AMERICAN STATES WATER CO (AWR) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation

The following discussion and analysis provides information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and/or its subsidiaries: GSWC, BVESI and ASUS and its subsidiaries, and AWR (parent) where applicable.  On July 1, 2020, GSWC completed the transfer of the electric utility assets and liabilities from its electric division to BVESI in exchange for common shares of BVESI. GSWC then immediately distributed all of BVESI's common shares to AWR, whereupon BVESI became wholly owned directly by AWR. The reorganization did not result in any substantive changes to AWR's operations or business segments.

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 sections titled “Summary Results by Segment.”

Overview

Factors affecting our financial performance are summarized under the Overview section in Item 1. Business and Item 1A. Risk Factors.

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 years 2022 - 2024:

On July 15, 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 are $1.2 million and became effective February 15, 2022. Advice letter projects are filed for revenue recovery only when those 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, retroactively effective January 1, 2022.

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Water General Rate Case for 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, including permitting delays, scope adjustments and constraints out of GSWC's control, not all the anticipated advice letter projects have been completed during this rate cycle. The majority of the $20.4 million of advice letter capital projects were included in GSWC’s water general rate case for the years 2022 – 2024.

The final decision also allowed for water rate increases 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 an earnings test at all of its ratemaking areas. The full step increase generated an additional $9.6 million in water revenues for 2020. Adopted supply costs for 2020 were $789,000 lower than the 2019 adopted supply costs. The CPUC also approved all of the third-year rate increases effective January 1, 2021, which generated an additional increase in the adopted water revenues of approximately $16.4 million in 2021. Adopted water supply costs for 2021 were $5.3 million higher than the 2020 adopted supply costs.

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 did not have any impact on GSWC's WRAM or MCBA balances during the 2019 – 2021 rate cycle. 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 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 other parties petitions requesting the Court to deny the requests. 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 February 1, 2022. The final decision also 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 from the state of California of relief funding for customers' unpaid water bills incurred during the pandemic, which it is applying 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 January 2022, the California Water Association filed a 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. Management cannot currently predict the final outcome of this matter.

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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%. 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. A final decision on this proceeding, once issued by the CPUC, is expected to have an effective date retroactive to January 1, 2022. GSWC's last authorized rate of return on rate base of 7.91% remained applicable through December 31, 2021.

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 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 included 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, as well as CPUC orders. Pursuant to the CPUC's July 15, 2021 decision in the Second Phase of the Low-Income Affordability Rulemaking discussed previously, the moratorium on water-service disconnections due to non-payment of past-due amounts billed to residential customers expired on February 1, 2022. However, water service cannot be disconnected so long as customers make timely payments on current bills, and are provided and adhere to payment plans to pay down past-due bills resulting from the pandemic. The moratorium on electric customer service disconnections ended on September 30, 2021. However, electric-service disconnections for non-payment can only be done after taking into account certain conditions such as average daily temperatures.

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. In addition, the economic impact of the pandemic has also significantly increased the amount of delinquent customer accounts receivable, resulting in both GSWC and BVESI increasing their allowance for doubtful accounts throughout the pandemic. However, 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 to be filed with the CPUC for future recovery.

On July 12, 2021, the governor of California approved SB-129 Budget Act of 2021, in which nearly $1 billion in relief funding for overdue water customer bills, and nearly $1 billion in relief funding for overdue electric customer bills were included. The water customer relief funding is being managed by the State Water Resources Control Board ("SWRCB") 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. In December 2021, GSWC received SWRCB approval for $9.5 million of relief funding of customers' unpaid water bills incurred during the pandemic. In January 2022, GSWC received these funds, which it is applying to its delinquent customers' eligible balances. Accordingly, as of December 31, 2021, GSWC has reflected these relief funds as a reduction to its COVID-19 CEMA account, as well as a reduction to its estimated customer

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bad debt reserve. In February 2022, BVESI received $321,000 from the state of California for similar customer relief funding for unpaid electric bills incurred during the pandemic.

GSWC and BVESI continue to experience delinquent account activity because of the ongoing pandemic. As of December 31, 2021, GSWC and BVESI had approximately $1.7 million and $302,000, respectively, in regulatory asset accounts related to bad debt expense in excess of their revenue requirements, the purchase of personal protective equipment, additional printing costs, and other incremental COVID-19-related costs. 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 or state relief for customers' 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 and BVESI will each file with the CPUC for recovery of any remaining balances.

By tracking incremental COVID-19-related costs in the CPUC-approved memorandum accounts, GSWC and BVESI can later ask for recovery of these costs from the CPUC. The CEMA and other emergency-type memorandum accounts are established as a result of a state or federally 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 during the pandemic. ASUS has experienced delays in receiving contract modifications from the U.S. government for additional construction projects due to government staffing shortages resulting from the COVID-19 pandemic but this has not had a material impact on its current operations.

In September 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. On January 13, 2022, the U.S. Supreme Court ruled to stop the president's administration from enforcing a requirement that employees at businesses with at least 100 employees be vaccinated against COVID-19 or undergo weekly testing and wear a mask on the job. Therefore, there is no COVID-19 vaccination mandate for Registrant’s regulated utilities workforce. However, although the federal contractor COVID-19 mandate has been challenged, it was not addressed in the January 13, 2022 ruling from the U.S. Supreme Court and, therefore, its applicability to Registrant’s non-regulated workforce remains uncertain at this time.

Summary Results by Segment

The table below sets forth a comparison of the diluted earnings per share contribution by business segment and for the parent company for the years ended December 31, 2021 and 2020.

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The following is a computation and reconciliation of diluted earnings per share from the measure of operating income by business segment as disclosed in Note 17 to the Consolidated Financial Statements, to AWR’s consolidated fully diluted earnings per common share for the year ended December 31, 2021 and 2020:

Water Segment:

Diluted earnings per share from the water segment for the year ended December 31, 2021 increased by $0.21 per share as compared to 2020. Included in the results for 2021 were gains on investments held to fund one of the Company's retirement plans totaling $4.3 million, or $0.08 per share, as compared to $3.0 million, or $0.06 per share, in gains generated during 2020 largely due to market conditions. Excluding these gains from both years, adjusted diluted earnings at the water segment for 2021 were $1.79 per share as compared to adjusted diluted earnings of $1.60 per share for 2020. This adjusted increase of $0.19 per share was due to the following items:

•An increase in the water segment’s operating revenues of $16.5 million, largely as a result of new rates authorized by the CPUC. GSWC received its full third-year step increase effective January 1, 2021 as well as mid-year increases to reflect higher water supply costs. Due to regulatory mechanisms in place for water supply costs, the increase in operating revenues includes the full recovery of increases in supply costs discussed below.

•An increase in water supply costs of $4.1 million, which consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. Actual water supply costs are tracked and passed through to customers on a dollar-for-dollar basis by way of the CPUC-approved water supply cost balancing accounts. The increase in water supply costs results in a corresponding increase in water operating revenues and has no net impact on the water segment’s profitability.

•An overall increase in operating expenses (excluding supply costs and a gain on the sale of assets) of $3.1 million, which negatively impacted the water segment's earnings. The increase was primarily due to higher chemical and water treatment costs, conservation costs, regulatory costs, insurance costs, depreciation expense, and property and other taxes as compared to 2020, partially offset by a decrease in maintenance expense.

•The sale of non-utility-related land at the water segment resulted in a gain of $409,000 recorded during 2021, with no equivalent item in 2020.

•An overall increase in interest expense (net of interest and other income) of $1.7 million, which negatively impacted earnings. GSWC issued $160 million of long-term debt in July 2020 and used the proceeds to pay down its intercompany borrowings (as required by the CPUC); intercompany borrowings bear lower short-term rates. There was also a decrease in interest income earned on regulatory assets at the water segment bearing interest at the current 90-day commercial paper rate, which decreased compared to 2020, as well as a decrease in the receipt of other income amounts owed by developers.

•A decrease in the effective income tax rate, which favorably impacted earnings. The decrease resulted primarily from changes in certain flow-through taxes and permanent items during 2021 as compared to 2020. As a regulated utility, GSWC treats certain temporary differences as flow-through in computing its income tax expense consistent with the income tax method used in its CPUC-jurisdiction ratemaking. Changes in the magnitude of flow-through items either increase or decrease tax expense, thereby affecting diluted earnings per share.

Electric Segment:

Diluted earnings from the electric segment was $0.21 per share for 2021, as compared to $0.20 per share recorded for 2020, an increase of $0.01 per share. There was an increase in electric revenues due to CPUC-approved rate increases effective January 1, 2021, as well as lower interest expense as compared to 2020. The decrease in interest expense was due primarily to the elimination of interest expense allocated from GSWC effective July 1, 2020 as a result of the spin-off of GSWC's electric division to BVESI. These increases to net earnings were partially offset by an increase in electric supply costs and other operating expenses. Due to regulatory mechanisms in place, the increase in electric supply costs results in a corresponding increase in electric operating revenues and has no net impact on the electric segment’s profitability.

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Contracted Services Segment:

Diluted earnings from the contracted services segment was $0.48 per share, as compared to $0.47 per share for 2020, an increase of $0.01 per share. This was due to an increase in management fee revenue, as well as a decrease in overall operating expenses, partially offset by overall lower construction activity as compared to 2020. The decrease in overall operating expenses was due to, among other things, lower legal and outside services costs and other non-income taxes.

AWR (Parent):

For the year ended December 31, 2021, diluted earnings from AWR (parent) decreased $0.01 per share compared to 2020 due primarily to changes in state unitary taxes.

The following discussion and analysis for the years ended December 31, 2021 and 2020 provide information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC, BVESI and ASUS and its subsidiaries.

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Consolidated Results of Operations — Years Ended December 31, 2021 and 2020 (amounts in thousands, except per share amounts):

* not meaningful

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Operating Revenues

General

GSWC and BVESI rely upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant. ASUS relies on economic price and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS. Current operating revenues and earnings may be negatively impacted if the Military Utility Privatization Subsidiaries do not receive adequate price adjustments in a timely manner. ASUS’s earnings are also impacted by the level of construction projects at the Military Utility Privatization Subsidiaries, which may or may not continue at current levels in future periods.

Water

For the year ended December 31, 2021, revenues from water operations increased by $16.5 million to $347.1 million, compared to the year ended December 31, 2020 as a result of full third-year step increases for 2021 approved by the CPUC. These increases were partially offset by lower CPUC-approved surcharges billed in 2021 to recover previously incurred costs. These surcharges are largely offset by corresponding decreases in operating expenses, resulting in no impact to earnings.

Billed water consumption for the year ended December 31, 2021 increased slightly compared to 2020. In general, changes in consumption do not have a significant impact on recorded revenues due to the CPUC-approved WRAM accounts in place in the majority of GSWC's rate-making areas. GSWC records the difference between what it bills its water customers and that which is currently authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities. The August 2020 CPUC decision on the First Phase of the Low-Income Affordability Rulemaking eliminates the continued use of the WRAM beginning with the next general rate case application that will be filed in 2023 and will set new rates for the years 2025 – 2027.

Electric

For the year ended December 31, 2021, revenues from electric operations were $38.3 million as compared to $37.0 million for the year ended December 31, 2020. This increase was due to new CPUC-approved electric rates effective January 1, 2021, partially offset by a 2% decrease in electric usage as compared to the same period in 2020. Due to the CPUC-approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, changes in usage do not have an impact on earnings.

Contracted Services

Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the year ended December 31, 2021, total revenues from contracted services were $113.4 million as compared to $120.6 million for 2020.  The decrease was due to an overall decrease in construction activity as compared to 2020, partially offset by an increase in management fees resulting from the successful resolution of various economic price adjustments and other filings at the military bases served.

ASUS's subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served. During 2021, ASUS was awarded approximately $17.3 million in new construction projects, some of which have been completed during 2021. The majority of the remainder are expected to be completed in 2022. Furthermore, in September 2021, ASUS received a contract modification that provided for additional infrastructure assets located at Joint Base Andrews to be operated and maintained by ASUS under its utility privatization contract with the U.S. government. The operation and maintenance, and renewal and replacement of these assets is expected to contribute additional revenue of approximately $41.0 million over the remaining life of the 50-year contract, through January 2056. Earnings and cash flows from modifications to the original 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

Operating Expenses:

Supply Costs

Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for 30.2% and 29.0% of total operating expenses for the years ended December 31, 2021 and 2020, respectively.

Water segment supply costs

Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. The overall actual percentages for purchased water for the years ended December 31, 2021 and 2020 was 45% and 44%,

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respectively, as compared to the adopted percentages of 34% for 2021 and 2020. The higher actual percentages of purchased water as compared to adopted percentages resulted primarily from several wells being out of service.

Under the CPUC-approved Modified Cost Balancing Account ("MCBA"), GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power and pump tax expenses. GSWC recovers from, or refunds to, customers the amount of such variances.  GSWC tracks these variances individually for each water ratemaking area. The August 2020 CPUC decision on the First Phase of the Low-Income Affordability Rulemaking, which eliminates the continued use of the WRAM, also eliminates the MCBA for GSWC beginning in the year 2025.

Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. For the years ended December 31, 2021 and 2020, water supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(11,421,000) and $(11,803,000) for 2021 and 2020, respectively.

Purchased water costs for 2021 increased to $77.9 million as compared to $74.6 million for 2020 primarily due to the higher mix of purchased water as compared to pumped water and an increase in wholesale water costs. The cost of power purchased for pumping increased to $11.1 million in 2021 as compared to $10.1 million for 2020, due to increased electricity costs. Groundwater production assessments decreased to $19.4 million in 2021 as compared to $20.4 million in 2020 due to a higher amount of purchased water versus pumped water.

The under-collection in the water supply cost balancing account decreased $765,000 during 2021 as compared to 2020 due to rate increases to specifically cover increases in supply costs experienced in these areas, partially offset by higher costs related to purchased water.

Electric segment supply costs

Supply costs for the electric segment consist primarily of purchased power for resale, the cost of natural gas used by BVESI’s generating unit, the cost of renewable energy credits and changes in the electric supply cost balancing account. For the years ended December 31, 2021 and 2020, electric supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(11,421,000) and $(11,803,000) for 2021 and 2020, respectively.

For 2021, the cost of power purchased for resale to BVESI's customers was $11.2 million as compared to $10.4 million for 2020 due to an increase in the average price per megawatt-hour ("MWh"). The average price per MWh, including fixed costs, increased to $71.94 per MWh in 2021 from $67.52 per MWh in 2020. This increase in price resulted in an under-collection of $126,000 recorded in the electric supply balancing account during 2021 as compared to an over-collection of $257,000 during 2020.

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Other Operation

The primary components of other operation expenses include payroll, materials and supplies, chemicals and water-treatment costs, and outside service costs of operating the regulated water and electric systems, including the costs associated with transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices.  Registrant’s contracted services operations incur many of the same types of expenses.  For the years ended December 31, 2021 and 2020, other operation expenses by business segment consisted of the following amounts (in thousands):

For the year ended December 31, 2021, other operation costs at the water segment increased due to increases in chemical and water treatment costs including outside service costs associated with the water treatment processes, as well as increases in water conservation costs incurred to address current drought conditions.

Other operation expenses for the electric segment increased primarily due to higher operation-related labor and outside services costs.

The change in other operation expenses for contracted services was primarily due to (i) higher bad debt expense experienced in 2020 related to certain receivable balances due from other prime contractors working for the U.S. government, and (ii) lower pre-contract costs incurred in 2021 as compared to 2020.

Administrative and General

Administrative and general expenses include payroll related to administrative and general functions, all employee-related benefits, insurance expenses, outside legal and consulting fees, regulatory utility commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the years ended December 31, 2021 and 2020, administrative and general expenses by business segment, including AWR (parent), consisted of the following amounts (in thousands):

For the year ended December 31, 2021, administrative and general expenses at the water segment increased $485,000. Excluding the impact of a reduction in billed surcharges, administrative and general expenses increased $739,000 due to higher employee-related benefits, insurance costs, and regulatory costs. Decreases in billed surcharges have a corresponding decrease in administrative and general expenses, resulting in no impact to earnings.

For the year ended December 31, 2021, administrative and general expenses for contracted services decreased by $608,000 due to lower legal and other outside services as compared to 2020. Legal and outside services tend to fluctuate from period to period.

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Depreciation and Amortization

For the years ended December 31, 2021 and 2020, depreciation and amortization expense by segment consisted of the following amounts (in thousands):

The increases in depreciation expense resulted primarily from additions to utility plant and other fixed assets since 2020.

Maintenance

For the years ended December 31, 2021 and 2020, maintenance expense by segment consisted of the following amounts (in thousands):

Maintenance expense decreased at the water segment due largely to lower unplanned maintenance incurred as compared to 2020. The need for unplanned maintenance activities for the water segment were significantly higher in 2020 than in 2021.

The decrease in maintenance at the electric segment was due to a decrease in billed surcharges as compared to 2020, which has a corresponding decrease in maintenance expense and, therefore, no earnings impact.

Property and Other Taxes

For the years ended December 31, 2021 and 2020, property and other taxes by segment, consisted of the following amounts (in thousands):

Property and other taxes at the water and electric segments increased during 2021 as compared to 2020 due, in large part, to an increase in property taxes resulting from capital additions and the associated higher assessed property values. The decrease at the contracted services segment was due to lower non-income tax assessments and fees as compared to 2020.

ASUS Construction

For the year ended December 31, 2021, construction expenses for contracted services were $56.9 million, decreasing by $5.5 million compared to 2020 due to an overall decrease in construction activity.

(Gain) Loss On Sale of Assets

The gain on sale of assets in 2021 was related primarily to the sale of a parcel of non-utility-related land at the water segment with no equivalent item in 2020. The loss on sale of assets in 2020 related to the sale of fixed assets at the contracted services segment.

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Interest Expense

For the years ended December 31, 2021 and 2020, interest expense by segment, including AWR (parent), consisted of the following amounts (in thousands):

Registrant's borrowings consist of bank debts under revolving credit facilities and long-term debt issuances at GSWC. Consolidated interest expense increased as compared to 2020 resulting from an overall increase in total borrowing levels to support, among other things, the capital expenditures program at the regulated utilities. In July 2020, GSWC issued unsecured private placement notes totaling $160.0 million. The increase in borrowing levels was partially offset by an overall decrease in average interest rates due, in part, from the early redemption in May 2021 of GSWC's 9.56% private placement notes in the amount of $28 million.

Interest Income

For the years ended December 31, 2021 and 2020, interest income by business segment, including AWR (parent), consisted of the following amounts (in thousands):

For the year ended December 31, 2021, overall interest income decreased by $308,000 as compared to 2020 due primarily to lower interest income earned on regulatory assets at the water segment bearing interest at the current 90-day commercial paper rate, which decreased compared to 2020.

Other Income and (Expense), net

For the years ended December 31, 2021 and 2020, other income and (expense) by business segment, including AWR (parent), consisted of the following amounts (in thousands):

For the year ended December 31, 2021, other income increased mostly as a result of larger gains generated and recorded on investments held to fund one of Registrant's retirement plans as compared to 2020 due to market conditions. This increase was partially offset by a decrease in the receipt of other income amounts owed by developers, and an increase in the non-service cost components of net periodic benefit costs related to Registrant's defined benefit pension plans and other retirement benefits as compared to 2020. Because of GSWC's and BVESI's two-way pension balancing accounts authorized by the CPUC, changes in pension costs have no material impact to net earnings at the regulated utilities.

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Income Tax Expense

For the years ended December 31, 2021 and 2020, income tax expense by segment, including AWR (parent), consisted of the following amounts (in thousands):

Consolidated income tax expense for the year ended December 31, 2021 increased by $2.2 million due to an increase in pretax income, partially offset by a lower overall effective income tax rate ("ETR"). AWR's consolidated effective ETR was 24.4% and 24.6% for 2021 and 2020, respectively. GSWC's ETR was 24.2% for 2021 as compared to 25.0% for 2020 resulting primarily from net changes in certain flow-through and permanent items. The decrease in the tax benefit at AWR (parent) was the result of changes in state unitary taxes.

Information comparing the consolidated results of operations for fiscal years 2020 and 2019 can be found under Item 7, Management’s Discussion and Analysis under the heading “Consolidated Results of Operations-Years Ended December 31, 2020 and 2019” in AWR's Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC.

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Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are important to the portrayal of AWR’s financial condition, results of operations and cash flows, and require the most difficult, subjective or complex judgments of AWR’s management. The need to make estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective and/or complex. Management makes subjective judgments about the accounting and regulatory treatment of many items. The following are accounting policies and estimates that are critical to the financial statements of AWR. For more information regarding the significant accounting policies of Registrant, see Note 1 of “Notes to Financial Statements” included in Part II, Item 8, in Financial Statements and Supplementary Data.

Accounting for Rate Regulation — Because GSWC and BVESI operate extensively in regulated businesses, they are subject to the authoritative guidance for accounting for the effects of certain types of regulation.  Application of this guidance requires accounting for certain transactions in accordance with regulations adopted by the regulatory commissions of the states in which rate-regulated operations are conducted.  Utility companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the ratemaking process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service.

Regulation and the effects of regulatory accounting have the most significant impact on the financial statements of GSWC and BVESI. When either files for adjustments to rates, the capital assets, operating costs and other matters are subject to review, and disallowances may occur. In the event that a portion of either GSWC’s or BVESI's operations are no longer subject to the accounting guidance for the effects of certain types of regulation, they are required to write-off related regulatory assets that are not specifically recoverable and determine if other assets might be impaired.  If the CPUC determines that a portion of either GSWC’s or BVESI's assets are not recoverable in customer rates, management is required to determine if it has suffered an asset impairment that would require a write-down in the asset valuation.  Management continually evaluates the anticipated recovery, settlement or refund of regulatory assets, liabilities, and revenues subject to refund and provides for allowances and/or reserves that it believes to be necessary.  In the event that management’s assessment as to the probability of the inclusion in the ratemaking process is incorrect, the associated regulatory asset or liability will be adjusted to reflect the change in assessment or the impact of regulatory approval of rates. Reviews by the CPUC may also result in additional regulatory liabilities to refund previously collected revenues to customers if the CPUC were to disallow costs included in the ratemaking process.

Registrant also reviews its utility plant in-service for possible impairment in accordance with accounting guidance for regulated entities for abandonments and disallowances of plant costs.

Revenue Recognition — GSWC and BVESI record water and electric utility operating revenues when the service is provided to customers. Operating revenues include unbilled revenues that are earned (i.e., the service has been provided) but not billed by the end of each accounting period. Unbilled revenues are calculated based on the number of days and total usage from each customer’s most recent billing record that was billed prior to the end of the accounting period and is used to estimate unbilled consumption as of the year-end reporting period.  Unbilled revenues are recorded for both monthly and bi-monthly customers.

In 2008, the CPUC granted GSWC the authority to implement revenue decoupling mechanisms through the adoption of the WRAM.  With the adoption of this alternative revenue program, GSWC adjusts revenues in the WRAM for the difference between what is billed to its water customers and that which is authorized by the CPUC. In a final decision issued by the CPUC in August 2020, any general rate case application filed by GSWC and the other California water utilities after the August 27, 2020 effective date of this decision, may not include a proposal to continue the use of the WRAM. Instead they include a proposal to use a limited price adjustment mechanism (the Monterey-Style WRAM). The final decision will not have any impact on GSWC's WRAM balances during the rate cycle covering the years 2019 – 2021, nor the pending general rate case application filed in July 2020 that will set new rates for the years 2022 – 2024. However, the next general rate case application in 2023 covering the years 2025 – 2027 is currently not permitted to include the continued use of the WRAM. The CPUC also granted BVESI a revenue decoupling mechanism through the BRRAM. BVESI adjusts revenues in the BRRAM for the difference between what is billed to its electric customers and that which is authorized by the CPUC.

As required by the accounting guidance for alternative revenue programs, GSWC and BVESI are required to collect their WRAM and BRRAM balances, respectively, within 24 months following the year in which they are recorded.  The CPUC has set the recovery period for under-collected balances that are up to 15% of adopted annual revenues at 18 months or less.  For net WRAM under-collected balances greater than 15%, the recovery period is 19 to 36 months. As a result of the accounting guidance and CPUC-adopted recovery periods, Registrant must estimate if any WRAM and BRRAM revenues will be collected beyond the 24-month period. This can affect the timing of when such revenues are recognized.

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ASUS's 50-year firm fixed-price contracts with the U.S. government are considered service concession arrangements under ASC 853 Service Concession Arrangements. Accordingly, the services under these contracts are accounted for under Topic 606 Revenue from Contracts with Customers and the water and/or wastewater systems are not recorded as Property, Plant and Equipment on Registrant’s balance sheet. Revenues for ASUS's operations and maintenance contracts are recognized when services have been rendered to the U.S. government pursuant to 50-year contracts. Revenues from construction activities are recognized based on either the percentage-of-completion or cost-plus methods of accounting.  In accordance with GAAP, revenue recognition under these methods requires management to estimate the progress toward completion on a contract in terms of efforts, such as costs incurred.  This approach is used because management considers it to be the best available measure of progress on these contracts. Changes in job performance, job conditions, change orders and estimated profitability, including those arising from any contract penalty provisions, and final contract settlements may result in revisions to costs and income, and are recognized in the period in which the revisions are determined. Unbilled receivables from the U.S. government represent amounts to be billed for construction work completed and/or for services rendered pursuant to the 50-year contracts with the U.S government, which are not presently billable but which will be billed under the terms of the contracts.

Income Taxes — Registrant’s income tax calculations require estimates due principally to the regulated nature of the operations of GSWC and BVESI, the multiple states in which Registrant operates, and potential future tax rate changes. Registrant uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Changes in regulatory treatment, or significant changes in tax-related estimates, assumptions or law, could have a material impact on the financial position and results of operations of Registrant.

As regulated utilities, GSWC and BVESI treat certain temporary differences as flow-through adjustments in computing their income tax expense consistent with the income tax approach approved by the CPUC for ratemaking purposes.  Flow-through adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate and the statutory federal income tax rate in any given period than would otherwise exist if GSWC or BVESI were not required to account for its income taxes as regulated enterprises. As of December 31, 2021, Registrant’s total amount of unrecognized tax benefits was zero.

Pension Benefits — Registrant’s pension benefit obligations and related costs are calculated using actuarial concepts within the framework of accounting guidance for employers' accounting for pensions and post-retirement benefits other than pensions.  Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these critical assumptions annually. Other assumptions include employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase. The discount rate enables Registrant to state expected future cash payments for benefits as a present value on the measurement date. The guideline for setting this rate is a high-quality, long-term corporate bond rate. Registrant’s discount rates were determined by considering the average of pension yield curves constructed using a large population of high-quality corporate bonds. The resulting discount rates reflect the matching of plan liability cash flows to the yield curves.  A lower discount rate increases the present value of benefit obligations and increases periodic pension expense. Conversely, a higher discount rate decreases the present value of benefit obligations and decreases periodic pension expense.  To determine the expected long-term rate of return on the plan assets, Registrant considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension expense. The long-term expected return on the pension plan's assets was 6.00% for 2021 and 6.25% for 2020.

For the pension plan obligation, Registrant increased the discount rate to 2.89% as of December 31, 2021 from 2.55% as of December 31, 2020 to reflect market interest-rate conditions at December 31, 2021. A hypothetical 25-basis point decrease in the assumed discount rate would have increased total net periodic pension expense for 2021 by approximately $1.1 million, or 23.0%, and would have increased the projected benefit obligation (“PBO”) and accumulated benefit obligation (“ABO”) at December 31, 2021 by a total of $9.9 million, or 3.8%.  A 25-basis point decrease in the long-term return on pension-plan-asset assumption would have increased 2021 pension cost by approximately $523,000, or 10.8%.

In addition, changes in the fair value of plan assets will impact future pension cost and the Plan’s funded status.  Changes in market conditions can affect the value of plan assets held to fund future long-term pension benefits. Any reductions in the value of plan assets will result in increased future expense, an increase in the underfunded position, and increase the required future contributions.

The CPUC has authorized GSWC and BVESI to each maintain a two-way balancing account to track differences between their forecasted annual pension expenses adopted in rates and the actual annual expense to be recorded in accordance with the accounting guidance for pension costs.  As of December 31, 2021, GSWC has a $261,000 under-collection in its two-

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way pension balancing account for the general office and water regions. As of December 31, 2021, BVESI has a $246,000 over-collection in its two-way pension balancing account.

Funding requirements for qualified defined benefit pension plans are determined by government regulations.  In establishing the contribution amount, Registrant has considered the potential impact of funding-rule changes under the Pension Protection Act of 2006. Registrant contributes the minimum required contribution as determined by government regulations or the forecasted annual pension cost authorized by the CPUC and included in customer rates, whichever is higher. In accordance with this funding policy, for 2022 the pension contribution is expected to be approximately $3.1 million. Any differences between the forecasted annual pension costs in rates and the actual pension costs are included in the two-way pension balancing accounts.  Additionally, market factors can affect assumptions we use in determining funding requirements with respect to our pension plan. For example, a relatively modest change in our assumptions regarding discount rates can materially affect our calculation of funding requirements. To the extent that market data compels us to reduce the discount rate used in our assumptions, our benefit obligations could materially increase.

Changes in demographics, including increased numbers of retirees or increases in life expectancy assumptions may also increase the funding requirements of our obligations related to the pension plan.  Mortality assumptions are a critical component of benefit obligation amounts and a key factor in determining the expected length of time for annuity payments. Assuming no changes in actuarial assumptions or plan amendments, the costs over the long term are expected to decrease due to the closure of Registrant’s defined benefit pension plan to new employees as of January 1, 2011.  Employees hired or rehired after December 31, 2010 are eligible to participate in a defined contribution plan instead of the pension plan.

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Liquidity and Capital Resources

AWR

Registrant’s regulated business is capital intensive and requires considerable capital resources. A portion of these capital resources is provided by internally generated cash flows from operations. AWR anticipates that interest expense will increase in future periods due to the need for additional external capital to fund its construction program and as market interest rates increase. AWR believes that costs associated with capital used to fund construction at GSWC and BVESI will continue to be recovered through water and electric rates charged to customers.

AWR funds its operating expenses and pays dividends on its outstanding Common Shares primarily through dividends from its wholly owned subsidiaries. The ability of GSWC and BVESI to pay dividends to AWR is restricted by California law. Under these restrictions, approximately $615.7 million was available for GSWC to pay dividends to AWR on December 31, 2021. Approximately $70.7 million was available for BVESI to pay dividends to AWR as of December 31, 2021. ASUS's ability to pay dividends to AWR is dependent upon state laws in which each Military Utility Privatization Subsidiary operates, as well as ASUS's ability to pay dividends under California law.

When necessary, Registrant obtains funds from external sources in the capital markets and through bank borrowings under revolving credit facilities. Access to external financing on reasonable terms depends on the credit ratings of AWR and GSWC and current business conditions, including that of the water utility industry in general, as well as conditions in the debt and equity capital markets. AWR currently has access to a $200.0 million credit facility and borrows under this facility, which expires in May 2023, to provide funds to GSWC and ASUS in support of their operations.  The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest expense under the credit facility. As of December 31, 2021, there was $174.5 million outstanding under this facility. Registrant expects to issue long-term debt through GSWC prior to May 2023 and use the debt proceeds to pay off borrowings under this facility. This facility has interest rates generally based on the London Interbank Offered Rate ("LIBOR"), which will cease immediately after June 30, 2023. In connection with the May 2023 expiration of this credit facility, as well as the pending discontinuation of LIBOR, Registrant anticipates renewing or entering into a new credit facility prior to May 2023, with interest rates based on other benchmark rates, such as the Secured Overnight Financing Rate ("SOFR"). Registrant does not believe the change in benchmark rates will have a material impact on financing costs.

BVESI has a $35.0 million revolving credit facility, which was amended in December 2021 to reduce the interest rate and fees charged, as well as extend the maturity date by one year to July 1, 2024. As of December 31, 2021, there was $31.0 million outstanding under this facility. Borrowings made under this facility support BVESI's operations and capital expenditures. Under the terms of the credit agreement, BVESI has the option to increase the facility by an additional $15.0 million, subject to lender approval. Interest rates under this facility are generally based on LIBOR. Under the terms of the December 2021 amendment, upon discontinuation of a benchmark rate such as LIBOR, the lender may replace LIBOR with a benchmark rate replacement such as SOFR. Registrant does not believe the change from LIBOR to a new benchmark rate will have a material impact on financing costs. Registrant does not have any other borrowings or debt indexed to LIBOR.

In 2019, the CPUC issued a decision approving BVESI's authority to issue long-term financing not to exceed $75 million. The CPUC requires BVESI to completely pay off all borrowings under its revolving credit facility within a 24-month period. The next 24-month period in which BVESI is required to pay off its borrowings from the facility ends in July 2022. Accordingly, the $31.0 million outstanding under BVESI's credit facility has been classified as a current liability in AWR's Consolidated Balance Sheet as of December 31, 2021. BVESI expects to fund this repayment through the issuance of long term debt during the first half of 2022.

In May 2021, GSWC redeemed its 9.56% private placement notes in the amount of $28.0 million, which pursuant to the note agreement included a redemption premium of 3.0% on par value, or $840,000. GSWC recovers redemption premiums in its embedded cost of debt as filed in cost of capital proceedings where the cost savings from redeeming higher interest rate debt are passed on to customers. Accordingly, the redemption premium has been deferred as a regulatory asset. Prior to May 15, 2021, the notes were subject to a make whole premium. GSWC funded the redemption by borrowing from AWR parent. AWR, in turn, funded this borrowing from its revolving credit facility.

The economic impact of the COVID-19 pandemic has significantly increased the amount of delinquent customer accounts receivable, resulting in both GSWC and BVESI increasing their allowance for doubtful accounts throughout the pandemic. This has affected cash flows from operating activities at the regulated utilities and has increased the need to borrow under AWR's and BVESI's credit facilities. However, 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 to be filed with the CPUC for future recovery. Furthermore, in January 2022, GSWC received $9.5 million from the state of California of relief funding for customers' unpaid water bills incurred during the pandemic, as previously discussed. As of December 31, 2021, GSWC has reflected these relief funds as a reduction to its COVID-19 related memorandum account, as well as a reduction to GSWC's estimated customer bad debt

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reserve. In February 2022, BVESI received $321,000 from the state of California for similar customer relief funding for unpaid electric bills incurred during the pandemic. However, GSWC and BVESI continue to experience delinquent account activity because of the ongoing pandemic.

In March 2021, Standard and Poor’s Global Ratings (“S&P”) affirmed an A+ credit rating for both AWR and GSWC. S&P also revised its rating outlook to negative from stable for both companies. S&P’s debt ratings range from AAA (highest possible) to D (obligation is in default). In November 2021, Moody's Investors Service ("Moody's") affirmed its A2 rating with a stable outlook for GSWC. Securities ratings are not recommendations to buy, sell or hold a security, and are subject to change or withdrawal at any time by the rating agencies. Management believes that AWR’s sound capital structure and A+ credit rating, combined with its financial discipline, will enable Registrant to access the debt and equity markets. However, unpredictable financial market conditions in the future may limit its access or impact the timing of when to access the market, in which case Registrant may choose to temporarily reduce its capital spending.

AWR’s ability to pay cash dividends on its Common Shares outstanding depends primarily upon cash flows from its subsidiaries. AWR intends to continue paying quarterly cash dividends in the future, on or about March 1, June 1, September 1 and December 1, subject to earnings and financial conditions, regulatory requirements and such other factors as the Board of Directors may deem relevant. On February 1, 2022, AWR's Board of Directors approved a first quarter dividend of $0.365 per share on AWR's Common Shares. Dividends on the Common Shares will be paid on March 1, 2022 to shareholders of record at the close of business on February 15, 2022. AWR has paid dividends on its Common Shares for over 82 consecutive years, and has increased the dividends received by shareholders each calendar year for 67 consecutive years. This places AWR in an exclusive group of companies on the New York Stock Exchange that have achieved that result. Registrant's current policy is to achieve a compound annual growth rate in the dividend of more than 7% over the long-term. The Company has achieved nearly a 10% compound annual growth rate in its calendar year dividend payments from 2011–2021.

Registrant's current liabilities may at times exceed its current assets. Management believes that internally generated cash flows from operations, borrowings from AWR's and BVESI's credit facilities, and access to long-term financing from capital markets will be adequate to provide sufficient capital to maintain normal operations and to meet its capital and financing requirements.

Cash Flows from Operating Activities:

Cash flows from operating activities have generally provided sufficient cash to fund operating requirements, including a portion of construction expenditures at GSWC and BVESI, and construction expenses at ASUS, and to pay dividends. Registrant’s future cash flows from operating activities are expected to be affected by a number of factors, including utility regulation; changes in tax law; maintenance expenses; inflation; compliance with environmental, health and safety standards; production costs; customer growth; per-customer usage of water and electricity; weather and seasonality; conservation efforts; compliance with local governmental requirements, including mandatory restrictions on water use; the impact of the COVID-19 pandemic on its customers' ability to pay utility bills and required cash contributions to pension and post-retirement plans. Future cash flows from contracted services subsidiaries will depend on new business activities, existing operations, the construction of new and/or replacement infrastructure at military bases, timely economic price and equitable adjustment of prices, and timely collection of payments from the U.S. government and other prime contractors operating at the military bases and any adjustments arising out of an audit or investigation by federal governmental agencies.

ASUS funds its operating expenses primarily through internal operating sources, which include U.S. government funding under 50-year contracts for operations and maintenance costs and construction activities, as well as investments by, or loans from, AWR. ASUS, in turn, provides funding to its subsidiaries. ASUS's subsidiaries may also from time to time provide funding to ASUS or its subsidiaries.

Cash flows from operating activities are primarily generated by net income, adjusted for non-cash expenses such as depreciation and amortization.  Cash generated by operations varies during the year. Net cash provided by operating activities was $115.6 million for 2021 as compared to $122.2 million for 2020.  The decrease was due primarily to different timing of income tax installment payments between the two years, as well as a decrease in billed surcharges to recover regulatory assets at GSWC. The decrease was also due to timing differences of when vendor payments are made for construction work performed at military bases and the billing of and cash receipts from the U.S. government for work completed. The billings (and cash receipts) for this construction work generally occur at completion of the work or in accordance with a billing schedule contractually agreed to with the U.S. government and/or other prime contractors. Thus, cash flow from construction-related activities may fluctuate from period to period with such fluctuations representing timing differences of when the work is being performed and when the cash is received for payment of the work. These decreases were partially offset by an improvement in cash from accounts receivable related to utility customers due, in part, to improved economic conditions as compared to 2020, which were more affected by the COVID-19 pandemic. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.

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Cash Flows from Investing Activities:

Net cash used in investing activities was $145.1 million for the year ended December 31, 2021 as compared to $131.6 million used in 2020 largely due to an increase in capital expenditures at the regulated utilities. Registrant invests capital to provide essential services to its regulated customer base, while working with the CPUC to have the opportunity to earn a fair rate of return on investment. Registrant’s infrastructure investment plan consists of both infrastructure renewal programs (where infrastructure is replaced, as needed) and major capital investment projects (where new water treatment, supply and delivery facilities are constructed). The regulated utilities may also be required from time to time to relocate existing infrastructure in order to accommodate local infrastructure improvement projects. Projected capital expenditures and other investments are subject to periodic review and revision. Cash used for other investments consists primarily of cash invested in a trust for a retirement benefit plan.

During 2022, the regulated utilities' company-funded capital expenditures are expected to be between $140 million and $160 million, barring any delays resulting from changes in capital improvement schedules due to supply chain issues or the effects of the COVID-19 pandemic. Projected capital expenditures and other investments are subject to periodic review and revision.

Cash Flows from Financing Activities:

Registrant’s financing activities include primarily: (i) the proceeds from the issuance of Common Shares, (ii) the issuance and repayment of long-term debt and notes payable to banks, and (iii) the payment of dividends on Common Shares. In order to finance new infrastructure, GSWC also receives customer advances (net of refunds) for, and contributions in aid of, construction. Borrowings on AWR's and BVESI's credit facilities are used to fund GSWC and BVESI capital expenditures, respectively, until long-term financing is arranged. Overall debt levels are expected to increase to fund a portion of the costs of the capital expenditures that will be made by the regulated utilities.

Net cash used by financing activities was $2.3 million for 2021 as compared to cash provided of $44.8 million for 2020. During 2021, GSWC redeemed its 9.56% private placement notes in the amount of $28.0 million. This decrease in cash flows was offset by an increase in net borrowings on AWR's credit facility during 2021 to fund the redemption and support other operating and investing activities. In 2020, GSWC issued unsecured private placement notes totaling $160.0 million. As required by the CPUC, GSWC used the proceeds from the notes to pay down a majority of its intercompany borrowings from AWR. AWR used the proceeds from GSWC to pay down amounts outstanding under its credit facility.

GSWC

GSWC funds its operating expenses, payments on its debt, dividends on its outstanding common shares, and a portion of its construction expenditures through internal sources. Internal sources of cash flow are provided primarily by retention of a portion of earnings from operating activities. Internal cash generation is influenced by factors such as weather patterns, conservation efforts, environmental regulation, litigation, changes in tax law and deferred taxes, changes in supply costs and regulatory decisions affecting GSWC’s ability to recover these supply costs, timing of rate relief, increases in maintenance expenses and capital expenditures, surcharges authorized by the CPUC to enable GSWC to recover expenses previously incurred from customers, and CPUC requirements to refund amounts previously charged to customers. Internal cash flows may also be impacted by delays in receiving payments from GSWC customers due to the economic impact of the COVID-19 pandemic.

GSWC may, at times, utilize external sources for long-term financing, as well as obtain funds from equity investments and intercompany borrowings from its parent, AWR, to help fund a portion of its operations and construction expenditures. In July 2020, GSWC completed the issuance of long-term unsecured private placement notes totaling $160.0 million. In addition, AWR borrows under a revolving credit facility and provides funds to GSWC in support of its operations under intercompany borrowing arrangements. This credit facility expires in May 2023. However, the CPUC requires GSWC to completely pay off all intercompany borrowings it has from AWR within a 24-month period. The next 24-month period in which GSWC is required to pay off its intercompany borrowings from AWR ends in May 2023.

In addition, GSWC receives advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are generally refundable at a rate of 2.5% in equal annual installments over 40 years. Utility plant funded by advances and contributions is excluded from rate base. Generally, GSWC amortizes contributions in aid of construction at the same composite rate of depreciation for the related property.

As is often the case with public utilities, GSWC’s current liabilities may at times exceed its current assets. Management believes that internally generated funds, along with the proceeds from the issuance of long-term debt, borrowings from AWR and common share issuances to AWR, will be adequate to provide sufficient capital to enable GSWC to maintain normal operations and to meet its capital and financing requirements pending recovery of costs in rates.

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On July 1, 2020, GSWC completed the transfer of the net assets from its electric utility division to BVESI. As a result of this transfer, from July 1, 2020 onward, the cash flows of the electric segment are no longer included in GSWC's statement of cash flows, but continue to be included in AWR's consolidated statement of cash flows.

Cash Flows from Operating Activities:

Net cash provided by operating activities was $100.3 million for 2021 as compared to $110.3 million for 2020.  The decrease was due primarily to different timing of income tax installment payments between the two years, as well as a decrease in billed surcharges to recover regulatory assets. This decrease was partially offset by an improvement in cash from accounts receivable related to utility customers due, in part, to improved economic conditions as compared to 2020, which were more affected by the COVID-19 pandemic. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.

Cash Flows from Investing Activities:

Net cash used in investing activities was $124.3 million for the year ended December 31, 2021 as compared to $117.7 million for the same period in 2020. During the years ended December 31, 2021 and 2020, cash paid for capital expenditures was $123.5 million and $116.4 million, respectively. Due to the electric utility reorganization effective July 1, 2020, GSWC's cash flows from investing activities during 2021 do not include the electric segment's capital expenditures, whereas the cash flows for 2020 include six months of electric utility capital expenditures.

In October 2020, AWR issued an interest bearing promissory note to GSWC, which expires in May 2023. Under the terms of the note, AWR may borrow from GSWC amounts up to $30 million for working capital purposes. AWR agrees to pay any unpaid principal amounts outstanding under this note, plus accrued interest. During 2021 and 2020, AWR borrowed and repaid a total of $26 million and $6 million, respectively, from GSWC under the terms of the note. As of December 31, 2021, there were no amounts outstanding under this note.

Cash Flows from Financing Activities:

Net cash used in financing activities was $11.1 million for 2021 as compared to net cash provided of $42.5 million for 2020. During 2021, GSWC redeemed early its 9.56% private placement notes in the amount of $28.0 million. In addition, GSWC paid $38.3 million in dividends to AWR parent in 2021 as compared to $22.5 million of dividends paid in 2020. These decreases in cash flows were partially offset by an increase in net intercompany borrowings from AWR to fund the redemption and support other operating and investing activities. During 2020, GSWC issued unsecured private placement notes totaling $160.0 million, and also issued five additional of GSWC common shares to AWR for $60.0 million. GSWC used these proceeds to pay down intercompany borrowings during 2020 as required by the CPUC.

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Contractual Obligations and Commitments

Registrant has various contractual obligations, which are recorded as liabilities in the consolidated financial statements.  Other items, such as certain purchase commitments, are not recognized as liabilities in the consolidated financial statements but are required to be disclosed. In addition to contractual maturities, Registrant has certain debt instruments that contain annual sinking funds or other principal payments. Registrant believes that it will be able to refinance debt instruments at their maturity through public issuance or private placement of debt or equity. Annual payments to service debt are generally made from cash flows from operations.

The following table reflects Registrant’s contractual obligations and commitments to make future payments pursuant to contracts as of December 31, 2021. The table reflects only financial obligations and commitments. Therefore, performance obligations associated with our 50-year firm, fixed-price contracts with the U.S. government at our contracted services segment are not included in the amounts below. Registrant believes that it will be able to refinance debt instruments at their maturity through public issuance or private placement of debt or equity. Annual payments to service debt are generally made from cash flows from operations.

(1) Excludes dividends and facility fees.

(2) The notes and debentures have been issued by GSWC under an Indenture dated September 1, 1993, as amended in December 2008. The notes and debentures do not contain any financial covenants that Registrant believes to be material or any cross-default provisions.

(3) Consists of GSWC senior private placement notes totaling $215.0 million issued to various banks, including $160.0 million of unsecured private placement notes issued in July 2020. Under the terms of each of these senior notes, GSWC may not incur any additional debt or pay any distributions to its shareholders if, after giving effect thereto, it would have a debt to capitalization ratio in excess of 0.6667-to-1 or a debt to earnings before interest, taxes, depreciation and amortization ratio of more than 8-to-1. GSWC is in compliance with all of its covenant provisions as of December 31, 2021.  GSWC does not currently have any outstanding mortgages or other liens on indebtedness on its properties.

(4) Consists of obligations at GSWC related to (i) a loan agreement supporting $7.7 million in outstanding debt issued by the California Pollution Control Financing Authority, and (ii) $3.0 million of obligations with respect to GSWC's 500 acre-foot entitlement to water from the State Water Project (“SWP”). These obligations do not contain any financial covenants believed to be material to Registrant or any cross-default provisions. In regard to its SWP entitlement, GSWC has entered into agreements with various developers for a portion of its 500 acre-foot entitlement to water from the SWP.

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(5) Consists of the outstanding debt portion of funds received under the American Recovery and Reinvestment Act for reimbursements of capital costs related to the installation of meters for conversion of non-metered service to metered service in GSWC's Arden-Cordova District.

(6) Consists of expected interest expense payments based on the assumption that GSWC’s long-term debt remains outstanding until maturity.

(7) Advances for construction represent contract refunds mostly from GSWC to developers for the cost of water systems paid for by the developers. The advances are generally refundable in equal annual installments over 40-year periods.

(8) Consists of an agreement by BVESI to purchase renewable energy credits through 2023. These renewable energy credits are used to meet California's renewables portfolio standard.

(9) Consists of BVESI fixed-cost purchased power contracts executed in September 2019 with Exelon Generation Company, LLC and Morgan Stanley Capital Group Inc.

(10) Consists primarily of capital expenditures estimated to be required under signed contracts at GSWC and BVESI as of December 31, 2021.

(11) Water purchase agreements consist of (i) a remaining amount of $1.7 million under an agreement expiring in 2028 to use water rights from a third party, and (ii) an aggregate amount of $1.7 million of other water purchase commitments with other third parties, which expire between 2025 through 2038.

(12) Reflects future minimum payments under noncancelable operating leases for both GSWC and ASUS.

(13) Consists of expected contributions to Registrant's defined benefit pension plan for the year 2022. Contributions to the pension plan are expected to be the higher of the minimum required contributions under the Employee Retirement Income Security Act (“ERISA”) or the amounts that are recovered in customer rates and approved by the CPUC. These amounts are estimates and are subject to change based on, among other things, the limits established for federal tax deductibility (pension plan) and the significant impact that returns on plan assets and changes in discount rates have on such amounts.

(14) Other commitments consist primarily of (i) a $200 million revolving credit facility under AWR, of which $174.5 million was outstanding as of December 31, 2021; (ii) a $35 million revolving credit facility under BVESI, of which $31 million was outstanding as of December 31, 2021; (iii) $9.7 million in asset retirement obligations of GSWC that reflect the retirement of wells by GSWC, which by law need to be properly capped at the time of removal; (iv) irrevocable letters of credit in the amount of $440,000 for the deductible in Registrant’s business automobile insurance policies; and (v) a $15,000 irrevocable letter of credit issued on behalf of GSWC pursuant to a franchise agreement with the City of Rancho Cordova. All of the letters of credit are issued pursuant to AWR's revolving credit facility. Pursuant to CPUC rules, BVESI must completely pay off all borrowings under its revolving credit facility within a 24-month period. The next 24-month period in which BVESI is required to pay off its borrowings from the facility ends in July 2022. Accordingly, the $31 million outstanding under BVESI's credit facility has been classified as a current liability in AWR's Consolidated Balance Sheet as of December 31, 2021. BVESI expects to fund this repayment through the issuance of long term debt during the first half of 2022.

BVESI Power-Supply Arrangements

BVESI purchases power pursuant to purchased power contracts approved by the CPUC effective in the fourth quarter of 2019 at a fixed cost over three and five-year terms depending on the amount of power and period during which the power is purchased under the contracts. In addition to the purchased power contracts, BVESI buys additional energy to meet peak demand as needed and sells surplus power when necessary. The average price per MWh, including fixed costs, increased to $71.94 per MWh in 2021 from $67.52 per MWh for 2020. BVESI’s average energy costs are impacted by pricing fluctuations on the spot market. However, BVESI has an electric-supply-cost balancing account, as approved by the CPUC, to alleviate any impacts to earnings.

Construction Program

GSWC maintains an ongoing water distribution main replacement program throughout its customer service areas based on the age and type of distribution-system materials, priority of leaks detected, remaining productive life of the distribution system and an underlying replacement schedule. In addition, GSWC and BVESI upgrade their facilities in accordance with industry standards, local and CPUC requirements, and new legislation.  California requires investor-owned electric utilities to submit an annual wildfire mitigation plan to the CPUC for approval, and requires all electric utilities to prepare plans on constructing, maintaining, and operating their electrical lines and equipment to minimize the risk of catastrophic wildfires.

As of December 31, 2021, GSWC and BVESI have unconditional purchase obligations for capital projects of approximately $86.2 million.  During the years ended December 31, 2021, 2020 and 2019, GSWC and BVESI had capital

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expenditures of $150.6 million, $130.4 million and $140.8 million, respectively.  A portion of these capital expenditures was funded by developers through contributions in aid of construction, which are not required to be repaid, and refundable advances. During the years ended December 31, 2021, 2020 and 2019, capital expenditures funded by developers were $8.0 million, $7.0 million and $4.7 million, respectively. During 2022, the water and electric segments' company-funded capital expenditures are estimated to be approximately $140 – $160 million, barring any delays resulting from changes in capital improvement schedules due to supply chain issues or the effects of the COVID-19 pandemic. These amounts include approximately $13 million estimated to be spent by BVESI on wildfire mitigation projects.

Contracted Services

Under the terms of the current and future utility privatization contracts with the U.S. government, each contract's price is subject to an economic price adjustment (“EPA”) on an annual basis. In the event that ASUS (i) is managing more assets at specific military bases than were included in the U.S. government’s request for proposal, (ii) is managing assets that are in substandard condition as compared to what was disclosed in the request for proposal, (iii) prudently incurs costs not contemplated under the terms of the utility privatization contract, and/or (iv) becomes subject to new regulatory requirements, such as more stringent water-quality standards, ASUS is permitted to file, and has filed, requests for equitable adjustment (“REAs”). The timely filing for and receipt of EPAs and/or REAs continues to be critical in order for the Military Utility Privatization Subsidiaries to recover increasing costs of operating, maintaining, renewing and replacing the water and/or wastewater systems at the military bases it serves.

Under the Budget Control Act of 2011 (the “2011 Act”), substantial automatic spending cuts, known as "sequestration," have impacted the expected levels of Department of Defense budgeting. The Military Utility Privatization Subsidiaries have not experienced any earnings impact to their existing operations and maintenance and renewal and replacement services, as utility privatization contracts are an "excepted service" within the 2011 Act. With the expiration of the 2011 Act at the end of government fiscal year 2021, there are currently no discretionary spending caps in fiscal year 2022 and beyond. However, similar issues may arise as part of the fiscal uncertainty and/or future debt-ceiling limits imposed by Congress. Any future impact on ASUS and its operations through the Military Utility Privatization Subsidiaries will likely be limited to (a) the timing of funding to pay for services rendered, (b) delays in the processing of EPAs and/or REAs, (c) the timing of the issuance of contract modifications for new construction work not already funded by the U.S. Government, and/or (d) delays in solicitation for and/or awarding of new contracts under the Department of Defense utility privatization program.

At times, the DCAA and/or the DCMA may, at the request of a contracting officer, perform audits/reviews of contractors for compliance with certain government guidance and regulations, such as the Federal Acquisition Regulations and Defense Federal Acquisition Regulation Supplements. Certain audit/review findings, such as system deficiencies for government-contract-business-system requirements, may result in delays in the resolution of filings submitted to and/or the ability to file new proposals with the U.S. government.

Below is a summary of current and projected EPA filings for price adjustments to operations and maintenance fees and renewal and replacement fees for the Military Utility Privatization Subsidiaries in fiscal 2022.

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Regulatory Matters

A discussion on various regulatory matters is included] in the section titled “Overview” in this Form 10-K's "Management’s Discussion and Analysis of Financial Condition and Results of Operations". The discussion below focuses on other regulatory matters and developments.

Certificates of Public Convenience and Necessity

GSWC and BVESI hold Certificates of Public Convenience and Necessity (“CPCN”) granted by the CPUC in each of the ratemaking areas they serve. ASUS is regulated, if applicable, by the state in which it primarily conducts water and/or wastewater operations. FBWS holds a CPCN from the Public Utilities Commission of Texas.  The Virginia State Corporation Commission exercises jurisdiction over ODUS as a public service company. The Maryland Public Service Commission approved the right of TUS to operate as a water and wastewater utility at Joint Base Andrews, Maryland, based on certain conditions. The South Carolina Public Service Commission exercises jurisdiction over PSUS as a public service company.  ONUS is regulated by the North Carolina Public Service Commission. ECUS and FRUS are not subject to regulation by their respective states' utility commissions.

GSWC and BVESI are subject to regulation by the CPUC which has broad authority over service and facilities, rates, classification of accounts, valuation of properties, the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service, the issuance of securities, the granting of certificates of public convenience and necessity as to the extension of services and facilities and various other matters.

Rates that GSWC and BVESI are authorized to charge are determined by the CPUC in general rate cases and are derived using rate base, cost of service and cost of capital, as projected for a future test year. Rates charged to customers vary according to customer class and rate jurisdiction and are generally set at levels allowing for recovery of prudently incurred costs, including a fair return on rate base.  Rate base generally consists of the original cost of utility plant in service, plus certain other assets, such as working capital and inventory, less accumulated depreciation on utility plant in service, deferred income tax liabilities and certain other deductions.

GSWC is required to file a water general rate case application every three years according to a schedule established by the CPUC. General rate cases typically include an increase in the first test year with inflation-rate adjustments for expenses for the second and third years of the rate case cycle.  For capital projects, there are two test years. Rates are based on a forecast of expenses and capital costs for each test year. GSWC's cost of capital is determined in a separate proceeding. Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis. BVESI's general rate cases are typically filed every four years. Rates may also be increased by offsets for certain expense increases, including, but not limited to, supply-cost offset and balancing-account amortization, advice letter filings related to certain plant additions and other operating cost increases.

Neither the operations of AWR nor the operations and rates of ASUS are directly regulated by the CPUC. The CPUC does, however, regulate certain transactions between GSWC, BVESI and ASUS and between GSWC and BVESI and AWR.

General Rate Cases and Other Regulatory Matters

Water Segment

Changes in Rates:

Rates that GSWC is authorized to charge are determined by the CPUC in general rate cases. The last approved general rate case covered new water rates for the years 2019 – 2021. Effective January 1, 2021, the CPUC approved GSWC's full third-year step increase, which it achieved as a result of passing an earnings test. The higher water rates generated an additional increase in the adopted water revenues of approximately $16.4 million in 2021. Adopted water supply costs for 2021 were $5.3 million higher than the 2020 adopted supply costs.

GSWC has a pending general rate case that will determine new water rates for the years 2022 – 2024. In November 2021, GSWC and 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 are $1.2 million and became effective February 15, 2022. Advice letter projects are filed for revenue recovery only when those 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. GSWC has filed with the CPUC for

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interim rates pending a final decision on this general rate case application, and will recognize revenues in 2022 based on 2021 adopted rates until the CPUC issues a final decision on the general rate case application, which is expected to be effective and retroactive to January 1, 2022.

Cost of Capital Proceeding:

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%. 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. A final decision on this proceeding, once issued by the CPUC, is expected to have an effective date retroactive to January 1, 2022.

Electric Segment

Completion of Electric Utility Reorganization Plan:

As authorized by the CPUC and FERC, on July 1, 2020, GSWC completed the transfer of the electric utility assets and liabilities from its electric division to BVESI in exchange for common shares of BVESI. GSWC then immediately distributed all of BVESI's common shares to AWR, whereupon BVESI became wholly owned directly by AWR. The reorganization did not result in any substantive changes to AWR's operations or business segments.

Recent Changes in Rates

In August 2019, the CPUC issued a final decision on the electric general rate case, which set new rates for the years 2018 – 2022. Among other things, the final decision increased the adopted electric revenues by $1.1 million for 2021, and will increase adopted revenues by $1.0 million for 2022 (the electric rate increases are not subject to an earnings test). The rate case decision continues to apply for BVESI.

Vegetation Management, Wildfire Mitigation Plans and Legislation

The August 2019 final decision also authorized BVESI to record incremental costs related to vegetation management, such as costs for increased minimum clearances around electric power lines, in a CPUC-approved account for future recovery. As of December 31, 2021, BVESI has approximately $5.8 million in incremental vegetation management costs recorded as a regulatory asset. BVESI will seek future recovery of the costs accumulated in this memorandum account in its next general rate case filing. BVESI is scheduled to file a general rate case application with the CPUC in 2022 to determine new rates for the years 2023 through 2026.

California legislation enacted in September 2018 requires all investor-owned electric utilities to submit an annual wildfire mitigation plan (WMP) to the CPUC for approval. The WMP must include a utility's plans on constructing, maintaining, and operating its electrical lines and equipment to minimize the risk of catastrophic wildfire. In September 2021, the CPUC approved BVESI's most recent WMP submission. Capital expenditures and other costs incurred as a result of the WMP are subject to CPUC audit. As a result, the CPUC’s Wildfire Safety Division (now part of the California Natural Resources Agency effective July 1, 2021) engaged an independent accounting firm to conduct examinations of the expenses and capital investments identified in the 2019 and 2020 WMPs for each of the investor-owned electric utilities, including BVESI. As of December 31, 2021, BVESI has approximately $2.8 million related to expenses accumulated in its WMP memorandum accounts that have been recognized as regulatory assets for future recovery. In December 2021, the independent accounting firm issued its final examination report, which contains the auditors' results and recommendations. While the final report did not identify any findings of inappropriate costs included in the WMP memorandum accounts under review, the report suggested that the CPUC should evaluate whether some of the costs recorded in the WMP memorandum accounts are incremental to what is being recovered in customer rates when BVESI seeks recovery in a future proceeding. At this time, BVESI considers the auditor's examination complete and does not expect further developments. In the future, the CPUC may refer to the recommendations in the final report when BVESI seeks recovery of the WMP memorandum accounts. All capital expenditures and other costs incurred through December 31, 2021 as a result of BVESI's WMPs are not currently in rates and are expected to be filed for future recovery in BVESI's next general rate case application.

Additionally, the governor of California approved Assembly Bill ("AB") 1054 in July 2019, which among other things, changed the burden of proof applicable in CPUC proceedings in which an electric utility with a valid safety certification seeks to recover wildfire costs. Previously, an electric utility seeking to recover costs had the burden to prove that it acted reasonably. Under AB 1054, if an electric utility has a valid safety certification, it will be presumed to have acted reasonably unless a party to the relevant proceeding creates a “serious doubt” as to the reasonableness of the utility’s conduct. In September 2021, the Office of Energy Infrastructure Safety under the California Natural Resources Agency approved BVESI's latest safety certification filing, which is valid through September 2022.

For more information regarding significant regulatory matters, see Note 3 of “Notes to Financial Statements” included in Part II, Item 8, in Financial Statements and Supplementary Data.

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Environmental Matters

AWR’s subsidiaries are subject to stringent environmental regulations. GSWC is required to comply with the safe drinking water standards established by the U.S. Environmental Protection Agency (“U.S. EPA”) and the Division of Drinking Water ("DDW"), under the State Water Resources Control Board ("SWRCB"). The U.S. EPA regulates contaminants that may have adverse health effects that are known or likely to occur at levels of public health concern, and the regulation of which will provide a meaningful opportunity for health risk reduction. The DDW, acting on behalf of the U.S. EPA, administers the U.S. EPA’s program in California. Similar state agencies administer these rules in the other states in which Registrant operates.

GSWC currently tests its water supplies and water systems according to, among other things, requirements listed in the Federal Safe Drinking Water Act (“SDWA”). GSWC works proactively with third parties and governmental agencies to address issues relating to known contamination threatening GSWC water sources. GSWC also incurs operating costs for testing to determine the levels, if any, of the constituents in its sources of supply and additional expense to treat contaminants in order to meet the federal and state maximum contaminant level standards and consumer demands. GSWC expects to incur additional capital costs as well as increased operating costs to maintain or improve the quality of water delivered to its customers in light of anticipated stress on water resources associated with watershed and aquifer pollution, as well as to meet future water quality standards and consumer expectations. The CPUC ratemaking process provides GSWC with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. Management believes that such incurred and expected future costs should be authorized for recovery by the CPUC.

Matters Relating to Environmental Cleanup

GSWC has been involved in environmental remediation and cleanup at one of its plant sites that contained an underground storage tank that was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.

As of December 31, 2021, the total amount spent to clean up and remediate GSWC’s plant facility was approximately $6.1 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of December 31, 2021, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.3 million to complete the cleanup at the site. The estimate includes costs for continued activities of groundwater cleanup and monitoring, future soil treatment, and site closure related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will continue to be approved for inclusion in rate base by the CPUC.

Drinking Water Notification and Response Levels

In July 2018, DDW issued drinking water notification levels for certain fluorinated organic chemicals used to make certain fabrics and other materials, and used in various industrial processes.  These chemicals were also present in certain fire suppression agents. These chemicals are referred to as perfluoroalkyl substances (PFAS). Notification levels are health-based advisory levels established for contaminants in drinking water for which maximum contaminant levels have not been established. The US EPA has also established health advisory levels for these compounds. Notification to consumers and stakeholders is required when the advisory levels or notification levels are exceeded.  Assembly Bill 756, signed into law in July 2019 and effective in January 2020, requires, among other things, additional notification requirements for water systems detecting levels of PFAS above response levels. GSWC is in the process of collecting and analyzing samples for PFAS under the direction of DDW. GSWC has removed some wells from service, and expects to incur additional treatment costs to treat impacted wells. GSWC has provided customers with information regarding PFAS detections, and provided updated information via its website. In February 2020, DDW established new response levels for two of the PFAS compounds: 10 parts per trillion for perfluorooctanoic acid (PFOA) and 40 parts per trillion for perfluorooctanesulfonic acid (PFOS). On March 5, 2021, DDW issued a drinking water notification level and response level of 0.5 parts per billion (ppb) and 5 ppb, respectively for perfluorobutane sulfonic acid (PFBS).

Lead and Copper Rule Revisions

On December 16, 2021, the U.S. EPA announced the Lead and Copper Rule Revisions under Executive Order 13990 which will go into effect effective immediately with a compliance date of October 16, 2024. Additionally, the EPA announced its intention to develop a new proposed rule, the Lead and Copper Rule Improvements (LCRI) that will further strengthen the regulatory framework prior to the October 2024 compliance date. There are still many unknowns regarding the implementation of the rule. The details of the requirements will be better understood over the next year once the LCRI is published.

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Matters Relating to Military Utility Privatization Contracts

Each of the Military Utility Privatization Subsidiaries is responsible for testing the water and wastewater systems on the military bases on which it operates in accordance with applicable law.

Each of the Military Utility Privatization Subsidiaries has the right to seek an equitable adjustment to its contract in the event that there are changes in environmental laws, a change in the quality of water used in providing water service or wastewater discharged by the U.S. government, or contamination of the air or soil not caused by the fault or negligence of the Military Utility Privatization Subsidiary. These changes can impact operations and maintenance and renewal and replacement costs under the contracts. The U.S. government is responsible for environmental contamination due to its fault or negligence and for environmental contamination that occurred prior to the execution of a contract.

Security Issues

We have physical and information security policies throughout our operations. Training on these matters begins during employee orientation and is ongoing through a series of training courses in addition to periodic, unannounced training exercises. We collaborate with various agencies, associations and third parties regarding information on possible threats and security measures for our operations. Risk assessments are conducted periodically to evaluate the effectiveness of existing security controls. These assessments provide areas for additional security focus, new controls, and policy changes.

Both GSWC and BVESI have security systems and infrastructure in place intended to prevent unlawful intrusion, service disruption and cyber-attacks.  GSWC and BVESI utilize a variety of physical security measures to protect their facilities.  These measures consider advances in security and emergency preparedness technology and relevant industry developments in developing their respective capital-improvement plans, and both intend to seek approval of the CPUC to recover any additional costs that either may incur in enhancing the security, reliability and resiliency of their utility systems.

On October 23, 2018, America’s Water Infrastructure Act (AWIA) became law. GSWC must now conduct additional risk and resilience assessments and develop emergency response plans for each of our water systems. These assessments and plans include natural hazards as well as malevolent acts. The first such assessments were completed in 2020. They will be reviewed and resubmitted every five years.

The Military Utility Privatization Subsidiaries operate facilities within the boundaries of military bases, which provide limited access to the general public.  To further enhance security, in prior years, certain upgrades were completed at various military bases through contract modifications funded by the U.S. government.

Registrant has evaluated its cyber-security systems and continues to address identified areas of improvement with respect to U.S. government regulations regarding cyber-security of government contractors. These improvements include the physical security at all of the office and employee facilities it operates. Registrant believes it is in compliance with these regulations.

Despite its efforts, Registrant cannot guarantee that intrusions, cyber-attacks or other attacks will not cause water or electric system problems, disrupt service to customers, compromise important data or systems or result in unintended release of customer or employee information.

Water Supply

GSWC

During 2021, GSWC delivered approximately 61.8 million hundred cubic feet (“ccf”) of water to its customers, which is an average of about 389 acre-feet per day or 127 million gallons per day (an acre-foot is approximately 435.6 ccf or 326,000 gallons). Approximately 53% of GSWC's supply came from groundwater produced from wells situated throughout GSWC’s service areas. GSWC supplemented its groundwater production with wholesale purchases from Metropolitan Water District ("MWD") member agencies and regional water suppliers (roughly 44% of total demand) and with authorized diversions from rivers (roughly 3%) under agreements with the United States Bureau of Reclamation (“Bureau”) and the Sacramento Municipal Utility District (“SMUD”). GSWC also utilizes recycled water supplies to serve recycled water customers in several service areas. GSWC continually assesses its water rights and groundwater storage assets to maximize use of lower cost groundwater sources where available.

Groundwater

GSWC has a diverse water supply portfolio which includes adjudicated groundwater rights, surface water rights, and a number of unadjudicated water rights to help meet supply requirements. The productivity of GSWC’s groundwater resources varies from year to year depending upon a variety of factors, including natural replenishment from snow-melt or rainfall, the availability of imported replenishment water, the amount of water previously stored in groundwater basins, natural or man-made contamination, legal production limitations, and the amount and seasonality of water use by GSWC’s customers and

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others. GSWC actively participates in efforts to protect groundwater basins from over-use and from contamination. In some periods, these efforts may require reductions in groundwater pumping and increased reliance on alternative water resources. GSWC also participates in implementation of California’s Sustainable Groundwater Management Act.

From time to time, GSWC may purchase or temporarily use water rights from others for delivery to customers. GSWC has contracts to purchase water or water rights for an aggregate amount of $3.4 million as of December 31, 2021.  Included in the $3.4 million is a remaining commitment of $1.7 million under an agreement with the City of Claremont (“the City”) to lease water rights that were ascribed to the City as part of the Six Basins adjudication. The initial term of the agreement expires in 2028. GSWC may exercise an option to renew this agreement for 10 additional years. The remaining $1.7 million is for commitments for purchased water with other third parties, which expire through 2038.

Imported Water

GSWC also manages a portfolio of water supply arrangements with water wholesalers who may import water from outside the immediate service area. For example, GSWC has contracts with various governmental entities (principally MWD member agencies) and other parties to purchase water through a total of 58 connections for distribution to customers, in addition to numerous emergency connections. MWD is a public agency organized and managed to provide a supplemental, imported supply to its member public agencies. There are 26 such member agencies, consisting of 14 cities, 11 municipal water districts and one county water authority. GSWC has 45 connections to MWD’s water distribution facilities and those of member agencies. GSWC purchases MWD water through six separate member agencies aggregating 52,732 acre-feet annually. MWD sources its supplies from the Colorado River from Northern California via the State Water Project through the Colorado River Aqueduct, which it owns and operates, and from local programs and transfer arrangements.

MWD currently has storage reserve levels of 2.5 million acre-feet (MAF) with annual demands of approximately 1.75 MAF. MWD has available access to store more than 1.65 MAF of water in Lake Mead as part of an intentionally created surplus program developed under a 2007 Interim Shortage agreement and is available for use during dry years. In addition, MWD, along with the seven other Basin states which use water from the Colorado River, developed and agreed to the Drought Contingency Plan in 2019 where each lower Basin state which diverts water from the Colorado River below Lees Ferry agrees to store defined amounts of water in Lake Mead to prevent both Lake Mead and Lake Powell from reaching critically low levels. Initial State Water Project allocations have been set at a zero percent allocation. On January 20, 2022, the Department of Water Resources increased the allocation to 15% due to improving water storage and snowpack from a series of winter storms in December and early January. California is a lower Basin state.

Drought Impact

In May 2018, the California Legislature passed two bills that provide a framework for long-term water-use efficiency standards and drought planning and resiliency. The initial steps in implementation of this legislation has been laid out in a summary document by the California Department of Water Resources ("DWR") and State Water Resources Control Board ("SWRCB"). Over the next several years, State agencies, water suppliers and other entities will be working to meet the requirements and timelines of plan implementation. A notable milestone is the establishment of an indoor water use standard of 55 gallons per capita per day (gpcd) until 2025 at which time the standard may be reduced to 52.5 gpcd or other standard as recommend by DWR. A recent report prepared by DWR for the California legislature, recommends reducing the standard to 42 gpcd by 2030. Legislation has been introduced in the current legislative session to reduce the standard to this value.

California's recent period of multi-year drought resulted in reduced recharge to the state's groundwater basins. GSWC utilizes groundwater from numerous groundwater basins throughout the state. Several of these basins, especially smaller basins, experienced lower groundwater levels because of the drought. Several of GSWC's service areas rely on groundwater as their only source of supply. Given the critical nature of the groundwater levels in California’s Central Coast area, GSWC implemented mandatory water restrictions in certain service areas, in accordance with CPUC procedures. In the event of water supply shortages beyond the locally available supply, GSWC would need to transport additional water from other areas, increasing the cost of water supply.

The 2021 water year ended as a critically dry period with the second driest single year for statewide precipitation and the second warmest year in statewide mean temperature. Precipitation to date in 2022 has been above average with several storm systems bringing the statewide snowpack up to about 150% of average. These values are approximately 50% of the April 1 average values. Should conditions remain dry up through April 1, 2022 the State will see on-going challenges in terms of water availability. As of February 15, 2022, the U.S. Drought Monitor reported that only 1.4% of California was considered in "Extreme Drought" as compared to 31% one year ago. This improvement was largely due to several storm systems experienced in late 2021. However, approximately 66% of California is considered to be in “Severe Drought” as compared to approximately 58% one year ago. Due to local conditions, water-use restrictions and allocations remain in place for customers in some of GSWC’s service areas. GSWC continues assessing water supply conditions and water-use restrictions in these service areas and intends to make appropriate adjustments as needed.

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Military Utility Privatization Subsidiaries

The U.S. government is responsible for providing the source of supply for all water on each of the bases served by the Military Utility Privatization Subsidiaries at no cost to the Military Utility Privatization Subsidiaries. Once received from the U.S. government, ASUS's subsidiaries are responsible for ensuring the continued compliance of the provided source of supply with all federal, state and local regulations. Furthermore, ASUS’s subsidiaries are responsible for ensuring compliance with the reduction and/or removal of all constituents required under its wastewater treatment plant operating permits. ASUS works closely with state regulators and industry associations to stay current with emergent issues and proactively addresses any change in wastewater treatment regulation to ensure permit compliance.

New Accounting Pronouncements

Registrant is subject to newly issued accounting requirements as well as changes in existing requirements issued by the Financial Accounting Standards Board. See Note 1 of Notes to Consolidated Financial Statements.