Coalbed methane (CBM) wells tend to produce large volumes of water, especially when there is hydraulic connectivity between coalbed and nearby formations. Cross-formational flow between producing coal and adjacent formations can have significant production and environmental implications, affecting economic viability of production from these shallow reservoirs. Such flows can also affect how much gas can be removed from a coalbed prior to mining and thus can have implications for methane control in mining as well. The aim of this paper is to investigate the impact of water flow from an external source into coalbed on production performance and also on reservoir variables including cleat porosity and relative permeability curves derived from production data analysis. A reservoir model is constructed to investigate the production performance of a CBM well when cross-formational flow is present between the coalbed and the overlying formation. Results show that cleat porosity calculated by analysis of production data can be more than one order of magnitude higher than actual cleat porosity. Due to hydraulic connectivity, water saturation within coalbed does not considerably change for a period of time, and hence, the peak of gas production is delayed. Upon depletion of the overlying formation, water saturation in coalbed quickly decreases. Rapid decline of water saturation in the coalbed corresponds to a sharp increase in gas production. As an important consequence, when cross-flow is present, gas and water relative permeability curves, derived from simulated production data, have distinctive features compared to the initial relative permeability curves. In the case of cross-flow, signatures of relative permeability curves are concave downward and low gas permeability for a range of water saturation, followed by rapid increase afterward for water and gas, respectively. The results and analyses presented in this work can help to assess the impact of cross-formational flow on reservoir variables derived from production data analysis and can also contribute to identifying hydraulic connectivity between coalbed and adjacent formations.