Leases

6 Months Ended

Jun. 30, 2019

Leases

The adoption of the new lease guidance (see Note 1) effective January 1, 2019 did not have a material impact on Registrant's results of operations or liquidity, but resulted in the recognition of operating lease liabilities and operating lease right-of-use assets on its balance sheets. Right-of-use ("ROU") assets represent the right to use an underlying asset for the lease term, and lease liabilities represent the obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. As of June 30, 2019, Registrant has right-of-use assets of $11.1 million, short-term operating lease liabilities of $1.8 million and long-term operating lease liabilities of $9.5 million.

Significant assumptions and judgments made as part of the adoption of this new lease standard include determining (i) whether a contract contains a lease, (ii) whether a contract involves an identified asset, and (iii) which party to the contract directs the use of the asset. The discount rates used to calculate the present value of lease payments were determined based on hypothetical borrowing rates available to Registrant over terms similar to the lease terms.

Registrant’s leases consist of real estate and equipment leases. Most of these are GSWC's leases. Most of Registrant's leases require fixed lease payments. Some real estate leases have escalation payments which depend on an index. Variable lease costs have not been material. Lease terms used to measure the lease liability include options to extend the lease if the option is reasonably certain to be exercised. Lease and non-lease components were combined to measure lease liabilities. Registrant also has a real estate lease that have not yet commenced as of June 30, 2019. This lease will create additional operating right-of-use assets and operating lease liabilities of approximately $2.2 million upon possession of the office space later in 2019.

GSWC's long-term debt includes $28.0 million of 9.56% private placement notes, which require GSWC to maintain a total indebtedness to capitalization ratio of less than 0.6667-to-1. The indebtedness, as defined in the note agreement, includes any lease liabilities required to be recorded under GAAP. As of June 30, 2019, GSWC had a total indebtedness (including GSWC's lease liabilities) to capitalization ratio of 0.46-to-1. None of the other covenants or restrictions contained in Registrant's long-term debt agreements were affected by the adoption of the new lease standard.

Registrant's supplemental lease information for the three and six months ended June 30, 2019 is as follows (in thousands, except for weighted average data):



	Three Months Ended June 30, 2019			Six Months Ended June 30, 2019

Operating lease costs	$	761		$	1,559
Short-term lease costs	$	106		$	180

Weighted average remaining lease term (in years)	7.81			7.81
Weighted-average discount rate	3.4		%	3.4		%

Non-cash transactions
Lease liabilities arising from obtaining right-of-use assets	$	6,730		$	14,698

During the three months ended June 30, 2019 and 2018, Registrant’s consolidated rent expense was approximately $630,000 and $567,000, respectively, and was approximately $1.3 million and $1.1 million for the six months ended June 30, 2019 and 2018, respectively. Registrant has entered into several new office leases during 2019. Registrant’s future minimum payments under long-term non-cancelable operating leases are as follows (in thousands):



	June 30, 2019		December 31, 2018
2019 (July through December 2019 as of June 30, 2019)	$	1,370	$	2,818
2020	2,293		2,530
2021	2,122		1,497
2022	1,795		1,007
2023	1,337		546
Thereafter	4,615		605
Total lease payments	13,532		$	9,003
Less: imputed interest	2,176
Total lease obligations	11,356
Less: current obligations	1,808
Long-term lease obligations	$	9,548

There is no material difference between the consolidated operations of AWR and the operations of GSWC in regard to the future minimum payments under long-term non-cancelable operating leases.