General


The following discussion and analysis provides information on AWR's consolidated
operations and assets and includes specific references to AWR's individual
segments and/or its subsidiaries (GSWC and ASUS and its subsidiaries), and AWR
(parent) where applicable.
Included in the following analysis is a discussion of water and electric gross
margins.  Water and electric gross margins are computed by subtracting total
supply costs from total revenues.  Registrant uses these gross margins as
important measures in evaluating its operating results.  Registrant believes
these measures are useful internal benchmarks in evaluating the performance of
GSWC. The discussions and tables included in the following analysis also present
Registrant's operations in terms of earnings per share by business segment,
which equals each business segment's earnings divided by Registrant's weighted
average number of diluted shares.
Registrant believes that the disclosure of the water and electric gross margins
and earnings per share by business segment provide investors with clarity
surrounding the performance of its different services.  Registrant reviews these
measurements regularly and compares them to historical periods and to its
operating budget. However, these measures, which are not presented in accordance
with accounting principles generally accepted in the United States of America
("GAAP"), may not be comparable to similarly titled measures used by other
entities and should not be considered as an alternative to operating income or
earnings per share, which are determined in accordance with GAAP. A
reconciliation of water and electric gross margins to the most directly
comparable GAAP measures is included in the table under the section titled
"Operating Expenses: Supply Costs." A reconciliation to AWR's diluted earnings
per share is included in the discussion under the sections titled "Summary of
First Quarter Results by Segment."
Overview
Factors affecting our financial performance are summarized under Forward-Looking
Information and under "Risk Factors" in our Form 10-K for the period ended
December 31, 2019.
Water and Electric Segments:
GSWC's revenues, operating income and cash flows are earned primarily through
delivering potable water to homes and businesses in California and the delivery
of electricity in the Big Bear area of San Bernardino County, California. Rates
charged to GSWC customers are determined by the CPUC. These rates are intended
to allow recovery of operating costs and a reasonable rate of return on
capital.  GSWC plans to continue to seek additional rate increases in future
years from the CPUC to recover operating and supply costs and receive reasonable
returns on invested capital. Capital expenditures in future years at GSWC are
expected to remain at higher levels than depreciation expense. When necessary,
GSWC obtains funds from external sources in the capital markets and through bank
borrowings.
General Rate Case Filings and Other Matters:
Water Segment:
In May 2019, the CPUC issued a final decision on GSWC's water general rate case,
which determines new rates for the years 2019 - 2021 with rates retroactive to
January 1, 2019. Among other things, the final decision authorized GSWC to
invest approximately $334.5 million over the rate cycle. The $334.5 million of
infrastructure investment includes $20.4 million of capital projects to be filed
for revenue recovery through advice letters when those projects are completed.
Due to the delay in receiving a final CPUC decision on the water general rate
case, billed water revenues for the first three months of 2019 were based on
2018 adopted rates, pending a final decision. As a result of the May 2019 CPUC
final decision, GSWC recorded the impact of the final decision in the second
quarter of 2019, including earnings of $0.08 per share that related to the first
quarter of 2019. The final decision also allowed for a water gross margin
increase in 2020 and 2021, subject to an earnings test. Effective January 1,
2020, GSWC received its full second-year step increase, which it achieved
because of passing the earnings test at all of its ratemaking areas.   The full
step increase is expected to generate an additional $10.4 million in water gross
margin for 2020. The final decision will also allow for a potential additional
increase in the water gross margin of approximately $11.4 million in 2021,
subject to the results of an earnings test and changes to the forecasted
inflationary index values.
Electric Segment:
In August 2019, the CPUC issued a final decision on the electric general rate
case. Among other things, the decision (i) extended the rate cycle by one year
(new rates were effective for 2018 - 2022); (ii) increased the electric gross
margin for 2018 by approximately $2.3 million compared to the 2017 adopted
electric gross margin, adjusted for Tax Act changes;

                                       26

--------------------------------------------------------------------------------

Table of Contents



(iii) authorizes BVES to construct all the capital projects requested in its
application, which are dedicated to improving system safety and reliability and
total approximately $44 million over the 5-year rate cycle; and (iv) increases
the adopted electric gross margin by $1.2 million for each of the years 2019 and
2020, by $1.1 million in 2021, and by $1.0 million in 2022. The rate increases
for 2019 - 2022 are not subject to an earnings test. The decision authorizes a
return on equity for GSWC's electric segment of 9.60% and includes a capital
structure and debt cost that is consistent with those approved by the CPUC in
March 2018 in connection with GSWC's water segment cost of capital proceeding.
Due to the delay in finalizing the electric general rate case, electric revenues
recognized during the first three months of 2019 were based on 2017 adopted
rates. Because the August 2019 CPUC final decision was retroactive to January 1,
2018, the cumulative retroactive earnings impact of the decision was included in
the third quarter results of 2019, including approximately $0.02 per share
related to the first quarter of 2019 had the new 2018 and 2019 rates been in
place at that time.
Cost of Capital Proceeding:
Investor-owned water utilities serving California are required to file their
cost of capital applications on a triennial basis, with the next scheduled
filing required to have taken place on May 1, 2020 and to be effective for the
years 2021 - 2023. In January 2020, GSWC, along with the three other water
utilities, requested an extension of the date by which each of them must file
its 2020 cost of capital application. In March 2020, the CPUC approved the
request, postponing the filing date by one year until May 1, 2021, with a
corresponding effective date of January 1, 2022. The CPUC also approved the
joint parties' request to leave the current Water Cost of Capital Mechanism in
place, but there will be no changes to the companies' rate of return on rate
base during the one-year extension, regardless of what the mechanism might
otherwise indicate.
GSWC's current authorized rate of return on rate base is 7.91%, based on its
weighted cost of capital, which will continue in effect through December 31,
2021. The 7.91% return on rate base includes a return on equity of 8.9%, an
embedded cost of debt of 6.6%, and a capital structure with 57% equity and 43%
debt.
Contracted Services Segment:
ASUS's revenues, operating income and cash flows are earned by providing water
and/or wastewater services, including operation and maintenance services and
construction of facilities at the water and/or wastewater systems at various
military installations, pursuant to 50-year firm fixed-price contracts. The
contract price for each of these 50-year contracts is subject to annual economic
price adjustments. Additional revenues generated by contract operations are
primarily dependent on new construction activities under contract modifications
with the U.S. government or agreements with other third-party prime contractors.
COVID-19:
Recently, the outbreak of novel coronavirus (COVID-19) has become a global
pandemic. GSWC continues to operate as its water and electric utility services
are deemed essential services. GSWC's response to the COVID-19 outbreak
continues to rapidly evolve and has included: (i) suspending through April 2021
service disconnections for nonpayments pursuant to CPUC orders, which will
remain in effect over other existing requirements governing disconnections; (ii)
waiving reconnection or facilities fees for affected customers and suspending
deposit requirements for affected customers who must reconnect to the system;
(iii) the temporary closing of customer service offices; (iv) increasing the
number of employees telecommuting; and (v) delaying some capital improvement
projects at its water utility services business.
The effects of the continuing pandemic on the Company are still emerging, but
among other things, it has caused significant negative impacts on financial
markets. This has resulted in significant fluctuations in the fair value of plan
assets in the Company's pension and other retirement plans, which are likely to
continue. Furthermore, due to expected future credit losses on utility customer
bills, GSWC has increased its allowance for doubtful accounts as of March 31,
2020 and expects to increase intercompany borrowings as well as borrowings from
outside sources due to the associated potential decrease in liquidity. Thus far,
the COVID-19 pandemic has not had a material impact on ASUS's operations, as the
water and wastewater services performed on the military bases are deemed
essential services.
The extent to which COVID-19 may materially impact GSWC's results is uncertain
but will depend on future developments, which cannot be predicted at this time.
However, the CPUC has approved GSWC to track incremental costs, including bad
debt expense in excess of what is included in GSWC's revenue requirement,
incurred as a result of the COVID-19 pandemic in a Catastrophic Event Memorandum
Account ("CEMA") to be filed with the CPUC for future recovery.

                                       27

--------------------------------------------------------------------------------

Table of Contents

Summary of First Quarter Results by Segment The table below sets forth the first quarter diluted earnings per share by business segment:

© Edgar Online, source Glimpses