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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) x
    
    Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the quarterly period ended March 31, 2004 oro
    
    Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the transition period from  to
 Commission file number 333-47647 American States Water Company 
 California
    
    95-4676679(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)630 East Foothill Boulevard, San Dimas
    
    91773(Address of Principal Executive Offices)
    
    (Zip Code)
 (909) 394-3600 
 Not Applicable 
 Commission file number 000-01121 Southern California Water Company 
 California
    
    95-1243678(State or Other Jurisdiction of
Incorporation or Organization)
    
    (IRS Employer Identification No.)630 East Foothill Boulevard, San Dimas
    
    91773(Address of Principal Executive Offices)
    
    (Zip Code)
 (909) 394-3600 
 Not Applicable 
 Indicate by check mark whether Registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. American States Water Company
    
    Yes x  No oSouthern California Water Company
    
    Yes x  No o
 Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.). American States Water Company
    
    Yes x  No oSouthern California Water Company
    
    Yes o  No x
 As of May 10, 2004, the number of Common Shares outstanding, of American States
Water Company was 15,244,928 shares. As of May 10, 2004, all of the 110 outstanding Common Shares of Southern
California Water Company were owned by American States Water Company.




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AMERICAN STATES WATER COMPANY
and SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q INDEX Page No.Part I
    
    Financial InformationItem 1:
    
    Financial Statements
    
    
    2Consolidated Balance Sheets of American States Water Company as of
March 31, 2004 and December 31, 2003
    
    
    3-4Consolidated Statements of Income of American States Water Company for the
Three Months Ended March 31, 2004 and March 31, 2003
    
    
    5Consolidated Statements of Cash Flow of American States Water Company for the
Three Months Ended March 31, 2004 and March 31, 2003
    
    
    6Balance Sheets of Southern California Water Company as of March 31, 2004 and
December 31, 2003
    
    
    7-8Statements of Income of Southern California Water Company for the Three Months
Ended March 31, 2004 and March 31, 2003
    
    
    9Statements of Cash Flow of Southern California Water Company for the Three Months
Ended March 31, 2004 and March 31, 2003
    
    
    10Notes to Consolidated Financial Statements
    
    
    11-21Item 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    22-51Item 3:
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    51Item 4:
    
    Controls and Procedures
    
    
    51Part II
    
    Other InformationItem 1:
    
    Legal Proceedings
    
    
    52-55Item 2:
    
    Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    56Item 3:
    
    Defaults Upon Senior Securities
    
    
    56Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    56Item 5:
    
    Other Information
    
    
    56Item 6:
    
    Exhibits and Reports on Form 8-K
    
    
    57Signature
    
    
    58EXHIBIT 10.25EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  1




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PART I 
 Item 1. Financial Statements General The basic financial statements included herein have been prepared by
Registrant, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with accounting principles
generally accepted in the United States of America, have been condensed or
omitted pursuant to such rules and regulations, although Registrant believes
that the disclosures are adequate to make the information presented not
misleading. In the opinion of management, all adjustments necessary for a fair
statement of results for the interim period have been made. It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto in the latest Annual Report on
Form 10-K of American States Water Company and its wholly owned subsidiary,
Southern California Water Company. Filing Format This quarterly report on Form 10-Q is a combined report being filed by two
separate Registrants: American States Water Company (hereinafter AWR) and
Southern California Water Company (hereinafter SCW). For more information,
please see Note 1 to the Notes to Financial Statementsand the heading entitled
Generalin Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operation.References in this report to Registrant are to AWR
and SCW collectively, unless otherwise specified. SCW makes no representations
as to the information contained in this report relating to AWR and its
subsidiaries, other than SCW. 2




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AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited) March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Utility Plant, at costWater
    
    $
    730,973
    
    
    $
    726,811Electric
    
    
    43,445
    
    
    
    42,711774,418
    
    
    
    769,522Less  Accumulated depreciation
    
    
    (228,114
    )
    
    
    (222,567
    )546,304
    
    
    
    546,955Construction work in progress
    
    
    63,902
    
    
    
    55,343Net utility plant
    
    
    610,206
    
    
    
    602,298Other Property and Investments
    
    
    22,071
    
    
    
    22,120Current AssetsCash and cash equivalents
    
    
    9,011
    
    
    
    12,775Accounts receivable-customers (less allowance for doubtful
accounts of $750 in 2004 and $831 in 2003)
    
    
    8,665
    
    
    
    11,758Unbilled revenue
    
    
    11,088
    
    
    
    12,714Other accounts receivable
    
    
    1,404
    
    
    
    10,649Materials and supplies, at average cost
    
    
    1,438
    
    
    
    1,346Regulatory assets  current
    
    
    5,262
    
    
    
    5,331Prepayments
    
    
    2,677
    
    
    
    3,78639,545
    
    
    
    58,359Regulatory and Other AssetsRegulatory assets
    
    
    58,239
    
    
    
    57,704Other accounts receivable
    
    
    8,000
    
    
    
    8,000Other
    
    
    8,904
    
    
    
    8,994Total regulatory and other assets
    
    
    75,143
    
    
    
    74,698Total Assets
    
    $
    746,965
    
    
    $
    757,475
 The accompanying notes are an integral part of these consolidated financial statements 3




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AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited) March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003CapitalizationCommon shares, no par value, no stated value
    
    $
    128,308
    
    
    $
    127,699Earnings reinvested in the business
    
    
    82,572
    
    
    
    84,788Total common shareholders equity
    
    
    210,880
    
    
    
    212,487Long-term debt
    
    
    229,590
    
    
    
    229,799Total capitalization
    
    
    440,470
    
    
    
    442,286Current LiabilitiesNotes payable to banks
    
    
    47,000
    
    
    
    56,000Long-term debt  current
    
    
    820
    
    
    
    820Accounts payable
    
    
    13,382
    
    
    
    18,774Taxes payable
    
    
    1,950
    
    
    
    2,784Accrued employee expenses
    
    
    4,791
    
    
    
    3,925Accrued interest
    
    
    5,006
    
    
    
    1,681Deferred income taxes  current
    
    
    1,486
    
    
    
    1,217Other
    
    
    7,979
    
    
    
    10,697Total current liabilities
    
    
    82,414
    
    
    
    95,898Other CreditsAdvances for construction
    
    
    79,313
    
    
    
    77,154Contributions in aid of construction  net
    
    
    64,555
    
    
    
    64,297Deferred income taxes
    
    
    54,007
    
    
    
    53,243Unamortized investment tax credits
    
    
    2,678
    
    
    
    2,700Accrued pension and other postretirement benefits
    
    
    5,849
    
    
    
    4,584Regulatory liabilities
    
    
    9,911
    
    
    
    9,642Other
    
    
    7,768
    
    
    
    7,671Total other credits
    
    
    224,081
    
    
    
    219,291Commitments and Contingencies (Note 8)
    
    
    
    
    
    
    Total Capitalization and Liabilities
    
    $
    746,965
    
    
    $
    757,475
 The accompanying notes are an integral part of these consolidated financial statements 4




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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003
(Unaudited) Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2004
    
    2003Operating RevenuesWater
    
    $
    38,742
    
    
    $
    39,425Electric
    
    
    7,627
    
    
    
    7,004Other
    
    
    282
    
    
    
    24746,651
    
    
    
    46,676Operating ExpensesWater purchased
    
    
    8,881
    
    
    
    7,888Power purchased for pumping
    
    
    1,717
    
    
    
    1,956Power purchased for resale
    
    
    4,829
    
    
    
    3,856Unrealized (gain) loss on purchased power contracts
    
    
    (557
    )
    
    
    283Groundwater production assessment
    
    
    1,822
    
    
    
    1,667Supply cost balancing accounts
    
    
    221
    
    
    
    958Other operating expenses
    
    
    4,437
    
    
    
    4,040Administrative and general expenses
    
    
    9,079
    
    
    
    7,524Depreciation and amortization
    
    
    5,177
    
    
    
    4,947Maintenance
    
    
    2,327
    
    
    
    1,950Taxes on income
    
    
    942
    
    
    
    1,995Other taxes
    
    
    2,226
    
    
    
    2,057Total operating expenses
    
    
    41,101
    
    
    
    39,121Operating Income
    
    
    5,550
    
    
    
    7,555Other Income (Loss)Other income (loss)  net of taxes
    
    
    (83
    )
    
    
    Total other income (loss)
    
    
    (83
    )
    
    
    Interest ChargesInterest on long-term debt
    
    
    4,050
    
    
    
    4,255Other interest and amortization of debt expense
    
    
    271
    
    
    
    310Total interest charges
    
    
    4,321
    
    
    
    4,565Net Income
    
    $
    1,146
    
    
    $
    2,990Weighted Average Number of Shares Outstanding
    
    
    15,224
    
    
    
    15,188Basic Earnings Per Common Share
    
    $
    0.08
    
    
    $
    0.20Weighted Average Number of Diluted Shares
    
    
    15,255
    
    
    
    15,194Fully Diluted Earnings Per Share
    
    $
    0.08
    
    
    $
    0.20Dividends Declared Per Common Share
    
    $
    0.221
    
    
    $
    0.221
 The accompanying notes are an integral part of these consolidated financial statements 5




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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003 (Unaudited) Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    1,146
    
    
    $
    2,990Adjustments for non-cash items:Depreciation and amortization
    
    
    5,177
    
    
    
    4,947Deferred income taxes and investment tax credits
    
    
    1,018
    
    
    
    2,330Unrealized (gain) loss on purchased power contracts
    
    
    (557
    )
    
    
    283Other  net
    
    
    184
    
    
    
    (15
    )Changes in assets and liabilities:Accounts receivable  customers
    
    
    3,093
    
    
    
    446Unbilled revenue
    
    
    1,626
    
    
    
    1,211Other accounts receivable
    
    
    9,245
    
    
    
    405Materials and supplies
    
    
    (92
    )
    
    
    (71
    )Prepayments
    
    
    1,109
    
    
    
    543Regulatory assets  supply cost balancing accounts
    
    
    221
    
    
    
    958Other assets
    
    
    (487
    )
    
    
    (1,327
    )Accounts payable
    
    
    (5,392
    )
    
    
    (3,215
    )Taxes payable
    
    
    (834
    )
    
    
    1,519Other liabilities
    
    
    3,661
    
    
    
    2,232Net cash provided
    
    
    19,118
    
    
    
    13,236Cash Flows From Investing Activities:Construction expenditures
    
    
    (13,399
    )
    
    
    (8,409
    )Net cash used
    
    
    (13,399
    )
    
    
    (8,409
    )Cash Flows From Financing Activities:Proceeds from issuance of common shares
    
    
    609
    
    
    
    402Receipt of advances for and contributions in aid of construction
    
    
    2,904
    
    
    
    1,780Refunds on advances for construction
    
    
    (425
    )
    
    
    (433
    )Repayment of long-term debt
    
    
    (209
    )
    
    
    (202
    )Net change in notes payable to banks
    
    
    (9,000
    )
    
    
    (5,000
    )Dividends paid
    
    
    (3,362
    )
    
    
    (3,356
    )Net cash used
    
    
    (9,483
    )
    
    
    (6,809
    )Net decrease in cash and cash equivalents
    
    
    (3,764
    )
    
    
    (1,982
    )Cash and cash equivalents, beginning of period
    
    
    12,775
    
    
    
    18,397Cash and cash equivalents, end of period
    
    $
    9,011
    
    
    $
    16,415Non-cash activities  supplemental disclosures:Adoption of new accounting standard for asset retirement obligations:Cumulative effect of adoption  Regulatory asset
    
    
    
    
    
    $
    2,495Net utility plant
    
    
    
    
    
    
    223Asset retirement obligations
    
    
    
    
    
    
    (2,718
    )
 The accompanying notes are an integral part of these consolidated financial statements 6




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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited) March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003Utility Plant, at costWater
    
    $
    690,474
    
    
    $
    688,079Electric
    
    
    43,445
    
    
    
    42,711733,919
    
    
    
    730,790Less  Accumulated depreciation
    
    
    (216,742
    )
    
    
    (211,424
    )517,177
    
    
    
    519,366Construction work in progress
    
    
    61,146
    
    
    
    51,354Net utility plant
    
    
    578,323
    
    
    
    570,720Other Property and Investments
    
    
    7,421
    
    
    
    7,471Current AssetsCash and cash equivalents
    
    
    3,199
    
    
    
    8,306Accounts receivable-customers (less allowance for doubtful
accounts of $714 in 2004 and $797 in 2003)
    
    
    8,587
    
    
    
    11,487Unbilled revenue
    
    
    10,895
    
    
    
    12,484Intercompany receivable
    
    
    1,072
    
    
    
    445Other accounts receivable
    
    
    1,231
    
    
    
    10,516Materials and supplies, at average cost
    
    
    1,414
    
    
    
    1,322Regulatory assets  current
    
    
    5,262
    
    
    
    5,331Prepayments
    
    
    2,549
    
    
    
    3,638Total current assets
    
    
    34,209
    
    
    
    53,529Regulatory and Other AssetsRegulatory assets
    
    
    58,156
    
    
    
    57,624Other accounts receivable
    
    
    8,000
    
    
    
    8,000Other
    
    
    8,150
    
    
    
    8,219Total regulatory and other assets
    
    
    74,306
    
    
    
    73,843Total Assets
    
    $
    694,259
    
    
    $
    705,563
 The accompanying notes are an integral part of these financial statements 7




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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited) March 31,
    
    December 31,(in thousands)
    
    2004
    
    2003CapitalizationCommon shares, no par value
    
    $
    123,391
    
    
    $
    123,391Earnings reinvested in the business
    
    
    80,523
    
    
    
    82,656Total common shareholders equity
    
    
    203,914
    
    
    
    206,047Long-term debt
    
    
    221,944
    
    
    
    221,996Total capitalization
    
    
    425,858
    
    
    
    428,043Current LiabilitiesLong-term debt  current
    
    
    260
    
    
    
    260Accounts payable
    
    
    12,664
    
    
    
    17,312Intercompany payable
    
    
    23,721
    
    
    
    34,111Taxes payable
    
    
    3,967
    
    
    
    4,382Accrued employee expenses
    
    
    4,687
    
    
    
    3,828Accrued interest
    
    
    4,841
    
    
    
    1,581Deferred income taxes  current
    
    
    1,330
    
    
    
    1,057Other
    
    
    7,667
    
    
    
    10,376Total current liabilities
    
    
    59,137
    
    
    
    72,907Other CreditsAdvances for construction
    
    
    69,000
    
    
    
    66,827Contributions in aid of construction-net
    
    
    64,272
    
    
    
    64,023Deferred income taxes-net
    
    
    50,934
    
    
    
    50,277Unamortized investment tax credits
    
    
    2,678
    
    
    
    2,700Accrued pension and other postretirement benefits
    
    
    5,849
    
    
    
    4,584Regulatory liabilities
    
    
    9,911
    
    
    
    9,642Other
    
    
    6,620
    
    
    
    6,560209,264
    
    
    
    204,613Commitments and Contingencies (Note 8)
    
    
    
    
    
    
    Total Capitalization and Liabilities
    
    $
    694,259
    
    
    $
    705,563
 The accompanying notes are an integral part of these financial statements 8




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SOUTHERN CALIFORNIA WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2004 AND 2003
(Unaudited) Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Operating RevenuesWater
    
    $
    37,461
    
    
    $
    38,169Electric
    
    
    7,627
    
    
    
    7,00445,088
    
    
    
    45,173Operating ExpensesWater purchased
    
    
    8,720
    
    
    
    7,710Power purchased for pumping
    
    
    1,641
    
    
    
    1,890Power purchased for resale
    
    
    4,829
    
    
    
    3,856Unrealized (gain) loss on power purchased contracts
    
    
    (557
    )
    
    
    283Groundwater production assessment
    
    
    1,822
    
    
    
    1,667Supply cost balancing accounts
    
    
    221
    
    
    
    958Other operating expenses
    
    
    4,093
    
    
    
    3,753Administrative and general expenses
    
    
    7,736
    
    
    
    7,010Depreciation and amortization
    
    
    4,937
    
    
    
    4,718Maintenance
    
    
    2,253
    
    
    
    1,872Taxes on income
    
    
    1,336
    
    
    
    2,090Other taxes
    
    
    2,125
    
    
    
    1,949Total operating expenses
    
    
    39,156
    
    
    
    37,756Operating Income
    
    
    5,932
    
    
    
    7,417Other Income (Loss)Other income (loss)  net of taxes
    
    
    (86
    )
    
    
    (3
    )Total other income (loss)
    
    
    (86
    )
    
    
    (3
    )Interest ChargesInterest on long-term debt
    
    
    3,935
    
    
    
    4,140Other interest and amortization of debt expense
    
    
    192
    
    
    
    150Total interest charges
    
    
    4,127
    
    
    
    4,290Net Income
    
    $
    1,719
    
    
    $
    3,124
 The accompanying notes are an integral part of these financial statements 9




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SOUTHERN CALIFORNIA WATER COMPANY
CASH FLOW STATEMENTS
FOR THE THREE MONTHS ENDED MARCH 31, 2004 AND 2003
(Unaudited) Three Months EndedMarch 31,(in thousands)
    
    2004
    
    2003Cash Flows From Operating Activities:Net income
    
    $
    1,719
    
    
    $
    3,124Adjustments for non-cash items:Depreciation and amortization
    
    
    4,937
    
    
    
    4,718Deferred income taxes and investment tax credits
    
    
    915
    
    
    
    2,255Unrealized (gain) loss on purchased power contracts
    
    
    (557
    )
    
    
    283Other  net
    
    
    152
    
    
    
    (84
    )Changes in assets and liabilities:Accounts receivable  customers
    
    
    2,900
    
    
    
    402Unbilled revenue
    
    
    1,589
    
    
    
    1,181Other accounts receivable
    
    
    9,285
    
    
    
    403Materials and supplies
    
    
    (92
    )
    
    
    (72
    )Prepayments
    
    
    1,089
    
    
    
    468Regulatory assets  supply cost balancing accounts
    
    
    221
    
    
    
    958Other assets
    
    
    (478
    )
    
    
    (1,322
    )Accounts payable
    
    
    (4,648
    )
    
    
    (2,603
    )Taxes payable
    
    
    (415
    )
    
    
    1,504Other liabilities
    
    
    3,561
    
    
    
    2,130Net Cash Provided
    
    
    20,178
    
    
    
    13,345Cash Flows From Investing Activities:Construction expenditures
    
    
    (12,848
    )
    
    
    (8,029
    )Net Cash Used
    
    
    (12,848
    )
    
    
    (8,029
    )Cash Flows From Financing Activities:Receipt of advances for and contributions in aid of construction
    
    
    2,895
    
    
    
    1,684Refunds on advances for construction
    
    
    (411
    )
    
    
    (433
    )Repayments of long-term debt
    
    
    (54
    )
    
    
    (57
    )Net change in intercompany borrowings
    
    
    (11,017
    )
    
    
    (7,098
    )Dividends paid
    
    
    (3,850
    )
    
    
    (3,850
    )Net Cash Used
    
    
    (12,437
    )
    
    
    (9,754
    )Net decrease in cash and cash equivalents
    
    
    (5,107
    )
    
    
    (4,438
    )Cash and cash equivalents, beginning of period
    
    
    8,306
    
    
    
    11,677Cash and cash equivalents, end of period
    
    $
    3,199
    
    
    $
    7,239Non-cash activities  supplemental disclosures:Adoption of new accounting standard for asset retirement obligations:Cumulative effect of adoption  Regulatory asset
    
    
    
    
    
    $
    2,479Utility plant, net
    
    
    
    
    
    
    221Asset retirement obligations
    
    
    
    
    
    
    (2,700
    )
 The accompanying notes are an integral part of these financial statements 10




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AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited) American States Water Company (AWR), incorporated in 1998, is the parent
company of Southern California Water Company (SCW), American States Utility
Services, Inc. (ASUS) and Chaparral City Water Company (CCWC). More than 90% of
AWRs assets consist of the common stock of SCW. SCW is a public utility
company engaged principally in the purchase, production, distribution and sale
of water in California. In addition, SCW distributes and sells electric energy
in several mountain communities in California. Unless otherwise stated in this
report, the term Registrant applies to both AWR and SCW, collectively. Note 1  Basis of Presentation:The consolidated financial statements
included herein have been prepared by Registrant, without audit, pursuant to
the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with accounting principles generally accepted
in the United States of America for annual financial statements have been
condensed or omitted pursuant to such rules and regulations. The preparation of
the consolidated financial statements requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates. In the
opinion of management, all adjustments, consisting of normal recurring items
and estimates necessary for a fair statement of the results for the interim
periods, have been made. It is suggested that these consolidated financial
statements be read in conjunction with the consolidated financial statements
and the notes thereto included in the Form 10-K for the year ended December 31,
2003 filed with the SEC. Note 2  Regulatory Matters:In accordance with accounting principles for
rate-regulated enterprises, Registrant records regulatory assets, which
represent probable future revenue associated with certain costs that will be
recovered from customers through the rate-making process, and regulatory
liabilities, which represent probable future reductions in revenue associated
with amounts that are to be credited to customers through the rate-making
process. Regulatory assets, less regulatory liabilities, included in the
consolidated balance sheets are as follows: March 31,
    
    December 31,(In thousands)
    
    2004
    
    2003SCWSupply cost balancing accounts
    
    $
    24,211
    
    
    $
    24,432Costs deferred for future recovery on Aerojet case
    
    
    16,272
    
    
    
    16,177Flow-through taxes, net
    
    
    10,683
    
    
    
    10,690Transmission line abandonment costs
    
    
    5,000
    
    
    
    5,000Asset retirement obligations
    
    
    2,791
    
    
    
    2,729Low income balancing accounts
    
    
    1,659
    
    
    
    1,462Refund of water right lease revenues
    
    
    (6,446
    )
    
    
    (6,177
    )Revenues subject to refund
    
    
    (3,465
    )
    
    
    (3,465
    )Other regulatory assets
    
    
    2,802
    
    
    
    2,465Total SCW
    
    $
    53,507
    
    
    $
    53,313CCWCAsset retirement obligations
    
    $
    45
    
    
    $
    40Other regulatory assets
    
    
    38
    
    
    
    40Total AWR
    
    $
    53,590
    
    
    $
    53,393
 11




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##### Table of Contents



Note 2  Regulatory Matters (Continued): Supply Cost Balancing Accounts: As permitted by the California Public Utilities Commission (CPUC), SCW
has historically maintained water supply balancing accounts prior to November
29, 2001 and electric supply balancing accounts to account for
under-collections and over-collections of revenues designed to recover such
costs. Costs are recorded in income and charged to balancing accounts when such
costs are incurred. The balancing accounts are reversed when such costs are
recovered through rate adjustments or through refunds of previously incurred
costs. SCW accrues interest on its supply cost balancing accounts at the rate
prevailing for 90-day commercial paper. CCWC does not maintain a supply cost
balancing account. Water Balancing Account On November 29, 2001, the CPUC ordered water
utilities with existing water supply balancing accounts to cease booking
amounts to such accounts. In its place, water utilities are now required to
establish a memorandum supply cost account. The over- or under-collection of
water supply costs is recorded in this memorandum account in a manner similar
to the balancing account. The income statements of SCW no longer include
entries reflecting differences between authorized water supply unit costs
included in rates and actual water supply costs. As a result, any changes in
water supply costs as well as any future authorized revenue increases for
supply expenses may directly impact earnings. In a decision issued on June 19, 2003 related to the memorandum supply
cost account, the CPUC concluded that (i) if a utility is within its 3-year
rate case cycle and does not earn in excess of its authorized rate of return,
the utility is entitled to recover its costs in the memorandum supply cost
account, subject to a reasonableness review by the CPUC; (ii) if a utility is
either within or outside of its rate case cycle and earns in excess of its
authorized rate-of-return, the utilitys recovery of expenses from the
memorandum supply cost account will be reduced by the amount exceeding the
authorized rate-of-return, and (iii) a utility is required to seek review of
under and over collections by filing an advice letter annually. SCW recently
filed advice letters for Regions I and II and will file Region III shortly,
seeking recovery of an under-collected balance of $2.3 million for the period
November 29, 2001 through December 31, 2002 and $1.7 million for the year 2003.
Upon receiving approval from the CPUC, SCW will recognize on its books the
authorized under-collected amount as supply cost balancing accounts. As of
March 31, 2004, SCW has an under-collection of approximately $4.5 million in
its memorandum supply cost account, including the $4.0 million filed with the
CPUC. SCW intends to file advice letters annually by March 31. Amounts
included in the memorandum supply cost account are not capitalized until a rate
order is received from the CPUC. With respect to pre-November 29, 2001 water supply balancing accounts, SCW
has a net under-collection amount of $1.5 million recorded at March 31, 2004,
the majority of which has been included in rates authorized on June 19, 2003. 12




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##### Table of Contents



Note 2  Regulatory Matters (Continued): Electric Balancing Account Electric power costs incurred by SCWs Bear
Valley Electric division continue to be charged to its electric supply cost
balancing account. The under-collection in the electric balancing account is
$22.7 million at March 31, 2004. The CPUC has authorized SCW to collect a
surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to
enable SCW to recover the under-collection. SCW sold 40,751,889 and 39,685,128
kilowatt hours of electricity to its Bear Valley Electric division customers
for the three months ended March 31, 2004 and 2003, respectively. SCW
anticipates electricity sales to be sufficient during this period for it to
recover the amount of the under-collection. SCW is allowed to include only up
to a weighted annual energy purchase cost of $77 per MWh each year through
August 2011 in its electric supply cost balancing account. To the extent that
actual weighted average annual cost for power purchased exceeds the $77 per MWh
amount, SCW will not be able to include these amounts in its balancing account
and such amounts will be expensed. During April 2001, SCW recorded a one-time
sale of energy on the spot market that generated a $644,000 gain which was
recorded in the supply cost balancing account at that time. The gain was the
subject of a complaint filed at the Federal Energy Regulatory Commission
(FERC) by Mirant Marketing where Mirant Marketing, the purchaser of the
energy, was seeking to be refunded all or a portion of the gain. In March 2004,
the FERC ordered SCW to refund the $644,000, plus interest, to Mirant. This
refund increased the cost of power purchased for resale during the three months
ended March 31, 2004, with a corresponding amount to the provision for supply
cost balancing account. The sale of excess energy on the spot market in 2001
resulted from a one-month overlap of energy purchase agreements. Costs Deferred for Future Recovery on Aerojet Case: SCW sued Aerojet-General Corporation (Aerojet) for causing the
contamination of the Sacramento County Groundwater Basin, which affected
certain SCW wells. On a related matter, SCW also filed a lawsuit against the
State of California. The CPUC authorized memorandum accounts to allow for
recovery, from customers, of costs incurred by SCW in prosecuting the cases
against Aerojet and the State, less any recovery from the defendants or others.
As of March 31, 2004 and December 31, 2003, approximately $16 million has been
recorded as a non-yielding regulatory asset representing primarily legal costs
incurred to date in connection with prosecuting the cases. Management believes
these costs are recoverable through rates; however, it is managements
intention to offset any settlement proceeds from Aerojet that may occur from
these actions, against the balance in the memorandum accounts at the time of
settlement. Management cannot give assurance that the CPUC will ultimately
allow recovery of all or any of these costs. Refund of Water Right Lease Revenues: In 1994, SCW entered into a contract to lease to the City of Folsom, 5,000
acre-feet per year of water rights to the American River, and had included all
associated revenues in a non-operating income account. This issue was raised
by the Office of Ratepayer Advocates (ORA) in SCWs Region III proceedings.
In a decision issued on March 16, 2004, the CPUC determined that SCW failed to
seek the CPUCs approval to effectuate the lease and is to pay a fine of
$180,000. The decision also ordered SCW to refund 70 percent of the total
amount of lease revenues received since 1994, plus interest, to customers.
Pursuant to the order, SCW recorded a $6.2 million regulatory liability with a
corresponding charge against non-operating income (net of taxes of $2.5
million) during the fourth quarter of 2003. Management disagrees with the
CPUCs decision and intends to file an appeal to the decision in which it will
vigorously defend its position. Pursuant to the order, the apportionment of any
lease revenues that SCW may collect in the future will be determined by a later
decision. Beginning in the first quarter of 2004, all amounts billed to the
City of Folsom are included as a regulatory liability. For the three months
ended March 31, 2004, SCW recorded an additional $269,000 in the regulatory
liability account. There were no other significant changes in regulatory matters during the
three months ended March 31, 2004. 13




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##### Table of Contents



Note 3  Earnings Per Share / Capital Stock:Basic earnings per common
share are calculated pursuant to Statement of Financial Accounting Standards
(SFAS) No. 128, Earnings per Share,and are based on the weighted average
number of common shares outstanding during each period and net income after
deducting preferred dividend requirements. Diluted earnings per common share
are based upon the weighted average number of common shares including both
outstanding and shares potentially issued in connection with stock options
granted under Registrants 2000 Stock Incentive Plan, and net income after
deducting preferred dividend requirements. At March 31, 2004 and 2003, there
were 476,254 and 333,679 options outstanding, respectively. Outstanding stock
options issued by the Registrant represent the only dilutive effect reflected
in diluted weighted average shares outstanding. The difference between basic
and diluted EPS is the effect of stock options that, under the treasury share
method, give rise to common stock equivalents. During the three months ended March 31, 2004 and 2003, Registrant issued
24,212 and 18,904 common shares which totaled approximately $609,000 and
$402,000, respectively, under the Registrants Common Share Purchase and
Dividend Reinvestment Plan (DRP) and 401(k) Plan. During the three months ended March 31, 2004 and 2003, AWR paid quarterly
dividends to the shareholders, totaling approximately $3.4 million or $0.221
per share. Note 4  Notes Payable To Banks:Registrant maintains a $75 million
revolving credit facility maturing in June 2005. Total borrowings outstanding
under this credit facility amounted to $47 million at March 31, 2004 included
in current liabilities. The credit agreement for this facility includes, among
other things, certain financial covenants. One of those covenants is
maintenance of an interest coverage ratio of at least 3.25x, as defined and
calculated in the credit agreement, based on trailing twelve-month results. The
Company violated this interest coverage ratio for the trailing twelve-month
period ended March 31, 2004 and has requested and received a waiver from its
lending syndicate, which excludes in the calculation, certain charges booked by
SCW following certain CPUC decisions in the fourth quarter of 2003. The waiver
cured the default at March 31, 2004 and allowed for the exclusion of those
charges from the calculation of the trailing twelve-month interest coverage
ratio through September 30, 2004. Note 5  Stock Incentive Plan:Registrant has a Stock Incentive Plan and
applies Accounting Principles Board Opinion (APB) No. 25, Accounting for Stock
Issued to Employees, in accounting for its stock options. Accordingly, no
compensation cost for the Plan has been recognized for options granted at fair
value at the date of grant. Registrant has also adopted the disclosure only
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. If Registrant had elected to adopt the optional recognition provisions of
SFAS No. 123 for its stock options, net income and earnings per share
applicable to common shareholders would have been changed to the pro forma
amounts indicated below: 14




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Note 5  Stock Incentive Plan (Continued): Three Months Ended March 31,dollars in thousands except EPS
    
    2004
    
    2003Earnings available  common:As reported
    
    $
    1,146
    
    
    $
    2,990Add: Stock-based compensation
expense included in reported net
income, net of tax
    
    
    
    
    
    
    Less: Stock-based compensation
expense determined under the
fair-value accounting method, net of
tax
    
    
    (76
    )
    
    
    (72
    )Pro forma
    
    $
    1,070
    
    
    $
    2,918Basic earnings per share:As reported
    
    $
    0.08
    
    
    $
    0.20Pro forma
    
    $
    0.07
    
    
    $
    0.19Diluted earnings per share:As reported
    
    $
    0.08
    
    
    $
    0.20Pro forma
    
    $
    0.07
    
    
    $
    0.19
 Note 6  Employee Benefit Plans:The components of net periodic benefit
costs for Registrants pension plan, postretirement plan, and Supplemental
Executive Retirement Plan (SERP) for the three months ended March 31, 2004
and 2003 are as follows: OtherPostretirementPension Benefits
    
    Benefits
    
    SERP(dollars in thousands)
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Components of Net Periodic BenefitsCost:Service Cost
    
    $
    701
    
    
    $
    545
    
    
    $
    101
    
    
    $
    87
    
    
    $
    32
    
    
    $
    10Interest Cost
    
    
    906
    
    
    
    800
    
    
    
    148
    
    
    
    139
    
    
    
    31
    
    
    
    11Expected Return on Plan Assets
    
    
    (830
    )
    
    
    (679
    )
    
    
    (64
    )
    
    
    (52
    )
    
    
    
    
    
    
    Amortization of Transition
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    105
    
    
    
    
    
    
    
    Amortization of Prior Service Cost
    
    
    40
    
    
    
    13
    
    
    
    (50
    )
    
    
    (50
    )
    
    
    37
    
    
    
    12Amortization of Actuarial (Gain) Loss
    
    
    90
    
    
    
    70
    
    
    
    30
    
    
    
    20
    
    
    
    
    
    
    
    Net Periodic Pension Cost
    
    $
    907
    
    
    $
    749
    
    
    $
    270
    
    
    $
    249
    
    
    $
    100
    
    
    $
    33
 Registrant
expects to contribute $3,315,000 and $900,000 to pension and postretirement plans in 2004,
respectively. No contributions were made during the three months ended March 31, 2004. 15




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Note 7  New Accounting Pronouncements: In January 2003, the Financial Accounting Standards Board (FASB) issued
Interpretation (FIN) No. 46, Consolidation of Variable Interest Entities
(VIE),(revised in December 2003 by FIN No. 46R), which addresses how a
business enterprise should evaluate whether it has a controlling financial
interest in an entity through means other than voting rights and accordingly
should consolidate the entity. FIN No. 46R, which was issued in December 2003,
replaces FIN No. 46. The adoption of FIN No. 46R did not have any impact on the
Registrants financial position, results of operations or cash flows as the
Registrant does not have any variable interests in VIEs. In December 2003, the SEC issued Staff Accounting Bulletin No. 104 (SAB
104), Revenue Recognition.SAB 104 supercedes SAB 101, Revenue Recognition
in Financial Statements.The primary purpose of SAB 104 is to rescind
accounting guidance contained in SAB 101 related to multiple element revenue
arrangements, superceded as a result of the issuance of Emerging Issues Task
Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple
Deliverables.Additionally, SAB 104 rescinds the SECs Revenue Recognition in
Financial Statements Frequently Asked Questions and Answers (the FAQ) issued
with SAB 101 that had been codified in SEC Topic 13, Revenue Recognition.
Selected portions of the FAQ have been incorporated into SAB 104. While the
wording of SAB 104 has changed to reflect the issuance of EITF 00-21, the
revenue recognition principles of SAB 101 remain largely unchanged by the
issuance of SAB 104. The adoption of SAB 104 did not have any impact on
Registrants financial position, results of operations or cash flows. In December 2003, the FASB issued SFAS No. 132 (Revised), Employers
Disclosures About Pensions and Other Postretirement Benefits  An Amendment of
FASB Statements Nos. 87, 88, and 106 and a revision of FASB Statement No. 132".
This statement revises employers disclosures about pension plans and other
postretirement benefits plans. It does not change the measurement or
recognition of those plans. The new disclosures were generally effective for
2003 calendar year-end financial statements and for interim periods beginning
first quarter of 2004. Registrant has included the new required disclosures in
Note 6. Note 8  Contingencies: Water Quality-Related Litigation: SCW has been named as a defendant in twenty-two lawsuits that allege that
SCW and other water utilities, delivered unsafe water to their customers.
Plaintiffs in these actions seek damages, including general, special, and
punitive damages, according to proof at trial, as well as attorneys fees on
certain causes of action, costs of suit, and other unspecified relief. Nineteen
of the lawsuits involve customer service areas located in Los Angeles County in
the southern portion of California; three of the lawsuits involve a customer
service area located in Sacramento County in northern California. On September
1, 1999, the Court of Appeal in San Francisco held that the CPUC had preemptive
jurisdiction over regulated public utilities and ordered dismissal of a series
of these lawsuits. On October 11, 1999, one group of plaintiffs appealed the
decision to the California Supreme Court. 16




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##### Table of Contents



Note 8  Contingencies (Continued): On February 4, 2002, the California Supreme Court concluded that (i) the
CPUC had preemptive jurisdiction over claims seeking injunctive relief and
claims based on the theory that a public utility regulated by the CPUC provided
unsafe drinking water even though it had complied with federal and state
drinking water standards, but (ii) the CPUC did not have preemptive
jurisdiction over damage claims alleging violations of federal and state
drinking water standards by public utilities regulated by the CPUC. As a
result, damage claims based on allegations of violations of federal and state
drinking water standards may proceed while the other claims must be dismissed.
In light of the breadth of plaintiffs claims, the lack of factual information
regarding plaintiffs claims and injuries, if any, the impact of the California
Supreme Court decision on plaintiffs claims and the fact that no discovery has
yet been completed, SCW is unable at this time to determine what, if any,
potential liability it may have with respect to claims based on allegations of
violation of federal and state drinking water standards. Based upon the
information currently available to it, Registrant believes that these claims
are without merit and intends to vigorously defend against these claims. SCW is subject to self-insured retention provisions in its applicable
insurance policies and has either expensed the self-insured amounts or has
reserved against payment of these amounts as appropriate. SCWs various
insurance carriers have, to date, provided reimbursement for costs incurred
above the self-insured amounts for defense against these lawsuits, subject to a
reservation of rights. In addition, on March 16, 2004, the CPUC issued a
decision which authorizes SCW to establish a memorandum account to accumulate
costs to comply with certain contamination remediation requirements for future
recovery. Based on the decision, SCW reversed $1.0 million of water quality
related reserves into income during the fourth quarter of 2003. Order Instituting Investigation (OII): In March 1998, the CPUC issued an OII to regulated water utilities in the
state of California, including SCW. The purpose of the OII was to determine
whether existing standards and policies regarding drinking water quality
adequately protect the public health and whether those standards and policies
were being uniformly complied with by those water utilities. On November 2,
2000, a final decision from the CPUC concluded that the CPUC has the
jurisdiction to regulate the service of water utilities with respect to the
health and safety of that service; that the California Department of Health
Services (DOHS) requirements governing drinking water quality adequately
protect the public health and safety; and that, based on an extensive review of
25 years of water quality records, regulated water utilities, including SCW,
have satisfactorily complied with past and present drinking water quality
requirements, except for one small unrelated water utility in Northern
California. The CPUC has authorized the establishment of memorandum accounts to
capture expenses related to the OII. Under the memorandum account procedure,
SCW may recover litigation costs from ratepayers to the extent authorized by
the CPUC. As of March 31, 2004 and December 31, 2003, SCW had incurred a net
cost of $890,000 related to the OII for which it had established a reserve in
prior years due to uncertainty of recoverability. In a decision issued by the
CPUC on March 16, 2004, SCW is now allowed to recover these costs through a
special condition surcharge over a twelve-month period. Based on the decision,
SCW reversed the $890,000 OII reserve into income during the fourth quarter of
2003. SCW was also authorized to recover the carrying cost associated with this
matter and therefore, recorded an additional $168,000 to the memorandum account
during the first quarter of 2004. 17




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##### Table of Contents



Note 8  Contingencies (Continued): Other Water Quality Litigation: On October 25, 1999, SCW sued Aerojet-General Corporation (Aerojet) for
causing the contamination of eastern portions of the Sacramento County
groundwater basin. On October 10, 2003, Registrant entered into a confidential
Memorandum of Understanding (MOU) with the Aerojet-General subsidiary of
GenCorp, Inc. for the settlement of legal actions brought by SCW. The MOU sets
forth the present financial terms and the structure of a settlement to cover,
over time, capital and litigation related costs incurred by SCW resulting from
the contamination. The MOU and the settlement embodied therein was found to be
binding by the Sacramento Superior Court on January 18, 2004. Further
documentation incorporating the terms of the MOU is presently underway.
However, documentation is not complete and management is presently unable to
predict when a comprehensive set of settlement documents will be completed. Based on the financial terms in the MOU, SCW established a receivable from
Aerojet in an amount of $16.7 million at the end of 2003, of which $8.7 million
has been received in early 2004 and was included in current Other Accounts
Receivable on the balance sheets. The remainder of the costs is subject to
further settlement documentation. Reimbursements received from Aerojet have
been applied directly to reduce SCWs costs of utility plant and purchased
water. Prior to the MOU, Aerojet had reimbursed SCW $4.3 million in capital
costs and $171,000 for additional water supply. In an action related to the draft settlement agreement, Registrant and
Aerojet have signed three separate agreements requiring Aerojet to pay for
certain transmission pipelines and upgrades to the Coloma Treatment Plant as a
contingency plan should additional wells be impacted prior to the high summer
demand period of 2004. The value of the three agreements approximates $6.8
million in capital improvements. In addition, SCW is in negotiations with the
County of Sacramento regarding the Countys plan to construct a treatment plant
to provide the Registrant with a replacement water supply, for wells lost due
to the contamination by Aerojet. The CPUC has authorized memorandum accounts to allow for recovery, from
customers, of costs incurred by SCW in prosecuting the suits filed against the
State and Aerojet, less any recovery from the defendants or others. As of March
31, 2004, approximately $16.3 million in legal and consulting related costs has
been recorded as deferred charges and included in Regulatory Assets on the
balance sheets. The CPUC has authorized SCW to increase rates, effective April
28, 2001, for recovery over a six-year period of approximately $1.8 million, in
expenses that were incurred on or before August 31, 2000, in the Aerojet matter
recorded as a regulatory asset (Note 2). As part of an abbreviated application
for SCWs Region I filed in 2003, SCW requested a long-term amortization of the
balance of costs included in the Aerojet litigation memorandum account, net of
any reimbursement amount. The draft agreement also addresses the possible
recovery of SCWs deferred charges through revenues in new development areas.
Management believes these costs are recoverable through rates; however, it is
managements intention to offset any settlement proceeds from Aerojet that may
occur from these actions, against the balance in the memorandum accounts at the
time of settlement. Management cannot give assurance that the CPUC
will ultimately allow recovery of all or any of these costs. 18




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##### Table of Contents



Note 8  Contingencies (Continued): The compound MTBE has been detected in a well serving SCWs Los Osos water
system. For some time, SCW has been working with the Regional Water Quality
Control Board as well as the owner of a service station. Although the owner of
the service station has attempted remediation with funds provided through the
California Underground Storage Tank Fund (CUSTF), it appears there will be
insufficient funds from the CUSTF to complete remediation sufficient to return
the well to service. In order to prevent the running of the statute of
limitations, on August 12, 2002 SCW filed suit in the Superior Court of the
State of California for the County of San Luis Obispo against the operators and
owners of the service station facility, and Chevron USA Products, Inc., the
supplier. A settlement with Chevron has been reached and all suits against the
station owners and operators have been dismissed. The impacted well may need to
be removed permanently from service and the settlement with Chevron is expected
to afford SCW sufficient funds to commence site development and construction of
a replacement well. Perchlorate and/or Volatile Organic Compounds (VOC) have been detected in
five wells servicing SCWs San Gabriel System. SCW filed suit, along with two
other affected water purveyors and the San Gabriel Basin Water Quality
Authority (WQA), in the federal court against some of those responsible for the
contamination. Some of the other potential defendants settled with SCW, other
water purveyors and the WQA on VOC related issues prior to the filing of the
lawsuit. In response to the filing of the Federal lawsuit, the Potentially
Responsible Party (PRP) defendants filed motions to dismiss the suit or strike
certain portions of the suit. The judge issued a ruling on April 1, 2003
granting in part and denying in part the defendants motions. A key ruling of
the court was that the water purveyors, including the Registrant, by virtue of
their ownership of wells contaminated with hazardous chemicals are themselves
PRPs under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA). Registrant has, pursuant to permission of the court,
amended its suit to claim certain affirmative defenses as an innocent party
under CERCLA. Registrant is presently unable to predict the outcome of this
ruling on its ability to fully recover from the PRPs future costs associated
with the treatment of these wells. On August 29, 2003, the US Environmental Protection Agency issued
Unilateral Administrative Orders (UAO) against 41 parties deemed responsible
for polluting the groundwater in that portion of the San Gabriel Valley from
which SCWs two impacted wells draw water. SCW was not named as a party to the
UAO. The UAO requires that these parties remediate the contamination. As a
result of the issuance of the UAO, these parties have begun settlement
discussions regarding the Federal lawsuits with SCW, the other two affected
water purveyors and WQA. Registrant is presently unable to predict the ultimate
outcome of these settlement discussions. MCO Properties, Inc. (MCO), a real estate developer, filed a complaint
against AWR and CCWC in the Superior Court of Maricopa County on June 6, 2003
alleging breach of contract, breach of the implied covenant of good faith and
fair dealing, interference with prospective economic advantage, negligence and
negligent misrepresentation and seeking a declaratory judgment. The complaint
arises out of allegations by MCO that AWR has failed to comply with the terms
of the Stock Purchase Agreement between MCO and AWR pursuant to which AWR
acquired CCWC from MCO and has thereby interfered with MCOs ability to develop
its real property in the Town of Fountain Hills. A revised complaint was filed
on December 12, 2003 further alleging that CCWC has not maintained its
designation of assured supply as required in the Stock Purchase Agreement.
Similar allegations have been filed by MCO against CCWC with the Arizona
Corporation Commission (ACC). A recent settlement has been executed which
dismisses the complaint filed in the Superior Court of Maricopa County as well
as the complaint filed with the ACC. In addition, CCWC has undertaken actions
that revised its assured water supply designation in a manner that will enable
CCWC to provide water service to new real estate developments in the Town of
Fountain Hills, including properties owned by MCO. 19




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##### Table of Contents



Note 8  Contingencies (Continued): Condemnation of Properties: The laws of the State of California provide for the acquisition of public
utility property by governmental agencies through their power of eminent
domain, also known as condemnation, where doing so is in the public interest.
In addition, however, the laws of the State of California also provide: (1)
that the owner of the utility property may contest whether the condemnation is
actually in the public interest; and (2) that the owner is entitled to receive
the fair market value of its property if the property is ultimately taken.
Although the City of Claremont, California located in SCWs Region III has not
initiated the formal condemnation process pursuant to California law, the City
hired a consultant to perform an appraisal of the value of Registrants water
system serving that city. On April 27, 2004, the City Counsel voted 3 to 2 to
make an offer to and enter into negotiations with SCWC to acquire the Claremont
water system. The Citys appraisal consultant has valued the system at $40
million to $45 million. SCWs estimate of system value is significantly
greater. SCW has informed the City that the Claremont water system is not for
sale and that it will vigorously defend against any action initiated by the
City to take the system through an eminent domain proceeding. SCW is unable to
predict the ultimate outcome of any such proceeding. As of March 31, 2004, the
recorded net book value of the Claremont water system is approximately $32
million. Other Litigation: Registrant is also subject to ordinary routine litigation incidental to
its business. Other than those disclosed above, no other legal proceedings are
pending, which are believed to be material. Management believes that rate
recovery, proper insurance coverage and reserves are in place to insure against
property, general liability and workers compensation claims incurred in the
ordinary course of business. 20




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##### Table of Contents



Note 9  Business Segments:AWR has three principal business units: water
and electric distribution units, through its SCW subsidiary, a water service
utility operation conducted through its CCWC unit, and a non-regulated activity
unit through the ASUS subsidiary. All activities of SCW currently are
geographically located within California. All activities of CCWC are located in
the state of Arizona. Both SCW and CCWC are regulated utilities. On a
stand-alone basis, AWR has no material assets other than its investments in its
subsidiaries. The tables below set forth information relating to SCWs water
and electric operating segments, CCWC, and non-regulated businesses, consisting
of ASUS and AWR corporate expenses. Included in the amounts set forth, certain
assets, revenues and expenses have been allocated. The identifiable assets are
net of respective accumulated provisions for depreciation. Capital additions
reflect capital expenditures paid in cash and exclude property installed by
developers and conveyed to the Company. (dollars in thousands)
    
    As of and for the Three Months Ended March 31, 2004SCWCCWC
    
    Non-
    
    
    
    
    
    ConsolidatedWater
    
    Electric
    
    Water
    
    Regulated*
    
    Eliminations
    
    AWROperating revenues
    
    $
    37,461
    
    
    $
    7,627
    
    
    $
    1,281
    
    
    $
    305
    
    
    
    ($23
    )
    
    $
    46,651Operating income
(loss) before income
taxes
    
    
    6,350
    
    
    
    918
    
    
    
    111
    
    
    
    (887
    )
    
    
    
    
    
    
    6,492Interest expense, net
    
    
    3,789
    
    
    
    338
    
    
    
    122
    
    
    
    72
    
    
    
    
    
    
    
    4,321Identifiable assets
    
    
    540,212
    
    
    
    38,111
    
    
    
    31,767
    
    
    
    116
    
    
    
    
    
    
    
    610,206Depreciation and
amortization expense
    
    
    4,527
    
    
    
    410
    
    
    
    236
    
    
    
    4
    
    
    
    
    
    
    
    5,177Capital additions
    
    
    11,110
    
    
    
    1,738
    
    
    
    527
    
    
    
    24
    
    
    
    
    
    
    
    13,399
 (dollars in thousands)
    
    As of and for The Three Months Ended March 31, 2003SCWCCWC
    
    Non-
    
    ConsolidatedWater
    
    Electric
    
    Water
    
    Regulated*
    
    AWROperating revenues
    
    $
    38,169
    
    
    $
    7,004
    
    
    $
    1,256
    
    
    $
    247
    
    
    $
    46,676Operating income (loss) before income
taxes
    
    
    9,704
    
    
    
    (197
    )
    
    
    177
    
    
    
    (134
    )
    
    
    9,550Interest expense, net
    
    
    3,939
    
    
    
    351
    
    
    
    121
    
    
    
    154
    
    
    
    4,565Identifiable assets
    
    
    511,190
    
    
    
    26,890
    
    
    
    29,012
    
    
    
    57
    
    
    
    567,149Depreciation expense
    
    
    4,326
    
    
    
    392
    
    
    
    229
    
    
    
    
    
    
    
    4,947Capital additions
    
    
    7,294
    
    
    
    735
    
    
    
    390
    
    
    
    (10
    )
    
    
    8,409
 *  Includes amounts from ASUS and AWR. 21




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation Forward-Looking Information Certain matters discussed in this report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as Registrant believes, anticipates, expects or words
of similar import. Similarly, statements that describe Registrants future
plans, objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital
expenditures, earnings, litigation, rates, water quality and other regulatory
matters, adequacy of water supplies, SCWs ability to recover electric and
water supply costs from ratepayers, liquidity and capital resources, and
accounting matters. Actual results in each case could differ materially from
those currently anticipated in such statements, by reason of factors such as
changes in utility regulation, including ongoing local, state and federal
activities; future economic conditions, including changes in customer demand
and changes in water and energy supply cost; future climatic conditions; and
legislative, regulatory and other circumstances affecting anticipated revenues
and costs. See the section entitled Risk Factors for more information. General American States Water Company (AWR) is the parent company of Southern
California Water Company (SCW), American States Utility Services, Inc. (ASUS)
and Chaparral City Water Company (CCWC). SCW is a California public utility
company engaged principally in the purchase, production, distribution and sale
of water (SIC No. 4941). SCW also distributes electricity in one customer
service area (SIC No. 4911). SCW is regulated by the Public Utilities
Commission of the State of California (CPUC) and was incorporated on December
31, 1929. SCW is organized into one electric customer service area and three
water service regions operating within 75 communities in 10 counties in the
State of California and provides water service in 21 customer service areas.
Region I incorporates 7 customer service areas in northern and central
California; Region II has 4 customer service areas located in Los Angeles
County; Region III incorporates 10 water customer service areas in eastern Los
Angeles County, and in Orange, San Bernardino and Imperial counties. SCW also
provides electric service to the City of Big Bear Lake and surrounding areas in
San Bernardino County through its Bear Valley electric service division. SCW served 250,564 water customers and 22,327 electric customers at March
31, 2004, or a total of 272,891 customers, compared with 270,952 total
customers at March 31, 2003. SCWs utility operations exhibit seasonal trends. Although SCWs water
utility operations have a diversified customer base, residential and commercial
customers account for the majority of SCWs water sales and revenues. Revenues
derived from commercial and residential water customers accounted for
approximately 94.7% of total water revenues for the three months ended March
31, 2004 as compared to 94.7% for the three months ended March 31, 2003. AWR also owns two other subsidiaries. American States Utility Services,
Inc. (ASUS) contracts to lease, operate and maintain water and wastewater
systems owned by others and to provide related services, such as billing and
meter reading, to approximately 90,000 accounts. Chaparral City Water Company
(CCWC) is an Arizona public utility company serving 12,258 customers as of
March 31, 2004, compared with 11,625 customers at March 31, 2003. Located in
the town of Fountain Hills, Arizona and a portion of the City of Scottsdale,
Arizona, the majority of CCWCs customers are residential. The Arizona
Corporation Commission (ACC) regulates CCWC. Neither AWR nor ASUS is directly regulated by either the CPUC or the ACC. 22




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##### Table of Contents



Consolidated Results of Operations  Three Months Ended March 31, 2004 and 2003 3MOS
    
    3MOSENDED
    
    ENDED
    
    $
    
    %3/31/2004
    
    3/31/2003
    
    CHANGE
    
    CHANGEOPERATING REVENUESWater
    
    $
    38,742
    
    
    $
    39,425
    
    
    $
    (683
    )
    
    
    -1.7
    %Electric
    
    
    7,627
    
    
    
    7,004
    
    
    
    623
    
    
    
    8.9
    %Other
    
    
    282
    
    
    
    247
    
    
    
    35
    
    
    
    14.2
    %Total operating revenues
    
    
    46,651
    
    
    
    46,676
    
    
    
    (25
    )
    
    
    -0.1
    %OPERATING EXPENSESWater purchased
    
    
    8,881
    
    
    
    7,888
    
    
    
    993
    
    
    
    12.6
    %Power purchased for pumping
    
    
    1,717
    
    
    
    1,956
    
    
    
    (239
    )
    
    
    -12.2
    %Power purchased for resale
    
    
    4,829
    
    
    
    3,856
    
    
    
    973
    
    
    
    25.2
    %Unrealized (gain) loss on purchased power contracts
    
    
    (557
    )
    
    
    283
    
    
    
    (840
    )
    
    
    -296.8
    %Groundwater production assessment
    
    
    1,822
    
    
    
    1,667
    
    
    
    155
    
    
    
    9.3
    %Supply cost balancing accounts
    
    
    221
    
    
    
    958
    
    
    
    (737
    )
    
    
    76.9
    %Other operating expenses
    
    
    4,437
    
    
    
    4,040
    
    
    
    397
    
    
    
    9.8
    %Administrative and general expenses
    
    
    9,079
    
    
    
    7,524
    
    
    
    1,555
    
    
    
    20.7
    %Depreciation and amortization
    
    
    5,177
    
    
    
    4,947
    
    
    
    230
    
    
    
    4.6
    %Maintenance
    
    
    2,327
    
    
    
    1,950
    
    
    
    377
    
    
    
    19.3
    %Taxes on income
    
    
    942
    
    
    
    1,995
    
    
    
    (1,053
    )
    
    
    -52.8
    %Other taxes
    
    
    2,226
    
    
    
    2,057
    
    
    
    169
    
    
    
    8.2
    %Total operating expenses
    
    
    41,101
    
    
    
    39,121
    
    
    
    1,980
    
    
    
    5.1
    %Operating income
    
    
    5,550
    
    
    
    7,555
    
    
    
    (2,005
    )
    
    
    -26.5
    %OTHER INCOME  NET
    
    
    (83
    )
    
    
    
    
    
    
    (83
    )
    
    
    -100.0
    %INTEREST CHARGES
    
    
    4,321
    
    
    
    4,565
    
    
    
    (244
    )
    
    
    -5.3
    %NET INCOME
    
    $
    1,146
    
    
    $
    2,990
    
    
    $
    (1,844
    )
    
    
    -61.7
    %
 Net income for the three months ended March 31, 2004 decreased 61.7% to
$1.1 million, equivalent to $0.08 per common share on a basic and fully diluted
basis, compared to $3.0 million or $0.20 per share for the three months ended
March 31, 2003. The decrease in recorded results underscores the importance of
receiving adequate and timely rate increases from the CPUC. Registrant had
anticipated an increase in the Region III customer service area of SCW,
effective the beginning of the fourth quarter of 2003. In fact, that rate
increase was not effective until March 22, 2004. The delay resulted in lost
revenues of approximately $2 million or $0.08 per share for the first quarter.
Exacerbating the delay in revenues was an increase in supply costs due to more
purchased water in SCWs resource mix that negatively impacted earnings by $1
million or $0.04 per share. Furthermore, changes in weather conditions
experienced this year as compared to the same time last year resulted in a
decrease in water demand. Operating Revenues For the three months ended March 31, 2004, revenues from water operations
decreased by 1.7% to $38.7 million, compared to $39.4 million for the three
months ended March 31, 2003. Lower water revenues reflect a decrease of 3% in
water consumption resulting from changes in weather conditions. Differences in
temperature and rainfall in Registrants service areas impact sales of water to
customers, 23




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##### Table of Contents



causing fluctuations in Registrants revenues and earnings between
comparative periods. The decrease in consumption was offset by two rate
increases for SCWs Region II, effective on January 21, 2003 and February 4,
2003, respectively. These two rate increases are expected to generate
additional revenues of approximately $6.2 million annually. For the three months ended March 31, 2004, revenues from electric
operations increased by 8.9% to $7.6 million compared to $7.0 million for the
three months ended March 31, 2003. The increase
reflects an increase of 3% in kilowatt-hour consumption and an increase in
on-peak consumption which resulted in higher on-peak demand charges for the
industrial customers. Other operating revenues consist of nonregulated water related services
and operations on a contract basis ranging from services such as billing and
meter reading, to full operation of water utility related systems, all
performed by AWRs subsidiary, American States Utility Services, Inc. (ASUS).
For the three months ended March 31, 2004, other operating revenues
increased by 14.2% to $282,000 compared to $247,000 for the three months ended
March 31, 2003 due to the addition of a new meter reading contract with the
City of Santa Fe Springs which increased revenues by approximately $15,000.
ASUS is pursuing growth and new business development for AWR, most specifically
in the area of privatization of water and wastewater systems at military bases.
As such, ASUS has carefully reviewed growth opportunities and exercised
prudence in the pursuit of increased revenues and earnings from contract
operations that are congruent with AWRs core competencies. ASUS has been an
active participant in the privatization of military bases, currently with 9
active bids for such opportunities. To date, ASUS has received preliminary
notification that it will be awarded a 50-year contract to own and operate the
water and wastewater systems at Ft. Bliss, located near El Paso, Texas. ASUS
plans to continue to bid on and negotiate for other military bases during 2004.
ASUS has also worked to develop an operating contract for the water services in
a rapidly developing area presently served by a mutual water company in
northern California. ASUS anticipates signing definitive agreements in 2004
and expects development to take place in this area beginning in 2005. Registrant relies upon rate approval by state regulatory agencies in
California and Arizona, in order to recover operating expenses and provide for
a return on invested and borrowed capital used to fund utility plant. Without
such adequate rate relief granted in a timely manner, revenues and earnings can
be negatively impacted. Operating Expenses For the three months ended March 31, 2004, purchased water costs increased
by 12.6% to $8.9 million compared to $7.9 million for the three months ended
March 31, 2003. The increase is due primarily to additional purchased water
necessary during the three months ended March 31, 2004 to replace groundwater
supply lost due to wells being removed from service as a result of water
quality issues and mechanical problems, particularly in SCWs Metropolitan and
Foothill districts which together increased the cost of purchased water by $1.0
million. Changes in the water resource mix between water supplied from
purchased sources and that supplied from Registrants own wells can increase
actual supply-related costs relative to that approved for recovery through
rates, thereby impacting earnings either negatively or positively. Registrant
has the opportunity to change the supply-related costs recovered through rates
by application to the appropriate regulatory body. Registrant believes that its
applications for recovery of supply-related costs accurately reflect the water
supply situation as it is known at the time. However, it is impossible to
adequately protect earnings from adverse changes in supply costs related to
unforeseen contamination. For the three months ended March 31, 2004, 45% of
our supply mix was purchased water as compared to 43% purchased water for the
three months ended March 31, 2003. For the three months ended March 31, 2004, cost of power purchased for
pumping decreased by 12.2% to $1.7 million compared to $2.0 million for the
three months ended March 31, 2003 due to lower consumption and additional wells
down for maintenance and water quality issues. 24




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##### Table of Contents



For the three months ended March 31, 2004, cost of power purchased for
resale to customers in SCWs Bear Valley Electric division increased by 25.2%
to $4.8 million compared to $3.9 million for the three months ended March 31,
2003. The increase was due primarily to the reversal of a $644,000 gain
generated from a one-time sale of energy on the spot market in April 2001. The
gain, which was previously recorded in April 2001 to the supply cost balancing
account, was ordered by the Federal Energy Regulatory Commission (FERC) in
March 2004 to be refunded, plus interest, to Mirant
Marketing. The FERCs order responded to a complaint filed by Mirant
Marketing where Mirant Marketing, the purchaser of the energy, was seeking to
be refunded all or a portion of the gain. This refund increased the cost of
power purchased for resale during the three months ended March 31, 2004, with a
corresponding amount booked to the provision for supply cost balancing account
which resulted in no net impact on earnings. The sale of excess energy on the
spot market in 2001 resulted from a one-month overlap of energy purchase
agreements. Unrealized gain and loss on purchased power contracts represents gains and
losses recorded for SCWs purchased power agreements with Pinnacle West Capital
Corporation (PWCC), which qualify as a derivative instruments under Statement
of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative
Instruments and Hedging Activities". The $557,000 pre-tax unrealized gain on
purchased power contracts for the three months ended March 31, 2004 is due to
an increase in the current forward market prices since December 31, 2003.
Unrealized gains and losses at Bear Valley Electric will continue to impact
earnings during the life of the contract with PWCC, through August, 2008. For the three months ended March 31, 2004, groundwater production
assessments increased by 9.3% to $1.8 million compared to $1.7 million for the
three months ended March 31, 2003 due to increases in assessment rates levied
against groundwater production, effective July 2003, offset by a decrease in
pumped water. The decrease in pumped water was due primarily to wells in the
Metropolitan and Foothill districts being down for maintenance and water
quality reasons, which resulted in increased purchased water and less pumping. A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. A decrease of $737,000
during the three months ended March 31, 2004 in the provision for supply cost
balancing accounts as compared to the three months ended March 31, 2003
primarily reflects the $644,000 refund to Mirant Marketing previously discussed
in cost of power purchased for resale. For the three months ended March 31, 2004, other operating expenses
increased by 9.8% to $4.4 million compared to $4.0 million for the three months
ended March 31, 2003 due primarily to higher labor, chemicals and water
treatment costs which increased by almost $300,000. For the three months ended March 31, 2004, administrative and general
expenses increased by 20.7% to $9.1 million compared to $7.5 million for the
three months ended March 31, 2003 due primarily to (i) approximately $483,000
increase in outside legal and consulting services incurred in connection with
new business development, most specifically in the area of privatization of
water and wastewater systems at military bases, (ii) approximately $680,000
increase in pensions and benefits due to actuarial assumption changes in the
discount rate and expected long-term rate of return on plan assets, and
increases in various benefit costs, and (iii) an increase in labor costs of
approximately $380,000. Registrant believes that prudent administrative
expenses incurred in the operation and management of its regulated subsidiaries
will be recovered through water and electric rates. Registrant plans through its non-regulated subsidiary, American States
Utility Services, Inc., to continue with the analysis and preparation of bids
for submission to the Department of Defense (DOD) 25




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##### Table of Contents



pursuant to DODs initiative to privatize the water and wastewater assets and operations of
military bases. The analysis and preparation of these bids is an extensive
process and, as such, Registrant expects to incur approximately $2 million in
legal and consulting expenses in 2004 for such efforts due to the volume of
Requests for Proposals available from the DOD. Registrant expects that it will
be awarded its first privatization of a military base during 2004 and will
enter into negotiations for several other bases as well. For the three months ended March 31, 2004, depreciation and amortization
expense increased by 4.6% to $5.2 million compared to $4.9 million for the
three months ended March 31, 2003 reflecting, among other things, the effects
of recording approximately $35 million in utility plant during 2003,
depreciation on which began in January 2004. Registrant anticipates that
depreciation expense will continue to increase due to Registrants on-going
construction program at its regulated subsidiaries. Registrant believes that
depreciation expense related to property additions approved by the appropriate
regulatory agency will be recovered through water and electric rates. For the three months ended March 31, 2004, maintenance expense increased
by 19.3% to $2.3 million compared to $2.0 million for the three months ended
March 31, 2003 due principally to increased maintenance on SCWs wells and
water supply sources and maintenance of water mains. For the three months ended March 31, 2004, taxes on income decreased by
52.8% to $942,000 compared to $2.0 million for the three months ended March 31,
2003 due primarily to lower pre-tax operating income. The effective income tax
rate (ETR) applicable to the first quarter results of 2004 reflects an
increase of approximately two percentage points, from 40.6% to 42.5% (an
approximately four percent increase in the ETR), compared to the first quarter
results of 2003. This is a result of differences that are added to book income
to arrive at taxable income that are permanent in nature and that are treated
as flow-through items increasing in the first quarter of 2004 as compared to
the first quarter of 2003, while pre-tax book income decreased. For the three months ended March 31, 2004, other taxes increased by 8.2%
to $2.2 million compared to $2.1 million for the three months ended March 31,
2003 reflecting additional property taxes resulting from higher assessed
values, and increases in payroll taxes based on increased labor costs. Other Income (Loss) For the three months ended March 31, 2004, other income decreased to an
$83,000 loss compared to other income and loss that netted to zero for the
three months ended March 31, 2003. The net decrease reflects a CPUC decision
on March 16, 2004 that ordered SCW to refund to its customers, amounts of lease
revenues received from the City of Folsom to customers. Pursuant to the order,
the apportionment of any lease revenues that SCW may collect in the future will
be determined by a later decision. All amounts billed to the City of Folsom
are included in a regulatory liability account. During the three months ended
March 31, 2003, approximately $263,000 was billed to the City of Folsom and
recorded in other income. Amounts invoiced during the three months ended March
31, 2004 of approximately $269,000 were reported as a regulatory liability.
The decrease was offset by decreases in taxes of approximately $147,000. Interest Charges For the three months ended March 31, 2004, interest expense decreased by
5.3% to $4.3 million compared to $4.6 million for the three months ended March
31, 2003 due primarily to repayment of $12.5 million long-term debt in October
of 2003 and recovery of carrying cost for water quality OII matter authorized
by the CPUC, partially offset by increases in short-term borrowing. Registrant
anticipates that interest costs will increase in future periods due to the need
for additional external capital to fund its construction program and to the
likelihood that interest rates will be increasing generally and due to the
recent downgrade of AWRs credit rating by Standard & Poors Ratings Service
(S&P) from A+ to A- 26




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with a negative outlook. Registrant believes that costs
associated with capital used to fund construction at its regulated subsidiaries
will continue to be recovered in water and electric rates charged to customers. S&P debt ratings range from AAA (highest rating possible) to D (obligation
is in default). Critical Accounting Policies Critical accounting policies 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. These judgments are based on AWRs historical experience, terms of
existing contracts, AWRs observance of trends in the industry, information
provided by customers and information available from other outside sources, as
appropriate. Actual results may differ from these estimates under different
assumptions or conditions. The critical accounting policies used in the preparation of the
Registrants financial statements that we believe affects the more significant
judgments and estimates used in the preparation of our consolidated financial
statements presented in this report are described in the Managements
Discussion and Analysis of Financial Condition and Results of Operation
included in our Annual Report on Form 10-K for the year ended December 31,
2003. There have been no material changes to the critical accounting policies. Liquidity and Capital Resources AWR Net cash provided by operating activities was $19.1 million for the three
months ended March 31, 2004 as compared to $13.2 million for the three months
ended March 31, 2003. The increase of $5.9 million was primarily attributable
to the receipt of $8.7 million from Aerojet in connection with the Memorandum
of Understanding (MOU), offset by the timing of cash receipts and disbursements
related to working capital items. (For more information about the MOU, see the
section entitled Environmental Matters included in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation). Net cash used in investing activities was $13.4 million for the three
months ended March 31, 2004 as compared to $8.4 million for the three months
ended March 31, 2003 due to higher capital expenditures consistent with
budgeted increases. Net cash used in financing activities was $9.5 million for the three
months ended March 31, 2004 as compared to $6.8 million for the three months
ended March 31, 2003. The increase was due primarily to an increase of $4
million in short-term bank borrowing against the revolving credit line, offset
by a $1.1 million decrease in receipt of advances for and contributions in aid
of construction. AWR funds its operating expenses and pays dividends on its outstanding
Common Shares primarily through dividends from its subsidiaries, principally
SCW. AWR has a Registration Statement on file with the Securities and Exchange
Commission (SEC) for issuance, from time to time, of up to $60 million in
Common Shares, Preferred Shares and/or debt securities. As of March 31, 2004,
approximately $31.1 million remained for issuance under this Registration
Statement. In June 2002, AWR established a $75 million revolving credit facility,
which matures in June 2005. Up to $15 million of this facility may be used for
letters of credit. As of March 31, 2004, an aggregate of $47 million in cash
borrowing included in current liabilities and approximately $7.5 million 27




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of letters of credit were outstanding under this facility. The credit agreement
for this facility includes, among other things, certain financial covenants.
One of those covenants is maintenance of an interest coverage ratio of at least
3.25x, as defined and calculated in the credit agreement, based on trailing
twelve-month results. The Company violated this interest coverage ratio for the
trailing twelve-month period ended March 31, 2004 and has requested and
received a waiver from its lending syndicate, which excludes in the
calculation, certain charges booked by SCW following certain CPUC decisions.
The waiver cured the default at March 31, 2004 and allowed for the exclusion
of those charges from the calculation of the trailing twelve-month interest
coverage ratio through September 30, 2004. SCW Net cash provided by operating activities was $20.2 million for the three
months ended March 31, 2004 as compared to $13.3 million for the three months
ended March 31, 2003. The increase of $6.9 million in cash provided by
operations was primarily attributable to the receipt of $8.7 million from
Aerojet in connection with the MOU, offset by the timing of cash receipts and
disbursements related to working capital items. Net cash used in investing activities increased to $12.8 million for the
three months ended March 31, 2004 as compared to $8.0 million for the same
period of 2003 due to increased capital expenditures consistent with budgeted
increases. Net cash used in financing activities was $12.4 million for the three
months ended March 31, 2004 as compared to $9.8 million for the three months
ended March 31, 2003, reflecting primarily an increase of $3.9 million in
intercompany borrowings. SCW funds the majority of its operating expenses, payments on its debt,
and dividends on its outstanding Common Shares 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, environmental regulation, litigation,
changes in supply costs and regulatory decisions affecting SCWs ability to
recover these supply costs, and timing of rate relief. For further information,
see the sections entitled Risk Factors and Electric Energy Situation in
California included in Part I, Item 2 in Managements Discussion and Analysis
of Financial Condition and Results of Operation. SCW also relies on external sources, including equity investments and
short-term borrowings from AWR, long-term debt,
contributions-in-aid-of-construction, advances for construction and
install-and-convey advances, to fund the majority of its construction
expenditures. CCWC CCWC funds the majority of its operating expenses, payments on its debt
and dividends, if any, through internal sources. CCWC also relies on external
sources, including long-term debt, contributions-in-aid-of-construction,
advances for construction and install-and-convey advances, to fund the majority
of its construction expenditures. ASUS ASUS funds its operating expenses primarily through contractual management
fees and investments by or loans from AWR. 28




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Contractual Obligations and Other Commitments In addition to contractual maturities, Registrant has certain debt
instruments that contain annual sinking fund 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 principal interest payments are generally made from cash flow from
operations. In the case of the $12,500,000 in notes that were due October 2003,
SCW used proceeds from short-term borrowings, which it intends to repay or
refinance through the issuance of notes in the public or private markets. The following table reflects Registrants contractual obligations and
commitments to make future payments pursuant to contracts as of March 31, 2004.
All obligations and commitments are obligations and commitments of SCW unless
otherwise noted. ($ in thousands)
    
    Payments/Commitments Due by Period (1)Less than 1Total
    
    Year
    
    1-3Years
    
    4-5 Years
    
    After 5 YearsNotes/Debentures(2)
    
    $
    173,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    173,100Private Placement Notes(3)
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000Tax-Exempt Obligations(4)
    
    
    18,886
    
    
    
    76
    
    
    
    163
    
    
    
    189
    
    
    
    18,458Other Debt Instruments(5)
    
    
    2,218
    
    
    
    183
    
    
    
    430
    
    
    
    459
    
    
    
    1,146Advances for Construction(6)
    
    
    79,313
    
    
    
    3,025
    
    
    
    5,314
    
    
    
    4,500
    
    
    
    66,474Purchased Power Contracts(7)
    
    
    56,185
    
    
    
    11,973
    
    
    
    23,947
    
    
    
    20,265
    
    
    
    Unconditional purchase
obligations(8)
    
    
    11,057
    
    
    
    11,057
    
    
    
    
    
    
    
    
    
    
    
    Operating leases(9)
    
    
    6,162
    
    
    
    2,013
    
    
    
    3,009
    
    
    
    1,136
    
    
    
    4Employer contributions(10)
    
    
    19,462
    
    
    
    4,215
    
    
    
    7,170
    
    
    
    8,077
    
    
    
    Other Commitments(11)
    
    
    48,491
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Chaparral City Water Co(12)
    
    
    8,206
    
    
    
    560
    
    
    
    781
    
    
    
    580
    
    
    
    6,285TOTAL
    
    $
    451,080
    
    
    $
    33,102
    
    
    $
    40,814
    
    
    $
    35,206
    
    
    $
    293,467
  (1)
    
    Excludes interest, dividends, commitment, and facility fees.(2)
    
    The Notes and Debentures are issued under an Indenture dated as of
September 1, 1993. The Notes and Debentures do not contain any financial
covenants that Registrant believes to be material, or cross default
provisions.(3)
    
    The private placement notes are issued pursuant to the terms of Note
Agreements with substantially similar terms. The Note Agreements contain
restrictions on the payment of dividends, minimum interest coverage
requirements, maximum debt to capitalization ratio and a negative pledge.
Pursuant to the Note Agreements, SCW must maintain a minimum interest
coverage ratio of two times interest expense. SCW does not currently have
any outstanding mortgages or other encumbrances on its properties.(4)
    
    Consists of obligations under a loan agreement supporting $8 million in
debt issued by the California Pollution Control Financing Authority, $6
million in obligations supporting $6 million in certificates of
participation issued by the Three Valleys Municipal Water District and
$5.5 million of obligations incurred by SCW with respect to its 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. SCWs obligations with
respect to the certificates of participation issued by the Three Valleys
Municipal Water District are supported by a letter of credit issued by 29




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##### Table of Contents



Wells Fargo Bank. In regards to its SWP entitlement, SCW has entered into
agreements with various developers for 422 acre-feet, in aggregate, of its
500 acre-foot entitlement to water from the SWP.(5)
    
    Consists of $1.5 million outstanding under a fixed rate obligation
incurred to fund construction of water storage and delivery facilities
with the Three Valleys Municipal Water District, $0.6 million outstanding
under a variable rate obligation incurred to fund construction of water
delivery facilities with the Three Valleys Municipal Water District and an
aggregate of $0.4 million outstanding under capital lease obligations.
These obligations do not contain any financial covenants believed to be
material to Registrant or any cross default provisions.(6)
    
    Advances for construction represent annual contract refunds to developers
for the cost of water systems paid for by the developers. The advances
are generally refundable at rates ranging from 10% to 22% of the revenue
received from the installation for which funds were advanced or in equal
annual installments over periods of time ranging from 10 to 40-year
periods.(7)
    
    Consists of the remaining balance of the purchased power contracts from
November 2002 to December 2008.(8)
    
    Consists of noncancelable commitments primarily for capital projects
under signed contracts.(9)
    
    Reflects Registrants future minimum payments under non-cancelable
operating leases.(10)
    
    Registrants expected contributions (all by employer) for its pension and
postretirement plans are approximately $3,315,000 and $900,000,
respectively, for the year ended December 31, 2004. These amounts are
subject to change based on, among other things, the limits established for
federal tax deductibility (pension plan). In addition, for years after
2004, Registrant has included as an obligation the estimated minimum
required contributions to its pension plan computed by its actuary. These
amounts are subject to change based on the significant impact that returns
on plan assets and changes in discount rates might have on such amounts.(11)
    
    Other commitments consist of (i) $75 million syndicated revolving credit
facility, expiring in June 2005 of which $47.0 million is outstanding as
of March 31, 2004, (ii) an amount of $296,000 with respect to a $6,296,000
irrevocable letter of credit issued by Wells Fargo Bank to support the
certificates of participation of Three Valleys Municipal Water District
(the other $6,000,000 is reflected under tax-exempt obligations), (iii) an
irrevocable letter of credit in the amount of $600,000 that expires on
October 2004 for the deductible in Registrants business automobile
insurance policy (v) an irrevocable letter of credit that expires March
31, 2005 for its energy scheduling agreement with Automated Power Exchange
as security for the purchase of power; the amount of the credit is
$585,000 for the months from November to March, and $270,000 to cover the
months from April to October, and (vi) outstanding performance bonds of
$9,550 to secure performance under franchise agreements with governmental
agencies. All of the letters of credit are issued pursuant to the
syndicated revolving credit facility. The syndicated revolving credit
facility contains restrictions on prepayments, disposition of property,
mergers, liens and negative pledges, indebtedness and guaranty
obligations, transactions with affiliates, minimum interest coverage
requirements, a maximum debt to capitalization ratio, and a minimum debt
rating. Pursuant to the Credit Agreement, AWR must maintain a minimum
interest coverage ratio of 3.25 times interest expense, a maximum total
funded debt ratio of 0.65 to 1.00 and a minimum debt rating of Baa1 or
BBB+. The Company violated the interest coverage ratio for the trailing
twelve-month period ended March 31, 2004 and has requested and received a
waiver from its lending syndicate, which excludes in the calculation,
certain charges booked by SCW following certain CPUC decisions. The
waiver cured the default at March 31, 2004 and allowed for the exclusion
of those charges from the calculation of the trailing twelve-month
interest coverage ratio through September 30, 2004. 30




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(12)
    
    Consists of $7.9 million of obligations under a loan agreement supporting
Industrial Development Revenue Bonds due in 2006 and a $1.0 million
repayment obligation to the United States Bureau of Reclamation. The loan
agreement contains provisions that establishes a maximum of 65% debt in
the capital structure, limits cash distributions when the percentage of
debt in the capital structure exceeds 55% and requires a debt service
coverage ratio of two times. The Bureau of Reclamation obligation does not
contain any financial covenants believed to be material to Registrant or
any cross default provisions. Under the terms of its power purchase contracts with Mirant Marketing and
PWCC, SCW is required to post security, at the request of the seller, if SCW is
in default under the terms of the contract and the future value of the contract
is greater than the future value of contracts of a similar term on the date of
default. SCW will be in default under the terms of these contracts if its debt
is rated less than BBB- by Standard & Poors Ratings Service (S&P) or Fitch,
Inc. (Fitch) or less than Baa3 by Moodys Investor Services, Inc (Moodys).
SCW currently has a rating of A- by S & P and A2 by Moodys, in each case with
a negative outlook. Fitch does not rate SCW. S&P debt ratings range from AAA (highest rating possible) to D (obligation
is in default). Moodys debt ratings range from Aaa (best quality) to C (lowest
quality). 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
agency. Electric Energy Situation in California Background Information On January 17, 2001, the Governor of the State of California proclaimed a
state of emergency in California due to shortages of electricity available to
certain of Californias utilities (resulting in blackouts), the unanticipated
and dramatic increases in electricity prices and the insufficiency of
electricity available from certain of Californias utilities to prevent
disruption of electric service in California. The Federal Energy Regulatory
Commission (FERC) also implemented a number of changes to the tariff for the
California Independent Operator System (Cal ISO) beginning in December 15,
2000 in an attempt to stabilize the market. The reasons for the high cost of
energy are under investigation but are reported to include, among other things,
limited supply caused by a lack of investment in new power plants to meet
growth in demand, planned and unplanned outages of power plants, decreased
availability of hydroelectric power from the Pacific Northwest due to lower
than usual precipitation and higher demand for electricity in the region,
transmission line constraints, increased prices for natural gas, the fuel used
in many of the power plants serving the region, a dysfunctional power market
and market manipulation through the withholding of generation and a variety of
gaming strategies. As of March 31, 2004, SCW had accrued $22.7 million in under-collected
power costs that SCW mostly incurred during the energy crisis in connection
with providing service to its Bear Valley Electric customers. SCW is
authorized to include up to a weighted annual energy purchase cost of $77 per
MWh each year through August, 2011 in its electric supply cost balancing
account. To the extent that actual weighted average annual cost for power
purchased exceeds the $77 per MWh amount, SCW will not be able to include these
amounts in its balancing account and such amounts will be expensed, unless the
CPUC approves adjustments. 31




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Power Supply Arrangements at SCWs Bear Valley Electric Service Area All electric energy sold by SCW to customers in its Bear Valley Electric
customer service area is purchased from others. Under the terms of contracts
with Dynegy Power Marketing, Inc. (Dynegy) that expired on April 30, 2001,
Dynegy provided electric energy to SCW, acted as scheduling coordinator and
provided other ancillary services. Beginning April 1, 2001, SCW entered into a
five-year and nine-month, block forward purchase contract with Mirant Marketing
for 15 MWs of electric energy at a price of $95 per MWh through December 31,
2006. Mirant Marketing filed a complaint with the FERC seeking to be refunded
all or a portion of the gain, $644,000, from Registrants sale of excess energy
on the spot market in 2001 resulted from a one-month overlap of energy purchase
agreements. In March 2004, the FERC issued an order that SCW is to refund the
$644,000, plus interest, to Mirant Marketing. This refund increased the cost
of power purchased for resale during the three months ended March 31, 2004,
with a corresponding amount booked to the provision for supply cost balancing
account. On December 20, 2001, SCW filed a complaint with FERC seeking to reduce
the amount charged by Mirant Marketing under the terms of this contract to a
just and reasonable price. In June 2003, the FERC issued a final order denying
SCWs complaint. On November 10, 2003, the FERC denied SCWs rehearing request.
SCW is currently reviewing its options with respect to the FERCs latest order
denying rehearing and is determining if it will appeal the decision in Federal
Court. On July 14, 2003, Mirant Marketing announced that, to facilitate its
financial restructuring, it filed voluntary petitions for reorganization under
Chapter 11 of the U.S. Bankruptcy Code. At this time, Registrant expects no
interruption in the delivery of electric energy under the Mirant Marketing
contract. In June 2001, SCW executed an agreement with PWCC for an additional 8 MWs
of electric energy to meet peak winter demands. The contract provided for
pricing of $75 per MWh from November 1, 2001 to March 31, 2002, $48 per MWh
from November 1, 2002 to March 31, 2003 and $36 per MWh from November 1, 2003
to March 31, 2004. In September 2002, SCW entered into a series of purchased power contracts
with PWCC. Under the agreements, SCW will sell 15 MWs to PWCC of electric
energy at a price of $95 per MWh beginning November 1, 2002 through December
31, 2006, and the 8 MWs of electric energy covered under the energy purchase
agreement with PWCC discussed previously. In return, PWCC will supply SCW with
15 MWs of electric energy at a price of $74.65 per MWh beginning November 1,
2002 through December 31, 2008, and an additional 8 MWs at $74.65 per MWh
beginning on November 1, 2002 through March 31, 2003 and each succeeding
November 1 through March 31 period through March 31, 2008, and for the period
November 1, 2008 through December 31, 2008. The average minimum monthly load at SCWs Bear Valley Electric customer
service area has been approximately 12 MWs. The average winter load has been 18
MWs with a winter peak of 39 MWs when the snowmaking machines at the ski
resorts are operating. In addition to the power purchase contracts, SCW buys
additional energy from the spot market to meet peak demand and sells surplus
power to the spot market as well. The average cost of power purchased,
including the transactions in the spot market, was approximately $81.3 per MWh
for the three months ended March 31, 2004 as compared to $80.5 per MWh for the
same period of 2003. SCWs average energy costs are impacted by pricing
fluctuations on the spot market. 32




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Transmission Constraints Demand for energy in SCWs Bear Valley Electric customer service area
generally has been increasing. However, the ability of SCW to deliver purchased
power to these customers is limited by the ability of the transmission
facilities owned by Southern California Edison Company (Edison) to transmit
this power. On December 27, 2000, SCW filed a lawsuit against Edison for breach
of contract as a result of delays in upgrading these transmission facilities as
well as for violations of good faith and fair dealing, negligent
misrepresentation, intentional misrepresentation and unjust enrichment. A
settlement has been reached between SCW and Edison, in which (i) SCW is to pay
$5 million project abandonment fee to Edison, (ii) Edison will file an
application to the FERC for approval of the entire $5.0 million settlement
payment as abandoned project costs to be in Edisons wholesale rate to SCW over
a 15 year period, and (iii) Edison is to sell the Goldhill substation and
associated transmission line to SCW at its book value. Management believes
that the FERCs approval of Edisons filing is probable and the abandonment
costs included in Edisons wholesale rate to SCW are recoverable through rates.
As a result, the $5.0 million obligation to Edison arising from this
settlement was recorded as a liability and a regulatory asset in the fourth
quarter of 2003. The settlement agreement was signed March 17, 2004 and
required the first payment of $1.4 million to be made to Edison during the
first quarter of 2004. New Generation Facility As a means of meeting these increasing demands for energy, SCW is
constructing a natural gas-fueled 8.4 MW generation facility to be owned by
SCW. A Certificate of Public Convenience and Necessity filed with the CPUC
seeking authorization for construction of the generation facility was approved
on July 10, 2003. It is expected that the generator will be on line during the
second quarter of 2004, and should assist SCW in controlling its spot purchase
prices, as discussed above. Southern California Wild Fires The October 2003 wild fires in Southern California had limited impact on
SCW. While the firestorms approached several water customer service areas, SCW
experienced minimal damage to its water facilities. In SCWs Bear Valley
Electric area, located in the mountains north of Los Angeles, electric service
was maintained throughout the fire event in spite of isolated damage to certain
electric distribution facilities. SCW will be filing with the CPUC for recovery
of the extra expenses incurred in meeting these community needs. These costs
are being accumulated in Catastrophic Event Memorandum Accounts (CEMA) and will
be amortized pursuant to prescribed procedures after review by the CPUC. Construction Program SCW maintains an ongoing water distribution main replacement program
throughout its customer service areas based on the priority of leaks detected,
fire protection enhancement and a reflection of the underlying replacement
schedule. In addition, SCW upgrades its electric and water supply facilities in
accordance with industry standards, local requirements and CPUC requirements.
SCWs Board of Directors has approved anticipated net capital expenditures of
approximately $61.7 million for 2004 principally reflecting water supply
related projects such as drilling and equipping of new wells, building a new
reservoir, and distribution and street improvement projects. As of March 31,
2004, SCW has unconditional purchase obligations for capital projects of
approximately $11.1 million. CCWCs Board of Directors has approved a net capital budget of $3.1
million for 2004 primarily reflecting a new treatment plant addition and
distribution improvements to its Golden Eagle Plant. 33




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##### Table of Contents



AWR and ASUS have no material capital commitments. However, ASUS actively
seeks opportunities to own, lease or operate water and wastewater systems for
governmental entities, which may involve significant capital commitments. Registrant does not have any material capital expenditures for specific
environmental control facilities or measures. Regulatory Matters Rate Regulation SCW is subject to regulation by the CPUC, which has broad powers with
respect to service and facilities, rates, classifications 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. CCWC is
subject to regulation by the ACC. Rates that SCW and CCWC are authorized to charge are determined by the
CPUC and the ACC, respectively, in general rate cases and are derived using
rate base, cost of service and cost of capital, as projected for a future test
year in California and using an historical test year, as adjusted in Arizona.
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 return on rate base. Rate base generally consists
of the original cost of utility plant in service, construction
work-in-progress, 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 such as advances and
contributions in aid of construction. Neither AWR nor ASUS are directly regulated by the CPUC. The CPUC does,
however, regulate certain transactions between SCW and its affiliates. The ACC
also regulates certain transactions between CCWC and its affiliates. For rate-making purposes, the 22 customer service areas of SCW are grouped
into 9 water districts and 1 electric district. Water rates vary among the 9
water ratemaking districts due to differences in operating conditions and
costs. SCW monitors operations on a regional basis in each of these districts
so that applications for rate changes may be filed, when warranted. Under the
CPUCs practices, rates may be increased by three methods: (i) general rate
case increases (GRCs), (ii) offsets for certain expense increases including
but not limited to supply cost offset and balancing account amortization, and
(iii) advice letter filings related to certain plant additions and other
operating cost increases. GRCs are typically for three-year periods, which
include step increases for the second and third year. Rates are based on a
forecast of expenses and capital costs. GRCs have a typical regulatory lag of
one year. Offset rate increases and advice letter filings typically have a two
to four month regulatory lag. Changes in Rates On January 16, 2003, the CPUC approved rate increases of approximately
$2.7 million annually, effective January 22, 2003, in SCWs Metropolitan
district to recover costs associated with an increase in Region II rate base
due to SCWs 2002 infrastructure replacement program and, additionally, to
recover general increases in operating expenses. On January 31, 2003, the CPUC
also approved SCWs Advice Letter filed for the 2003 infrastructure replacement
program with rate increases of $3.5 million annually effective February 4,
2003. 34




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In October 2002, SCW filed an application to increase water rates in the
customer service areas that comprise Region III. SCW also filed a concurrent
application requesting a rate increase applicable to SCWs entire customer base
to recover costs associated with the general office functions of SCW. On March
16, 2004, the CPUC issued its Region 3 decision, under which (i) new water
rates will generate an initial annual increase in revenues of approximately
$8.1 million, (ii) a special condition surcharge in rates is approved to
amortize the water quality OII memorandum account balance, and (iii) SCW is
authorized to establish a memorandum account to accumulate costs to comply with
certain contamination remediation requirements. Based on the decision, SCW
reversed an $890,000 OII reserve and a $1.0 million water quality related
reserves into income during the fourth quarter of 2003. In 1994, SCW entered a contract to lease, to the City of Folsom, 5,000
acre-feet per year of water rights to the American River and has included all
associated revenues in a non-operating income account. The issue was raised by
the ORA in the Region III proceeding. In a decision issued on March 16, the
CPUC determined that SCW failed to seek the CPUCs approval to effectuate the
lease and is to pay a net fine of $180,000. The decision also orders SCW to
refund 70 percent of the total amount of lease revenues since 1994, plus
interest, to customers. Pursuant to the order, SCW recorded $6.2 million as a
regulatory liability with a corresponding charge against income (less taxes)
during the fourth quarter of 2003. Management disagrees with the CPUCs
decision and has appealed the decision in which it will vigorously defend its
position. During the three months ended March 31, 2004, SCW recorded an
additional $269,000 of lease payments subject to refund. Pursuant to the order,
the apportionment of any lease revenues that SCW may collect in the future will
be determined by a later decision. Beginning in the first quarter of 2004, all
amounts billed to the City of Folsom are included in a regulatory liability
account. As of March 31, 2004, SCW had accrued approximately $22.7 million in
under-collected purchased power costs included in its Bear Valley Electric
balancing account. In 2001, the CPUC approved two Advice Letters which allow
SCW to collect $11.1 million in aggregate over five years, equivalent to 2.2¢
per kilowatt hour, for recovery of its under-collection in the electric
balancing account. On July 17, 2002, CPUC approved a settlement agreement reached among SCW,
all intervening parties and the Office of Ratepayer Advocates (ORA). The
authorization permits SCW to recover $77 per MWh of purchased power costs
through rates. SCW is allowed to include its actual purchased power costs up to
an average annual weighted cost of $77 per MWh each year, through August 2011,
in its balancing account. To the extent SCWs actual average annual weighted
cost for purchased power is less than $77 per MWh, the differential would
offset amounts included in the electric supply balancing account. Conversely,
to the extent that actual average annual weighted costs for power purchased
exceed the $77 per MWh amount, SCW would not be able to include these amounts
in its balancing account and such amounts would be expensed. The CPUC settlement also extended the previously approved surcharges of
2.2¢ per kilowatt hour for an additional five years through August of 2011 to
allow SCW an opportunity to collect amounts remaining in its electric cost
balancing account. SCW anticipates that electricity sales will be sufficient to
enable SCW to fully recover the under-collection in its balancing account
during this period. The CPUC settlement requires SCW to pursue its complaint filed with FERC
in which SCW has requested FERC to reduce the prices in its power purchase
contract with Mirant Marketing to a just and reasonable price. If FERC rules a
price reduction, SCW is required, based on the settlement, to file an Advice
Letter to notify the CPUC within 30 days of the ruling. On December 19, 2002,
the FERC Administrative Law Judge issued an initial decision denying SCWs
request to reduce the charges under the contract. SCW has appealed the initial
decision which results in the complaint being reviewed by all member
commissioners at the FERC. On November 10, 2003, the FERC denied SCWs
rehearing request. SCW is currently reviewing its options with respect to the
FERCs latest order denying rehearing and is determining if it will appeal the
decision in Federal Court. On July 14, 2003, Mirant Marketing 35




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announced that, to facilitate its financial restructuring, it filed
voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy
Code. At this time, Registrant expects no interruption in the delivery of
electric energy under the Mirant Marketing contract. See the section entitled Electric Energy Situation in California
included in Part I, Item 2 in Managements Discussion and Analysis of Financial
Condition and Results of Operation. Pending Rate Changes On July 10, 2003, the CPUC approved the Certificate of Public Convenience
and Necessity (CPCN) filed by SCW in March 2002 seeking authorization to
construct an 8.4 MW natural gas-fueled generation facility on a portion of its
property in the City of Big Bear Lake. The capital cost of the generating
facility is estimated to be approximately $13 million. The CPUCs order
authorizes construction and enables SCW to file a rate application to generate
an annual revenue increase of about $2.4 million. SCW will file for increased
rates using a special filing called a Major Adjustment Clause or MAC filing
that should result in at least 75% of the revenue requirement related to this
facility being included in rates. The remainder will be subject to recovery in
a general rate case filing. Registrant filed an application to increase water rates in the Region II
customer service areas on September 11, 2003, which was accepted by the CPUC on
October 6, 2003. The new water rates in this filing, as stipulated, would
generate an annual increase in revenues of $4.7 million for 2004, $5.1 million
and $5.2 million for 2005 and 2006, respectively, subject to earnings tests.
The increases for 2004 are retroactive, less the interim increase as discussed
below, to January 1, 2004. A decision is not expected until the third quarter
of 2004. Due to delays in the CPUCs review of this GRC application which have
delayed the processing of the application, SCW sought authority for interim
rate relief by motion filed on December 23, 2003. The Administrative Law Judge
at the CPUC in a ruling issued in February 2004 granted SCWs motion for
interim rate relief and ordered SCW to file an advice letter implementing
interim rates for Region II, commencing January 1, 2004, subject to refund.
The interim rates are expected to generate additional approximately $1.4
million annual revenues. Management expects no refunds will be made. On October 30, 2003, SCW also filed an abbreviated application to the CPUC
to request an inflationary increase in three of the Region I customer services
areas, totaling $388,500 annually. As part of the Region I filing, SCW
requested a long-term amortization of the balance of costs included in the
Aerojet litigation memorandum account, net of any reimbursement amount. For
more information, see the section entitled Other Water Quality Litigation
included in Part I, Item 3 in Legal Proceedings. An Interim Decision issued by the CPUC on May 8, 2003 approved a
settlement between the City of Santa Monica (City) and SCW. The settlement
agreement conveyed SCW water rights to the City and relieved SCW from its
participation in a number of pending lawsuits related to the Charnock
Groundwater Basin. A Proposed Decision (PD) issued on December 19, 2003
proposing the ratemaking treatment of the settlement proceeds and the treatment
of contamination payments made to SCW by Potentially Responsible Parties (PRPs)
since 1998. In summary, the PD directs SCW to (i) invest all net settlement
proceeds received from the City in infrastructure improvements within eight
years, and (ii) refund to ratepayers the net proceeds received from PRPs, for
which $3.5 million was recorded as a liability in December 2003. In April of
2004, the CPUC also issued an alternate decision which proposes to resolve the
ratemaking treatment of the settlement proceeds to be received from the City of
Santa Monica. The alternate decision orders SCW to refund to ratepayers the
net proceeds to be received from the City pursuant to the settlement agreement.
SCW is in the final stages of finalizing the settlement agreement with the City
of Santa Monica on the Charnock issue. Total settlement is approximately $5.7
million of which $2.0 million is for facilities and $3.7 million is for the water
rights. The Santa Monica city council is expected to approve the settlement at
its meeting on May 11, 2004. SCW has been informed by the City that the
settlement proceeds will be available 30 days after the city council approval. 36




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SCW will book the net settlement proceeds from the City in accordance with
the final CPUC decision to be issued later this year. For more information,
see the section entitled Environmental Matters included in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation. In 1993, the CPUC disallowed $1.6 million of costs incurred in
construction of a water treatment facility in SCWs Clearlake customer service
area and Registrant wrote off the disallowed amount at that time. Based on new
water quality standards, in 2000, SCW re-applied to the CPUC for inclusion of
the disallowed amount in rate base. A draft decision issued on March 30, 2001
by the CPUC would have allowed SCW to include $500,000 of the $1.6 million in
the regulated rate base. An alternate draft decision issued by one of the CPUC
Commissioners proposed to deny the relief sought by SCW in its application. An
Administrative Law Judge subsequently reopened the proceeding in August 2001
requiring additional information. Registrant cannot predict when the final
order will be issued, nor can it give assurance that the CPUC will ultimately
allow recovery of all or any of the remaining costs through rates. Other Regulatory Matters On November 29, 2001, the CPUC adopted an Order Instituting Rulemaking
(OIR) to (i) evaluate existing rate making practices and policies, (ii)
determine whether new procedures or policies for processing offset rate
increases and balancing accounts should be made and (iii) determine whether the
new memorandum account procedures adopted on November 29, 2001 should be made
permanent. Pursuant to a resolution issued by the CPUC on December 17, 2002, SCW
filed advice letters on March 17, 2003 requesting recovery of $2.2 million of
under-collections remaining in the balancing accounts for water supply costs
incurred prior to November 29, 2001. On June 19, 2003, the CPUC authorized
increases in rates in total of $2.1 million, effective June 24, 2003, for SCW
to recover the pre-November 29, 2001 balances. In a decision issued on June 19, 2003, the CPUC concluded that (i) if a
utility is within its rate case cycle and does not earn over its authorized
rate of return, the utility shall recover its costs in the memorandum supply
cost account subject to reasonableness review by the CPUC; (ii) if a utility is
either within or outside of its rate case cycle and earns over the authorized
return, the utilitys recovery of expenses from the memorandum supply cost
account will be reduced by the amount exceeding the authorized rate of return;
and (iii) a utility is required to seek review of under and over collections by
filing an advice letter annually. SCW has recently filed advice letters for
Regions I and II and will file Region III shortly, seeking recovery for
under-collected balances of $2.3 million for the period of November 29, 2001
through December 31, 2002, and $1.7 million for the year of 2003. For more
information, see the section entitled Accounting for Supply Costs included in
Part I, Item 2 in Managements Discussion and Analysis of Financial Condition
and Results of Operation. CCWC is planning to file its next rate case with the Arizona Corporation
Commission in 2004. Currently, there are no active regulatory proceedings
affecting CCWC or its operations. Environmental Matters 1996 Amendments to Federal Safe Drinking Water Act The U.S. Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, 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 EPA has published a list
of contaminants for possible regulation and must update that list every five
years. In addition, every five years, the EPA must select at least five
contaminants on that list and determine whether to regulate them. This law
allows the EPA to bypass the selection process and adopt interim regulations
for contaminants in 37




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order to address urgent health threats. The DOHS, acting on behalf of the
EPA, administers the EPAs program in California. The Arizona Department of
Environmental Quality (ADEQ) administers EPAs program in Arizona. The EPA may base primary drinking water regulations on risk assessment and
cost/benefit considerations and on minimizing overall risk. The EPA must base
regulations on best available, peer-reviewed science and data from best
available methods. For proposed regulations that involve the setting of maximum
contaminant levels (MCLs), the EPA must use, and seek public comment on, an
analysis of quantifiable and non-quantifiable risk-reduction benefits and costs
for each such MCL. SCW and CCWC currently test their wells and water systems according to
requirements listed in the Safe Drinking Water Act (SDWA). Water from wells
found to contain levels of contaminants above the established MCLs is treated
to reduce contaminants to acceptable levels before it is delivered to
customers. If treatment is not possible, the wells are shut down. Since the
SDWA became effective, SCW and CCWC have experienced increased operating costs
for testing to determine the levels, if any, of the constituents in their
sources of supply and additional expense to lower the level of any contaminants
in order to meet the MCL standards. Such costs and the costs of controlling any
other contaminants may cause SCW and/or CCWC to experience additional capital
costs as well as increased operating costs. The CPUC and ACC ratemaking
processes provide SCW and CCWC with the opportunity to recover prudently
incurred capital and operating costs associated with water quality. Management
believes that such incurred and expected future costs should be authorized for
recovery by the CPUC and ACC, as applicable. Enhanced Surface Water Treatment Rules The EPA has adopted the Enhanced Surface Water Treatment Rule (ESWTR),
which required increased surface-water treatment to decrease the risk of
microbial contamination. These rules apply to each of SCWs five surface water
treatment plants and CCWCs surface water treatment plant. Registrant
anticipates that all plants will achieve compliance within the three-year to
five-year time frames identified by EPA. Registrant is required to be in
compliance by June 1, 2006. SCW has initiated phased construction of a new
treatment plant in the Calipatria-Niland customer service area (see further
discussion below under Regulation of Disinfectant/Disinfection By-Products) to
bring that facility into compliance. Once this project is completed, all the
surface water plants in SCW and CCWC should be in compliance with these rules. Regulation of Disinfection/Disinfection By-Products SCW and CCWC are also subject to regulations concerning
disinfection/disinfection by-products (DBPs). Stage I of the regulations was
effective in November 1998 with full compliance required for systems serving
10,000 or more persons by 2002 and for systems serving fewer than 10,000
persons by 2004. Stage I requires reduction of trihalomethane contaminants from
100 micrograms per liter to 80 micrograms per liter. SCW has already
implemented modifications to the treatment process in its Bay Point and Cordova
systems to achieve compliance and the Calipatria plant has undergone treatment
modifications, which will also address the requirements under the ESWTR, in
order to comply with the DBPs. The EPA is not allowed to use the cost/benefit analysis provided for in
the 1996 SDWA amendments for establishing the Stage II rules applicable to
DBPs but may utilize the regulatory negotiating process provided for in the
1996 SDWA amendments to develop the Stage II rule. The final rule is not
expected until later this year. 38




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The Stage 2 Disinfectants/Disinfection By-Products Rule (DBPR) and the
Long-Term 2 Enhanced Surface Water Treatment Rule (LT2ESWTR) The LT2ESWTR proposal was published in the Federal Registeron August 11,
2003, and the Stage 2 DBPR was published shortly thereafter on August 18.
These proposed Rules are very complex and EPA has asked for comments on
hundreds of technical issues. EPA will likely publish the final rules in early
to mid-2005, since the close of public comments was in January 2004, and it
typically takes EPA 12-18 months to finalize rules after the close of the
comment period. Registrant is currently waiting for the EPA to finalize these
proposed rules to determine the impact. Ground Water Rule On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR),
which establishes multiple barriers to protect against bacteria and viruses in
drinking water systems that use ground water. The proposed rule will apply to
all U.S. public water systems that use ground water as a source. The proposed
GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems; source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifers or have detected
fecal indicators within a distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. It was anticipated
that the GWR would be issued as a final regulation by the end of 2003, but this
has been delayed until later this year. While no assurance can be given as to
the nature and cost of any additional compliance measures, if any, SCW and CCWC
do not believe that such regulations will impose significant compliance costs,
since they already currently engage in disinfection of the majority of their
groundwater systems. Regulation of Radon and Arsenic On October 31, 2001, EPA announced that the arsenic standard in drinking
water would be 10 parts per billion (ppb). Compliance with an MCL of 10 ppb
will require implementation of wellhead treatment remedies for eight affected
wells in SCWs system and two wells in CCWCs system. The effective date for
utilities to comply with the standard is January 2006. The California DOHS
Office of Environmental Health Hazard Assessment (OEHHA) published the final
Public Health Goal (PHG) of 4.0 parts per trillion in April 2004. This is the
first step for California to adopt its own MCL for arsenic. The California DOHS
will take this number and begin the formal MCL process for California. The DOHS
MCL process is expected to take up to a year (even as an emergency regulation).
In that interim period, the current MCL in California will remain at 50 parts
per billion. The USEPA MCL has been changed to 10 ppb, but it is not effective
until 2006. The EPA has proposed new radon regulations following a National Academy of
Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPAs original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative
MCL of 4000 Pico Curies per liter, based upon potential mitigation measures for
overall radon reduction. Registrant is currently waiting for the EPA to
establish a MCL to determine the impact. 39




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Voluntary Efforts to Provide Treated Surface Water Below Minimum Surface
Water Treatment Requirements SCW is a voluntary member of the EPAs Partnership for Safe Water, a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to treat surface water to levels much lower than the minimum
operating requirements governing surface water treatment, optimize surface
water treatment plant operations and seeks to have its surface water treatment
facilities perform as efficiently as possible. Unregulated Contaminants Monitoring Rule EPA has revised the Unregulated Contaminant Monitoring Rule (UCMR). The
data generated by the UCMR will be used to evaluate and prioritize contaminants
on the Drinking Water Contaminant Candidate List, a list of contaminants EPA is
considering for possible new drinking water standards. This data will help to
ensure that future decisions on drinking water standards are based on sound
science. A tiered approach will be utilized with the three monitoring lists to
provide the maximum capability to monitor up to the statutory limit of no more
than 30 contaminants in any 5-year monitoring cycle. Therefore, as List 3
contaminants are found to occur in public water systems, they may move up to
List 2, and likewise, List 2 contaminants may move up to List 1, when the UCMR
is revised again later this year. The law requires that EPA publish a new
contaminant-monitoring list every 5 years.When the EPA adds contaminants to
their list, they will also include a compliance date. Registrant will evaluate
the impact and necessary actions as additions are made to the contaminant
lists. Fluoridation of Water Supplies SCW is required to fluoridate water supplies for public water systems
serving more than 10,000 service connections if funds have been made available
to cover capital and operating costs. The CPUC is required to authorize cost
recovery through rates should funds for the operation of fluoridation
facilities, once installed, become unavailable in future years.Currently,
funds have been made available to public agencies only. SCW has not been
offered any funding and has not installed any fluoridation facilities. Perchlorate Action Level Activities In January 2002, DOHS reduced the action level from 18 ppb to a level of 4
ppb, based upon new reference dose for health risk information from EPA.
California has a law requiring DOHS to establish an MCL for perchlorate by
January 1, 2004. This has been delayed due to the lack of a final Public Health
Goal. SCW has removed eight wells from service in its Rancho Cordova system
and six additional wells in various other systems since they contained
perchlorate in amounts in excess of this reduced action level of 4 ppb. On
December 6, 2002, the OEHHA published a revised draft perchlorate Public Health
Goal (PHG) of 2 to 6 ppb. This is the first step in the establishment of an MCL
in California. The PHG of 6 ppb was adopted in the first quarter of 2004 after
which DOHS revised the state Action Level for perchlorate from 4 ppb to 6 ppb.
The California MCL for perchlorate is expected to be finalized in 2005. SCW is
continuing to periodically monitor all of its wells to determine that levels of
perchlorate are below the action level currently in effect. Nitrosodimethylamine (NDMA) Action Level In February 2002, DOHS increased the action level from 2 parts per
trillion (ppt) to 10 ppt. NDMA is an additional by-product from the production
and use of rocket fuels. 40




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Matters Relating to SCWs Arden-Cordova Water System In SCWs Rancho Cordova system, four wells have been removed from service
and destroyed due to contamination from perchlorate. The supply has been
replaced for three of these wells. An additional three wells are currently out
of service due to perchlorate levels above the EPA trigger level of 4 ppb as
defined in the EPAs Administrative Orders, and two wells are out of service
due to detectable levels of NDMA above the action level. SCW continues to
monitor all of its active groundwater wells in the Rancho Cordova system for
perchlorate and NDMA. Aerojet-General Corp. (Aerojet) has, in the past, used
ammonium perchlorate in oxidizing rocket fuels. NDMA is an additional
by-product from the production of rocket fuels and it is believed that such
contamination is also related to the activities of Aerojet. SCW has filed suit
against Aerojet for contamination of SCWs ground water supply in its Rancho
Cordova system. On October 10, 2003 Registrant entered into a confidential Memorandum of
Understanding (MOU) with the Aerojet-General subsidiary of GenCorp, Inc. for
the settlement of legal actions brought by SCW. The MOU sets forth the present
financial terms and the structure of a settlement to cover all SCWs costs
incurred resulting from the contamination. The MOU and the settlement embodied
therein was found to be binding by the Sacramento Superior Court on January 18,
2004. Further documentation incorporating the terms of the MOU is presently
underway. However, documentation is not complete and management is presently
unable to predict when a comprehensive set of settlement documents will be
completed. To date, Aerojet has reimbursed SCW for constructing a pipeline to
interconnect with the City of Folsom water system to provide an alternative
source of water supply in SCWs Rancho-Cordova customer service area and has
reimbursed SCW for a portion of the costs associated with the drilling and
equipping of new wells. Aerojet had, prior to the MOU, reimbursed SCW $4.3
million of the approximately $20 million in capital costs SCW has incurred, and
$171,000 for additional water supply costs. Based on the financial terms in
the MOU, SCW established a receivable from Aerojet in an amount of $16.7
million at the end of 2003, of which $8.7 million was received in early 2004.
The remainder of the costs is subject to further settlement documentation.
Reimbursements received from Aerojet have been applied directly to reduce SCWs
costs of utility plant and purchased water. Management believes these costs
are recoverable through rates; however, proceeds from any settlement agreement
with Aerojet would be applied to reduced amounts collected from
customers. Management cannot give assurance that the CPUC will
ultimately allow recovery of all or any of these costs. For
further information regarding litigation related to contamination of ground
water in Sacramento County, see the section entitled Other Water Quality
Litigation included in Part I, Item 3, Legal Proceedings. Matters Relating to SCWs Culver City Water System The compound, methyl tertiary butyl ether (MTBE), an oxygenate used in
reformulated fuels, has been detected in the Charnock Basin, located in the
vicinity of the City of Santa Monica and within SCWs Culver City customer
service area. At the request of the Regional Water Quality Control Board, the
City of Santa Monica and the California Environmental Protection Agency, SCW
removed two of its wells in the Culver City water system from service in
October 1996 to help in efforts to avoid further spread of the MTBE
contamination plume. Neither of these wells has been found to be contaminated
with MTBE. SCW is purchasing water from the Metropolitan Water District of
Southern California (MWD) at an increased cost to replace the water supply
formerly pumped from the two wells removed from service. On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company,
Equilon Enterprises LLC and others to provide replacement drinking water to
both SCW and the City of Santa Monica due to MTBE contamination in the Charnock
Basin. The EPA has ordered Shell Oil and others to reimburse SCW for water
replacement costs. In March 2002, SCW reached a settlement agreement with the
City of Santa 41




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Monica, in which SCW assigned its rights against all the potentially
responsible parties, who stored, transported and dispensed gasoline containing
methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or
other related infrastructure, and its water rights in the Charnock Basin to the
City of Santa Monica and Santa Monica took over the prosecution against the
potentially responsible parties in exchange for an assignment payment. On May
8, 2003, the CPUC issued a decision approving the settlement agreement.
Pursuant to the resolution, SCW has subsequently filed a report that sets forth
specific details as to SCWs plans to reinvest the net proceeds from the
settlement agreement with the City of Santa Monica. A Proposed Decision (PD)
issued on December 19, 2003 proposes the ratemaking treatment of the settlement
proceeds and the treatment of contamination payments made to SCW by Potentially
Responsible Parties (PRPs) since 1998. In summary, the PD directs SCW to (i)
invest all net settlement proceeds received from the City in infrastructure
improvements within eight years, and (ii) refund to ratepayers the net proceeds
received from PRPs, for which $3.5 million was recorded as a liability in
December 2003. In April of 2004, the CPUC also issued an alternate decision
which proposes to resolve the ratemaking treatment of the settlement proceeds
to be received from the City of Santa Monica. The alternate decision orders
SCW to refund to ratepayers the net proceeds to be received from the City
pursuant to the settlement agreement. SCW is in the final stages of finalizing
the settlement agreement with the City of Santa Monica on the Charnock issue.
Total settlement is approximately $5.7 million of which $2.0 million is for
facilities and $3.7 million is for the water rights. The Santa Monica city
council is expected to approve the settlement at its meeting on May 11, 2004.
SCW has been informed by the City that the settlement proceeds will be
available 30 days after the city council approval. SCW will book the net
settlement proceeds from the City in accordance with the final CPUC decision to
be issued later this year. Matters Relating to SCWs Yorba Linda Water System The compound MTBE has been detected in three wells serving SCWs Yorba
Linda water system. Two of the wells are currently inactive, and to date the
third well has not shown MTBE above the DOHS secondary standard of 5.0 ppb. SCW
has constructed an interconnection with the Metropolitan Water District of
Southern California to provide for the needed supply for this system in the
event the third well experiences levels of detection in excess of the DOHS
standard. SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, (OCWD), the City of Anaheim, the DOHS and three
potentially responsible parties (PRPs) to define the extent of the MTBE
contamination plume and assess the contribution from the PRPs. The PRPs have
voluntarily initiated a work plan for regional investigation. While there have
not been significant disruptions to the water supply in Yorba Linda at this
point in time, no assurances can be given that MTBE contamination will not
increase in the future. In December 2003, a settlement was reached between
SCW and the PRPs. Under the settlement agreement, the PRPs are to pay SCW (i)
$581,250 for reimbursement of costs related to the issue, and (ii) up to
$260,000 per year for five years for incremental supply costs should the MTBE
level in the third well exceed the DOHS action level. SCW received payment of
the $581,250 in January 2004. Matters Relating to SCWs Los Osos Water System The compound MTBE has been detected in a well serving SCWs Los Osos water
system. For some time SCW has been working with the Regional Water Quality
Control Board as well as the owner of a service station. Although the owner of
the service station has attempted remediation with funds provided through the
California Underground Storage Tank Fund (CUSTF), it appears there will be
insufficient funds from the CUSTF to complete remediation sufficient to return
the well to service. In order to prevent the running of the statute of
limitations, on August 12, 2002 SCW filed suit in the Superior Court of the
State of California for the County of San Luis Obispo against the operators and
owners of the service station facility, and Chevron USA Products, Inc., the
supplier. A settlement with Chevron has been reached and fully executed. The
impacted well may need to be removed permanently 42




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from service and the settlement payment from Chevron is expected to afford
SCW sufficient funds to commence site development and construction of a
replacement well. Matters Relating to SCWs San Gabriel Water Systems Perchlorate and/or Volatile Organic Compounds (VOC) have been detected in
five wells servicing SCWs San Gabriel System. SCW filed suit, along with two
other affected water purveyors and the San Gabriel Basin Water Quality
Authority (WQA), in federal court against some of those responsible for the
contamination. Some of the other potential defendants settled with SCW, other
water purveyors and the WQA on VOC related issues prior to the filing of the
lawsuit resulting in reimbursement to SCW of the $1 million in capital cost of
VOC treatment facilities and contribution of approximately $380,000 towards
future operating and maintenance (O&M) costs of the facilities. In response to the filing of the Federal lawsuit, the Potentially
Responsible Party (PRP) defendants filed motions to dismiss the suit or strike
certain portions of the suit. Following a hearing on these motions on March 31,
2003, the judge issued a ruling on April 1, 2003 granting in part and denying
in part the defendants motions. A key ruling of the court was that the water
purveyors, including the Registrant, by virtue of their ownership of wells
contaminated with hazardous chemicals are themselves PRPs under the
Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA).
Registrant has, pursuant to permission of the court, amended its suit to claim
certain affirmative defenses as an innocent party under CERCLA. Registrant is
presently unable to predict the outcome of this ruling on its ability to fully
recover from the PRPs future costs associated with the treatment of these
wells. On August 29, 2003, the US Environmental Protection Agency (EPA) issued
Unilateral Administrative Orders (UAO) against 41 parties deemed responsible
for polluting the groundwater in that portion of the San Gabriel Valley from
which SCWs two impacted wells draw water. SCW was not named as a party to the
UAO. The UAO requires that these parties remediate the contamination. As a
result of the issuance of the UAO, these parties have begun settlement
discussions regarding the Federal lawsuits with SCW, the other two affected
water purveyors, WQA and, separately, EPA. Registrant is presently unable to
predict the ultimate outcome of these settlement discussions. Three other wells serving customers in SCWs San Gabriel customer service
area are also impacted by VOC contamination. A settlement with several
potentially responsible parties together with federal funds administered by WQA
resulted in reimbursement of 100% of the $1.1 million in capital costs,
$205,000 of past operations and maintenance costs and 100% of future operations
and maintenance costs for a period of up to 30 years for VOC treatment
facilities at these wells. Bark Beetle Infestation in SCWs Bear Valley Electric Service Area In a Proclamation issued on March 7, 2003 former Governor Gray Davis
declared a State of Emergency with respect to a severe fire risk caused by dead
and dying trees plagued by drought and a major bark beetle infestation in the
counties of Riverside, San Bernardino, and San Diego of the State of
California. The threat is continuing and shows no sign of abating. On April 3,
2003, the CPUC issued an order requiring Southern California Edison Company,
San Diego Gas & Electric Company and Bear Valley Electric to take all
reasonable and necessary actions to mitigate the increased fire hazard by
removing dead, dying or diseased trees from falling or contacting distribution
and transmission lines within their rights of way and to ensure compliance with
existing vegetation clearance statutes and regulations. The utilities,
including Bear Valley Electric, are authorized to make annual advice letter
filings requesting recovery of the costs of removal and mitigation. SCW has
determined the scope and magnitude of the bark beetle infestation in its Bear
Valley Electric service territory to date and has formulated a course of action
to mitigate the fire potential in its rights-of-way. Estimated costs of dead
tree removal totals $620,000 based on experiences with other utility vegetation
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and current information gathered and assessed for the Big Bear Lake area.
These costs represent only the cost of addressing the problem to date. If the
drought continues, the infestation will likely spread and mitigation costs may
increase. SCW expects that current and future costs incurred in remediation of
Bark Beetle Infestation will be recoverable in rates through the annual Advice
Letter filings, as the April 2003 order issued by the CPUC contained cost
recovery provisions. As of March 31, 2004, approximately $17,000 has been
incurred and is included in the CEMA accounts. Security Issues Since the tragic events of September 11, 2001, water utilities, including
Registrant, have been advised to increase security at key facilities in order
to avoid contamination of water supplies and other disruptions of service. In
compliance with The Public Health Security and Bioterrorism Preparedness Act
of 2002 (HR 3448),Registrant has continued to implement measures to increase
security, which includes a vulnerability assessment of its large systems. In
addition to large system assessments, all systems operated by Registrant were
assessed to identify potential areas requiring enhancements. These assessments
resulted in a prioritized listing of recommended facility upgrades to enhance
the safety of water system operations. Costs associated with capital
improvements identified as a result of the assessment process, of approximately
$15 million, have been included in an application filed with the CPUC in
October 2002. Water Supply SCWs Water Supply For the three months ended March 31, 2004, SCW supplied a total of
16,863,000 CCF of water. Of this amount, approximately 54% came from pumped
sources and 45% was purchased from others, principally the Metropolitan Water
District of Southern California (MWD). The remaining was surface water
principally supplied by the Bureau of Reclamation (the Bureau) under a no-cost
contract and by the Sacramento Municipal Utility District (SMUD), the cost of
which is being reimbursed by Aerojet-General Corp. pursuant to a Memorandum of
Understanding. For more information, please see the section entitled
Environmental Matters included in Part I, Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operation. During the same
period of 2003, SCW supplied 16,483,000 CCF of water, 56% of which came from
pumped sources, 43% was purchased, and the Bureau and SMUD supplied the
remainder. The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. Registrant has 58 connections to the water distribution
facilities of MWD and other municipal water agencies. MWD imports water from
two principal sources: the Colorado River and the SWP. Available water supplies
from the Colorado River and the SWP have historically been sufficient to meet
most of MWDs requirements. On October 17, 2003 Federal government, State government, and four
Southern California water agency officials, including the MWD, met to sign the
Quantification Settlement Agreement (QSA) which divides up each states share
of the Colorado River. Under the QSA, MWD will have access (as in the past) to
Colorado River water and up to 1.6 million acre feet of additional water that
the Imperial Irrigation District proposes to conserve and sell to the state.
With the signing of this agreement California once again has access to excess
Colorado River water for the next 13 years. However for the near term, excess
water may not be available due to the recent drought in the Colorado watershed.
MWD has also publicly stated that it is stepping up a number of efforts
including desalination, conservation, recycling, transfer and storage, to
increase water supplies. SCWs water supply and revenues are significantly affected, both in the
short-run and the long run, by changes in meteorological conditions. The
current water year for California has generally been drier than last year with
state wide precipitation at 95% and snow pack at 85% of average, versus 100% 44




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and 117%, respectively, during last year. Particularly March has seen
much warmer and drier weather. However, reservoir levels are up from last year
with the current statewide level at 105% of normal as opposed to 100% last
year. Runoff is forecasted to be 80% of normal from April 2004 to July 2004. Although overall groundwater conditions remain at adequate levels, certain
of SCWs groundwater supplies have been affected to varying degrees by various
forms of contamination which, in some cases, has caused SCW to increase its
reliance on purchased water in its supply mix. For further information, see
Part I, Item 3 in Legal Proceedings. A sudden and unexplained drop in groundwater water supply severely
impacted SCWs Wrightwood customer service area in the third quarter of 2002.
In response to this emergency situation, SCW undertook a number of steps to
provide water service, including trucking water into the area from nearby
sources, bringing a formerly shut down well into service, taking steps to
increase capacity at existing wells and expediting the drilling and equipping
of a new well. SCW experienced increased operating costs associated with the
trucking of water of approximately $1.4 million (approximately $1.26 million
was incurred in 2002 and $166,000 in the first quarter of 2003). Due to the
actions of SCW and conservation efforts of consumers, the situation has
stabilized and the water hauling ceased at end of January 2003. Management is
unable to predict the extent to which additional costs may be incurred or the
extent to which additional problems may be encountered. An additional well and
filtration equipment have been installed during the past 12 months and, along
with voluntary conservation by the community, water supplies have been
sustained throughout 2003 even though water levels in Wrightwood are still low.
We will be evaluating other alternatives to secure water supply. The cause of
the unexplained and sudden drop in groundwater supply has not been identified,
but it is believed to be partially drought-related. CCWCs Water Supply Arizona will continue to experience drought conditions. During this water
year, precipitation has been well below normal, except for the southeastern
portion of the state. The warm March melted much of the snow pack to levels
below 20% of normal. The Natural Resource Conservation Service warned users to
expect reduced water supplies through the spring and summer of 2004. In the
Colorado river basin Lake Mead is at 15,255,000 acre feet, 56% of normal and
Lake Powell is 10,180,000 acre feet , or 69% of normal. The forecast of steam
flow into Lake Powell is for 50% of average. The Arizona Water Banking Authority (AWBA) was created to store Arizonas
unused Colorado River water entitlement in western, central and southern
Arizona to develop long-term storage credits to: (i) firm existing water
supplies for municipal and industrial users during Colorado River shortages or
Central Arizona Project (CAP) service interruptions; (ii) help meet the water
management objectives of the Arizona Groundwater Code; and (iii) assist in the
settlement of American Indian water rights claims. The ABWA successfully
recharged more than 209,000 acre-feet in 2003 allowing for the second year in a
row for Arizona to use its full allocation of Colorado River entitlement of 2.8
million acre-feet. This banked water can be used as a hedge against future
drought conditions. Further, the first curtailment of CAP deliveries in the
event of shortage would occur to non-Indian agricultural users. Such users
accounted for a third of CAP deliveries in 2003, creating a buffer for users
such as CCWC. Though it is difficult to predict drought conditions with
certainty, the activities of AWBA, and the priority for users of CAP, such as
CCWC, provides an improved outlook for CCWC supplies. CCWC obtains its water supply from two operating wells and from Colorado
River water delivered by the CAP. The majority of CCWCs water supply is
obtained from its CAP allocation and well water is used for peaking capacity in
excess of treatment plant capability, during treatment plant shutdown, and to
keep the well system in optimal operating condition. 45




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CCWC has an Assured Water Supply designation, by decision and order of the
Arizona Department of Water Resources (ADWR), providing in part that, subject
to its requirements, CCWC has a sufficient supply of ground water and CAP water
which is physically, continuously and legally available to satisfy current and
committed demands of its customers, plus at least two years of predicted
demands, for 100 years. CCWC has, however, received a letter from the ADWR stating that the
current and committed demand for water in CCWCs service area has exceeded
CCWCs supply of water in its proven assured water supply account by 400
acre-feet per year. ADWRs letter requires CCWC to make up this accounting
deficit by securing additional water supplies and/or providing information to
ADWR that would allow ADWR to issue a new decision that CCWCs current and
committed demands are within the proven available supplies in CCWCs assured
water supply account. The ADWR letter is part of a routine administrative
review of all water providers. ADWRs review will have no impact on CCWCs
ability to deliver water to its existing customers. CCWC has since undertaken actions requested by the ADWR, including (i) joining
the Central Arizona Groundwater Replenishment District as a Member Service
Area, (ii) submitting an application to the ADWR to modify its assured supply
designation in a manner that will enable CCWC to provide water service to new
real estate developments in the Town of Fountain Hills, and (iii) filing a
report supporting the modification of designation of assured water supply. On
April 7, 2004 ADWR issued a revised decision confirming that CCWC has
demonstrated the physical, legal and continuous availability of CAP water and
groundwater, consistent with the management goal, in an aggregate volume of
9,828 acre-feet per year for a minimum of 100 years which is greater than
CCWCs projected demand for the calendar year 2014 of approximately 8,000
acre-feet. The 9,828 is comprised of our existing CAP allocation of 6.978
acre-feet per year, and groundwater usage of; incidental recharge credits of
500 acre-feet per year, our existing groundwater account balance of 35,829
acre-feet that would provide approximately 350 acre-feet per year for a hundred
years and our Central Arizona Groundwater Replenishment District (CAGRD)
contract of 2,000 acre-feet per year. Notwithstanding an assured water supply designation, CCWCs water supply
may be subject to interruption or reduction, in particular owing to
interruption or reduction of CAP water. In the event of interruption or
reduction of CAP water, CCWC can currently rely on its well water supplies for
short-term periods. However, in any event, the quantity of water CCWC supplies
to some or all of its customers may be interrupted or curtailed, pursuant to
the provisions of its tariffs. CCWC also has the physical capability to deliver
water far in excess of that which is currently accounted for in CCWCs assured
water supply account. Risk Factor Summary You should carefully read the risks described below and other information
in this Form 10-Q in order to understand certain of the risks of our business. Our liquidity and earnings could be adversely affected by changes in water
supply costs Prior to November 29, 2001, we recovered certain water supply costs
through a balancing account mechanism. Water supply costs include the cost of
purchased water and power and groundwater production assessments. Changes in
the unit costs did not directly affect earnings. The balancing account was not,
however, designed to insulate our earnings against changes in supply mix. As a
result, we were not permitted to recover increased costs due to increased use
of purchased water, which is generally more expensive than groundwater, through
the balancing account mechanism. Increased costs of this nature were only
recoverable, on a prospective basis, through the filing of a general rate case. 46




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On November 29, 2001, the CPUC ordered us to suspend the use of the
current water balancing account, and instead start a memorandum account for
each offsettable expense of purchased water, purchased power and pump tax for
our water service areas. Changes in water supply costs compared to the
authorized amount, as well as any future authorized offset increases may
directly affect our earnings. In June 2003, we received the CPUCs
authorization to increase our rates to recover the pre- November 29, 2001
balance in our supply costs balancing account. In a decision issued on June 19, 2003 for memorandum supply accounts, the
CPUC concluded that our recovery of deferred water supply costs for providing
water service will be reduced if we are earning more than our authorized rate
of return. Pursuant to the resolution, we recently filed advice letters seeking
recovery for under-collected balances of $2.5 million for the period of
November 29, 2001 through December 31, 2002, and approximately $1.7 million for
the 2003 under-collected balance. Future recovery of the under-collected
balances is subject to the earning tests and the CPUCs review of the
reasonableness of the cost. For more information, see the section entitled
Accounting for Supply Costs included in Part I, Item 2 in Managements
Discussion and Analysis of Financial Condition and Results of Operation. Our liquidity, and in certain circumstances, earnings, could be adversely
affected by increases in electricity prices in California Under California law, we are permitted to file for a rate increase to
recover electric power costs not being recovered in current rates. Increases in
electric power costs generally have no direct impact on profit margins, unless
recovery of these costs is disallowed, but do affect cash flows and can
therefore impact the amount of our capital resources. Electric power costs
increased substantially in California during the fall of 2000 until the summer
of 2001. On July 17, 2002, the FERC extended and modified the mitigation
measures that were set to expire on September 30, 2002, citing delays in
construction of new generation resources in California and throughout the West,
delays in adopting a new market design and market rules by the Cal ISO,
transmission line constraints, constraints on natural gas pipeline capacity and
continuing dysfunctions in the power market. It remains unclear how long the
FERC will leave its mitigation measures in place. The premature termination of
such mitigation measures could result in a substantial increase in spot market
prices and the prices of long-term contracts for power and capacity. In
addition, a number of market reforms are under consideration at FERC. Certain
of these reforms, if adopted, could result in significantly increased electric
supply reserve requirements that have the potential for further cost increases. On July 17, 2002, the CPUC approved a settlement authorizing us to include
$0.077 per kilowatt-hour (KWh) in rates to recover electric power costs at our
Bear Valley Electric operation. If our actual annual costs exceed this amount,
we cannot recover the excess and the amount will be expensed against income. If
our actual annual energy costs are less than $0.077 per KWh, we can use this
difference to collect amounts previously included in the balancing account. The
CPUC also has authorized SCW to collect a surcharge from its customers of 2.2¢
per Kwh for a period through August 2011, to enable SCW to recover the
under-collection in its balancing account arising out of the energy crisis. SCW
anticipates that the 2.2¢ surcharge on its electricity sales during this period
will be sufficient to enable SCW to recover the amount of this
under-collection, with interest. In March 2001, SCW entered into a five-year nine-month, block forward
purchase contract with Mirant Marketing to supply its Bear Valley Electric
customer service area with 15 MWs of electric energy at a price of $95 per MWh
beginning April 1, 2001 through December 31, 2006. Effective November 2002,
SCW entered into a series of purchase power contracts with PWCC. The purchased
power agreements with PWCC enable SCW to purchase a contractual volume of power
at $74.65 per megawatt hour (MWh). SCW also buys additional energy from the
spot market to meet peak demand and sell surplus power to the spot market from
time to time. SCW should be able to recover these costs up to the annual
recovery cap of $77 per MWh, unless the CPUC determines that the costs incurred
by SCW 47




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for purchasing power are not reasonable. The CPUC has not yet reviewed the
purchased power agreements with PWCC or SCWs spot market practices for
reasonableness. Significant claims have been asserted against us in water quality
litigation SCW and others have been sued in twenty-two water quality related lawsuits
alleging personal injury and property damage as a result of the delivery of
water that was allegedly contaminated. Nineteen of the lawsuits involve
plaintiffs who received water from two groundwater basins in Los Angeles
County. The other lawsuits involve plaintiffs in Sacramento County. In March 1998, the CPUC issued an Order Instituting Investigation as a
result of water quality lawsuits being filed against water utilities in
California. On November 2, 2000, the CPUC issued a final order concluding that
(i) the CPUC has jurisdiction to regulate the service of water utilities with
respect to the health and safety of that service; (ii) DOHS requirements
governing drinking water quality adequately protect the public health and
safety; and (iii) regulated water utilities, including SCW, have satisfactorily
complied with past and present drinking water quality requirements. On February 5, 2002, the California Supreme Court ruled that water
utilities regulated by the CPUC may only be sued for damages based on
allegations and ultimate proof that the utility failed to comply with federal
and state safe drinking water requirements. As a result, plaintiffs may proceed
on their claims against SCW to the extent that these claims are based on
violations of federal and state law. Persons that are potentially responsible for causing the contamination of
groundwater supplies have also been increasingly asserting claims against water
distributors on a variety of theories and have thus far successfully brought
them within the class of potentially responsible parties thereby increasing the
costs of seeking recovery from the potentially responsible parties and the
risks associated with seeking recovery of these costs. Management believes
that rate recovery, proper insurance coverage and reserves are in place to
insure against these claims. Our operating costs have increased and are expected to continue to
increase as a result of groundwater contamination Our operations have been impacted by groundwater contamination in certain
of our service territories. We have taken a number of steps to address this
contamination, including the removal of wells from service, the construction of
water treatment facilities and securing alternative sources of supply from
other areas not affected by the contamination. In some cases, potentially responsible parties have reimbursed us for our
costs. In other cases, we have taken legal action against parties that we
believe to be potentially responsible for the contamination. To date, the CPUC
has also permitted SCW to establish memorandum accounts for recovery of these
types of costs. Environmental regulation has increased, and is expected to continue to
increase our operating costs SCW and CCWC are subject to increasingly stringent environmental
regulations that will result in increasing capital and operating costs. These
regulations include:  
    
    The 1996 amendments to the Safe Drinking Water Act that
require increased testing and treatment of water to reduce
specified contaminants to maximum contaminant levels  
    
    Approved regulations requiring increased surface-water
treatment to decrease the risk of microbial contamination; these
regulations affect SCWs five surface water treatment plants and
two CCWC plants 48




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
    
    Additional regulation of disinfection/disinfection byproducts  
    
    Additional regulations requiring disinfection of certain groundwater systems  
    
    Regulation of arsenic and radon  
    
    Changes in the action level and the proposed adoption
of maximum contamination levels for perchlorate and other by
products of the production of rocket fuel SCW and CCWC may be able to recover costs incurred to comply with these
regulations through the ratemaking process. In a recent rate case, the CPUC has
authorized SCW to establish a memorandum account for future recovery of costs
associated with compliance and remediation. We may also be able to recover
certain of these costs under our contractual arrangements with municipalities.
In certain circumstances, we may be able to recover costs from parties
responsible or potentially responsible for contamination, either voluntarily or
through specific court action. The adequacy of our water supplies depends upon a variety of factors
beyond our control The adequacy of our water supplies varies from year to year depending upon
a variety of factors, including:  
    
    Rainfall  
    
    Availability of Colorado River water and imported water from northern California  
    
    The amount of water stored in reservoirs and groundwater basins  
    
    The amount of water used by our customers and others  
    
    Water quality  
    
    Legal limitations on use Population growth and increases in the amount of water used have increased
limitations on use to prevent over-drafting of groundwater basins. The
importation of water from the Colorado River, one of SCWs important sources of
supply, is expected to decrease in future years due to the requirements of the
Central Arizona Project (CAP) and other limitations on the amount of water
that the Metropolitan Water District of Southern California is entitled to take
from the Colorado River. We have also taken wells out of service due to
groundwater contamination. MWD is expected to increase its efforts to secure
additional supplies from conservation, desalination and water exchanges with
the agricultural water users. CCWC obtains its water supply from operating wells and from the Colorado
River through the CAP. CCWCs water supply may be subject to interruption or
reduction if there is an interruption or reduction in CAP water. In addition,
CCWCs ability to provide water service to new real estate developments is
dependent upon CCWCs ability to meet the requirements of the Arizona
Department of Water Resources regarding its assured water supply account. Water shortages may affect us in a variety of ways:  
    
    They adversely affect supply mix by causing us to rely
on more expensive purchased water.  
    
    They adversely affect operating costs.  
    
    They may result in an increase in capital expenditures
for building pipelines to connect to alternative sources of
supplies and reservoirs and other facilities to conserve or
reclaim water. We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs from third parties that may be responsible, or
potentially responsible, for groundwater contamination. 49




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Our earnings are greatly affected by weather during different seasons The demand for water and electricity varies by season. Therefore, the
results of operations for one period may not indicate results to be expected in
another period. For instance, most water consumption occurs during the third
quarter of each year when weather tends to be hot and dry. On warm days, use of
water by residential and commercial customers may be significantly greater than
on cold days because of the increased use of water for outdoor landscaping.
Likewise the demand for electricity in our Bear Valley Electric service area is
greatly affected by winter snows. An increase in winter snows reduces the use
of snow making machines at ski resorts in the Big Bear area and, as a result
reduces electric revenues. Likewise, unseasonably warm weather during a skiing
season may result in temperatures too high for snowmaking conditions which also
reduces electric revenues. Variability of weather from normal temperatures or changes in snow or
rainfall can materially impact results of operations. As a result, weather has
been and will continue to be one of the dominant factors in our financial
performance. Our business is heavily regulated and, as a result, decisions by
regulatory agencies and changes in laws and regulations can significantly
affect our business Our revenues depend substantially on the rates that we are permitted to
charge our customers and our ability to recover our costs in these rates on a
timely basis, including the ability to recover the costs of purchased water,
groundwater assessments and electric power costs in rates. We have filed for
increased water rates to recover operating costs from customers in all our
water regions as well as for costs associated with general office activities,
but have been experiencing increasing delays in the processing of our
applications. In addition, we will be seeking CPUC authorization to recover in
rates for constructing an 8.4 MW natural gas-fueled generator facility to meet
increasing demand in our Bear Valley customer service area. The CPUCs resolution ordering SCW to suspend the use of the current water
balancing account, and instead to start a memorandum account for its supply
costs has and will directly impact our earnings since the recovery of deferred
water supply costs is reduced if we are earning an amount in excess of our
authorized rate of return. We have also been adversely affected by electric
restructuring in California and the limitations that have been placed on our
ability to recover these costs in rates. Our costs have increased as a result of increasing environmental
regulation, requirements to increase security at our water facilities and
requirements to mitigate fire hazard risks in our Bear Valley Electric service
area arising out of the drought and a major bark beetle infestation. The regulatory authoritys decision can impact prospective revenues and
earnings as well as overturning past decisions. Our business requires significant capital expenditures The utility business is capital intensive. On an annual basis, we spend
significant sums for additions to or replacement of property, plant and
equipment. During the three months ended March 31, 2004 and 2003, Registrant
spent $13,399,000 and $8,409,000, respectively, for these purposes. Our net
budgeted capital expenditures for calendar year 2004 for these purposes are
approximately $61.7 million. There is no capital expenditure for environmental
control facilities budgeted for 2004. We obtain funds for these capital projects from operations, contributions
by developers and others and advances from developers (which must be repaid).
We also periodically borrow money or issue 50




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equity for these purposes. In addition, we secured a syndicated bank
facility that we can use for these purposes. We cannot assure you that these
sources will continue to be adequate or that the cost of funds will remain at
levels permitting us to earn a reasonable rate of return. New Accounting Pronouncements Registrant is subject to newly issued as well as changes in existing
requirements issued by the Financial Accounting Standard Board. Differences in
financial reporting between periods could occur unless and until the CPUC and
the ACC approve such changes for conformity through regulatory proceedings. See
Note 7of Notes to Consolidated Financial Statements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Registrant is exposed to certain market risks, including fluctuations in
interest rates, and commodity price risk primarily relating to changes in the
market price of electricity. Market risk is the potential loss arising from
adverse changes in prevailing market rates and prices. There have been no
material changes regarding Registrants market risk position from the
information provided in its Annual Report on Form 10-K for the year ended
December 31, 2003. The quantitative and qualitative disclosures about market
risk are discussed in Item 7A-Quantitative and Qualitative Disclosures About
Market Risk, contained in Registrants Annual Report on Form 10-K. 
 Item 4. Controls and Procedures As of the end of the period covered by this report, Registrant carried out
an evaluation, under the supervision and with the participation of the
Companys management, including the Companys Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of the
Companys disclosure controls and procedures pursuant to Rule 13a-15(b) and
15d-15(b) under the Exchange Act. Based upon that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Companys
disclosure controls and procedures are effective. There were no significant
changes in the Companys internal controls over financial reporting or in other
factors identified in connection with this evaluation that occurred during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, the Companys internal control over financial
reporting. 51




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PART II 
 Item 1. Legal Proceedings Water Quality-Related Litigation SCW is a defendant in twenty-two lawsuits involving claims pertaining to
water quality. Nineteen of the lawsuits involve customer service areas located
in Los Angeles County that have been filed in Los Angeles Superior Court:
Robert Arenas, et al. v. Suburban Water Systems, Inc., et al., Case No.
KC037559, Anthony John Bell, et al. v. City of Pomona, et al., Case No.
KC038796, Adler, et al. v. Southern California Water Company, et al., Case No.
BC169892, Santamaria, et al. v. Suburban Water Systems, et al., Case No.
KC025995, Georgianna Dominguez et al. v. Southern California Water Company, et
al., Case No. GC021657, Anderson, et al. v. Suburban Water Company, et al.,
Case No. KC028524, Abarca, et al. v. City of Pomona, et al., Case No. K027795,
Celi, et al. v. San Gabriel Valley Water Company, Case No. GC020622, Boswell et
al. v. Suburban Water Systems, et al., Case No. KC027318, Demciuc et al. v.
Suburban Water Systems, et al., Case No. KC028732, Antoinette Adejare, et al.
v. City of Pomona, et al., Case No. KC031096, Almelia Brooks, et al. v.
Suburban Water System, et al., Case No. KC032915, Lori Alexander, et al. v.
Suburban Water Systems, et al., Case No. KC031130, David Arnold, et al. v. City
of Pomona, et al., Case No. KC034636, Gilda Ambrose-Dubre, et al. v. City of
Pomona, et al., Case No. KC032906, Melissa Garrity Alvarado, et al. v. Suburban
Water Systems et al., Case No. KC034953 , Charles Alexander, et al. v. City of
Pomona, et al., Case No KC035526, Criner, et al. v. San Gabriel Valley Water
Company, et al., Case No. GC021658, and Donerson, et al. v. City of Pomona, et
al., Case No. KC035987. The lawsuits filed in Los Angeles County Superior Court
are based on the allegations that SCW and the other defendants have provided
and continue to provide plaintiffs with contaminated water from its wells,
several of which are located in an area of the San Gabriel Valley that has been
designated a federal superfund site, that the maintenance of this contaminated
well water has resulted in contamination of the soil, subsurface soil and
surrounding air with solvents and other substances, and that plaintiffs have
been injured and their property damaged as a result. Three of the lawsuits
involve a customer service area located in Sacramento County that have been
filed in Sacramento County Superior Court: Nathaniel Allen, Jr. v.
Aerojet-General Corporation, et al., Case No. 97AS06295, Daphne Adams, et al.
v. Aerojet-General Corporation, et al., Case No. 98AS01025, and Wallace Andrew
Pennington et al. v. Aerojet-General Corporation, et al., Case No. 00AS02622.
The lawsuits filed in Sacramento County Superior Court are based on the
allegations that SCW and other defendants have delivered water to plaintiffs
that are contaminated with a number of chemicals, including trichloroethylene,
perchloroethylene, carbon tetrachloride, perchlorate, Freon-113, hexavalent
chromium and other unnamed chemicals and that plaintiffs have been injured and
their property damaged as a result. On September 1, 1999, the Court of Appeals in San Francisco held that the
CPUC had preemptive jurisdiction over regulated public utilities with respect
to water quality matters and ordered dismissal of a series of these lawsuits.
On October 11, 1999, one group of plaintiffs appealed this decision to the
California Supreme Court. On February 4, 2002, the California Supreme Court
concluded that (i) the CPUC had preemptive jurisdiction over claims seeking
injunctive relief and claims based on the theory that a public utility
regulated by the CPUC provided unsafe drinking water even though it had
complied with federal and state drinking water standards, but (ii) the CPUC did
not have preemptive jurisdiction over damage claims based on allegations of
violations of federal and state drinking water standards by public utilities
regulated by the CPUC. As a result, damage claims based on allegations of
violations of federal and state drinking water standards may proceed while the
other claims must be dismissed. In light of the breadth of plaintiffs claims, the lack of factual
information regarding plaintiffs claims and injuries, if any, the impact of
the California Supreme Court decision on plaintiffs claims and the fact that
investigation is presently underway, SCW is unable at this time to determine
what, if any, potential liability it may have with respect to these claims.
Based upon the information currently available 52




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to it, Registrant believes that these claims are without merit and intends
to vigorously defend against these claims. SCW is subject to self-insured retention provisions in its applicable
insurance policies and has either expensed the self-insured amounts or has
reserved against payment of these amounts as appropriate. SCWs various
insurance carriers have, to date, provided reimbursement for costs incurred
above the self-insured amounts for defense against these lawsuits, subject to a
reservation of rights. Order Instituting Investigation (OII) In March 1998, the CPUC issued an OII to regulated water utilities in the
state of California, including SCW. The purpose of the OII was to determine
whether existing standards and policies regarding drinking water quality
adequately protect the public health and whether those standards and policies
were being uniformly complied with by those water utilities. On November 2,
2000, a final decision from the CPUC concluded that the CPUC has the
jurisdiction to regulate the service of water utilities with respect to the
health and safety of that service; that the DOHS requirements governing
drinking water quality adequately protect the public health and safety; and
that, based on an extensive review of 25 years of water quality records,
regulated water utilities, including SCW, have satisfactorily complied with
past and present drinking water quality requirements, except for one small
unrelated water utility in Northern California. The CPUC had previously authorized establishment of memorandum accounts to
capture expenses related to the OII. Under the memorandum account procedure,
SCW may recover litigation costs from ratepayers to the extent authorized by
the CPUC. As of March 31, 2004, SCW has incurred a net cost of $890,000
related to the OII. In a decision issued by the CPUC on March 16, 2004, SCW is
allowed to recover the cost through a special condition surcharge over a
twelve-month period. Other Water Quality Litigation On October 25, 1999, SCW sued Aerojet-General Corporation (Aerojet) for
causing the contamination of eastern portions of the Sacramento County
groundwater basin. On October 10, 2003 Registrant entered into a confidential
memorandum of understanding (MOU) with the Aerojet-General subsidiary of
GenCorp, Inc. for the settlement of legal actions brought by SCW. The MOU sets
forth the present financial terms and the structure of a settlement to cover,
over time, capital and litigation related costs incurred by SCW resulting from
the contamination. The MOU and the settlement embodied therein was found to
be binding by the Sacramento Superior Court on January 18, 2004. Further
documentation incorporating the terms of the MOU is presently underway.
However, documentation is not complete and management is presently unable to
predict when a comprehensive set of settlement documents will be completed. Based on the financial terms in the MOU, SCW established a receivable from
Aerojet in an amount of $16.7 million for capital project and purchased water
reimbursements at the end of 2003, of which $8.7 million has been received in
early 2004. The remainder of the costs is subject to further settlement
documentation. Reimbursements received from Aerojet have been applied directly
to reduce SCWs costs of utility plant and purchased water. Prior to the MOU,
Aerojet had reimbursed SCW $4.3 million in capital costs and $171,000 for
additional water supply. In an action related to the draft settlement agreement, Registrant and
Aerojet have signed three separate agreements requiring Aerojet to pay for
certain infrastructure and upgrades to Registrants Coloma Treatment Plant as a
contingency plan should additional wells be impacted prior to the high summer
demand period of 2004. The value of the three agreements approximates $6.8
million in capital improvements. In addition, SCW is in negotiations with the
County of Sacramento regarding a replacement of water supply. 53




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The CPUC has previously authorized memorandum accounts to allow for
recovery, from customers, of costs incurred by SCW in prosecuting the suits
filed against the State and Aerojet, less any recovery from the defendants or
others. As of March 31, 2004, approximately $16.3 million in legal and
consulting related costs has been recorded as deferred charges and included as
Regulatory Assets on the balance sheets. The CPUC has authorized SCW to
increase rates, effective April 28, 2001, for recovery over a six-year period
of approximately $1.8 million in expenses that were incurred on or before
August 31, 2000, in the Aerojet matter. As part of an abbreviated application
for SCWs Region I, SCW requested a long-term amortization of the balance of
costs included in the Aerojet litigation memorandum account, net of any
reimbursement amount. The draft agreement with Aerojet also addresses the
possible recovery of SCWs deferred charges through revenues in new development
areas. Management believes these costs are recoverable through rates;
however, proceeds from any settlement agreement with Aerojet would be
applied to reduce amounts collected from customers. Management cannot
give assurance that the CPUC will ultimately allow recovery of all or
any of these costs. See the section entitled Regulatory
Matters and Environmental Matters in Part I, Item 2 in Managements
Discussion and Analysis of Financial Conditions and Results of Operation. The compound MTBE has been detected in a well serving SCWs Los Osos water
system. For some time SCW has been working with the Regional Water Quality
Control Board as well as the owner of a service station. Although the owner of
the service station has attempted remediation with funds provided through the
California Underground Storage Tank Fund (CUSTF), it appears there will be
insufficient funds from the CUSTF to complete remediation sufficient to return
the well to service. In order to prevent the running of the statute of
limitations, on August 12, 2002 SCW filed suit in the Superior Court of the
State of California for the County of San Luis Obispo against the operators and
owners of the service station facility, and Chevron USA Products, Inc., the
supplier. A settlement with Chevron has been reached and a filing has been made
for dismissal by the Court. SCW has dismissed all other parties. The impacted
well may need to be removed permanently from service and the settlement with
Chevron is expected to afford SCW sufficient funds to commence site development
and construction of a replacement well. Perchlorate and/or Volatile Organic Compounds (VOC) have been detected in
five wells servicing SCWs San Gabriel System. SCW filed suit, along with two
other affected water purveyors and the San Gabriel Basin Water Quality
Authority (WQA), in the federal court against some of those responsible for the
contamination. Some of the other potential defendants settled with SCW, other
water purveyors and the WQA on VOC related issues prior to the filing of the
lawsuit. In response to the filing of the Federal lawsuit, the Potentially
Responsible Party (PRP) defendants filed motions to dismiss the suit or strike
certain portions of the suit. The judge issued a ruling on April 1, 2003
granting in part and denying in part the defendants motions. A key ruling of
the court was that the water purveyors, including the Registrant, by virtue of
their ownership of wells contaminated with hazardous chemicals are themselves
PRPs under the Comprehensive Environmental Response, Compensation, and
Liability Act (CERCLA). Registrant has, pursuant to permission of the court,
amended its suit to claim certain affirmative defenses as an innocent party
under CERCLA. Registrant is presently unable to predict the outcome of this
ruling on its ability to fully recover from the PRPs the future costs
associated with the treatment of these wells. On August 29, 2003, the US Environmental Protection Agency issued
Unilateral Administrative Orders (UAO) against 41 parties deemed responsible
for polluting the groundwater in that portion of the San Gabriel Valley from
which SCWs two impacted wells draw water. SCW was not named as a party to the
UAO. The UAO requires that these parties remediate the contamination. As a
result of the issuance of the UAO, these parties have begun settlement
discussions regarding the Federal lawsuits with SCW, the other two affected
water purveyors and WQA. Registrant is presently unable to predict the ultimate
outcome of these settlement discussions. MCO Properties, Inc., a real estate developer (MCO), has filed a complaint
against AWR and CCWC in the Superior Court of Maricopa County (CV 2003-011184)
on June 6, 2003 alleging breach of 54




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contract, breach of the implied covenant of good faith and fair dealing,
interference with prospective economic advantage, negligence and negligent
misrepresentation and seeking a declaratory judgment. The complaint arises out
of allegations by MCO that AWR has failed to comply with the terms of the
Stock Purchase Agreement between MCO and AWR pursuant to which AWR acquired
CCWC from MCO and has thereby interfered with MCOs ability to develop its real
property in the Town of Fountain Hills. A revised complaint was filed on
December 12, 2003 further alleging that CCWC has not maintained its designation
of assured supply as required in the Stock Purchase Agreement. Similar
allegations have been filed by MCO against CCWC with the Arizona Corporation
Commission (Docket No. W-02113A-3-0383). A settlement agreement between CCWC
and MCO was executed which dismisses all claims. In addition, CCWC has
undertaken actions requested by the Arizona Department of Water Resources
(ADWR), including (i) joining the Central Arizona Groundwater Replenishment
District as a Member Service Area, (ii) submitting an application to the ADWR
to modify its designation of assured supply that revised its assured water
supply designation in a manner that will enable CCWC to provide water service
to new real estate developments in the Town of Fountain Hills, and (iii) filing
a report supporting the modification of designation of assured water supply.
On April 7, 2004 ADWR issued a revised decision confirming that CCWC has the
physical, legal and continuous availability of Central Arizona Project water
and groundwater for 100 years, in excess of its projected demands through 2014. For further information on CCWCs assured water supply designation, see
Item 2. Managements Discussion and Analysis of Financial Conditions and
Results of Operation-Water Supply-CCWCs Water Supply. Electric Service Litigation SCW has been, in conjunction with the Southern California Edison (Edison)
unit of Edison International, planning to upgrade transmission facilities to
115kv (the 115kv Project) in order to meet increased energy and demand
requirements for SCWs Bear Valley Electric service area. On December 27, 2000,
SCW filed a lawsuit against Edison for declaratory relief and seeking damages
for breach of contract as a result of delays in the 115kv Project, violations
of good faith and fair dealing, negligent misrepresentation, intentional
misrepresentation and unjust enrichment. Subsequently Edison filed a
cross-complaint against SCW for breach of contract, anticipatory breach, and
quantum meruit. SCW has also sought declaratory relief from Edisons claims. To
date, SCW has spent approximately $3.4 million in this matter, all of which has
been expensed. A settlement has been reached between SCW and Edison, in which
(i) SCW is to pay Edison $5.0 million as the cost of abandoning and terminating
the 115kv Project, (ii) Edison shall make a filing with the Federal Energy
Regulatory Commission (FERC) to include the cost in a FERC rate schedule under
the Transmission Service Agreement between SCW and Edison, and (iii) Edison is
to sell the Goldhill substation and associated transmission line to SCW at its
book value. Management believes that the FERCs approval on Edisons filing is
probable and this cost is within the meaning of the CPUCs Code of Abandonment
Fee which is recoverable through the supply cost balancing account. As a
result, the $5.0 million obligation to Edison arising from the settlement was
recorded as a liability and a regulatory asset in the fourth quarter of 2003,
of which $1.4 million was paid in the first quarter of 2004. A final
settlement agreement was reached on March 17, 2004. Other Litigation Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no other legal proceedings are
pending, which are believed to be material. Management believes that rate
recovery, proper insurance coverage and reserves are in place to insure against
property, general liability and workers compensation claims incurred in the
ordinary course of business. 55




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Item 2. Changes in
Securities, Use of Proceeds and Issuer Purchases of Equity Securities (a) None (b) None (c) None (d) None (e) None 
 Item 3. Defaults Upon Senior Securities Registrant maintains a $75 million revolving credit facility maturing in
June 2005. Total borrowings outstanding under this credit facility amounted to
$47 million at March 31, 2004 included in current liabilities. The credit
agreement for this facility includes, among other things, certain financial
covenants. One of those covenants is maintenance of an interest coverage ratio
of at least 3.25x, as defined and calculated in the credit agreement, based on
trailing twelve-month results. The Company violated this interest coverage
ratio for the trailing twelve-month period ended March 31, 2004 and has
requested and received a waiver from its lending syndicate, which excludes in
the calculation, certain charges booked by SCW following certain CPUC
decisions. The waiver cured the default at March 31, 2004 and allowed for the
exclusion of those charges from the calculation of the trailing twelve-month
interest coverage ratio through September 30, 2004. 
 Item 4. Submission of Matters to a Vote of Security Holders No items were submitted during the first quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation
of proxies or otherwise. However, on or about April 2, 2004, common and
preferred shareholders of AWR were mailed a Notice of Annual Meeting and a
Proxy Statement. Shareholders were requested to vote their shares to: (1) elect
four Class II directors to the Board of Directors to serve until their
successors are elected and qualified; (2) approve the 2003 Non-Employee
Directors Stock Plan; (3) ratify the appointment of PricewaterhouseCoopers, LLP
as the independent auditors; and (4) to transact any other business, which may
properly come before the meeting or any adjournment thereof. The Annual Meeting of Shareholders will be held on May 11, 2004. 
 Item 5. Other Information On April 27, 2004, the Board of Directors of Registrant declared a regular
quarterly dividend of $0.221 per common share. The dividend will be paid June
1, 2004 to shareholders of record as of the close of business on May 10, 2004. 56




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Item 6. Exhibits and Reports on Form 8-K (a) The following documents are filed as Exhibits to this report:  10.25
    
    Amendment No. 2 to the Credit Agreement between American States
Water Company dated April 29, 2004 with Wells Fargo Bank, N.A., as
Administrative Agent (1)31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (1)31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 (1)32.1
    
    Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (2)32.2
    
    Certification of Chief Executive Officer pursuant to Section
906 of the Sarbanes-Oxley Act of 2002 (2)   (1) Filed concurrently herewith(2) Furnished concurrently herewith.  (b)
    
    Registrant filed a Form 8-K with the Securities and Exchange
Commission (SEC) dated March 17, 2004 under Item 12. No financial
statements were filed with this report. 57




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SIGNATURE Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized and as its principal financial officer. AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANYBy:
    /s/ McClellan Harris IIIMcClellan Harris IIISenior Vice President-Finance, Chief Financial
Officer, Treasurer and Corporate Secretary Dated: May 10, 2004 58