Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At June 30, 2017, Registrant had approximately $56.2 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $26.3 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $4.5 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES's purchase power contracts over the term of the contracts, and $20.6 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense. The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment requiring it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each ratemaking area. Amounts expected to be collected or refunded in the next 12 months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



(dollars in thousands)	June 30, 2017			December 31, 2016
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	48,277		$	47,340
Costs deferred for future recovery on Aerojet case	11,470			11,820
Pensions and other post-retirement obligations (Note 7)	26,575			28,118
Derivative unrealized loss (Note 4)	4,493			4,901
Flow-through taxes, net (Note 6)	20,627			20,134
Low income rate assistance balancing accounts	8,019			8,272
General rate case memorandum accounts	13,780			13,929
Other regulatory assets	17,016			17,633
Various refunds to customers	(4,763		)	(5,866		)
Total	$	145,494		$	146,281

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2016 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2016.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. The over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding ratemaking area and bears interest at the current 90-day commercial paper rate.

GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2016. For the three months ended June 30, 2017 and 2016, surcharges (net of surcredits) of approximately $9.5 million and $5.0 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. For the six months ended June 30, 2017 and 2016, surcharges (net of surcredits) of approximately $13.4 million and $6.4 million, respectively, were billed to customers. During the six months ended June 30, 2017, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of $16.3 million due to higher than adopted supply costs as well as lower than adopted customer water usage. As of June 30, 2017, GSWC had an aggregated regulatory asset of $48.3 million which is comprised of a $30.0 million under-collection in the WRAM accounts and a $18.3 million under-collection in the MCBA accounts.

As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded. The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 24 months; however, as of December 31, 2015 there were some ratemaking areas that had recovery periods related to the 2015 WRAM balances that were greater than 24 months. As a result, during the fourth quarter of 2015, GSWC did not record $1.4 million of the 2015 WRAM under-collection balance as revenue. This amount is recognized as revenue in the periods in which it is determined that the amounts will be collected within 24 months and, therefore, approximately $320,000 and $910,000 was recognized during the first six months of 2017 and during the year ended December 31, 2016, respectively, with the remaining balance to be recognized in future periods.

Water General Rate Case:

In December 2016, the CPUC issued a decision in GSWC's water general rate case for all its water ratemaking areas and the general office to determine new rates for the years 2016, 2017 and 2018. The new rates approved were retroactive to January 1, 2016. However, because of the delay in issuing a decision, the CPUC ordered GSWC to bypass implementing 2016 rates and to implement 2017 rates after the correction of minor rate calculations in the December 2016 decision, which the CPUC completed and subsequently issued a final decision in March 2017. Any revenue shortfall due to differences between the actual rates charged in 2016 and early 2017 while the decision was still pending and the new rates adopted in the March 2017 final decision will be recovered through a rate surcharge. The new rates were implemented in April 2017.

Because of the delay in the final decision, GSWC accumulated a net $9.9 million under-collection in its general rate case memorandum accounts as of June 30, 2017, representing the rate difference between interim rates and final rates authorized by the CPUC in March 2017, retroactive to January 1, 2016. Surcharges are expected to be implemented later in 2017 to recover the retroactive rate difference over approximately 12 - 24 months for the majority of GSWC's water ratemaking areas.

Other Regulatory Matters:

Formal Complaint Filed with the CPUC

In June 2016, a third party filed a formal complaint with the CPUC against GSWC about a water main break that occurred in 2014 causing damage to a commercial building. Repairs to the building have been delayed for a variety of reasons, including a dispute and litigation between two of GSWC's insurance carriers regarding their respective coverage obligations, as well as questions as to the nature and extent of the building’s damage and the costs associated therewith. The complaint filed with the CPUC requests, among other things, that the CPUC investigate the main break, the damage to the commercial building and the delay of its repairs, and order GSWC to complete repairs immediately. GSWC believes it has reasonable defenses to the complaint filed with the CPUC. In July 2016, GSWC filed an answer to the formal complaint with the CPUC as well as a motion to dismiss the complaint. A CPUC decision on the formal complaint is expected during the third quarter of 2017.

Previously, the owners of the commercial building filed suit in Ventura County Superior Court against GSWC for damages to the building. The bench trial of this lawsuit was completed on July 14, 2017, and the Ventura County Superior Court ruled in favor of the plaintiffs as to liability. The Court’s statement of decision, which will set forth the findings and damages, will be finalized and filed in the next 45- 60 days. GSWC believes it has sufficient insurance coverage to cover any judgment entered by the Court in this lawsuit. However, GSWC cannot predict the final outcome of the damages to be awarded by the Court, the dispute and litigation between its insurers, or the CPUC proceeding. GSWC does not believe the outcome will materially affect GSWC's consolidated results of operations, financial position or cash flows.