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** **

 

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**x****                              Quarterlyreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**for thequarterly period ended June 30, 2010**

 

**or**

 

**o****                                 Transitionreport pursuant to Section 13 or 15(d) of the Securities Exchange Actof 1934**

 

**for the transition periodfrom             to            **

 

**Commission file number  001-14431**

 

**AmericanStates Water Company**

(Exact Name ofRegistrant as Specified in Its Charter)

 

| **California**                                                                      | ** ** | **95-4676679**                    |
|-------------------------------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization)                      |       | (IRS Employer Identification No.) |
| ** **                                                                          | ** ** | ** **                        |
| **630 E. Foothill Blvd, San Dimas, CA**                                             | ** ** | **91773-1212**                    |
| (Address of Principal Executive Offices)                                            |       | (Zip Code)                        |
| ** **                                                                          |
| **(909) 394-3600**                                                                  |
| (Registrant’s Telephone Number, Including Area Code)                      |
| ** **                                                                          |
| **Not Applicable**                                                                  |
| (Former Name, Former Address and Former Fiscal Year, if Changed Since  Last Report) |

 

**Commission file number   001-12008**

 

**GoldenState Water Company**

(ExactName of Registrant as Specified in Its Charter)

 

| **California**                                                                      | ** ** | **95-1243678**                     |
|-------------------------------------------------------------------------------------|------------|------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization)                     |       | (IRS  Employer Identification No.) |
| ** **                                                                          | ** ** | ** **                         |
| **630 E.  Foothill Blvd, San Dimas, CA**                                            | ** ** | **91773-1212**                     |
| (Address  of Principal Executive Offices)                                           |       | (Zip  Code)                        |
| ** **                                                                          |
| **(909)  394-3600**                                                                 |
| (Registrant’s  Telephone Number, Including Area Code)                     |
| ** **                                                                          |
| **Not  Applicable**                                                                 |
| (Former  Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

 

Indicate by check mark whether Registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat Registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.

 
| American States Water Company | Yes x  No o |
|-------------------------------|------------------|
| Golden State Water Company    | Yes x  No o |

 

Indicate by check mark whether Registrant has submitted electronicallyand posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T(§ 232.405 of this chapter) during the preceding 12 months (or such shorterperiod that the Registrant was required to submit and post such files).

 
| American States Water Company | Yes o  No o |
|-------------------------------|------------------|
| Golden State Water Company    | Yes o  No o |

 

Indicate by check mark whether theRegistrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See definition of “largeaccelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2of the Exchange Act. (Check one):

 

**American States Water Company**

 
| Large accelerated filer o | Accelerated filer x | Non-accelerated filer o | Smaller reporting company o |
|---------------------------|---------------------|-------------------------|-----------------------------|

 

**Golden State Water Company**

 
| Large accelerated filer o | Accelerated filer o | Non-accelerated filer x | Smaller reporting company o |
|---------------------------|---------------------|-------------------------|-----------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

 
| American States Water Company | Yes  ̈  No x |
|-------------------------------|-----------------------|
| Golden State Water Company    | Yes  ̈  No x |

 

Asof August 4, 2010, the number of Common Shares outstanding, of AmericanStates Water Company was 18,594,118 shares. As of August 4, 2010, allof the 142 outstanding Common Shares of Golden State Water Company were ownedby American States Water Company.

 

GoldenState Water Company meets the conditions set forth in General Instruction(H)(1)(a) and (b) of Form 10-Q and is therefore filing thisForm, in part, with the reduced disclosure format for Golden State WaterCompany.

 

 

 

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**AMERICAN STATES WATER COMPANY**

**and**

**GOLDEN STATE WATER COMPANY**

**FORM 10-Q**

 

**INDEX**

 
| **Part I**  | **Financial Information**                                                                                                    | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       | ** **                                                                                                                   | ** ** |
| Item 1:          | Financial  Statements                                                                                                        | 1          |
|             |                                                                                                                         |       |
|             | Consolidated Balance Sheets of American States Water  Company as of June 30, 2010 and December 31, 2009            | 2          |
|             |                                                                                                                         |       |
|             | Consolidated Statements of Income of American States  Water Company for the Three Months Ended June 30, 2010 and 2009   | 4          |
|             |                                                                                                                         |       |
|             | Consolidated Statements of Income of American States  Water Company for the Six Months Ended June 30, 2010 and 2009     | 5          |
|             |                                                                                                                         |       |
|             | Consolidated  Statements of Cash Flow of American States Water Company for the Six Months  Ended June 30, 2010 and 2009 | 6          |
|             |                                                                                                                         |       |
|             | Balance  Sheets of Golden State Water Company as of June 30, 2010 and  December 31, 2009                           | 7          |
|             |                                                                                                                         |       |
|             | Statements  of Income of Golden State Water Company for the Three Months Ended  June 30, 2010 and 2009                  | 9          |
|             |                                                                                                                         |       |
|             | Statements  of Income of Golden State Water Company for the Six Months Ended  June 30, 2010 and 2009                    | 10         |
|             |                                                                                                                         |       |
|             | Statements  of Cash Flow of Golden State Water Company for the Six Months Ended  June 30, 2010 and 2009                 | 11         |
|             |                                                                                                                         |       |
|             | Notes to Consolidated Financial Statements                                                                                   | 12         |
|             |                                                                                                                         |       |
| Item 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                  | 31         |
|             |                                                                                                                         |       |
| Item 3:          | Quantitative  and Qualitative Disclosures About Market Risk                                                                  | 67         |
|             |                                                                                                                         |       |
| Item 4:          | Controls and  Procedures                                                                                                     | 67         |
|             |                                                                                                                         |       |
| Item 4T:         | Controls and  Procedures                                                                                                     | 67         |
|             |                                                                                                                         |       |
| **Part II** | **Other Information**                                                                                                        |       |
| ** **       | ** **                                                                                                                   | ** ** |
| Item 1:          | Legal Proceedings                                                                                                            | 68         |
|             |                                                                                                                         |       |
| Item 1A:         | Risk Factors                                                                                                                 | 68         |
|             |                                                                                                                         |       |
| Item 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                 | 68         |
|             |                                                                                                                         |       |
| Item 3:          | Defaults Upon  Senior Securities                                                                                             | 68         |
|             |                                                                                                                         |       |
| Item 4:          | [Removed and  Reserved]                                                                                                      | 68         |
|             |                                                                                                                         |       |
| Item 5:          | Other Information                                                                                                            | 68         |
|             |                                                                                                                         |       |
| Item 6:          | Exhibits                                                                                                                     | 69         |
|             |                                                                                                                         |       |
|             | Signatures                                                                                                                   | 70         |

 

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**PART I**

 

**Item 1. Financial Statements**

 

General

 

The basic financial statements included herein have been prepared byRegistrant, without audit, pursuant to the rules and regulations of theSecurities and Exchange Commission.

 

Certaininformation and footnote disclosures normally included in financial statements,prepared in accordance with accounting principles generally accepted in theUnited States of America, have been condensed or omitted pursuant to suchrules and regulations. In the opinion of management, all adjustmentsconsisting of normal recurring items and estimates necessary for a fairstatement of results for the interim period have been made.

 

Itis suggested that these financial statements be read in conjunction with thefinancial statements and notes thereto in the latest Annual Report onForm 10-K of American States Water Company and its wholly ownedsubsidiary, Golden State Water Company.

 

FilingFormat

 

AmericanStates Water Company (hereinafter “AWR”) is the parent company of Golden StateWater Company (hereinafter “GSWC”), Chaparral City Water Company (hereinafter “CCWC”)and American States Utility Services, Inc. (hereinafter “ASUS”) and itssubsidiaries.

 

Thisquarterly report on Form 10-Q is a combined report being filed by twoseparate Registrants: AWR and GSWC. For more information, please see Note 1 tothe Notes to Consolidated Financial Statements and the heading entitled Generalin Item 2 - Management’s Discussion and Analysis of Financial Condition andResults of Operations. References in this report to “Registrant” are to AWR andGSWC collectively, unless otherwise specified. GSWC makes no representations asto the information contained in this report relating to AWR and itssubsidiaries, other than GSWC.

 

**Forward-LookingInformation**

 

This Form 10-Q and thedocuments incorporated by reference herein contain forward-looking statementsintended to qualify for the “safe harbor” from liability established by thePrivate Securities Litigation Reform Act of 1995.  Forward-looking statements include statementsregarding our goals, beliefs, plans or current expectations, taking intoaccount the information currently available to management.  Forward-looking statements are not statementsof historical facts.   For example, whenwe use words such as “believes,” “anticipates,” “expects,” “plans,” “estimates,”“intends,” “may” and other words that convey uncertainty of future events oroutcome, we are making forward-looking statements. Such statements addressfuture events and conditions concerning such matters as our ability to raisecapital, capital expenditures, earnings, litigation, rates, water sales, waterquality and other regulatory matters, adequacy of water supplies, our abilityto recover electric, natural gas and water supply costs from ratepayers,contract operations, liquidity and capital resources, and accounting matters.

 

Wecaution you that any forward-looking statements made by us are not guaranteesof future performance and that actual results may differ materially from those currently anticipated in suchstatements, by reason of factors such as: changes in utility regulation;recovery of regulatory assets not yet included in rates; future economicconditions which affect changes in customer demand and changes in water andenergy supply costs; changes in pension and post-retirement benefit plan costs;future climatic conditions; delays in customer payments or priceredeterminations and/or equitable adjustments on contracts executed by ASUS andits subsidiaries; potential assessments for failure to meet interim targets forthe purchase of renewable energy; and legislative, legal proceedings,regulatory and other circumstances affecting anticipated revenues and costs.

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****ASSETS****(Unaudited)**

 
| **(in thousands)**                                                                                       | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Property, Plant and Equipment**                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Regulated utility plant, at cost                                                                              |       | $                       | 1,210,699  |                        | $          | 1,171,618 |   |
| Non utility property, at cost                                                                                 |       | 5,184                   |       | 4,532                       |       |
| Total                                                                                                         |       | 1,215,883               |       | 1,176,150                   |       |
| Less - Accumulated depreciation                                                                               |       | (369,675                | )          | (354,123                    | )          |
| Net property, plant and equipment                                                                             |       | 846,208                 |       | 822,027                     |       |
|                                                                                                          |       |                    |       |                        |       |
| **Other Property and Investments**                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Goodwill                                                                                                      |       | 1,116                   |       | 1,116                       |       |
| Other property and investments                                                                                |       | 10,545                  |       | 10,989                      |       |
| Total other property and investments                                                                          |       | 11,661                  |       | 12,105                      |       |
|                                                                                                          |       |                    |       |                        |       |
| **Current Assets**                                                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                                     |       | 6,603                   |       | 1,557                       |       |
| Accounts receivable — customers (less allowance  for doubtful accounts of $633 in 2010 and $657 in 2009) |       | 15,844                  |       | 16,193                      |       |
| Unbilled revenue                                                                                              |       | 26,122                  |       | 17,835                      |       |
| Receivable from the U.S. government (less  allowance for doubtful accounts of $64 in 2010 and $67 in 2009)    |       | 4,310                   |       | 4,245                       |       |
| Other accounts receivable (less allowance for  doubtful accounts of $251 in 2010 and $434 in 2009)            |       | 8,162                   |       | 8,334                       |       |
| Income taxes receivable                                                                                       |       | 2,687                   |       | 4,159                       |       |
| Materials and supplies, at average cost                                                                       |       | 2,240                   |       | 1,895                       |       |
| Regulatory assets — current                                                                              |       | 20,456                  |       | 12,267                      |       |
| Prepayments and other current assets                                                                          |       | 1,775                   |       | 3,165                       |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                                  |       | 29,042                  |       | 19,766                      |       |
| Deferred income taxes — current                                                                          |       | 5,311                   |       | 5,307                       |       |
| Assets of discontinued operations (Note 10)                                                                   |       | 49,499                  |       | 50,177                      |       |
| Total current assets                                                                                          |       | 172,051                 |       | 144,900                     |       |
|                                                                                                          |       |                    |       |                        |       |
| **Regulatory and Other Assets**                                                                               | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Regulatory assets                                                                                             |       | 106,169                 |       | 110,420                     |       |
| Other accounts receivable                                                                                     |       | 5,919                   |       | 5,717                       |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                                  |       | 7,144                   |       | 7,933                       |       |
| Deferred income taxes                                                                                         |       | 152                     |       | 220                         |       |
| Other                                                                                                         |       | 10,326                  |       | 9,971                       |       |
| Total regulatory and other assets                                                                             |       | 129,710                 |       | 134,261                     |       |
|                                                                                                          |       |                    |       |                        |       |
| **Total Assets**                                                                                              |       | $                       | 1,159,630  |                        | $          | 1,113,293 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****CAPITALIZATION AND LIABILITIES****(Unaudited)**

 
| **(in thousands)**                                                      | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Capitalization**                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Common shares, no par value, no stated value                                 |       | $                       | 225,394    |                        | $          | 223,066 |   |
| Earnings reinvested in the business                                          |       | 144,140                 |       | 136,364                     |       |
| Total common shareholders’ equity                                       |       | 369,534                 |       | 359,430                     |       |
| Long-term debt                                                               |       | 299,935                 |       | 300,221                     |       |
| Total capitalization                                                         |       | 669,469                 |       | 659,651                     |       |
|                                                                         |       |                    |       |                        |       |
| **Current Liabilities**                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Notes payable to banks                                                       |       | 40,200                  |       | 17,400                      |       |
| Long-term debt — current                                                |       | 368                     |       | 365                         |       |
| Accounts payable                                                             |       | 41,233                  |       | 33,746                      |       |
| Income taxes payable                                                         |       | 234                     |       | 72                          |       |
| Accrued employee expenses                                                    |       | 8,663                   |       | 7,262                       |       |
| Accrued interest                                                             |       | 3,467                   |       | 3,263                       |       |
| Regulatory liabilities - current                                             |       | —                  |       | 113                         |       |
| Unrealized loss on purchased power contracts                                 |       | 9,552                   |       | 7,338                       |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 9,722                   |       | 6,315                       |       |
| Other                                                                        |       | 14,152                  |       | 23,047                      |       |
| Liabilities of discontinued operations (Note 10)                             |       | 27,217                  |       | 27,006                      |       |
| Total current liabilities                                                    |       | 154,808                 |       | 125,927                     |       |
|                                                                         |       |                    |       |                        |       |
| **Other Credits**                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Advances for construction                                                    |       | 78,646                  |       | 79,443                      |       |
| Contributions in aid of construction — net                              |       | 93,265                  |       | 91,519                      |       |
| Deferred income taxes                                                        |       | 92,628                  |       | 94,341                      |       |
| Unamortized investment tax credits                                           |       | 2,109                   |       | 2,154                       |       |
| Accrued pension and other postretirement benefits                            |       | 42,901                  |       | 40,158                      |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 17,034                  |       | 11,580                      |       |
| Other                                                                        |       | 8,770                   |       | 8,520                       |       |
| Total other credits                                                          |       | 335,353                 |       | 327,715                     |       |
|                                                                         |       |                    |       |                        |       |
| **Commitments and Contingencies  (Note 9)**                                  |       | —                  |       | —                      |       |
|                                                                         |       |                    |       |                        |       |
| **Total Capitalization and  Liabilities**                                    |       | $                       | 1,159,630  |                        | $          | 1,113,293 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| **Operating Revenues**                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                               | 72,816     |   | $ | 72,295 |   |
| Electric                                                              |       | 7,845                                           |       | 5,888 |   |
| Contracted services                                                   |       | 14,815                                          |       | 13,508 |   |
| Total operating revenues                                              |       | 95,476                                          |       | 91,691 |   |
|                                                                  |       |                                            |       |   |   |
| **Operating Expenses**                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 13,564                                          |       | 11,954 |   |
| Power purchased for pumping                                           |       | 2,046                                           |       | 2,535 |   |
| Groundwater production assessment                                     |       | 2,664                                           |       | 2,857 |   |
| Power purchased for resale                                            |       | 2,876                                           |       | 2,403 |   |
| Supply cost balancing accounts                                        |       | 4,686                                           |       | 3,332 |   |
| Other operation expenses                                              |       | 7,262                                           |       | 6,943 |   |
| Administrative and general expenses                                   |       | 16,569                                          |       | 15,268 |   |
| Depreciation and amortization                                         |       | 8,365                                           |       | 7,878 |   |
| Maintenance                                                           |       | 4,375                                           |       | 3,783 |   |
| Property and other taxes                                              |       | 3,281                                           |       | 2,643 |   |
| ASUS construction expenses                                            |       | 8,633                                           |       | 7,829 |   |
| Net loss on sale of property                                          |       | 5                                               |       | — |   |
| Total operating expenses                                              |       | 74,326                                          |       | 67,425 |   |
|                                                                  |       |                                            |       |   |   |
| **Operating Income**                                                  |       | 21,150                                          |       | 24,266 |   |
|                                                                  |       |                                            |       |   |   |
| **Other Income and Expenses**                                         | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (5,870                                          | )          | (5,558 | ) |
| Interest income                                                       |       | 158                                             |       | 298 |   |
| Other — net                                                      |       | (69                                             | )          | 82 |   |
| Total other income and expenses                                       |       | (5,781                                          | )          | (5,178 | ) |
|                                                                  |       |                                            |       |   |   |
| **Income from continuing  operations before income tax expense**      |       | 15,369                                          |       | 19,088 |   |
| Income tax expense                                                    |       | 6,499                                           |       | 7,673 |   |
| **Income from continuing  operations**                                |       | 8,870                                           |       | 11,415 |   |
|                                                                  |       |                                            |       |   |   |
| **Income from discontinued  operations, net of tax**                  |       | 105                                             |       | 84 |   |
|                                                                  |       |                                            |       |   |   |
| **Net Income**                                                        |       | $                                               | 8,975      |   | $ | 11,499 |   |
|                                                                  |       |                                            |       |   |   |
| **Basic Earnings Per Common Share**                                   |       |                                            |       |   |   |
| Income from continuing operations                                     |       | $                                               | 0.47       |   | $ | 0.64 |   |
| Income from discontinued operations, net of tax                       |       | 0.01                                            |       | — |   |
| Net Income                                                            |       | $                                               | 0.48       |   | $ | 0.64 |   |
|                                                                  |       |                                            |       |   |   |
| **Fully Diluted Earnings Per  Share**                                 |       |                                            |       |   |   |
| Income from continuing operations                                     |       | $                                               | 0.47       |   | $ | 0.64 |   |
| Income from discontinued operations, net of tax                       |       | 0.01                                            |       | — |   |
| Net Income                                                            |       | $                                               | 0.48       |   | $ | 0.64 |   |
|                                                                  |       |                                            |       |   |   |
| **Weighted Average Number of  Shares Outstanding**                    |       | 18,576                                          |       | 17,861 |   |
| **Weighted Average Number of  Diluted Shares**                        |       | 18,720                                          |       | 17,987 |   |
|                                                                  |       |                                            |       |   |   |
| **Dividends Declared Per Common  Share**                              |       | $                                               | 0.26       |   | $ | 0.25 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME****FOR THE SIX MONTHS****ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 
| ** **                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Operating Revenues**                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                             | 128,873    |   | $ | 127,473 |   |
| Electric                                                              |       | 18,824                                        |       | 14,520 |   |
| Contracted services                                                   |       | 36,245                                        |       | 27,691 |   |
| Total operating revenues                                              |       | 183,942                                       |       | 169,684 |   |
|                                                                  |       |                                          |       |   |   |
| **Operating Expenses**                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 21,566                                        |       | 19,942 |   |
| Power purchased for pumping                                           |       | 3,603                                         |       | 4,102 |   |
| Groundwater production assessment                                     |       | 5,286                                         |       | 5,374 |   |
| Power purchased for resale                                            |       | 6,545                                         |       | 6,365 |   |
| Supply cost balancing accounts                                        |       | 8,501                                         |       | 6,860 |   |
| Other operation expenses                                              |       | 13,946                                        |       | 13,924 |   |
| Administrative and general expenses                                   |       | 35,196                                        |       | 31,719 |   |
| Depreciation and amortization                                         |       | 16,724                                        |       | 15,753 |   |
| Maintenance                                                           |       | 8,568                                         |       | 7,679 |   |
| Property and other taxes                                              |       | 6,903                                         |       | 5,973 |   |
| ASUS construction expenses                                            |       | 16,801                                        |       | 16,274 |   |
| Net (gain) loss on sale of property                                   |       | 2                                             |       | (15 | ) |
| Total operating expenses                                              |       | 143,641                                       |       | 133,950 |   |
|                                                                  |       |                                          |       |   |   |
| **Operating Income**                                                  |       | 40,301                                        |       | 35,734 |   |
|                                                                  |       |                                          |       |   |   |
| **Other Income and Expenses**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (11,528                                       | )          | (10,749 | ) |
| Interest income                                                       |       | 819                                           |       | 502 |   |
| Other — net                                                      |       | (5                                            | )          | 52 |   |
| Total other income and expenses                                       |       | (10,714                                       | )          | (10,195 | ) |
|                                                                  |       |                                          |       |   |   |
| **Income from continuing  operations before income tax expense**      |       | 29,587                                        |       | 25,539 |   |
| Income tax expense                                                    |       | 12,427                                        |       | 9,096 |   |
| **Income from continuing  operations**                                |       | 17,160                                        |       | 16,443 |   |
|                                                                  |       |                                          |       |   |   |
| **Income (loss) from discontinued  operations, net of tax**           |       | 305                                           |       | (12 | ) |
|                                                                  |       |                                          |       |   |   |
| **Net Income**                                                        |       | $                                             | 17,465     |   | $ | 16,431 |   |
|                                                                  |       |                                          |       |   |   |
| **Basic Earnings Per Common Share**                                   |       |                                          |       |   |   |
| Income from continuing operations                                     |       | $                                             | 0.92       |   | $ | 0.93 |   |
| Income from discontinued operations, net of tax                       |       | 0.02                                          |       | — |   |
| Net Income                                                            |       | $                                             | 0.94       |   | $ | 0.93 |   |
|                                                                  |       |                                          |       |   |   |
| **Fully Diluted Earnings Per  Share**                                 |       |                                          |       |   |   |
| Income from continuing operations                                     |       | $                                             | 0.91       |   | $ | 0.92 |   |
| Income from discontinued operations, net of tax                       |       | 0.02                                          |       | — |   |
| Net Income                                                            |       | $                                             | 0.93       |   | $ | 0.92 |   |
|                                                                  |       |                                          |       |   |   |
| **Weighted Average Number of  Shares Outstanding**                    |       | 18,561                                        |       | 17,588 |   |
| **Weighted Average Number of  Diluted Shares**                        |       | 18,695                                        |       | 17,718 |   |
|                                                                  |       |                                          |       |   |   |
| **Dividends Declared Per Common  Share**                              |       | $                                             | 0.52       |   | $ | 0.50 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF CASH FLOW****FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                      | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Cash Flows From Operating  Activities:**                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                                   |       | $                                             | 17,465     |   | $ | 16,431 |   |
| Adjustments for non-cash items:                                              |       |                                          |       |   |   |
| Depreciation and amortization                                                |       | 17,690                                        |       | 16,748 |   |
| Provision for doubtful accounts                                              |       | 553                                           |       | 530 |   |
| Deferred income taxes and investment tax credits                             |       | (931                                          | )          | 1,108 |   |
| Stock-based compensation expense                                             |       | 952                                           |       | 825 |   |
| Other — net                                                             |       | 673                                           |       | 755 |   |
| Changes in assets and liabilities:                                           |       |                                          |       |   |   |
| Accounts receivable — customers                                         |       | (113                                          | )          | (2,121 | ) |
| Unbilled revenue                                                             |       | (8,415                                        | )          | (6,946 | ) |
| Other accounts receivable                                                    |       | (93                                           | )          | 1,849 |   |
| Receivable from the U.S. government                                          |       | (65                                           | )          | 1,624 |   |
| Materials and supplies                                                       |       | (345                                          | )          | 337 |   |
| Prepayments and other current assets                                         |       | 1,376                                         |       | 714 |   |
| Regulatory assets — supply cost balancing accounts                      |       | 8,501                                         |       | 6,860 |   |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | (8,487                                        | )          | (2,657 | ) |
| Other assets                                                                 |       | (10,559                                       | )          | (6,950 | ) |
| Accounts payable                                                             |       | 4,967                                         |       | 1,271 |   |
| Income taxes receivable/payable                                              |       | 1,751                                         |       | 1,035 |   |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 8,861                                         |       | 2,759 |   |
| Accrued pension and other postretirement benefits                            |       | 2,743                                         |       | 2,655 |   |
| Other liabilities                                                            |       | (6,983                                        | )          | 2,286 |   |
| Net cash provided                                                            |       | 29,541                                        |       | 39,113 |   |
|                                                                         |       |                                          |       |   |   |
| **Cash Flows From Investing  Activities:**                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Construction expenditures                                                    |       | (38,345                                       | )          | (36,940 | ) |
| Proceeds from sale of property                                               |       | 86                                            |       | 16 |   |
| Net cash used                                                                |       | (38,259                                       | )          | (36,924 | ) |
|                                                                         |       |                                          |       |   |   |
| **Cash Flows From Financing  Activities:**                                   | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds from issuance of Common Shares, net of  issuance costs              |       | 946                                           |       | 34,887 |   |
| Proceeds from stock option exercises                                         |       | 370                                           |       | 10 |   |
| Receipt of advances for and contributions in aid  of construction            |       | 2,674                                         |       | 852 |   |
| Refunds on advances for construction                                         |       | (2,653                                        | )          | (2,389 | ) |
| Repayments of long-term debt                                                 |       | (283                                          | )          | (181 | ) |
| Proceeds from issuance of long-term debt, net of  issuance costs             |       | —                                        |       | 39,777 |   |
| Net change in notes payable to banks                                         |       | 22,800                                        |       | (63,850 | ) |
| Dividends paid                                                               |       | (9,651                                        | )          | (8,660 | ) |
| Other — net                                                             |       | (142                                          | )          | (164 | ) |
| Net cash provided                                                            |       | 14,061                                        |       | 282 |   |
| **Net increase in cash and cash  equivalents**                               |       | 5,343                                         |       | 2,471 |   |
| **Cash and cash equivalents,  beginning of period**                          |       | 1,685                                         |       | 7,283 |   |
| **Cash and cash equivalents, end  of period**                                |       | 7,028                                         |       | 9,754 |   |
| **Less cash and cash equivalents  of discontinued operations**               |       | 425                                           |       | 235 |   |
| **Cash and cash equivalents of  continuing operations**                      |       | $                                             | 6,603      |   | $ | 9,519 |   |

 

*The accompanying notes are an integral part ofthese consolidated financial statements*

 

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**GOLDEN STATE WATER COMPANY****BALANCE SHEETS****ASSETS****(Unaudited)**

 
| **(in thousands)**                                                                                | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Utility Plant**                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Utility plant, at cost                                                                                 |       | $                       | 1,210,699  |                        | $          | 1,171,618 |   |
| Less - Accumulated depreciation                                                                        |       | (367,798                | )          | (352,574                    | )          |
| Net utility plant                                                                                      |       | 842,901                 |       | 819,044                     |       |
|                                                                                                   |       |                    |       |                        |       |
| **Other Property and Investments**                                                                     |       | 8,297                   |       | 8,738                       |       |
|                                                                                                   |       |                    |       |                        |       |
| **Current Assets**                                                                                     | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                              |       | 147                     |       | 1,096                       |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $633 in 2010 and $657 in 2009) |       | 15,844                  |       | 16,193                      |       |
| Unbilled revenue                                                                                       |       | 26,122                  |       | 17,835                      |       |
| Inter-company receivable                                                                               |       | 314                     |       | 372                         |       |
| Other accounts receivable (less allowance for  doubtful accounts of $245 in 2010 and $431 2009)        |       | 5,842                   |       | 8,044                       |       |
| Income taxes receivable from Parent                                                                    |       | 2,058                   |       | 2,496                       |       |
| Materials and supplies, at average cost                                                                |       | 1,905                   |       | 1,679                       |       |
| Regulatory assets — current                                                                       |       | 20,456                  |       | 12,267                      |       |
| Prepayments and other current assets                                                                   |       | 1,751                   |       | 3,144                       |       |
| Deferred income taxes — current                                                                   |       | 5,167                   |       | 5,146                       |       |
| Total current assets                                                                                   |       | 79,606                  |       | 68,272                      |       |
|                                                                                                   |       |                    |       |                        |       |
| **Regulatory and Other Assets**                                                                        | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Regulatory assets                                                                                      |       | 106,169                 |       | 110,420                     |       |
| Other accounts receivable                                                                              |       | 5,919                   |       | 5,717                       |       |
| Other                                                                                                  |       | 9,747                   |       | 9,654                       |       |
| Total regulatory and other assets                                                                      |       | 121,835                 |       | 125,791                     |       |
|                                                                                                   |       |                    |       |                        |       |
| **Total Assets**                                                                                       |       | $                       | 1,052,639  |                        | $          | 1,021,845 |   |

 

*The accompanying notes are an integral part of these financialstatements*

 

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**GOLDEN STATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**

 
| **(in thousands)**                           | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Capitalization**                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Common shares, no par value, no stated value      |       | $                       | 216,625    |                        | $          | 195,821 |   |
| Earnings reinvested in the business               |       | 137,731                 |       | 135,709                     |       |
| Total common shareholder’s equity            |       | 354,356                 |       | 331,530                     |       |
| Long-term debt                                    |       | 299,935                 |       | 300,221                     |       |
| Total capitalization                              |       | 654,291                 |       | 631,751                     |       |
|                                              |       |                    |       |                        |       |
| **Current Liabilities**                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Long-term debt — current                     |       | 368                     |       | 365                         |       |
| Accounts payable                                  |       | 32,463                  |       | 26,829                      |       |
| Inter-company payable                             |       | 12,977                  |       | 7,551                       |       |
| Income tax payable to Parent                      |       | 400                     |       | —                      |       |
| Accrued employee expenses                         |       | 7,653                   |       | 6,338                       |       |
| Accrued interest                                  |       | 3,412                   |       | 3,256                       |       |
| Regulatory liabilities - current                  |       | —                  |       | 113                         |       |
| Unrealized loss on purchased power contracts      |       | 9,552                   |       | 7,338                       |       |
| Other                                             |       | 13,126                  |       | 22,136                      |       |
| Total current liabilities                         |       | 79,951                  |       | 73,926                      |       |
|                                              |       |                    |       |                        |       |
| **Other Credits**                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Advances for construction                         |       | 78,646                  |       | 79,443                      |       |
| Contributions in aid of construction - net        |       | 93,265                  |       | 91,519                      |       |
| Deferred income taxes                             |       | 92,772                  |       | 94,418                      |       |
| Unamortized investment tax credits                |       | 2,109                   |       | 2,154                       |       |
| Accrued pension and other postretirement benefits |       | 42,901                  |       | 40,158                      |       |
| Other                                             |       | 8,704                   |       | 8,476                       |       |
| Total other credits                               |       | 318,397                 |       | 316,168                     |       |
|                                              |       |                    |       |                        |       |
| **Commitments and Contingencies  (Note 9)**       |       | —                  |       | —                      |       |
|                                              |       |                    |       |                        |       |
| **Total Capitalization and  Liabilities**         |       | $                       | 1,052,639  |                        | $          | 1,021,845 |   |

 

*The accompanying notes are an integral part of these financialstatements*

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2010**                                        | ** ** | **2009** | ** ** |
| **Operating Revenues**                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                               | 72,816     |   | $ | 72,295 |   |
| Electric                                              |       | 7,845                                           |       | 5,888 |   |
| Total operating revenues                              |       | 80,661                                          |       | 78,183 |   |
|                                                  |       |                                            |       |   |   |
| **Operating Expenses**                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 13,564                                          |       | 11,955 |   |
| Power purchased for pumping                           |       | 2,047                                           |       | 2,535 |   |
| Groundwater production assessment                     |       | 2,664                                           |       | 2,857 |   |
| Power purchased for resale                            |       | 2,876                                           |       | 2,403 |   |
| Supply cost balancing accounts                        |       | 4,686                                           |       | 3,332 |   |
| Other operating expenses                              |       | 6,369                                           |       | 6,215 |   |
| Administrative and general expenses                   |       | 13,476                                          |       | 12,289 |   |
| Depreciation and amortization                         |       | 8,181                                           |       | 7,721 |   |
| Maintenance                                           |       | 4,001                                           |       | 2,996 |   |
| Property and other taxes                              |       | 3,013                                           |       | 2,357 |   |
| Net loss on sale of property                          |       | 5                                               |       | — |   |
| Total operating expenses                              |       | 60,882                                          |       | 54,660 |   |
|                                                  |       |                                            |       |   |   |
| **Operating Income**                                  |       | 19,779                                          |       | 23,523 |   |
|                                                  |       |                                            |       |   |   |
| **Other Income and Expenses**                         |       |                                            |       |   |   |
| Interest expense                                      |       | (5,752                                          | )          | (5,423 | ) |
| Interest income                                       |       | 156                                             |       | 296 |   |
| Other                                                 |       | (65                                             | )          | 63 |   |
| Total other income and expenses                       |       | (5,661                                          | )          | (5,064 | ) |
|                                                  |       |                                            |       |   |   |
| **Income from operations before  income tax expense** |       | 14,118                                          |       | 18,459 |   |
|                                                  |       |                                            |       |   |   |
| Income tax expense                                    |       | 6,024                                           |       | 7,545 |   |
|                                                  |       |                                            |       |   |   |
| **Net Income**                                        |       | $                                               | 8,094      |   | $ | 10,914 |   |

 

*The accompanying notes are an integral part of these financialstatements*

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME****FOR THE SIX MONTHS****ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 

 
| ** **                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Operating Revenues**                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                             | 128,873    |   | $ | 127,473 |   |
| Electric                                              |       | 18,824                                        |       | 14,520 |   |
| Total operating revenues                              |       | 147,697                                       |       | 141,993 |   |
|                                                  |       |                                          |       |   |   |
| **Operating Expenses**                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 21,566                                        |       | 19,942 |   |
| Power purchased for pumping                           |       | 3,603                                         |       | 4,102 |   |
| Groundwater production assessment                     |       | 5,286                                         |       | 5,374 |   |
| Power purchased for resale                            |       | 6,545                                         |       | 6,365 |   |
| Supply cost balancing accounts                        |       | 8,501                                         |       | 6,860 |   |
| Other operating expenses                              |       | 12,258                                        |       | 12,284 |   |
| Administrative and general expenses                   |       | 28,373                                        |       | 26,098 |   |
| Depreciation and amortization                         |       | 16,363                                        |       | 15,434 |   |
| Maintenance                                           |       | 7,599                                         |       | 6,037 |   |
| Property and other taxes                              |       | 6,160                                         |       | 5,366 |   |
| Net (gain) loss on sale of property                   |       | 5                                             |       | (15 | ) |
| Total operating expenses                              |       | 116,259                                       |       | 107,847 |   |
|                                                  |       |                                          |       |   |   |
| **Operating Income**                                  |       | 31,438                                        |       | 34,146 |   |
|                                                  |       |                                          |       |   |   |
| **Other Income and Expenses**                         |       |                                          |       |   |   |
| Interest expense                                      |       | (11,332                                       | )          | (10,419 | ) |
| Interest income                                       |       | 306                                           |       | 495 |   |
| Other                                                 |       | (8                                            | )          | 41 |   |
| Total other income and expenses                       |       | (11,034                                       | )          | (9,883 | ) |
|                                                  |       |                                          |       |   |   |
| **Income from operations before  income tax expense** |       | 20,404                                        |       | 24,263 |   |
|                                                  |       |                                          |       |   |   |
| Income tax expense                                    |       | 8,746                                         |       | 9,656 |   |
|                                                  |       |                                          |       |   |   |
| **Net Income**                                        |       | $                                             | 11,658     |   | $ | 14,607 |   |

 

*The accompanying notes are an integral part of these financialstatements*

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF CASH FLOW****FOR THE SIX MONTHS ENDED JUNE 30, 2010 AND 2009****(Unaudited)**

 
| ** **                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2010**                                      | ** ** | **2009** | ** ** |
| **Cash Flows From Operating  Activities:**                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net income                                                           |       | $                                             | 11,658     |   | $ | 14,607 |   |
| Adjustments for non-cash items:                                      |       |                                          |       |   |   |
| Depreciation and amortization                                        |       | 16,363                                        |       | 15,434 |   |
| Provision for doubtful accounts                                      |       | 526                                           |       | 507 |   |
| Deferred income taxes and investment tax credits                     |       | (948                                          | )          | 1,509 |   |
| Stock-based compensation expense                                     |       | 690                                           |       | 621 |   |
| Other — net                                                     |       | 905                                           |       | 486 |   |
| Changes in assets and liabilities:                                   |       |                                          |       |   |   |
| Accounts receivable — customers                                 |       | (84                                           | )          | (2,066 | ) |
| Unbilled revenue                                                     |       | (8,287                                        | )          | (6,876 | ) |
| Other accounts receivable                                            |       | 1,907                                         |       | (15 | ) |
| Materials and supplies                                               |       | (226                                          | )          | (113 | ) |
| Prepayments and other current assets                                 |       | 1,393                                         |       | 728 |   |
| Regulatory assets — supply cost balancing accounts              |       | 8,501                                         |       | 6,860 |   |
| Other assets                                                         |       | (10,564                                       | )          | (6,981 | ) |
| Accounts payable                                                     |       | 2,924                                         |       | 2,976 |   |
| Inter-company receivable/payable                                     |       | 51                                            |       | (343 | ) |
| Income taxes receivable/payable from/to Parent                       |       | 838                                           |       | 1,348 |   |
| Accrued pension and other postretirement benefits                    |       | 2,743                                         |       | 2,655 |   |
| Other liabilities                                                    |       | (7,349                                        | )          | 2,346 |   |
| Net cash provided                                                    |       | 21,041                                        |       | 33,683 |   |
|                                                                 |       |                                          |       |   |   |
| **Cash Flows From Investing  Activities:**                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Construction expenditures                                            |       | (37,451                                       | )          | (35,966 | ) |
| Proceeds from sale of property                                       |       | 83                                            |       | 16 |   |
| Net cash used                                                        |       | (37,368                                       | )          | (35,950 | ) |
|                                                                 |       |                                          |       |   |   |
| **Cash Flows From Financing  Activities:**                           | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds from issuance of Common Shares to Parent                    |       | 20,000                                        |       | — |   |
| Receipt of advances for and contributions in aid  of construction    |       | 2,601                                         |       | 852 |   |
| Refunds on advances for construction                                 |       | (2,653                                        | )          | (2,369 | ) |
| Proceeds from the issuance of long-term debt, net  of issuance costs |       | —                                        |       | 39,777 |   |
| Repayments of long-term debt                                         |       | (283                                          | )          | (182 | ) |
| Net change in inter-company borrowings                               |       | 5,400                                         |       | (16,200 | ) |
| Dividends paid                                                       |       | (9,600                                        | )          | (19,400 | ) |
| Other — net                                                     |       | (87                                           | )          | (135 | ) |
| Net cash provided                                                    |       | 15,378                                        |       | 2,343 |   |
|                                                                 |       |                                          |       |   |   |
| **Net increase (decrease) in cash  and cash equivalents**            |       | (949                                          | )          | 76 |   |
| **Cash and cash equivalents,  beginning of period**                  |       | 1,096                                         |       | 3,812 |   |
| **Cash and cash equivalents, end  of period**                        |       | $                                             | 147        |   | $ | 3,888 |   |

 

*The accompanying notes are an integral part of these financialstatements*

 

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**AMERICAN STATES WATER COMPANY****AND****GOLDEN STATE WATER COMPANY****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)**

 

**Note 1— Summary of Significant Accounting Policies:**

 

General/Natureof Operations: American States Water Company (“AWR”) is theparent company of Golden State Water Company (“GSWC”), Chaparral City WaterCompany (“CCWC”) and American States Utility Services, Inc. (“ASUS”) (andits subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin UtilityServices, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”),Palmetto State Utility Services, Inc. (“PSUS”) and Old North UtilityServices, Inc. (“ONUS”)).  AWR andits subsidiaries may be collectively referred to herein as “Registrant” or the “Company”.  The subsidiaries of ASUS may be collectivelyreferred to herein as the “Military Utility Privatization Subsidiaries.”

 

GSWCis a public utility engaged principally in the purchase, production,distribution and sale of water in California serving approximately 255,000water customers. GSWC also distributes electricity in several San BernardinoMountain communities serving approximately 23,000 electric customers. TheCalifornia Public Utilities Commission (“CPUC”) regulates GSWC’s water andelectric business, including properties, rates, services, facilities and othermatters. CCWC is a public utility regulated by the Arizona CorporationCommission (“ACC”) serving over 13,000 customers in the Town of Fountain Hills,Arizona and a portion of the City of Scottsdale, Arizona. On June 7, 2010,AWR entered into a stock purchase agreement with EPCOR Water (USA) Inc. to sellall of the common shares of CCWC for a total purchase price of $35 million, includingthe assumption of approximately $6 million of long-term debt as more fullydescribed in Note 10.  ASUS performswater and wastewater services and operations on a contract basis. Through itswholly owned subsidiaries, ASUS has entered into agreements with the U.S.government to operate and maintain the water and/or wastewater systems atvarious military bases pursuant to 50-year fixed price contracts, which aresubject to periodic price redeterminations and modifications for changes incircumstances, changes in laws and regulations and changes in wages and fringebenefits to the extent provided in each of the contracts. There is no directregulatory oversight by either the CPUC or the ACC of AWR or the operation orrates of the contracted services provided by ASUS or any of its wholly ownedsubsidiaries.  AWR’s assets and operatingincome are primarily those of GSWC.

 

Basisof Presentation: The consolidated financial statements and notesthereto are being presented in a combined report being filed by two separateRegistrants: AWR and GSWC. References in this report to “Registrant” are to AWRand GSWC, collectively, unless otherwise specified. Certain prior periodamounts have been reclassified to conform to the 2010 financial statementpresentation related to discontinued operations described in Note 10.

 

The consolidated financialstatements of AWR include the accounts of AWR and its subsidiaries, all ofwhich are wholly owned. These financial statements are prepared in conformitywith accounting principles generally accepted in the United States of America.Inter-company transactions and balances have been eliminated in the AWRconsolidated financial statements. Investmentsin partially-owned affiliates are accounted for by the equity method whenRegistrant’s ownership interest exceeds 20%. The consolidated financialstatements included herein have been prepared by Registrant, without audit,pursuant to the rules and regulations of the Securities and ExchangeCommission (“SEC”). Certain information and footnote disclosures normallyincluded in financial statements prepared in accordance with accountingprinciples generally accepted in the United States of America for annualfinancial statements have been condensed or omitted pursuant to suchrules and regulations. The preparation of the consolidated financialstatements requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from those estimates. In the opinion of management, alladjustments, consisting of normal, recurring items and estimates necessary fora fair statement of the results for the interim periods, have been made.It is suggested that these consolidated financial statements be read inconjunction with the consolidated financial statements and the notes theretoincluded in the Form 10-K for the year ended December 31, 2009 filedwith the SEC.

 

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GSWC’sRelated Party Transactions: GSWC and other subsidiariesprovide and receive various services to and from their parent, AWR, and amongthemselves. In addition, AWR has a $100 million syndicated credit facility. AWRborrows under this facility and provides funds to its subsidiaries, includingGSWC, in support of their operations. Amounts owed to AWR for borrowings underthis facility are included in inter-company payables on GSWC’s balance sheetsas of June 30, 2010 and December 31, 2009. The interest rate chargedto GSWC and other affiliates is sufficient to cover AWR’s interest cost underthe credit facility. GSWC also allocates certain corporate officeadministrative and general costs to its affiliates using allocation factorsmandated by the CPUC.  On May 26,2010, the Board of Directors approved the issuance of eight additional GSWCCommon Shares to AWR for $20.0 million. Proceeds from the issuance were used to pay down GSWC’s intercompanyborrowings due to AWR.

 

Notes Payable to Banks:  On May 27,2010, AWR entered into the third amendment to the credit agreement in order toextend the expiration date ofthe syndicated credit facility to May 27, 2013 from June 3,2010.  The maximum amount that may be borrowed under this facilitywas reduced from $115,000,000 to $100,000,000.   AWR may, under theterms of the amended credit agreement, elect to increase the aggregate bankcommitments by up to an additional $40,000,000.  The aggregateeffective amount that may be outstanding under letters of credit has beenincreased to $25,000,000 from $20,000,000.  The rates at which AWRmay borrow under this facility have been increased due to market conditions andthe lenders have consented to modifications to certain of the covenants in theamended credit agreement requested by AWR.

 

Sales and Use Taxes:  GSWC bills certain sales and use taxes leviedby state or local governments to its customers. Included in these sales and usetaxes are franchise fees, which GSWC pays to various municipalities (based onordinances adopted by these municipalities) in order to use public right of wayfor utility purposes. GSWC bills these franchise fees to its customers based ona CPUC-authorized rate. These franchise fees, which are required to be paidregardless of GSWC’s ability to collect from the customer, are accounted for ona gross basis. GSWC’s franchise fees billed to customers and recorded asoperating revenue were approximately $715,000 and $708,000 for the three monthsended June 30, 2010 and 2009, respectively, and $1,400,000 and $1,334,000for the six months ended June 30, 2010 and 2009, respectively. When GSWCacts as an agent, and the tax is not required to be remitted if it is notcollected from the customer, the taxes are accounted for on a net basis.

 

Dependingon the state in which the operations are conducted, ASUS and its subsidiariesare also subject to certain state non-income tax assessments generally computedon a “gross receipts” or “gross revenues” basis.  These non-income tax assessments are requiredto be paid regardless of whether the subsidiary is reimbursed by the U.S.government for these assessments under its 50-year contracts with the U.S.government.  The non-income taxassessments are accounted for on a gross basis and totaled $144,000 and$159,000 during the three months ended June 30, 2010 and 2009, respectively,and $439,000 and $329,000 for the six months ended June 30, 2010 and 2009,respectively.

 

Recently Adopted Accounting Pronouncements:  In June 2009, the Financial AccountingStandards Board (“FASB”) issued revised guidance which enhances informationreported to users of financial statements by providing greater transparencyabout transfers of financial assets and a company’s continuing involvement intransferred assets. Generally accepted accounting principles no longer includethe concept of qualifying special purpose entity.  The revised guidance also changes therequirements for derecognizing financial assets and requires additionaldisclosures about a transferor’s continuing involvement in transferredfinancial assets. This revised guidance was effective for the Company beginningJanuary 1, 2010 and did not have any impact on Registrant’s consolidatedresults of operations, financial position or cash flows.

 

InJune 2009, the FASB amended the guidance on consolidation for variableinterest entities. The new guidance requires a company to perform a qualitativeanalysis when determining whether it must consolidate a variable interestentity.  This guidance also amends how todetermine whether an entity is a variable interest entity. A company must nowdisclose how its involvement with a variable interest entity affects thecompany’s financial statements and disclose any significant judgments andassumptions made in determining whether it must consolidate a variable interestentity. This guidance was effective for the Company beginning January 1,2010 and did not have any impact on the Registrant’s consolidated results ofoperations, financial position or cash flows.

 

In October 2009, the FASB issued an update tothe accounting standards and provided amendments to the criteria of AccountingStandards Codification Topic 605, *“RevenueRecognition”*, for separately recognizing consideration inmultiple-deliverable arrangements. The amendments establish a selling pricehierarchy for 

 

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determining the selling price of adeliverable.  This guidance is effective for financial statements issuedfor fiscal years beginning on or after June 15, 2010.  Registrant iscurrently evaluating the effects this statement may have on its consolidatedfinancial statements, but does not expect the adoption will have a materialimpact on its consolidated financial statements.

 

In January 2010, the FASB issued an update tothe accounting standards and amended the disclosure guidance with respect tofair value measurements.  Specifically, the new guidance requiresdisclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements,a reconciliation presented on a gross basis rather than a net basis of activityin Level 3 fair value measurements, greater disaggregation of the assets andliabilities for which fair value measurements are presented and more robustdisclosure of the valuation techniques and inputs used to measure Level 2 and 3fair value measurements. This guidance is currently effective, with theexception of the new guidance for Level 3 activity reconciliations.  Theadoption of the effective portion of the guidance had no impact on Registrant’sconsolidated financial statements.  Certain Level 3 activities disclosurerequirements of this guidance will be effective for fiscal years beginningafter December 15, 2010.  Registrant is currently evaluating the impactof Level 3 disclosure of this guidance, but does not expect the adoption willhave a material impact on its consolidated financial statements.

 

Otheraccounting standards that have been issued or proposed by the FASB or otherstandards-setting bodies that do not require adoption until a future date arenot expected to have a material impact on Registrant’s consolidated financialstatements upon adoption.

 

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**Note 2— Regulatory Matters:**

 

Inaccordance with accounting principles for rate-regulated enterprises,Registrant records regulatory assets, which represent probable future revenueassociated with certain costs that will be recovered from customers through theratemaking process, and regulatory liabilities, which represent probable futurereductions in revenue associated with amounts that are to be credited tocustomers through the ratemaking process. At June 30, 2010, Registrant hadapproximately $46.7 million of regulatory assets not accruing carrying costs.Of this amount, $27.0 million relates to the underfunded positions of thepension and other post-retirement obligations, $5.9 million relates to deferredincome taxes representing accelerated tax benefits flowed through toratepayers, which will be included in rates concurrently with recognition ofthe associated future tax expense, and $9.6 million relates to a memorandumaccount authorized by the CPUC to track unrealized gains and losses on GSWC’spurchase power contracts over the life of the contract.  The remainder relates to other expenses thatdo not provide for recovery of carrying costs that Registrant expects torecover in rates over a short period. Regulatory assets, less regulatory liabilities, included in theconsolidated balance sheets for continuing operations are as follows:

 
| **(In thousands)**                                                           | ** ** | **June 30,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **GSWC**                                                                     |       |                    |       |                        |       |
| Electric supply cost balancing account                                       |       | $                       | 10,984     |                        | $          | 13,111 |   |
| Water supply cost balancing accounts                                         |       | 3,618                   |       | 4,717                       |       |
| Water revenue adjustment mechanism, net of  modified cost balancing accounts |       | 29,603                  |       | 21,168                      |       |
| Aerojet litigation memorandum account                                        |       | 19,305                  |       | 19,676                      |       |
| Pensions and other postretirement obligations                                |       | 26,968                  |       | 27,833                      |       |
| Derivative unrealized loss                                                   |       | 9,551                   |       | 7,338                       |       |
| Flow-through taxes, net                                                      |       | 5,897                   |       | 6,661                       |       |
| Electric transmission line abandonment costs                                 |       | 2,735                   |       | 2,828                       |       |
| Asset retirement obligations                                                 |       | 3,994                   |       | 3,826                       |       |
| Low income rate assistance balancing accounts                                |       | 5,631                   |       | 4,764                       |       |
| Santa Maria adjudication memorandum accounts                                 |       | 3,814                   |       | 3,895                       |       |
| Deferred rate case costs                                                     |       | 3,399                   |       | 3,642                       |       |
| Refund of water right lease revenues                                         |       | (1,587                  | )          | (1,806                      | )          |
| Other regulatory assets, net                                                 |       | 2,713                   |       | 4,921                       |       |
| Total                                                                        |       | $                       | 126,625    |                        | $          | 122,574 |   |

 

Regulatorymatters are discussed in detail in the consolidated financial statements andthe notes thereto included in the Form 10-K for the year endedDecember 31, 2009 filed with the SEC. The discussion below focuses on significant matters and changes since December 31,2009.

 

***Electric Supply Cost Balancing Accounts******:***

 

Electricpower costs incurred by GSWC’s Bear Valley Electric Service (“BVES”) divisioncontinue to be charged to its electric supply cost balancing account. Theunder-collection in the electric supply cost balancing account is $11.0 millionat June 30, 2010.  For the sixmonths ended June 30, 2010 and 2009, the under-collection decreased byapproximately $2.1 million and $2.0 million, respectively, primarily as aresult of a payment of a surcharge by its customers of 2.2¢ per kilowatt hour,which is currently scheduled to run through August 2011.  In addition, BVES is allowed to include itsactual recorded purchased energy costs up to a weighted annual average cost of$77 per megawatt-hour (“MWh”) through August 2011 in its electric supplycost balancing account.  BVES beganreceiving power under a new purchased power contract in January 1,2009.   The main product under the newcontract provides for 13 megawatts (“MW”) of electric energy at a fixed priceof $67.85 per MWh during 2010 as compared to the $77 per MWh included inrates.  The reduction in the actual priceof purchased power helps decrease the under-collection balance in the electricsupply cost balancing account.  To theextent that the actual weighted average annual cost for power purchased exceedsthe $77 per MWh amount, GSWC will not be able to include these amounts in itsbalancing account and such amounts will be expensed.  There were no amounts expensed over the $77per MWh cap during the three months and six months ended June 30, 2010 and2009.

 

Asof June 30, 2010, the electric supply cost balancing account consists of$4.1 million for costs of abandonment of a transmission line upgrade and $6.9million for changes in purchased energy and power system delivery costs.

 

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***Water Supply Cost Balancing Accounts******:***

 

Priorto the implementation of the Modified Cost Balancing Account (“MCBA”) furtherdiscussed below, Registrant maintained water supply cost balancing accounts forGSWC to account for under-collections and over-collections of revenues designedto recover such costs.  These supply costbalancing accounts tracked differences between the current cost for supplyitems (water, power and pump taxes) charged by GSWC’s suppliers and the costfor those items incorporated into GSWC’s rates. Under-collections (recorded asregulatory assets) occurred when the current cost exceeded the amount in ratesfor these items and, conversely, over-collections (recorded as regulatoryliabilities) occurred when the current cost of these items were less than theamount in rates.  Typically,under-collections or over-collections, when they occur, were tracked in thesupply cost balancing accounts for future recovery through a surcharge (in theevent of an under-collection) or refund through a surcredit (in the event of anover-collection) on customers’ bills. Registrant accrues interest on its supply cost balancing accounts at therate prevailing for 90-day commercial paper. Registrant does not maintain a supply cost balancing account for CCWC.

 

Asof June 30, 2010, there is a $3.6 million net under-collection remainingin the water supply cost balancing accounts. Of this amount, approximately $1.1 million relates to GSWC’s Region IIIcustomer service area, $2.4 million relates to GSWC’s Region I customer serviceareas and $115,000 relates to GSWC’s Region II customer service area.  Currently, there are surcharges in place inRegion I and Region III to recover these under-collections. When thesesurcharges expire, any unrecovered balances will be included in future filingsfor recovery.

 

OnAugust 21, 2008, the CPUC issued a final decision approving a settlementagreement between GSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”)regarding conservation rate design.  As aresult of this decision, GSWC established an MCBA that permits GSWC to recoversupply costs related to changes in water supply mix in addition to rate changesby GSWC’s suppliers. GSWC implemented this MCBA in November 2008 forRegions II and III and in September 2009 for Region I.  This account replaces the water supply costbalancing account procedure for costs incurred after the modified supply costbalancing account was implemented.

 

***Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost BalancingAccount (“MCBA”):***

 

Withthe adoption of the WRAM and the MCBA effective November 25, 2008 for RegionsII and III and September 1, 2009 for Region I’s ratemaking areas, GSWCbegan recording the difference between what is billed to its water customersand that which is authorized by the CPUC. Under the WRAM, GSWC records theadopted level of volumetric revenues as authorized by the CPUC for meteredaccounts (adopted volumetric revenues). While the WRAM tracks volumetric-based revenues, the revenuerequirements approved by the CPUC include service charges, flat rate charges,and other items that are not subject to the WRAM. The adopted volumetricrevenues consider the seasonality of consumption of water based upon historicalaverages. The variance between adopted volumetric revenues and actual billedvolumetric revenues for metered accounts is recorded as a component of revenuewith an offsetting entry to an asset or liability balancing account (trackedindividually for each rate making area). The variance amount may be positive ornegative and represents amounts that will be billed or refunded to customers inthe future.  The WRAM only applies tocustomer classes with conservation rates in place.  Currently, the majority of GSWC’s watercustomers have conservation tiered rate billing structures.

 

Under the MCBA, GSWC began tracking adopted expense levels forpurchased water, purchased power and pump taxes, as established by the CPUC.Variances (which include the effects of changes in both rate and volume)between adopted and actual purchased water, purchased power, and pump taxexpenses are recorded as a component of the supply cost balancing accountprovision, as the amount of such variances will be recovered from or refundedto GSWC’s customers at a later date. This is reflected with an offsetting entryto an asset or liability balancing account (tracked individually for eachrate-making area).  Unlike the WRAM, theMCBA applies to all customer classes.

 

Thebalances in the WRAM and MCBA assets and liabilities accounts will fluctuate ona monthly basis depending upon the variance between adopted and actual results.The recovery or refund of the WRAM is netted against the MCBA over- orunder-collection for the corresponding rate-making area and is interest bearingat the current 90-day commercial paper rate. When the net amount at the end ofthe calendar year for Regions II, III or any of the Region I ratemakingareas achieves a pre-determined level (i.e., at least 2.5 percent over- orunder-recovery of the approved revenue requirement), GSWC will seek approvalfrom the CPUC to refund or collect the balance in the accounts. Accountbalances less than those levels may be refunded or collected in GSWC’s generalrate case 

 

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proceedings or aggregated with futurecalendar year balances for comparison with the pre-determined recovery level of2.5 percent of adopted revenues.

 

InMarch 2010, GSWC filed an advice letter with the CPUC for recovery of theRegion II and III WRAM, net of the MCBA and supply cost balancing accounts, of$18.3 million.  A surcharge was put inplace in March 2010 which is expected to recover the amounts accumulated,as of December 31, 2009, in Regions II and III’s WRAM, net of MCBA andsupply cost balancing accounts.  In April andMay 2010, surcharges were implemented for recovery of $2.1 million of theRegion I WRAM accounts, net of the MCBA. For the three and six months ended June 30, 2010, approximately$1.5 million of surcharges were billed to customers to decrease previouslyincurred under-collections in the WRAM, net of MCBA balancing accounts.  Going forward, GSWC will seek recovery of itsWRAM, net of MCBA, on an annual basis. As of June 30, 2010, GSWC has a net aggregated regulatory asset of$29.6 million which is comprised of a $37.3 million under-collection in theWRAM accounts and $7.7 million over-collection in the MCBA accounts.

 

***Aerojet Litigation Memorandum Account******:***

 

OnJuly 21, 2005, the CPUC authorized GSWC to collect approximately $21.3million of the Aerojet litigation memorandum account, through a rate surcharge,which will continue for no longer than 20 years. Beginning in October 2005,new rates went into effect to begin amortizing the memorandum account over a20-year period.  A rate surchargegenerating approximately $211,000 and $252,000 was billed to customers duringthe three months ended June 30, 2010 and 2009, respectively, andapproximately $392,000 and $463,000 for the six months ended June 30, 2010and 2009, respectively.  GSWC will keepthe Aerojet memorandum account open until the earlier of full amortization ofthe balance or 20 years.  However,no costs will be added to the memorandum account, other than on-going interestcharges approved by the CPUC decision. Pursuant to the decision, additionalinterest of approximately $13,000 was added to the Aerojet litigationmemorandum account for the three months ended June 30, 2010 and 2009, and$21,000 and $33,000 for the six months ended June 30, 2010 and 2009,respectively.

 

Aerojethas also agreed to reimburse GSWC $17.5 million, plus interest accruingfrom January 1, 2004, for GSWC’s past legal and expert costs, which isincluded in the Aerojet litigation memorandum account. The reimbursement of the$17.5 million is contingent upon the issuance of land use approvals fordevelopment in a defined area within Aerojet property in Eastern SacramentoCounty and the receipt of certain fees in connection with such development. TheWestborough development is within the defined area in the settlementagreement.  It is management’s intentionto offset certain proceeds from the housing development by Aerojet in theWestborough areas, pursuant to the settlement agreement, against the balance inthis litigation memorandum account.  Atthis time, management believes the full balance of the Aerojet litigationmemorandum account will be collected by 2025.

 

***Derivative Gains and Losses on Purchased Power Contracts MemorandumAccount:***

 

GSWC’sBVES division began receiving power under a new purchased power contract on January 1,2009 at a fixed cost over three and five year terms depending on the amount ofpower and period during which the power will be purchased under thecontract.  This contract is subject toaccounting guidance as amended for derivative instruments and hedgingactivities**and requires mark-to-market derivativeaccounting.  In May 2009, the CPUC authorized GSWC toestablish a non-interest bearing regulatory memorandum account to track unrealizedgains and losses on this contract. Accordingly, all unrealizedgains and losses generated from this contract will be deferred on a monthlybasis into the memorandum account and, as a result, do not impact GSWC’searnings. As of June 30, 2010, $9.6 million of unrealized losses have beenincluded in this memorandum account. This unrealized loss increased since December 31,2009 as a result of decreasing quoted market prices forenergy over the duration of the contract.

 

***Deferred Rate Case Costs:***

 

Asof June 30, 2010, GSWC has deferred rate case costs totaling $3.4 million.These are direct costs consisting primarily of outside consulting services,which have been incurred in connection with the preparation and processing of ageneral rate case.  Historically, GSWC has deferred these costs as a regulatoryasset which are then recovered in rates and amortized over the term of a ratecase cycle once the new rates go into effect.  In the current general ratecase for Regions II and III and the general office, the DRA is challenging GSWC’shistorical practice of deferring these costs with subsequent recovery upon theeffective date of the new rates.  Instead, DRA believes that 

 

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rate case costs should be projected forfuture periods and recovered prospectively.   Management believesthat DRA’s rationale and recommendations are inconsistent with GSWC’shistorical practice of deferring and recovering rate case expenses associatedwith the current general rate case.  Thispractice has not been challenged by the CPUC in prior rate cases.  GSWCwill vigorously defend its position.  However, if DRA prevails, GSWC may berequired to write off approximately $2.1 million of costs deferred as of June 30, 2010related to the current water rate case.  The final resolution of thisissue is expected in October 2010 as part of the CPUC’s final decision inthe Regions II and III and the general office rate case.  At this time, GSWC is unable to predict theoutcome of this matter.

 

***Other Regulatory Assets/Liabilities:***

 

*Bear Valley Electric Service*:

 

Aspart of the CPUC’s final decision in October 2009 on the BVES general ratecase, GSWC was authorized to establish a Base Revenue Requirement AdjustmentMechanism (“BRRAM”) account effective November 2, 2009. With the adoptionof the BRRAM account, GSWC began recording the difference between the base raterevenue portion of its charges on customers’ bills and the amount of base rate costsauthorized for recovery in rates by the CPUC. The variance between adopted electric base rate revenue and actualbilled base rate revenue will be recorded as a component of electric revenuewith an offsetting entry to an asset or liability balancing account.  The variance amount may be positive ornegative and represents amounts that will be billed or refunded to electriccustomers in the future and is interest bearing at the current 90-daycommercial paper rate.  When the amountof the under- or over-collection is equal to or greater than five percent ofthe adopted base rate revenue requirement established for the previous twelvemonths, GSWC intends to seek approval from the CPUC to refund or collect thebalance in the account.  As of June 30,2010, GSWC has included in other regulatory assets $789,000 related to theBRRAM.  Management will evaluate theanticipated recovery of this under-collection and will provide for allowancesand/or reserves as deemed necessary.

 

Includedin other regulatory assets as of June 30, 2010 is a BVES memorandumaccount totaling $925,000.  In June 2009,the CPUC authorized BVES to track the difference between the 2007 adoptedgeneral office cost allocation to BVES and the 1996 adopted general office costallocation to BVES, until the 2007 costs were incorporated into BVES’rates.  From June 4, 2009 to October 31,2009, when the 2007 costs were incorporated into BVES’ rates, $958,000 wasrecorded in the memorandum account. However, the decision issued on October 15, 2009 did not addressthe disposition of this memorandum account.  In November 2009, GSWC filed a petition for modification to seekclarification from the CPUC on the treatment and recovery of this memorandumaccount.   In March 2010, the CPUCapproved for recovery this memorandum account through a surcharge over a24-month period effective May 1, 2010. Accordingly, during the first quarter of 2010, GSWC recorded aregulatory asset and a corresponding increase to earnings for amounts includedin this memorandum account.  The October 2009decision in the general rate case for BVES also allows for an update to BVES’rates in 2010 for the corporate headquarters’ costs based on the CPUC’sadoption of new rates for GSWC’s current Regions II and III general rate caseincluding the recovery of expenses associated with its corporateheadquarters.  For the three and sixmonths ended June 30, 2010, a surcharge generating approximately $33,000was billed to BVES customers.

 

In January 2010, the City of Big Bear Lake andsurrounding areas of San Bernardino County experienced a series of snow storms,which damaged many BVES power lines, poles, transformers, and other facilitiesand caused temporary interruption of service to many BVES customers.  As a result of these storms, BVES hasincurred additional operating costs to repair equipment and restore electricservice to its customers.  While servicehas been restored to BVES customers, costs are still being incurred to repairequipment affected by the storms.  In February 2010,GSWC informed the CPUC that it will track these costs in a Catastrophic EventMemorandum Account (“CEMA”).  Once allwork resulting from these storms is completed, GSWC intends to file an adviceletter with the CPUC for recovery of these costs through a surcharge.  The incremental costs include BVES labor,outside services assistance, equipment, materials, facilities damages andrelated snow removal services. Management believes these incremental costs will be approved by the CPUCfor recovery through the CEMA.  As of June 30,2010, approximately $403,000 has been incurred as a result of the storms andhas been included in the CEMA account within other regulatory assets.

 

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*Excess Usage Charges - Refund to Customers:*

 

In July 2009, GSWC began receiving reducedwater allocations from member agencies of the Metropolitan Water District ofSouthern California (“MWD”). As a result, in July 2009, GSWC beganimplementing water rationing, restrictions, and excess usage charges to itscustomers in several of its service areas. The excess usage charges were beingcollected in the event that penalties were required to be paid to MWD forexceeding GSWC’s water allocations.  Asof June 30, 2010, GSWC has billed its customers excess usage chargestotaling $3.3 million.  Because GSWC wasable to comply with the reduced water allocations from MWD, it will not have toremit to MWD these excess usage charges collected from its customers.  Accordingly, these amounts will be refundedto customers and have been included in other regulatory assets/liabilities asof June 30, 2010.

 

***Other Regulatory Liabilities at CCWC:***

 

Fountain Hills Sanitary District (“FHSD”) is a political subdivision ofthe State of Arizona that provides sanitary sewer service to customers residingwithin CCWC’s water service area. In connection with its sanitary system, FHSDconstructed a recharge system whereby it recharges treated effluent throughmultiple injection wells. In order for FHSD to secure an Aquifer ProtectionPermit for its recharge system, FHSD requested CCWC to permanently cease usingone of its wells. As a possible replacement for this well, FHSD constructed anew well adjacent to the community center (“Community Center Well”).  However, this well was not able to produce anequivalent amount of water to CCWC’s well that was taken out ofproduction.  Accordingly, in February 2005,CCWC entered into an agreement with FHSD whereby CCWC agreed to permanentlyremove from service this well and in return CCWC received a settlement fee of$1,520,000 from FHSD.

 

In2005, CCWC recognized a net gain of $760,000 related to this settlementagreement and established a regulatory liability for the remaining $760,000pending ACC review of this matter.  On October 8,2009, the ACC made a final ruling ordering CCWC to treat the entire gain of$1,520,000 from the settlement agreement with FHSD as a reduction to rate base.As a result, CCWC recorded a loss of $760,000 during the third quarter of2009.  This effectively reversed theoriginal gain recorded in 2005.  In November 2009,CCWC filed an application for rehearing on several issues including the sharingof this gain from the settlement proceeds.  The ACC granted CCWC’srequest to hold a rehearing on the issues.  In January 2010, aprocedural conference was held with the judge and the staff of the ACC involvedin the rate case to address a schedule for the rehearing. The rehearing washeld in April 2010 and a final decision by the ACC is expected later thisyear.  At this time, management cannotpredict the final outcome of this matter.

 

***Other Regulatory Matters******:***

 

*LaSerena Plant Improvement Project:*

 

InJanuary 2008, the CPUC approved Region I’s general rate case effective foryears 2008, 2009, and 2010.  On March 3,2008, the DRA filed an application for rehearing of this decision on variouslegal grounds.  As permitted by the CPUC,GSWC filed a response to DRA’s application. In September 2008, the CPUC granted a limited rehearing in order toconsider whether it is reasonable to include in Region I’s rate baseapproximately $3.5 million of costs incurred in connection with the La SerenaPlant Improvement Project.  The projectis currently in rate base and the earnings have been included in rates since January 1,2008.  If DRA prevails, GSWC may be required to write off the costsincurred to date and also refund amounts collected from customers since January 1,2008.  At this time, management cannotpredict the final outcome of this matter or a range of loss, if any.  The final resolution of this issue isexpected in October 2010 as part of the CPUC’s final decision in theRegions II and III and the general office rate case.

 

*CPUCSubpoena*:

 

OnFebruary 15, 2007, the CPUC issued a subpoena to GSWC in connection withan investigation of certain work orders and charges paid to a specificcontractor used by GSWC for numerous construction projects estimated to total$24.0 million. The CPUC’s investigation focuses on whether GSWC was overchargedfor these construction projects and whether these overcharges were approved incustomer rates.  The construction projects completed by this specificcontractor related primarily to work on water treatment and pumping plantswhich have been placed in service and are used and useful.  InJune 2007, GSWC received notification from the CPUC that it wasinstituting an audit. The purpose of the audit was to examine for the period1994 to the present, GSWC’s policies, procedures, and practices throughout allof its Regions regarding the granting or awarding of construction 

 

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contracts or jobs.  GSWC is currentlyresponding to data requests submitted by the CPUC including recent datarequests which asked for information prior to 1994.  Should the CPUC investigation result in aproposed disallowance of certain previously capitalized costs, such costs, andpotentially any return earned on such costs, may be required to be refunded tothe customers upon settlement of the proposed disallowance, if any, resultingin a charge to operating income.   In addition to the disallowance ofpreviously capitalized costs, the CPUC may seek to recover amounts previouslyrecovered in rates relating to such costs and also has the authority to assessfines and penalties.  Management isunable to predict whether and the extent to which the CPUC may disallow suchcapitalized costs, seek recovery of previously paid rates or assess fines andpenalties.  However, any suchdisallowance, refunds to customers and/or assessment, if imposed could have amaterial adverse effect on AWR and GSWC.

 

InJanuary 2009, the ACC staff requested information regarding the CPUCsubpoena and on-going audit.  GSWC hasbeen working with the ACC staff and has provided responsive materials,including but not limited to, materials that are relevant to CCWC. Although theACC has issued a decision in the CCWC general rate case, it has held the docketopen pending resolution of the staff’s review of the CPUC subpoenadocuments.  In the first quarter of 2010,the ACC staff issued a report recommending that proper controls be establishedin CCWC’s procurement policies and procedures, and that status reports of theCPUC’s investigation and resolution be filed with the ACC periodically. Thestaff’s report did not result in any financial impact to CCWC.  The ACC will still need to act on the staff’srecommendations.  Management cannotpredict the outcome of the ACC’s final decision on this matter.

 

*BearValley Electric Service*

 

GSWC’sBVES division has been regularly filing compliance reports with the CPUCregarding its purchases of energy from renewable energy resources. The filingshave indicated that BVES has not achieved interim target purchase levels ofrenewable energy resources and thus, on its face, might be subject to apotential penalty. However, BVES expects that the CPUC will waive any potentialfines in accordance with the flexible compliance rules.  Accordingly, no provision for loss has beenrecorded in the financial statements as of June 30, 2010.  At this time, management cannot determine ifinterim targets for the 2010 year will be met. BVES is continuing its efforts to procure renewable resources. In November 2009,GSWC entered into a ten-year contract to purchase renewable energy created fromlandfill gas.  The contract is subject toCPUC approval.  On June 8, 2010,GSWC filed an application with the CPUC seeking approval of this contract.  If approved, the contract will provide up to3 megawatts for ten years at a fixed price of $110.0 per MWh.  In November 2009, GSWC also entered intoa ten-year contract to purchase biogas to power BVES’s gas-fueled 8.4 MWgeneration facility.  This contract isalso subject to CPUC approval.  On July 8,2010, GSWC filed an application with the CPUC seeking approval of thiscontract.

 

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**Note 3— Earnings per Share/Capital Stock:**

 

Inaccordance with the accounting guidance for participating securities andearnings per share (“EPS”), Registrant uses the “two-class” method of computingEPS. The “two-class” method is an earnings allocation formula that determinesEPS for each class of common stock and participating security. AWR hasparticipating securities related to stock options and restricted stock unitsthat earn dividend equivalents on an equal basis with AWR’s Common Shares (the “CommonShares”) that have been issued under AWR’s 2000 and 2008 Employee Plans and the2003 Directors Plan. In applying the “two-class” method, undistributed earningsare allocated to both common shares and participating securities. The followingis a reconciliation of Registrant’s net income and weighted average CommonShares outstanding for calculating basic net income per share:

 
| **Basic**                                                             | ** **                                                    | **For The Three Months********Ended June 30,** | ** ** | **For The Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|---------------------------------------------------------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** **                                                    | **2010**                                                                | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Net income from continuing operations                                 |                                                          | $                                                                       | 8,870      |                                              | $          | 11,415 |   | $ | 17,160 |   | $ | 16,443 |   |
| Net income (loss) from discontinued operations                        |                                                          | 105                                                                     |       | 84                                                |       | 305 |   | (12 | ) |
| Total net income                                                      |                                                          | 8,975                                                                   |       | 11,499                                            |       | 17,465 |   | 16,431 |   |
| Less: (a)                                                             | Distributed earnings to common shareholders                   |                                                                    | 4,830      |                                              | 4,465      |   | 9,652 |   | 8,794 |   |
|                                                                  | Distributed earnings to participating securities              |                                                                    | 26         |                                              | 23         |   | 48 |   | 43 |   |
| Undistributed earnings                                                |                                                          | 4,119                                                                   |       | 7,011                                             |       | 7,765 |   | 7,594 |   |
|                                                                  |                                                          |                                                                    |       |                                              |       |   |   |   |   |
| (b)                                                                   | Undistributed earnings allocated to common  shareholders      |                                                                    | 4,098      |                                              | 6,976      |   | 7,727 |   | 7,558 |   |
|                                                                  | Undistributed earnings allocated to participating  securities |                                                                    | 21         |                                              | 35         |   | 38 |   | 36 |   |
|                                                                  |                                                          |                                                                    |       |                                              |       |   |   |   |   |
| Total income available to common shareholders,  basic (a)+(b)         |                                                          | $                                                                       | 8,928      |                                              | $          | 11,441 |   | $ | 17,379 |   | $ | 16,352 |   |
|                                                                  |                                                          |                                                                    |       |                                              |       |   |   |   |   |
| Weighted average Common Shares outstanding, basic                     |                                                          | 18,576                                                                  |       | 17,861                                            |       | 18,561 |   | 17,588 |   |
|                                                                  |                                                          |                                                                    |       |                                              |       |   |   |   |   |
| **Basic earnings per Common  Share:**                                 |                                                          |                                                                    |       |                                              |       |   |   |   |   |
| Income from continuing operations                                     |                                                          | $                                                                       | 0.47       |                                              | $          | 0.64 |   | $ | 0.92 |   | $ | 0.93 |   |
| Income from discontinued operations                                   |                                                          | 0.01                                                                    |       | —                                            |       | 0.02 |   | — |   |
| Net Income                                                            |                                                          | $                                                                       | 0.48       |                                              | $          | 0.64 |   | $ | 0.94 |   | $ | 0.93 |   |
|                                                                       |                                                               |                                                                         |            |                                                   |            |  |  |  |  |  |  |  |  |  |  |

 

DilutedEPS is based upon the weighted average number of Common Shares, including bothoutstanding shares and shares potentially issuable in connection with stockoptions granted under Registrant’s 2000 and 2008 Employee Plans, and the 2003Directors Plan, and net income. At June 30, 2010 and 2009, there were742,387 and 680,758 options outstanding, respectively, under these Plans. AtJune 30, 2010 and 2009, there were also 104,498 and 92,502 restrictedstock units outstanding, respectively.

 

Thefollowing is a reconciliation of Registrant’s net income and weighted averageCommon Shares outstanding for calculating diluted net income per share:

 
| **Diluted**                                                           | ** ** | **For The Three Months********Ended June 30,** | ** ** | **For The Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                                                | ** ** | **2009**                                          | ** ** | **2010** | ** ** | **2009** | ** ** |
| Common shareholders earnings, basic                                   |       | $                                                                       | 8,928      |                                              | $          | 11,441 |   | $ | 17,379 |   | $ | 16,352 |   |
| Undistributed earnings for dilutive stock options                     |       | 21                                                                      |       | 35                                                |       | 38 |   | 36 |   |
| Total common shareholders earnings, diluted                           |       | $                                                                       | 8,949      |                                              | $          | 11,476 |   | $ | 17,417 |   | $ | 16,388 |   |
|                                                                  |       |                                                                    |       |                                              |       |   |   |   |   |
| Weighted average common shares outstanding, basic                     |       | 18,576                                                                  |       | 17,861                                            |       | 18,561 |   | 17,588 |   |
| Stock-based compensation (1)                                          |       | 144                                                                     |       | 126                                               |       | 134 |   | 130 |   |
| Weighted average common shares outstanding,  diluted                  |       | 18,720                                                                  |       | 17,987                                            |       | 18,695 |   | 17,718 |   |
|                                                                  |       |                                                                    |       |                                              |       |   |   |   |   |
| **Diluted earnings per Common  Share:**                               |       |                                                                    |       |                                              |       |   |   |   |   |
| Income from continuing operations                                     |       | $                                                                       | 0.47       |                                              | $          | 0.64 |   | $ | 0.91 |   | $ | 0.92 |   |
| Income from discontinued operations                                   |       | 0.01                                                                    |       | —                                            |       | 0.02 |   | — |   |
| Net Income                                                            |       | $                                                                       | 0.48       |                                              | $          | 0.64 |   | $ | 0.93 |   | $ | 0.92 |   |

 

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(1)         In applying the treasury stock method of reflectingthe dilutive effect of outstanding stock-based

 

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compensationin the calculation of diluted EPS, 395,833 and 329,975 stock options at June30, 2010 and 2009, respectively, were deemed to be outstanding in accordancewith accounting guidance on earnings per share. All of the 104,498 and 92,502 restricted stock units at June 30, 2010and 2009, respectively, were included in the calculation of diluted EPS for thesix months ended June 30, 2010 and 2009.

 

Stockoptions of 112,026  and 346,349 wereoutstanding at June 30, 2010 and 2009, respectively, but not included in thecomputation of diluted EPS because the related option exercise price wasgreater than the average market price of AWR’s Common Shares for the six monthsended June 30, 2010 and 2009.  Stockoptions of 234,528 and 4,434 were outstanding at June 30, 2010 and 2009,respectively, but not included in the computation of diluted EPS because theywere antidilutive.

 

Duringthe six months ended June 30, 2010 and 2009, Registrant issued 57,299 and38,073 Common Shares, for approximately $1,316,000 and $915,000, respectively,under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the401(k) Plan, and the stock incentive plans. In addition, Registrant purchased67,241 and 13,593 Common Shares on the open market during the six months endedJune 30, 2010 and 2009, respectively, under Registrant’s 401(k) Plan and theCommon Share Purchase and Dividend Reinvestment Plan. The Common Sharespurchased by Registrant were used to satisfy the requirements of these plans.

 

Duringthe three months ended June 30, 2010 and 2009, AWR paid quarterly dividends ofapproximately $4.8 million, or $0.26 per share and $4.3 million, or $0.25 pershare, respectively.  During the sixmonths ended June 30, 2010 and 2009, AWR paid quarterly dividends toshareholders of approximately $9.7 million, or $0.52 per share and $8.7million, or $0.50 per share.

 

OnMay 26, 2010, the Board of Directors approved the issuance of eight additionalGSWC Common Shares to AWR for $20.0 million. Proceeds from the issuance were used to pay down GSWC’s intercompanyborrowings due to AWR.

 

**Note 4 — Derivative Instruments:**

 

Mostof the electric energy sold by BVES to its customers is purchased fromothers.  To mitigate exposure tospot-market prices, Registrant has entered into purchased power contracts,which are subject to derivative accounting, to serve its BVES customer servicearea.  By entering into thesefixed-priced purchased power contracts, Registrant has been able to limit theamount of risk and uncertainty due to spot-market price variability.  Changes in electricity costs are outside ofmanagement’s control, therefore, the purpose of entering into these fixed pricecontracts is to stabilize purchased power costs.  Except for the resale of small amounts ofpower in the spot market that are in excess of BVES’ customers’ then immediateneeds, the power purchased under the contracts is only used to service BVEScustomers’ demand.

 

Registrant has a block-forwardpurchase power contract that has been and is subject to the accounting guidancefor derivative instruments and hedging activities, as amended.  A derivative financial instrument or othercontract derives its value from another investment or designatedbenchmark.  Accounting guidance requirescompanies to record derivatives on the balance sheet as assets and liabilities,and to measure those instruments at their fair value.

 

In October 2008, GSWC executed apurchased power contract that permits GSWC to purchase power at a fixed costover three and five year terms depending on the amount of power and periodduring which the power is purchased under the contract.  The contract is subject to the accountingguidance for derivatives and requires mark-to-market derivativeaccounting.   GSWC began receiving powerunder this contract on January 1, 2009. In May 2009, the CPUC issued a final decision approving the contract andauthorized GSWC to establish a regulatory asset and liability memorandumaccount to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and lossesgenerated from the new purchased power contract will be deferred on a monthlybasis into a non-interest bearing regulatory memorandum account that will trackthe changes in fair value of the derivative throughout the term of thecontract.   As of June 30, 2010 there wasa $9.6 million cumulative unrealized loss which has been included in thememorandum account.  This memorandumaccount does not impact GSWC’s earnings.

 

On a monthly basis, the relatedasset or liability is adjusted to reflect the fair market value at the end ofthe month.  Registrant adopted accountingguidance for fair value measurements effective January 1, 2008 for financial assetsand liabilities measured on a recurring basis. This guidance applies to all financial assets and financial liabilitiesthat are being measured and reported on a fair value basis. There was no impactin the adoption of this 

 

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accountingguidance to the consolidated financial statements. However, the accountingguidance requires disclosure that establishes a framework for measuring fairvalue and expands disclosure about fair value measurements. The guidancerequires fair value measurements to be classified and disclosed in one of thefollowing three categories:

 

*Level 1*: Unadjusted quoted prices in active markets thatare accessible at the measurement date for identical, unrestricted assets orliabilities;

 

*Level 2*: Quoted prices in markets that are not active, orinputs which are observable, either directly or indirectly, for substantiallythe full term of the asset or liability, or

 

*Level 3*: Prices or valuation techniques that require inputsthat are both significant to the fair value measurement and unobservable (i.e.,supported by little or no market activity).

 

Registrant’s valuation modelutilizes various inputs that include quoted market prices for energy over theduration of the contract. The market prices used to determine the fair valuefor this derivative instrument were estimated based on independent sources suchas broker quotes and publications that are not observable in or corroborated bythe market.  Registrant receives onebroker quote to determine the fair value of its derivative instrument.  When such inputs have a significant impact onthe measurement of fair value, the instrument is categorized in Level 3.  Accordingly, the valuation of the derivativeon Registrant’s new purchased power contract has been classified as Level 3 forall periods presented.

 

The following table presentschanges in the fair value of the derivative for the three and six months endedJune 30, 2010 and 2009.

 
| ** **                                           | ** ** | **For the Three Months Ended June 30,** | ** ** | **For the Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------|------------|---------------------------------------|------------|
| **(dollars in thousands)**                 | ** ** | **2010**                                | ** ** | **2009**                              | ** ** | **2010** | ** ** | **2009** | ** ** |
| Balance, at beginning of the period                  |       | $                                       | (10,038    | )                                     | $          | (8,428 | ) | $ | (7,338 | ) | $ | — |   |
| Unrealized gain (loss) on purchased power  contracts |       | 486                                     |       | (119                                  | )          | (2,214 | ) | (8,547 | ) |
| Balance, at end of the period                        |       | $                                       | (9,552     | )                                     | $          | (8,547 | ) | $ | (9,552 | ) | $ | (8,547 | ) |

 

Forthe three and six months ended June 30, 2010 and 2009, the unrealized gains andlosses were included in regulatory assets due to regulatory mechanisms in placeeffective January 1, 2009.

 

**Note 5 — Fair Value of FinancialInstruments:**

 

Forcash and cash equivalents, accounts receivable, accounts payable and short-termdebt, the carrying amount is assumed to approximate fair value due to theshort-term nature of the amounts. The table below estimates the fair value oflong-term debt held by the continuing utility subsidiaries. Rates available tothe continuing utility subsidiaries at June 30, 2010 and December 31,2009 for debt with similar terms and remaining maturities were used to estimatefair value for long-term debt. Changes in the assumptions will producediffering results.

 
| ** **                           | ** ** | **June 30, 2010**        | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|--------------------------|------------|-----------------------|------------|
| **(dollars in thousands)** | ** ** | **Carrying Amount** | ** ** | **Fair Value**   | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| Financial liabilities:               |       |                     |       |                  |       |   |   |   |   |
| Long-term debt—GSWC             |       | $                        | 300,303    |                  | $          | 336,846 |   | $ | 300,586 |   | $ | 335,217 |   |
|                                      |            |                          |            |                       |            |  |  |  |  |  |  |  |  |

 

**Note 6— Military Privatization:**

 

ASUS,through its wholly owned subsidiaries, has entered into agreements with theU.S. government to operate and maintain the water and/or wastewater systems atvarious military bases pursuant to 50-year fixed price contracts, subject toperiodic prospective price redeterminations and modifications for changes incircumstances.

 

Theamounts charged by the Military Utility Privatization Subsidiaries for waterand/or wastewater services at the respective military bases are based upon theterms of the 50-year contracts between ASUS or its subsidiaries and the U.S.government. Under the terms of these agreements, the Military UtilityPrivatization Subsidiaries agreed to operate and maintain the water and/orwastewater systems at the respective bases for a monthly net fixed price foroperation and maintenance, and for an amount to cover renewals and replacementsfor the first two years of the contract. Under the terms of each of these contracts, prices are to beredetermined at the end of the initial two year period and every three yearsthereafter, unless otherwise agreed to by the parties to a contract. Inaddition, prices may be equitably adjusted for changes in law and othercircumstances.  These adjustments can beretrospective and/or prospective.  TheMilitary Utility Privatization Subsidiaries have experienced delays inobtaining readjustment of prices and equitable adjustments as required by theterms of these contracts.

 

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InMarch 2009, ONUS filed a request for equitable adjustment related to a jointinventory report which indicated the quantity of the Fort Bragg infrastructureto be greater than what was estimated by the U.S. government as part of itssolicitation for this contract.  On January22, 2010, the U.S. government approved a $6.5 million equitable adjustmentregarding this inventory. As a result of this contract modification, ASUSrecorded $3.1 million of revenues and operating income during the first quarterof 2010 (approximately $2.8 million of which is retroactive from thecommencement of the contract in March 2008 toDecember 31, 2009).  Theremaining $3.4 million, related to renewal and replacement funds, was recordedas billings in excess of costs and estimated earnings on uncompleted contractsin the first quarter of 2010.  Thedeferred revenue will be recognized in construction revenues (along with therelated construction costs) when the work is performed.

 

InMarch 2008, FBWS filed a request for equitable adjustment as a claim with theU.S. government seeking an adjustment in the contract after it was determinedthat the infrastructure at Fort Bliss was substantially more than originallyestimated by the U.S. government as part of its solicitation for this contract.  In January 2010, FBWS and the U.S. governmententered into a settlement agreement pursuant to which the U.S. governmentagreed to pay FBWS retroactive operation and maintenance management fees andretroactive renewal and replacement fees from the contract commencement date,October 1, 2004.  In March 2010, the U.S.government issued a $6 million contract modification funding a majority of thesettlement agreement.  As a result, ASUSrecorded $2.5 million in revenues and pretax operating income and $510,000 ininterest income during the first quarter of 2010.  The remaining $3.0 million, related torenewal and replacement funds, was recorded as billings in excess of costs andestimated earnings on uncompleted contracts. The deferred revenue will be recognized in construction revenues (alongwith the related construction costs) as the work is performed.  An additional modification funding thebalance of the settlement amount was received in June 2010. As a result, forthe second quarter of 2010, ASUS recorded additional revenues of $85,000 and areduction in administrative and general expense of $117,000 for reimbursementof costs incurred to prepare the request for equitable adjustment filing.

 

OnJuly 22, 2010, ASUS was served with a subpoena issued in connection with aGrand Jury investigation related to ODUS’ water and wastewater privatizationcontract at the TRADOC bases, and the wastewater utility privatization contractat Fort Lee.  The investigation is in its early stages and ASUS is in theprocess of producing documents requested in the subpoena.  At this time,management cannot predict the final outcome of the investigation or a range ofloss, if any.

 

**Note 7— Income Taxes:**

 

Asa regulated utility, GSWC treats certain temporary differences asflow-through adjustments in computing its income tax provisionconsistent with the income tax approach approved by the CPUC for ratemakingpurposes. Flow-through adjustments increase or decrease tax expensein one period, with an offsetting increase or decrease occurring inanother period. Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal income tax rate in anygiven period than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.  The GSWC ETR for the three months ended June30, 2010 was 42.7% as compared to 40.9% applicable to the three months ended June30, 2009.  The GSWC ETR for the six monthsended June 30, 2010 was 42.9% as compared to 39.8% applicable to the six monthsended June 30, 2009.  The GSWC ETRdeviated from the federal statutory rate primarily due to changes between bookand taxable income that are treated as flow-through adjustments in accordancewith regulatory requirements (principally plant-, rate-case- andcompensation-related items).

 

Registrant’spolicy is to classify interest on income tax over/underpayments in interestincome/expense and penalties in operating expenses.

 

AWR(parent) receives a tax benefit for expenses incurred at the parent-companylevel.  For the six months ended June 30, 2009, the taxes recorded at AWR(parent) also include the effect of changes in California law relating to stateunitary tax principles during the first quarter of 2009.  Managementintends to elect, commencing with the 2011 tax year, an alternativeapportionment method made available by tax law changes in 2009.  As aresult of management’s intention to apply the alternative method, AWR adjustedits deferred tax balances in the first quarter of 2009 to reflect the expectedamount at which it will realize its California deferred taxes consistent withthe change in tax law, and refined certain related estimates.  Thisresulted in the recording of a benefit of approximately $918,000, or $0.05 pershare, during the first quarter of 2009. While the effect of the tax law changeswill continue to affect AWR’s state taxes, the future effects may be beneficialor detrimental depending on a 

 

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combination of the profitability of AWR’snon-California activities as well as the relative proportion of the factor(s)applied by its apportionment method.  Periodically, management will assessits intention to apply the alternative method and will adjust its deferred taxbalances accordingly.

 

GSWCcontinues to compute its state tax provision as if it were autonomous and not amember of AWR’s unitary group.  Thisapproach is consistent with the methodology used for ratemaking purposes.  Given that all of GSWC’s activities areconducted within California, GSWC’s state tax provision does not reflectapportionment of its income; consequently, the change in California law has hadno effect upon GSWC’s state taxes.

 

**Note 8— Employee Benefit Plans:**

 

Thecomponents of net periodic benefit costs, before allocation to the overheadpool, for Registrant’s pension plan, postretirement plan, and SupplementalExecutive Retirement Plan (“SERP”) for the three and six months ended June 30,2010 and 2009 are as follows:

 
| ** **                                     | ** ** | **For The Three Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**               | ** ** | **Other Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2010**                                | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                                    |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                       | 1,199      |   | $ | 1,119 |   | $ | 102 |   | $ | 85 |   | $ | 108 |   | $ | 82 |   |
| Interest cost                                  |       | 1,526                                   |       | 1,426 |   | 159 |   | 161 |   | 89 |   | 80 |   |
| Expected return on plan assets                 |       | (1,313                                  | )          | (974 | ) | (63 | ) | (52 | ) | — |   | — |   |
| Amortization of transition                     |       | —                                  |       | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization of prior service cost (benefit)   |       | 30                                      |       | 29 |   | (50 | ) | (50 | ) | 40 |   | 40 |   |
| Amortization of actuarial loss (gain)          |       | 293                                     |       | 572 |   | — |   | — |   |   |   | — |   |
| Net periodic pension cost                      |       | $                                       | 1,735      |   | $ | 2,172 |   | $ | 253 |   | $ | 249 |   | $ | 237 |   | $ | 202 |   |

 
| ** **                                     | ** ** | **For The Six Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**             | ** ** | **Other Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2010**                              | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                                  |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                     | 2,398      |   | $ | 2,238 |   | $ | 204 |   | $ | 171 |   | $ | 216 |   | $ | 175 |   |
| Interest cost                                  |       | 3,052                                 |       | 2,852 |   | 318 |   | 321 |   | 178 |   | 166 |   |
| Expected return on plan assets                 |       | (2,626                                | )          | (1,948 | ) | (126 | ) | (104 | ) | — |   | — |   |
| Amortization of transition                     |       | —                                |       | — |   | 210 |   | 210 |   | — |   | — |   |
| Amortization of prior service cost (benefit)   |       | 60                                    |       | 58 |   | (100 | ) | (100 | ) | 80 |   | 80 |   |
| Amortization of actuarial loss (gain)          |       | 586                                   |       | 1,144 |   | — |   | — |   | — |   | — |   |
| Net periodic pension cost                      |       | $                                     | 3,470      |   | $ | 4,344 |   | $ | 506 |   | $ | 498 |   | $ | 474 |   | $ | 421 |   |

 

Registrant expects to contribute approximately $8,583,000 and $575,000to the pension and postretirement medical plans in 2010, respectively.  During the three and six months endedJune 30, 2010, $726,000 was contributed to the pension plan.  No contributions were made during the firstquarter of 2010.

 

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**Note 9 — Contingencies:**

 

***Water Quality-Related Litigation******:***

 

Perchlorate and/or Volatile Organic Compounds (“VOC”) have beendetected in five wells servicing GSWC’s South San Gabriel System. GSWC filedsuit in federal court, along with two other affected water purveyors and theSan Gabriel Basin Water Quality Authority (“WQA”), against some of thoseallegedly responsible for the contamination of two of these wells. Some of theother potential defendants settled with GSWC, other water purveyors and the WQA(the “Water Entities”), on VOC related issues prior to the filing of thelawsuit. In response to the filing of the lawsuit, the Potentially ResponsibleParty (“PRP”) defendants filed motions to dismiss the suit or strike certainportions of the suit. The judge issued a ruling on April 1, 2003 grantingin part and denying in part the PRP’s motions. A key ruling of the court wasthat the water purveyors, including GSWC, by virtue of their ownership of wellscontaminated with hazardous chemicals are themselves PRPs under theComprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

 

GSWC has, pursuant to permission of the court, amended its suit toclaim certain affirmative defenses as an “innocent” party under CERCLA.Registrant is presently unable to predict the outcome of this ruling on itsability to fully recover from the PRPs future costs associated with thetreatment of these wells. In this same suit, the PRPs have filedcross-complaints against the Water Entities, the MWD, the Main San GabrielBasin Watermaster and others on the theory that they arranged for and didtransport contaminated water into the Main San Gabriel Basin for use by GSWCand the other two affected water purveyors and for other related claims.

 

On August 29, 2003, the US Environmental Protection Agency (“EPA”)issued Unilateral Administrative Orders (“UAO”) against 41 parties deemedresponsible for polluting the groundwater in that portion of the San GabrielValley from which the two impacted GSWC wells draw water. GSWC was not named asa party to the UAO. The UAO requires that these parties remediate thecontamination. The judge in the lawsuit has appointed a special master tooversee mandatory settlement discussions between the PRPs and the WaterEntities. EPA is also conducting settlement discussions with several PRPsregarding the UAO. The Water Entities and EPA are working to coordinate theirsettlement discussions under the special master in order to arrive at acomplete resolution of all issues affecting the lawsuit and the UAO.Settlements have been reached between WQA and some PRPs. Settlements with anumber of other PRPs are being finalized; however, Registrant is presentlyunable to predict the ultimate outcome of these settlement discussions.

 

***Condemnation of Properties******:***

 

The laws of the State of California and the State of Arizona providefor the acquisition of public utility property by governmental agencies throughtheir power of eminent domain, also known as condemnation, where doing so isnecessary and in the public interest. In addition, however, the laws ofCalifornia provide: (i) that the owner of utility property may contestwhether the condemnation is actually necessary and in the public interest, and(ii) that the owner is entitled to receive the fair market value of itsproperty if the property is ultimately taken.

 

TheTown of Apple Valley (the “Town”) abandoned its activities related to a potentialcondemnation of GSWC’s water system serving the Town in 2007. However, in April2009, the Town announced that it will again consider a potential takeover ofGSWC’s Apple Valley water systems as well as those of another privately-ownedutility.  The Town Council has directedstaff to research the costs associated with updating the previously preparedfinancial feasibility study for the acquisition of GSWC’s water system.

 

TheStanton City Council recently decided to solicit proposals to identify theprocess, potential costs and legal issues for acquiring the water system ownedby GSWC.

 

Exceptfor the City of Stanton and the Town of Apple Valley, Registrant is currentlynot involved in activities related to the potential condemnation of any of itswater customer service areas or in its BVES customer service area. No formalcondemnation proceedings have been filed against any of the Registrant’sservice areas during the past three years.

 

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***Santa Maria Groundwater Basin Adjudication******:***

 

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit sought an adjudication of the Santa Maria Groundwater Basin(the “Basin”). A stipulated settlement of the lawsuit has been reached, subjectto CPUC approval.  The settlement, amongother things, if approved by the CPUC, would preserve GSWC’s historical pumpingrights and secure supplemental water rights for use in case of drought or otherreductions in the natural yield of the Basin. GSWC, under the stipulation, hasa right to 10,000 acre-feet of groundwater replenishment provided by theTwitchell Project, a storage and flood control reservoir project operated bythe Santa Maria Valley Conservation District.  A monitoring and annualreporting program has been established to allow the parties to responsiblymanage the Basin and to respond to shortage conditions.  If severe watershortage conditions are found over a period of five years, the management areaengineer will make findings and recommendations to alleviate suchshortages.  In the unlikely case that the Basin experiences severeshortage conditions, the court has the authority to limit GSWC’sgroundwater production to 10,248 acre-feet per year, based ondeveloped water in the Basin.  Overthe last five years, GSWC’s average groundwater production has been 10,140acre-feet per year.

 

On February 11, 2008, the court issued itsfinal judgment, which approves and incorporates the stipulation.  Thejudgment awards GSWC prescriptive rights to groundwater against thenon-stipulating parties.  In addition, the judgment grants GSWC the rightto use the Basin for temporary storage and to recapture 45 percent of thereturn flows that are generated from its importation of State Water Projectwater.  Pursuant to this judgment, the court retains jurisdiction over allof the parties to make supplemental orders or to amend the judgment asnecessary.  On March 20, 2008, thenon-stipulating parties filed notices of appeal.  Registrant is unable to predict the outcomeof the appeal.

 

***Aerojet Note Receivable:***

 

Pursuantto the settlement agreement with Aerojet discussed in Note 2, GSWC has a notereceivable, plus accrued interest, guaranteed by Aerojet.  This note, plus interest on the unpaidbalance, is scheduled to be paid by Aerojet in installments over five yearsbeginning in December 2009.  GenCorpInc. is the parent of Aerojet.  In January 2010,Standard & Poor’s (“S&P”) upgraded GenCorp Inc’s credit rating toB- from CCC+ with a stable outlook.  Thisis a non-investment grade rating assigned by S&P to companies whosefinancial situation varies.  On March 26,2010, Moody’s Investor Services (“Moody’s) upgraded its corporate family ratingfrom B3 to B2.  This is a non-investmentgrade rating assigned by Moody’s to obligations that are speculative andsubject to high credit risk and of generally poor credit quality.

 

In December 2009, the Company received from Aerojet$2.6 million, including interest, as payment of the first annual installmentunder the terms of the 2004 settlement agreement.  As of June 30, 2010, the unpaid portionof the note receivable is $8.4 million, comprised of $6.4 million in principaland $2.0 million in accrued interest.  Atthis time, management believes the note receivable from Aerojet is fullycollectible and has not provided a reserve for uncollectible amounts as of June 30,2010.  GSWC will continue to assessrecoverability of this note receivable.

 

***Environmental Clean-Up and Remediation******:***

 

ChadronPlant: GSWC has been involved in environmental remediation and clean-up at aplant site (“Chadron Plant”) that contained an underground storage tank whichwas used to store gasoline for its vehicles. This tank was removed inJuly 1990 along with the dispenser and ancillary piping. Since then, GSWC hasbeen involved in various remediation activities at this site.  Recent site assessments have been conductedwhich showed thatthere was more gasoline at higher concentrations spread over a larger area thanpreviously measured. Remediation is estimated to take two more years, followed by at least oneyear of monitoring and reporting.  As of June 30, 2010, the total spent to clean-up andremediate GSWC’s plant facility is approximately $2.4 million, of which$1.5 million has been paid by the State of California Underground StorageTank Fund. Amounts paid by GSWC have been included in rate base and approved bythe CPUC for recovery.

 

As of June 30, 2010, GSWC has an accrued liability for theestimated additional cost of $1.4 million to complete the clean-up at the site.The ultimate cost may vary as there are many unknowns in remediation ofunderground gasoline spills and this is an estimate based on currentlyavailable information. Management also believes it is probable that theestimated additional costs will be approved in rate base by the CPUC.

 

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BallonaPlant: During the first quarter of 2008, hydrocarbon contaminated soil wasfound at a plant site (“Ballona Plant”) located in GSWC’s Southwest customerservice area where an abandoned water tank was demolished.  An investigation and characterization of thecontaminated area was conducted.  Theinvestigation report indicates that contamination levels are below normalcleanup goals.  GSWC submitted a clean-upaction plan to the local Certified Unified Program Agency (“CUPA”), whichapproved the clean-up plan.  The clean-upwas completed during the first quarter of 2010. All contaminated soil was removed and replaced with clean soil.  The final Removal Action Completion Report (“RACR”)was submitted to the Site Mitigation Unit (“SMU”) on May 10, 2010.  The SMU reviewed the RACR and issued a nofurther action letter.  The letter statesthat the SMU concurs with the contents of the RACR, which states that the sitecontamination has been satisfactorily mitigated for the current use and nofurther action is required at the subject site. Clean-up costs incurred through June 30, 2010 totaled approximately$337,000.  Historically, the costs forthis type of cleanup have been included in rate base for recovery.

 

Hawaiian Gardens Plant: GSWC conducted****a study forarsenic removal at the Hawaiian Gardens Plant in GSWC’s Region II from October 2009through March 2010.  Two loads ofsludge generated****during thistime period that were hazardous waste were inadvertently classified anddisposed of as non-hazardous waste.   OnMay 28, 2010, GSWC voluntarily reported disposing of hazardous wastefrom the plant incorrectly to the Department of Toxic Substance Control (“DTSC”).DTSC has guidelines for voluntary disclosure which is intended to reducepenalties and eliminate the potential for criminal prosecution.  If DTSC issues a fine, GSWC does not expectthat such fines will have a material impact on its consolidated financialstatements.

 

***Other Litigation******:***

 

Registrantis also subject to other ordinary routine litigation incidental to itsbusiness. Management believes that rate recovery, proper insurance coverage andreserves are in place to insure against property, general liability and workers’compensation claims incurred in the ordinary course of business. Registrant isunable to predict an estimate of the loss, if any, resulting from any pendingsuits or administrative proceedings.

 

**Note 10 — DiscontinuedOperations:**

 

On June 7, 2010, Registrantentered into a stock purchase agreement with EPCOR Water (USA) Inc. to sell allof the common shares of CCWC for a total purchase price of $35 million,including the assumption of approximately $6 million of long-term debt.  Approximately $29 million in cash will bepaid to AWR at closing. The purchase price is subject to certain adjustmentsfor changes in retained earnings. The consummation of the transactioncontemplated by the agreement is subject to customary conditions, includingamong other things, regulatory approval by the Arizona Corporation Commission,which is anticipated to be received in 2011. Therefore, no gain on disposal of CCWC has been recorded during thethree and six months ended June 30, 2010, pending regulatoryapproval.  Had the transaction closed asof June 30, 2010, AWR would have recognized a pretax gain on disposal ofapproximately $6.0 million, net of transaction costs of $659,000. The assetsand liabilities of CCWC have been classified as current assets and liabilitiesheld for sale as of June 30, 2010.

 

The carrying amounts of the majorclasses of assets and liabilities of CCWC included in discontinued operationsare as follows:

 
| ** **                                              | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(dollars in thousands)**                         | ** ** | **2010**          | ** ** | **2009**              | ** ** |
| Assets:                                                 |       |              |       |                  |       |
| Utility Plant, net                                      |       | $                 | 43,393     |                  | $          | 44,391 |   |
| Goodwill, net                                           |       | 3,321             |       | 3,321                 |       |
| Other assets                                            |       | 2,785             |       | 2,465                 |       |
| Total assets of discontinued operations                 |       | $                 | 49,499     |                  | $          | 50,177 |   |
|                                                    |       |              |       |                  |       |
| Liabilities:                                            |       |              |       |                  |       |
| Advances and contributions in aid of construction,  net |       | $                 | 17,907     |                  | $          | 18,035 |   |
| Long term debt                                          |       | 5,975             |       | 5,975                 |       |
| Other liabilities                                       |       | 3,335             |       | 2,996                 |       |
| Total liabilities of discontinued operations            |       | $                 | 27,217     |                  | $          | 27,006 |   |

 

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A summary of discontinuedoperations presented in the consolidated statements of income for the three andsix months ended June 30, 2010 and 2009 are as follows:

 
| ** **                                         | ** ** | **For The Three Months Ended  June 30,** | ** ** | **For The Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| **(dollars in thousands)**                    | ** ** | **2010**                                                          | ** ** | **2009**                                                        | ** ** | **2010** | ** ** | **2009** | ** ** |
| Operating revenues                                 |       | $                                                                 | 2,272      |                                                            | $          | 1,862 |   | $ | 4,089 |   | $ | 3,478 |   |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Supply costs                                       |       | 411                                                               |       | 456                                                             |       | 764 |   | 803 |   |
| Other operating expenses                           |       | 941                                                               |       | 1,158                                                           |       | 1,979 |   | 2,477 |   |
| Total operating expenses                           |       | 1,352                                                             |       | 1,614                                                           |       | 2,743 |   | 3,280 |   |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Operating income                                   |       | 920                                                               |       | 248                                                             |       | 1,346 |   | 198 |   |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Interest expense, net                              |       | (89                                                               | )          | (103                                                            | )          | (180 | ) | (213 | ) |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) before income taxes                  |       | 831                                                               |       | 145                                                             |       | 1,166 |   | (15 | ) |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Income tax expense/(benefit) **(1)**               |       | 331                                                               |       | 61                                                              |       | 466 |   | (3 | ) |
| Net income (loss)                                  |       | 500                                                               |       | 84                                                              |       | 700 |   | (12 | ) |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Transaction costs, net of taxes **(2)**            |       | 395                                                               |       | —                                                          |       | 395 |   | — |   |
|                                               |       |                                                              |       |                                                            |       |   |   |   |   |
| Income (loss) from discontinued operations **(3)** |       | $                                                                 | 105        |                                                            | $          | 84 |   | $ | 305 |   | $ | (12 | ) |

 

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**(1)****        **Income taxexpense (benefit) does not include the effects of CCWC’s inclusion in the AWRcombined California unitary return, which are included in, and do notmaterially affect, the income tax expense of continuing operations.

 

**(2)****        **Included indiscontinued operations for the three and six months ended June 30, 2010are direct transaction costs of $659,000 for legal and consulting services inconnection with the sale of CCWC.

 

**(3)****        **Corporateoverhead costs allocated to CCWC have been excluded from discontinuedoperations.  The majority of these costsare expected to continue primarily at GSWC. Accordingly, these corporate overhead costs have been included in otheroperating expenses and administrative and general expenses as part ofcontinuing operations in the consolidated statements of income.  Such costs allocated to CCWC that have beenreflected as part of continuing operations amounted to $233,000 and $261,000for the three months ended June 30, 2010 and 2009, respectively, and$514,000 and $434,000 for the six months ended June 30, 2010 and 2009,respectively.

 

**Note 11 — Business Segments**

 

AWRhas three reportable segments, water, electric and contracted services, whereasGSWC has two segments, water and electric. Within the segments, AWR has twocontinuing principal business units: water and electric service utilityoperations conducted through GSWC, and a contracted services unit conductedthrough ASUS and its subsidiaries. All activities of GSWC are geographicallylocated within California.  The operatingactivities of CCWC have been included in discontinued operations as describedin Note 10.  All activities of CCWC arelocated in the state of Arizona. Both GSWC and CCWC are rate-regulatedutilities.

 

Activitiesof ASUS and its subsidiaries have been conducted in California, Maryland, NewMexico, North Carolina, South Carolina, Texas and Virginia.  ASUS’s wholly owned subsidiaries areregulated by the state in which the subsidiary primarily conducts water and/orwastewater operations.  Fees charged foroperation and maintenance and renewal and replacement services are based uponthe terms of the contracts with the U.S. government which have been filed withthe commissions in the states in which ASUS’s subsidiaries areincorporated.  On a stand-alone basis,AWR has no material assets other than its investments in its subsidiaries.

 

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Thetables below set forth information relating to GSWC’s operating segments, ASUSand its subsidiaries, and other matters. Certain assets, revenues and expenseshave been allocated in the amounts set forth. The identifiable assets are netof respective accumulated provisions for depreciation. Capital additionsreflect capital expenditures paid in cash and exclude property installed bydevelopers and conveyed to GSWC and CCWC.

 
| ** **                              | ** ** | **As Of And For The Three Months Ended June 30, 2010** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**    | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                      |       | $                                                                                                        | 72,816     |   | $ | 7,845 |   | $ | — |   | $ | 14,815 |   | $ | — |   | $ | 95,476 |   |
| Operating income (loss) **(1)**         |       | 19,086                                                                                                   |       | 693 |   | (233 | ) | 1,623 |   | (19 | ) | 21,150 |   |
| Interest expense, net                   |       | 5,215                                                                                                    |       | 381 |   | — |   | 71 |   | 45 |   | 5,712 |   |
| Identifiable assets                     |       | 806,216                                                                                                  |       | 36,685 |   | — |   | 3,307 |   | — |   | 846,208 |   |
| Depreciation and amortization expense   |       | 7,621                                                                                                    |       | 560 |   | — |   | 184 |   | — |   | 8,365 |   |
| Net income from discontinued operations |       | —                                                                                                   |       | — |   | 105 |   | — |   | — |   | 105 |   |
| Capital additions                       |       | 21,419                                                                                                   |       | 294 |   | 148 |   | 508 |   | — |   | 22,369 |   |
|                                         |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **As Of And For The Three Months Ended June 30, 2009** | ** ** |
|-----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**    | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                      |       | $                                                                                                        | 72,295     |   | $ | 5,888 |   | $ | — |   | $ | 13,508 |   | $ | — |   | $ | 91,691 |   |
| Operating income (loss) **(1)**         |       | 23,451                                                                                                   |       | 72 |   | (261 | ) | 1,015 |   | (11 | ) | 24,266 |   |
| Interest expense, net                   |       | 4,584                                                                                                    |       | 543 |   | — |   | 90 |   | 43 |   | 5,260 |   |
| Identifiable assets                     |       | 763,879                                                                                                  |       | 37,120 |   | — |   | 2,072 |   | — |   | 803,071 |   |
| Depreciation and amortization expense   |       | 7,157                                                                                                    |       | 564 |   | — |   | 157 |   | — |   | 7,878 |   |
| Net income from discontinued operations |       | —                                                                                                   |       | — |   | 84 |   | — |   | — |   | 84 |   |
| Capital additions                       |       | 18,512                                                                                                   |       | 278 |   | 336 |   | 132 |   | — |   | 19,258 |   |
|                                         |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                              | ** ** | **As Of And For The Six Months Ended June 30, 2010** | ** ** |
|-----------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                              | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**    | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                      |       | $                                                                                                      | 128,873    |   | $ | 18,824 |   | $ | — |   | $ | 36,245 |   | $ | — |   | $ | 183,942 |   |
| Operating income (loss) **(1)**         |       | 28,262                                                                                                 |       | 3,176 |   | (514 | ) | 9,447 |   | (70 | ) | 40,301 |   |
| Interest expense, net                   |       | 10,269                                                                                                 |       | 757 |   | — |   | (369 | ) | 52 |   | 10,709 |   |
| Identifiable assets                     |       | 806,216                                                                                                |       | 36,685 |   | — |   | 3,307 |   | — |   | 846,208 |   |
| Depreciation and amortization expense   |       | 15,243                                                                                                 |       | 1,120 |   | — |   | 361 |   | — |   | 16,724 |   |
| Net income from discontinued operations |       | —                                                                                                 |       | — |   | 305 |   | — |   | — |   | 305 |   |
| Capital additions                       |       | 36,710                                                                                                 |       | 741 |   | 214 |   | 680 |   | — |   | 38,345 |   |
|                                         |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **As Of And For The Six Months Ended June 30, 2009** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**  | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                    |       | $                                                                                                      | 127,473    |   | $ | 14,520 |   | $ | — |   | $ | 27,691 |   | $ | — |   | $ | 169,684 |   |
| Operating income (loss) **(1)**       |       | 34,618                                                                                                 |       | (472 | ) | (434 | ) | 2,083 |   | (61 | ) | 35,734 |   |
| Interest expense, net                 |       | 8,870                                                                                                  |       | 1,054 |   | — |   | 189 |   | 134 |   | 10,247 |   |
| Identifiable assets                   |       | 763,879                                                                                                |       | 37,120 |   | — |   | 2,072 |   | — |   | 803,071 |   |
| Depreciation and amortization expense |       | 14,305                                                                                                 |       | 1,129 |   | — |   | 319 |   | — |   | 15,753 |   |
| Net loss from discontinued operations |       | —                                                                                                 |       | — |   | (12 | ) | — |   | — |   | (12 | ) |
| Capital additions                     |       | 35,377                                                                                                 |       | 589 |   | 824 |   | 150 |   | — |   | 36,940 |   |
|                                       |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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**(1)****        **Operatingincome (loss) include CCWC’s allocated corporate overhead costs that areexpected to continue primarily at GSWC.

 

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**Item 2. Management’s Discussionand Analysis of Financial Condition and Results of Operations**

 

**General**

 

AmericanStates Water Company (“AWR”) is the parent company of Golden State WaterCompany (“GSWC”), Chaparral City Water Company (“CCWC”) and American StatesUtility Services, Inc. (“ASUS”) and its subsidiaries (Fort Bliss WaterServices Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), OldDominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc.(“PSUS”) and Old North Utility Services, Inc. (“ONUS”)). AWR wasincorporated as a California corporation in 1998 as a holding company.  AWR has three reportable segments: water,electric and contracted services. Within the segments, AWR has three principalbusiness units: water and electric service utility operations conducted throughGSWC, a water service utility operation conducted through CCWC, and contractedservices conducted through ASUS and its subsidiaries. FBWS, TUS, ODUS, PSUS andONUS may be referred to herein collectively as the “Military UtilityPrivatization Subsidiaries.”

 

GSWCis a California public utility company engaged principally in the purchase,production and distribution of water. GSWC also distributes electricity in onecustomer service area. GSWC is regulated by the California Public UtilitiesCommission (“CPUC”) and was incorporated as a California corporation on December 31,1929. GSWC is organized into one electric customer service area and three waterservice regions operating within 75 communities in 10 counties in the State ofCalifornia and provides water service in 21 customer service areas. Region Iconsists of 7 customer service areas in northern and central California; RegionII consists of 4 customer service areas located in Los Angeles County; andRegion III consists of 10 customer service areas in eastern Los Angeles County,and in Orange, San Bernardino and Imperial counties. GSWC also provideselectric service to the City of Big Bear Lake and surrounding areas in SanBernardino County through its Bear Valley Electric Service (“BVES”) division.

 

GSWCserved 255,472 water customers and 23,183 electric customers at June 30,2010, or a total of 278,655 customers, compared with 254,730 water customersand 23,002 electric customers, or a total of 277,732 customers at June 30,2009. GSWC’s utility operations exhibit seasonal trends. Although GSWC’s waterutility operations have a diversified customer base, residential and commercialcustomers account for the majority of GSWC’s water sales and revenues. Revenuesderived from commercial and residential water customers accounted forapproximately 90% of totalwater revenues for the three and six months ended June 30,2010 and 2009.

 

GSWChas also been pursuing opportunities to provide retail water services withinthe service area of the Natomas Central Mutual Water Company (“Natomas”). Natomas is a California mutual water company which currently provides waterservice to its shareholders, primarily for agricultural irrigation in portionsof Sacramento and Sutter counties in northern California. GSWC and Natomas haveentered into various agreements including the purchase of certain water andwater rights that may allow GSWC the ability to serve portions of Sutter Countyin the future.

 

CCWCis an Arizona public utility company serving 13,455 customers at June 30,2010, compared with 13,392 customers at June 30, 2009. Located in the townof Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona,the majority of CCWC’s customers are residential. The Arizona CorporationCommission (“ACC”) regulates CCWC.  On June 7,2010, AWR entered into a stock purchase agreement with EPCOR (USA) Inc. (“EPCOR”)to sell all the common shares of CCWC for a total purchase price of $35million, including the assumption of approximately $6 million of long-termdebt.  Approximately $29 million in cashwill be paid to AWR at closing. The purchase price is subject to certainadjustments for changes in retained earnings. The consummation of thetransaction contemplated by the agreement is subject to customary conditions,including among other things, regulatory approval by the ACC, which isanticipated to be received in 2011.  Accordingly, the operationalresults of CCWC are reported in discontinued operations.

 

ASUS,through its wholly owned subsidiaries, has contracted with the U.S. governmentto provide water and/or wastewater services, including both the operation andmaintenance and, in most cases, the renewal and replacement of the water and/orwastewater systems pursuant to 50-year fixed price contracts, which are subjectto periodic prospective price redeterminations and modifications for changes incircumstances.  All of the contracts withthe U.S. government may be terminated, in whole or in part, prior to the end ofthe 50-year term for convenience of the U.S. government or as a result ofdefault or nonperformance by the subsidiary performing the contract. In eitherevent, the Military Utility Privatization Subsidiary is entitled to recover theremaining amount of its capital investment pursuant to the terms of atermination settlement with the U.S. government at the time of termination asprovided in each of the contracts. The contract price for each of thesecontracts is subject to

 

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redetermination two years after commencementof operations and every three years thereafter under the terms of thesecontracts unless the parties agree otherwise. Prices are subject to equitableadjustment based upon changes in circumstances, changes in laws and/orregulations, and changes in wages and fringe benefits to the extent provided ineach of the contracts.  AWR guaranteesperformance on all of ASUS’ military contracts. Pursuant to the terms of these contracts, the Military UtilityPrivatization Subsidiaries operate, as of the effective date of theirrespective contracts, the following water and wastewater systems:

 

·                  FBWS - water and wastewater systems at Fort Bliss locatednear El Paso, Texas and extending into southeastern New Mexico effective October 1,2004;

 

·                  TUS - water and wastewater systems at Andrews Air ForceBase in Maryland effective February 1, 2006;

 

·                  ODUS - wastewater systems at Fort Lee in Virginia effectiveFebruary 23, 2006 and the water and wastewater systems at Fort Eustis,Fort Monroe and Fort Story in Virginia effective April 3, 2006(collectively, the “TRADOC bases”);

 

·                  PSUS - water and wastewater systems at Fort Jackson inSouth Carolina effective February 16, 2008; and

 

·                  ONUS - water and wastewater systems at Fort Bragg, Pope AirForce Base and Camp MacKall, North Carolina effective March 1, 2008.

 

**Overview**

 

Includedin the following analysis is a discussion of water and electric margins.  Water and electric margins are computed bytaking total revenues, less total supply costs. Registrant uses these margins and related percentages as an importantmeasure in evaluating its operating results. Registrant believes this measure is a useful internal benchmark inevaluating the utility business performance within its water and electricsegments. Registrant reviews these measurements regularly and compares them tohistorical periods and to our operating budget as approved. However, thismeasure, which is not presented in accordance with Generally AcceptedAccounting Principles (“GAAP”), may not be comparable to similarly titledmeasures used by other entities and should not be considered as an alternativeto operating income, which is determined in accordance with GAAP, as anindicator of operating performance. A reconciliation of water and electricmargins to the most directly comparable GAAP measures are included in the tableunder our discussion of supply costs included in operating expenses.

 

Registrant’srevenues, operating income and cash flows are earned primarily throughdelivering potable water to homes and businesses through approximately 2,900miles of water distribution pipelines and the delivery of electricity in theBig Bear area of San Bernardino County. Rates charged to customers of GSWC andCCWC are determined by the CPUC and ACC, respectively. These rates are intendedto allow recovery of operating costs and a reasonable rate of return oncapital.  Factors affecting financialperformance of our regulated utilities include the process and timing ofsetting rates charged to customers; the ability to recover, and the process forrecovering in rates, the costs of distributing water and electricity and ouroverhead costs; weather; the impact of increased water quality standards andenvironmental regulations on the cost of operations and capital expenditures;pressures on water supply caused by population growth, more stringent waterquality standards, deterioration in water quality and water supply from avariety of causes; capital expenditures needed to upgrade water systems andincreased costs; and risks associated with litigation relating to water qualityand water supply, including suits initiated by Registrant to protect its watersupply.

 

Operatingrevenues and income from contracted services at ASUS and its subsidiaries areearned primarily from the operation and maintenance and renewal and replacementof the water and/or wastewater systems for the U.S. government at variousmilitary bases. All of the current operations and maintenance contracts withthe U.S. government are 50-year firm, fixed-price contracts with prospectiveprice redeterminations. ASUS also may generate revenues from the constructionof infrastructure improvements at these bases pursuant to the terms of these50-year contracts or pursuant to contract modifications.  Additional revenues generated by contractoperations are primarily dependent on these new construction activities.  As a result, ASUS is subject to risks thatare different than those of Registrant’s regulated water and electricutilities.  ASUS plans to continueseeking contracts for the operation and maintenance and renewal and replacementof water and/or wastewater services at military bases.  Factors affecting the financial performanceof our Military Utility Privatization Subsidiaries include delays in receivingpayments from the U.S. government and the redetermination and equitableadjustment of prices under contracts with the U.S. government.

 

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Registrantplans to continue to seek additional rate increases in future years to recoveroperating and supply costs and receive reasonable returns on invested capital.Capital expenditures in future years are expected to remain at much higherlevels than depreciation expense. When necessary, Registrant obtains funds fromexternal sources in capital markets and through bank borrowings. In May 2010,the Company entered into the Third Amendment to the Amended and Restated CreditAgreement in order to extend the expiration date of the syndicated creditfacility to May 27, 2013 from June 3, 2010.  The maximumamount that may be borrowed under the amended facility was reduced from$115,000,000 to $100,000,000.  The Company may, under the terms ofthe Amended and Restated Credit Agreement, elect to increase the aggregate bankcommitments by up to $40,000,000.

 

Aspreviously discussed, on June 7, 2010, Registrant entered into a stockpurchase agreement to sell all of the common shares of CCWC for a totalpurchase price of $35 million, including the assumption of approximately $6million of long-term debt. Approximately $29 million in cash will be paid toAWR at closing. The purchase price is subject to certain adjustments forchanges in retained earnings.  Theconsummation of the transaction contemplated by the agreement is subject tocustomary conditions, including among other things, regulatory approval by theACC, which is anticipated to be received in 2011.  Therefore, no gain on disposal of CCWC hasbeen recorded during the three and six months ended June 30, 2010, pendingregulatory approval.  Had the transactionclosed as of June 30, 2010, AWR would have recognized a pretax gain ondisposal of approximately $6.0 million, net of transaction costs of $659,000.The results of operations of CCWC for the three and six months ended June 30,2010 and 2009 have been presented as a discontinued operation.

 

Forthe three months ended June 30, 2010, net income was $9.0 million comparedto $11.5 million in the same period of 2009, a decrease of 21.9%. Dilutedearnings per share for the three months ended June 30, 2010 were $0.48compared to $0.64 in the same period of 2009, a decrease of $0.16 pershare.  Impacting the comparability inthe results of the two periods on a diluted per share basis are the followingsignificant items, all of which are more fully discussed later: (i) adecrease in the dollar water margin of GSWC water operations of $1.8 million,or $0.06 per share, largely offset by an increase in the dollar electric marginof $1.5 million, or $0.05 per share; (ii) an increase in other operatingexpenses, including administrative and general expenses, at GSWC of $3.5million, or $0.11 per share; (iii) the improved financial performance ofthe Military Utility Privatization Subsidiaries resulting in an increase inASUS’ pretax operating income of $608,000, or $0.02 per share; (iv) anincrease in income from discontinued operations of $0.01 per share, due toimproved financial performance at CCWC; (v) an increase in interestexpense, net of interest income of $452,000, or $0.01 per share; (vi) anoverall increase in the effective income tax rate, or $0.03 per share, and (vii) adecrease of $0.03 per share due to an increase in the weighted average numberof common shares outstanding resulting from the issuance of 1.15 million sharesof AWR’s Common Shares in May 2009.

 

Forthe six months ended June 30, 2010, net income was $17.5 million comparedto $16.4 million in the same period of 2009, an increase of 6.3%.  Diluted earnings for the six months ended June 30,2010 were $0.93 per share compared to $0.92 per share for the six months ended June 30,2009.  Impacting the comparability in theresults of the two periods on a diluted per share basis are the followingsignificant items, all of which are more fully discussed later: (i) anincrease in the dollar electric margin of $4.0 million, or $0.13 per share,partially offset by a decrease in GSWC’s dollar water margin of $1.1 million,or $0.04 per share; (ii) an increase in other operating expenses at GSWC,including administrative and general expenses, of $5.6 million, or $0.18 pershare; (iii) an increase in operating income of $7.4 million, or $0.23 pershare for contracted services due to the improved financial performance of theMilitary Utility Privatization Subsidiaries and the receipt of two equitableadjustments; (iv) an increase in interest expense, net of interest incomeof $462,000, or $0.01 per share; (v) a change in enacted state tax lawduring the first quarter of 2009 which resulted in a tax benefit of $918,000,or $0.05 per share which did not recur in 2010; (vi) an overall increasein the effective income tax rate (excluding the tax benefit mentionedpreviously) decreasing earnings by approximately $0.05 per share, due primarilyto changes between book and taxable income that are treated as flow-throughadjustments in accordance with regulatory requirements; (vii) an increasein income from discontinued operations of $317,000, or $0.02 per share, due toimproved financial performance at CCWC, and (viii) a decrease of $0.04 pershare due to an increase in the weighted average number of common sharesoutstanding resulting from the issuance of 1.15 million shares of AWR’s CommonShares in a public offering in May 2009.

 

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**SummaryResults by Segment**

 

AWR has three reportable segments:water, electric and contracted services. Within the segments, AWR has twoprincipal business units included in continuing operations: water and electricservice utility operations conducted through GSWC, and a contracted servicesunit through ASUS and its subsidiaries. As discussed previously, in June 2010 AWR entered into a stockpurchase agreement to sell all the common shares of CCWC.  Accordingly, the results of operations ofCCWC for the three and six months ended June 30, 2010 and 2009 have beenreported in discontinued operations.  Thesummary results by segment below are presented for AWR’s continuing operations.

 

*Second Quarter Results*

 

The tables below set forthsummaries of the results by segment of continuing operations (amounts inthousands):

 
| ** **                         | ** ** | **Operating Revenues** | ** ** | **Pretax Operating Income** | ** ** |
|------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **                         | ** ** | **3 Months**           | ** ** | **3 Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **3 Months** | ** ** | **3 Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Ended**              | ** ** | **Ended**                   | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                         | ** ** | **6/30/2010**          | ** ** | **6/30/2009**               | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                               |       |                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                              |       | $                      | 72,816     |                        | $          | 72,295 |   | $ | 521 |   | 0.7 | % | $ | 18,853 |   | $ | 23,190 |   | $ | (4,337 | ) | -18.7 | % |
| Electric                           |       | 7,845                  |       | 5,888                       |       | 1,957 |   | 33.2 | % | 693 |   | 72 |   | 621 |   | 862.5 | % |
| Contracted  services               |       | 14,815                 |       | 13,508                      |       | 1,307 |   | 9.7 | % | 1,623 |   | 1,015 |   | 608 |   | 59.9 | % |
| AWR  (parent)                      |       | —                 |       | —                      |       | — |   | — |   | (19 | ) | (11 | ) | (8 | ) | 72.7 | % |
| Totals  from continuing operations |       | $                      | 95,476     |                        | $          | 91,691 |   | $ | 3,785 |   | 4.1 | % | $ | 21,150 |   | $ | 24,266 |   | $ | (3,116 | ) | -12.8 | % |

 

***Water -***For the three months ended June 30,2010, pretax operating income for water decreased by $4.3 million, or18.7%.  The decrease was primarily due toa $1.8 million decrease in the dollar water margin and a $2.5 million increasein operating expenses as compared to the same period in 2009, with nocorresponding rate recovery due to the delay in the CPUC’s decision on GSWC’sRegions II, III and general office rate case.  The dollar water margin decreased due to $2.8million in additional revenues recorded during the second quarter of 2009 relatedto the CPUC’s approval of the Water Conservation Memorandum Account (“WCMA”) totrack the extraordinary expenses and revenue shortfall associated withconservation measures in conjunction with the declared drought inCalifornia.  This decrease in watermargin was partially offset by the implementation of the Water RevenueAdjustment Mechanism (“WRAM”) account and the Modified Cost Balancing Account (“MCBA”)for Region I, both implemented in September 2009.  Operating expenses increased by $2.5 millionprimarily due to higher administrative and general expenses, maintenance costs,property and other taxes, and depreciation and amortization without the receiptof rate increases due to a delay in the CPUC’s decision on GSWC’s Regions IIand III and general office rate case (discussed further in *RegulatoryMatters*).  Due to this****delay, GSWC’s revenues and supply costs for Regions II andIII for the second quarter of 2010 have been recorded using 2009 adopted saleslevels pending resolution of this general rate case, which is expected in October 2010.  New rates, once approved by the CPUC, areexpected to be retroactive to January 1, 2010.

 

***Electric —***For the three months ended June 30,2010, pretax operating income from electric operations increased by $621,000due to an increase in the electric margin of $1.5 million due primarily torevenues related to rate increases effective November 2009 and January 2010,partially offset by an $879,000 increase in operating expenses.

 

***Contracted Services -***For the threemonths ended June 30, 2010, pretax operating income for contractedservices increased by $608,000, or 59.9%. This was primarily due to interim increases in operations andmaintenance revenues at Fort Bragg in North Carolina and construction projectrevenues at Fort Bragg and at Fort Jackson in South Carolina. In March 2010,the U.S. government issued a contract modification to Fort Bliss in Texas,funding a majority of an inventory settlement agreement previously entered intowith Fort Bliss.  In June 2010, FortBliss received the remainder of the settlement agreement, which resulted in anincrease of $202,000 to pretax operating income for the second quarter.  These increases were partially offset bydecreased construction activity at the military bases in Virginia.

 

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Thetimely receipt of price redeterminations continues to be critical in order forASUS to recover increasing costs for operating and maintaining the water andwastewater systems at the military bases. In addition, higher allocations of corporate headquarters’ expenses toASUS and its wholly owned subsidiaries by the CPUC were not contemplated at thetime the contracts with the U.S. government were negotiated and will need to beaddressed in future price redeterminations.

 

Under theterms of these contracts, the contract price is subject to priceredetermination two years after commencement of operations and every threeyears thereafter, unless otherwise agreed to by the parties to a contract.  In the event that ASUS is managing moreassets at specific military bases than were included in the U.S. government’sRequest for Proposal or if the assets are in substandard condition, ASUS ispermitted to file a request for equitable adjustment (“REA”).

 

Below isa summary of price redetermination and requests for equitable adjustmentfilings by Military Utility Privatization Subsidiary.

 

·                  FWBS— In connection with the inventory settlement with the U.S. government reachedin January 2010, FBWS and the government agreed to waive the first andsecond price redeterminations for Fort Bliss required under the original50-year contract.

 

·                  TUS—TUS is currently in discussions with the government on the structure of theAndrews Air Force Base price redetermination to facilitate the government’sreview.  Pending the outcome of thesediscussions, the government has approved interim management fee increases of18.92% effective July 2010 through September 2010.

 

·                  ODUS— The first price redeterminations for the bases in Virginia were filed in November 2007for Fort Lee and in February 2008 for the other bases.  ODUS has received notification from the U.S.government that its price redetermination filings for these bases areinadequate.  The Company is currently indiscussions with the U.S. government to address the inadequacies. Interimincreases have been in effect for these bases since 2008.

 

·                  PSUS— PSUS filed an REA in the third quarter of 2009 with the U.S. government. Inthe REA filing, PSUS is requesting $690,000 in connection with costs incurredin response to an emergency sanitary sewer overflow at Fort Jackson in SouthCarolina.  PSUS also filed an REA inconnection with the condition of the inventory assumed at Fort Jackson, whichis in substandard condition as compared to what was presented in the government’sRequest for Proposal.  Resolution ofthese REAs is expected in 2010.  Finally,the first price redetermination for Fort Jackson has been delayed, pending theoutcome of the ODUS and TUS discussions with the government.  PSUS expects to file this priceredetermination in the third or fourth quarter of 2010.

 

·                  ONUS- In April 2009, ONUS filed a request for contract modification with thegovernment in connection with costs associated with initial system deficiencywork.  Resolution of this request isexpected in 2010.  The first priceredetermination for Fort Bragg has been delayed, pending the outcome of theODUS and TUS discussions with the government. ONUS expects to file this price redetermination in the third or fourthquarter of 2010.

 

Priceredeterminations and equitable adjustments, which include adjustments toreflect changes in operating conditions and infrastructure levels from thatassumed at the time of the execution of the contracts, as well as inflation incosts, are expected to provide added revenues to help offset increased costsand provide Registrant the opportunity to continue to generate positiveoperating income at its Military Utility Privatization Subsidiaries.  As of June 30, 2010, ASUS has $1.1million of goodwill, which may be at risk for potential impairment if requestedprice redeterminations and equitable adjustments that have not yet beenapproved, are not received.

 

On July 22, 2010, ASUS was served with asubpoena issued in connection with a Grand Jury investigation related to ODUS’water and wastewater privatization contract at the TRADOC bases, and thewastewater utility privatization contract at Fort Lee.  The investigationis in its early stages and ASUS is in the process of producing documentsrequested in the subpoena.  At this time, management cannot predict thefinal outcome of the investigation or a range of loss, if any.

 

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*Year-to-Date Results*

 

The tables below set forthsummaries of the results by segment of continuing operations (amounts inthousands):

 
| ** **                         | ** ** | **Operating  Revenues** | ** ** | **Pretax  Operating Income** | ** ** |
|------------------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **                         | ** ** | **6  Months**           | ** ** | **6  Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                         | ** ** | **Ended**               | ** ** | **Ended**                    | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                         | ** ** | **6/30/2010**           | ** ** | **6/30/2009**                | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                               |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                              |       | $                       | 128,873    |                         | $          | 127,473 |   | $ | 1,400 |   | 1.1 | % | $ | 27,748 |   | $ | 34,184 |   | $ | (6,436 | ) | -18.8 | % |
| Electric                           |       | 18,824                  |       | 14,520                       |       | 4,304 |   | 29.6 | % | 3,176 |   | (472 | ) | 3,648 |   | -772.9 | % |
| Contracted  services               |       | 36,245                  |       | 27,691                       |       | 8,554 |   | 30.9 | % | 9,447 |   | 2,083 |   | 7,364 |   | 353.5 | % |
| AWR  (parent)                      |       | —                  |       | —                       |       | — |   | — |   | (70 | ) | (61 | ) | (9 | ) | 14.8 | % |
| Totals  from continuing operations |       | $                       | 183,942    |                         | $          | 169,684 |   | $ | 14,258 |   | 8.4 | % | $ | 40,301 |   | $ | 35,734 |   | $ | 4,567 |   | 12.8 | % |

 

***Water -***Pretax operating income forwater decreased by $6.4 million, or 18.8%, primarily due to a $5.3 millionincrease in operating expenses, with no corresponding rate recovery due to thedelay in the CPUC’s decision on GSWC’s Regions II, III and general officerate case discussed further in *Regulatory Matters*.In addition, the dollar water margin decreased by $1.1 million due to $2.8million in additional revenues recorded during the second quarter of 2009related to the CPUC’s approval of the WCMA, partially offset by theimplementation of Region I’s WRAM and MCBA in September 2009, aspreviously discussed. GSWC’s revenues and supply costs for Regions II and IIIfor the first six months of 2010 have been recorded using 2009 adopted levelspending resolution of the general rate case, which is expected in October 2010.  New rates, once approved by the CPUC, areexpected to be retroactive to January 1, 2010.

 

***Electric —***For the six months ended June 30,2010, pretax operating income from electric operations increased by $3.6million due to increases in rates which went into effect in November 2009and January 2010.  In addition, as aresult of the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) whichalso went into effect in November 2009, BVES recorded $680,000 in additional revenues due to lower customerusage as compared to adopted levels authorized by the CPUC.  Also, in March 2010, the CPUC approvedfor recovery a memorandum account which tracked the difference between the 2007adopted general office cost allocation to BVES and the 1996 adopted generaloffice cost allocation, effective and retroactive from June 4, 2009 to October 31,2009.  As a result, during the first quarter of2010, BVES recorded a regulatory asset of $958,000 and a corresponding increaseto revenues for amounts included in this memorandum account.

 

***Contracted Services -***For the sixmonths ended June 30, 2010, pretax operating income for contractedservices increased by $7.4 million, or $0.23 per share.  This was primarily due to contractmodifications approved by the U.S. government during the first quarter of 2010in connection with two separate requests for equitable adjustment previouslyfiled for inventory price adjustments at Fort Bliss in Texas and Fort Bragg inNorth Carolina.  These two contractmodifications increased revenues and pretax operating income by a combined $5.6million.  In addition, constructionrevenues increased by $2.1 million as compared to the same period in 2009primarily due to increased construction activity at Fort Bragg, partiallyoffset by decreased construction activity at Fort Bliss, Andrews Air ForceBase, and the military bases in Virginia. Earnings and cash flows from modifications to the original 50-yearcontracts with the U.S. government for additional construction activity may ormay not continue in future periods.

 

Thefollowing discussion and analysis provides information on AWR’s consolidatedoperations and assets and where necessary, includes specific references to AWR’sindividual segments and/or other continuing subsidiaries: GSWC and ASUS and itssubsidiaries, and the discontinued operations of CCWC.

 

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***Consolidated Results of Operations — Three Months Ended June 30,2010 and 2009 (amounts in thousands):***

 
| ** **                                                   | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                   | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                                           |       |          |       |          |       |       |       |       |       |
| Water                                                        |       | $             | 72,816     |          | $          | 72,295     |       | $          | 521        |   | 0.7 | % |
| Electric                                                     |       | 7,845         |       | 5,888         |       | 1,957      |       | 33.2       | %          |
| Contracted services                                          |       | 14,815        |       | 13,508        |       | 1,307      |       | 9.7        | %          |
| Total operating revenues                                     |       | 95,476        |       | 91,691        |       | 3,785      |       | 4.1        | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                                           |       |          |       |          |       |       |       |       |       |
| Water purchased                                              |       | 13,564        |       | 11,954        |       | 1,610      |       | 13.5       | %          |
| Power purchased for pumping                                  |       | 2,046         |       | 2,535         |       | (489       | )          | -19.3      | %          |
| Groundwater production assessment                            |       | 2,664         |       | 2,857         |       | (193       | )          | -6.8       | %          |
| Power purchased for resale                                   |       | 2,876         |       | 2,403         |       | 473        |       | 19.7       | %          |
| Supply cost balancing accounts                               |       | 4,686         |       | 3,332         |       | 1,354      |       | 40.6       | %          |
| Other operation expenses                                     |       | 7,262         |       | 6,943         |       | 319        |       | 4.6        | %          |
| Administrative and general expenses                          |       | 16,569        |       | 15,268        |       | 1,301      |       | 8.5        | %          |
| Depreciation and amortization                                |       | 8,365         |       | 7,878         |       | 487        |       | 6.2        | %          |
| Maintenance                                                  |       | 4,375         |       | 3,783         |       | 592        |       | 15.6       | %          |
| Property and other taxes                                     |       | 3,281         |       | 2,643         |       | 638        |       | 24.1       | %          |
| ASUS construction expenses                                   |       | 8,633         |       | 7,829         |       | 804        |       | 10.3       | %          |
| Net loss on sale of property                                 |       | 5             |       | —        |       | 5          |       | —     |       |
| Total operating expenses                                     |       | 74,326        |       | 67,425        |       | 6,901      |       | 10.2       | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                             |       | 21,150        |       | 24,266        |       | (3,116     | )          | -12.8      | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                                    |       |          |       |          |       |       |       |       |       |
| Interest expense                                             |       | (5,870        | )          | (5,558        | )          | (312       | )          | 5.6        | %          |
| Interest income                                              |       | 158           |       | 298           |       | (140       | )          | -47.0      | %          |
| Other                                                        |       | (69           | )          | 82            |       | (151       | )          | -184.1     | %          |
|                                                         |       | (5,781        | )          | (5,178        | )          | (603       | )          | 11.6       | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME  TAX EXPENSE |       | 15,369        |       | 19,088        |       | (3,719     | )          | -19.5      | %          |
| Income tax expense                                           |       | 6,499         |       | 7,673         |       | (1,174     | )          | -15.3      | %          |
| INCOME FROM CONTINUING OPERATIONS                            |       | 8,870         |       | 11,415        |       | (2,545     | )          | -22.3      | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX              |       | 105           |       | 84            |       | 21         |       | 25.0       | %          |
| NET INCOME                                                   |       | $             | 8,975      |          | $          | 11,499     |       | $          | (2,524     | ) | -21.9 | % |

 

Netincome for the three months ended June 30, 2010 was $9.0 million,equivalent to $0.48 per common share on a basic and fully diluted basis,compared to $11.5 million or $0.64 per common share on a basic and fullydiluted basis, for the three months ended June 30, 2009, a decrease of$0.16 per common share.

 

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Impactingthe comparability of the results between the two periods on a diluted per sharebasis are the following significant items:

 

·                  A decrease in the water margin of GSWC of$1.8 million, or $0.06 per share, during the three months ended June 30,2010 as compared to the same period in 2009 due primarily to the recording in2009 of $2.8 million of additional revenues in the WCMA, which was approved bythe CPUC.  This was partially offset bythe margin impact of recording $1.3 million in the WRAM accounts, net of theMCBA, implemented in September 2009 in Region I’s rate making areas.

 

·                  An increase in the electric margin of $1.5million, or $0.05 per share, during the three months ended June 30, 2010as compared to the same period in 2009 due primarily to: (i) higher ratesapproved by the CPUC effective November 2, 2009 and January 1, 2010and, (ii) the margin impact of recording $359,000 of additional revenuesin the BRRAM account, implemented in November 2009.

 

·                  A settlement agreement reached with MirantTrading resulting in the recording of $1.0 million, or $0.03 per share, inproceeds as a reduction to legal costs in 2009. There was no similar reductionin costs in the same period of 2010.

 

·                   An increase of$2.5 million, or $0.08 per share, in other operating expenses (includingadministrative and general expenses), at GSWC’s operations, for the secondquarter of 2010 due primarily to: (i) an increase in operation and administrativeand general expenses of $341,000due to higher labor costs and other employee benefits; (ii) anincrease of $1.0 million in maintenance expenses; (iii) an increase inproperty taxes of $656,000 due primarily to a $488,000 property tax refundrecorded in 2009, and (iv) an increase of $460,000 in depreciationexpense.   These increases in operatingexpenses were incurred with no corresponding rate recovery due to the delay inthe CPUC’s decision on GSWC’s Regions II, III and the general office ratecase.

 

·                  An increase inpretax operating income for contracted services of $608,000, or $0.02 pershare, during the three months ended June 30, 2010 due primarily tointerim increases in management fees for operating and maintaining the waterand wastewater systems at Fort Bragg in North Carolina.

 

·                  An increase inincome from discontinued operations of $0.01 per share due to improvedfinancial performance at CCWC.  Theimproved performance at CCWC was primarily due to rate increases approved bythe ACC in October 2009 and a decrease in operating expenses as comparedto the second quarter of 2009.  Theseincreases were partially offset by direct legal and consulting costs related tothe stock purchase agreement entered into with EPCOR.

 

·                    An increase ininterest expense, net of interest income of $452,000, or $0.01 per share, dueprimarily to interest expense recorded in the interest rate balancing accountapproved by the CPUC in July 2009 in the cost of capital proceeding, andslightly higher interest rates on short-term borrowings as compared to the sameperiod of 2009.

 

·                   An increase inthe effective income tax rate negatively impacted earnings by approximately$0.03 per share during the second quarter of 2010 primarily resulting fromchanges between book and taxable income that are treated as flow-throughadjustments in accordance with regulatory requirements.

 

·                  A decrease of$0.03 per share due to an increase in the weighted average number of commonshares outstanding resulting from the issuance of 1.15 million shares of AWR’sCommon Shares in a public offering completed in May 2009.

 

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***Operating Revenues***

 

*Water*

 

Dueto the****delay in GSWC’s Regions II and III andgeneral office rate case (discussed further in *RegulatoryMatters*), GSWC’s revenues and supply costs for Regions II and IIIfor the second quarter of 2010 have been recorded using 2009 adopted levelspending resolution of this general rate case, which is expected in October 2010.For the three months ended June 30, 2010, revenues from continuing wateroperations increased slightly to $72.8 million, compared to $72.3 million forthe three months ended June 30, 2009. For the three months ended June 30, 2010, GSWC recorded $1.7million in additional revenues in Region I’s WRAM which was implemented in September 2009to adjust consumption levels to those adopted by the CPUC, partially offset bya decrease in Region I’s actual consumption when compared to the second quarterof 2009.  Actual consumption for GSWCdecreased 11.7% for three months ended June 30, 2010 as compared to thesame period in 2009. There was an increase in water revenues of $1.6 milliondue to surcharges approved by the CPUC in effect to recover under-collectionsin supply costs.  These increases inwater revenues were partially offset by the recording of $2.8 million duringthe three months ended June 30, 2009 included in the WCMA at each of GSWC’swater regions to track the extraordinary expenses and revenue shortfallassociated with conservation measures in conjunction with the declared droughtin California.  The WCMA was effective August 18,2008 until the WRAM was implemented on November 25, 2008 for Regions IIand III and through August 31, 2009 for Region I.

 

*Electric*

 

Forthe three months ended June 30, 2010, revenues from electric operationsincreased by 33.2% to $7.8 million compared to $5.9 million for the threemonths ended June 30, 2009 due primarily to rate increases effective November 2,2009 and January 1, 2010 approved in October 2009 by the CPUC.  This generated an increase of approximately$1.0 million in electric revenues.  Inaddition, the Company recorded $359,000 in additional revenues related to theBRRAM account, also effective November 2, 2009, to adjust BVES’ 2010second quarter revenues to base rate revenues approved by the CPUC.  Electric usage increased by 2.6% for thethree months ended June 30, 2010 as compared to the same period in 2009.

 

*Contracted Services*

 

Revenues from contracted services are primarily comprisedof construction revenues (including renewals and replacements) and managementfees for operating and maintaining the water and/or wastewater systems atmilitary bases.  For the three monthsended June 30, 2010, revenues from contracted services increased by $1.3million, or 9.7%, to $14.8 million compared to $13.5 million for the threemonths ended June 30, 2009 primarily due to higher construction revenuesand an interim increase in management fees for ONUS at Fort Bragg in NorthCarolina.

 

Construction revenues increased by $613,000 comparedto the second quarter of 2009.  This wasdue to an increase of $4.3 million related to increased construction activityat Fort Bragg in North Carolina and at Fort Jackson in South Carolina,partially offset by lower construction revenues at other military bases.  Earnings and cash flows from modifications tothe original 50-year contracts with the U.S. government for new constructionactivity may or may not continue in future periods.

 

For the three months ended June 30, 2010,management fees totaled $4.1 million as compared to $3.4 million for the threemonths ended June 30, 2009.  Thisincrease is due primarily to the receipt of contract modifications to reflectincreased inventory levels covered under the original contract at Fort Bragg(ONUS), which provided for interim increases totaling $145,000 per month since March 2010.  This resulted in an increase in managementfees of $435,000 for the three months ended June 30, 2010.   In addition, there was an increase inmanagement fees totaling $293,000 earned in 2010 and related to a contract witha municipality to provide billing and meter reading services. EffectiveJanuary 1, 2010, GSWC assigned this service contract with the municipalityto ASUS.

 

Registrantrelies upon rate approvals by state regulatory agencies in California andArizona to provide for a return on invested and borrowed capital used to fundutility plant, and price redeterminations and equitable adjustments by the U.S.government in order to recover operating expenses and profit margin. Ifadequate rate relief and/or price redeterminations and adjustments are notgranted in a timely manner, operating revenues and earnings can be negativelyimpacted.

 

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***Operating Expenses:***

 

***Supply Costs***

 

Supplycosts for the water segment consist of purchased water, purchased power forpumping, groundwater production assessments and water supply cost balancingaccounts. Supply costs for the electric segment consist of purchased power forresale (including the cost of natural gas used by BVES in operating itselectric generator) and the electric supply cost balancing account*.* Water and electric margins are computed by taking totalrevenues and deducting total supply costs. Registrant uses these margins andrelated percentages as an important measure in evaluating its operatingresults. Registrant believes this measure is a useful internal benchmark inevaluating the utility business performance within its water and electricsegments. Registrant reviews these measurements regularly and compares them tohistorical periods and to our operating budget as approved. However, thismeasure, which is not presented in accordance with Generally AcceptedAccounting Principles (“GAAP”), may not be comparable to similarly titledmeasures used by other entities and should not be considered as an alternativeto operating income, which is determined in accordance with GAAP, as anindicator of operating performance.

 

Totalsupply costs comprise the largest segment of total operating expenses. Supplycosts accounted for approximately 35% and 34% of total operating expenses forthe three months ended June 30, 2010 and 2009, respectively.

 

Thetable below provides the amount of increases (decreases), percent changes insupply costs, and margins during the three months ended June 30, 2010 and2009 (amounts in thousands):

 
| ** **                                      | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                      | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                |       | $             | 72,816     |          | $          | 72,295     |       | $          | 521        |   | 0.7 | % |
| WATER SUPPLY COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                         |       | $             | 13,564     |          | $          | 11,954     |       | $          | 1,610      |   | 13.5 | % |
| Power purchased for pumping **(1)**             |       | 2,046         |       | 2,535         |       | (489       | )          | -19.3      | %          |
| Groundwater production assessment **(1)**       |       | 2,664         |       | 2,857         |       | (193       | )          | -6.8       | %          |
| Water supply cost balancing accounts **(1)**    |       | 3,767         |       | 2,421         |       | 1,346      |       | 55.6       | %          |
| TOTAL WATER SUPPLY COSTS                        |       | $             | 22,041     |          | $          | 19,767     |       | $          | 2,274      |   | 11.5 | % |
| WATER MARGIN **(2)**                            |       | $             | 50,775     |          | $          | 52,528     |       | $          | (1,753     | ) | -3.3 | % |
| PERCENT MARGIN - WATER                          |       | 69.7          | %          | 72.7          | %          |       |       |       |       |
|                                            |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**             |       | $             | 7,845      |          | $          | 5,888      |       | $          | 1,957      |   | 33.2 | % |
| ELECTRIC SUPPLY COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(1)**              |       | $             | 2,876      |          | $          | 2,403      |       | $          | 473        |   | 19.7 | % |
| Electric supply cost balancing accounts **(1)** |       | 919           |       | 911           |       | 8          |       | 0.9        | %          |
| TOTAL ELECTRIC SUPPLY COSTS                     |       | $             | 3,795      |          | $          | 3,314      |       | $          | 481        |   | 14.5 | % |
| ELECTRIC MARGIN **(2)**                         |       | $             | 4,050      |          | $          | 2,574      |       | $          | 1,476      |   | 57.3 | % |
| PERCENT MARGIN - ELECTRIC                       |       | 51.6          | %          | 43.7          | %          |       |       |       |       |

 

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(1)                                  As reported on AWR’sConsolidated Statements of Income, except for supply cost balancing accounts.The sum of water and electric supply cost balancing accounts in the table aboveare shown on AWR’s Consolidated Statements of Income and totaled $4,686,000 and$3,332,000 for the three months ended June 30, 2010 and 2009,respectively.

 

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(2)                                  Water and electric marginsdo not include any depreciation and amortization, maintenance expense, or otheroperating expenses.

 

Twoof the principal factors affecting water supply costs and gross margin are theamount of water produced and the source of the water. Generally, the variable costof producing water from wells is less than the cost of water purchased fromwholesale suppliers. In addition, GSWC is authorized to establish water andelectric supply cost balancing accounts for increases and/or decreases in costsdue to changes in rates charged by its suppliers which provide purchased waterand purchased power, and by agencies assessing groundwater related pump taxesfor water service areas in California. Higher or lower actual costs as compared to costs authorized by the CPUCwill either be recovered from or refunded to customers in the future.

 

OnAugust 21, 2008, the CPUC issued a final decision for Regions II andIII which approved the establishment of a modified cost balancing account thatallows recovery of supply costs for changes in water supply mix.  GSWC implemented the MCBA in late November 2008for Regions II and III and in September 2009 for Region I’s rate-makingareas prospectively in connection with the new conservation rate design and theimplementation of a WRAM.  Under theMCBA, GSWC began tracking adopted expense levels for purchased water, purchasedpower and pump taxes, as established by the CPUC. Variances (which include theeffects of changes in both rate and volume) between adopted and actualpurchased water, purchased power, and pump tax expenses are recorded as acomponent of the supply cost balancing account provision.  The amount of such variances will berecovered from or refunded to GSWC’s customers at a later date. This isreflected with an offsetting entry to a regulatory asset or liability balancingaccount (tracked individually for each rate-making area).

 

Aspreviously discussed, GSWC’s supply costs for Regions II and III for the secondquarter of 2010 have been recorded using 2009 adopted levels pending resolutionof the Region II, Region III and the general office rate case, which isexpected in October 2010.  For thethree months ended June 30, 2010, 39.1% of GSWC’s water supply mix waspurchased as compared to 37.3% purchased for the three months ended June 30,2009.  However, as noted above, theimplementation of the MCBA for GSWC’s water regions eliminates the effects onearnings of changes in the water supply mix prospectively.   The adopted percentage of purchased waterfor the three months ended June 30, 2010 at Regions I, II andIII was 22.4%, 62.1% and 44.7%, respectively, as compared to actual purchasedwater of 19.3%, 41.7% and 48.6%, respectively, for the second quarter of 2010.The overall improvement in actual mix compared to the mix approved by the CPUCresulted in an over-collection in the MCBA account. However, this was partiallyoffset by under-collections as a result of higher rates charged by suppliersthan those included in the adopted supply costs.  The overall water margin percent was 69.7% inthe second quarter of 2010 as compared to 72.7% in the same period of 2009.

 

Purchasedwater costs for the three months ended June 30, 2010 increased by 13.5% to$13.6 million as compared to $12.0 million for the same period of 2009.  The increase in purchased water costs was dueto higher water rates charged from wholesale suppliers, partially offset bylower customer usage.

 

Forthe three months ended June 30, 2010, power purchased for pumpingdecreased to $2.0 million as compared to $2.5 million in the same period of2009 due to a decrease in total demand as a result of conservation efforts thatwas partially offset by an increase in supplier rates.  Groundwaterproduction assessments were reduced by 6.8% due to lower customer demandpartially offset by increases in assessment rates (pump tax rates) leviedagainst groundwater production, effective July 2009.  Average pumptax rates increased in Region II by approximately 19% between the twoperiods.  The MCBA tracks the increases in pump tax rates for futurerecovery in water rates.

 

Anincrease of $1.3 million in the water supply cost balancing account provisionduring the three months ended June 30, 2010 as compared to the same periodin 2009 was primarily caused by a net decrease of $481,000 of under-collectionsfor the three months ended June 30, 2010 (related to Region I) compared tothe same period in 2009, and a $1.6 million increase in the amortization of thewater supply cost balancing accounts for surcharges currently in effect. This was partially offset by a decrease in the MCBA accounts of $694,000 forthe three months ended June 30, 2010 as compared to the same period in2009.

 

Forthe three months ended June 30, 2010, the cost of power purchased forresale to customers in GSWC’s BVES division increased by 19.7% to $2.9 millioncompared to $2.4 million for the three months ended June 30, 2009 reflecting higher customer demand.  Customer usage increased by 2.6%.  In addition, GSWC beganreceiving power under a purchased power contract in January 1, 2009.   The main product under the new contract

 

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provides for 13 MWs of electric energy at afixed price of $67.85 per MWh during 2010 as compared to $63.75 per MWh during2009.  This difference between the priceof purchased power and $77 per MWh as authorized by the CPUC is reflected inthe electric supply cost balancing account.

 

***Other Operation Expenses***

 

Theprimary components of other operation expenses include payroll, materials andsupplies, chemicals and water treatment, and outside service costs of operatingthe regulated systems of Registrant’s continuing water business, including thecosts associated with water transmission and distribution, pumping, waterquality, meter reading, billing, and operations of district offices.  Registrant’s electric and contracted servicesoperations incur many of the same types of costs as well.  For the three months ended June 30, 2010and 2009, other operation expenses by segment consisted of the following(amounts in thousands):

 
| ** **                     | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 5,849      |          | $          | 5,686      |       | $          | 163        |   | 2.9 | % |
| Electric Services              |       | 541           |       | 550           |       | (9         | )          | -1.6       | %          |
| Contracted Services            |       | 872           |       | 707           |       | 165        |       | 23.3       | %          |
| Total other operation expenses |       | $             | 7,262      |          | $          | 6,943      |       | $          | 319        |   | 4.6 | % |

 

For the three months ended June 30, 2010, other operation expensesfor GSWC’s water services increased by $163,000 due primarily to: (i) anincrease in costs related to water conservation educational materials andsupplies of $378,000; (ii) higher chemicals and water treatment costs ofapproximately $80,000, largely in Region III, and (iii) an increase of$24,000 in other miscellaneous operating expenses.  These increases were partially offset by adecrease in outside services of $319,000.

 

There was an increase of $165,000 in other operating expenses forcontracted services primarily due to higher wages and related benefits of$137,000 as a result of increases in salaries for employees under the annualperformance-based salary review program and the addition of staff at variouslocations, and an increase in other miscellaneous operating expenses of$28,000.

 

***Administrative and General Expenses***

 

Administrativeand general expenses include payroll related to administrative and generalfunctions, all employee benefits charged to expense accounts, insuranceexpenses, outside legal and consulting fees, regulatory utility commissionexpenses, expenses associated with being a public company, and generalcorporate expenses. For the three months ended June 30, 2010 and 2009,administrative and general expenses by segment, including AWR (parent),consisted of the following (amounts in thousands):

 
| ** **                                | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 11,804     |          | $          | 11,455     |       | $          | 349        |   | 3.0 | % |
| Electric Services                         |       | 1,885         |       | 1,075         |       | 810        |       | 75.3       | %          |
| Contracted Services                       |       | 2,863         |       | 2,727         |       | 136        |       | 5.0        | %          |
| AWR (parent)                              |       | 17            |       | 11            |       | 6          |       | 54.5       | %          |
| Total administrative and general expenses |       | $             | 16,569     |          | $          | 15,268     |       | $          | 1,301      |   | 8.5 | % |

 

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For the three months ended June 30,2010, administrative and general expenses increased by $349,000 from GSWC’swater services compared to the three months ended June 30, 2009 dueprimarily to an increase in labor costs and other employee benefits of$851,000 due to higher wages largelyrelated to Registrant’s annual performance-based salary review program.  This increase was partially offset by: (i) adecrease in pension costs of $275,000; (ii) a decrease of $185,000 inoutside services including legal and consulting costs, and (iii) adecrease of approximately $42,000 in other miscellaneous administrativeand general expenses.

 

Forthe three months ended June 30, 2010, administrative and general expensesincreased by $810,000 from electric services compared to the three months endedJune 30, 2009 due to the recording in 2009 of $1.0 million of proceedsreceived from Mirant Trading in connection with a settlement agreement reachedin May 2009.  The amount receivedfrom Mirant Trading went towards reducing previously incurred legalcosts.  There was also an increase of $126,000 in labor and employee relatedbenefits.  These increases were partially offset by lower outside services costs related to the rate case andpurchased power contract.

 

For the three months ended June 30,2010, administrative and general expenses increased by $136,000 forcontracted services compared to the three months ended June 30, 2009 dueprimarily to an increase in allocation of costs from the corporate headquartersof $162,000, partially offset by a decrease in other miscellaneousadministrative and general costs of $26,000.

 

***Depreciation andAmortization***

 

Forthe three months ended June 30, 2010 and 2009, depreciation andamortization by segment consisted of the following (amounts in thousands):

 
| ** **                          | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 7,621      |          | $          | 7,157      |       | $          | 464        |   | 6.5 | % |
| Electric Services                   |       | 560           |       | 564           |       | (4         | )          | -0.7       | %          |
| Contracted Services                 |       | 184           |       | 157           |       | 27         |       | 17.2       | %          |
| Total depreciation and amortization |       | $             | 8,365      |          | $          | 7,878      |       | $          | 487        |   | 6.2 | % |

 

Forthe three months ended June 30, 2010, depreciation and amortizationexpense for water and electric services increased by $460,000 to $8.2 millioncompared to $7.7 million for the three months ended June 30, 2009reflecting, among other things, approximately $82.8 million of additions toutility plant during 2009, depreciation on which began inJanuary 2010.  Registrantanticipates that depreciation expense will continue to increase due to ongoingconstruction at its continuing regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through water and electric rates.

 

There were also increases ofapproximately $27,000 for the contracted services segment due to the addition of fixed assets.

 

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***Maintenance***

 

Forthe three months ended June 30, 2010 and 2009, maintenance expense bysegment consisted of the following (amounts in thousands):

 
| ** **          | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 3,824      |          | $          | 2,835      |       | $          | 989        |   | 34.9 | % |
| Electric Services   |       | 177           |       | 162           |       | 15         |       | 9.3        | %          |
| Contracted Services |       | 374           |       | 786           |       | (412       | )          | -52.4      | %          |
| Total maintenance   |       | $             | 4,375      |          | $          | 3,783      |       | $          | 592        |   | 15.6 | % |

 

For the three months ended June 30,2010, maintenance expense for water and electric services increased by $1.0million to $4.0 million compared to $3.0 million for the three months ended June 30,2009 due principally to an increase in planned maintenance on GSWC’s wells,water supply and distribution facilities, particularly in Regions I and III.

 

Forthe three months ended June 30, 2010, maintenance expense for contractedservices decreased by $412,000 due to lower labor and outside servicescosts.  Internal labor activity for 2010was focused more on operations related work and less on maintenance activity,while in 2009 there was a higher level of maintenance related activity that wasrequired.  The decreases in maintenanceexpense is partially offset by higher operation expenses.

 

***Property and Other Taxes***

 

Forthe three months ended June 30, 2010 and 2009, property and other taxes bysegment consisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 2,819      |          | $          | 2,207      |       | $          | 612        |   | 27.7 | % |
| Electric Services              |       | 195           |       | 151           |       | 44         |       | 29.1       | %          |
| Contracted Services            |       | 267           |       | 285           |       | (18        | )          | -6.3       | %          |
| Total property and other taxes |       | $             | 3,281      |          | $          | 2,643      |       | $          | 638        |   | 24.1 | % |

 

Forthe three months ended June 30, 2010, property and other taxes for waterand electric services increased by $656,000 due, in part, to a tax refund of$488,000 recorded in the second quarter of 2009 resulting from lower reassessedproperty values from an examination.  Inaddition, there was an increase in payroll taxes due to higher labor costs andan increase in franchise fees.

 

Propertyand other taxes were lower in contracted services due primarily to lowerconstruction revenues at the military bases located in Virginia, which imposesa gross receipts tax.

 

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***ASUS Construction Expenses***

 

Forthe three months ended June 30, 2010, construction expenses were $8.6million, increasing $0.8 million compared to the same period in 2009 dueprimarily to new construction projects at Fort Bragg in North Carolina and FortJackson in South Carolina, which increased $3.1 million and $0.8 million,respectively, over the same period in 2009. These increases were partially offset by a decrease of $3.1 million inconstruction expenses at the other Military Utility Privatization Subsidiaries.

 

***Interest Expense***

 

Forthe three months ended June 30, 2010 and 2009, interest expense bysegment, including AWR (parent) consisted of the following (amounts inthousands):

 
| ** **                  | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 5,752      |          | $          | 5,422      |       | $          | 330        |   | 6.1 | % |
| Contracted Services         |       | 71            |       | 90            |       | (19        | )          | -21.1      | %          |
| AWR (parent)                |       | 47            |       | 46            |       | 1          |       | 2.2        | %          |
| Total interest expense      |       | $             | 5,870      |          | $          | 5,558      |       | $          | 312        |   | 5.6 | % |

 

Interestexpense increased in 2010 due primarily to interest expense recorded to theinterest rate balancing account and a slight increase in interest rates onshort term borrowings.  A decisionissued in July 2009 in the GSWCcost of capital proceeding authorized an interest rate balancing account totrack interest costs of new debt.  Thisbalancing account tracks any difference between the incremental cost of debtincluded in the cost of capital decision and the actual cost of debt for anylong-term debt issued by GSWC from the effective date of the final decision.The average interest rate on short-term borrowings for the three months ended June 30,2010 was 1.5% as compared to an average of 1.2% during the same period of 2009.Average bank loan balances outstanding under the AWR credit facility for thethree months ended June 30, 2010 and 2009 were approximately $30 million.

 

***Interest Income***

 

Forthe three months ended June 30, 2010 and 2009, interest income by segment,including AWR (parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 156        |          | $          | 295        |       | $          | (139       | ) | -47.1 | % |
| AWR (parent)                |       | 2             |       | 3             |       | (1         | )          | -33.3      | %          |
| Total interest income       |       | $             | 158        |          | $          | 298        |       | $          | (140       | ) | -47.0 | % |

 

Interestincome decreased by $140,000 for the three months ended June 30, 2010 dueprimarily to the recording of $126,000 in interest income during the secondquarter of 2009 in connection with the property tax refund discussed above.

 

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***Other***

 

For the three months ended June 30,2010 and 2009, Registrant recorded other expenses of $69,000 and other incomeof $82,000, respectively, as a result of Registrant’s equity interest in aninvestment and a loss on investments held in the Rabbi Trust for thesupplemental executive retirement plan (“SERP”).  In mid-2009, Registrant established a RabbiTrust for the SERP.  Investment losses inthis Trust of $57,000 were recordedduring the three months ended June 30, 2010.

 

***Income Tax Expense***

 

Forthe three months June 30, 2010 and 2009, income tax expense by segment,including AWR (parent), consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 5,930      |          | $          | 7,438      |       | $          | (1,508     | ) | -20.3 | % |
| Contracted Services         |       | 594           |       | 327           |       | 267        |       | 81.7       | %          |
| AWR (parent)                |       | (25           | )          | (92           | )          | 67         |       | -72.8      | %          |
| Total income tax expense    |       | $             | 6,499      |          | $          | 7,673      |       | $          | (1,174     | ) | -15.3 | % |

 

Forthe three months ended June 30, 2010, income tax expense for water andelectric services decreased by 20.3% to $5.9 million compared to $7.4 millionfor the three months ended June 30, 2009 due primarily to a decrease in pretaxincome of $3.7 million. The effective tax rate (“ETR”) for water and electricservices for the three months ended June 30, 2010 was 42.7% as compared toa 40.9% ETR applicable to the three months ended June 30, 2009.  The ETR deviates from the federal statutoryrate primarily due to state taxes and changes between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements (principally plant-, rate-case- and compensation-related items).  Flow-through adjustments increase or decreasetax expense in one period, with an offsetting increase or decrease occurring inanother period.

 

Incometax expense for contracted services increased to $594,000 for the three monthsended June 30, 2010 compared to $327,000 for the three months ended June 30,2009 due primarily to an increase in pretax income.  The ETR for contracted services for the threemonths ended June 30, 2010 was 38.3% as compared to a 35.3% ETR applicableto the three months ended June 30, 2009.

 

***Income From Discontinued Operations***

 

OnJune 7, 2010, AWR entered into a stock purchase agreement with EPCOR (USA)Inc. to sell all the common shares of CCWC for a total purchase price of $35million, including the assumption of approximately $6 million of long-termdebt.  Approximately $29 million in cashwill be paid to AWR at closing. The purchase price is subject to certainadjustments for changes in retained earnings. The consummation of thetransaction contemplated by the agreement is subject to customary conditions,including among other things, regulatory approval by the ACC, which isanticipated to be received in 2011.  Accordingly, the results of CCWChave been reported in discontinued operations.

 

Forthe three months ended June 30, 2010, income from discontinued operationsof $105,000 includes $395,000 (net of tax) of legal and consulting costsrelated to the CCWC sale transaction. Excluding these transaction costs, CCWC’s results improved by $416,000as compared to the second quarter of 2009 due primarily to: (i) higherwater rates implemented in October 2009 as a result of the approval by theACC of CCWC’s general rate case, and (ii) a decrease in operating expensesas compared to the same period in 2009 primarily due to lower outside servicesand regulatory expenses in 2010 due to the finalization of the general ratecase in October 2009 and lower water treatment and other operation costs.

 

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***Consolidated Results of Operations — Six Months Ended June 30,2010 and 2009 (amounts in thousands):***

*** ***
| ** **                                                   | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                                   | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                                   | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                                           |       |          |       |          |       |       |       |       |       |
| Water                                                        |       | $             | 128,873    |          | $          | 127,473    |       | $          | 1,400      |   | 1.1 | % |
| Electric                                                     |       | 18,824        |       | 14,520        |       | 4,304      |       | 29.6       | %          |
| Contracted services                                          |       | 36,245        |       | 27,691        |       | 8,554      |       | 30.9       | %          |
| Total operating revenues                                     |       | 183,942       |       | 169,684       |       | 14,258     |       | 8.4        | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                                           |       |          |       |          |       |       |       |       |       |
| Water purchased                                              |       | 21,566        |       | 19,942        |       | 1,624      |       | 8.1        | %          |
| Power purchased for pumping                                  |       | 3,603         |       | 4,102         |       | (499       | )          | -12.2      | %          |
| Groundwater production assessment                            |       | 5,286         |       | 5,374         |       | (88        | )          | -1.6       | %          |
| Power purchased for resale                                   |       | 6,545         |       | 6,365         |       | 180        |       | 2.8        | %          |
| Supply cost balancing accounts                               |       | 8,501         |       | 6,860         |       | 1,641      |       | 23.9       | %          |
| Other operation expenses                                     |       | 13,946        |       | 13,924        |       | 22         |       | 0.2        | %          |
| Administrative and general expenses                          |       | 35,196        |       | 31,719        |       | 3,477      |       | 11.0       | %          |
| Depreciation and amortization                                |       | 16,724        |       | 15,753        |       | 971        |       | 6.2        | %          |
| Maintenance                                                  |       | 8,568         |       | 7,679         |       | 889        |       | 11.6       | %          |
| Property and other taxes                                     |       | 6,903         |       | 5,973         |       | 930        |       | 15.6       | %          |
| ASUS construction expenses                                   |       | 16,801        |       | 16,274        |       | 527        |       | 3.2        | %          |
| Net loss (gain) on sale of property                          |       | 2             |       | (15           | )          | 17         |       | -113.3     | %          |
| Total operating expenses                                     |       | 143,641       |       | 133,950       |       | 9,691      |       | 7.2        | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                             |       | 40,301        |       | 35,734        |       | 4,567      |       | 12.8       | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                                    |       |          |       |          |       |       |       |       |       |
| Interest expense                                             |       | (11,528       | )          | (10,749       | )          | (779       | )          | 7.2        | %          |
| Interest income                                              |       | 819           |       | 502           |       | 317        |       | 63.1       | %          |
| Other                                                        |       | (5            | )          | 52            |       | (57        | )          | -109.6     | %          |
|                                                         |       | (10,714       | )          | (10,195       | )          | (519       | )          | 5.1        | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| INCOME FROM CONTINUING OPERATIONS BEFORE INCOME  TAX EXPENSE |       | 29,587        |       | 25,539        |       | 4,048      |       | 15.9       | %          |
| Income tax expense                                           |       | 12,427        |       | 9,096         |       | 3,331      |       | 36.6       | %          |
| INCOME FROM CONTINUING OPERATIONS                            |       | 17,160        |       | 16,443        |       | 717        |       | 4.4        | %          |
|                                                         |       |          |       |          |       |       |       |       |       |
| INCOME (LOSS) FROM DISCONTINUED OPERATIONS, NET OF  TAX      |       | 305           |       | (12           | )          | 317        |       | -2641.7    | %          |
| NET INCOME                                                   |       | $             | 17,465     |          | $          | 16,431     |       | $          | 1,034      |   | 6.3 | % |

 

Netincome for the six months ended June 30, 2010 was $17.5 million,equivalent to $0.94 and $0.93 per common share on a basic and fully dilutedbasis, respectively, compared to $16.4 million or $0.93 and $0.92 per commonshare on a basic and fully diluted basis, respectively, for the six monthsended June 30, 2009, an increase in net income of 6.3%.

 

Impactingthe comparability in the results of the two periods on a diluted per sharebasis are the following significant items:

 

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·                  A decrease in the dollar water margin for theCompany’s continuing water business of $1.1 million, or $0.04 per share, duringthe six months ended June 30, 2010, due to the recording of $2.8 millionin additional revenues during the second quarter of 2009 related to the CPUC’sapproval of the WCMA accounts.  This waspartially offset by the margin impact of recording the WRAM, net of MCBA,implemented for Region I’s rate making areas in September 2009. Due to the****delay in GSWC’s Regions II and III and the general officerate case discussed further in *Regulatory Matters*,GSWC’s revenues and supply costs for Regions II and III for the first sixmonths of 2010 have been recorded using 2009 adopted levels pending resolutionof this general rate case, which is expected in October 2010.  New rates, once approved by the CPUC, areexpected to be retroactive to January 1, 2010.

 

·                  An increase in the electric margin of $4.0million, or $0.13 per share, during the six months ended June 30, 2010compared to the same period of 2009 due primarily to:  (i) increases in rates in November 2009and January 2010 related to BVES’ general rate case approved by the CPUC; (ii) theCPUC approval in March 2010 for recovery of $958,000 in a memorandumaccount which tracked the difference between the 2007 adopted general officecost allocation to BVES and the 1996 adopted general office cost allocation toBVES, and (iii) the recording of $680,000 in the BRRAM account implementedin November 2009 to adjust BVES’ 2010 revenues to the base rate revenuesapproved by the CPUC.

 

·                  A settlement agreement reached with MirantTrading resulting in the recording of $1.0 million, or $0.03 per share, inproceeds as a reduction to legal costs in 2009. There was no similar reductionin costs in the same period of 2010.

 

·                  An increase inother operating expenses (including administrative and general expenses), of$4.6 million at GSWC’s operations, or $0.15 per share, for the first six monthsof 2010 due to an increase in labor and other related benefits, and an increasein outside services costs as compared to the same period in 2009.  These increases in operating expenses wereincurred with no corresponding rate recovery due to the delay in the CPUC’sdecision on GSWC’s Regions II, III and the general office rate case.

 

·                  An increase inpretax operating income for contracted services of $7.4 million, or $0.23 pershare, during the six months ended June 30, 2010 due primarily to contractmodifications received from the U.S government resolving two requests forequitable adjustment, which increased revenues and pretax operating income by atotal of $5.6 million as compared to the same period in 2009.  In addition, there was an increase in newconstruction projects at ONUS as compared to the same period in 2009.

 

·                  An increase ininterest expense, net of interest income of $462,000, or $0.01 per share,primarily due to anincrease in long-term debt. On March 10, 2009, GSWC issued a $40.0 millionsenior note to CoBank due March 10, 2019. Also, additional interestexpense was recorded in the interest rate balancing account approved by theCPUC in July 2009 in the cost of capital proceeding.  This balancing account tracks any differencebetween the incremental cost of debt included in the cost of capital decisionand the actual cost of debt for any long-term debt issued by GSWC from theeffective date of the final decision.

 

·                  An increase inincome tax expense during the six months ended June 30, 2010 as comparedto the same period in 2009, due primarily to: (i) a tax benefit of $918,000or $0.05 per share recorded during the first quarter of 2009 resulting fromchanges in California apportionment laws, which did not recur in 2010, and (ii) anincrease in the effective income tax rate (excluding the effects of the taxbenefit discussed previously), which negatively impacted earnings byapproximately $0.05 per share during the first six months of 2010 primarilyresulting from changes between book and taxable income that are treated asflow-through adjustments in accordance with regulatory requirements.

 

·                  An increase inincome from discontinued operations of $317,000, or $0.02 per share,representing the operations of CCWC. Income from discontinued operations includes $395,000, net of tax, indirect legal and consulting costs related to the stock purchase agreemententered into with EPCOR. The improved performance at CCWC was primarily due torate increases approved by the ACC in October 2009 and a decrease inoperating expenses as compared to the first six months of 2009.

 

·                  A decrease of$0.04 per share due to an increase in the weighted average number of commonshares outstanding resulting from the issuance of 1.15 million shares of AWR’sCommon Shares in a public offering completed in May 2009.

 

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***Operating Revenues***

 

*Water*

 

GSWC’srevenues and supply costs for Regions II and III for the first six months of2010 have been recorded using 2009 adopted levels pending resolution of thegeneral rate case for these Regions, which is expected in October 2010.For the six months ended June 30, 2010, revenues from continuing wateroperations increased slightly by $1.4 million to $128.9 million, compared to$127.5 million for the six months ended June 30, 2009.  For the six months ended June 30, 2010,GSWC recorded $3.2 million in additional revenues in Region I’s WRAM which wasimplemented in September 2009 to adjust consumption levels adopted by theCPUC, partially offset by a decrease in Region I’s actual consumption whencompared to 2009.  Overall consumptionfor continuing water operations decreased 11.6% for the six months ended June 30,2010 as compared to the same period in 2009. There was also an increase inwater revenues of $1.6 million due to surcharges approved by the CPUC in effectto recover under-collections in supply costs. These increases in water revenues were partially offset by the recordingof $2.8 million during the six months ended June 30, 2009 included in theWCMA at each of GSWC’s water regions to track the extraordinary expenses andrevenue shortfall associated with conservation measures in conjunction with thedeclared drought in California.  The WCMAwas effective August 18, 2008 until the WRAM was implemented on November 25,2008 for Regions II and III and through August 31, 2009 for Region I.  In addition, there was a decrease inmanagement fees at GSWC totaling $258,000 earned in 2009 related to a contractwith a municipality to provide billing and meter reading services. EffectiveJanuary 1, 2010, GSWC assigned this service contract with the municipalityto ASUS.  These management fees are nowearned by ASUS.

 

*Electric*

 

Forthe six months ended June 30, 2010, revenues from electric operationsincreased by 29.6% to $18.8 million compared to $14.5 million for the sixmonths ended June 30, 2009 due primarily to electric rate increaseseffective November 2, 2009 and January 1, 2010.  In addition, as a result of the BRRAM whichalso went into effect in November 2009, BVES recorded $680,000 in additional electric revenues primarily due tolower customer usage.  Finally, in March 2010,the CPUC approved for recovery a memorandum account which tracked thedifference between the 2007 adopted general office cost allocation to BVES andthe 1996 adopted general office cost allocation, effective and retroactive fromJune 4, 2009 to October 31, 2009. As a result, BVES recorded a regulatory asset of $958,000 and acorresponding increase to revenues for amounts included in this memorandumaccount.

 

*Contracted Services*

 

Revenues from contracted services are primarilycomprised of construction revenues (including renewals and replacements) andmanagement fees for operating and maintaining the water and/or wastewatersystems at military bases.  For the sixmonths ended June 30, 2010, revenues from contracted services increased by$8.6 million, or 30.9%, to $36.2 million compared to $27.7 million for the sixmonths ended June 30, 2009 primarily due to the receipt of contractmodifications in connection with two separate requests for equitable adjustmentpreviously filed for inventory price adjustments at Fort Bliss in Texas andFort Bragg in North Carolina.  These twocontract modifications increased revenues and pretax operating income by acombined $5.6 million.

 

Forthe six months ended June 30, 2010, management fees increased by $6.5million to $13.2 million for the six months ended June 30, 2010 ascompared to $6.7 million for the six months ended June 30, 2009.  The two requests for equitable adjustmentdiscussed above added $5.6 million of additional management fees.  The request for equitable adjustment relatedto Fort Bragg provided for retroactive revenues through February 2010 andtotaled $3.1 million.  In addition, FortBragg received contract modifications to reflect, prospectively, the increasedinventory levels discussed above covered under the original contract, whichprovided for interim increases totaling $145,000 per month beginning March 2010.  This resulted in an additional increase inmanagement fees of $580,000 for the six months ended June 30, 2010.   In addition, there was an increase inmanagement fees totaling $415,000 earned in 2010 and related to a contract witha municipality to provide billing and meter reading services. EffectiveJanuary 1, 2010, GSWC assigned this service contract with the municipalityto ASUS.

 

Therewas also an increase in construction revenues of $2.1 million, primarilyrelated to construction activities at Fort Bragg in North Carolina and FortJackson in South Carolina, partially offset by decreases in 

 

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construction revenues at the other militarybases.  Earnings and cash flows fromamendments and modifications to the original 50-year contracts with the U.S.government may or may not continue in future periods.

 

***Operating Expenses:***

 

***Supply Costs***

 

Supplycosts for the water segment consist of purchased water, purchased power forpumping, groundwater production assessments and water supply cost balancingaccounts. Supply costs for the electric segment consist of purchased power forresale (including the cost of natural gas) and the electric supply costbalancing account*.* Water and electric margins arecomputed by taking total revenues, less total supply costs. Registrant usesthese margins and related percentages as an important measure in evaluating itsoperating results. Registrant believes this measure is a useful internalbenchmark in evaluating the utility business performance within its water andelectric segments. Registrant reviews these measurements regularly and comparesthem to historical periods and to its operating budget as approved. However,this measure, which is not presented in accordance with Generally AcceptedAccounting Principles (“GAAP”), may not be comparable to similarly titledmeasures used by other entities and should not be considered as an alternativeto operating income, which is determined in accordance with GAAP, as anindicator of operating performance.

 

Totalsupply costs comprise the largest segment of total operating expenses. Supplycosts accounted for approximately 32% of total operating expenses for the sixmonths ended June 30, 2010 and 2009, respectively.

 

Thetable below provides the amount of increases (decreases), percent changes insupply costs, and margins during the six months ended June 30, 2010and  2009 (amounts in thousands):

 
| ** **                                      | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                      | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                |       | $             | 128,873    |          | $          | 127,473    |       | $          | 1,400      |   | 1.1 | % |
| WATER SUPPLY COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                         |       | $             | 21,566     |          | $          | 19,942     |       | $          | 1,624      |   | 8.1 | % |
| Power purchased for pumping **(1)**             |       | 3,603         |       | 4,102         |       | (499       | )          | -12.2      | %          |
| Groundwater production assessment **(1)**       |       | 5,286         |       | 5,374         |       | (88        | )          | -1.6       | %          |
| Water supply cost balancing accounts **(1)**    |       | 6,281         |       | 4,798         |       | 1,483      |       | 30.9       | %          |
| TOTAL WATER SUPPLY COSTS                        |       | $             | 36,736     |          | $          | 34,216     |       | $          | 2,520      |   | 7.4 | % |
| WATER MARGIN **(2)**                            |       | $             | 92,137     |          | $          | 93,257     |       | $          | (1,120     | ) | -1.2 | % |
| PERCENT MARGIN - WATER                          |       | 71.5          | %          | 73.2          | %          |       |       |       |       |
|                                            |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**             |       | $             | 18,824     |          | $          | 14,520     |       | $          | 4,304      |   | 29.6 | % |
| ELECTRIC SUPPLY COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(1)**              |       | $             | 6,545      |          | $          | 6,365      |       | $          | 180        |   | 2.8 | % |
| Electric supply cost balancing accounts **(1)** |       | 2,220         |       | 2,062         |       | 158        |       | 7.7        | %          |
| TOTAL ELECTRIC SUPPLY COSTS                     |       | $             | 8,765      |          | $          | 8,427      |       | $          | 338        |   | 4.0 | % |
| ELECTRIC MARGIN **(2)**                         |       | $             | 10,059     |          | $          | 6,093      |       | $          | 3,966      |   | 65.1 | % |
| PERCENT MARGIN - ELECTRIC                       |       | 53.4          | %          | 42.0          | %          |       |       |       |       |

 

----

(1)                                  As reported on AWR’sConsolidated Statements of Income, except for supply cost balancing accounts.The sum of water and electric supply cost balancing accounts in the table aboveare shown on AWR’s 

 

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ConsolidatedStatements of Income and totaled $8,501,000 and $6,860,000 for the six monthsended June 30, 2010 and 2009, respectively.

 

(2)                                  Water and electric marginsdo not include any depreciation and amortization, maintenance expense, or otheroperating expenses.

 

GSWC’ssupply costs for Regions II and III for the first six months of 2010 have beenrecorded using 2009 adopted levels pending resolution of the Region II, IIIand the general office rate case, which is expected in October 2010.  For the six months ended June 30, 2010,35.9% of GSWC’s water supply mix was purchased as compared to 35.0% purchasedfor the six months ended June 30, 2009. However, GSWC implemented the MCBA for all its water regions whicheliminates the effects on earnings of changes in the water supply mixprospectively.  The adopted percentage ofpurchased water for the six months ended June 30, 2010 at Regions I, IIand III was 23.6%, 60.9% and 41.0%, respectively, as compared to actualpurchased water of 20.8%, 39.4% and 41.4%, respectively, for the six months of2010.  The improvement in Regions II’sactual mix compared to the mix approved by the CPUC resulted in anover-collection in the MCBA account.

 

Purchasedwater costs for the six months ended June 30, 2010 increased by 8.1% to$21.6 million as compared to $20.0 million in the same period of 2009.  The increase in purchased water costs was dueto higher water rates charged from wholesale suppliers, partially offset bylower customer usage.

 

Forthe six months ended June 30, 2010, power purchased for pumping decreasedto $3.6 million, compared to $4.1 million for the same period of 2009, due to adecrease in overall customer demand of 11.6%. Groundwater production assessments were slightly lower due to lowercustomer demand, partially offset by increases in assessment rates (pump tax rates) levied againstgroundwater production, effective July 2009.  In particular, Region II’s average pump taxrates increased by approximately 19%. The MCBA tracks the increases in pump tax rates for future recovery inwater rates.

 

Anincrease of $1.5 million in the water supply cost balancing account provisionduring the six months ended June 30, 2010 as compared to the same periodin 2009 was primarily caused by a net decrease of $759,000 of under-collectionsfor the six months ended June 30, 2010 (related to Region I) compared tothe same period in 2009, and a $1.6 million increase in the amortization of thewater supply cost balancing accounts.  This was partially offset by adecrease in the MCBA accounts of $853,000 for the six months ended June 30,2010 as compared to the same period in 2009.

 

Forthe six months ended June 30, 2010, the cost of power purchased for resaleto customers in GSWC’s BVES division increased by 2.8% to $6.5 million comparedto $6.4 million for the six months ended June 30, 2009 reflecting a higher fixed energy cost under the currentpurchased power contract.  This waspartially offset by lower customer usage of 2.6% over the same period in2009.  GSWC began receiving powerunder this purchased power contract on January 1, 2009.   The main product under the new contractprovides for 13 MWs of electric energy at a fixed price of $67.85 per MWhduring 2010 as compared to $63.75 during 2009. The increase in the price of purchased power is reflected in theelectric supply cost balancing account resulting in no change to the dollar margin for electric services.

 

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***Other Operation Expenses***

 

Theprimary components of other operation expenses include payroll, materials andsupplies, chemicals and water treatment, and outside service costs of operatingthe continuing regulated water systems, including the costs associated withwater transmission and distribution, pumping, water quality, meter reading,billing, and operations of district offices. Registrant’s electric and contracted services operations incur many ofthe same types of costs as well.  For thesix months ended June 30, 2010 and 2009, other operation expenses bysegment consisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 11,179     |          | $          | 11,136     |       | $          | 43         |   | 0.4 | % |
| Electric Services              |       | 1,123         |       | 1,191         |       | (68        | )          | -5.7       | %          |
| Contracted Services            |       | 1,644         |       | 1,597         |       | 47         |       | 2.9        | %          |
| Total other operation expenses |       | $             | 13,946     |          | $          | 13,924     |       | $          | 22         |   | 0.2 | % |

 

For the six months ended June 30, 2010, other operation expensesfor water services increased by $43,000 primarily due to an increase in costsrelated to water conservation educational materials and supplies of $392,000.This increase was partially offset by: (i) a decrease in outside servicescosts of $205,000 related to water treatment; (ii) a decrease in laborcosts of $133,000, and (iii) a decrease of $11,000 in other miscellaneousoperating expenses.

 

There was a decrease in other operating expenses for electric servicesprimarily due to a $39,000 decrease in bad debt expense and $29,000 inmiscellaneous other operating expenses.

 

Contracted services experiencedincreases in other operating expenses of $47,000 primarily due to increases of$248,000 in labor costs.  This increasewas largely offset by decreases of $190,000 in outsides services and $11,000 inmiscellaneous other operating expenses.

 

***Administrative and General Expenses***

 

Administrativeand general expenses include payroll related to administrative and generalfunctions, all employee benefits charged to expense accounts, insuranceexpenses, outside legal and consulting fees, regulatory utility commissionexpenses, expenses associated with being a public company, and generalcorporate expenses. For the six months ended June 30, 2010 and 2009,administrative and general expenses by segment, including AWR (parent),consisted of the following (amounts in thousands):

 
| ** **                                | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 25,026     |          | $          | 22,978     |       | $          | 2,048      |   | 8.9 | % |
| Electric Services                         |       | 3,818         |       | 3,512         |       | 306        |       | 8.7        | %          |
| Contracted Services                       |       | 6,284         |       | 5,169         |       | 1,115      |       | 21.6       | %          |
| AWR (parent)                              |       | 68            |       | 60            |       | 8          |       | 13.3       | %          |
| Total administrative and general expenses |       | $             | 35,196     |          | $          | 31,719     |       | $          | 3,477      |   | 11.0 | % |

 

For the six months ended June 30,2010, administrative and general expenses increased by $2.0 million in waterservices compared to the six months ended June 30, 2009 due primarily toincreases in labor costs and other employee benefits of $2.3 million due to higher wages largely related to Registrant’s annualperformance-based 

 

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salaryreview program and an increase of $834,000 in outside services costs includinglegal costs incurred in preparation for trial and the finalization of asettlement agreement reached in February 2010 between GSWC and two formerofficers.  These increases were partially offset by: (i) adecrease in pension expense of $595,000 due to improved pension planperformance during 2009; (ii) a decrease in supplies and miscellaneousequipment expenses of $185,000 and, (iii) a decrease of $306,000 inmiscellaneous other administrative and general expenses.

 

For the six months ended June 30,2010, administrative and general expenses increased by $306,000 in electricservices compared to the six months ended June 30, 2009 due primarily to the recordingin 2009 of $1.0 million of proceeds received from Mirant Trading in connectionwith a settlement agreement reached in May 2009.  The amount received from Mirant Trading wenttowards reducing previously incurred legal costs.  There was also anincrease of $318,000in allocation of costs from the corporate headquarters to BVES and a $23,000increase in labor costs and employee related benefits as discussed above inwater services.  These increases werepartially offset by a decrease in consulting costs due to costs incurred in2009 related to the BVES rate case and new purchased power contract.

 

Therewas an increase of $1.1 million in contracted services administrative andgeneral expenses due primarily to: (i) an increase of $501,000 in laborcosts and related employee benefits due to higher wages pursuant to the company’sannual performance-basedsalary review program and an increase in the number of employees; (ii) a$286,000 increase in allocation of costs from the corporate headquarters toASUS; (iii) a $78,000 increase in outside services and, (iv) a$250,000 increase in miscellaneous other administrative and general expenses.

 

***Depreciation andAmortization***

 

Forthe six months ended June 30, 2010 and 2009, depreciation and amortizationby segment consisted of the following (amounts in thousands):

 
| ** **                          | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 15,243     |          | $          | 14,305     |       | $          | 938        |   | 6.6 | % |
| Electric Services                   |       | 1,120         |       | 1,129         |       | (9         | )          | -0.8       | %          |
| Contracted Services                 |       | 361           |       | 319           |       | 42         |       | 13.2       | %          |
| Total depreciation and amortization |       | $             | 16,724     |          | $          | 15,753     |       | $          | 971        |   | 6.2 | % |

 

Forthe six months ended June 30, 2010, depreciation and amortization expensefor water and electric services increased by $929,000 to $16.4 million comparedto $15.4 million for the six months ended June 30, 2009 reflecting,among other things, the approximately $82.8 million of additions to utilityplant during 2009, depreciation on which began in January 2010.  Registrant anticipates that depreciationexpense will continue to increase due to ongoing construction at its continuingregulated subsidiaries. Registrant believes that depreciation expense relatedto property additions approved by the appropriate regulatory agency will berecovered through water and electric rates.

 

Therewas also an increase in depreciation and amortization expense for contractedservices due primarily to theaddition of fixed assets.

 

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***Maintenance***

 

Forthe six months ended June 30, 2010 and 2009, maintenance expense bysegment consisted of the following (amounts in thousands):

 
| ** **          | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 7,204      |          | $          | 5,674      |       | $          | 1,530      |   | 27.0 | % |
| Electric Services   |       | 395           |       | 364           |       | 31         |       | 8.5        | %          |
| Contracted Services |       | 969           |       | 1,641         |       | (672       | )          | -41.0      | %          |
| Total maintenance   |       | $             | 8,568      |          | $          | 7,679      |       | $          | 889        |   | 11.6 | % |

 

For the six months ended June 30,2010, maintenance expense for water services increased by $1.5 million to $7.2million compared to $5.7 million for the six months ended June 30, 2009due principally to an increase in planned maintenance on GSWC’s wells, watersupply and distribution facilities, particularly in Regions I and III.

 

There was an increase of$31,000 in maintenance expenses for electric services related to the 8.4 MWnatural gas-fueled generation plant.

 

Forthe six months ended June 30, 2010, maintenance expense for contractedservices decreased by $672,000 due to lower labor and outside servicescosts.  Internal labor activity for 2010 was focused more on operationsrelated work and less on maintenance activity, while in 2009 there was a higherlevel of maintenance related activity that was required.

 

***Property and Other Taxes***

 

Forthe six months ended June 30, 2010 and 2009, property and other taxes bysegment consisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 5,733      |          | $          | 4,998      |       | $          | 735        |   | 14.7 | % |
| Electric Services              |       | 428           |       | 369           |       | 59         |       | 16.0       | %          |
| Contracted Services            |       | 742           |       | 606           |       | 136        |       | 22.4       | %          |
| Total property and other taxes |       | $             | 6,903      |          | $          | 5,973      |       | $          | 930        |   | 15.6 | % |

 

Forthe six months ended June 30, 2010, property and other taxes for water andelectric services increased by $794,000 due in part to a tax refund of $488,000recorded in the second quarter of 2009 resulting from lower reassessed propertyvalues from an examination.  There wasalso an increase in payroll taxes due to increased labor costs.

 

Propertyand other taxes were higher in contracted services due primarily to an increase in gross receipts taxes of $182,000 at ONUS.  This increase was due primarily to the $3.1million in management fees approved in the request for equitable adjustmentrecorded in the first quarter of 2010.

 

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***ASUS Construction Expenses***

 

Forthe six months ended June 30, 2010 construction expenses were $16.8million, increasing $527,000 compared to the same period in 2009, due primarilyto new construction projects at Fort Bragg and Fort Jackson totaling $7.9million.  These increases were partiallyoffset by a decrease of $7.4 million in construction expense at the othermilitary bases.

 

***Interest Expense***

 

Forthe six months ended June 30, 2010 and 2009, interest expense by segment,including AWR (parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 11,332     |          | $          | 10,420     |       | $          | 912        |   | 8.8 | % |
| Contracted Services         |       | 141           |       | 192           |       | (51        | )          | -26.6      | %          |
| AWR (parent)                |       | 55            |       | 137           |       | (82        | )          | -59.9      | %          |
| Total interest expense      |       | $             | 11,528     |          | $          | 10,749     |       | $          | 779        |   | 7.2 | % |

 

Overall,interest expense increased in 2010 reflecting an increase in long-term debt. OnMarch 10, 2009, GSWC issued a senior note in the amount of $40.0 millionto CoBank due March 10, 2019.  In addition, a decision issued in July 2009 in the GSWC cost ofcapital proceeding authorized an interest rate balancing account to trackinterest costs of new debt.  Thisbalancing account tracks any difference between the incremental cost of debtincluded in the cost of capital decision and the actual cost of debt for anylong-term debt issued by GSWC from the effective date of the final decision.This difference totaled $318,000 for the six months ended June 30, 2010and was included in the balancing account, increasing interest expense. Theseincreases were partially offset by lower short term borrowings.  Average bank loan balances outstanding underthe AWR credit facility for the six months ended June 30, 2010 wereapproximately $25 million, as compared to an average of $52 million during thesame period of 2009.

 

***Interest Income***

 

Forthe six months ended June 30, 2010 and 2009, interest income by segment,including AWR (parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 306        |          | $          | 496        |       | $          | (190       | ) | -38.3 | % |
| Contracted Services         |       | 510           |       | 3             |       | 507        |       | 16900.0    | %          |
| AWR (parent)                |       | 3             |       | 3             |       | —     |       | 0.0        | %          |
| Total interest income       |       | $             | 819        |          | $          | 502        |       | $          | 317        |   | 63.1 | % |

 

Interestincome increased by $317,000 for the six months ended June 30, 2010 dueprimarily to the recording of $510,000 in interest income in connection withthe Fort Bliss inventory price adjustment due to a contract modification issued by the U.S. government in March 2010.  This was partially offset by interest incomerecorded in 2009 related to a property tax refund resulting from lowerreassessed property values.

 

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***Income Tax Expense***

 

Forthe six months ended June 30, 2010 and 2009, income tax expense bysegment, including AWR (parent), consisted of the following (amounts inthousands):

 
| ** **                  | ** ** | **6 Months**  | ** ** | **6 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2010** | ** ** | **6/30/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 8,538      |          | $          | 9,479      |       | $          | (941       | ) | -9.9 | % |
| Contracted Services         |       | 3,782         |       | 687           |       | 3,095      |       | 450.5      | %          |
| AWR (parent)                |       | 107           |       | (1,070        | )          | 1,177      |       | -110.0     | %          |
| Total income tax expense    |       | $             | 12,427     |          | $          | 9,096      |       | $          | 3,331      |   | 36.6 | % |

 

Forthe six months ended June 30, 2010, income tax expense for water andelectric services decreased by 9.9% to $8.5 million compared to $9.5 millionfor the six months ended June 30, 2009 due primarily to a decrease inpretax income.  The effective tax rate (“ETR”)for water and electric services for the six months ended June 30, 2010 was42.9% as compared to a 39.8% ETR applicable to the six months ended June 30,2009.  The ETR deviates from the federalstatutory rate primarily due to state taxes and changes between book andtaxable income that are treated as flow-through adjustments in accordance withregulatory requirements (principally plant-, rate-case- andcompensation-related items). Flow-through adjustments increase or decrease tax expense in one period,with an offsetting increase or decrease occurring in another period.

 

Incometax expense for contracted services increased to $3.8 million compared to$687,000 for the six months ended June 30, 2009 due primarily to anincrease in pretax income.  The ETR forcontracted services for the six months ended June 30, 2010 was 38.5% ascompared to a 36.3% ETR applicable to the six months ended June 30, 2009.

 

AWR(parent) receives a tax benefit for expenses incurred at the parent-companylevel.  For the six months ended June 30,2009, the taxes recorded at AWR (parent) also include the effect of changes inCalifornia law relating to state unitary tax principles during the firstquarter of 2009.  Management intends toelect, commencing with the 2011 tax year, an alternative apportionmentmethod made available by tax law changes in 2009.  As a result of management’s intention toapply the alternative method, AWR adjusted its deferred tax balances in thefirst quarter of 2009 to reflect the expected amount at which it will realizeits California deferred taxes consistent with the change in tax law, andrefined certain related estimates.  This resulted in the recording of abenefit of approximately $918,000, or $0.05 per share, during the first quarterof 2009. While the effect of the tax law changes will continue to affect AWR’sstate taxes, the future effects may be beneficial or detrimental depending on acombination of the profitability of AWR’s non-California activities as well asthe relative proportion of the factor(s) applied by its apportionmentmethod.  Periodically, management will assess its intention to apply thealternative method and will adjust its deferred tax balances accordingly.  The consolidated ETR for the six months endedJune 30, 2009 was approximately 35.6%. Absent this tax benefit, the consolidated ETR for the six months ended June 30,2009 would have been 39.2%.

 

***Income (Loss) from DiscontinuedOperations***

 

Asdiscussed in the quarterly results, on June 7, 2010, AWR entered into astock purchase agreement with EPCOR (USA) Inc. to sell all the common shares ofCCWC for a total purchase price of $35 million, including the assumption ofapproximately $6 million of long-term debt. Accordingly, the results of CCWC have been reported in discontinued operations.

 

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Forthe six months ended June 30, 2010, income from discontinued operations of$305,000 includes $395,000 (net of tax) of legal and consulting costs relatedto the CCWC sale transaction.  Excludingthese transaction costs, CCWC’s results improved by $712,000 as compared to2009 due primarily to higher water rates implemented in October 2009 as aresult of the approval by the ACC of CCWC’s general rate case, and a decreasein operating expenses as compared to the same period in 2009 primarily dueto:  (i) lower outside services andregulatory expenses in 2010 due to the finalization of the general rate case inOctober 2009; (ii) lower water treatment and other operation costs,and (iii) lower maintenance costs.

 

**CriticalAccounting Policies and Estimates**

 

Criticalaccounting policies and estimates are those that are important to the portrayalof AWR’s financial condition, results of operations and cash flows, and requirethe most difficult, subjective or complex judgments of AWR’s management. Theneed to make estimates about the effect of items that are uncertain is whatmakes these judgments difficult, subjective and/or complex. Management makessubjective judgments about the accounting and regulatory treatment of manyitems. These judgments are based on AWR’s historical experience, terms ofexisting contracts, AWR’s observance of trends in the industry, informationprovided by customers and information available from other outside sources, asappropriate. Actual results may differ from these estimates underdifferent assumptions or conditions.

 

The critical accounting policiesused in the preparation of the Registrant’s financial statements that itbelieves affect the more significant judgments and estimates used in thepreparation of its consolidated financial statements presented in this reportare described in *“Management’s Discussion and Analysis ofFinancial Condition and Results of Operation”* included in Registrant’sAnnual Report on Form 10-K for the year ended December 31, 2009.There have been no material changes to the critical accounting policies.

 

**Liquidityand Capital Resources**

 

***AWR***

 

Registrant’s regulated business (primarily that of GSWC), is capitalintensive and requires considerable capital resources. A portion of thesecapital resources are provided by internally generated cash flows fromoperations. When necessary, Registrant obtains funds from external sources inthe capital markets and through bank borrowings. Access to external financingon reasonable terms depends on Registrant’s credit ratings and current businessconditions, including that of the water utility industry in general as well asconditions in the debt or equity capital markets. If these business and marketconditions deteriorate to the extent that AWR no longer has access to thecapital markets at reasonable terms, Registrant has access to a revolvingcredit facility that is currently utilized to support operations.  On May 27, 2010, the Company enteredinto the Third Amendment to the Amended and Restated Credit Agreement in orderto extend the syndicated credit facility to May 27, 2013 from June 3,2010.  The maximum amount that may be borrowed under this facilitywas amended from $115 million to $100 million.  Registrant may, underthe terms of the Amended and Restated Credit Agreement, elect to increase theaggregate bank commitments by up to $40 million.  The aggregateeffective amount that may be outstanding under letters of credit has beenincreased to $25 million from $20 million.  The rates (spreads toLIBOR) at which the Company may borrow under this facility have been increaseddue to market conditions and the lenders have consented to modifications tocertain of the covenants in the Amended and Restated Credit Agreement requestedby the Company.  As of June 30,2010, an aggregate of $40.2 million in cash borrowings were included in currentliabilities and $11.1 million of letters of credit were outstanding under thisfacility.  As of June 30, 2010,AWR had $48.7 million available to borrow under the credit facility.

 

In addition, AWR filed a Registration Statement on August 10, 2009with the Securities and Exchange Commission (“SEC”) for the sale from time totime of debt and equity securities. As of June 30, 2010, $115.0 millionwas available for issuance under this Registration Statement.

 

OnJune 7, 2010, AWR entered into a stock purchase agreement with EPCOR (USA)Inc. to sell all the common shares of CCWC for a total purchase price of $35million, including the assumption of approximately $6 million of long-termdebt.  Approximately $29 million in cashwill be paid to AWR at closing.  Proceedsfrom the sale of CCWC may allow AWR to defer issuing equity to fund operationsand capital expenditures.

 

InJuly 2010, Standard & Poor’s Ratings Services (“S&P”)upgraded its corporate credit rating on AWR and GSWC from ‘A’ positive to ‘A+’stable.  S&P debt ratings range fromAAA (highest rating possible) to D 

 

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(obligation is in default).  Securities ratings are not recommendations tobuy, sell, or hold a security and are subject to change or withdrawal at anytime by the rating agency.  Registrantbelieves that AWR’s sound capital structure and an “A+ Stable” credit rating,combined with its financial discipline, will enable AWR to access the debtand/or equity markets.  However,unpredictable financial market conditions in the future may limit its access orimpact the timing of when to access the market, in which case Registrant maychoose to temporarily reduce its capital spending.  We expect to fund capital expenditures during2010 primarily through internally generated cash, short-term borrowings, andadvances and contributions from developers.  Registrant’s capitalexpenditures for 2010 are estimated at approximately $85 - $90 million.

 

AWRhas paid common dividends for over 75 consecutive years.  On July 27, 2010, AWR declared a regular quarterly dividend of $0.26 per Common Share. Thedividend, totaling approximately $5.0 million,will be paid on September 1, 2010 to common shareholders ofrecord at the close of business on August 9, 2010. AWR’s ability to paycash dividends on its Common Shares outstanding depends primarily upon cashflows from GSWC.  AWR presently intendsto continue paying quarterly cash dividends in the future, on or about March 1,June 1, September 1 and December 1, subject to earnings andfinancial condition, regulatory requirements and such other factors as theBoard of Directors may deem relevant.

 

*Cash Flows from Operating Activities*:

 

Registrant’sfuture cash flows from operating activities will be affected by utilityregulation; infrastructure investment; maintenance expenses; inflation;compliance with environmental, health and safety standards; production costs;customer growth; per customer usage of water and electricity; weather andseasonality; and required cash contributions to pension and post-retirement plans. In addition, future cash flows from non-regulated subsidiaries willdepend on new business activities, including military base operations and theconstruction of new and/or replacement infrastructure, timely redeterminationof prices and requests for equitable adjustments of prices and timelycollection of payments from the U.S. government.

 

Cashflows from operating activities have generally been sufficient to meetoperating requirements and a portion of capital expenditure requirements. Aspreviously discussed, AWR has access to a $100 million revolving creditfacility that is currently utilized to support operations.  Registrant may continue to seek access todebt and equity capital markets to meet future operating requirements andcapital expenditure requirements.  Therecan be no assurance that Registrant will be able to successfully access suchmarkets on favorable terms or at all. Operating cash flows can be negativelyaffected by changes in the regulatory environments and changes in economicconditions.

 

Registrantalso obtains cash from non-operating sources such as customer advances for andcontributions in aid of construction, discussed below in financing activities.

 

Netcash provided by operating activities was $29.5 million for the six monthsended June 30, 2010 as compared to $39.1 million for the six months ended June 30,2009.  The overall decrease of $9.6million was primarily attributable to an 11.6% decrease in water consumption atRegistrant’s continuing water operations as compared to the first six months of2009.  The reduction in water usagereduces cash flow from operating activities and increases the need forshort-term bank borrowings.  As a result, the increase in other regulatoryassets includes the WRAM which represents the revenue difference between whatis billed to GSWC’s water customers and that which is authorized by theCPUC. Surcharges have been implemented in 2010 and are expected to be inplace through 2011 to recover the revenue shortfall tracked in the WRAM. This was partially offset by improved performance for the Military UtilityPrivatization Subsidiaries for the first six months of 2010, resulting in a$4.3 million increase in ASUS’ cash flows from operating activities.  The timing of cash receipts and disbursementsrelated to other working capital items also affected the changes in net cashprovided by operating activities.

 

*Cash Flows from Investing Activities*:

 

Netcash used in investing activities, which consists primarily of capitalexpenditures at GSWC, were $38.3 million for the six months ended June 30,2010 as compared to $36.9 million for the same period in 2009.

 

Registrantintends to invest capital prudently to provide essential services to itsregulated customer base, while working with its regulators to have theopportunity to earn a fair rate of return on investment. Registrant’sinfrastructure investment plan consists of both infrastructure renewalprograms, where infrastructure is replaced, as needed, and major capitalinvestment projects, where new water treatment and delivery facilities will beconstructed.  Capital expenditures areexpected to be approximately $85 - $90 million during 2010.  Projected capital 

 

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expenditures and other investments aresubject to periodic review and revision to reflect changes in economicconditions and other factors.

 

*Cash Flows from Financing Activities*:

 

Registrant’sfinancing activities include primarily: (i) the issuance of Common Sharesand long-term debt; (ii) the repayments of long-term debt and notespayable to banks, primarily through its wholly owned subsidiary, GSWC; (iii) proceedsfrom stock option exercises, and (iv) the payment of dividends on CommonShares.  In order to finance newinfrastructure, Registrant also receives customer advances for andcontributions in aid of construction (net of refunds).   Short-term borrowings are used to fundcapital expenditures until long-term financing is arranged.

 

Netcash provided by financing activities was $14.1 million for the six monthsended June 30, 2010 as compared to $282,000 for the same period in2009.  During the six months ended June 30,2010, Registrant increased short-term borrowings by $22.8 million on itsrevolving credit facility and paid $9.7 million in dividends on CommonShares.  During the six months ended June 30,2009, Registrant received net proceeds of $34.9 million from the issuance ofCommon Shares and $39.8 million from the issuance of long-term debt.  During the six months ended June 30,2009, Registrant also paid down short term borrowings by $63.9 million and paid$8.7 million in dividends on Common Shares.

 

***GSWC***

 

GSWC funds the majority of its operating expenses, payments on itsdebt, and dividends on its outstanding common shares and a portion of itsconstruction expenditures through internal sources. Internal sources of cashflow are provided primarily by retention of a portion of earnings fromoperating activities. Internal cash generation is influenced by factors such asweather patterns, environmental regulation, litigation, changes in supply costsand regulatory decisions affecting GSWC’s ability to recover these supplycosts, timing of rate relief, increases in maintenance expenses and capitalexpenditures.  As of June 30, 2010,GSWC had $100 million available for issuance of debt or equity securities undera Registration Statement filed with the SEC.

 

GSWC relies on externalsources, including equity investments and short-term borrowings from AWR, andlong-term debt to help fund a portion of its construction expenditures.  On May 26, 2010, the Board of Directorsapproved the issuance of eight additional GSWC Common Shares to AWR for $20.0million.  Proceeds from the issuance wereused to pay down GSWC’s intercompany borrowings due to AWR.  In addition, GSWC receives advances andcontributions from customers, home builders and real estate developers to fundconstruction necessary to extend service to new areas. Advances forconstruction are refundable generally at rates ranging from 10% to 22% of therevenues received from the installation for which funds were advanced or inequal annual installments, and are generally paid over 40 years.  Amounts which are no longer refundable arereclassified to contributions in aid of construction. Utility plant funded byadvances and contributions is excluded from rate base. Generally, GSWCdepreciates contributed property and amortizes contributions in aid ofconstruction at the composite rate of the related property.

 

*Cash Flows from Operating Activities*:

 

Netcash provided by operating activities was $21.0 million for the six monthsended June 30, 2010 as compared to $33.7 million for the same period in2009.  This decrease is due primarily tolower water consumption of approximately 11.6% as compared to 2009’s actualconsumption.  The reduction in water usage reduces cash flow fromoperating activities and increases the need for short-term bankborrowings.  As a result, the increase in other regulatory assets includesthe WRAM which represents the revenue difference between what is billed to GSWC’swater customers and that which is authorized by the CPUC.  Surcharges havebeen implemented in 2010 and are expected to be in place through 2011 torecover the revenue shortfall tracked in the WRAM.   The timing ofcash receipts and disbursements related to other working capital items alsoaffected the changes in net cash provided by operating activities.

 

*Cash Flows from Investing Activities*:

 

Netcash used in investing activities were $37.4 million for the six months ended June 30,2010 as compared to $36.0 million for the same period in 2009. This isconsistent with Registrant’s capital investment plan of approximately $80 - $85million primarily for upgrades to its water supply and distribution facilitiesas well as costs for computer software and implementation.

 

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*Cash Flows from Financing Activities*:

 

Netcash provided by financing activities was $15.4 million for the six monthsended June 30, 2010 as compared to $2.3 million for the same period in2009.  The increase in net cash providedby financing activities was primarily due to the issuance of eight additionalshares of GSWC Common Shares to AWR for $20.0 million.  Proceeds from the issuance were used to paydown GSWC’s intercompany borrowings due to AWR. During the six months ended June 30, 2010, GSWC also paid dividendsof $9.6 million to AWR.  During the sameperiod in 2009, GSWC received net proceeds of $39.8 million from the issuanceof long-term debt.  A portion of theproceeds were used to pay down inter-company borrowings.  GSWC also paid dividends of $19.4 millionduring the six months ended June 30, 2009.

 

***CCWC and ASUS***

 

CCWC funds the majority ofits operating expenses, payments on its debt and dividends, if any, throughinternal operating sources or short-term borrowings from AWR. CCWC also relieson external sources, including long-term debt,contributions-in-aid-of-construction, advances for construction andinstall-and-convey advances, to fund the majority of its constructionexpenditures. ASUS funds its operating expenses primarily throughinternal operating sources and investments by or loans from AWR.  ASUS, in turn, provides funding to itssubsidiaries.

 

**Contractual Obligationsand Other Commitments**

 

Registrant has various contractual obligations which are recorded asliabilities in the consolidated financial statements. Other items, such ascertain purchase commitments and operating leases are not recognized asliabilities in the consolidated financial statements, but are required to bedisclosed. In addition to contractual maturities, Registrant has certain debtinstruments that contain annual sinking fund or other principal payments.Registrant believes that it will be able to refinance debt instruments at theirmaturity through public issuance, or private placement, of debt or equity.Annual principal and interest payments are generally made from cash flow fromoperations.

 

There have been no other materialchanges to AWR’s contractual obligations and other commitments sinceDecember 31, 2009. See *“Management’s Discussionand Analysis of Financial Condition and Results of Operation—ContractualObligations, Commitments and Off Balance Sheet Arrangements”*section ofthe Registrant’s Form 10-K for the year-ended December 31, 2009 for adetailed discussion of contractual obligations and other commitments.

 

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**Regulatory Matters**

 

***Recent Changes in Rates***

 

*Rate increases in 2010:*

 

In December 2009, theCPUC approved escalation rate increases for GSWC’s Region I water ratemakingarea effective January 1, 2010.  Theauthorized rate increases are expected to provide GSWC with additional annualrevenues of approximately $76,000 for Region I after adjusting for customergrowth.

 

In October 2009, theCPUC issued a final decision regarding the BVES general rate case.  This decision provided for an incrementalannual increase of $1.2 million for 2010, rates for which went into effect on January 1,2010 at BVES.  In addition, in June 2009,the CPUC had authorized BVES to track the difference between the 2007 adoptedgeneral office cost allocation to BVES and the 1996 adopted general office costallocation to BVES, effective and retroactive from June 4, 2009 to October 31,2009 (the date when the 2007 costs were incorporated into BVES’ rates).  The amount in this memorandum account totaledapproximately $958,000 as of October 31, 2009 (the date when the 2007costs were incorporated into BVES’ rates). In March 2010, the CPUCapproved for recovery this memorandum account through a surcharge over a24-month period effective May 1, 2010. Accordingly, during the first quarter of 2010, GSWC recorded aregulatory asset and a corresponding increase to revenues for amounts includedin this memorandum account.  The balancein this memorandum account included in regulatory assets totaled $925,000 as ofJune 30, 2010.  BVES will beentitled to another rate increase in 2010 when the CPUC issues its finaldecision in the Region II, Region III and general office rate case to theextent that the general office allocation to BVES increases.

 

*Rate increases in 2009:*

 

*GSWC*

 

In January 2009, theCPUC approved escalation/attrition year rate increases for all three GSWC waterratemaking areas effective January 1, 2009.  The authorized rate increases provided GSWCwith additional annual revenues of approximately $256,000 for Region I,approximately $5.1 million for Region II, representing the third year of athree-year rate case increase approved by the CPUC in 2007, and approximately$4.0 million for Region III in 2009. These estimates of additional revenueswere based upon normalized sales levels approved by the CPUC, effective January 1,2009.

 

The CPUC also issued its final decision in the cost of capitalproceeding in June 2009.  In thatdecision, the CPUC authorized a 10.2% return on equity and a correspondingreturn on rate base of 8.9% to be implemented into rates for all GSWC waterratemaking areas.  Implementation of thecost of capital decision resulted in a net annual increase in revenues ofapproximately $670,000.  In the finalcost of capital decision, theCPUC also authorized an interest rate balancing account to track interest costsof new debt.  This balancing accounttracks any difference between the incremental cost of debt included in the costof capital decision and the actual cost of debt for any long-term debt issuedby GSWC from the effective date of the final decision.

 

During the third quarter of2008, BVES filed an amended application to request CPUC approval of a newpurchased power contract and regulatory accounting treatment for all unrealizedgains and losses on the new contract due to derivative accounting.  A final decision on this application wasissued in May 2009 approving the contract and authorizing the memorandumaccount to track derivative gains and losses.

 

In June 2008, GSWC’sBVES division filed its general rate case with the CPUC’s electric division. OnOctober 15, 2009, the CPUC issued a final decision regarding the BVESgeneral rate case.  The decisionauthorized a return on equity of 10.5% with a corresponding return on rate baseof 9.15%.  The incremental annual revenueincreases approved in the decision were $4.8 million for 2009, $1.2 million for2010, $0.2 million for 2011 and $0.2 million in 2012.  All increases are prospective.  Based on the decision, BVES is also allowedto establish a Base Revenue Requirement Adjustment Mechanism to decouplerevenue from usage.

 

Among other things, thedecision allows for an update to BVES’ rates in 2010 for the corporateheadquarters’ costs based on the CPUC’s adoption of new rates for GSWC’scurrent general rate case including the recovery of expenses associated withits corporate headquarters. However, as discussed in the pending rate requestsbelow, the general rate case for Regions II and III and the general office hasbeen delayed.

 

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*CCWC*

 

CCWC filed a rate case withthe ACC in August 2004 for its water system in Fountain Hills,Arizona.  In September 2005, the ACCapproved a rate increase for CCWC. After appealing the ACC’s decision onvarious grounds, in July 2008, the ACC rendered another decisionincreasing CCWC’s annual revenues by only $12,000.   Once again, CCWC appealed the decision. In June 2010,the Court of Appeals rendered a decision which was adverse to CCWC’sclaim.  CCWC has no intention ofappealing this latest decision.

 

CCWC filed a rate caseduring the fourth quarter of 2007, requesting rate increases of approximately$2.9 million.  On October 8,2009, the ACC issued a final decision approving a rate increase for CCWC, whichwas effective on October 15, 2009 and is expected to generate additionalannual revenues of approximately $1.7 million, a 23% increase over currentrevenues.  In addition, despite itsprevious rulings, the ACC also ordered CCWC to treat the entire gain of$1,520,000 from a settlement agreement with the Fountain Hills SanitaryDistrict (“FHSD”) as a reduction to rate base.  As a result, CCWC recognized a loss of $760,000, or $0.02 per share,during the third quarter of 2009, which effectively reversed the original gainrecorded in 2005.  In November 2009,CCWC filed an application for rehearing on several issues including the sharingof this gain from the settlement proceeds.   The ACC granted CCWC’srequest to hold a rehearing on the issues.  On January 27, 2010, aprocedural conference was held with the judge and the staff of the ACC involvedin the rate case to address a schedule for the rehearing. The rehearing washeld in April 2010 and a final decision by the ACC is expected later thisyear.   At this time, management isunable to predict the outcome of this matter.

 

As of June 30, 2010,CCWC has $3.3 million of goodwill which may be at risk for potential impairmentif the ACC does not approve the sale with EPCOR and future requested rateincreases are not granted or further delayed by the ACC.

 

***PendingRate Requests***

 

*GSWC*

 

GSWCfiled its general rate case for Region I on January 4, 2010.  The new rates are to be effective for 2011and 2012.  GSWC requested an increase inrates which, if approved as filed, are expected to generate approximately $57.1million in annual revenues in 2011 and $58.3 million in 2012.

 

InJanuary 2008, the CPUC approved Region I’s general rate case (“GRC”)effective for years 2008, 2009, and 2010. On March 3, 2008, the CPUC’s Division of Ratepayer Advocates (“DRA”)filed an application for rehearing of this decision on various legalgrounds.  As permitted by the CPUC, GSWCfiled a response to DRA’s application. In September 2008, the CPUC granted a limited rehearing in order toconsider whether it is reasonable to include in Region I’s rate baseapproximately $3.5 million of costs incurred in connection with the La SerenaPlant Improvement Project.  The projectis currently in rate base and the earnings have been included in rates since January 1,2008.  If DRA prevails, GSWC may be required to write off the costsincurred to date and also refund amounts collected from customers since January 1,2008. At this time, management cannot predict the final outcome of the CPUC’sdecision on this matter.  The finalresolution of this issue is expected in October 2010 as part of the CPUC’sfinal decision in the Regions II and III and the general office rate case,further discussed below.

 

GSWC filed its general ratecase for Regions II and III plus the general office on July 1, 2008 forrates effective for years 2010, 2011 and 2012. In January 2010, the CPUC approved interim rates for GSWC’s RegionII and Region III water ratemaking areas effective January 1, 2010,pending a final decision on the general rate case.  While the increase for interim rates was zeropercent, it is important to establish the effective date so that new rates,once approved by the CPUC, will be retroactive to January 1, 2010.  On January 29, 2010, the CPUC issued aruling revising the scoping memo and reopening the general rate case proceedingto receive supplemental information and testimony on a number of issuesincluding cost allocation, pension and benefit calculations, general officerent expense, equity adjustments, costs regarding the La Serena PlantImprovement Project, and deferred rate case costs (further discussedbelow).  GSWC has provided additionalinformation and testimony regarding these issues to the CPUC.  A final decision is expected in October 2010.  At this time, management cannot predict theoutcome of the final decision.

 

Includedin GSWC’s other regulatory assets are deferred rate case costs totaling $3.4million. These are direct costs consisting primarily of outside consultingservices, which are incurred in connection with the preparation and processingof a GRC. Historically, GSWC has deferred these costs as a regulatory assetwhich are 

 

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then recovered in rates and amortized overthe term of a rate case cycle once the new rates go into effect.  In thecurrent GRC for Regions II and III and the general office, DRA has challengedGSWC’s historical practice of deferring these costs with subsequent recoveryupon the effective date of the new rates.  Instead, DRA believes that ratecase costs should be projected for future periods and recovered prospectively. Management believes that DRA’s rationale and recommendations are inconsistentwith GSWC’s historical practice of deferring and recovering rate case expensesassociated with the current GRC.  Thesepractices have not been challenged by the CPUC in prior rate cases.  IfDRA prevails, GSWC may be required to write off approximately $2.1 million asof June 30, 2010 related to the current rate case.  Resolution ofthis matter is expected in October 2010 as part of the final decision onthe Regions II and III and the general office rate case.

 

InAugust 2009, GSWC filed an application with the CPUC requestingauthorization to implement corrective measures to address water qualityproblems in its Bay Point water system. These corrective measures include: (i) retiring an existing watertreatment plant and purchasing total system demand from Contra Costa WaterDistrict (“CCWD”); (ii) entering into an asset lease agreement with CCWDfor 4.4 million gallons per day of treated water for a one-time lease price of$4.7 million; (iii) recovering costs associated with the purchase ofadditional treated water to replace purchased raw water due to contamination;and (iv) amending tariffs to appropriately charge GSWC’s Bay Pointcustomers for the cost of the asset lease agreement with CCWD.  On February 17, 2010 GSWC and DRA fileda motion to approve a Settlement Agreement resolving all issues in theapplication.  Hearings were held on March 1,2010.  In part, the Settlement Agreementrecommends approval of  (i) retiringan existing water treatment plant and purchasing total system demand from CCWD;(ii) entering into an asset lease agreement with CCWD for 4.4 milliongallons per day of treated water for a one-time lease price of $4.7 million; (iii) recoveringcosts associated with the purchase of additional treated water to replacepurchased raw water due to contamination; and (iv) amending tariffs toappropriately charge GSWC’s Bay Point customers for the cost of the asset leaseagreement with CCWD.   On June 24, 2010,the CPUC issued a decision conditionally approving the asset lease agreementwith CCWD and deferring the ratemaking considerations to the pending Region Igeneral rate case.

 

***Other Regulatory Matters***

 

See *“Management’sDiscussion and Analysis of Financial Condition and Results ofOperation—Regulatory Matters”*section of the Registrant’sForm 10-K for the year-ended December 31, 2009 for a detaileddiscussion of other regulatory matters. The discussion below focuses onsignificant matters and changes since December 31, 2009.

 

**ConservationRate Design and Revenue Adjustment Mechanisms**

 

Inaccordance with the CPUC’s administrative processing rules, GSWC implementedtiered increasing block rates and began recording in the WRAM accounts thedifference between what is billed to its regulated customers and that which isauthorized by the CPUC. GSWC provided customers with conservation rate noticesas a bill insert and explained to them the impact of conservation rates oncustomers’ bills.  Conservation rate changesbecame effective in Regions II and III in November 2008 and in Region I inSeptember 2009.

 

InMarch 2010, GSWC filed a tier one advice letter with the CPUC for recoveryof the Regions II and III WRAM, net of the MCBA and supply cost balancingaccounts, of $18.3 million.  A surchargewas put in place in March 2010 which is expected to recover the amountsaccumulated in Regions II and III’s WRAM, net of MCBA and supply cost balancingaccounts, as of December 31, 2009. In April and May of 2010, surcharges were put in place inRegion I’s rate making areas to recover $2.1 million of the $2.8 million netregulatory asset balance as of December 31, 2009.  Going forward, GSWC will seek recovery of itsWRAM, net of MCBA, on an annual basis. As of June 30, 2010, GSWC has a net aggregated regulatory asset of$29.6 million which is comprised of a $37.3 million under-collection in theWRAM accounts and $7.7 million over-collection in the MCBA accounts.

 

**CPUC Subpoena**

 

OnFebruary 15, 2007, the CPUC issued a subpoena to GSWC in connection withan investigation of certain work orders and charges paid to a specificcontractor used by GSWC for numerous construction projects estimated to total$24.0 million. The CPUC’s investigation focuses on whether GSWC was overchargedfor these construction projects and whether these overcharges were approved incustomer rates.  The construction projects completed by this specificcontractor related primarily to work on water treatment and pumping plantswhich have been placed in service and are used and useful.  InJune 2007, GSWC received notification from the CPUC that it 

 

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was instituting an audit. The purpose of theaudit was to examine for the period 1994 to the present, GSWC’s policies,procedures, and practices throughout all of its Regions regarding the grantingor awarding of construction contracts or jobs.  GSWC is currently respondingto data requests submitted by the CPUC including recent data requests whichasked for information prior to 1994. Should the CPUC investigation result in a proposed disallowance ofcertain previously capitalized costs, such costs, and potentially any returnearned on such costs, may be required to be refunded to the customers uponsettlement of the proposed disallowance, if any, resulting in a charge tooperating income.  In addition to the disallowance of previouslycapitalized costs, the CPUC may seek to recover amounts previously recovered inrates relating to such costs and also has the authority to assess fines andpenalties.  Management is unable topredict whether and the extent to which the CPUC may disallow such capitalizedcosts, seek recovery of previously paid rates or assess fines andpenalties.  However, any suchdisallowance, refunds to customers and/or assessment, if imposed could have amaterial adverse effect on AWR and GSWC.

 

InJanuary 2009, the ACC staff requested information regarding the CPUCsubpoena and on-going audit.  GSWC hasbeen working with the ACC staff and has provided responsive materials,including but not limited to, materials that are relevant to CCWC. Although theACC has issued a decision in the CCWC general rate case, it has held the docketopen pending resolution of the staff’s review of the CPUC subpoenadocuments.  In the first quarter of 2010,the ACC staff issued a report recommending that proper controls be establishedin CCWC’s procurement policies and procedures, and that status reports of theCPUC’s investigation and resolution be filed with the ACC periodically. Thestaff’s report did not result in any financial impact to CCWC.  The ACC will still need to act on the staff’srecommendations.  Management cannotpredict the outcome of the ACC’s final decision on this matter.

 

**Bear Valley ElectricService**

 

GSWC’sBVES division has been regularly filing compliance reports with the CPUCregarding its purchases of energy from renewable energy resources. The filingshave indicated that BVES has not achieved interim target purchase levels ofrenewable energy resources and thus, on its face, might be subject to apotential penalty. At this time, management does not believe interim targetsfor the 2010 year will be met.  However,BVES expects that the CPUC will waive any potential fines in accordance withthe flexible compliance rules. Accordingly, no provision for loss has been recorded in the financialstatements as of June 30, 2010. BVES is continuing its efforts to procure renewable resources.  In November 2009, GSWC entered into aten-year contract to purchase renewable energy created from landfill gas.  The contract is subject to CPUCapproval.  If approved, the contract willprovide up to three megawatts for ten years at a fixed price of $110.0 perMWh.  In November 2009, GSWC alsoentered into a ten-year contract to purchase biogas to power BVES’s gas-fueled8.4 MW generation facility.  Thiscontract is also subject to CPUC approval.

 

**Catastrophic Event Memorandum Account**

 

In January 2010, the City of Big Bear Lake andsurrounding areas of San Bernardino County experienced a series of snow storms,which damaged many BVES power lines, poles, transformers, and other facilitiesand caused temporary interruption of service to many BVES customers.  As a result of these storms, BVES hasincurred additional operating costs to repair equipment and restore electricservice to its customers.  In February 2010,GSWC informed the CPUC it will track these costs in a Catastrophic EventMemorandum Account (“CEMA”).  Once allwork resulting from these storms is completed, GSWC intends to file an adviceletter with the CPUC for recovery of these costs through a surcharge.  At this time, BVES estimates that the stormdamage costs will be approximately $450,000. This estimate includes BVES labor, outside services assistance,equipment, materials, facilities damages and related snow removalservices.  We believe these incrementalcosts will be approved by the CPUC for recovery through the CEMA.  As of June 30, 2010, approximately$403,000 has been incurred as a result of the storms and has been included inthe CEMA account as a regulatory asset. Management believes this amount is probable of future recovery.

 

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**Disposition of Chaparral CityWater Company**

 

On June 7, 2010, the Company entered into astock purchase agreement with EPCOR Water (USA) Inc. to sell all of the commonshares of CCWC. The consummation of the transaction contemplated by theagreement is subject to customary conditions, including among other things,regulatory approval by the ACC.  In July 2010, the Company filedfor approval of the transaction with the ACC. Regulatory approval is anticipated to be received in 2011.

 

**Environmental Matters**

 

AWR’s subsidiaries are subject to increasingly stringent environmentalregulations including the 1996 amendments to the Federal Safe Drinking WaterAct; enhancedsurface water treatment rules; regulation of disinfectant/disinfectionby-products; and the long-term enhancedsurface water treatment rules; ground water treatmentrule; contaminant regulation of radon and arsenic; and unregulated contaminants monitoring rule.

 

There have been no material changesto AWR’s environmental matters since December 31, 2009. See *“Management’s Discussion and Analysis of Financial Condition andResults of Operation-Environmental Matters”*section of theRegistrant’s Form 10-K for the year-ended December 31, 2009 for adetailed discussion of environmental matters.

 

**WaterSupply**

 

See *“Management’sDiscussion and Analysis of Financial Condition and Results of Operation—WaterSupply”*section of the Registrant’s Form 10-K for the yearended December 31, 2009 for a detailed discussion of water supply issues.The discussion below focuses on significant matters and changes since December 31,2009.

 

***State Water Project***

 

Watersupplies available to the Metropolitan Water District of Southern California (“MWD”)through the State Water Project (“SWP”) have historically varied from year toyear based on weather.  However, MWD hasgenerally been able to provide sufficient quantities of water to satisfy theneeds of its constituents.

 

Akey link in the SWP is the Sacramento/San Joaquin River Delta adjacent to theSan Francisco Bay (“Delta”).  The freshwater pathway through the Delta is supported by earthen levees, and thereliability of those levees has been called into question based on posthurricane Katrina assessments by various federal, state and localagencies.  A significant failure of theDelta levee system would substantially interfere with water exports, thuspotentially disrupting the water supply available to GSWC from northernCalifornia via MWD.  In light of theserisks, the state Department of Water Resources (“DWR”) and the Governorconvened a series of interdisciplinary task forces to develop proposals topreserve the environmental viability of the Delta and safeguard the watersupply.  A series of legislative actionswere approved in 2009 to address the overall needs of the Delta.  A key component of the legislation includes abond package which must be approved by voters in California.  GSWC is unable to predict the outcome orsuccess of the bond package to implement the legislative initiatives.  GSWC continues to participate in and monitordevelopments related to the Delta and efforts to craft a workable solution tothe risks presented by reliance on the Delta for water supply conveyance tosouthern California.

 

Everyyear, DWR establishes the SWP allocation for water deliveries to the statewater contractors.  DWR generallyestablishes a percentage allocation of delivery requests based on a number offactors, including weather patterns, snow pack levels and reservoirlevels.  The percent allocation given tostate contractors can vary throughout the year as weather and other factorschange.  DWR initially established anestimate of delivery of 5% of delivery requests for 2010.  In February 2010, DWR announced anincrease in this allocation to 15% of delivery requests.  In June 2010, DWR increased theallocation to 50%.  In 2009, the SWPdelivered 40% of contractor requests.

 

***Colorado River***

 

On October 17, 2003, the federalgovernment, acting through the United States Bureau of Reclamation in itscapacity as Colorado River watermaster, the State of California, and fourSouthern California water agencies, including MWD, reached an agreement, knownas the Quantification Settlement Agreement (“QSA”).  The QSA allocates California’s annual 4.4million acre-feet (“MAF”) share of the Colorado River among those agencies andprovides the framework for accounting and transfers among them. Under the QSA,MWD will continue to have 

 

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accessto its base allotment of Colorado River water each year, as well as excessColorado River water until October 2016, and up to 1.6 MAF of additionalwater that the Imperial Irrigation District proposes to conserve and sell tothe state for use by MWD members.  TheQSA has been subject to ongoing litigation.  A trial court has ruled thatthe QSA is invalid to the extent that it relies upon an unconditionalappropriation from the State of California to fund environmentalmitigation.  MWD and the other Southern California wateragencies intend to appeal.  There is no expected disruption inwater supplies while the case awaits resolution of the appeal.

 

***Wholesale Water Supplier Responses***

 

Underits Integrated Resources Plan, MWD estimates that it can meet its memberagencies’ demands over at least the next 20 years.  However, in light of pressure on all of its sourcesof imported water, MWD adopted a Water Supply Allocation Plan (“the Plan”) on February 12,2008.  MWD implemented the Plan effectiveJuly 1, 2009 requiring a regional reduction in delivery of 10%.  The Plan is continuing effective July 1,2010.  GSWC had also implementedmandatory and voluntary actions in areas relying on MWD as a supply, and metthe required reduction for the 2010 water year. As a result, GSWC has moved to voluntary actions in all MWD serviceareas.  MWD has declared restrictions onwater availability for groundwater replenishment and other supplyprograms.  MWD has announced a rateincrease of 7.5% beginning January 2011, with another increase of 7.5% for2012.  Increases in prices fromwholesalers such as MWD flow through the modified cost balancing account forGSWC.

 

TheContra Costa Water District (“CCWD”), which also relies on water flow throughthe Delta, also announced plans for mandatory water allocations andrestrictions in 2009.  GSWC purchaseswater from the CCWD for use in its Bay Point service territory.  GSWC has implemented mandatory and voluntaryactions in this area similar to those by CCWD. GSWC continues to work closely with CCWD to ensure continued supply tocustomers in its Bay Point service territory through implementation ofmandatory water conservation activities. Effective May 1, 2010, CCWD terminated their mandatory allocationsas did GSWC.

 

GSWCis closely monitoring developments and working with its water suppliers tosafeguard the supply and evaluate potential emergency responses to prolongedreduction in imported supplies.

 

***Agreement with Cadiz Inc.***

 

In June 2010, GSWC signed anagreement with Cadiz Inc. to proceed with the Cadiz WaterConservation & Storage Project (“Cadiz Project”) and participate in theCadiz Project’s environmental review. GSWC will also commit funds to theenvironmental review and has committed to the goal of a general “environmentalbenefit” for the operation of the project. Under the terms of the agreement,GSWC has the right to acquire an annual supply of 5,000 acre-feet of water at apre-determined formula once the environmental review is complete. In addition,GSWC has the option to acquire storage rights in the Cadiz Project to allowGSWC to manage the supply as part of its overall water supply portfolio. CadizInc, is a publicly-held renewable resources company that owns 70 square milesof property with significant water resources and clean energy potential ineastern San Bernardino County, California.

 

**New Accounting Pronouncements**

 

Registrantis subject to newly issued requirements as well as changes in existingrequirements issued by the Financial Accounting Standards Board. Differences infinancial reporting between periods could occur unless and until the CPUC andthe ACC approve such changes for conformity through regulatory proceedings. See*Note 1**of UnauditedNotes to Consolidated Financial Statements.*

 

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**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Registrantis exposed to certain market risks, including fluctuations in interest rates,commodity price risk primarily relating to changes in the market price ofelectricity and the potential impact of financial market turmoil. Market riskis the potential loss arising from adverse changes in prevailing market ratesand prices.

 

Therehave been no other material changes regarding Registrant’s market risk positionfrom the information provided in its Annual Report on Form 10-K for theyear ended December 31, 2009. The quantitative and qualitative disclosuresabout market risk are discussed in *Item 7A-Quantitative andQualitative Disclosures About Market Risk*, contained in Registrant’sAnnual Report on Form 10-K.

 

**Item 4. Controls and Procedures**

 

**(a) Evaluationof Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) under the Securities and Exchange Act of1934 (the “Exchange Act”), we have carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of theeffectiveness, as of the end of the fiscal quarter covered by this report, ofthe design and operation of our “disclosure controls and procedures” as definedin Rule 13a-15(e) and 15d-15(e) promulgated by the Securitiesand Exchange Commission (“SEC”) under the Exchange Act. Based upon thatevaluation, the CEO and the CFO concluded that disclosure controls andprocedures, as of the end of such fiscal quarter, were adequate and effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsand that such information is accumulated and communicated to our management,including our CEO and CFO, as appropriate to allow timely decisions regardingrequired disclosure.

 

**(b) Changesin Internal Controls over Financial Reporting**

 

Therehas been no change in our internal control over financial reporting during thequarter ended June 30, 2010, that has materially affected or isreasonably likely to materially affect our internal control over financialreporting.

 

**Item 4T. Controls and Procedures**

 

Notapplicable.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

Therehave been no material developments in any of the legal proceedings described inour 2009 Annual Report on Form 10-K.

 

Registrant is subject to ordinaryroutine litigation incidental to its business. Other than those disclosed inRegistrant’s Form 10-K for the year ended December 31, 2009, no otherlegal proceedings are pending, which are believed to be material. Managementbelieves that rate recovery, proper insurance coverage and reserves are inplace to insure against property, general liability and workers’ compensationclaims incurred in the ordinary course of business.

 

**Item 1A. Risk Factors**

 

There have been no significant changes in the risk factors disclosed inour 2009 Annual Report on Form 10-K.

 

**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

The shareholders of AWR haveapproved the material features of all equity compensation plans under which AWRdirectly issues equity securities. AWR did not directly issue any unregisteredequity securities during the second quarter of 2010.  The following table provides informationabout repurchases of common shares by AWR during the second quarter of 2010:

 
| **Period**                  | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs (1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|-----------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1  - 30, 2010    |       | 40                                               |       | $                                                | 38.42      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| May 1  – 31, 2010 |       | 23,881                                           |       | $                                                | 34.28      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| June 1  - 30, 2010     |       | 11,515                                           |       | $                                                | 32.81      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| Total                       |       | 35,436                                           | (2)        | $                                                | 34.25      |                                                                                                                                 | —     |                                                                                                                                | NA         | (3) |

 

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(1)          None of the commonshares were purchased pursuant to any publicly announced stock repurchaseprogram.

 

(2)          Of the amounts presented, 35,250 Common Shares wereacquired on the open market for employees pursuant to the Company’s 401(k) plan.  The remainder of the Common Shares wasacquired on the open market for participants in the Company’s Common SharePurchase and Dividend Reinvestment Plan.

 

(3)          None of these plans contain a maximum number ofcommon shares that may be purchased in the open market under the plans.

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. [Removed and Reserved]**

 

**Item 5. Other Information**

 

(a)          On July 27, 2010, the Board of Directors of AWRdeclared a regular quarterly dividend of $0.26 per Common Share. The dividendwill be paid on September 1, 2010 to shareholders of record as of theclose of business on August 9, 2010.

 

(b)         There have been no material changes during the secondquarter of 2010 to the procedures by which shareholders may nominatepersons to the Board of Directors of AWR. The annual meeting of shareholders was held on May 27, 2010. Thevoting results were disclosed in a Form 8-K filed with the SEC on June 2,2010.

 

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**Item 6. Exhibits**

 

(a)          The following documents are filed as Exhibits tothis report:

 
| 31.1   | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 for AWR (1)  |
|--------|------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                   |
| 31.1.1 | Certification  of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 for GSWC (1) |
|   |                                                                                                                   |
| 31.2   | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 for AWR (1)  |
|   |                                                                                                                   |
| 31.2.1 | Certification  of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley  Act of 2002 for GSWC (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 Financial Officer pursuant to Section 906 of the Sarbanes-Oxley  Act of 2002 (2)          |

 

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(1)          Filed concurrently herewith

 

(2)          Furnished concurrently herewith

 

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**SIGNATURE**

 

Pursuantto the requirements of Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized and as its principal financial officer.

 
|   |            | AMERICAN  STATES WATER COMPANY (“AWR”): |
|--------|-----------------|---------------------------------------------------|
|   |            |                                              |
|   |   By: | /s/  EVA G. TANG                                  |
|   |            | Senior  Vice President-Finance, Chief Financial   |
|   |            | Officer,  Corporate Secretary and Treasurer       |
|   |            |                                              |
|   |            | GOLDEN  STATE WATER COMPANY (“GSWC”):   |
|   |            |                                              |
|   |   By: | /s/  EVA G. TANG                                  |
|   |            | Senior  Vice President-Finance, Chief Financial   |
|   |            | Officer  and Secretary                            |
|   |            |                                              |
|   | Date:           | August 6,  2010                              |

 

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