,093
Unrealized gain on investment, net of tax of $28	—	—		—			—			77			—		77
Share-based compensation	—	—		1,058			(42		)	—			—		1,016
Issuance of restricted and deferred stock units	19,274	—		(985		)	—			—			—		(985		)
Employee stock purchase plan	16,198	—		860			—			—			—		860
Dividends paid ($0.32 per share)	—	—		—			(9,131		)	—			—		(9,131		)
BALANCES, September 30, 2020	28,552,177	$	29	$	509,031		$	403,923		$	78		$	—	$	913,061

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

(in thousands, except share and per share data)



	Common Stock			Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total Stockholders’ Equity
	Number of Shares	Amount		Additional Paid-in Capital			Retained Earnings			Accumulated Other Comprehensive Income		Noncontrolling Interest			Total Stockholders’ Equity
BALANCES, December 31, 2018	28,404,316	$	28	$	495,366		$	393,918		$	—	$	—		$	889,312
Net income	—	—		—			5,873			—		—			5,873
Cumulative effect of change in accounting principle, net of tax effect of $33	—	—		—			97			—		—			97
Share-based compensation	—	—		886			(16		)	—		—			870
Issuance of restricted and deferred stock units	14,312	—		(132		)	—			—		—			(132		)
Employee stock purchase plan	15,932	—		811			—			—		—			811
Common stock issuance cost	—	—		(10		)	—			—		—			(10		)
Dividends paid ($0.30 per share)	—	—		—			(8,528		)	—		—			(8,528		)
BALANCES, March 31, 2019	28,434,560	28		496,921			391,344			—		—			888,293
Net income before noncontrolling interest	—	—		—			13,538			—		224			13,762
Distribution to noncontrolling interest	—	—		—			—			—		(224		)	(224		)
Share-based compensation	—	—		718			(16		)	—		—			702
Issuance of restricted and deferred stock units	7,579	—		(6		)	—			—		—			(6		)
Dividends paid ($0.30 per share)	—	—		—			(8,532		)	—		—			(8,532		)
BALANCES, June 30, 2019	28,442,139	$	28	$	497,633		$	396,334		$	—	$	—		$	893,995
Net income before noncontrolling interest	—	—		—			9,478			—		—			9,478
Share-based compensation	—	—		952			(16		)	—		—			936
Employee stock purchase plan	14,351	—		792			—			—		—			792
Dividends paid ($0.30 per share)	—	—		—			(8,537		)	—		—			(8,537		)
BALANCES, September 30, 2019	28,456,490	$	28	$	499,377		$	397,259		$	—	$	—		$	896,664

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in thousands)



	Nine months ended September 30,
	2020			2019
OPERATING ACTIVITIES:
Net income	$	48,231		29,113
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	68,683			47,363
Deferred income taxes	(6,358		)	(7,214	)
Stock-based compensation	2,318			2,556
Gain on sale of real estate investments	(1,050		)	(745	)
Loss on sale of utility property	—			20
Changes in operating assets and liabilities:
Accounts receivable and accrued unbilled utility revenue	(34,491		)	(20,553	)
Accounts payable and other current liabilities	(3,877		)	4,166
Accrued groundwater extraction charges, purchased water and power	10,396			9,055
Tax receivable and payable, and other accrued taxes	6,459			4,471
Postretirement benefits	408			2,514
Regulatory assets and liabilities related to balancing and memorandum accounts	(14,086		)	22,789
Up-front service concession payment	(5,000		)	—
Other changes, net	(1,018		)	(2,258	)
NET CASH PROVIDED BY OPERATING ACTIVITIES	70,615			91,277
INVESTING ACTIVITIES:
Additions to utility plant:
Company-funded	(130,426		)	(101,120	)
Contributions in aid of construction	(9,584		)	(10,040	)
Additions to real estate investments	(391		)	(137	)
Payments to retire utility plant, net of salvage	(1,877		)	(4,374	)
Proceeds from sale of real estate investments	1,068			745
Proceeds from sale of utility property	—			150
NET CASH USED IN INVESTING ACTIVITIES	(141,210		)	(114,776	)
FINANCING ACTIVITIES:
Borrowings on line of credit	226,884			73,000
Repayments on line of credit	(218,290		)	(111,000	)
Long-term borrowings	85,000			80,000
Repayments of long-term borrowings	(9,589		)	—
Debt issuance and broker fee costs	(646		)	(1,157	)
Dividends paid	(27,371		)	(25,596	)
Receipts of advances and contributions in aid of construction	19,059			13,373
Refunds of advances for construction	(2,121		)	(2,295	)
Other changes, net	(64		)	1,154
NET CASH PROVIDED BY FINANCING ACTIVITIES	72,862			27,479
NET CHANGE IN CASH AND CASH EQUIVALENTS	2,267			3,980
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, BEGINNING OF PERIOD	17,944			420,722
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	20,211		424,702

Cash paid during the period for:
Interest	$	40,409		19,821
Income taxes	7,024			16,286
Supplemental disclosure of non-cash activities:
Change in accrued payables for construction costs capitalized	1,997			505
Utility property installed by developers	5,051			(109	)

See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

SEPTEMBER 30, 2020

(in thousands, except share and per share data)


Note 1.	General

In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments (consisting only of normal, recurring adjustments) necessary for a fair presentation of the results for the interim periods.

The unaudited interim financial information has been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the instructions for Form 10-Q and Rule 10-01 of Regulation S-X promulgated by the Securities and Exchange Commission (the “SEC”). The Notes to Consolidated Financial Statements in SJW Group’s 2019 Annual Report on Form 10-K should be read with the accompanying unaudited condensed consolidated financial statements.

Recently Adopted Accounting Pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“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. ASU 2016-13 was effective for SJW Group in the first quarter of fiscal 2020. The adoption of ASU 2016-13 did not have a material impact on the condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued Accounting Standards Update (“ASU”) 2018-14, “Compensation - Retirement Benefits - Defined Benefit Plans - General (Subtopic 715-20: “Disclosure Framework - Changes to the Disclosure Requirements for Defined Benefit Plans,” which aims to improve the overall usefulness of disclosure to financial statement users and reduce unnecessary costs to companies when preparing defined benefit plan disclosures. This update is effective for SJW Group’s Form 10-K for the year ending December 31, 2020. 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.

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes”, which simplifies the accounting for income taxes, eliminates certain exceptions within Topic 740, “Income Taxes”, and clarifies certain aspects of the current guidance to promote consistency among reporting entities. This update is effective for fiscal years beginning after December 15, 2021. Most amendments within the standard are required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. Management is currently evaluating the impacts of the provisions of ASU 2019-12 on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting”. ASU 2020-04 provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships and other transactions affected by the expected transition away from reference rates that are expected to be discontinued, such as LIBOR. ASU 2020-04 was effective upon issuance. Companies may elect to apply the guidance prospectively through December 31, 2022. Management is evaluating the effect that the new standard will have on its consolidated financial statements.

Revenue

Water sales are seasonal in nature and influenced by weather conditions. The timing of precipitation and climatic conditions can cause seasonal water consumption by customers to vary significantly. Due to the seasonal nature of the water business, the operating results for interim periods are not indicative of the operating results for a 12-month period. Revenue is generally higher in the warm, dry summer months when water usage and sales are greater, and lower in the winter months when cooler temperatures and increased precipitation curtail water usage and sales.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2020

(in thousands, except share and per share data)

The major streams of revenue for SJW Group are as follows:



	Three months ended September 30,					Nine months ended September 30,
	2020			2019		2020		2019
Revenue from contracts with customers	$	167,045		130,777		$	414,344	314,003
Alternative revenue programs, net	1,324			(11,912	)	4,877		(14,218	)
Other balancing and memorandum accounts revenue, net	(3,909		)	(6,221	)	5,388		(9,229	)
Rental income	1,403			1,353		4,217		4,088
	$	165,863		113,997		$	428,826	294,644

Earnings per Share

Basic earnings per share is calculated using income available to common stockholders, divided by the weighted average number of shares outstanding during the period. Diluted earnings per share is calculated using income available to common stockholders divided by the weighted average number of shares of common stock including both shares outstanding and shares potentially issuable in connection with restricted common stock awards under SJW Group’s Long-Term Incentive Plan (as amended, the “Incentive Plan”), shares potentially issuable under the performance stock plans assumed through the business combination with Connecticut Water Service, Inc. (“CTWS”), and shares potentially issuable under the Employee Stock Purchase Plan (“ESPP”). For the three months ended September 30, 2020 and 2019, 1,029 and 524 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively. For the nine months ended September 30, 2020 and 2019, 20,220 and 10,158 anti-dilutive restricted common stock units were excluded from the dilutive earnings per share calculation, respectively.

Utility Plant Depreciation

A portion of depreciation expense is allocated to administrative and general expense. For the three months ended September 30, 2020 and 2019, the amounts allocated to administrative and general expense were $658 and $663, respectively. For the nine months ended September 30, 2020, and 2019, the amounts allocated to administrative and general expense were $2,128 and $1,995, respectively.


Note 2.	Equity Plans

SJW Group accounts for stock-based compensation based on the grant date fair value of awards issued to employees in accordance with FASB ASC Topic 718 - “Compensation - Stock Compensation,” which requires the measurement and recognition of compensation expense based on the estimated fair value of stock-based payment awards.

The Incentive Plan allows SJW Group to provide employees, non-employee board members or the board of directors of any parent or subsidiary, consultants, and other independent advisors who provide services to the company or any parent or subsidiary the opportunity to acquire an equity interest in SJW Group. The types of awards included in the Incentive Plan are restricted stock awards, restricted stock units, performance shares, or other share-based awards. As of September 30, 2020, 182,367 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units and an additional 743,038 shares are available for award issuances under the Incentive Plan. In addition, shares are issued to employees under the company’s ESPP.

In connection with the merger with CTWS on October 9, 2019, SJW Group assumed outstanding awards of restricted stock units and deferred share units under the following stock plans: CTWS 2014 Performance Stock Program, CTWS 2004 Performance Stock Program and CTWS 1994 Performance Stock Program (collectively, the “CTWS Plans”). As of September 30, 2020, approximately 66,430 shares are issuable upon the exercise of outstanding restricted stock units and deferred restricted stock units under the CTWS Plans.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2020

(in thousands, except share and per share data)

Stock compensation costs charged to income are recognized on a straight-line basis over the requisite service period. A summary of compensation costs charged to income and proceeds from the exercise of any restricted stock and similar instruments that are recorded to additional paid-in capital and common stock, by award type, are presented below for the three and nine months ended September 30, 2020, and 2019.



	Three months ended September 30,			Nine months ended September 30,
	2020		2019	2020		2019
Adjustments to additional paid-in capital and common stock for:
Compensation costs charged to income:
ESPP	$	152	140	$	323	283
Restricted stock and deferred restricted stock	906		812	1,995		2,273
Total compensation costs charged to income	$	1,058	952	$	2,318	2,556
ESPP proceeds	$	860	792	$	1,830	1,603

Stock, Restricted Stock and Deferred Restricted Stock

For the three months ended September 30, 2020, and 2019, SJW Group granted under the Incentive Plan 761 and 0, respectively, three year service-based restricted stock awards with a weighted-average grant date fair value of $58.63 and $0, respectively, per unit.

For the nine months ended September 30, 2020, and 2019, SJW Group granted under the Incentive Plan 43,474 and 26,565, respectively, one year and three year service-based restricted stock awards with a weighted-average grant date fair value of $63.87 and $51.42, respectively, per unit.

Performance-based and market-based restricted stock awards granted for the three months ended September 30, 2020, and 2019 were 58 and 0 target units, respectively, with a weighted-average grant date fair value of $62.95 and $0 respectively, per unit.

Performance-based and market-based restricted stock awards granted for the nine months ended September 30, 2020, and 2019 were 24,777 and 30,401 target units, respectively, with a weighted-average grant date fair value of $65.02 and $60.46, respectively, per unit. Based upon actual attainment relative to the target performance metric, the number of shares issuable can range between 0% to 150% of the target number of shares for performance-based restricted stock awards, or between 0% and 200% of the target number of shares for market-based restricted stock awards.

As of September 30, 2020, the total unrecognized compensation costs related to restricted and deferred restricted stock plans amounted to $4,987. This cost is expected to be recognized over a weighted-average period of 1.86 years.

Employee Stock Purchase Plan

The ESPP allows eligible employees to purchase shares of SJW Group’s common stock at 85% of the fair value of shares on the purchase date. Under the ESPP, employees can designate up to a maximum of 10% of their base compensation for the purchase of shares of common stock, subject to certain restrictions. A total of 400,000 shares of common stock have been reserved for issuance under the ESPP.

SJW Group’s recorded expenses were $85 and $244 for the three and nine months ended September 30, 2020, respectively, and $82 and $223 for the three and nine months ended September 30, 2019, respectively, related to the ESPP. The total unrecognized compensation costs related to the semi-annual offering period that ends January 29, 2021, for the ESPP is approximately $116. This cost is expected to be recognized during the fourth quarter of 2020 and first quarter of 2021.

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2020

(in thousands, except share and per share data)


Note 3.	Real Estate Investments

The major components of real estate investments as of September 30, 2020, and December 31, 2019, are as follows:



	September 30, 2020		December 31, 2019
Land	$	14,168	14,168
Buildings and improvements	43,917		43,531
Subtotal	58,085		57,699
Less: accumulated depreciation and amortization	14,493		13,597
Total	$	43,592	44,102

Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the assets, ranging from 7 to 39 years. Substantially all of the real estate investments relate to assets that are currently subject to operating leases.

On September 28, 2020, San Jose Water Company sold six nonutility properties located in Los Gatos, California for $1,075. SJW Group recognized a pre-tax gain on the sale of real estate investments of $1,048, after selling expenses of $22.

On April 6, 2017, 444 West Santa Clara Street, L.P. sold all of its interest in the commercial building and land the partnership owned and operated. In connection with this sale, the partnership was required to deposit $750 into an escrow account for estimated repairs to the creek next to the land the partnership sold. On April 22, 2019, all creek repairs were completed and a reimbursement of $745 was provided to the partnership. SJW Land Company holds a 70% limited partner interest in 444 West Santa Clara Street, L.P. SJW Land Company and the noncontrolling interest recognized a pre-tax gain on the creek reimbursement of $521 and $224, respectively, on the transaction.


Note 4.	Defined Benefit Plan

SJW Group maintains noncontributory defined benefit pension plans for its eligible employees. San Jose Water Company (“SJWC”) and CTWS employees hired before March 31, 2008, and January 1, 2009, respectively, are entitled to benefits under the pension plans based on the employee’s years of service and compensation. Certain employees hired before March 1, 2012, and covered by a plan merged into the CTWS plan in 2013 are also entitled to benefits based on the employee’s years of service and compensation. For SJWC employees hired on or after March 31, 2008, benefits are determined using a cash balance formula based upon compensation credits and interest credits for each employee. CTWS employees hired on or after January 1, 2009, are entitled to an additional 1.5% of eligible compensation to their company sponsored savings plan. SJW Group does not have multi-employer plans.

In addition, senior management hired before March 31, 2008, for SJWC and January 1, 2009, for CTWS are eligible to receive additional retirement benefits under supplemental executive retirement plans and retirement contracts. SJWC’s senior management hired on or after March 31, 2008, are eligible to receive additional retirement benefits under SJWC’s Cash Balance Executive Supplemental Retirement Plan. The supplemental retirement plans and Cash Balance Executive Supplemental Retirement Plan are non-qualified plans in which only senior management and other designated members of management may participate. SJW Group also provides health care and life insurance benefits for retired employees under employer-sponsored postretirement benefits other than pension plans.

The components of net periodic benefit costs for the defined benefit plans and other postretirement benefits for the three and nine months ended September 30, 2020, and 2019 are as follows:



	Three months ended September 30,					Nine months ended September 30,
	2020			2019		2020			2019
Service cost	$	2,390		1,479		$	7,170		4,437
Interest cost	2,860			2,113		8,580			6,338
Expected return on assets	(4,126		)	(2,310	)	(12,429		)	(6,929	)
Unrecognized actuarial loss	1,296			1,056		3,888			3,168
Amortization of prior service cost	39			61		115			184
	$	2,459		2,399		$	7,324		7,198

SJW GROUP AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—(Continued)

September 30, 2020

(in thousands, except share and per share data)

The following tables summarize the fair values of plan assets by major categories as of September 30, 2020, and December 31, 2019:



	Fair Value Measurements at September 30, 2020
			Quoted Prices in Active Markets for Identical Assets	Significant Observable Inputs	Significant Unobservable Inputs
Asset Category	Total		(Level 1)	(Level 2)	(Level 3)
Cash and cash equivalents	$	7,921	7,921	—	—
Equity securities (a)	159,687		155,850	3,837	—
Fixed income (b)	101,653		34,806	66,847	—
Total	$	269,261