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 of Registrant's operations in
terms of earnings per share by business segment and AWR (parent), which equals
each business segment's earnings divided by Registrant's weighted average number
of diluted common shares. This item is derived from consolidated financial
information but is not presented in our financial statements that are prepared
in accordance with Generally Accepted Accounting Principles (GAAP) in the United
States. This item constitutes a "non-GAAP financial measure" under the
Securities and Exchange Commission rules.
Registrant believes that the disclosure of earnings per share by business
segment provides investors with clarity surrounding the performance of its
segments. Registrant reviews this measurement regularly and compares it to
historical periods and to its operating budget. However, this measure, which is
not presented in accordance with GAAP, may not be comparable to similarly titled
measures used by other enterprises and should not be considered as an
alternative to earnings per share, which is determined in accordance with GAAP.
A reconciliation to AWR's consolidated diluted earnings per share is included in
the discussion under the section titled "Summary of First Quarter 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, 2021 filed with the SEC.
Water and Electric Segments:
GSWC's and BVESI's revenues, operating income, and cash flows are earned
primarily through delivering potable water to homes and businesses in California
and electricity in the Big Bear area of 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
substantially higher levels than depreciation expense. When necessary, GSWC and
BVESI may 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:
In July 2020, GSWC filed a general rate case application for all of its water
regions and its general office. This general rate case will determine new water
rates for the years 2022-2024. In November 2021, GSWC and the Public Advocates
Office at the CPUC ("Public Advocates") filed with the CPUC a joint motion to
adopt a settlement agreement between GSWC and Public Advocates on this general
rate case application. The settlement agreement, if approved, resolves all
issues related to the 2022 annual revenue requirement in the general rate case
application, leaving only three unresolved issues. Among other things, the
settlement authorizes GSWC to invest approximately $404.8 million in capital
infrastructure over the three-year cycle. The settlement also authorizes GSWC to
complete certain advice letter capital projects approved in the last general
rate case, which have recently been completed for a total capital investment of
$9.4 million. The additional annual revenue requirements generated from these
capital investments total $1.2 million and became effective February 15, 2022.
Advice letter projects are filed for revenue recovery only when the projects are
completed. Excluding the advice letter project revenues, the amounts included in
the settlement agreement would increase the 2022 adopted revenues by
approximately $30.3 million as compared to the 2021 adopted revenues, and
increase the 2022 adopted supply costs by $9.7 million as compared to the 2021
adopted supply costs. The settlement agreement also allows for potential
additional increases in adopted revenues for 2023 and 2024 subject to an
earnings test and changes to the forecasted inflationary index values.
The three remaining unresolved issues relate to 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. GSWC and Public Advocates have filed briefs with the CPUC on these
unsettled issues. A proposed decision is expected in mid-2022, and would address
the three unresolved issues along with the settlement agreement filed by GSWC
and Public Advocates. Pending a final decision on this general rate case
application, GSWC filed with the CPUC for interim rates, which will make new
2022 rates, once approved in a CPUC final decision, effective January 1, 2022.
Due to the delay in finalizing the water general rate case, water revenues
billed and recorded for the first quarter of 2022 were based on 2021 adopted
rates, pending a final decision by the CPUC in this general rate case
application. When approved, the new rates will be retroactive to January 1, 2022
and cumulative adjustments will be recorded in the quarter the new rates are
approved by the CPUC.
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Final Decision in the First Phase of the Low-Income Affordability Rulemaking:
In August 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
discontinued 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. For GSWC, the discontinuance of the WRAM and MCBA accounts would be
effective for the year 2025 and onward.
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 revenue and supply costs. 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. The
CPUC requested that the Court hold GSWC's request in abeyance until such time as
the CPUC acts on the pending request for rehearing. 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. On January 28, 2022, the CPUC
served its response to GSWC's and the other parties' petitions including
requesting the Court to deny the requests. On March 28, 2022, GSWC and the other
parties filed a reply to the CPUC's January 2022 filing with the California
Supreme Court. The Court has not yet determined whether it will review the
CPUC's August 2020 decision. 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. The final decision requires that amounts
tracked in GSWC's COVID-19 Catastrophic Event Memorandum Account ("CEMA")
account for unpaid customer bills be first offset by any (i) federal or state
relief for customers' utility bill debt, and (ii) customer payments through
payment-plan arrangements prior to receiving recovery from customers at large.
In January 2022, GSWC received $9.5 million of relief funding from the state of
California for customers' unpaid water bills incurred during the pandemic, which
it applied to its delinquent customers' eligible balances as discussed later
under the section titled COVID-19. 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. In March 2022, the California Water Association
filed a petition for writ of review to the California Supreme Court, urging the
Court to review the CPUC's final decision on the second phase of the Low-Income
Affordability Rulemaking. The Court has granted a CPUC request to hold the
California Water Association's petition until such time as the CPUC acts on the
pending applications for rehearing. Management cannot currently predict the
final outcome of this matter.
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%, an embedded cost of debt of
5.1%, and a return on rate base of 8.18%. A final decision on this proceeding,
once issued by the CPUC, is expected to have an effective date retroactive to
January 1, 2022. The cost of debt of 5.1% requested in this application is lower
than the cost of debt of 6.6% included in 2021 rates currently being billed to
water customers, pending a final decision in the water general rate case. GSWC
expects the impact of the new cost of capital, once approved by the CPUC, will
include an adjustment of the cost of debt from 6.6% to approximately 5.1%. As a
result, for the three months ended March 31, 2022, GSWC reduced revenues by $1.4
million to reflect the effect of revenues subject to refund from this lower cost
of debt. The lower cost of debt of 5.1% is expected to lower 2022 adopted water
revenues by approximately $7.5 million, or $0.15 per share, as compared to 2021
adopted water revenues at the cost of debt of 6.6%. At this time, management
cannot predict the outcome of the other items in the cost of capital
application. Hearings on this proceeding are scheduled for the second quarter of
2022. A proposed decision on this proceeding is expected in the second half of
2022.
Electric Segment:
On August 15, 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) allows the electric
segment 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 (iii) increased the
adopted electric revenues 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
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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 a debt cost that
are consistent with those approved by the CPUC in March 2018 in connection with
GSWC's water segment cost of capital proceeding. BVESI intends to file its next
general rate case application in June 2022 to set new rates for the years 2023
through 2026.
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 for 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 annual economic price adjustments, and 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. The Company continues to monitor the guidance provided by
federal, state, and local health authorities and other government officials. Due
to falling transmission rates in California and other variables, employees that
have been telecommuting due to COVID-19 have begun returning to company offices.
GSWC and BVESI continue to experience delinquent customer accounts receivable
due to the lingering effects of the COVID-19 pandemic, resulting in both GSWC
and BVESI increasing their allowance for doubtful accounts during the three
months ended March 31, 2022. 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 incurred as a result of the pandemic in
COVID-19-related memorandum accounts, such as a Catastrophic Event Memorandum
Account ("CEMA"), which is to be filed with the CPUC for future recovery. As of
March 31, 2022, GSWC and BVESI had approximately $4.5 million and $576,000,
respectively, in regulatory asset accounts related to bad debt expense in excess
of their revenue requirements, the purchase of personal protective equipment,
additional incurred printing costs, and other incremental COVID-19-related
costs. CEMA and other emergency-type memorandum accounts are well-established
cost recovery mechanisms authorized 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 or BVESI's earnings. Thus far, the COVID-19
pandemic has not had a material impact on ASUS's current operations.
The CPUC's moratoriums on service disconnections for nonpayment for water and
electric customers have ended, and service disconnections due to non-payment for
commercial customers have resumed. In accordance with Senate Bill 998
guidelines, service disconnections due to non-payment for residential customers
are set to resume in May of 2022. Furthermore, in January 2022, GSWC received
$9.5 million in COVID relief funds through the California Water and Wastewater
Arrearage Payment Program to provide assistance to customers for their water
debt accrued during the COVID-19 pandemic by remitting federal funds that the
state received from the American Rescue Plan Act of 2021 to the utility on
behalf of eligible customers. GSWC applied these funds to its delinquent
customers' eligible balances. In February 2022, BVESI received $321,000 from the
state of California for similar customer relief funding for unpaid electric
customer bills incurred during the pandemic.
The CPUC requires that amounts tracked in GSWC's and BVESI's COVID-19 memorandum
accounts for unpaid customer bills be first offset by any (i) federal and state
relief for water or electric utility bill debt, and (ii) customer payments
through payment plan arrangements, prior to receiving recovery from customers at
large. After these offsets are made, GSWC will file with the CPUC for recovery
of the remaining balance. BVESI intends to include the remaining balance in its
COVID-19 memorandum account for recovery in its next general rate case
application expected to be filed in June 2022.
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