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 its subsidiaries (GSWC, BVESI, and ASUS and its subsidiaries), and
AWR (parent) where applicable.
Included in the following analysis is a discussion about "operating revenues
less supply costs" at AWR's water and electric segments. Operating revenues less
supply costs are computed by subtracting water supply costs from water operating
revenues, and by subtracting electric supply costs from electric operating
revenues.  Registrant believes these measures are useful supplemental data in
that they remove the effects of pass-through supply costs that, due to
regulatory mechanisms in place, do not impact the profitability of GSWC or
BVESI. The discussions and tables included in the following analysis also
present Registrant's operations in terms of diluted earnings per share by
business segment, which equals each business segment's net income divided by
Registrant's weighted average number of diluted shares. Furthermore, the gains
generated on the investments held to fund one of the Company's retirement plans
during the three-and nine-month periods ended September 30, 2021 and 2020 have
been excluded when communicating the results to help facilitate comparisons of
the Company's performance from period to period. All of these items are derived
from consolidated financial information but are not presented in our financial
statements that are prepared in accordance with Generally Accepted Accounting
Principles (GAAP) in the United States. These items constitute "non-GAAP
financial measures" under the Securities and Exchange Commission rules.
Registrant believes that the disclosures of "operating revenues less supply
costs" for its water and electric segments, and diluted earnings per share by
each business segment provide investors with clarity surrounding the performance
of its segments.  Registrant reviews these measurements regularly and compares
them to historical periods and to its operating budget. However, these measures
are not presented in accordance with GAAP and may not be comparable to similarly
titled measures used by other entities and, therefore, should not be considered
as an alternative to "operating revenues" or "fully diluted earnings per common
share", which are determined in accordance with GAAP and presented in
Registrant's consolidated statements of income. Registrant has provided the
computations and reconciliations of its non-GAAP measures to the most directly
comparable GAAP measures. Calculations of "operating revenues less supply costs"
for the water and electric segments are included in the tables under the
sections titled "Operating Expenses: Supply Costs."  A computation and
reconciliation of diluted earnings per share from the measure of operating
income by business segment (as disclosed in this Form 10-Q in Note 10 to the
Unaudited Consolidated Financial Statements), to AWR's consolidated fully
diluted earnings per common share is included in the discussion under the
sections titled "Summary of Third Quarter Results by Segment" and "Summary of
Year-to-Date Results by Segment."
Overview
Factors affecting our financial performance are summarized under "Risk Factors"
in our Form 10-K for the period ended December 31, 2020 filed with the SEC.
Water and Electric Segments:
GSWC's and BVESI's revenues, operating income, and cash flows have been earned
primarily through delivering potable water to homes and businesses in California
and electricity in the City of Big Bear Lake and surrounding areas in San
Bernardino County, California, respectively. Rates charged to GSWC and BVESI
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 and BVESI
plan to continue seeking 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 and BVESI are expected to
remain at higher levels than depreciation expense. When necessary, GSWC and
BVESI are able to obtain funds from external sources in the capital markets and
through bank borrowings.
General Rate Case Filings and Other Matters:
Water General Rate Case for the years 2022 - 2024:
On July 15, 2020, GSWC filed a general rate case application for all its water
regions and the general office. This general rate case will determine new water
rates for the years 2022 - 2024. Among other things, GSWC requested capital
budgets in this application of approximately $450.6 million for the three-year
rate cycle, and another $11.4 million of capital projects to be filed for
revenue recovery only through advice letters when those projects are completed.
GSWC and the Public Advocates Office at the CPUC have reached a settlement in
principle on nearly all of the items in this general rate case application. The
unsettled matters are GSWC's requests for: (i) a medical cost balancing account,
(ii) a general liability insurance cost balancing account, and (iii) the
consolidation of two of GSWC's customer service areas. The date to file a Joint
Motion for Approval of Settlement Agreement to the CPUC has been proposed for
November 23, 2021. As a result of this proposed timing, a final decision from
the CPUC on this general rate case application is not expected by the end of
2021. For a final decision issued after 2021, new rates adopted in the case will
be effective retroactively to January 1, 2022.


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Water General Rate Case for the years 2019 - 2021:
In May 2019, the CPUC issued a final decision in GSWC's water general rate case
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
included $20.4 million of capital projects to be filed for revenue recovery
through advice letters when those projects are completed. Due to changes in
circumstances, not all the anticipated advice letter projects have been
completed during this rate cycle.
The final decision also allowed for increases in water's operating revenues less
water supply costs ("RLWSC") for 2020 and 2021, subject to an earnings test. The
full second-year step increases generated an additional $10.4 million in water's
RLWSC for 2020. Effective January 1, 2021, the CPUC also approved all third-year
rate increases, which GSWC achieved as a result of passing the earnings test.
The third-year rate increases are expected to generate an additional increase in
water's RLWSC of approximately $11.1 million in 2021 as compared to 2020.
Final Decision in the First Phase of the Low-Income Affordability Rulemaking:
On August 27, 2020, the CPUC issued a final decision in the first phase of the
CPUC's Order Instituting Rulemaking evaluating the low income ratepayer
assistance and affordability objectives contained in the CPUC's 2010 Water
Action Plan. This decision also addressed other issues, including the continued
use of the Water Revenue Adjustment Mechanism ("WRAM") and the Modified Cost
Balancing Account ("MCBA"). The MCBA is a full-cost balancing account used to
track the difference between adopted and actual water supply costs (including
the effects of changes in both rates and volume). Based on the final decision,
any general rate case application filed by GSWC and the other California water
utilities after August 27, 2020 may not include a proposal to continue the use
of the WRAM or MCBA, but may instead include a proposal to use a limited price
adjustment mechanism and an incremental supply cost balancing account.
The final decision will not have any impact on GSWC's WRAM or MCBA balances
during the current rate cycle (2019 - 2021). In February 2021, the assigned
administrative law judge in the pending general rate case proceeding confirmed
that GSWC may continue using the WRAM and MCBA through the year 2024. GSWC's
next general rate case application will be filed in 2023 to establish new rates
for the years 2025 - 2027, which may not include the WRAM or MCBA for those
years.
Since its implementation in 2008, the WRAM and MCBA have helped mitigate
fluctuations in GSWC's earnings due to changes in water consumption by its
customers or changes in water supply mix. Replacing them with mechanisms
recommended in the final decision will likely result in more volatility in
GSWC's future earnings and could result in less than, or more than, full
recovery of its authorized RLWSC. In October 2020, GSWC, certain other
California water utilities, and the California Water Association filed separate
applications for rehearing on this matter. Due to the delay in the CPUC issuing
a decision on any of these applications for rehearing, GSWC filed a petition for
writ of review to the California Supreme Court in May 2021, requesting the Court
to review the CPUC's final decision on this matter. In response, the CPUC
requested that the Court hold the case, pending a CPUC decision on the October
2020 applications for rehearing, and the Court granted the request. In September
2021, the CPUC issued a decision denying all the October 2020 applications for
rehearing. In October 2021, GSWC re-filed its writ of review to the California
Supreme Court, requesting the Court to review the CPUC's final decision on this
matter. Certain other California water utilities, and the California Water
Association also filed separate writs of review with the Court. Management
cannot currently predict the final outcome of this matter.
Final Decision in the Second Phase of the Low-Income Affordability Rulemaking:
On July 15, 2021, the CPUC issued a final decision in the second phase of the
Low-Income Affordability Rulemaking. Among other things, the decision extended
the suspension of water-service disconnection implemented during the COVID-19
pandemic due to non-payment of past-due amounts billed to residential customers
until the earlier of February 1, 2022 or pursuant to further CPUC guidance on
this matter. The final decision also requires that amounts tracked in GSWC's
COVID-19 Catastrophic Event Memorandum Account ("CEMA") account for unpaid
customer bills be offset by any (i) federal and state relief for water utility
bill debt, and (ii) customer payments through payment plan arrangements, prior
to receiving recovery from customers. In August 2021, GSWC, in addition to three
other parties, filed separate applications to the CPUC for rehearing on certain
aspects of this final decision.
Cost of Capital Proceeding:
Investor-owned water utilities serving California are required to file their
cost of capital applications on a triennial basis. GSWC filed a cost of capital
application with the CPUC in May 2021 requesting a capital structure of 57%
equity and 43% debt, a return on equity of 10.5%, and a return on rate base of
8.18%. A final decision on this proceeding is expected during the first half of
2022, with an effective date retroactive to January 1, 2022. GSWC's current
authorized rate of return on rate base of 7.91% will remain in effect through
December 31, 2021.
Electric Segment General Rate Case:
On August 15, 2019, the CPUC issued a final decision in the electric general
rate case. Among other things, the decision (i) extended the rate cycle by one
year to include 2022; (ii) increased electric's operating revenues less electric
supply costs ("RLESC") for 2018 by approximately $2.3 million compared to its
2017 adopted RLESC, adjusted for tax reform changes;
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(iii) allows the electric segment to construct capital projects of approximately
$44 million over the 5-year rate cycle, all of which are dedicated to improving
system safety and reliability; and (iv) increased electric's RLESC by $1.2
million for each of the years 2019 and 2020, by $1.1 million for 2021, and by
$1.0 million for 2022. The rate increases for 2019 - 2022 are not subject to an
earnings test. The decision authorized a return on equity for the electric
segment of 9.6% and included 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. The rate case decision
continues to apply to BVESI.
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:
GSWC, BVESI and ASUS have continued their operations throughout the COVID-19
pandemic given that their water, wastewater and electric utility services are
deemed essential. AWR's responses take into account orders issued by the CPUC,
and the guidance provided by federal, state, and local health authorities and
other government officials for the COVID-19 pandemic. Some of the actions taken
by GSWC and BVESI continue to include suspending service disconnections for
nonpayment pursuant to CPUC and state orders, and telecommuting by employees.
The suspension of water-service disconnections at GSWC was implemented in
response to an executive order from the governor of California. On July 15,
2021, the CPUC issued a final decision in the second phase of the Low-Income
Affordability Rulemaking which, among other things, extended the moratorium on
water-service disconnections due to non-payment of past-due amounts billed to
residential customers until the earlier of February 1, 2022 or pursuant to
further CPUC guidance on the matter. On June 24, 2021, the CPUC issued a final
decision to extend the moratorium on electric customer service disconnections
until September 30, 2021. Under the terms of CPUC-adopted payment plans, actual
electric-service disconnections for non-payment will occur no earlier than
December 1, 2021
The pandemic has caused volatility in financial markets resulting in
fluctuations in the fair value of plan assets in GSWC's pension and other
retirement plans. Furthermore, as discussed above, GSWC's and BVESI's response
to the pandemic required the suspension of service disconnections for
nonpayment, which has significantly increased the amount of delinquent customer
accounts receivable during the COVID-19 pandemic. Due to the expected future
credit losses on utility customer bills, GSWC and BVESI have increased their
allowance for doubtful accounts as of September 30, 2021 for past due customer
receivables. The CPUC has authorized GSWC and BVESI to track incremental costs,
including bad debt expense, in excess of what is included in their respective
revenue requirements in COVID-19-related memorandum accounts, which is to be
filed with the CPUC for future recovery. Through September 30, 2021, AWR has
recorded approximately $8.5 million in these COVID-19-related memorandum
accounts related to bad debt expense, personal protective equipment, printing
costs, and other incremental costs in excess of GSWC's and BVESI's revenue
requirements. By tracking these costs in memorandum accounts, utilities can
later request authorization from the CPUC for recovery of them. Emergency-type
memorandum accounts are well-established cost recovery mechanisms authorized by
the CPUC as a result of a state/federal declared emergency, and are therefore
recognized as regulatory assets for future recovery. As a result, the amounts
recorded in the COVID-19-related memorandum accounts have not impacted GSWC's
and BVESI's earnings. Thus far, the COVID-19 pandemic has not had a material
impact on ASUS's operations. On September 9, 2021, the president of the United
States issued orders and instructions on mandatory COVID-19 vaccination of all
federal employees, federal contractors and employees of companies with 100 or
more employees. The effects of mandatory vaccination on Registrant's workforce
are unknown given that federal vaccine-mandate guidance has yet to be issued.
The CPUC requires that amounts tracked in GSWC's and BVESI's COVID-19 memorandum
accounts for unpaid customer bills be offset by any (i) federal and state relief
for water utility bill debt, and (ii) customer payments through payment plan
arrangements, prior to receiving recovery from customers. After these offsets
are made, GSWC will file with the CPUC for future recovery of the remaining
balance. BVESI intends to include the remaining balance in its COVID-19
memorandum account in its next general rate case application expected to be
filed in 2022. On July 12, 2021, the governor of California approved SB-129
Budget Act of 2021, which includes almost $1 billion in relief funding for
overdue water customer bills, and almost $1 billion in relief funding for
overdue electric customer bills. The water utility relief funding is being
managed by the State Water Resources Control Board through the California Water
and Wastewater Arrearage Payment Program to provide direct assistance to
community water systems to credit customer accounts for water debt accrued
during the COVID-19 pandemic. The electric utility relief funding is being
managed by the California Department of Community Services and Development
through the California Arrearage Payment Program. Both GSWC and BVESI intend to
seek recovery of overdue amounts from all available funding sources. Funds for
both water and electric utility relief are expected to be distributed to
utilities during the fourth quarter of 2021 or the first quarter of 2022.
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Summary of Third Quarter Results by Segment
The table below sets forth the third quarter diluted earnings per share by
business segment:

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