Table of Contents

 

 

 

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

 
| **x**                                                                                                                                                                                                                                                                                 | **Quarterly  report pursuant to Section 13 or 15(d) of the Securities Exchange Act  of 1934**  |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                            |
| **for the quarterly period ended March 31,  2010**                                                                                                                                                                                                                               |
|                                                                                                                                                                                                                                                                                  |
| **or**                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                                                                                                  |
| **o**                                                                                                                                                                                                                                                                                 | **Transition  report pursuant to Section 13 or 15(d) of the Securities Exchange  Act of 1934** |
| ** **                                                                                                                                                                                                                                                                            |
| **for the transition period  from                    to                    ** |

** **

**Commission file number   001-14431**

** **

**AmericanStates Water Company**

(Exact Name of Registrant asSpecified 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 TelephoneNumber, Including Area Code)

** **

**NotApplicable**

(Former Name, FormerAddress and Former Fiscal Year, if Changed Since Last Report)

 

**Commission file number   001-12008**

** **

**GoldenState Water Company**

(Exact Name 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 andFormer Fiscal Year, if Changed Since Last Report)

 

Indicate by checkmark whether Registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that Registrant was required to file suchreports), and (2) has been subject to such filing requirements for thepast 90 days.

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

 

Indicate by checkmark whether Registrant has submitted electronically and posted on its corporateWeb site, if any, every Interactive Data File required to be submitted andposted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter)during the preceding 12 months (or such shorter period that the Registrant wasrequired to submit and post such files).

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

 

Indicateby check mark whether the Registrant is a large accelerated filer, anaccelerated filer, a non-accelerated filer, or a smaller reporting company. Seedefinition of “large accelerated filer”, “accelerated filer” and smallerreporting company” in Rule 12b-2 of 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 |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act)

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

 

As of May 5, 2010,the number of Common Shares outstanding, of American States Water Company was18,569,352 shares. As of May 5, 2010, all of the 134 outstanding CommonShares of Golden State Water Company were owned by American States WaterCompany.

 

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

 

 

 

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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 March 31, 2010 and December 31, 2009             | 2          |
|             |                                                                                                                           |       |
|             | Consolidated Statements of Income of American States  Water Company for the Three Months Ended March 31, 2010 and 2009    | 4          |
|             |                                                                                                                           |       |
|             | Consolidated Statements of Cash Flow of American  States Water Company for the Three Months Ended March 31, 2010 and 2009 | 5          |
|             |                                                                                                                           |       |
|             | Balance Sheets of Golden State Water Company as of  March 31, 2010 and December 31, 2009                             | 6          |
|             |                                                                                                                           |       |
|             | Statements of Income of Golden State Water Company for  the Three Months Ended March 31, 2010 and 2009                    | 8          |
|             |                                                                                                                           |       |
|             | Statements  of Cash Flow of Golden State Water Company for the Three Months Ended  March 31, 2010 and 2009                | 9          |
|             |                                                                                                                           |       |
|             | Notes to Consolidated Financial Statements                                                                                     | 10         |
|             |                                                                                                                           |       |
| Item 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                    | 26         |
|             |                                                                                                                           |       |
| Item 3:          | Quantitative  and Qualitative Disclosures About Market Risk                                                                    | 50         |
|             |                                                                                                                           |       |
| Item 4:          | Controls and  Procedures                                                                                                       | 50         |
|             |                                                                                                                           |       |
| Item 4T:         | Controls and  Procedures                                                                                                       | 50         |
|             |                                                                                                                           |       |
| **Part II** | **Other  Information**                                                                                                         |       |
| ** **       | ** **                                                                                                                     | ** ** |
| Item 1:          | Legal Proceedings                                                                                                              | 51         |
|             |                                                                                                                           |       |
| Item  1A:        | Risk  Factors                                                                                                                  | 51         |
|             |                                                                                                                           |       |
| Item 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                   | 51         |
|             |                                                                                                                           |       |
| Item 3:          | Defaults  Upon Senior Securities                                                                                               | 51         |
|             |                                                                                                                           |       |
| Item 4:          | Other Information                                                                                                              | 51         |
|             |                                                                                                                           |       |
| Item  5:         | Exhibits                                                                                                                       | 52         |
|             |                                                                                                                           |       |
|             | Signatures                                                                                                                     | 53         |

 

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#### **PART I**

 

**Item 1. Financial Statements**

 

General

 

Thebasic financial statements included herein have been prepared by Registrant,without audit, pursuant to the rules and regulations of the Securities andExchange 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 such rules andregulations. In the opinion of management, all adjustments consisting of normalrecurring items and estimates necessary for a fair statement of results for theinterim period have been made.

 

It issuggested that these financial statements be read in conjunction with thefinancial statements and notes thereto in the latest Annual Report on Form 10-Kof American States Water Company and its wholly-owned subsidiary, Golden StateWater 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 the documents incorporated byreference herein contain forward-looking statements intended to qualify for the“safe harbor” from liability established by the Private Securities LitigationReform Act of 1995.  Forward-lookingstatements include statements regarding our goals, beliefs, plans or currentexpectations, taking into account the information currently available tomanagement.  Forward-looking statementsare not statements of historical facts.  For example, when we use words such as “believes,” “anticipates,” “expects,“ “plans”, “estimates,” “intends,” “may” and other words that conveyuncertainty of future events or outcome, we are making forward-lookingstatements. Such statements address future events and conditions concerningsuch matters as our ability to raise capital, capital expenditures, earnings,litigation, rates, water sales, water quality and other regulatory matters,adequacy of water supplies, our ability to recover electric, natural gas andwater supply costs from ratepayers, contract operations, liquidity and capitalresources, 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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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**ASSETS**

**(Unaudited)**

 
| **(in thousands)**                                                                                        | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Property,  Plant and Equipment**                                                                             | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Regulated  utility plant, at cost                                                                              |       | $                        | 1,250,145  |                        | $          | 1,235,187 |   |
| Non utility  property, at cost                                                                                 |       | 4,676                    |       | 4,532                       |       |
| Total                                                                                                          |       | 1,254,821                |       | 1,239,719                   |       |
| Less -  Accumulated depreciation                                                                               |       | (381,567                 | )          | (373,301                    | )          |
| Net property,  plant and equipment                                                                             |       | 873,254                  |       | 866,418                     |       |
|                                                                                                           |       |                     |       |                        |       |
| **Other  Property and Investments**                                                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Goodwill                                                                                                       |       | 4,437                    |       | 4,437                       |       |
| Other property  and investments                                                                                |       | 11,723                   |       | 11,720                      |       |
| Total other  property and investments                                                                          |       | 16,160                   |       | 16,157                      |       |
|                                                                                                           |       |                     |       |                        |       |
| **Current  Assets**                                                                                            | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                     |       | 5,080                    |       | 1,685                       |       |
| Accounts  receivable — customers (less allowance for doubtful accounts of $683 in 2010  and $687 in 2009) |       | 12,824                   |       | 16,611                      |       |
| Unbilled revenue                                                                                               |       | 18,804                   |       | 18,199                      |       |
| Receivable from  the U.S. government (less allowance for doubtful accounts of $67 in 2010 and  2009)           |       | 9,898                    |       | 4,245                       |       |
| Other accounts  receivable (less allowance for doubtful accounts of $258 in 2010 and $441 in  2009)            |       | 7,704                    |       | 8,424                       |       |
| Income taxes  receivable                                                                                       |       | 56                       |       | 4,190                       |       |
| Materials and  supplies, at average cost                                                                       |       | 2,090                    |       | 1,900                       |       |
| Regulatory  assets — current                                                                              |       | 16,479                   |       | 12,286                      |       |
| Prepayments and  other current assets                                                                          |       | 2,492                    |       | 3,355                       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                                   |       | 26,965                   |       | 19,766                      |       |
| Deferred income  taxes — current                                                                          |       | 4,985                    |       | 5,354                       |       |
| Total current  assets                                                                                          |       | 107,377                  |       | 96,015                      |       |
|                                                                                                           |       |                     |       |                        |       |
| **Regulatory  and Other Assets**                                                                               | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                             |       | 112,407                  |       | 110,420                     |       |
| Other accounts  receivable                                                                                     |       | 5,817                    |       | 5,717                       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                                   |       | 7,283                    |       | 7,933                       |       |
| Deferred income  taxes                                                                                         |       | 238                      |       | 313                         |       |
| Other                                                                                                          |       | 10,318                   |       | 10,320                      |       |
| Total regulatory  and other assets                                                                             |       | 136,063                  |       | 134,703                     |       |
|                                                                                                           |       |                     |       |                        |       |
| **Total  Assets**                                                                                              |       | $                        | 1,132,854  |                        | $          | 1,113,293 |   |

 

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

 

2

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**CAPITALIZATIONAND LIABILITIES**

**(Unaudited)**

 
| **(in thousands)**                                                      | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Capitalization**                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Common shares,  no par value, no stated value                                |       | $                        | 223,953    |                        | $          | 223,066 |   |
| Earnings  reinvested in the business                                         |       | 140,013                  |       | 136,364                     |       |
| Total common  shareholders’ equity                                      |       | 363,966                  |       | 359,430                     |       |
| Long-term debt                                                               |       | 305,794                  |       | 305,866                     |       |
| Total  capitalization                                                        |       | 669,760                  |       | 665,296                     |       |
|                                                                         |       |                     |       |                        |       |
| **Current  Liabilities**                                                     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Notes payable to  banks                                                      |       | 21,000                   |       | 17,400                      |       |
| Long-term debt —  current                                               |       | 699                      |       | 695                         |       |
| Accounts payable                                                             |       | 33,967                   |       | 33,903                      |       |
| Income taxes  payable                                                        |       | 2,640                    |       | 72                          |       |
| Accrued employee  expenses                                                   |       | 9,031                    |       | 7,326                       |       |
| Accrued interest                                                             |       | 5,356                    |       | 3,290                       |       |
| Regulatory  liabilities - current                                            |       | —                   |       | 113                         |       |
| Unrealized loss  on purchased power contracts                                |       | 10,038                   |       | 7,338                       |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 5,896                    |       | 6,315                       |       |
| Other                                                                        |       | 17,466                   |       | 23,254                      |       |
| Total current  liabilities                                                   |       | 106,093                  |       | 99,706                      |       |
|                                                                         |       |                     |       |                        |       |
| **Other  Credits**                                                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Advances for  construction                                                   |       | 84,544                   |       | 84,653                      |       |
| Contributions in  aid of construction - net                                  |       | 104,303                  |       | 104,344                     |       |
| Deferred income  taxes                                                       |       | 93,986                   |       | 95,235                      |       |
| Unamortized  investment tax credits                                          |       | 2,132                    |       | 2,154                       |       |
| Accrued pension  and other postretirement benefits                           |       | 41,930                   |       | 40,158                      |       |
| Regulatory  liabilities                                                      |       | 1,177                    |       | 1,173                       |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 19,988                   |       | 11,580                      |       |
| Other                                                                        |       | 8,941                    |       | 8,994                       |       |
| Total other  credits                                                         |       | 357,001                  |       | 348,291                     |       |
|                                                                         |       |                     |       |                        |       |
| **Commitments  and Contingencies (Note 9)**                                  |       | —                   |       | —                      |       |
|                                                                         |       |                     |       |                        |       |
| **Total  Capitalization and Liabilities**                                    |       | $                        | 1,132,854  |                        | $          | 1,113,293 |   |

 

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

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THETHREE MONTHS**

**ENDED MARCH 31,2010 AND 2009**

**(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| **Operating  Revenues**                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                                | 57,874     |   | $ | 56,794 |   |
| Electric                                                              |       | 10,979                                           |       | 8,632 |   |
| Contracted  services                                                  |       | 21,430                                           |       | 14,183 |   |
| Total operating  revenues                                             |       | 90,283                                           |       | 79,609 |   |
|                                                                  |       |                                             |       |   |   |
| **Operating  Expenses**                                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 8,257                                            |       | 8,214 |   |
| Power purchased  for pumping                                          |       | 1,655                                            |       | 1,688 |   |
| Groundwater  production assessment                                    |       | 2,622                                            |       | 2,517 |   |
| Power purchased  for resale                                           |       | 3,669                                            |       | 3,962 |   |
| Supply cost  balancing accounts                                       |       | 3,815                                            |       | 3,528 |   |
| Other operation  expenses                                             |       | 6,839                                            |       | 7,153 |   |
| Administrative  and general expenses                                  |       | 18,863                                           |       | 16,865 |   |
| Depreciation and  amortization                                        |       | 8,842                                            |       | 8,361 |   |
| Maintenance                                                           |       | 4,296                                            |       | 4,073 |   |
| Property and  other taxes                                             |       | 3,683                                            |       | 3,400 |   |
| Construction  expenses                                                |       | 8,168                                            |       | 8,445 |   |
| Net gain on sale  of property                                         |       | (3                                               | )          | (15 | ) |
| Total operating  expenses                                             |       | 70,706                                           |       | 68,191 |   |
|                                                                  |       |                                             |       |   |   |
| **Operating  Income**                                                 |       | 19,577                                           |       | 11,418 |   |
|                                                                  |       |                                             |       |   |   |
| **Other  Income and Expenses**                                        | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (5,749                                           | )          | (5,294 | ) |
| Interest income                                                       |       | 661                                              |       | 202 |   |
| Other — net                                                      |       | 64                                               |       | (30 | ) |
| Total other  income and expenses                                      |       | (5,024                                           | )          | (5,122 | ) |
|                                                                  |       |                                             |       |   |   |
| **Income  from operations before income tax expense**                 |       | 14,553                                           |       | 6,296 |   |
|                                                                  |       |                                             |       |   |   |
| Income tax  expense                                                   |       | 6,063                                            |       | 1,364 |   |
|                                                                  |       |                                             |       |   |   |
| **Net  Income**                                                       |       | $                                                | 8,490      |   | $ | 4,932 |   |
|                                                                  |       |                                             |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                    |       | 18,546                                           |       | 17,312 |   |
| **Basic  Earnings Per Common Share**                                  |       | $                                                | 0.46       |   | $ | 0.28 |   |
|                                                                  |       |                                             |       |   |   |
| **Weighted  Average Number of Diluted Shares**                        |       | 18,666                                           |       | 17,440 |   |
| **Fully  Diluted Earnings Per Share**                                 |       | $                                                | 0.45       |   | $ | 0.28 |   |
|                                                                  |       |                                             |       |   |   |
| **Dividends  Declared Per Common Share**                              |       | $                                                | 0.260      |   | $ | 0.250 |   |

 

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

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDSTATEMENTS OF CASH FLOW**

**FOR THETHREE MONTHS ENDED MARCH 31, 2010 AND 2009**

**(Unaudited)**

 
| ** **                                                                   | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                                      | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| **Cash  Flows From Operating Activities:**                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                                   |       | $                                                | 8,490      |   | $ | 4,932 |   |
| Adjustments for  non-cash items:                                             |       |                                             |       |   |   |
| Depreciation and  amortization                                               |       | 8,842                                            |       | 8,361 |   |
| Net gain on sale  of property                                                |       | (3                                               | )          | (15 | ) |
| Provision for  doubtful accounts                                             |       | 347                                              |       | 358 |   |
| Deferred income  taxes and investment tax credits                            |       | (572                                             | )          | (1,194 | ) |
| Stock-based  compensation expense                                            |       | 459                                              |       | 383 |   |
| Other — net                                                             |       | 88                                               |       | (606 | ) |
| Changes in  assets and liabilities:                                          |       |                                             |       |   |   |
| Accounts  receivable — customers                                        |       | 3,533                                            |       | 324 |   |
| Unbilled revenue                                                             |       | (605                                             | )          | (13 | ) |
| Other accounts  receivable                                                   |       | 527                                              |       | 1,241 |   |
| Receivable from  the U.S. government                                         |       | (5,653                                           | )          | 2,123 |   |
| Materials and  supplies                                                      |       | (190                                             | )          | 252 |   |
| Prepayments and  other current assets                                        |       | 863                                              |       | 607 |   |
| Regulatory  assets — supply cost balancing accounts                     |       | 3,815                                            |       | 3,528 |   |
| Costs and  estimated earnings in excess of billings on uncompleted contracts |       | (6,549                                           | )          | (3,930 | ) |
| Other assets  (including other regulatory assets)                            |       | (10,613                                          | )          | (2,760 | ) |
| Accounts payable                                                             |       | (444                                             | )          | (2,406 | ) |
| Income taxes  receivable/payable                                             |       | 6,702                                            |       | 1,542 |   |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 7,989                                            |       | 1,298 |   |
| Accrued pension  and other postretirement benefits                           |       | 1,772                                            |       | 1,887 |   |
| Other  liabilities                                                           |       | 1,063                                            |       | 3,861 |   |
| Net cash  provided                                                           |       | 19,861                                           |       | 19,773 |   |
|                                                                         |       |                                             |       |   |   |
| **Cash  Flows From Investing Activities:**                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Construction  expenditures                                                   |       | (15,976                                          | )          | (17,682 | ) |
| Proceeds from  sale of property                                              |       | 17                                               |       | 16 |   |
| Net cash used                                                                |       | (15,959                                          | )          | (17,666 | ) |
|                                                                         |       |                                             |       |   |   |
| **Cash  Flows From Financing Activities:**                                   | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Proceeds from  issuance of common shares                                     |       | 515                                              |       | 462 |   |
| Proceeds from  stock option exercises                                        |       | 51                                               |       | 10 |   |
| Receipt of  advances for and contributions in aid of construction            |       | 889                                              |       | 332 |   |
| Refunds on  advances for construction                                        |       | (445                                             | )          | (422 | ) |
| Repayments of  long-term debt                                                |       | (68                                              | )          | (63 | ) |
| Proceeds from  issuance of long-term debt, net of issuance cost              |       | —                                           |       | 39,777 |   |
| Net change in  notes payable to banks                                        |       | 3,600                                            |       | (20,330 | ) |
| Dividends paid                                                               |       | (4,822                                           | )          | (4,328 | ) |
| Other — net                                                             |       | (227                                             | )          | 65 |   |
| Net cash (used)  provided                                                    |       | (507                                             | )          | 15,503 |   |
| **Net  increase in cash and cash equivalents**                               |       | 3,395                                            |       | 17,610 |   |
| **Cash  and cash equivalents, beginning of period**                          |       | 1,685                                            |       | 7,283 |   |
| **Cash  and cash equivalents, end of period**                                |       | $                                                | 5,080      |   | $ | 24,893 |   |

 

*Theaccompanying notes are an integral part of these consolidated financialstatements*

 

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**GOLDENSTATE WATER COMPANY**

**BALANCESHEETS**

**ASSETS****(Unaudited)**

 
| **(in thousands)**                                                                                 | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Utility  Plant**                                                                                      | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Utility plant,  at cost                                                                                 |       | $                        | 1,186,478  |                        | $          | 1,171,618 |   |
| Less -  Accumulated depreciation                                                                        |       | (360,087                 | )          | (352,574                    | )          |
| Net utility  plant                                                                                      |       | 826,391                  |       | 819,044                     |       |
|                                                                                                    |       |                     |       |                        |       |
| **Other  Property and Investments**                                                                     |       | 8,737                    |       | 8,738                       |       |
|                                                                                                    |       |                     |       |                        |       |
| **Current  Assets**                                                                                     | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                              |       | —                   |       | 1,096                       |       |
| Accounts  receivable-customers (less allowance for doubtful accounts of $646 in 2010  and $657 in 2009) |       | 12,551                   |       | 16,193                      |       |
| Unbilled revenue                                                                                        |       | 18,412                   |       | 17,835                      |       |
| Inter-company  receivable                                                                               |       | 245                      |       | 372                         |       |
| Other accounts  receivable (less allowance for doubtful accounts of $248 in 2010 and $431  2009)        |       | 6,799                    |       | 8,044                       |       |
| Income taxes  receivable from Parent                                                                    |       | —                   |       | 2,496                       |       |
| Materials and  supplies, at average cost                                                                |       | 1,755                    |       | 1,679                       |       |
| Regulatory  assets — current                                                                       |       | 16,460                   |       | 12,267                      |       |
| Prepayments and  other current assets                                                                   |       | 2,312                    |       | 3,144                       |       |
| Deferred income  taxes — current                                                                   |       | 4,778                    |       | 5,146                       |       |
| Total current  assets                                                                                   |       | 63,312                   |       | 68,272                      |       |
|                                                                                                    |       |                     |       |                        |       |
| **Regulatory  and Other Assets**                                                                        | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                      |       | 112,407                  |       | 110,420                     |       |
| Other accounts  receivable                                                                              |       | 5,817                    |       | 5,717                       |       |
| Other                                                                                                   |       | 9,715                    |       | 9,654                       |       |
| Total regulatory  and other assets                                                                      |       | 127,939                  |       | 125,791                     |       |
|                                                                                                    |       |                     |       |                        |       |
| **Total  Assets**                                                                                       |       | $                        | 1,026,379  |                        | $          | 1,021,845 |   |

 

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

 

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**GOLDENSTATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**

 
| **(in thousands)**                            | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|----------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **Capitalization**                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Common shares,  no par value, no stated value      |       | $                        | 195,972    |                        | $          | 195,821 |   |
| Earnings  reinvested in the business               |       | 134,456                  |       | 135,709                     |       |
| Total common  shareholder’s equity            |       | 330,428                  |       | 331,530                     |       |
| Long-term debt                                     |       | 300,149                  |       | 300,221                     |       |
| Total  capitalization                              |       | 630,577                  |       | 631,751                     |       |
|                                               |       |                     |       |                        |       |
| **Current  Liabilities**                           | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Long-term debt —  current                     |       | 369                      |       | 365                         |       |
| Accounts payable                                   |       | 24,729                   |       | 26,829                      |       |
| Inter-company  payable                             |       | 14,317                   |       | 7,551                       |       |
| Income taxes  payable to Parent                    |       | 819                      |       | —                      |       |
| Accrued employee  expenses                         |       | 7,816                    |       | 6,338                       |       |
| Accrued interest                                   |       | 5,244                    |       | 3,256                       |       |
| Regulatory  liabilities - current                  |       | —                   |       | 113                         |       |
| Unrealized loss  on purchased power contracts      |       | 10,038                   |       | 7,338                       |       |
| Other                                              |       | 15,893                   |       | 22,136                      |       |
| Total current  liabilities                         |       | 79,225                   |       | 73,926                      |       |
|                                               |       |                     |       |                        |       |
| **Other  Credits**                                 | ** ** | ** **               | ** ** | ** **                  | ** ** |
| Advances for  construction                         |       | 79,334                   |       | 79,443                      |       |
| Contributions in  aid of construction - net        |       | 91,560                   |       | 91,519                      |       |
| Deferred income  taxes                             |       | 93,213                   |       | 94,418                      |       |
| Unamortized  investment tax credits                |       | 2,132                    |       | 2,154                       |       |
| Accrued pension  and other postretirement benefits |       | 41,930                   |       | 40,158                      |       |
| Other                                              |       | 8,408                    |       | 8,476                       |       |
| Total other  credits                               |       | 316,577                  |       | 316,168                     |       |
|                                               |       |                     |       |                        |       |
| **Commitments  and Contingencies (Note 9)**        |       | —                   |       | —                      |       |
|                                               |       |                     |       |                        |       |
| **Total  Capitalization and Liabilities**          |       | $                        | 1,026,379  |                        | $          | 1,021,845 |   |

 

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

 

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**GOLDENSTATE WATER COMPANY**

**STATEMENTSOF INCOME**

**FOR THETHREE MONTHS**

**ENDED MARCH 31,2010 AND 2009**

**(Unaudited)**

 
| ** **                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|-------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| **Operating  Revenues**                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                                | 56,057     |   | $ | 55,178 |   |
| Electric                                              |       | 10,979                                           |       | 8,632 |   |
| Total operating  revenues                             |       | 67,036                                           |       | 63,810 |   |
|                                                  |       |                                             |       |   |   |
| **Operating  Expenses**                               | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 8,002                                            |       | 7,987 |   |
| Power purchased  for pumping                          |       | 1,556                                            |       | 1,567 |   |
| Groundwater  production assessment                    |       | 2,622                                            |       | 2,517 |   |
| Power purchased  for resale                           |       | 3,669                                            |       | 3,962 |   |
| Supply cost  balancing accounts                       |       | 3,815                                            |       | 3,528 |   |
| Other operation  expenses                             |       | 5,889                                            |       | 6,069 |   |
| Administrative  and general expenses                  |       | 14,897                                           |       | 13,809 |   |
| Depreciation and  amortization                        |       | 8,182                                            |       | 7,713 |   |
| Maintenance                                           |       | 3,598                                            |       | 3,041 |   |
| Property and  other taxes                             |       | 3,147                                            |       | 3,009 |   |
| Net gain on sale  of property                         |       | —                                           |       | (15 | ) |
| Total operating  expenses                             |       | 55,377                                           |       | 53,187 |   |
|                                                  |       |                                             |       |   |   |
| **Operating  Income**                                 |       | 11,659                                           |       | 10,623 |   |
|                                                  |       |                                             |       |   |   |
| **Other  Income and Expenses**                        |       |                                             |       |   |   |
| Interest expense                                      |       | (5,580                                           | )          | (4,996 | ) |
| Interest income                                       |       | 150                                              |       | 199 |   |
| Other — net                                      |       | 57                                               |       | (22 | ) |
| Total other  income and expenses                      |       | (5,373                                           | )          | (4,819 | ) |
|                                                  |       |                                             |       |   |   |
| **Income  from operations before income tax expense** |       | 6,286                                            |       | 5,804 |   |
|                                                  |       |                                             |       |   |   |
| Income tax  expense                                   |       | 2,722                                            |       | 2,111 |   |
|                                                  |       |                                             |       |   |   |
| **Net  Income**                                       |       | $                                                | 3,564      |   | $ | 3,693 |   |

 

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

 

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**GOLDENSTATE WATER COMPANY**

**STATEMENTSOF CASH FLOW**

**FOR THETHREE MONTHS ENDED MARCH 31, 2010 AND 2009**

**(Unaudited)**

 
| ** **                                                          | ** ** | **Three Months Ended  March 31,** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| **(in thousands)**                                             | ** ** | **2010**                                         | ** ** | **2009** | ** ** |
| **Cash  Flows From Operating Activities:**                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net income                                                          |       | $                                                | 3,564      |   | $ | 3,693 |   |
| Adjustments for  non-cash items:                                    |       |                                             |       |   |   |
| Depreciation and  amortization                                      |       | 8,182                                            |       | 7,713 |   |
| Provision for  doubtful accounts                                    |       | 335                                              |       | 347 |   |
| Deferred income  taxes and investment tax credits                   |       | (604                                             | )          | (731 | ) |
| Stock-based  compensation expense                                   |       | 242                                              |       | 232 |   |
| Other — net                                                    |       | (3                                               | )          | (614 | ) |
| Changes in  assets and liabilities:                                 |       |                                             |       |   |   |
| Accounts  receivable — customers                               |       | 3,401                                            |       | 281 |   |
| Unbilled revenue                                                    |       | (577                                             | )          | 14 |   |
| Other accounts  receivable                                          |       | 1,052                                            |       | 3 |   |
| Materials and  supplies                                             |       | (76                                              | )          | (110 | ) |
| Prepayments and  other current assets                               |       | 832                                              |       | 569 |   |
| Regulatory  assets — supply cost balancing accounts            |       | 3,815                                            |       | 3,528 |   |
| Other assets  (including other regulatory assets)                   |       | (10,602                                          | )          | (2,768 | ) |
| Accounts payable                                                    |       | (2,580                                           | )          | (569 | ) |
| Inter-company  receivable/payable                                   |       | 2,193                                            |       | (42 | ) |
| Income taxes  receivable/payable from/to Parent                     |       | 3,315                                            |       | 1,843 |   |
| Accrued pension  and other postretirement benefits                  |       | 1,772                                            |       | 1,887 |   |
| Other  liabilities                                                  |       | 287                                              |       | 3,423 |   |
| Net cash  provided                                                  |       | 14,548                                           |       | 18,699 |   |
|                                                                |       |                                             |       |   |   |
| **Cash  Flows From Investing Activities:**                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Construction  expenditures                                          |       | (15,738                                          | )          | (17,176 | ) |
| Proceeds from  sale of property                                     |       | 14                                               |       | 16 |   |
| Net cash used                                                       |       | (15,724                                          | )          | (17,160 | ) |
|                                                                |       |                                             |       |   |   |
| **Cash  Flows From Financing Activities:**                          | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Receipt of  advances for and contributions in aid of construction   |       | 871                                              |       | 317 |   |
| Refunds on  advances for construction                               |       | (445                                             | )          | (395 | ) |
| Proceeds from  the issuance of long-term debt, net of issuance cost |       | —                                           |       | 39,777 |   |
| Repayments of  long-term debt                                       |       | (68                                              | )          | (63 | ) |
| Net change in  inter-company borrowings                             |       | 4,700                                            |       | (18,200 | ) |
| Dividends paid                                                      |       | (4,800                                           | )          | (4,400 | ) |
| Other — net                                                    |       | (178                                             | )          | 90 |   |
| Net cash  provided                                                  |       | 80                                               |       | 17,126 |   |
|                                                                |       |                                             |       |   |   |
| **Net  (decrease) increase in cash and cash equivalents**           |       | (1,096                                           | )          | 18,665 |   |
| **Cash  and cash equivalents, beginning of period**                 |       | 1,096                                            |       | 3,812 |   |
| **Cash  and cash equivalents, end of period**                       |       | $                                                | —     |   | $ | 22,477 |   |

 

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

 

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**AMERICANSTATES WATER COMPANY**

**AND**

**GOLDENSTATE WATER COMPANY**

**NOTES TOCONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

General/Natureof Operations:American States Water Company (“AWR”) is the parent company of Golden StateWater Company (“GSWC”), Chaparral City Water Company (“CCWC”) and AmericanStates Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort BlissWater Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”),Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State UtilityServices, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”)).  AWR and its subsidiaries may be collectivelyreferred 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. ASUS performs waterand 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, revenues andoperations are primarily those of GSWC.

 

Basisof Presentation:The consolidated financial statements and notes thereto are being presented ina combined report being filed by two separate Registrants: AWR and GSWC.References in this report to “Registrant” are to AWR and GSWC, collectively,unless otherwise specified.

 

The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. Investments in partially-owned affiliates are accounted for by the equity method when Registrant’s ownership interest exceeds 20%. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2009 filed with the SEC.  Certain prior-period amounts were reclassified to conform to the March 31, 2010 financial statement presentation.

 

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GSWC’sRelated Party Transactions: GSWC and other subsidiaries provide and receivevarious services to and from their parent, AWR, and among themselves. Inaddition, AWR has a $115 million syndicated credit facility. AWR borrows underthis facility and provides funds to its subsidiaries, including GSWC, insupport of their operations. Amounts owed to AWR for borrowings under this facilityare included in inter-company payables on GSWC’s balance sheets as of March 31,2010 and December 31, 2009. The interest rate charged to GSWC and otheraffiliates is sufficient to cover AWR’s interest cost under the creditfacility. GSWC also allocates certain corporate office administrative andgeneral costs to its affiliates using allocation factors mandated by the CPUC.

 

Long-Term Debt:  A senior note was issued on March 10,2009, to CoBank, ACB(“Co-Bank”). Under the terms of this senior note, CoBank purchased a 6.7%Senior Note due March 10, 2019 in the aggregate principal amount of $40.0million from GSWC. This note also provides for patronage, where GSWC shares inthe profits of CoBank.  If the currentamount of patronage continues to be paid, the annual cost of the note is atabout 6.0%. The proceeds were used to pay down short-term borrowings, and fundcapital expenditures.  The termsof the agreement are substantially the same as the terms of a previous noteagreement with CoBank executed in October 2005.

 

Sales and UseTaxes:  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 $685,000 and $626,000 for the three monthsended March 31, 2010 and 2009, respectively. When GSWC acts as an agent,and the tax is not required to be remitted if it is not collected from thecustomer, the taxes are accounted for on a net basis.

 

Depending on the state inwhich the operations are conducted, ASUS and its subsidiaries are also subjectto certain state non-income tax assessments generally computed on a “grossreceipts” or “gross revenues” basis. These non-income tax assessments are required to be paid regardless ofwhether the subsidiary is reimbursed by the U.S. government for these assessmentsunder its 50-year contracts with the U.S. government.  The non-income tax assessments are accountedfor on a gross basis and totaled $295,000 and $170,000 during the three monthsended March 31, 2010 and 2009, respectively.

 

Recently AdoptedAccounting Pronouncements:  In June 2009, the FinancialAccounting Standards Board (“FASB”) issued revised guidance which enhancesinformation reported to users of financial statements by providing greatertransparency about transfers of financial assets and a company’s continuinginvolvement in transferred assets. Generally accepted accounting principles nolonger include the 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.

 

In June 2009, theFASB amended the guidance on consolidation for variable interest entities. Thenew guidance requires a company to perform a qualitative analysis whendetermining whether it must consolidate a variable interest entity.  This guidance also amends how to determinewhether an entity is a variable interest entity. A company must now disclosehow its involvement with a variable interest entity affects the company’sfinancial statements and disclose any significant judgments and assumptionsmade in determining whether it must consolidate a variable interest entity.This guidance was effective for the Company beginning January 1, 2010 anddid not have any impact on the Registrant’s consolidated results of operations,financial position or cash flows.

 

InOctober 2009, the FASB issued an update to the accounting standards andprovided amendments to the criteria of Accounting Standards Codification Topic605, *“Revenue Recognition”*, forseparately recognizing consideration in multiple-deliverable arrangements. Theamendments establish a selling price hierarchy for determining the sellingprice of a deliverable.  This guidance is effective for financialstatements issued for fiscal years beginning on or after June 15, 2010. Registrant is currently evaluating the effects the adoption will have onits consolidated financial statements, but does not expect the adoption willhave a material impact on its consolidated financial statements.

 

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InJanuary 2010, the FASB issued an update to the accounting standards andamended the disclosure guidance with respect to fair value measurements. Specifically, the new guidance requires disclosure of amounts transferredin and out of Levels 1 and 2 fair value measurements, a reconciliationpresented on a gross basis rather than a net basis of activity in Level 3 fairvalue measurements, greater disaggregation of the assets and liabilities forwhich fair value measurements are presented and more robust disclosure of thevaluation techniques and inputs used to measure Level 2 and 3 fair valuemeasurements. This guidance is currently effective, with the exception of thenew guidance around the Level 3 activity reconciliations.  The adoption ofthe 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 theimpact of Level 3 disclosure of this guidance, but does not expect the adoptionwill have a material impact on its consolidated financial statements.

 

Other accountingstandards 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:**

 

In accordance withaccounting principles for rate-regulated enterprises, Registrant recordsregulatory assets, which represent probable future revenue associated withcertain costs that will be recovered from customers through the ratemakingprocess, and regulatory liabilities, which represent probable future reductionsin revenue associated with amounts that are to be credited to customers throughthe ratemaking process. At March 31, 2010, Registrant had approximately$48.2 million of regulatory assets not accruing carrying costs. Of this amount,$27.4 million relates to the underfunded positions of the pension and otherpost-retirement obligations, $6.4 million relates to deferred income taxesrepresenting accelerated tax benefits flowed through to ratepayers, which willbe included in rates concurrently with recognition of the associated future taxexpense, and $10.0 million relates to a memorandum account authorized by theCPUC to track unrealized gains and losses on GSWC’s purchase power contractsover the life of the contract.  Theremainder relates to other expenses that do not provide for recovery ofcarrying costs that Registrant expects to recover in rates over a shortperiod.  Regulatory assets, lessregulatory liabilities, included in the consolidated balance sheets are asfollows:

 
| **(In thousands)**                                                           | ** ** | **March 31,  2010** | ** ** | **December 31,  2009** | ** ** |
|------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **GSWC**                                                                     |       |                     |       |                        |       |
| Electric  supply cost balancing account                                      |       | $                        | 11,856     |                        | $          | 13,111 |   |
| Water  supply cost balancing accounts                                        |       | 4,156                    |       | 4,717                       |       |
| Water  revenue adjustment mechanism, net of modified cost balancing accounts |       | 26,225                   |       | 21,168                      |       |
| Aerojet  litigation memorandum account                                       |       | 19,503                   |       | 19,676                      |       |
| Pensions  and other postretirement obligations                               |       | 27,401                   |       | 27,833                      |       |
| Derivative  unrealized loss                                                  |       | 10,038                   |       | 7,338                       |       |
| Flow-through  taxes, net                                                     |       | 6,406                    |       | 6,661                       |       |
| Electric  transmission line abandonment costs                                |       | 2,782                    |       | 2,828                       |       |
| Asset  retirement obligations                                                |       | 3,910                    |       | 3,826                       |       |
| Low  income rate assistance balancing accounts                               |       | 5,183                    |       | 4,764                       |       |
| Santa  Maria adjudication memorandum accounts                                |       | 3,888                    |       | 3,895                       |       |
| Deferred  rate case costs                                                    |       | 3,474                    |       | 3,642                       |       |
| Refund  of water right lease revenues                                        |       | (1,707                   | )          | (1,806                      | )          |
| Other  regulatory assets, net                                                |       | 5,752                    |       | 4,921                       |       |
| Total  GSWC                                                                  |       | $                        | 128,867    |                        | $          | 122,574 |   |
| **CCWC**                                                                     |       |                     |       |                        |       |
| Asset  retirement obligations                                                |       | $                        | 60         |                        | $          | 59 |   |
| Other  regulatory liabilities, net                                           |       | (1,218                   | )          | (1,213                      | )          |
| Total  AWR                                                                   |       | $                        | 127,709    |                        | $          | 121,420 |   |

 

Regulatory matters are discussed in detail inthe consolidated financial statements and the notes thereto included in the Form 10-Kfor the year ended December 31, 2009 filed with the SEC.  The discussion below focuses on significantmatters and changes since December 31, 2009.

 

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

 

Electric power costsincurred by GSWC’s Bear Valley Electric Service (“BVES”) division continue tobe charged to its electric supply cost balancing account. The under-collectionin the electric supply cost balancing account is $11.9 million at March 31,2010.  For the three months ended March 31,2010 and 2009, the under-collection decreased by approximately $1.3 million and$1.1 million, respectively, primarily as a result of a payment of a surcharge byits customers of 2.2¢ per kilowatt hour 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 its

 

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balancing account andsuch amounts will be expensed.  Therewere no amounts expensed over the $77 per MWh cap during the three months endedMarch 31, 2010 and 2009.

 

As of March 31,2010, the electric supply cost balancing account consists of $4.0 million forcosts of abandonment of a transmission line upgrade and $7.9 million forchanges in purchased energy and power system delivery costs.

 

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

 

Prior to theimplementation of the Modified Cost Balancing Account (“MCBA”) further discussedbelow,  Registrant maintained watersupply cost balancing accounts for GSWC to account for under-collections andover-collections of revenues designed to recover such costs.  These supply cost balancing accounts trackeddifferences between the current cost for supply items (water, power and pumptaxes) charged by GSWC’s suppliers and the cost for those items incorporatedinto GSWC’s rates. Under-collections (recorded as regulatory assets) occurredwhen the current cost exceeded the amount in rates for these items and,conversely, over-collections (recorded as regulatory liabilities) occurred whenthe current cost of these items were less than the amount in rates.  Typically, under-collections orover-collections, when they occur, were tracked in the supply cost balancingaccounts for future recovery or refund through a surcharge (in the event of anunder-collection) or through a surcredit (in the event of an over-collection)on customers’ bills.  Registrant accruedinterest on its supply cost balancing accounts at the rate prevailing for90-day commercial paper.  Registrant doesnot maintain a supply cost balancing account for CCWC.

 

As of March 31,2010, there is a $4.2 million net under-collection remaining in the watersupply cost balancing accounts.  Of thisamount, approximately $1.6 million relates to GSWC’s Region III customerservice area and $2.6 million relates primarily to GSWC’s Region I.  Currently, there are surcharges in place inRegion I and Region III to recover these under-collections including theapproval in January 2010 by the CPUC of a 36-month surcharge in one ofRegion I’s ratemaking areas to begin recovering the under-collectionprospectively.  When these surchargesexpire, any unrecovered balances will be included in the MCBA for recovery in afuture filing.

 

On August 21, 2008,the CPUC issued a final decision which approved a settlement agreement betweenGSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”) regardingconservation rate design.  As a result ofthis decision, GSWC established an MCBA that permits GSWC to recover supplycosts related to changes in water supply mix in addition to rate changes byGSWC’s suppliers. GSWC implemented this MCBA in November 2008 for RegionsII 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.

 

***WaterRevenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”):***

 

With the adoption of theWRAM and the MCBA effective November 25, 2008 for Regions II and III and September 1,2009 for Region I’s ratemaking areas, GSWC began recording the differencebetween what is billed to its regulated water customers and that which isauthorized by the CPUC. Under the WRAM, GSWC records the adopted level ofvolumetric revenues as authorized by the CPUC for metered accounts (adoptedvolumetric revenues).  While the WRAMtracks volumetric-based revenues, the revenue requirements approved by the CPUCinclude service charges, flat rate charges, and other items that are notsubject to the WRAM. The adopted volumetric revenues consider the seasonalityof consumption of water based upon historical averages. The variance betweenadopted volumetric revenues and actual billed volumetric revenues for meteredaccounts is recorded as a component of revenue with an offsetting entry to acurrent asset or liability balancing account (tracked individually for eachrate- making area). The variance amount may be positive or negative andrepresents amounts that will be billed or refunded to customers in thefuture.  The WRAM only applies tocustomer classes with conservation rates/tiered rates in place.

 

Underthe MCBA, GSWC began tracking adopted expense levels for purchased water,purchased power and pump taxes, as established by the CPUC. Variances (whichinclude the effects of changes in both rate and volume) between adopted andactual purchased water, purchased power, and pump tax expenses are recorded asa component of the supply cost balancing account provision, as the amount ofsuch variances will be recovered from or refunded to GSWC’s customers at alater date. This is reflected with an offsetting entry to a current asset orliability balancing account (tracked individually for each water region).  Unlike the WRAM, the MCBA applies to allcustomer classes.

 

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The balances in the WRAMand MCBA assets and liabilities accounts will fluctuate on a monthly basisdepending upon the variance between adopted and actual results. The recovery orrefund of the WRAM is netted against the MCBA over- or under-collection for thecorresponding rate-making area and is interest bearing at the current90 day commercial paper rate. When the net amount for Regions II, IIIor any of the Region I ratemaking areas achieves a pre-determined level (i.e.,at least 2.5 percent over- or under-recovery of the approved revenuerequirement), GSWC will seek approval from the CPUC to refund or collect thebalance in the accounts. Account balances less than those levels may berefunded or collected in GSWC’s general rate case proceedings or aggregatedwith future calendar year balances for comparison with the pre-determinedrecovery level of 2.5 percent of adopted revenues.

 

In March 2010, GSWCfiled an advice letter with the CPUC for recovery of the Region II and IIIWRAM, net of the MCBA and supply cost balancing accounts, of $18.3million.  A surcharge was put in place inMarch 2010 which is expected to recover the amounts accumulated in RegionsII and III’s WRAM, net of MCBA and supply cost balancing accounts, as of December 31,2009.  As of March 31, 2010, RegionI has a net regulatory asset of $3.8 million. In April 2010, GSWC filed advice letters with the CPUC for recoveryof $2.8 million of this amount which represented the net regulatory assetbalance as of December 31, 2009. Going forward, GSWC will seek recovery of its WRAM, net of MCBA, on anannual basis.  As of March 31, 2010,GSWC has a net aggregated regulatory asset of $26.2 million which is comprisedof a $30.9 million under-collection in the WRAM accounts and $4.7 millionover-collection in the MCBA accounts.

 

***AerojetLitigation Memorandum Account******:***

 

On July 21,2005, the CPUC authorized GSWC to collect approximately $21.3 million of theAerojet litigation memorandum account, through a rate surcharge, which willcontinue for no longer than 20 years. Beginning in October 2005, new rateswent into effect to begin amortizing the memorandum account over a 20-yearperiod.  A rate surcharge generatingapproximately $181,000 and $211,000 was billed to customers during the threemonths ended March 31, 2010 and 2009, respectively.  GSWC will keep the Aerojet memorandum accountopen until the earlier of full amortization of the balance or20 years.  However, no costs will beadded to the memorandum account, other than on-going interest charges approvedby the CPUC decision. Pursuant to the decision, additional interest ofapproximately $8,000 and $20,000 was added to the Aerojet litigation memorandumaccount during the three months ended March 31, 2010 and 2009,respectively.

 

Aerojet has also agreedto reimburse GSWC $17.5 million, plus interest accruing from January 1,2004, for GSWC’s past legal and expert costs, which is included in the Aerojetlitigation memorandum account. The reimbursement of the $17.5 million iscontingent upon the issuance of land use approvals for development in a definedarea within Aerojet property in Eastern Sacramento County and the receipt ofcertain fees in connection with such development. The Westborough developmentis within the defined area in the settlement agreement.  It is management’s intention to offsetcertain proceeds from the housing development by Aerojet in the Westboroughareas, pursuant to the settlement agreement, against the balance in thislitigation memorandum account.  At thistime, management believes the full balance of the Aerojet litigation memorandumaccount will be collected by 2025.

 

***DerivativeGains and Losses on Purchased Power Contracts Memorandum Account:***

 

As described in Note 4,in October 2008 GSWC executed a new purchased power contract.  GSWC’s BVES division began receiving powerunder this contract on January 1, 2009 at a fixed cost over three and fiveyear terms depending on the amount of power and period during which the powerwill be purchased under the contract. The new contract is also subject to accounting guidance as amended forderivative instruments and hedging activities**andrequires mark-to-market derivative accounting. In May 2009, the CPUC authorized GSWCto establish a non-interestbearing regulatory memorandum accountto track unrealized gains and losses on the new contract, which the CPUC alsoapproved, throughout the term of the contract. Accordingly,all unrealized gains and losses generated from the new purchased power contractwill be deferred on a monthly basis into the memorandum account and, as aresult, do not impact GSWC’s earnings. As of March 31, 2010, $10.0 millionof unrealized losses have been included in this memorandum account. This unrealized loss increased since December 31,2009 as a result of decreasing quoted market prices for energy over the duration ofthe contract.

 

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***DeferredRate Case Costs:***

 

As of March 31,2010, GSWC has deferred rate case costs totaling $3.5 million. These are directcosts consisting primarily of outside consulting services, which have beenincurred in connection with the preparation and processing of a general ratecase.  Historically, GSWC has deferred these costs as a regulatory assetwhich are then recovered in rates and amortized over the term of a rate casecycle once the new rates go into effect.  In the current general rate casefor 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 rate casecosts should be projected for future periods and recovered prospectively.  Management believes that DRA’s rationale and recommendations areinconsistent with GSWC’s historical practice of deferring and recovering ratecase expenses associated with the current general rate case (“GRC”).  This practice has not been challenged by theCPUC in prior rate cases.  GSWC will vigorously defend its position. However, if DRA prevails, GSWC may be required to write-off approximately $2.2million of costs deferred as of March 31, 2010 related to the currentwater rate case.  The final resolution of this issue is expected in September 2010as part of the CPUC’s final decision in the Region II and III general ratecase.  At this time, GSWC is unable topredict the outcome of this matter.

 

***OtherRegulatory Assets:***

 

As part of the CPUC’sfinal decision in October 2009 on the BVES general rate case, GSWC wasauthorized to establish a Base Revenue Requirement Adjustment Mechanism (“BRRAM”)account effective November 2, 2009. With the adoption of the BRRAMaccount, GSWC began recording the difference between what is billed to itselectric customers and that which is authorized by the CPUC.  The variance between adopted electric revenueand actual billed revenue will be recorded as a component of electric revenue withan offsetting entry to a current 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 5 percent of therevenue requirement established for the previous twelve months, GSWC intends toseek approval from the CPUC to refund or collect the balance in the account.  As of March 31, 2010, GSWC has includedin other regulatory assets $426,000 related to the BRRAM. Management willevaluate the anticipated recovery of this under-collection and will provide forallowances and/or reserves as deemed necessary.

 

Included in otherregulatory assets is a memorandum account totaling $958,000 recorded in thefirst quarter of 2010.  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 amount in this memorandumaccount totaled approximately $958,000. 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 corporate headquarters.

 

In January 2010,the City of Big Bear and surrounding areas of San Bernardino County experienceda series of snow storms, which damaged many BVES power lines, poles,transformers, and other facilities and caused temporary interruption of serviceto many BVES customers.  As a result ofthese storms, BVES has incurred additional operating costs to repair equipmentand restore electric service to its customers. While service has been restored to BVES customers, costs are still beingincurred to repair equipment affected by the storms.  In February 2010, GSWC informed the CPUCthat it will track these costs in a Catastrophic Event Memorandum Account (“CEMA”).  Once all work resulting from these storms iscompleted, GSWC intends to file an advice letter with the CPUC for recovery ofthese costs through a surcharge.  Theincremental costs include BVES labor, outside services assistance, equipment,materials, facilities damages and related snow removal services.  Management believes these incremental costswill be approved by the CPUC for recovery through the CEMA .  As of March 31, 2010, approximately$403,000 has been incurred as a result of the storms and has been included inthe CEMA account within other regulatory assets.  Management believes this amount is probableof future recovery.

 

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

 

Fountain Hills Sanitary District (“FHSD”) is apolitical subdivision of the State of Arizona that provides sanitary sewerservice to customers residing within CCWC’s water service area. In connectionwith its sanitary system, FHSD constructed a recharge system whereby itrecharges treated effluent through multiple injection wells. In order for FHSDto secure an Aquifer Protection Permit for its recharge system, FHSD requestedCCWC to permanently cease using one of its wells. As a possible replacement forthis well, FHSD constructed a new well adjacent to the community center (“CommunityCenter Well”).  However, this well wasnot able to produce an equivalent amount of water to CCWC’s well that was takenout of production.  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.

 

In 2005, CCWC recognizeda net gain of $760,000 related to this settlement agreement and established aregulatory liability for the remaining $760,000 pending ACC review of thismatter.  On October 8, 2009, the ACCmade a final ruling ordering CCWC to treat the entire gain of $1,520,000 fromthe settlement agreement with FHSD as a reduction to rate base. As a result,CCWC recorded a loss of $760,000 during the third quarter of 2009.  This 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.  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 in thethird quarter of 2010.  At this time,management cannot predict the final outcome of this matter.

 

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

 

*La Serena Plant ImprovementProject:*

 

In January 2008, theCPUC approved Region I’s general rate case effective for years 2008, 2009, and2010.  On March 3, 2008, the DRAfiled 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 believesit is probable that the costs of this project will be allowed to remain in ratebase.  The final resolution of this issueis expected in September 2010 as part of the CPUC’s final decision in theRegion II and III general rate case.

 

*CPUC Subpoena*:

 

On February 15,2007, the CPUC issued a subpoena to GSWC in connection with an investigation ofcertain work orders and charges paid to a specific contractor used by GSWC fornumerous construction projects totaling approximately $24.0 million. The CPUC’sinvestigation focuses on whether GSWC was overcharged for these constructionprojects and whether these overcharges were approved in customer rates. The construction projects completed by this specific contractor relatedprimarily to work on water treatment and pumping plants which have been placedin service and are used and useful.  In June 2007, GSWC receivednotification from the CPUC that it 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 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.  GSWC believes that the costs incurredrelated to the aforementioned construction projects were prudent andappropriately capitalized.  Management cannot predict the outcome of theinvestigation or audit at this time and is unable to reasonably estimate apotential loss related to items under the aforementioned investigation, as noformal claim has been made against GSWC to date.

 

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In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with theACC staff and has provided responsive materials, including but not limited to,materials that are relevant to CCWC. Although the ACC has issued a decision inthe CCWC general rate case, they have held the docket open pending resolution ofthe staff’s review of the CPUC subpoena documents.  In the first quarter of 2010, the ACC staffissued a report recommending that proper controls be established in CCWC’sprocurement policies and procedures, and that status reports of the CPUC’sinvestigation and resolution be filed with the ACC periodically. The staff’sreport 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 Electric Service*

 

GSWC’s BVES division hasbeen regularly filing compliance reports with the CPUC regarding its purchasesof energy from renewable energy resources. The filings have indicated that BVEShas not achieved interim target purchase levels of renewable energy resourcesand thus, on its face, might be subject to a potential penalty. However, BVESexpects that the CPUC will waive any potential fines in accordance with theflexible compliance rules.  Accordingly,no provision for loss has been recorded in the financial statements as of March 31, 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.  If approved, the contractwill provide up to 3 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.

 

**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 March 31,** | ** ** |
|-----------------------------------------------------------------------|---------------------------------------------------------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** **                                                    | **2010**                                                               | ** ** | **2009** | ** ** |
| Net income                                                            |                                                          | $                                                                      | 8,490      |   | $ | 4,932 |   |
| Less: (a)                                                             | Distributed  earnings to common shareholders                  |                                                                   | 4,822      |   | 4,328 |   |
|                                                                  | Distributed  earnings to participating securities             |                                                                   | 23         |   | 25 |   |
| Undistributed  earnings                                               |                                                          | 3,645                                                                  |       | 579 |   |
|                                                                  |                                                          |                                                                   |       |   |   |
| (b)                                                                   | Undistributed  earnings allocated to common shareholders      |                                                                   | 3,627      |   | 576 |   |
|                                                                  | Undistributed  earnings allocated to participating securities |                                                                   | 18         |   | 3 |   |
| Total income  available to common shareholders, basic (a)+(b)         |                                                          | $                                                                      | 8,449      |   | $ | 4,904 |   |
|                                                                  |                                                          |                                                                   |       |   |   |
| Weighted average  Common Shares outstanding, basic                    |                                                          | 18,546                                                                 |       | 17,312 |   |
| **Basic  earnings per Common Share**                                  |                                                          | $                                                                      | 0.46       |   | $ | 0.28 |   |
|                                                                       |                                                               |                                                                        |            |  |  |  |  |  |  |

 

DilutedEPS is based upon the weighted average number of Common Shares, including bothoutstanding shares and shares potentially issuable in connection with stockoptions granted in 2006 under Registrant’s 2003 Non-Employee Directors StockPlan and restricted stock units issued under Registrant’s 2000 Stock IncentivePlan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, andnet income. At March 31, 2010 and 2009, there were 760,372 and 680,008options outstanding, respectively, under these Plans. At March 31, 2010and 2009, there were also 100,469 and 87,373 restricted stock unitsoutstanding, respectively.

 

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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 March 31,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2010**                                                               | ** ** | **2009** | ** ** |
| Common  shareholders earnings, basic                                  |       | $                                                                      | 8,449      |   | $ | 4,904 |   |
| Undistributed  earnings for dilutive stock options                    |       | 18                                                                     |       | 3 |   |
| Total common  shareholders earnings, diluted                          |       | $                                                                      | 8,467      |   | $ | 4,907 |   |
|                                                                  |       |                                                                   |       |   |   |
| Weighted average  common shares outstanding, basic                    |       | 18,546                                                                 |       | 17,312 |   |
| Stock-based  compensation (1)                                         |       | 120                                                                    |       | 128 |   |
| Weighted average  common shares outstanding, diluted                  |       | 18,666                                                                 |       | 17,440 |   |
| **Diluted  earnings per Common Share**                                |       | $                                                                      | 0.45       |   | $ | 0.28 |   |

 

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(1)  In applying the treasury stock method of reflectingthe dilutive effect of outstanding stock-based compensation in the calculationof diluted EPS, 248,565 and 425,053 stock options at March 31, 2010 and2009, respectively, were deemed to be outstanding in accordance with accountingguidance on earnings per share.  All ofthe 100,469 and 87,373 restricted stock units at March 31, 2010 and 2009,respectively, were included in the calculation of diluted EPS for the threemonths ended March 31, 2010 and 2009.

 

Stockoptions of 415,504 and 254,271 were outstanding at March 31, 2010 and2009, respectively, but not included in the computation of diluted EPS becausethe related option exercise price was greater than the average market price ofAWR’s Common Shares for the three months ended March 31, 2010 and2009.  Stock options of 96,303 and 684were outstanding at March 31, 2010 and 2009, respectively, but notincluded in the computation of diluted EPS because they were antidilutive.

 

Duringthe three months ended March 31, 2010 and 2009, Registrant issued 26,117and 19,957 Common Shares, for approximately $566,000 and $472,000,respectively, under Registrant’s Common Share Purchase and DividendReinvestment Plan, the 401(k) Plan, and the stock incentive plans. Inaddition, Registrant purchased 31,805 and 304 Common Shares on the open marketduring the three months ended March 31, 2010 and 2009, respectively, underRegistrant’s 401(k) Plan and the Common Share Purchase and DividendReinvestment Plan. The Common Shares purchased by Registrant were used tosatisfy the requirements of these plans.

 

Duringthe three months ended March 31, 2010, AWR paid quarterly dividends ofapproximately $4.8 million, or $0.260 per share.  During the three months ended March 31,2009, AWR paid quarterly dividends to shareholders of approximately $4.3million, or $0.250 per share.

 

**Note 4 — Derivative Instruments:**

 

Most of the electricenergy sold by BVES to its customers is purchased from others.  To mitigate exposure to spot-market prices,Registrant has entered into purchased power contracts, which are subject toderivative accounting, to serve its BVES customer service area.  By entering into these fixed-priced purchasedpower contracts, Registrant has been able to limit the amount of risk anduncertainty 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 ablock-forward purchase power contract that has been and is subject to theaccounting guidance for derivative instruments and hedging activities, asamended.  A derivative financial instrumentor other contract 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 a purchased power contract that permits GSWC to purchase power ata fixed cost over three and five year terms depending on the amount of powerand period during 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 

 

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2009, the CPUC issued a final decision approvingthe contract and authorized GSWC to establish a regulatory asset and liabilitymemorandum account to offset the entries required by the accountingguidance.  Accordingly, all unrealizedgains and losses generated from the new purchased power contract will bedeferred on a monthly basis into a non-interest bearing regulatory memorandumaccount that will track the changes in fair value of the derivative throughoutthe term of the contract.   As of March 31,2010 there was a $10.0 million cumulative unrealized loss which has beenincluded in the memorandum account.  Thismemorandum account does not impact GSWC’s earnings.

 

On a monthly basis, therelated asset or liability is adjusted to reflect the fair market value at theend of the month.  Registrant adoptedaccounting guidance for fair value measurements effective January 1, 2008for financial assets and liabilities measured on a recurring basis.  This guidance applies to all financial assetsand financial liabilities that are being measured and reported on a fair valuebasis. There was no impact in the adoption of this accounting guidance to the consolidatedfinancial statements. However, the accounting guidance requires disclosure thatestablishes a framework for measuring fair value and expands disclosure aboutfair value measurements. The guidance requires fair value measurements to beclassified and disclosed in one of the following three categories:

 

*Level 1*: Unadjusted quoted prices in activemarkets that are accessible at the measurement date for identical, unrestrictedassets or liabilities;

 

*Level 2*: Quoted prices in markets that are notactive, or inputs which are observable, either directly or indirectly, forsubstantially the full term of the asset or liability, or

 

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

 

Registrant’s valuationmodel utilizes various inputs that include quoted market prices for energy overthe duration of the contract. The market prices used to determine the fairvalue for this derivative instrument were estimated based on independentsources such as broker quotes and publications that are not observable in orcorroborated by the market.  Registrantreceives one broker quote to determine the fair value of its derivativeinstrument.  When such inputs have asignificant impact on the measurement of fair value, the instrument iscategorized in Level 3.  Accordingly, thevaluation of the derivative on Registrant’s new purchased power contract hasbeen classified as Level 3 for all periods presented.

 

The following tablepresents changes in the fair value of the derivative for the three months endedMarch 31, 2010 and 2009.

 
| ** **                                    | ** ** | **For The Three Months Ended March 31,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(dollars in thousands)**               | ** ** | **2010**                                                               | ** ** | **2009** | ** ** |
| Balance, at  beginning of the period          |       | $                                                                      | (7,338     | ) | $ | — |   |
| Unrealized loss  on purchased power contracts |       | (2,700                                                                 | )          | (8,428 | ) |
| Balance, at end  of the period                |       | $                                                                      | (10,038    | ) | $ | (8,428 | ) |

 

Forthe three months ended March 31, 2010 and 2009, the unrealized losses wereincluded in regulatory assets due to regulatory mechanisms in place effective January 1,2009.

 

**Note 5 — Fair Value of Financial Instruments:**

 

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 utility subsidiaries. Rates available to the utilitysubsidiaries at March 31, 2010 and December 31, 2009 for debt withsimilar terms and remaining maturities were used to estimate fair value forlong-term debt. Changes in the assumptions will produce differing results.

 
| ** **                           | ** ** | **March 31, 2010**  | ** ** | **December 31, 2009** | ** ** |
|--------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in thousands)** | ** ** | **Carrying Amount** | ** ** | **Fair Value**        | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| Financial  liabilities:              |       |                     |       |                       |       |   |   |   |   |
| Long-term debt—GSWC             |       | $                        | 300,518    |                       | $          | 321,727 |   | $ | 300,586 |   | $ | 335,217 |   |
| Long-term  debt—CCWC            |       | 5,975                    |       | 5,454                      |       | 5,975 |   | 5,623 |   |
| Total AWR                            |       | $                        | 306,493    |                       | $          | 327,181 |   | $ | 306,561 |   | $ | 340,840 |   |

 

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**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 Utility PrivatizationSubsidiaries agreed to operate and maintain the water and/or wastewater systemsat the respective bases for a monthly net fixed price for operation andmaintenance, and for an amount to cover renewals and replacements for the firsttwo years of the contract.  Under theterms of each of these contracts, prices are to be redetermined at the end ofthe initial two year period and every three years thereafter, unless otherwiseagreed to by the parties to a contract. In addition, prices may be equitablyadjusted for changes in law and other circumstances.  These adjustments can be retrospective and/orprospective.  The Military UtilityPrivatization Subsidiaries have experienced delays in obtaining readjustment ofprices and equitable adjustments as required by the terms of these contracts.

 

In March 2009, ONUSfiled a request for equitable adjustment related to a joint inventory reportwhich indicated the quantity of the Fort Bragg infrastructure to be greaterthan what was estimated by the U.S. government as part of its solicitation forthis contract.  On January 22, 2010,the U.S. government approved a $6.5 million equitable adjustment regarding thisinventory. As a result of this contract modification, ASUS recorded $3.1million of revenues and operating income during the first quarter of 2010(approximately $2.8 million of which is retroactive from the commencement ofthe contract in March 2008 to December 31, 2009).  The remaining $3.4 million, related torenewal and replacement funds, was recorded as deferred revenue in the firstquarter of 2010. The deferred revenue will be recognized in constructionrevenues (along with the related construction costs) when the work isperformed.

 

In March 2008,FBWS filed a request for equitable adjustment as a claim with the U.S.government seeking an adjustment in the contract after it was determined thatthe 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.government entered into a settlement agreement pursuant to which the U.S.government agreed to pay FBWS retroactive operation and maintenance managementfees and retroactive renewal and replacement fees from the contract commencementdate, October 1, 2004.  In March 2010,the U.S. government issued a $6 million contract modification funding amajority of the settlement agreement.  Asa result, ASUS recorded $2.5 million in revenues and pretax operating incomeand $510,000 in interest income during the first quarter of 2010.  The remaining $3.0 million, related torenewal and replacement funds, was recorded as deferred revenue for the threemonths ended March 31, 2010. The deferred revenue will be recognized inconstruction revenues (along with the related construction costs) as the workis performed.  An additional modificationfunding the balance of the settlement amount (approximately $373,000) ispending and will not be recorded until such modification is received.

 

**Note 7 —Income Taxes:**

 

As aregulated 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 March 31,2010 was 43.3% as compared to 36.4% applicable to the three months ended March 31,2009.  The GSWC ETR deviated from thefederal statutory rate primarily due to changes between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements (principally plant-, rate-case- and compensation-related items).

 

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

 

AWR (parent) recordsthe tax effects of the members of the AWR group joining infiling federal consolidated and state combined returns.  For thethree months ended March 31, 2010, the state taxes, net of federal 

 

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benefit, recorded atAWR (parent) include an expense of approximately $146,000 as a result ofapplying the California state unitary tax principles (“unitary effect”). The unitary effect 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.  The net unfavorable unitary effect for the three months ended March 31,2010 was primarily attributable to the increased profitability of contractedservices outside of California.  Management continues to intend toelect, commencing with the 2011 tax year, an alternative apportionmentmethod made available by tax law changes in 2009.

 

For the three monthsended March 31, 2009, the taxes recorded at AWR (parent) also include theeffect of management’s intention to apply an alternative method made availableby a change in California law during the first quarter of 2009.  Thechange in law permits most taxpayers to compute the portion of their incomederived from multiple jurisdictions that is subject to California taxation byapplying an alternative apportionment method  commencing with the 2011 taxyear.  As a result of management’s intention to apply the alternativemethod, AWR adjusted its deferred tax balances in the first quarter of 2009 toreflect the expected amount at which it will realize its California deferredtaxes consistent with the change in tax law, and refined certain relatedestimates.  This resulted in the recording of a benefit of approximately$918,000 during the first quarter of 2009. While the effect of the tax lawchange will continue to affect AWR’s state taxes, the future effects may bebeneficial or detrimental depending on a combination of the profitability ofAWR’s non-California activities as well as the relative proportion of thefactor(s) applied by its apportionment method.  Periodically,management will assess its intention to apply the alternative method and willadjust its deferred tax balances accordingly.

 

GSWC continues to computeits state tax provision as if it were autonomous and not a member of AWR’sunitary group.  This approach isconsistent with the methodology used for ratemaking purposes.  Given that 100 percent of GSWC’s activitiesare conducted 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 months ended March 31,2010 and 2009 are as follows:

 
| ** **                                     | ** ** | **Pension Benefits** | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
|------------------------------------------------|------------|---------------------------|------------|-------------------------------------|------------|----------|------------|
| **(dollars in thousands)**           | ** ** | **2010**                  | ** ** | **2009**                            | ** ** | **2010** | ** ** | **2009** | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                      |       |                                |       |     |       |   |   |   |   |   |   |
| Service cost                                   |       | $                         | 1,158      |                                | $          | 1,044    |       | $ | 101 |   | $ | 86 |   | $ | 108 |   | $ | 93 |   |
| Interest cost                                  |       | 1,534                     |       | 1,444                               |       | 159      |       | 160 |   | 89 |   | 86 |   |
| Expected return  on plan assets                |       | (1,312                    | )          | (971                                | )          | (63      | )          | (52 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                    |       | —                              |       | 105      |       | 105 |   | — |   | — |   |
| Amortization of  prior service cost (benefit)  |       | 30                        |       | 30                                  |       | (50      | )          | (50 | ) | 40 |   | 40 |   |
| Amortization of  actuarial loss                |       | 308                       |       | 572                                 |       | —   |       | — |   |   |   | — |   |
| Net periodic  pension cost                     |       | $                         | 1,718      |                                | $          | 2,119    |       | $ | 252 |   | $ | 249 |   | $ | 237 |   | $ | 219 |   |

 

Registrant expects to contribute approximately $8,583,000and $575,000 to the pension and postretirement medical plans in 2010,respectively.  No contributions were madeduring the three months ended March 31, 2010.

 

**Note 9 — Contingencies:**

 

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

 

Perchlorate and/orVolatile Organic Compounds (“VOC”) have been detected in five wells servicingGSWC’s South San Gabriel System. GSWC filed suit in federal court, along withtwo other affected water purveyors and the San Gabriel Basin Water QualityAuthority (“WQA”), against some of those allegedly responsible for thecontamination of two of these wells. Some of the other potential defendantssettled with GSWC, other water purveyors and the WQA (the “Water Entities”), onVOC related issues prior to the filing of the lawsuit. In response to thefiling of the lawsuit, the Potentially Responsible Party (“PRP”) defendantsfiled motions to dismiss the suit or strike certain portions of the suit. Thejudge issued a ruling on April 1, 2003 granting in part and denying inpart the PRP’s motions. A key ruling of the court was that the water purveyors,including GSWC, by virtue of their

 

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ownership of wellscontaminated with hazardous chemicals are themselves PRPs under theComprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

 

GSWC has, pursuant topermission of the court, amended its suit to claim certain affirmative defensesas an “innocent” party under CERCLA. Registrant is presently unable to predictthe outcome of this ruling on its ability to fully recover from the PRPs futurecosts associated with the treatment of these wells. In this same suit, the PRPshave filed cross-complaints against the Water Entities, the MWD, the Main SanGabriel Basin Watermaster and others on the theory that they arranged for anddid transport contaminated water into the Main San Gabriel Basin for use byGSWC and the other two affected water purveyors and for other related claims.

 

On August 29, 2003,the US Environmental Protection Agency (“EPA”) issued Unilateral AdministrativeOrders (“UAO”) against 41 parties deemed responsible for polluting thegroundwater in that portion of the San Gabriel Valley from which the twoimpacted GSWC wells draw water. GSWC was not named as a party to the UAO. TheUAO requires that these parties remediate the contamination. The judge in thelawsuit has appointed a special master to oversee mandatory settlementdiscussions between the PRPs and the Water Entities. EPA is also conductingsettlement discussions with several PRPs regarding the UAO. The Water Entitiesand EPA are working to coordinate their settlement discussions under thespecial master in order to arrive at a complete resolution of all issuesaffecting the lawsuit and the UAO. Settlements have been reached between WQAand some PRPs. Settlements with a number of other PRPs are being finalized;however, Registrant is presently unable to predict the ultimate outcome ofthese settlement discussions.

 

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

 

The laws of the State ofCalifornia and the State of Arizona provide for the acquisition of publicutility property by governmental agencies through their power of eminentdomain, also known as condemnation, where doing so is necessary and in the publicinterest. In addition, however, the laws of California provide: (i) thatthe owner of utility property may contest whether the condemnation is actuallynecessary and in the public interest, and (ii) that the owner is entitledto receive the fair market value of its property if the property is ultimatelytaken.

 

The Town of Apple Valley(the “Town”) abandoned its activities related to a potential condemnation ofGSWC’s water system serving the Town in 2007. However, in April 2009, theTown announced that it will again consider a potential takeover of GSWC’s AppleValley water systems as well as those of another privately-owned utility.  The Town Council has directed staff toresearch the costs associated with updating the previously prepared financial feasibilitystudy for the acquisition of GSWC’s water system.

 

The Stanton City Councilrecently decided to solicit proposals to identify the process, potential costsand legal issues for acquiring the water system owned by GSWC.

 

Except for the City ofStanton and the Town of Apple Valley, Registrant is currently not involved inactivities related to the potential condemnation of any of its water customerservice areas or in its BVES customer service area. No formal condemnationproceedings have been filed against any of the Registrant’s service areasduring the past three years.

 

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

 

In1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed alawsuit against multiple defendants, including GSWC, the City of Santa Maria,and several other public water purveyors. The plaintiff’s lawsuit sought anadjudication of the Santa Maria Groundwater Basin (the “Basin”). A stipulatedsettlement of the lawsuit has been reached, subject to CPUC approval.  The settlement, among other things, ifapproved by the CPUC, would preserve GSWC’s historical pumping rights andsecure supplemental water rights for use in case of drought or other reductionsin the natural yield of the Basin. GSWC, under the stipulation, has a right to10,000 acre-feet of groundwater replenishment provided by the TwitchellProject, a storage and flood control reservoir project operated by the SantaMaria Valley Conservation District.  A monitoring and annual reportingprogram has been established to allow the parties to responsibly manage theBasin and to respond to shortage conditions.  If severe water shortageconditions 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.

 

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OnFebruary 11, 2008, the court issued its final judgment, which approves andincorporates the stipulation.  The judgment awards GSWC prescriptiverights to groundwater against the non-stipulating parties.  In addition,the judgment grants GSWC the right to use the Basin for temporary storage andto recapture 45 percent of the return flows that are generated from itsimportation of State Water Project water.  Pursuant to this judgment, thecourt retains jurisdiction over all of the parties to make supplemental ordersor to amend the judgment as necessary. On March 20, 2008, the non-stipulating parties filed notices ofappeal.  Registrant is unable to predictthe outcome of the appeal.

 

***AerojetNote Receivable:***

 

Pursuant to thesettlement 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.   GenCorp Inc. is the parent of Aerojet. In January 2010, Standard & Poor’s (“S&P”) upgradedGenCorp Inc’s credit rating to B- from CCC+ with a stable outlook.  This is a non-investment grade ratingassigned by S&P to companies whose financial situation varies.

 

InDecember 2009, the Company received from Aerojet $2.6 million, includinginterest, as payment of the first annual installment under the terms of the 2004 settlementagreement.  As of March 31, 2010,the unpaid portion of the note receivable is $8.3 million, comprised of $6.4million in principal and $1.9 million in accrued interest.  At this time, management believes the notereceivable from Aerojet is fully collectible and has not provided a reserve foruncollectible amounts as of March 31, 2010.  GSWC will continue to assess recoverabilityof this note receivable.

 

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

 

Chadron Plant: GSWC has been involved in environmentalremediation and clean-up at a plant site (“Chadron Plant”) that contained anunderground storage tank which was used to store gasoline for its vehicles.This tank was removed in July 1990 along with the dispenser and ancillarypiping. Since then, GSWC has been involved in various remediation activities atthis site.  Recent site assessments havebeen conducted which showed that therewas more gasoline at higher concentrations spread over a larger area thanpreviously measured. Remediation isestimated to take two more years, followed by at least one year of monitoringand reporting.  As of March 31,2010, the total spent to clean-up and remediate GSWC’s plant facility isapproximately $2.4 million, of which $1.5 million has been paid by theState of California Underground Storage Tank Fund. Amounts paid by GSWC havebeen included in rate-base and approved by the CPUC for recovery.

 

As of March 31, 2010, GSWC has an accruedliability for the estimated additional cost of $1.2 million to complete theclean-up at the site. The ultimate cost may vary as there are many unknowns inremediation of underground gasoline spills and this is an estimate based oncurrently available information. Management also believes it is probable thatthe estimated additional costs will be approved in rate base by the CPUC.

 

Ballona Plant: During the first quarter of 2008,hydrocarbon contaminated soil was found at a plant site (“Ballona Plant”)located in GSWC’s Southwest customer service area where an abandoned water tankwas demolished.  An initial investigationand characterization of the contaminated area has been conducted.  The investigation report indicates that contaminationlevels are below normal cleanup goals. GSWC submitted a clean-up action plan to the local Certified UnifiedProgram Agency (“CUPA”), which approved the clean-up plan.  The clean-up was completed during the firstquarter of 2010.  All contaminated soilwas removed and replaced with clean soil. Currently, the contractor is preparing a closure report.  The report requires the approval of LosAngeles County Fire Authority which serves as the local CUPA.  Although GSWC cannot predict the final decisionby the CUPA, based on the clean-up test results, the closure report is expectedto be approved.  Clean-up costs incurredthrough March 31, 2010 totaled approximately $200,000.  Historically, the costs for this type ofcleanup have been included in rates as approved by the CPUC.

 

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

 

Registrant is alsosubject to other ordinary routine litigation incidental to its business.Management believes that rate recovery, proper insurance coverage and reservesare 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.

 

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**Note 10 — Business Segments:**

 

AWR has three reportablesegments, water, electric and contracted services, whereas GSWC has twosegments, water and electric. 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 acontracted services unit conducted through ASUS and its subsidiaries. Allactivities of GSWC are geographically located within California. All activitiesof CCWC are located in the state of Arizona. Both GSWC and CCWC arerate-regulated utilities.

 

Activities of ASUS andits subsidiaries have been conducted in California, Maryland, New Mexico, NorthCarolina, South Carolina, Texas and Virginia. ASUS’s wholly-owned subsidiaries are regulated by the state in which thesubsidiary primarily conducts water and/or wastewater operations.  Fees charged for operation and maintenanceand renewal and replacement services are based upon the terms of the contractswith the U.S. government which have been filed with the commissions in thestates in which ASUS’s subsidiaries are incorporated.  On a stand-alone basis, AWR has no materialassets other than its investments in its subsidiaries.

 

The tables below setforth information relating to GSWC’s operating segments, CCWC, ASUS and itssubsidiaries, and other matters. Certain assets, revenues and expenses have beenallocated in the amounts set forth. The identifiable assets are net ofrespective accumulated provisions for depreciation. Capital additions reflectcapital expenditures paid in cash and exclude property installed by developersand conveyed to GSWC or CCWC.

 
| ** **                             | ** ** | **As Of And For The Three Months Ended March 31, 2010** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                  | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                 | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                         | 56,057     |   | $ | 10,979 |   | $ | 1,817 |   | $ | 21,430 |   | $ | — |   | $ | 90,283 |   |
| Operating income  (loss)               |       | 9,176                                                                                                     |       | 2,483 |   | 144 |   | 7,824 |   | (50 | ) | 19,577 |   |
| Interest  expense, net                 |       | 5,054                                                                                                     |       | 376 |   | 91 |   | (441 | ) | 8 |   | 5,088 |   |
| Identifiable  assets                   |       | 789,387                                                                                                   |       | 37,004 |   | 43,883 |   | 2,980 |   | — |   | 873,254 |   |
| Depreciation and  amortization expense |       | 7,622                                                                                                     |       | 560 |   | 483 |   | 177 |   | — |   | 8,842 |   |
| Capital  additions                     |       | 15,291                                                                                                    |       | 447 |   | 66 |   | 172 |   | — |   | 15,976 |   |
|                                        |            |                                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Three Months Ended March 31, 2009** | ** ** |
|----------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                  | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                 | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                         | 55,178     |   | $ | 8,632 |   | $ | 1,616 |   | $ | 14,183 |   | $ | — |   | $ | 79,609 |   |
| Operating income  (loss)               |       | 11,167                                                                                                    |       | (544 | ) | (223 | ) | 1,068 |   | (50 | ) | 11,418 |   |
| Interest  expense, net                 |       | 4,286                                                                                                     |       | 511 |   | 105 |   | 99 |   | 91 |   | 5,092 |   |
| Identifiable  assets                   |       | 751,745                                                                                                   |       | 37,466 |   | 45,127 |   | 2,164 |   | — |   | 836,502 |   |
| Depreciation and  amortization expense |       | 7,148                                                                                                     |       | 565 |   | 486 |   | 162 |   | — |   | 8,361 |   |
| Capital  additions                     |       | 16,865                                                                                                    |       | 311 |   | 488 |   | 18 |   | — |   | 17,682 |   |
|                                        |            |                                                                                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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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 States UtilityServices, Inc. (“ASUS”) and its subsidiaries (Fort Bliss Water ServicesCompany (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old DominionUtility 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.

 

GSWC served 255,117 water customers and 23,223electric customers at March 31, 2010, or a total of 278,340 customers,compared with 254,451 water customers and 23,094 electric customers, or a totalof 277,545 customers at March 31, 2009. GSWC’s utility operations exhibitseasonal trends. Although GSWC’s water utility operations have a diversifiedcustomer base, residential and commercial customers account for the majority ofGSWC’s water sales and revenues. Revenues derived from commercial andresidential water customers accounted for approximately 94% and 90% of total water revenues for thethree months ended March 31, 2010 and 2009, respectively.

 

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 13,457 customers as of March 31,2010, compared with 13,405 customers at March 31, 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.

 

ASUS,through its wholly-owned subsidiaries, has contracted with the U.S. governmentto provide water and/or wastewater services, including the operation,maintenance, renewal and replacement of the water and/or wastewater systems,pursuant to 50-year fixed price contracts. Each of the contracts with the U.S. government may be subject totermination, in whole or in part, prior to the end of the 50-year term forconvenience of the U.S. government or as a result of default or nonperformanceby the subsidiary performing the contract. In either event, each Military Utility Privatization Subsidiary soimpacted should be entitled to recover the remaining amount of its capitalinvestment pursuant to the terms of a termination settlement with the U.S.government at the time of termination as provided in the contract. The contractprice for each of these contracts is subject to redetermination two years aftercommencement of operations and every three years thereafter under the terms ofthe contract. Prices are subject to equitable adjustment based upon changes incircumstances, changes in laws and/or regulations, and changes in wages andfringe benefits to the extent provided in each of the contracts.  AWR guarantees performance of ASUS’ militaryprivatization contracts.  Pursuant to theterms of these contracts, the Military Utility Privatization Subsidiariesoperate, as of the effective date of their respective contracts, the followingwater and wastewater systems:

 

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

 

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

 

·                  ODUS- wastewater system at Fort Lee in Virginia effective February 23, 2006and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Storyin Virginia effective April 3, 2006;

 

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

 

·                  ONUS- water and wastewater systems at Fort Bragg, Pope Air Force Base and CampMacKall, North Carolina effective March 1, 2008.

 

**Overview**

 

Included in the followinganalysis 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 important measurein 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 tableon page 33.

 

Registrant’s revenues,operating income and cash flows are earned primarily through delivering potablewater to homes and businesses through approximately 2,900 miles of waterdistribution pipelines and the delivery of electricity in the Big Bear area ofSan Bernardino County.  Rates charged tocustomers of GSWC and CCWC are determined by the CPUC and ACC, respectively.These rates are intended to allow recovery of operating costs and a reasonablerate of return on capital.  Factorsaffecting financial performance of our regulated utilities include the processand timing of setting rates charged to customers; the ability to recover, andthe process for recovering in rates the costs of distributing water andelectricity and our overhead costs; weather; the impact of increased waterquality standards and environmental regulations on the cost of operations andcapital expenditures; water supply shortages caused by a variety of factors;capital expenditures needed to upgrade water systems; and risks associated withlitigation relating to water quality and water supply, including suitsinitiated by Registrant to protect its water supply.

 

Operating revenues andincome from contracted services at ASUS and its subsidiaries are earnedprimarily from the operation, maintenance, renewal and replacement of water and/or wastewater systemsat various military bases. All of these contracts with the U.S. government are50-year firm, fixed-price contracts with prospective price redeterminations.ASUS also may generate revenues from the construction of new infrastructurepursuant to contract modifications. Additional revenues generated by contract operations are primarilydependent on these additional 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, maintenance, renewal and replacement ofwater 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 timing of implementation by the U.S.government of redeterminations and/or equitable adjustments of prices undercontracts with the U.S. government.

 

Registrant plans tocontinue to seek additional rate increases in future years to recover operatingand supply costs and receive reasonable returns on invested capital. Capitalexpenditures in future years are expected to remain at much higher levels thandepreciation expense. When necessary, Registrant obtains funds from externalsources in the capital markets and through bank borrowings.  In May 2009, AWR completed a publicoffering of 1,150,000 shares of its Common Shares, including 150,000 sharesissued upon exercise of an option granted to the underwriters to coverover-allotments, at a price to the public of $31 per share. The net proceedsfrom the offering were $34.0 million, after deductions for underwritingcommissions and discounts, and direct legal and accounting fees. The Companyused the proceeds of the offering to repay short-term debt.  Inaddition, a senior note was issued by GSWC on March 10, 2009, to CoBank, ACB (“CoBank”). Under theterms of this senior note, CoBank 

 

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purchased a 6.7% SeniorNote due March 10, 2019 in the aggregate principal amount of $40.0 millionfrom GSWC. The proceeds from the sale of the note to CoBank have been used topay down short-term borrowings and to fund capital expenditures.

 

For three months ended March 31,2010, net income was $8.5 million compared to $4.9 million in the same periodof 2009, an increase of 72.1%. Diluted earnings per share for the three monthsended March 31, 2010 were $0.45 compared to $0.28 in the same period of2009.  The increase in earnings is dueprimarily to: (i) an increase in the water and electric margins of $3.3million or $0.11 per share due to higher customer rates approved by the CPUCand ACC, the implementation of the Water Revenue Adjustment Mechanism (“WRAM”)for Region I, and the CPUC’s authorization of additional revenues to coverincreased general office allocation to BVES, and (ii) an increase inpretax operating income for contracted services of $6.8 million, or $0.23 pershare, during the three months ended March 31, 2010 when compared to2009.

 

These increases toearnings were partially offset by: (i) higher operating expenses at theCompany’s utility businesses of $1.9 million, or $0.06 per share; (ii) achange in enacted state tax law during the first quarter of 2009 which resultedin a tax benefit of $918,000, or $0.05 per share and did not recur in firstquarter of 2010; (iii) an overall increase in the effective income taxrate (excluding the tax benefit mentioned previously) decreasing earnings by approximately$0.03 per share, due primarily to changes between book and taxable income thatare treated as flow-through adjustments in accordance with regulatoryrequirements, and (iv) a decrease of $0.03 per share due to an increase inthe weighted average number of common shares outstanding resulting from theissuance of 1.15 million shares of AWR’s Common Shares in a public offeringcompleted in May 2009.

 

**SummaryResults by Segment**

 

AWR has three reportablesegments: water, electric and contracted services . Within the segments, AWRhas three principal business units: water and electric service utilityoperations conducted through GSWC, a water-service utility operation conductedthrough CCWC, and a contracted services unit through ASUS and itssubsidiaries.  The tables below set forthsummaries of the results by segment (amounts in thousands):

 
| ** **             | ** ** | **Operating Revenues** | ** ** | **Pretax Operating Income** | ** ** |
|------------------------|------------|------------------------|------------|-----------------------------|------------|
| ** **             | ** ** | **3 Months**           | ** ** | **3 Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **3 Months** | ** ** | **3 Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**              | ** ** | **Ended**                   | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **3/31/2010**          | ** ** | **3/31/2009**               | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                   |       |                        |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                      | 57,874     |                        | $          | 56,794 |   | $ | 1,080 |   | 1.9 | % | $ | 9,320 |   | $ | 10,944 |   | $ | (1,624 | ) | -14.8 | % |
| Electric               |       | 10,979                 |       | 8,632                       |       | 2,347 |   | 27.2 | % | 2,483 |   | (544 | ) | 3,027 |   | -556.4 | % |
| Contracted  services   |       | 21,430                 |       | 14,183                      |       | 7,247 |   | 51.1 | % | 7,824 |   | 1,068 |   | 6,756 |   | 632.6 | % |
| AWR parent             |       | —                 |       | —                      |       | — |   | — |   | (50 | ) | (50 | ) | 0 |   | 0.0 | % |
| Totals from  operation |       | $                      | 90,283     |                        | $          | 79,609 |   | $ | 10,674 |   | 13.4 | % | $ | 19,577 |   | $ | 11,418 |   | $ | 8,159 |   | 71.5 | % |

 

***Water —***Pretax operating income for waterdecreased by $1.6 million, or 14.8%, due to higher operating expenses of $2.5million, as more fully described later. Higher operating expenses were partially offset by an increase in thedollar water margin of $828,000 as a result of rate increases at CCWC approvedby the ACC in October 2009 and as a result of the WRAM account implementedfor Region I in September 2009.  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 first quarter of 2010 have been recorded using 2009 adopted levelspending resolution of this general rate case, which is expected in September 2010.

 

***Electric—***For thethree months ended March 31, 2010, pretax operating income from electricoperations increased by $3.0 million due to an increase in rates which wentinto effect in November 2009.  Inaddition, as a result of the Base Revenue Requirement Adjustment Mechanism (“BRRAM”)which also went into effect in November 2009,  BVES recorded $320,000 in additional revenuesdue to lower customer usage.  Also, 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, 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.  Finally, other operating expenses decreaseddue to lower outside services costs. Costs for outside services 

 

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were higher during the first three months of 2009 as aresult of legal costs associated with the new purchased power contract and thegeneral rate case which was decided in October 2009.

 

***Contracted Services -***For the three months ended March 31, 2010, pretaxoperating income for contracted services increased by $6.8 million, or $0.23per share.  This was primarily due tocontract modifications approved by the U.S. government during the first quarterof 2010 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.  There was also anincrease in construction revenues of $1.5 million, partially offset byincreases in other operating expenses due to increased labor and relatedbenefits and outside service costs. Earnings and cash flows from amendments andmodifications to the original 50-year contracts with the U.S. government may ormay not continue in future periods.

 

The timely receipt ofprice redeterminations continues to be critical in order for ASUS to recoverincreasing costs for operating and maintaining the water and wastewater systemsat the military bases.  In addition,higher allocations of corporate headquarters’ expenses to ASUS and itswholly-owned subsidiaries by the CPUC were not contemplated at the time thecontracts with the U.S. government were negotiated and will need to beaddressed in future price redeterminations.

 

Under the terms of thesecontracts, the contract price is subject to price redetermination two yearsafter commencement of operations and every three years thereafter, unlessotherwise agreed to by the parties to a contract.  Redeterminations have been submitted and areunder review by the U.S. government for operations of ODUS and TUS in Virginiaand Maryland, respectively.   The priceredeterminations for ODUS are expected to be completed in 2010.  The price redetermination for TUS is beingreviewed by the Defense Contract Audit Agency; however, TUS has received preliminaryinformation indicating that DCAA has deemed TUS’ submission to be “inadequate”for audit purposes.  Resolution of thismatter will be based upon discussions with the U.S. government  to be held during the second quarter of 2010.  Pending redetermination of prices, ASUS hasreceived interim inflation adjustments during 2008 to the management fees atODUS for operating and maintaining the water and wastewater systems at FortEustis, Fort Story and Fort Monroe in Virginia, and the wastewater system atFort Lee also in Virginia effective on the second anniversary of the date whenODUS began operating these bases (February 23, 2008 for Fort Lee and April 3,2008 for the other three bases).   Inconnection with the FBWS inventory adjustment discussed above, we agreed towaive the first and second price redetermination of prices required by theoriginal 50-year contract at Fort Bliss.

 

Theseprice redeterminations 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 prospectively to help offsetincreased costs and provide Registrant the opportunity to generate positiveoperating income at its Military Utility Privatization Subsidiaries.  As of March 31, 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.

 

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 subsidiaries: GSWC, CCWC, ASUS and itssubsidiaries.

 

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***ConsolidatedResults of Operations — Three Months Ended March 31, 2010 and 2009(amounts in thousands):***

 
| ** **                                        | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                        | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING  REVENUES                               |       |          |       |          |       |       |       |       |       |
| Water                                             |       | $             | 57,874     |          | $          | 56,794     |       | $          | 1,080      |   | 1.9 | % |
| Electric                                          |       | 10,979        |       | 8,632         |       | 2,347      |       | 27.2       | %          |
| Contracted  services                              |       | 21,430        |       | 14,183        |       | 7,247      |       | 51.1       | %          |
| Total operating  revenues                         |       | 90,283        |       | 79,609        |       | 10,674     |       | 13.4       | %          |
|                                              |       |          |       |          |       |       |       |       |       |
| OPERATING  EXPENSES                               |       |          |       |          |       |       |       |       |       |
| Water purchased                                   |       | 8,257         |       | 8,214         |       | 43         |       | 0.5        | %          |
| Power purchased  for pumping                      |       | 1,655         |       | 1,688         |       | (33        | )          | -2.0       | %          |
| Groundwater  production assessment                |       | 2,622         |       | 2,517         |       | 105        |       | 4.2        | %          |
| Power purchased  for resale                       |       | 3,669         |       | 3,962         |       | (293       | )          | -7.4       | %          |
| Supply cost  balancing accounts                   |       | 3,815         |       | 3,528         |       | 287        |       | 8.1        | %          |
| Other operation  expenses                         |       | 6,839         |       | 7,153         |       | (314       | )          | -4.4       | %          |
| Administrative  and general expenses              |       | 18,863        |       | 16,865        |       | 1,998      |       | 11.8       | %          |
| Depreciation and  amortization                    |       | 8,842         |       | 8,361         |       | 481        |       | 5.8        | %          |
| Maintenance                                       |       | 4,296         |       | 4,073         |       | 223        |       | 5.5        | %          |
| Property and  other taxes                         |       | 3,683         |       | 3,400         |       | 283        |       | 8.3        | %          |
| ASUS construction expenses                        |       | 8,168         |       | 8,445         |       | (277       | )          | -3.3       | %          |
| Net gain on sale  of property                     |       | (3            | )          | (15           | )          | 12         |       | -80.0      | %          |
| Total operating  expenses                         |       | 70,706        |       | 68,191        |       | 2,515      |       | 3.7        | %          |
|                                              |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                  |       | 19,577        |       | 11,418        |       | 8,159      |       | 71.5       | %          |
|                                              |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND  EXPENSES                        |       |          |       |          |       |       |       |       |       |
| Interest expense                                  |       | (5,749        | )          | (5,294        | )          | (455       | )          | 8.6        | %          |
| Interest income                                   |       | 661           |       | 202           |       | 459        |       | 227.2      | %          |
| Other                                             |       | 64            |       | (30           | )          | 94         |       | -313.3     | %          |
|                                              |       | (5,024        | )          | (5,122        | )          | 98         |       | -1.9       | %          |
|                                              |       |          |       |          |       |       |       |       |       |
| INCOME FROM  OPERATIONS BEFORE INCOME TAX EXPENSE |       | 14,553        |       | 6,296         |       | 8,257      |       | 131.1      | %          |
| ** **                                        |       |          |       |          |       |       |       |       |       |
| Income tax  expense                               |       | 6,063         |       | 1,364         |       | 4,699      |       | 344.5      | %          |
|                                              |       |          |       |          |       |       |       |       |       |
| NET INCOME                                        |       | $             | 8,490      |          | $          | 4,932      |       | $          | 3,558      |   | 72.1 | % |

 

Net income for the threemonths ended March 31, 2010 was $8.5 million, equivalent to $0.46 and$0.45 per common share on a basic and fully diluted basis, respectively,compared to $4.9 million or $0.28 per common share on a basic and fully dilutedbasis, for the three months ended March 31, 2009, an increase of 72.1%.

 

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Impacting thecomparability in the results of the two periods on a diluted per share basisare the following significant items:

 

·      Thedollar water margin increased by $828,000, or $0.03 per share, during the firstquarter of 2010 due primarily to: (i) an increase in water rates at CCWCin connection with the ACC’s approval of CCWC’s rate case on October 8,2009, partially offset by lower consumption, increasing CCWC’s water revenuesby approximately $200,000, and (ii) the implementation in September 2009of the WRAM in Region I which increased water revenues by $1.5 million,partially offset by lower actual consumption of 14.6%.  The net increase in water revenues for RegionI was approximately $673,000 during the first quarter of 2010.

 

·      Thedollar electric margin increased by $2.5 million, or $0.08 per share, duringthe first quarter of 2010 due primarily to: (i) increases in electricrates on November 2, 2009 and on January 1, 2010 related to BVES’general rate case approved by the CPUC; (ii) the CPUC approval in March 2010for recovery of $958,000 in a memorandum account which tracked the differencebetween the 2007 adopted general office cost allocation to BVES and the 1996adopted general office cost allocation to BVES, and (iii) the recording of$320,000 to the BRRAM implemented in November 2009 to adjust BVES’ 2010first quarter revenues to the usage levels approved by the CPUC, partiallyoffset by lower consumption of 6.1% compared to 2009 actual.

 

·      Otheroperating expenses, including administrative and general expenses, at theCompany’s utility businesses increased by $1.9 million, or $0.06 per share, forthe first quarter of 2010 due to an increase in labor and other relatedbenefits, and an increase in outside legal and consulting services costs ascompared to the first quarter of 2009.

 

·      Pretaxoperating income for contracted services increased by $6.8 million, or $0.23per share, during the first quarter of 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 first quarter of 2009.

 

·      Incometax expense increased during the three months ended March 31, 2010 ascompared to the same period in 2009, due primarily to: (i) a tax benefitof $918,000 or $0.05 per share recorded during the first quarter of 2009resulting from changes in California apportionment laws, which did not recur in2010, and (ii) an increase in the effective income tax rate (excluding theeffects of the tax benefit discussed previously), which negatively impactedearnings by approximately $0.03 per share during the first quarter of 2010primarily resulting from changes between book and taxable income that aretreated as flow-through adjustments in accordance with regulatory requirements.

 

·      Adecrease of $0.03 per share due to an increase in the weighted average number ofcommon shares outstanding resulting from the issuance of 1.15 million shares ofAWR’s Common Shares in a public offering completed in May 2009.

 

***Operating Revenues***

 

*Water*

 

Dueto the****delay in GSWC’s Regions II and III andgeneral office rate case (discussed further in *RegulatoryMatters*), GSWC’s revenues for Regions II and III for the firstquarter of 2010 have been recorded using 2009 adopted levels pending resolutionof this general rate case, which is expected in September 2010.  For the three months ended March 31,2010, revenues from water operations increased by $1.1 million, or 1.9%, to$57.9 million as compared to $56.8 million for the three months ended March 31,2009.   The increase in water revenues isprimarily due to the implementation in September 2009 of the WRAM accountfor Region I, which resulted in the recording of $1.5 million additionalrevenues to adjust to consumption levels approved by the CPUC, partially offsetby lower actual consumption compared to 2009. There was also an increase in customer rates at CCWC approved by the ACCin October 2009.

 

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*Electric*

 

For the three monthsended March 31, 2010, revenues from electric operations increased by 27.2%to $11.0 million compared to $8.6 million for the three months ended March 31,2009 due primarily to: (i) increases in electric rates on November 2,2009 and on January 1, 2010 approved in October 2009 by the CPUCrelated to BVES’ general rate case added approximately $1.5 million to electricrevenues; (ii) the CPUC approval in March 2010 for recovery of$958,000 in a memorandum account which tracked the difference between the 2007adopted general office cost allocation to BVES and the 1996 adopted generaloffice cost allocation to BVES, and (iii) the recording of $320,000 to theBRRAM implemented in November 2009 to adjust BVES’ 2010 first quarterrevenues to the usage levels approved by the CPUC. These increases werepartially offset by a decrease of 6.1% in actual customer usage.

 

*ContractedServices*

 

Revenues from contractedservices are composed of construction revenues (including renewals andreplacements) and management fees for operating and maintaining the waterand/or wastewater systems at military bases. For the three months ended March 31, 2010, revenues from contractedservices increased by $7.2 million, or 51.1%, to $21.4 million as compared to$14.2 million for the three months ended March 31, 2009 primarily due to$5.6 million in retroactive management fees in connection with two requests forequitable adjustment (“REAs”) resolved with the U.S. government, as more fullydescribed below.  Construction revenuesincreased by $1.5 million to $12.3 million for the first quarter of 2010 ascompared to $10.8 million during the same period in 2009 primarily related tospecial projects at Fort Bragg, partially offset by decreases in constructionactivity at Fort Bliss and the military bases in Virginia.  Earnings and cash flows from amendments andmodifications to the original 50-year contracts with the U.S. government foradditional construction projects may or may not continue in future periods.

 

In March 2009, ONUSfiled an REA following a joint inventory of the infrastructure at Fort Bragg inNorth Carolina.  On the basis of thisjoint inventory, it was determined that the size of the ONUS infrastructure wasgreater than what was estimated at the time that the original 50-year contractwas executed.  In January 2010, theU.S. government issued a contract modification approving in full the REA. As aresult of this contract modification, ASUS recorded $3.1 million of revenuesand pretax operating income (approximately $2.8 million of which is retroactivefor the period from the commencement of the contract in March 2008 to December 31,2009) during the first quarter of 2010. The U.S. government is also expected to issue further contractmodifications to continue the payment of this increased amount prospectively.

 

In March 2008, FBWSfiled an REA as a claim with the U.S. government seeking an adjustment in thecontract after it was determined that the infrastructure at Fort Bliss wassubstantially more than originally estimated by the U.S. government as part ofits solicitation for this contract.  In January 2010,FBWS and the U.S. government entered into a settlement agreement pursuant towhich the U.S. government agreed to pay FBWS retroactive operation andmaintenance management fees and renewal and replacement fees from the contractcommencement date, October 1, 2004. In March 2010, the U.S. government issued a contract modificationfunding a majority of the settlement agreement. As a result, ASUS recorded $2.5 million in revenues and pretax operatingincome and $510,000 in interest income during the first quarter of 2010.  In addition, we waived the first and secondprice redeterminations for FBWS required by the contract.  Going forward, monthly operation andmaintenance management fees will be $246,000, which is approximately $33,000less per month than the interim increases in effect since October 2008. Anadditional modification funding the balance of the settlement amount(approximately $373,000) is pending and will not be recorded until suchmodification is received.

 

Registrant relies uponrate approvals by state regulatory agencies in California and Arizona toprovide for a return on invested and borrowed capital used to fund utilityplant, and price redeterminations and equitable adjustments by the U.S.government in order to recover operating expenses and profit margin. Ifadequate rate relief and price redeterminations and adjustments are not grantedin a timely manner, operating revenues and earnings can be negatively impacted.

 

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***Operating Expenses:***

 

***Supply Costs***

 

Supply costs for thewater segment consist of purchased water, purchased power for pumping,groundwater production assessments and water supply cost balancing accounts.Supply costs for the electric segment consist of purchased power for resale(including the cost of natural gas used by BVES’ generating unit) and theelectric supply cost balancing account*.* Water andelectric margins are computed by taking total revenues, less total supplycosts. Registrant uses these margins and related percentages as an importantmeasure in evaluating its operating results. Registrant believes this measureis a useful internal benchmark in evaluating the utility business performancewithin its water and electric segments. Registrant reviews these measurementsregularly and compares them to historical periods and to our operating budgetas approved. However, this measure, which is not presented in accordance withGenerally Accepted Accounting Principles (“GAAP”), may not be comparable tosimilarly titled measures used by other entities and should not be consideredas an alternative to operating income, which is determined in accordance withGAAP, as an indicator of operating performance.

 

Total supply costscomprise the largest segment of total operating expenses. Supply costsaccounted for 28.3% and 29.2% of total operating expenses for the three monthsended March 31, 2010 and 2009, respectively.

 

The table below providesthe amount of increases (decreases), percent changes in supply costs, andmargins during the three months ended March 31, 2010 and 2009 (amounts inthousands):

 
| ** **                                       | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                       | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING  REVENUES **(1)**                |       | $             | 57,874     |          | $          | 56,794     |       | $          | 1,080      |   | 1.9 | % |
| WATER SUPPLY  COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                          |       | $             | 8,257      |          | $          | 8,214      |       | $          | 43         |   | 0.5 | % |
| Power purchased  for pumping **(1)**             |       | 1,655         |       | 1,688         |       | (33        | )          | -2.0       | %          |
| Groundwater  production assessment **(1)**       |       | 2,622         |       | 2,517         |       | 105        |       | 4.2        | %          |
| Water supply  cost balancing accounts **(1)**    |       | 2,514         |       | 2,377         |       | 137        |       | 5.8        | %          |
| TOTAL WATER  SUPPLY COSTS                        |       | $             | 15,048     |          | $          | 14,796     |       | $          | 252        |   | 1.7 | % |
| WATER MARGIN**(2)**                              |       | $             | 42,826     |          | $          | 41,998     |       | $          | 828        |   | 2.0 | % |
| PERCENT MARGIN -  WATER                          |       | 74.0          | %          | 73.9          | %          |       |       |       |       |
|                                             |       |          |       |          |       |       |       |       |       |
| ELECTRIC  OPERATING REVENUES **(1)**             |       | $             | 10,979     |          | $          | 8,632      |       | $          | 2,347      |   | 27.2 | % |
| ELECTRIC SUPPLY  COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased  for resale **(1)**              |       | $             | 3,669      |          | $          | 3,962      |       | (293       | )          | -7.4 | % |
| Electric supply  cost balancing accounts **(1)** |       | 1,301         |       | 1,151         |       | 150        |       | 13.0       | %          |
| TOTAL ELECTRIC  SUPPLY COSTS                     |       | $             | 4,970      |          | $          | 5,113      |       | $          | (143       | ) | -2.8 | % |
| ELECTRIC MARGIN **(2)**                          |       | $             | 6,009      |          | $          | 3,519      |       | $          | 2,490      |   | 70.8 | % |
| PERCENT MARGIN -  ELECTRIC                       |       | 54.7          | %          | 40.8          | %          |       |       |       |       |

 

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(1)           As reported on AWR’s Consolidated Statements ofIncome, except for supply cost balancing accounts. The sum of water andelectric supply cost balancing accounts in the table above are shown on AWR’sConsolidated Statements of Income and totaled $3,815,000 and $3,528,000 for thethree months ended March 31, 2010 and 2009, respectively.

 

(2)           Water and electric margins do not include anydepreciation and amortization, maintenance expense, or other operatingexpenses.

 

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Two of the principalfactors affecting water supply costs and gross margin are the amount of waterproduced and the source of the water. Generally, the variable cost of producingwater from wells is less than the cost of water purchased from wholesalesuppliers. In addition, GSWC is authorized to establish water and electricsupply cost balancing accounts for increases and/or decreases in costs due tochanges in rates charged by its suppliers which provide purchased water andpurchased power, and by agencies assessing groundwater related pump taxes forwater 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.

 

On August 21, 2008,the CPUC issued a final decision which approved the establishment of a modifiedcost balancing account or MCBA that allows recovery of supply costs for changesin water supply mix.  GSWC implementedthe MCBA in late November 2008 for Regions II and III and in September 2009for Region I’s rate-making areas prospectively in connection with the newconservation rate design and the implementation of a WRAM.  Under the MCBA, GSWC began tracking adoptedexpense levels for purchased water, purchased power and pump taxes, asestablished by the CPUC. Variances (which include the effects of changes inboth rate and volume) between adopted and actual purchased water, purchasedpower, and pump tax expenses are recorded as a component of the supply costbalancing account provision.  The amountof such variances will be recovered from or refunded to GSWC’s customers at alater date. These variances are reflected with an offsetting entry to aregulatory asset or liability balancing account (tracked individually for eachwater ratemaking area).

 

As previously discussed,GSWC’s supply costs for Regions II and III for the first quarter of 2010 havebeen recorded using 2009 adopted levels pending resolution of the Region II, IIIand general office rate case, which is expected in September 2010.  For the three months ended March 31,2010, 33.6% of the Company’s water supply mix was purchased as compared to36.6% purchased for the three months ended March 31, 2009.  However, as noted above, the implementationof the MCBA for GSWC’s water regions eliminates the effects on earnings ofchanges in the water supply mix prospectively. The adopted percentages of purchased water for the three months ended March 31,2010 at Regions I, II and III were 24.3%, 55.0% and 39.2%, respectively,as compared to actual purchased water of 25.2%, 36.8% and 28.2%, respectively,for the first quarter of 2010.  Theoverall improvement in actual mix compared to the mix approved by the CPUCresulted in an over-collection in the MCBA account. However, this increase inthe MCBA was partially offset by under-collections in the MCBA as a result ofhigher rates charged by suppliers than those included in the adopted supplycosts and lower consumption compared to adopted consumption levels.  The overall water margin percent was 74.0% inthe first quarter of 2010 as compared to 73.9% in the same period of 2009.

 

Purchased water costs forthe three months ended March 31, 2010 increased slightly to $8.3 millionas compared to $8.2 million in the same period of 2009.  The slight increase in purchased water costswas due to higher water rates charged from wholesale suppliers, partiallyoffset by lower customer usage.

 

For the three monthsended March 31, 2010, power purchased for pumping of $1.7 million wasapproximately the same as in the first quarter of 2009.  Increases in supplier rates were offset bylower customer demand and changes in the actual supply mix, as discussedabove.  Groundwater production assessmentswere higher by 4.2% due to increased pumped volume and increases in assessmentrates (pump tax rates) levied against groundwater production, effective July 2009.  In particular, Region II’s average pump taxrates increased by approximately 19% between the two periods.  These increases in groundwater productionassessments were partially offset by lower customer demand.   The MCBA tracks the increases in pump taxrates for future recovery in rates.

 

An increase of $137,000in the water supply cost balancing account provision during the three monthsended March 31, 2010 as compared to the same period in 2009 was primarilycaused by a net decrease of $278,000 of under-collections for the three monthsended March 31, 2010 (related to Region I) compared to the same period in2009, and a $17,000 increase in the amortization of the water supply costbalancing accounts.  This was partiallyoffset by a decrease in the MCBA accounts of $158,000 for the three monthsended March 31, 2010 as compared to the same period in 2009.

 

For the three monthsended March 31, 2010, the cost of power purchased for resale to customersin GSWC’s BVES division decreased by 7.4% to $3.7 million compared to $4.0million for the three months ended March 31, 2009, due largely to a decreasein customer usage of 6.1%.  In addition,GSWC began receiving power under a new purchased power contract beginning in January 2009.  The main product under this contract providesfor 13 MWs of electric energy at a fixed price of $67.85 per MWh during 2010 ascompared to $63.75 during 2009.  Thisdifference between the price of purchased power and $77 per MWh as authorizedby the CPUC is reflected in the electric supply cost balancing account.

 

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***Other Operation Expenses***

 

The primary components ofother operation expenses include payroll, materials and supplies, chemicals andwater treatment, and outside service costs of operating the regulated watersystems, including the costs associated with water transmission anddistribution, pumping, water quality, meter reading, billing, and operations ofdistrict offices.  Registrant’s electricand contracted services operations incur many of the same types of costs aswell.  For the three months ended March 31,2010 and 2009, other operation expenses by segment consisted of the following(amounts in thousands):

 
| ** **                      | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                      | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                  |       | $             | 5,485      |          | $          | 5,622      |       | $          | (137       | ) | -2.4 | % |
| Electric  Services              |       | 582           |       | 641           |       | (59        | )          | -9.2       | %          |
| Contracted  Services            |       | 772           |       | 890           |       | (118       | )          | -13.3      | %          |
| Total other  operation expenses |       | $             | 6,839      |          | $          | 7,153      |       | $          | (314       | ) | -4.4 | % |

 

For the three months ended March 31, 2010, otheroperation expenses for water services decreased by 2.4% due primarily todecreased labor costs of $112,000 resulting from a decrease in the number ofemployees due to delays in filling positions that became vacant, and $96,000 inother miscellaneous costs.  This waspartially offset by an increase in water treatment costs of $71,000.

 

There was a decrease of $59,000 in other operationexpenses for electric services primarily due to a decrease of $39,000 in baddebt expense and $20,000 in other miscellaneous operating expenses.

 

Contracted services experienced decreases in otheroperation expenses of $118,000 primarily due to lower outside services costs of$167,000 reflecting the transfer of some activities from subcontractors toemployees, and a decrease of $75,000 in equipment and materials.  These decreases were partially offset byincreases of $110,000 in labor costs and $14,000 in other miscellaneousoperating expenses.

 

***Administrative and General Expenses***

 

Administrative andgeneral expenses include payroll related to administrative and generalfunctions, the related 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 March 31, 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**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                 | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                             |       | $             | 13,458     |          | $          | 11,937     |       | $          | 1,521      |   | 12.7 | % |
| Electric  Services                         |       | 1,933         |       | 2,437         |       | (504       | )          | -20.7      | %          |
| Contracted  Services                       |       | 3,421         |       | 2,442         |       | 979        |       | 40.1       | %          |
| AWR (parent)                               |       | 51            |       | 49            |       | 2          |       | 4.1        | %          |
| Total  administrative and general expenses |       | $             | 18,863     |          | $          | 16,865     |       | $          | 1,998      |   | 11.8 | % |

 

For thethree months ended March 31, 2010, administrative and general expenses increased by$1.5 million in water services compared to the three months ended March 31,2009 due primarily to: (i) an increase in outside services of $1.0 millionincluding legal costs incurred in preparation for trial and thefinalization of a settlement 

 

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agreement reached in February 2010 between GSWCand two former officers, and (ii) an increase in labor costs and otheremployee benefits of $1.0million due primarily to higher wages related to Registrant’s annualperformance-based salary review program. These increases were partially offset by: (i) a decrease in pensionexpense of $281,000 due to improved pension plan performance during 2009, and (ii) adecrease of $198,000 in other miscellaneous administrative and general expensesincluding supplies and rent.

 

For the three months ended March 31, 2010,administrative and general expenses for electric services decreased by $504,000as compared to the three months ended March 31, 2009 due primarily to a $660,000decrease in outside consulting, legal and other services incurred during thefirst quarter of 2009 related to the general rate case and new purchased powercontract, and a $76,000 decrease in labor costs and employee related benefits.  These decreases were partially offset byincreases of $217,000 in allocation of costs from the corporate headquarters toBVES and a $15,000 increase in other miscellaneous administrative and generalexpenses.

 

Administrativeand general expenses forcontracted services increased by $979,000 due to: (i) increases of$414,000 in labor costs and other related employee benefits; (ii) anincrease of $245,000 in outside services including legal fees associated withthe REA claim settlement at FBWS; (iii) an increase of$214,000 in allocation of costs from the corporate headquarters to ASUS, and (iv) anincrease of $106,000 inother miscellaneous administrative and general expenses.

 

***Depreciation and Amortization***

 

For the three monthsended March 31, 2010 and 2009, depreciation and amortization by segmentconsisted of the following (amounts in thousands):

 
| ** **                           | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                           | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                           | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                       |       | $             | 8,105      |          | $          | 7,634      |       | $          | 471        |   | 6.2 | % |
| Electric  Services                   |       | 560           |       | 565           |       | (5         | )          | -0.9       | %          |
| Contracted  Services                 |       | 177           |       | 162           |       | 15         |       | 9.3        | %          |
| Total  depreciation and amortization |       | $             | 8,842      |          | $          | 8,361      |       | $          | 481        |   | 5.8 | % |

 

For the three monthsended March 31, 2010, depreciation and amortization expense for waterservices increased by $471,000 to $8.1 million compared to $7.6 million for thethree months ended March 31, 2009 reflecting, among other things,approximately $84.3 million of additions to utility plant during 2009,depreciation on which began in January 2010.  Registrant anticipates that depreciationexpense for water services will continue to increase due to ongoingconstruction at its regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through rates.

 

For the three monthsended March 31, 2010, depreciation and amortization expense for contractedservices increased slightly due to increases in fixed assets sincethe first quarter of 2009.

 

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***Maintenance***

 

For the three monthsended March 31, 2010 and 2009, maintenance expense by segment consisted ofthe following (amounts in thousands):

 
| ** **           | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **           | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **           | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services       |       | $             | 3,484      |          | $          | 3,016      |       | $          | 468        |   | 15.5 | % |
| Electric  Services   |       | 217           |       | 202           |       | 15         |       | 7.4        | %          |
| Contracted  Services |       | 595           |       | 855           |       | (260       | )          | -30.4      | %          |
| Total  maintenance   |       | $             | 4,296      |          | $          | 4,073      |       | $          | 223        |   | 5.5 | % |

 

For the three months ended March 31, 2010,maintenance expense for water services increased by $468,000 to $3.5 millioncompared to $3.0 million for the three months ended March 31, 2009 dueprimarily to maintenance performed on wells and water supply sources at all ofGSWC’s water regions, particularly in Region II which increased by $337,000including some unplanned maintenance.

 

There was an increase of $15,000 in maintenanceexpenses for electric services related to the 8.4 MW natural gas-fueledgeneration plant.

 

There was a decrease of$260,000 in contracted services maintenance expense due primarily to a decreaseof $131,000 in labor costs, a decrease of $123,000 in outside services costs,and a decrease of $6,000 in other miscellaneous maintenance costs.

 

***Property and Other Taxes***

 

For the three monthsended March 31, 2010 and 2009, property and other taxes by segmentconsisted of the following (amounts in thousands):

 
| ** **                      | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                      | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                  |       | $             | 2,975      |          | $          | 2,861      |       | $          | 114        |   | 4.0 | % |
| Electric  Services              |       | 233           |       | 218           |       | 15         |       | 6.9        | %          |
| Contracted  Services            |       | 475           |       | 321           |       | 154        |       | 48.0       | %          |
| Total property  and other taxes |       | $             | 3,683      |          | $          | 3,400      |       | $          | 283        |   | 8.3 | % |

 

For the three monthsended March 31, 2010, property and other taxes for water and electricservices increased by $129,000.  Therewere additional property taxes resulting from higher assessed values and anincrease in payroll taxes based on increased labor costs.

 

Property and other taxeswere higher in contracted services due to an increase ingross receipt taxes for the three months ended March 31, 2010.  This increase was due primarily to the $3.1million approved request for equitable adjustment recorded in the first quarterof 2010 by ONUS at Fort Bragg, North Carolina.

 

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***ASUS******ConstructionExpenses***

 

For the three monthsended March 31, 2010, construction expenses for contracted services were$8.2 million, decreasing $277,000 compared to the same period in 2009 dueprimarily to decreases at Fort Bliss and bases in Virginia, which had severallarge construction projects during the same period in 2009.  These decreases were partially offset by a$3.8 million increase in construction costs at Fort Bragg, North Carolina.  Although construction expenses decreased forthe quarter, construction revenues increased.  The cost to completeseveral large projects are expected to be less than originallyanticipated.  Thus, with revenue on these projects being fixed bycontract, the anticipated profit margin for them improved.

 

***Net Gain on Sale of Property***

 

For the three months ended March 31, 2010, contractedservices recorded a pretax gain of $3,000 on the sale of property as comparedto a pretax gain of $15,000 in water services for the same period of 2009.  Earnings and cash flows from thesetransactions are sporadic and may or may not continue in future periods.

 

***Interest Expense***

 

For the three monthsended March 31, 2010 and 2009, interest expense by segment, including AWR(parent) consisted of the following (amounts in thousands):

 
| ** **                   | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                   | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and  Electric Services |       | $             | 5,672      |          | $          | 5,101      |       | $          | 571        |   | 11.2 | % |
| Contracted  Services         |       | 69            |       | 102           |       | (33        | )          | -32.4      | %          |
| AWR (parent)                 |       | 8             |       | 91            |       | (83        | )          | -91.2      | %          |
| Total interest  expense      |       | $             | 5,749      |          | $          | 5,294      |       | $          | 455        |   | 8.6 | % |

 

Overall, interest expense increasedby 8.6% primarily due to the issuance in March 2009 of senior notes in theamount of $40 million due March 10, 2019 with an interest rate of6.7%.  This increase to interest expensewas partially offset by lower short-term interest rates and borrowings.  The average interest rates on short-termborrowings for the three months ended March 31, 2010 was 0.86% as comparedto an average of 1.3% during the same period of 2009.  Average bank loan balances outstanding underthe AWR credit facility for the three months ended March 31, 2010 wereapproximately $19 million, as compared to an average of $74 million during thesame period of 2009.

 

***Interest Income***

 

For the three monthsended March 31, 2010 and 2009, interest income by segment consisted of thefollowing (amounts in thousands):

 
| ** **                   | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                   | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and  Electric Services |       | $             | 151        |          | $          | 199        |       | $          | (48        | ) | -24.1 | % |
| Contracted  Services         |       | 510           |       | 3             |       | 507        |       | 16900.0    | %          |
| Total interest  income       |       | $             | 661        |          | $          | 202        |       | $          | 459        |   | 227.2 | % |

 

Interest income increasedby $459,000 for the three months ended March 31, 2010 due primarily to$510,000 in interest income related to the Fort Bliss inventory priceadjustment funded by a modification issued by the U.S. government in March 2010.

 

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***Other***

 

For the three months ended March 31, 2010 and 2009,Registrant recorded other income of $33,000 and other loss of $30,000,respectively, as a result of Registrant’s earnings of an equity interest in aninvestment.  In mid-2009, Registrantestablished a Rabbi Trust for the SERP Plan. Investment income earned in this Trust of $31,000 was also included inother income during the three months ended March 31, 2010.

 

***Income Tax Expense***

 

For the three months March 31,2010 and 2009, income tax expense by segment, including AWR (parent), consistedof the following (amounts in thousands):

 
| ** **                   | ** ** | **3 Months**  | ** ** | **3 Months**  | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                   | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                   | ** ** | **3/31/2010** | ** ** | **3/31/2009** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and  Electric Services |       | $             | 2,744      |          | $          | 1,982      |       | $          | 762        |   | 38.4 | % |
| Contracted  Services         |       | 3,188         |       | 360           |       | 2,828      |       | 785.6      | %          |
| AWR (parent)                 |       | 131           |       | (978          | )          | 1,109      |       | -113.4     | %          |
| Total income tax  expense    |       | $             | 6,063      |          | $          | 1,364      |       | $          | 4,699      |   | 344.5 | % |

 

For the three monthsended March 31, 2010, income tax expense for water and electric servicesincreased by 38.4% to $2.7 million compared to $2.0 million for the threemonths ended March 31, 2009 due primarily to a increase in pretax incomeand a higher effective tax rate (“ETR”). The ETR for water and electric services for the three months ended March 31,2010 was 43.3% as compared to a 36.2% ETR applicable to the three months ended March 31,2009.  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.

 

For the three monthsended March 31, 2010, income tax expense for contracted services increasedto $3.2 million as compared $360,000 for the three months ended March 31,2009 due primarily to an increase in pretax income.  The ETR for contracted services for the threemonths ended March 31, 2010 was 38.6% as compared to a 37.1% ETRapplicable to the three months ended March 31, 2009.  The 2010 ETR is higher than the 2009 ETRprimarily as a result of the impact of differing state tax rates among thestand-alone state taxing jurisdictions within which ASUS and itssubsidiaries operate.

 

AWR (parent) receives atax benefit for expenses incurred at the parent-company level.  Inaddition, AWR (parent) records the tax effects of the members of the AWRgroup joining in filing federal consolidated and state combinedreturns.  For the three months ended March 31, 2010, the statetaxes, net of federal benefit, recorded at AWR (parent) include an expenseof approximately $146,000 as a result of applying the California state unitarytax principles (“unitary effect”).  The unitary effect may bebeneficial or detrimental depending on a combination of the profitability ofAWR’s non-California activities as well as the relative proportion of thefactor(s) applied by its apportionment method.  The net unfavorableunitary effect for the three months ended March 31, 2010 was primarilyattributable to the increased profitability of contracted services outside ofCalifornia.  Absent the unitary effect, the consolidated ETR for the threemonths ended March 31, 2010 would have been 40.8%.  Managementcontinues to intend to elect, commencing with the 2011 tax year, analternative apportionment method made available by tax law changes in 2009.

 

For the three monthsended March 31, 2009, the taxes recorded at AWR (parent) also include theeffect of management’s intention to apply an alternative method made availableby a change in California law during the first quarter of 2009.  Thechange in law permits most taxpayers to compute the portion of their incomederived from multiple jurisdictions that is subject to California taxation byapplying an alternative apportionment method  commencing with the 2011 taxyear.  As a result of management’s intention to apply the alternativemethod, AWR adjusted its deferred tax balances in the first quarter of 2009 toreflect the expected amount at which it will realize its 

 

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California deferred taxesconsistent with the change in tax law, and refined certain relatedestimates.  This resulted in the recording of a benefit of approximately$918,000, or $0.05 per share, during the first quarter of 2009. While theeffect of the tax law change will continue to affect AWR’s state taxes, thefuture effects may be beneficial or detrimental depending on a combination ofthe profitability of AWR’s non-California activities as well as the relativeproportion of the factor(s) applied by its apportionment method. Periodically, management will assess its intention to apply the alternativemethod and will adjust its deferred tax balances accordingly.

 

**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 policies used in the preparation of the Registrant’s financial statements that it believes affect the more significant judgments and estimates used in the preparation of its consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in Registrant’s Annual 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 ofGSWC), is capital intensive and requires considerable capital resources. Aportion of these capital resources are provided by internally generated cashflows from operations. When necessary, Registrant obtains funds from externalsources in the capital markets and through bank borrowings. Access to externalfinancing on reasonable terms depends on Registrant’s credit ratings andcurrent business conditions, including that of the water utility industry ingeneral as well as conditions in the debt or equity capital markets. If thesebusiness and market conditions deteriorate to the extent that AWR no longer hasaccess to the capital markets at reasonable terms, Registrant has access to a$115 million revolving credit facility that is currently utilized to supportoperations, which will expire on June 3, 2010.  Management expects to extend and amend thisfacility prior to its expiration.  Up to$20 million of this facility may be used for letters of credit. As of March 31,2010, an aggregate of $21 million in cash borrowings were included in currentliabilities and $11.1 million of letters of credit were outstanding under thisfacility.  As of March 31, 2010,AWR had $82.9 million available to borrow under the credit facility.  In addition, AWR filed a RegistrationStatement on August 10, 2009 with the Securities and Exchange Commission (“SEC”)for the sale from time to time of debt and equity securities. As of March 31,2010, $115.0 million was available for issuance under this RegistrationStatement.

 

InJuly 2009, Standard & Poor’s (“S&P”) Ratings Servicesimproved its outlook on AWR and GSWC to positive from stable.  At the same time, S&P affirmed the ‘A’corporate credit rating on AWR and GSWC. S&P debt ratings range from AAA (highest rating possible) to D(obligation is in default).  Securitiesratings are not recommendations to buy, sell, or hold a security and aresubject to change or withdrawal at any time by the rating agency.  Registrant believesthat AWR’s sound capital structure and an “A Stable” credit rating, combined withits financial discipline, will enable AWR to access the debt and/or equitymarkets.  However, unpredictablefinancial market conditions in the future may limit its access or impact thetiming of when to access the market, in which case Registrant may choose totemporarily reduce its capital spending. We expect to fund capital expenditures during 2010 primarily throughinternally generated cash, short-term borrowings, and advances andcontributions from developers.  Registrant’s capital expenditures for 2010are estimated at approximately $85 - $90 million.

 

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AWR has paidcommon dividends for over 75 consecutive years. On April 26, 2010, AWR declared a regular quarterly dividendof $0.260 per Common Share. The dividend, totaling approximately $4.8million, will be paid onJune 1, 2010 to common shareholders of record at the close of business on May 12,2010. AWR’s ability to pay cash dividends on its Common Shares outstandingdepends primarily upon cash flows from GSWC. AWR presently intends to continue paying quarterly cash dividends in thefuture, on or about March 1, June 1, September 1 and December 1,subject to earnings and financial condition, regulatory requirements and suchother factors as the Board of Directors may deem relevant.

 

*Cash Flows from Operating Activities*:

 

Registrant’s future cashflows from operating activities will be affected by utility regulation;infrastructure investment; maintenance expenses; inflation; compliance withenvironmental, health and safety standards; production costs; customer growth;per customer usage of water and electricity; weather and seasonality; andrequired cash contributions  to pensionand post-retirement plans.  In addition,future cash flows from non-regulated subsidiaries will depend on new businessactivities, including military base operations and the construction of newand/or replacement infrastructure at the different military bases, timelyredetermination of prices and requests for equitable adjustments of prices andtimely collection of payments from the U.S. government.

 

Cash flows from operatingactivities have generally been sufficient to meet operating requirements and aportion of capital expenditure requirements. As previously discussed, AWR has access to a $115 million revolving credit facility that iscurrently utilized to support operations.  This revolving credit facility expires in June 2010.  Registrant is currently in the process ofrenewing this facility and expects to complete the process prior to June 2010.  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.

 

Registrant also obtainscash from non-operating sources such as customer advances for and contributionsin aid of construction, discussed below in financing activities.

 

Cash flow from operatingactivities is primarily generated by net income, non-cash expenses fordepreciation and amortization, and deferred income taxes.  Net cashprovided by operating activities was $19.9 million for the three months ended March 31,2010 as compared to $19.8 million for the three months ended March 31,2009.  Consolidated net income for thethree months ended March 31, 2010 increased by $3.6 million as compared tothe same period in 2009 primarily due to the improved performance of theMilitary Utility Privatization Subsidiaries resulting in an increase in ASUS’scash flows from operating activities.  In particular, ASUS receivedcontract modifications approved by the U.S. government during the first quarterof 2010 in connection with two separate requests for equitable adjustmentpreviously filed for inventory price adjustments at Fort Bliss in Texas andFort Bragg in North Carolina.  The cashassociated with the Fort Bragg contract modification was billed and received;therefore, increasing ASUS’ cash flow from operating activities by $6.5 millionduring the first quarter of 2010.  Theamount collected included $3.4 million related to construction funds, which wasrecorded as deferred revenue in the first quarter of 2010 to be recognized inrevenues when the construction work is performed.

 

Cash flows from operatingactivities at GSWC decreased by $4.2 million in 2010 compared to 2009 due tolower water consumption of approximately 13% 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. A surcharge wasimplemented in March 2010 and is 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.

 

*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities, which consists primarily of capital expenditures at GSWC,were $16.0 million for the three months ended March 31, 2010 as comparedto $17.7 million for the same period in 2009.  Construction activities decreased due to more adverse weather conditionsexperienced in the first quarter of 2010 as compared to the same period in2009.

 

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Registrant intends toinvest capital prudently to provide essential services to its regulatedcustomer base, while working with its regulators to have the opportunity toearn a fair rate of return on investment. Registrant’s infrastructureinvestment plan consists of both infrastructure renewal programs, whereinfrastructure is replaced, as needed, and major capital investment projects,where new water treatment and delivery facilities will be constructed.  Capital expenditures are expected to be approximately$85 - $90 million during 2010.  Projectedcapital expenditures and other investments are subject to periodic review andrevision to reflect changes in economic conditions and other factors.

 

*CashFlows from Financing Activities*:

 

Registrant’s financingactivities include primarily: (i) the issuance of common shares andlong-term debt; (ii) the repayments of long-term debt and notes payable tobanks, 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.

 

Net cash used infinancing activities was $507,000 for the three months ended March 31,2010 as compared to net cash provided of $15.5 million for the same period in2009.  During the three months ended March 31,2010, Registrant paid $4.8 million in dividends on common shares, increasedshort-term borrowings by $3.6 million on its revolving credit facility andreceived $889,000 in advances of and contribution in aid of construction.During the three months ended March 31, 2009, Registrant received net proceedsof $39.8 million from the issuance of long-term debt, a portion of which wasused to pay down short term borrowings by $20.3 million.  During the three months ended March 31,2009, Registrant also paid $4.3 million in dividends on commons shares andreceived $332,000 in advances for and contributions in aid of construction.

 

***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 March 31, 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.  A senior note was issued by GSWC on March 10,2009, to CoBank, ACB (“CoBank”).  Underthe terms of this senior note, CoBank purchased a 6.7% Senior Note due March 10,2019 in the aggregate principal amount of $40.0 million from GSWC.  Under the terms of the note, GSWC shares inthe profits of CoBank under a patronage arrangement.  If CoBank continues to pay the current amountof patronage, the annual cost of the note will be at about 6.0%. The proceedsfrom the sale of the note to CoBank were used to pay down short-term borrowingsand to fund capital expenditures.  Inaddition, GSWC receives advances and contributions from customers, homebuilders and real estate developers to fund construction necessary to extendservice to new areas. Advances for construction are refundable generally atrates ranging from 10% to 22% of the revenues received from the installationfor which funds were advanced or in equal annual installments, generally over40 years.  Amounts which are no longerrefundable are reclassified to contributions in aid of construction. Utilityplant funded by advances and contributions is excluded from rate base.Generally, GSWC depreciates contributed property and amortizes contributions inaid of construction at the composite rate of the related property.

 

*CashFlows from Operating Activities*:

 

Net cash provided byoperating activities was $14.5 million for the three months ended March 31,2010 as compared to $18.7 million for the same period in 2009.  This decrease is due primarily to lower waterconsumption of approximately 13% 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.  A surcharge wasimplemented in March 2010 and is 

 

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expected to be in placethrough 2011 to recover the revenue shortfall tracked in the WRAM.  The timing of cash receipts and disbursements related to other working capitalitems also affected the changes in net cash provided by operating activities.

 

*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities were $15.7 million for the three months ended March 31,2010 as compared to $17.2 million for the same period in 2009. This decreasewas due to lower capital expenditures as compared to the same period in 2009primarily due to changes in weather conditions in 2010. GSWC is expected toincur capital expenditures in 2010 of approximately $80 - $85 million primarilyfor upgrades to its water supply and distribution facilities as well as costsfor computer software and implementation.

 

*CashFlows from Financing Activities*:

 

Netcash provided by financing activities was $80,000 for the three months ended March 31,2010 as compared to $17.1 million for the same period in 2009.  GSWC paid dividends of $4.8 million to AWRand increased intercompany borrowings by $4.7 million during the three monthsended March 31, 2010.  During thesame period in 2009, GSWC received net proceeds of $39.8 million from theissuance of long-term debt.   A portionof the proceeds were used to pay down inter-company borrowings which decreasedcash flows from financing activities by $18.2 million.  GSWC also paid dividends of $4.4 millionduring the three months ended March 31, 2009.

 

***CCWCand 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 Obligations and OtherCommitments**

 

Registrant has various contractual obligations whichare recorded as liabilities in the consolidated financial statements. Otheritems, such as certain purchase commitments and operating leases are notrecognized as liabilities in the consolidated financial statements, but arerequired to be disclosed. In addition to contractual maturities, Registrant hascertain debt instruments that contain annual sinking fund or other principalpayments. Registrant believes that it will be able to refinance debtinstruments at their maturity through public issuance, or private placement, ofdebt or equity. Annual principal and interest payments are generally made fromcash flow from operations.

 

There have been no other material changes to AWR’s contractual obligations and other commitments since December 31, 2009. See *“Management’s Discussion and Analysis of Financial Condition and Results of Operation—Contractual Obligations, Commitments and Off Balance Sheet Arrangements”*section of the Registrant’s Form 10-K for the year-ended December 31, 2009 for a detailed discussion of contractual obligations and other commitments.

 

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**Regulatory Matters**

 

***Recent Changes in Rates***

 

*Rate increases in 2010:*

 

In December 2009, the CPUC approved escalationrate increases for GSWC’s Region I water ratemaking area effective January 1,2010.  The authorized rate increases areexpected to provide GSWC with additional annual revenues of approximately$76,000 for Region I after adjusting for customer growth.

 

In October 2009, the CPUC issued a final decisionregarding the BVES general rate case. This decision provided for an incremental annual increase of $1.2million for 2010, rates for which went into effect on January 1, 2010 atBVES.  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 amount in this memorandumaccount totaled approximately $958,000 as of December 31, 2009. However,the decision issued on October 15, 2009 did not address the disposition ofthis memorandum account.   In November 2009,GSWC filed a petition for modification to seek clarification from the CPUC onthe treatment and recovery of this memorandum account.   In March 2010, the CPUC approved forrecovery this memorandum account through a surcharge over a 24-monthperiod.  Accordingly, during the firstquarter of 2010, GSWC recorded a regulatory asset and a corresponding increaseto revenues for amounts included in this memorandum account.

 

*Rate increases in 2009:*

 

*GSWC*

 

In January 2009, the CPUC approvedescalation/attrition year rate increases for all three GSWC water ratemakingareas effective January 1, 2009. The authorized rate increases are expected to provide GSWC withadditional 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 revenues arebased upon normalized sales levels approved by the CPUC, effective January 1,2009.

 

The CPUC also issued its final decision in the cost ofcapital proceeding in June 2009.  Inthat decision, 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.

 

During the third quarter of 2008, BVES filed anamended application to request CPUC approval of a new purchased power contractand regulatory accounting treatment for all unrealized gains and losses on thenew contract due to derivative accounting. A final decision on this application was issued in May 2009approving the contract and authorizing the memorandum account to track derivativegains and losses.

 

In June 2008, GSWC’s BVES division filed itsgeneral rate case with the CPUC’s electric division. On October 15, 2009,the CPUC issued a final decision regarding the BVES general rate case.  The decision authorizes return on equity of10.5% with a corresponding return on rate base of 9.15%.  The incremental annual revenue increasesapproved in the decision are $4.8 million for 2009, $1.2 million for 2010, $0.2million for 2011 and $0.2 million in 2012. All increases are prospective. Based on the decision, BVES is also allowed to establish a Base RevenueRequirement Adjustment Mechanism to decouple revenue from usage.

 

Among other things, the decision allows for an updateto BVES’ rates in 2010 for the corporate headquarters’ costs based on the CPUC’sadoption of new rates for GSWC’s current general rate case including therecovery of expenses associated with its corporate headquarters. However, asdiscussed in the pending rate requests below, the general rate case for RegionsII and III and the general office has been delayed.

 

*CCWC*

 

CCWC filed a rate case with the ACC in August 2004for its water system in Fountain Hills, Arizona. In September 2005, theACC approved a rate increase for CCWC. CCWC appealed the ACC’s use of onlyoriginal cost less depreciation rate base to determine the revenue requirementwith the Arizona Court of Appeals. Because CCWC’s fair value rate base washigher, the use of original cost exclusively to determine the revenuerequirement 

 

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deprived CCWC of a substantial amount of operatingincome.  After several proceedings, theACC rendered its final decision on July 17, 2008.  The decision reduced the ROE from the 9.3% inthe original decision by 200 basis points resulting in a return on fair valuerate base of only 6.4%. Under this decision, CCWC’s annual revenues would onlybe expected to increase by $12,000.  CCWChas filed an appeal of this decision.  InOctober 2009, the Arizona Court of Appeals notified CCWC that it wouldhear oral arguments on the CCWC Appeal. Oral arguments were held in January 2010.  At this time, management is unable to predictthe outcome of this matter.

 

CCWC filed a rate case during the fourth quarter of2007, requesting rate increases of approximately $2.9 million.  On October 8, 2009, the ACC issued afinal decision approving a rate increase for CCWC, which was effective on October 15,2009 and is expected to generate additional annual revenues of approximately$1.7 million, a 23% increase over current revenues.  In addition, despite its previous rulings,the ACC also ordered CCWC to treat the entire gain of $1,520,000 from asettlement agreement with the Fountain Hills Sanitary District (“FHSD”) as areduction to rate base.   As a result,CCWC recognized a loss of $760,000, or $0.02 per share, during the thirdquarter of 2009, which effectively reversed an original gain recorded in 2005.  In November 2009, CCWC filed anapplication for rehearing on several issues including the sharing of this gainfrom the settlement proceeds.   The ACC granted CCWC’s request tohold a rehearing on the issues.  On January 27, 2010, a proceduralconference was held with the judge and the staff of the ACC involved in therate case to address a schedule for the rehearing. The rehearing was held in April 2010and a final decision by the ACC is expected later this year.   At this time, management is unable topredict the outcome of this matter.

 

As of March 31, 2010, CCWC has $3.3 million ofgoodwill which may be at risk for potential impairment if future requested rateincreases are not granted or further delayed by the ACC.

 

***PendingRate Requests***

 

*GSWC*

 

GSWC filed its generalrate case for Region I on January 4, 2010. The new rates are to be effective for 2011 and 2012.  GSWC filed for revenue increases and, ifapproved as filed, are expected to generate approximately $57.1 million inannual revenues in 2011 and $58.3 million in 2012.

 

In January 2008, theCPUC 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 forrehearing of this decision on various legal grounds.  As permitted by the CPUC, GSWC filed aresponse to DRA’s application.  In September 2008,the CPUC granted a limited rehearing in order to consider whether it isreasonable to include in Region I’s rate base approximately $3.5 million ofcosts incurred in connection with the La Serena Plant Improvement Project.  The project is currently in rate base and theearnings have been included in rates since January 1, 2008.  If DRAprevails, GSWC may be required to write-off the costs incurred to date and alsorefund amounts collected from customers since January 1, 2008. At thistime, management believes it is probable that the costs of this project will beallowed to remain in rate base.  Thefinal resolution of this issue is expected in September 2010 as part ofthe CPUC’s final decision in the Region II and III general rate case, furtherdiscussed below.

 

GSWC filed its general rate case for Regions II andIII plus the general office on July 1, 2008 for rates effective for years2010, 2011 and 2012.  In January 2010,the CPUC approved interim rates for GSWC’s Region II and Region III waterratemaking areas effective January 1, 2010, pending a final decision onthe general rate case.  While theincrease for interim rates was zero percent, it is important to establish theeffective date so that new rates, once approved by the CPUC, will beretroactive to January 1, 2010.  On January 29,2010, the CPUC issued a ruling revising the scoping memo and reopening thegeneral rate case proceeding to receive supplemental information and testimonyon a number of issues including cost allocation, pension and benefitcalculations, general office rent expense, equity adjustments, costs regardingthe La Serena Plant Improvement Project, and deferred rate case costs (furtherdiscussed below).  GSWC has providedadditional information and testimony regarding these issues to the CPUC.  A final decision is expected in September 2010.  At this time, management cannot predict theoutcome of the final decision.

 

Included in GSWC’s otherregulatory assets are deferred rate case costs totaling $3.5 million. These aredirect costs consisting primarily of outside consulting services, which areincurred in connection with the preparation and processing of a GRC.  Historically,GSWC has deferred these costs as a regulatory asset which are then recovered inrates and amortized over the term of a rate case cycle once the new rates gointo effect.  In the 

 

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current GRC for RegionsII and III and the general office, DRA has challenged GSWC’s historicalpractice of deferring these costs with subsequent recovery upon the effectivedate of the new rates.  Instead, DRA believes that rate case costs shouldbe projected for future periods and recovered prospectively.  Managementbelieves that DRA’s rationale and recommendations are inconsistent with GSWC’shistorical practice of deferring and recovering rate case expenses associatedwith the current GRC.  These practiceshave not been challenged by the CPUC in prior rate cases.  If DRAprevails, GSWC may be required to write-off approximately $2.2 million as of March 31,2010 related to the current rate case.  Resolution of this matter isexpected in September 2010 as part of the final decision on the Region IIand III rate case.

 

In August 2009, GSWCfiled an application with the CPUC requesting authorization to implementcorrective measures to address water quality problems in its Bay Point watersystem.  These corrective measuresinclude: (i) retiring an existing water treatment plant and purchasingtotal system demand from Contra Costa Water District (“CCWD”); (ii) enteringinto an asset lease agreement with CCWD for 4.4 million gallons per day oftreated 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 February 17,2010 GSWC and DRA filed a motion to approve a Settlement Agreement resolvingall issues in the application.  Hearingswere held on March 1, 2010.  Inpart, the Settlement Agreement recommends approval of  (i) retiring an existing water treatmentplant and purchasing total system demand from CCWD; (ii) entering into anasset lease agreement with CCWD for 4.4 million gallons per day of treatedwater for a one-time lease price of $4.7 million; (iii) recovering costsassociated with the purchase of additional treated water to replace purchasedraw water due to contamination; and (iv) amending tariffs to appropriatelycharge GSWC’s Bay Point customers for the cost of the asset lease agreementwith CCWD.  A proposed decision isexpected in May of 2010 with a final decision in June or July,2010.  At this time, management believesthat it is probable that its request will be approved by the CPUC.

 

***Other Regulatory Matters***

 

See *“Management’s Discussion and Analysis of Financial Condition andResults of Operation—Regulatory Matters”*section of theRegistrant’s Form 10-K for the year-ended December 31, 2009 for adetailed discussion of other regulatory matters. The discussion below focuseson significant matters and changes since December 31, 2009.

 

**ConservationRate Design and Revenue Adjustment Mechanisms**

 

In accordance with theCPUC’s administrative processing rules, GSWC implemented tiered increasingblock rates and began recording in the WRAM accounts the difference betweenwhat is billed to its regulated customers in Regions II and III in November 2008and in Region I in September 2009, and that which is authorized by the CPUC.GSWC provided customers with conservation rate notices as a bill insert andexplained to them the impact of conservation rates on customers’ bills.

 

In March 2010, GSWCfiled an advice letter with the CPUC for recovery of the Region II and IIIWRAM, net of the MCBA and supply cost balancing accounts, of $18.3million.  A surcharge was put in place inMarch 2010 which is expected to recover the amounts accumulated in RegionsII and III’s WRAM, net of MCBA and supply cost balancing accounts, as of December 31,2009.  As of March 31, 2010, RegionI has a net regulatory asset of $3.8 million. In April 2010, GSWC filed advice letters with the CPUC for recoveryof $2.8 million of this amount which represented the net regulatory assetbalance as of December 31, 2009. Going forward, GSWC will seek recovery of its WRAM, net of MCBA, on anannual basis.  As of March 31, 2010,GSWC has a net aggregated regulatory asset of $26.2 million which is comprisedof a $30.9 million under-collection in the WRAM accounts and $4.7 millionover-collection in the MCBA accounts.

 

**CPUCSubpoena**

 

On February 15,2007, the CPUC issued a subpoena to GSWC in connection with an investigation ofcertain work orders and charges paid to a specific contractor used by GSWC fornumerous construction projects totaling approximately $24.0 million. The CPUC’sinvestigation focuses on whether GSWC was overcharged for these constructionprojects and whether these overcharges were approved in customer rates. The construction projects completed by this specific contractor relatedprimarily to work on water treatment and pumping plants which have been placedin service and are used and useful.  In June 2007, GSWC receivednotification from the 

 

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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 contracts orjobs.  GSWC is currently responding to data requests submitted by the CPUCincluding recent data requests 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.  GSWC believes that the costs incurredrelated to the aforementioned construction projects were prudent andappropriately capitalized.  Management cannot predict the outcome of theinvestigation or audit at this time and is unable to reasonably estimate apotential loss related to items under the aforementioned investigation, as noformal claim has been made against GSWC to date.

 

In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with theACC staff and has provided responsive materials, including but not limited to,materials that are relevant to CCWC. Although the ACC has issued a decision inthe CCWC general rate case, they have held the docket open pending resolutionof the staff’s review of the CPUC subpoena documents.  In the first quarter of 2010, the ACC staffissued a report recommending that proper controls be established in CCWC’sprocurement policies and procedures, and that status reports of the CPUC’sinvestigation and resolution be filed with the ACC periodically. The staff’sreport 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 Electric Service**

 

GSWC’s BVES division hasbeen regularly filing compliance reports with the CPUC regarding its purchasesof energy from renewable energy resources. The filings have indicated that BVEShas not achieved interim target purchase levels of renewable energy resourcesand thus, on its face, might be subject to a potential penalty. However, BVESexpects that the CPUC will waive any potential fines in accordance with theflexible compliance rules.  Accordingly,no provision for loss has been recorded in the financial statements as of March 31, 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 aten-year contract to purchase renewable energy created from landfill gas.  The contract is subject to CPUCapproval.  If approved, the contract willprovide up to 3 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.

 

**CatastrophicEvent Memorandum Account**

 

In January 2010,the City of Big Bear and surrounding areas of San Bernardino County experienceda series of snow storms, which damaged many BVES power lines, poles,transformers, and other facilities and caused temporary interruption of serviceto many BVES customers.  As a result ofthese storms, BVES has incurred additional operating costs to repair equipmentand restore electric service to its customers. While service has been restored to BVES customers, costs are still beingincurred to repair equipment affected by the storms.  In February 2010, GSWC informed the CPUCit will track these costs in a Catastrophic Event Memorandum Account (“CEMA”).  Once all work resulting from these storms iscompleted, GSWC intends to file an advice letter with the CPUC for recovery ofthese costs through a surcharge.  At thistime, BVES estimates that the storm damage costs will be approximately$650,000.  This estimate includes BVESlabor, outside services assistance, equipment, materials, facilities damagesand related snow removal services.  Webelieve these incremental costs will be approved by the CPUC for recoverythrough the CEMA.  As of March 31,2010, approximately $403,000 has been incurred as a result of the storms andhas been included in the CEMA account as a regulatory asset.  Management believes this amount is probableof future recovery.

 

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**Environmental Matters**

 

AWR’s subsidiaries are subject to increasingly stringent environmentalregulations including the 1996 amendments to the Federal Safe Drinking WaterAct; enhanced surface water treatment rules; regulationof disinfectant/disinfection by-products; and the long-term enhanced surface water treatment rules; ground water treatment rule; contaminant regulationof radon and arsenic; and unregulated contaminants monitoring rule.

 

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

 

**WaterSupply**

 

See *“Management’s Discussion and Analysis of Financial Condition andResults of Operation—Water Supply”*section of the Registrant’s Form 10-Kfor the year-ended December 31, 2009 for a detailed discussion of watersupply issues. The discussion below focuses on significant matters and changessince December 31, 2009.

 

***StateWater Project***

 

Water supplies availableto the Metropolitan Water District of Southern California (“MWD”) through theState Water Project (“SWP”) have historically varied from year to year based onweather.  However, MWD has generally beenable to provide sufficient quantities of water to satisfy the needs of itsconstituents.

 

A keylink in the SWP is the Sacramento/San Joaquin River Delta adjacent to the SanFrancisco Bay (“Delta”).  The fresh waterpathway through the Delta is supported by earthen levees, and the reliabilityof those levees has been called into question based on post hurricane Katrinaassessments by various federal, state and local agencies.  A significant failure of the Delta levee systemwould substantially interfere with water exports, thus potentially disruptingthe water supply available to GSWC from northern California via MWD.  In light of these risks, the state Departmentof Water Resources (“DWR”) and the Governor have convened a series ofinterdisciplinary task forces to develop proposals to preserve theenvironmental viability of the Delta and safeguard the water supply.  A series of legislative actions were approvedin 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 state watercontractors.  DWR generally establishes apercentage allocation of delivery requests based on a number of factors,including weather patterns, snow pack levels and reservoir levels.  The percent allocation given to statecontractors 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 May 2010, DWR increased theallocation to 40%.  In 2009, the SWPdelivered 40% of contractor requests.

 

***ColoradoRiver***

 

On October 17, 2003, theFederal government, acting through the United States Bureau of Reclamation (“Bureau”)in its capacity as Colorado River watermaster, the State of California, andfour Southern California water agencies, including MWD, reached an agreement,known as 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 access to its base allotment of Colorado River watereach year, as well as excess Colorado River water until October 2016, andup to 1.6 MAF of additional water that the Imperial Irrigation Districtproposes to conserve and sell to the state for use by MWD members.  The QSA has been subject to ongoinglitigation.  A trial court has ruled that the QSA is invalid to theextent that it relies upon an unconditional appropriation from the Stateof California to fund environmental mitigation.  MWD and theother Southern California water agencies intend to appeal.  There isno expected disruption in water supplies while the case awaitsresolution of the appeal.

 

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***WholesaleWater Supplier Responses***

 

Under its IntegratedResources Plan, MWD estimates that it can meet its member agencies’ demandsover at least the next 20 years. However, in light of pressure on all of its sources of 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%.  GSWC had also implemented mandatory andvoluntary actions in areas relying on MWD as a supply, and expects to meet the10% allocation reduction.  As a result,GSWC has moved to voluntary actions in all MWD service areas.   MWD has declared restrictions on wateravailability for groundwater replenishment and other supply programs.  MWD has announced a rate increase of 7.5%beginning January 2011, with another increase of 7.5% for 2012.  Increases in prices from wholesalers such asMWD flow through the modified cost balancing account for GSWC.

 

The Contra Costa WaterDistrict (“CCWD”), which also relies on water flow through the Delta, alsoannounced plans for mandatory water allocations and restrictions in 2009.  GSWC purchases water from the CCWD for use inits Bay Point service territory.  GSWChas implemented mandatory and voluntary actions in this area similar to thoseby CCWC.  GSWC continues to work closelywith CCWD to ensure continued supply to customers in its Bay Point serviceterritory through implementation of mandatory water conservationactivities.  Effective May 1, 2010,CCWD will be terminating their mandatory allocations and so will GSWC.

 

GSWC is closely monitoringdevelopments and working with its water suppliers to safeguard the supply andevaluate potential emergency responses to prolonged reduction in importedsupplies.

 

**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 DisclosuresAbout 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 impact of the current financial crisis. Market risk is thepotential loss arising from adverse changes in prevailing market rates andprices.

 

Therehave been no other material changes regarding Registrant’s market risk positionfrom the information provided in its Annual Report on Form 10-K for the yearended 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 March 31, 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**

 

There have been no material developmentsin any of the legal proceedings described in our 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 other legal proceedingsare pending, which are believed to be material. Management believes that rate recovery, properinsurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinary courseof business.

 

**Item 1A. Risk Factors**

 

There have been no significant changes in the risk factorsdisclosed in our 2009 Annual Report on Form 10-K.

 

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

 

The shareholders of AWR have approved the material featuresof all equity compensation plans under which AWR directly issues equitysecurities. AWR did not directly issue any unregistered equity securitiesduring the first quarter of 2010.  Thefollowing table provides information about repurchases of common shares by AWRduring the first 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** | ** ** |
|----------------------------|------------|-----------------------------------------|------------|------------------------------------|------------|-----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------|------------|
| January 1 - 31, 2010       |       | 144                                     |       | $                                  | 34.32      |                                                                                          | —     |                                                                                   | NA         |   |
| February 1 – 28, 2010 |       | 20,765                                  |       | $                                  | 32.09      |                                                                                          | —     |                                                                                   | NA         |   |
| March 1 - 31, 2010         |       | 10,896                                  |       | $                                  | 33.93      |                                                                                          | —     |                                                                                   | NA         |   |
| Total                      |       | 31,805                                  | (2)        | $                                  | 32.73      |                                                                                          | —     |                                                                                   | NA         | (3) |

 

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(1)   None of the common shares were purchasedpursuant to any publicly announced stock repurchase program.

 

(2)   Of the amounts presented,31,550 Common Shares were acquired on the open market for employees pursuant tothe Company’s 401(k) plan.  The remainderof the Common Shares was acquired on the open market for participants in the Company’s CommonShare Purchase and Dividend Reinvestment Plan.

 

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

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

**Item 4. Other Information**

 

(a)   OnApril 26, 2010, the Board of Directors of AWR declared a regular quarterlydividend of $0.260 per common share. The dividend will be paid on June 1, 2010to shareholders of record as of the close of business on May 12, 2010.

 

(b)   Therehave been no material changes during the first quarter of 2010 to theprocedures by which shareholders may nominate persons to the Board of Directorsof AWR.

 

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## **Item 5. Exhibits**

##  

(a)   The following documents are filed asExhibits to this 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:      | May 7, 2010                                      |

 

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