San JoseWater’s $750Mmerger would create new company

More than 1 million people in four states would be served by utility if deal goes through

SAN JOSE » SJW Group, whose principal local unit is San Jose Water Company, has agreed to merge with a water utility in New England, in a deal that will leave SJW’s chief executive officer in charge of the new organization, the two companies said Thursday.

The $750 million deal combines San Jose- based SJW Group and Clinton, Connecticut- based Connecticut Water Service, a transaction that would create a water company serving 1.5 million people located in four states: California, Texas, Connecticut and Maine. That would make the combined entity the nation’s third-largest investor- owned water and wastewater utility.

“This combination does provide some significant improvements in overall financial strength and it really helps you lower your cost of capital,” Eric Thornburg, chief executive officer and president of SJWGroup, said Thursday in an interview. Reduced capital costs canmake it more feasible for the new company to upgrade facilities throughout its service territory. Thornburg added, “We invest between $100 million to $140 million a year in infrastructure.”

San Jose Water serves about 229,000 customers in an area that contains 1million residents, according to SJW Group’s most recent annual report. The service territory of San Jose Water includes about 80 percent of San Jose, as well as Saratoga, Los Gatos, Monte Sereno, Campbell

and a portion of Cupertino. The company doesn’t serve south San Jose and a portion of east San Jose.

“Together, we create a new larger, stronger company capable of delivering greater value and benefits for our shareholders, customers, employees and communities than either company could deliver on its own,” said David Benoit, CEO and president of Connecticut Water. Benoit would become president of the merged company’s New England operations, including those in Connecticut.

Under the stock- swap deal, shareholders of SJW Group would wind up owning 60 percent of the new company. Thornburg would serve as chairman andCEO of the new enterprise.

SJW Group’s revenue is nearly four times that of Connecticut Water, and SJW’s profits aremore than double.

During 2017, SJW Group earned $59.2million on revenue of $389.2 million. Over the 12 months that ended in September, Connecticut Water Service earned $23.9 million on revenue of $103.8 million. The combined company initially would be expected to generate $ 496 million in annual revenue and $74 million in profits.

SJW shares plunged 4.1 percent and closed at $52.14. Connecticut Water’s stock spouted 9.7 percent higher and closed at $57.68.

In 2006, SJWGroup ventured outside its primary territory when it bought a small water utility in Texas. That utility has grown steadily amid residential growth in the Austin and San Antonio areas.

The Connecticut deal appears to position San Jose Water’s owner for even further expansion throughout the United States.

“The merger create the power of scale,” Thornburg said in the interview. “As we bring four states together, we really have some compelling investment opportunities. It is going to be very powerful.”

The proposed merger is subject to certain federal and state regulatory approvals.

“We do expect this to close by the end of the year,” Thornburg said.

The state Public Utilities Commission in July 2017 approved a rate increase for San JoseWater that resulted in an average monthly increase of $3.67 for the typical customer. But rate hikes shouldn’t happen due to the merger, according to SJW Group.

“We don’t expect any rate changes to occur as a result of this transaction,” said James Lynch, SJW’s chief financial officer.