**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

**FORM10-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 June 30, 2007**                                                                                                                                                                                                                                         |
| ** **                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **or**                                                                                                                                                                                                                                                                                    |
| ** **                                                                                                                                                                                                                                                                                | ** **                                                                                    |
| **o**                                                                                                                                                                                                                                                                                     | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934** |
| **for the  transition period from                        to                    ** |

 

**Commissionfile number   001-14431**

**American States WaterCompany**

(Exact Name of Registrant as Specified in Its Charter)

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

 

**Commission file number   001-12008**

**Golden State Water Company**

(Exact Name of Registrant as Specified in ItsCharter)

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

 

Indicateby check mark whether Registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that Registrant was required tofile such reports), and (2) has been subject to such filing requirements forthe past 90 days.

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

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, or anonaccelerated file. See definition of “accelerated filer and large acceleratedfile” in Rule 12b-2 of the Exchange Act. (Check one):
| American States Water  Company |   | Large accelerated filer o |   | Accelerated filer x |   | Nonaccelerated filer o |
|--------------------------------|--------|---------------------------|--------|---------------------|--------|------------------------|
| Golden State  Water Company    |   | Large accelerated filer o |   | Accelerated filer o |   | Nonaccelerated filer x |

 

Indicate by check mark whetherthe Registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct)

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

 

As of August 8, 2007, thenumber of Common Shares outstanding, of American States Water Company was17,113,878 shares.

As ofAugust 8, 2007, all of the 122 outstanding Common Shares of Golden State WaterCompany were owned by American States Water Company.

 

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**AMERICAN STATES WATER COMPANYandGOLDEN STATE WATER COMPANYFORM 10-Q**

### **INDEX**

| **Part I**  | **Financial  Information**                                                                                             | ** ** | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------------|------------|------------|
|             | ** **                                                                                                             | ** ** | ** ** |
| Item 1:          | Financial  Statements                                                                                                  |       |       |
|             |                                                                                                                   |       |       |
|             | Consolidated Balance Sheets of American States Water  Company as of June 30, 2007 and December 31, 2006           |       |       |
|             |                                                                                                                   |       |       |
|             | Consolidated Statements of Income of American States  Water Company for the Three Months Ended June 30, 2007 and 2006  |       |       |
|             |                                                                                                                   |       |       |
|             | Consolidated Statements of Income of American States  Water Company for the Six Months Ended June 30, 2007 and 2006    |       |       |
|             |                                                                                                                   |       |       |
|             | Consolidated Statements of Cash Flow of American  States Water Company for the Six Months Ended June 30, 2007 and 2006 |       |       |
|             |                                                                                                                   |       |       |
|             | Balance Sheets  of Golden State Water Company as of June 30, 2007 and December 31, 2006                           |       |       |
|             |                                                                                                                   |       |       |
|             | Statements of Income of Golden State Water Company for  the Three Months Ended June 30, 2007 and 2006                  |       |       |
|             |                                                                                                                   |       |       |
|             | Statements of Income of Golden State Water Company for  the Six Months Ended June 30, 2007 and 2006                    |       |       |
|             |                                                                                                                   |       |       |
|             | Statements of Cash Flow of Golden State Water Company  for the Six Months Ended June 30, 2007 and 2006                 |       |       |
|             |                                                                                                                   |       |       |
|             | Notes to Consolidated Financial Statements                                                                             |       |       |
|             |                                                                                                                   |       |       |
| Item 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       |       |
|             |                                                                                                                   |       |       |
| Item 3:          | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       |       |
|             |                                                                                                                   |       |       |
| Item 4:          | Controls and  Procedures                                                                                               |       |       |
|             |                                                                                                                   |       |       |
| **Part II** | **Other Information**                                                                                                  | ** ** |       |
|             | ** **                                                                                                             | ** ** | ** ** |
| Item 1:          | Legal Proceedings                                                                                                      |       |       |
|             |                                                                                                                   |       |       |
| Item  1A:        | Risk Factors                                                                                                           |       |       |
|             |                                                                                                                   |       |       |
| Item 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           |       |       |
|             |                                                                                                                   |       |       |
| Item 3:          | Defaults  Upon Senior Securities                                                                                       |       |       |
|             |                                                                                                                   |       |       |
| Item 4:          | Submission  of Matters to a Vote of Security Holders                                                                   |       |       |
|             |                                                                                                                   |       |       |
| Item 5:          | Other Information                                                                                                      |       |       |
|             |                                                                                                                   |       |       |
| Item  6:         | Exhibits                                                                                                               |       |       |
|             |                                                                                                                   |       |       |
|             | Signatures                                                                                                             |       |       |

 

----

#### **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.

Certain information and footnote disclosures normallyincluded in financial statements, prepared in accordance with accountingprinciples generally accepted in the United States of America, have beencondensed or omitted pursuant to such rules and regulations. In theopinion of management, all adjustments consisting of normal recurring items andestimates necessary for a fair statement of results for the interim period havebeen made.

It is suggested that these financial statements beread in conjunction with the financial statements and notes thereto in thelatest Annual Report on Form 10-K of American States Water Company and itswholly-owned subsidiary, Golden State Water Company.

Filing Format

This quarterly report on Form 10-Q is a combinedreport being filed by two separate Registrants: American States Water Company(hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”). Formore information, please see Note 1 to the *Notes to ConsolidatedFinancial Statements* and the heading entitled *General*in*Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations*. References in thisreport to “Registrant” are to AWR and GSWC collectively, unless otherwisespecified. GSWC makes no representations as to the information contained inthis report relating to AWR and its subsidiaries, other than GSWC.

**Forward-Looking Information**

Certain matters discussed in this report (includingthe documents incorporated herein by reference) are forward-looking statementsintended to qualify for the “safe harbor” from liability established by thePrivate Securities Litigation Reform Act of 1995. These forward-lookingstatements can generally be identified as such because the context of thestatement will include words such as Registrant “believes,” “anticipates,” “expects”or words of similar import. Similarly, statements that describe Registrant’sfuture plans, objectives, estimates or goals are also forward-lookingstatements. Such statements address future events and conditions concerningcapital expenditures, earnings, litigation, rates, water quality and otherregulatory matters, adequacy of water supplies, the ability to recover supply costs from ratepayers, contractoperations, liquidity and capital resources, and accounting matters. Actualresults in each case could differ materially from those currently anticipatedin such statements, by reason of factors such as changes in utility regulation,including ongoing local, state and federal activities; recovery of regulatoryassets not yet included in rates; future economic conditions, including changesin customer demand and changes in water and energy supply costs; futureclimatic conditions; and legislative, legal proceedings, regulatory and othercircumstances affecting anticipated revenues and costs.

1

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****ASSETS****(Unaudited)**
| ** **                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                                                                                | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Utility  Plant, at cost**                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
| Water                                                                                                  |       | $                 | 948,153    |                  | $          | 936,810 |   |
| Electric                                                                                               |       | 64,609            |       | 64,103                |       |
|                                                                                                   |       | 1,012,762         |       | 1,000,913             |       |
| Less - Accumulated depreciation                                                                        |       | (302,053          | )          | (286,951              | )          |
|                                                                                                   |       | 710,709           |       | 713,962               |       |
| Construction work in progress                                                                          |       | 46,416            |       | 36,639                |       |
| Net utility plant                                                                                      |       | 757,125           |       | 750,601               |       |
|                                                                                                   |       |              |       |                  |       |
| **Other  Property and Investments**                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Goodwill                                                                                               |       | 11,593            |       | 11,614                |       |
| Other property and investments                                                                         |       | 10,003            |       | 9,977                 |       |
| Total other property and investments                                                                   |       | 21,596            |       | 21,591                |       |
|                                                                                                   |       |              |       |                  |       |
| **Current  Assets**                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                              |       | 5,274             |       | 3,223                 |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $659 in 2007 and $796 in 2006) |       | 15,714            |       | 14,816                |       |
| Unbilled revenue                                                                                       |       | 20,318            |       | 15,696                |       |
| Receivable from the U.S. government                                                                    |       | 4,883             |       | 6,388                 |       |
| Other accounts receivable (less allowance for  doubtful accounts of $420 in 2007 and $300 in 2006)     |       | 5,379             |       | 5,368                 |       |
| Income taxes receivable                                                                                |       | 247               |       | 1,100                 |       |
| Materials and supplies, at average cost                                                                |       | 1,649             |       | 1,565                 |       |
| Regulatory assets - current                                                                            |       | 4,271             |       | 3,905                 |       |
| Prepayments and other current assets                                                                   |       | 2,628             |       | 2,787                 |       |
| Costs and estimated earnings in excess of billings  on uncompleted contracts                           |       | 5,865             |       | 4,495                 |       |
| Deferred income taxes - current                                                                        |       | 3,982             |       | 5,093                 |       |
| Total current assets                                                                                   |       | 70,210            |       | 64,436                |       |
|                                                                                                   |       |              |       |                  |       |
| **Regulatory  and Other Assets**                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Regulatory assets                                                                                      |       | 88,819            |       | 84,686                |       |
| Other accounts receivable                                                                              |       | 9,564             |       | 9,335                 |       |
| Deferred income taxes                                                                                  |       | 2                 |       | 16                    |       |
| Other                                                                                                  |       | 8,525             |       | 6,290                 |       |
| Total regulatory and other assets                                                                      |       | 106,910           |       | 100,327               |       |
|                                                                                                   |       |              |       |                  |       |
| **Total  Assets**                                                                                      |       | $                 | 955,841    |                  | $          | 936,955 |   |

 

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

2

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED BALANCE SHEETS****CAPITALIZATION AND LIABILITIES****(Unaudited)**
| ** **                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                                                      | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Capitalization**                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common shares, no par value, no stated value                                 |       | $                 | 177,442    |                  | $          | 175,135 |   |
| Earnings reinvested in the business                                          |       | 114,996           |       | 108,599               |       |
| Total common shareholders’ equity                                       |       | 292,438           |       | 283,734               |       |
| Long-term debt                                                               |       | 267,628           |       | 267,833               |       |
| Total capitalization                                                         |       | 560,066           |       | 551,567               |       |
|                                                                         |       |              |       |                  |       |
| **Current  Liabilities**                                                     | ** ** | ** **        | ** ** | ** **            | ** ** |
| Notes payable to banks                                                       |       | 28,500            |       | 32,000                |       |
| Long-term debt - current                                                     |       | 596               |       | 603                   |       |
| Accounts payable                                                             |       | 25,020            |       | 23,984                |       |
| Income taxes payable                                                         |       | 2,208             |       | 103                   |       |
| Accrued employee expenses                                                    |       | 5,564             |       | 5,320                 |       |
| Accrued interest                                                             |       | 2,469             |       | 2,583                 |       |
| Unrealized loss on purchased power contracts                                 |       | 1,180             |       | 3,654                 |       |
| Regulatory liabilities - current                                             |       | 3,919             |       | 3,546                 |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 1,739             |       | 2,038                 |       |
| Other                                                                        |       | 12,660            |       | 12,072                |       |
| Total current liabilities                                                    |       | 83,855            |       | 85,903                |       |
|                                                                         |       |              |       |                  |       |
| **Other  Credits**                                                           | ** ** | ** **        | ** ** | ** **            | ** ** |
| Advances for construction                                                    |       | 83,169            |       | 83,203                |       |
| Contributions in aid of construction - net                                   |       | 98,302            |       | 91,702                |       |
| Deferred income taxes                                                        |       | 85,500            |       | 80,727                |       |
| Unamortized investment tax credits                                           |       | 2,382             |       | 2,427                 |       |
| Accrued pension and other postretirement benefits                            |       | 31,595            |       | 31,042                |       |
| Regulatory liabilities                                                       |       | 572               |       | 588                   |       |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 2,477             |       | 2,005                 |       |
| Other                                                                        |       | 7,923             |       | 7,791                 |       |
| Total other credits                                                          |       | 311,920           |       | 299,485               |       |
|                                                                         |       |              |       |                  |       |
| **Commitments  and Contingencies (Note 7)**                                  |       | —            |       | —                |       |
|                                                                         |       |              |       |                  |       |
| **Total  Capitalization and Liabilities**                                    |       | $                 | 955,841    |                  | $          | 936,955 |   |

 

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

3

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**AMERICANSTATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED JUNE 30, 2007 AND 2006****(Unaudited)**
| ** **                                                            | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**                | ** ** |
| **(in thousands, except per share amounts)** | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Operating  Revenues**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                | 60,826     |   | $ | 53,444 |   |
| Electric                                                              |       | 6,255                            |       | 7,027 |   |
| Contracted services                                                   |       | 12,165                           |       | 2,567 |   |
| Total operating revenues                                              |       | 79,246                           |       | 63,038 |   |
|                                                                  |       |                             |       |   |   |
| **Operating  Expenses**                                               | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 12,077                           |       | 10,916 |   |
| Power purchased for pumping                                           |       | 2,673                            |       | 2,416 |   |
| Groundwater production assessment                                     |       | 2,549                            |       | 2,239 |   |
| Power purchased for resale                                            |       | 2,915                            |       | 3,248 |   |
| Unrealized loss on purchased power contracts                          |       | 236                              |       | 923 |   |
| Supply cost balancing accounts                                        |       | (1,190                           | )          | (825 | ) |
| Other operating expenses                                              |       | 6,559                            |       | 5,886 |   |
| Administrative and general expenses                                   |       | 13,664                           |       | 10,902 |   |
| Depreciation and amortization                                         |       | 7,088                            |       | 6,610 |   |
| Maintenance                                                           |       | 4,353                            |       | 3,246 |   |
| Property and other taxes                                              |       | 2,843                            |       | 2,480 |   |
| Construction expenses                                                 |       | 8,260                            |       | 809 |   |
| Net gain on sale of property                                          |       | (238                             | )          | — |   |
| Total operating expenses                                              |       | 61,789                           |       | 48,850 |   |
|                                                                  |       |                             |       |   |   |
| **Operating  Income**                                                 |       | 17,457                           |       | 14,188 |   |
|                                                                  |       |                             |       |   |   |
| **Other  Income and Expenses**                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (5,570                           | )          | (5,433 | ) |
| Interest income                                                       |       | 586                              |       | 963 |   |
| Other                                                                 |       | 63                               |       | — |   |
| Total other income and expenses                                       |       | (4,921                           | )          | (4,470 | ) |
|                                                                  |       |                             |       |   |   |
| **Income  from operations before income tax expense**                 |       | 12,536                           |       | 9,718 |   |
|                                                                  |       |                             |       |   |   |
| Income tax expense                                                    |       | 5,214                            |       | 3,449 |   |
|                                                                  |       |                             |       |   |   |
| **Net  Income**                                                       |       | $                                | 7,322      |   | $ | 6,269 |   |
|                                                                  |       |                             |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                    |       | 17,094                           |       | 16,881 |   |
| **Basic  Earnings Per Common Share**                                  |       | $                                | 0.42       |   | $ | 0.36 |   |
|                                                                  |       |                             |       |   |   |
| **Weighted  Average Number of Diluted Shares**                        |       | 17,146                           |       | 16,947 |   |
| **Fully  Diluted Earnings Per Share**                                 |       | $                                | 0.42       |   | $ | 0.36 |   |
|                                                                  |       |                             |       |   |   |
| **Dividends Declared Per Common  Share**                              |       | $                                | 0.235      |   | $ | 0.225 |   |

 

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

4

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME****FOR THE SIX MONTHS****ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                                            | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                            | ** ** | **June 30,**              | ** ** |
| **(in thousands, except per share amounts)** | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Operating  Revenues**                                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                              | 111,153    |   | $ | 104,199 |   |
| Electric                                                              |       | 15,124                         |       | 15,372 |   |
| Contracted services                                                   |       | 25,239                         |       | 7,867 |   |
| Total operating revenues                                              |       | 151,516                        |       | 127,438 |   |
|                                                                  |       |                           |       |   |   |
| **Operating  Expenses**                                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 20,950                         |       | 19,260 |   |
| Power purchased for pumping                                           |       | 4,791                          |       | 4,020 |   |
| Groundwater production assessment                                     |       | 4,828                          |       | 4,322 |   |
| Power purchased for resale                                            |       | 7,196                          |       | 7,811 |   |
| Unrealized (gain) loss on purchased power contracts                   |       | (2,474                         | )          | 3,078 |   |
| Supply cost balancing accounts                                        |       | (1,910                         | )          | (338 | ) |
| Other operating expenses                                              |       | 13,156                         |       | 10,587 |   |
| Administrative and general expenses                                   |       | 26,671                         |       | 22,015 |   |
| Depreciation and amortization                                         |       | 14,177                         |       | 13,092 |   |
| Maintenance                                                           |       | 7,326                          |       | 5,719 |   |
| Property and other taxes                                              |       | 5,773                          |       | 5,027 |   |
| Construction expenses                                                 |       | 17,329                         |       | 4,511 |   |
| Net gain on sale of property                                          |       | (605                           | )          | — |   |
| Total operating expenses                                              |       | 117,208                        |       | 99,104 |   |
|                                                                  |       |                           |       |   |   |
| **Operating  Income**                                                 |       | 34,308                         |       | 28,334 |   |
|                                                                  |       |                           |       |   |   |
| **Other  Income and Expenses**                                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (11,066                        | )          | (10,688 | ) |
| Interest income                                                       |       | 1,152                          |       | 1,776 |   |
| Other                                                                 |       | 132                            |       | — |   |
| Total other income and expenses                                       |       | (9,782                         | )          | (8,912 | ) |
|                                                                  |       |                           |       |   |   |
| **Income  from operations before income tax expense**                 |       | 24,526                         |       | 19,422 |   |
|                                                                  |       |                           |       |   |   |
| Income tax expense                                                    |       | 10,220                         |       | 7,252 |   |
|                                                                  |       |                           |       |   |   |
| **Net  Income**                                                       |       | $                              | 14,306     |   | $ | 12,170 |   |
|                                                                  |       |                           |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                    |       | 17,066                         |       | 16,844 |   |
| **Basic  Earnings Per Common Share**                                  |       | $                              | 0.83       |   | $ | 0.71 |   |
|                                                                  |       |                           |       |   |   |
| **Weighted  Average Number of Diluted Shares**                        |       | 17,121                         |       | 16,905 |   |
| **Fully  Diluted Earnings Per Share**                                 |       | $                              | 0.82       |   | $ | 0.71 |   |
|                                                                  |       |                           |       |   |   |
| **Dividends Declared Per Common  Share**                              |       | $                              | 0.470      |   | $ | 0.450 |   |

 

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

5

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF CASH FLOW****FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                                        | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                                           | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                              | 14,306     |   | $ | 12,170 |   |
| Adjustments for  non-cash items:                                  |       |                           |       |   |   |
| Depreciation and amortization                                     |       | 14,177                         |       | 13,092 |   |
| Provision for doubtful accounts                                   |       | 194                            |       | 264 |   |
| Deferred income taxes and investment tax credits                  |       | 3,248                          |       | 3,704 |   |
| Unrealized (gain) loss on purchased power contracts               |       | (2,474                         | )          | 3,078 |   |
| Stock based compensation expense                                  |       | 530                            |       | 325 |   |
| Net gain on sale of property                                      |       | (605                           | )          | — |   |
| Other - net                                                       |       | 520                            |       | 421 |   |
| Changes in  assets and liabilities:                               |       |                           |       |   |   |
| Accounts receivable - customers                                   |       | (982                           | )          | (130 | ) |
| Unbilled revenue                                                  |       | (4,622                         | )          | (3,730 | ) |
| Other accounts receivable                                         |       | (350                           | )          | 1,717 |   |
| Receivable from the U.S. government                               |       | 1,505                          |       | (1,434 | ) |
| Materials and supplies                                            |       | (84                            | )          | (129 | ) |
| Prepayments and other current assets                              |       | 2,633                          |       | 832 |   |
| Regulatory assets — supply cost balancing accounts           |       | (1,910                         | )          | (338 | ) |
| Other assets                                                      |       | 616                            |       | (6,227 | ) |
| Accounts payable                                                  |       | 1,036                          |       | 1,222 |   |
| Income taxes receivable/payable                                   |       | 3,150                          |       | 1,559 |   |
| Other liabilities                                                 |       | (541                           | )          | 660 |   |
| Net cash provided                                                 |       | 30,347                         |       | 27,056 |   |
|                                                              |       |                           |       |   |   |
| **Cash  Flows From Investing Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Construction expenditures                                         |       | (19,880                        | )          | (34,122 | ) |
| Proceeds from sale of property                                    |       | 623                            |       | — |   |
| Net cash used                                                     |       | (19,257                        | )          | (34,122 | ) |
|                                                              |       |                           |       |   |   |
| **Cash  Flows From Financing Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Proceeds from issuance of common shares                           |       | 507                            |       | 1,023 |   |
| Proceeds from stock option exercises                              |       | 1,127                          |       | 3,421 |   |
| Tax benefits from exercise of stock-based awards                  |       | 122                            |       | 897 |   |
| Receipt of advances for and contributions in aid of  construction |       | 4,391                          |       | 5,892 |   |
| Refunds on advances for construction                              |       | (3,418                         | )          | (2,196 | ) |
| Repayments of long-term debt                                      |       | (212                           | )          | (260 | ) |
| Net change in notes payable to banks                              |       | (3,500                         | )          | 1,000 |   |
| Cash received on financing portion of purchased  power contracts  |       | —                         |       | 1,333 |   |
| Dividend equivalent rights                                        |       | (67                            | )          | (127 | ) |
| Tax benefits from payment of dividend equivalent  rights          |       | 28                             |       | 52 |   |
| Dividends paid                                                    |       | (8,017                         | )          | (7,567 | ) |
| Net cash (used) provided                                          |       | (9,039                         | )          | 3,468 |   |
|                                                              |       |                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**         |       | 2,051                          |       | (3,598 | ) |
| **Cash  and cash equivalents, beginning of period**               |       | 3,223                          |       | 13,032 |   |
| **Cash and cash equivalents, end  of period**                     |       | $                              | 5,274      |   | $ | 9,434 |   |

 

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

6

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**GOLDENSTATE WATER COMPANY****BALANCE SHEETS****ASSETS****(Unaudited)**
| ** **                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                                                                                | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Utility  Plant, at cost**                                                                            | ** ** | ** **        | ** ** | ** **            | ** ** |
|                                                                                                   |       |              |       |                  |       |
| Water                                                                                                  |       | $                 | 890,009    |                  | $          | 884,719 |   |
| Electric                                                                                               |       | 64,609            |       | 64,103                |       |
|                                                                                                   |       | 954,618           |       | 948,822               |       |
| Less - Accumulated depreciation                                                                        |       | (285,847          | )          | (271,716              | )          |
|                                                                                                   |       | 668,771           |       | 677,106               |       |
| Construction work in progress                                                                          |       | 45,111            |       | 34,438                |       |
| Net utility plant                                                                                      |       | 713,882           |       | 711,544               |       |
|                                                                                                   |       |              |       |                  |       |
| **Other  Property and Investments**                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Other property and investments                                                                         |       | 7,721             |       | 7,745                 |       |
| Total other property and investments                                                                   |       | 7,721             |       | 7,745                 |       |
|                                                                                                   |       |              |       |                  |       |
| **Current  Assets**                                                                                    | ** ** | ** **        | ** ** | ** **            | ** ** |
| Cash and cash equivalents                                                                              |       | 3,135             |       | 1,735                 |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $633 in 2007 and $771 in 2006) |       | 15,296            |       | 14,465                |       |
| Unbilled revenue                                                                                       |       | 19,895            |       | 15,371                |       |
| Inter-company receivable                                                                               |       | 22                |       | 111                   |       |
| Other accounts receivable (less allowance for  doubtful accounts of $367 in 2007 and $283 in 2006)     |       | 4,448             |       | 4,066                 |       |
| Materials and supplies, at average cost                                                                |       | 1,634             |       | 1,550                 |       |
| Regulatory assets - current                                                                            |       | 4,200             |       | 3,834                 |       |
| Prepayments and other current assets                                                                   |       | 2,411             |       | 2,575                 |       |
| Deferred income taxes - current                                                                        |       | 3,853             |       | 5,024                 |       |
| Total current assets                                                                                   |       | 54,894            |       | 48,731                |       |
|                                                                                                   |       |              |       |                  |       |
| **Regulatory  and Other Assets**                                                                       | ** ** | ** **        | ** ** | ** **            | ** ** |
| Regulatory assets                                                                                      |       | 88,819            |       | 84,686                |       |
| Other accounts receivable                                                                              |       | 9,564             |       | 9,335                 |       |
| Other                                                                                                  |       | 8,082             |       | 5,620                 |       |
| Total regulatory and other assets                                                                      |       | 106,465           |       | 99,641                |       |
|                                                                                                   |       |              |       |                  |       |
| **Total  Assets**                                                                                      |       | $                 | 882,962    |                  | $          | 867,661 |   |

 

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

7

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**GOLDENSTATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(in thousands)**                           | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **Capitalization**                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Common shares, no par value, no stated value      |       | $                 | 162,098    |                  | $          | 161,459 |   |
| Earnings reinvested in the business               |       | 109,394           |       | 105,506               |       |
| Total common shareholder’s equity            |       | 271,492           |       | 266,965               |       |
| Long-term debt                                    |       | 261,043           |       | 261,248               |       |
| Total capitalization                              |       | 532,535           |       | 528,213               |       |
|                                              |       |              |       |                  |       |
| **Current  Liabilities**                          | ** ** | ** **        | ** ** | ** **            | ** ** |
| Long-term debt - current                          |       | 316               |       | 323                   |       |
| Accounts payable                                  |       | 21,224            |       | 19,818                |       |
| Inter-company payable                             |       | 13,449            |       | 12,272                |       |
| Income taxes payable to Parent                    |       | 3,489             |       | 1,642                 |       |
| Accrued employee expenses                         |       | 5,078             |       | 4,887                 |       |
| Accrued interest                                  |       | 2,427             |       | 2,445                 |       |
| Unrealized loss on purchased power contracts      |       | 1,180             |       | 3,654                 |       |
| Regulatory liabilities – current             |       | 3,919             |       | 3,546                 |       |
| Other                                             |       | 12,277            |       | 11,654                |       |
| Total current liabilities                         |       | 63,359            |       | 60,241                |       |
|                                              |       |              |       |                  |       |
| **Other  Credits**                                | ** ** | ** **        | ** ** | ** **            | ** ** |
| Advances for construction                         |       | 77,033            |       | 76,646                |       |
| Contributions in aid of construction – net   |       | 87,449            |       | 85,513                |       |
| Deferred income taxes                             |       | 81,635            |       | 76,678                |       |
| Unamortized investment tax credits                |       | 2,382             |       | 2,427                 |       |
| Accrued pension and other postretirement benefits |       | 31,595            |       | 31,042                |       |
| Other                                             |       | 6,974             |       | 6,901                 |       |
| Total other credits                               |       | 287,068           |       | 279,207               |       |
|                                              |       |              |       |                  |       |
| **Commitments  and Contingencies (Note 7)**       |       | —            |       | —                |       |
|                                              |       |              |       |                  |       |
| **Total  Capitalization and Liabilities**         |       | $                 | 882,962    |                  | $          | 867,661 |   |

 

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

8

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME****FOR THE THREE MONTHS****ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                            | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **June 30,**                | ** ** |
| **(in thousands)**                               | ** ** | **2007**                         | ** ** | **2006** | ** ** |
| **Operating Revenues**                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                | 58,894     |   | $ | 51,396 |   |
| Electric                                              |       | 6,255                            |       | 7,027 |   |
| Total operating  revenues                             |       | 65,149                           |       | 58,423 |   |
|                                                  |       |                             |       |   |   |
| **Operating Expenses**                                | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 11,877                           |       | 10,702 |   |
| Power purchased  for pumping                          |       | 2,506                            |       | 2,218 |   |
| Groundwater  production assessment                    |       | 2,549                            |       | 2,239 |   |
| Power purchased  for resale                           |       | 2,915                            |       | 3,248 |   |
| Unrealized loss  on purchased power contracts         |       | 236                              |       | 923 |   |
| Supply cost  balancing accounts                       |       | (1,190                           | )          | (825 | ) |
| Other operating  expenses                             |       | 5,631                            |       | 4,906 |   |
| Administrative  and general expenses                  |       | 11,676                           |       | 8,910 |   |
| Depreciation and  amortization                        |       | 6,645                            |       | 6,134 |   |
| Maintenance                                           |       | 4,037                            |       | 3,022 |   |
| Property and  other taxes                             |       | 2,733                            |       | 2,373 |   |
| Net gain on sale  of property                         |       | (238                             | )          | — |   |
| Total operating  expenses                             |       | 49,377                           |       | 43,850 |   |
|                                                  |       |                             |       |   |   |
| **Operating Income**                                  |       | 15,772                           |       | 14,573 |   |
|                                                  |       |                             |       |   |   |
| **Other Income and Expenses**                         | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Interest expense                                      |       | (5,182                           | )          | (4,875 | ) |
| Interest income                                       |       | 528                              |       | 928 |   |
| Other                                                 |       | 47                               |       | — |   |
| Total other  income and expenses                      |       | (4,607                           | )          | (3,947 | ) |
|                                                  |       |                             |       |   |   |
| **Income from operations before  income tax expense** |       | 11,165                           |       | 10,626 |   |
|                                                  |       |                             |       |   |   |
| Income tax  expense                                   |       | 4,695                            |       | 3,867 |   |
|                                                  |       |                             |       |   |   |
| **Net Income**                                        |       | $                                | 6,470      |   | $ | 6,759 |   |

 

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

9

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME****FOR THE SIX MONTHS****ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                            | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                            | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                               | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Operating  Revenues**                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Water                                                 |       | $                              | 107,582    |   | $ | 100,367 |   |
| Electric                                              |       | 15,124                         |       | 15,372 |   |
| Total operating revenues                              |       | 122,706                        |       | 115,739 |   |
|                                                  |       |                           |       |   |   |
| **Operating  Expenses**                               | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 20,586                         |       | 18,877 |   |
| Power purchased for pumping                           |       | 4,522                          |       | 3,733 |   |
| Groundwater production assessment                     |       | 4,828                          |       | 4,322 |   |
| Power purchased for resale                            |       | 7,196                          |       | 7,811 |   |
| Unrealized (gain) loss on purchased power contracts   |       | (2,474                         | )          | 3,078 |   |
| Supply cost balancing accounts                        |       | (1,910                         | )          | (338 | ) |
| Other operating expenses                              |       | 11,331                         |       | 9,434 |   |
| Administrative and general expenses                   |       | 23,171                         |       | 19,094 |   |
| Depreciation and amortization                         |       | 13,289                         |       | 12,165 |   |
| Maintenance                                           |       | 6,807                          |       | 5,341 |   |
| Property and other taxes                              |       | 5,562                          |       | 4,802 |   |
| Net gain on sale of property                          |       | (605                           | )          | — |   |
| Total operating expenses                              |       | 92,303                         |       | 88,319 |   |
|                                                  |       |                           |       |   |   |
| **Operating  Income**                                 |       | 30,403                         |       | 27,420 |   |
|                                                  |       |                           |       |   |   |
| **Other  Income and Expenses**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Interest expense                                      |       | (10,201                        | )          | (9,678 | ) |
| Interest income                                       |       | 1,061                          |       | 1,724 |   |
| Other                                                 |       | 99                             |       | — |   |
| Total other income and expenses                       |       | (9,041                         | )          | (7,954 | ) |
|                                                  |       |                           |       |   |   |
| **Income  from operations before income tax expense** |       | 21,362                         |       | 19,466 |   |
|                                                  |       |                           |       |   |   |
| Income tax expense                                    |       | 8,990                          |       | 7,362 |   |
|                                                  |       |                           |       |   |   |
| **Net Income**                                        |       | $                              | 12,372     |   | $ | 12,104 |   |

 

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

10

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF CASH FLOW****FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006**

**(Unaudited)**
| ** **                                                        | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                        | ** ** | **June 30,**              | ** ** |
| **(in thousands)**                                           | ** ** | **2007**                       | ** ** | **2006** | ** ** |
| **Cash  Flows From Operating Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Net income                                                        |       | $                              | 12,372     |   | $ | 12,104 |   |
| Adjustments for  non-cash items:                                  |       |                           |       |   |   |
| Depreciation and amortization                                     |       | 13,289                         |       | 12,165 |   |
| Provision for doubtful accounts                                   |       | 154                            |       | 239 |   |
| Deferred income taxes and investment tax credits                  |       | 3,309                          |       | 3,417 |   |
| Unrealized (gain) loss on purchased power contracts               |       | (2,474                         | )          | 3,078 |   |
| Stock based compensation expense                                  |       | 492                            |       | 310 |   |
| Net gain on sale of property                                      |       | (605                           | )          | — |   |
| Other — net                                                  |       | 467                            |       | 346 |   |
| Changes in  assets and liabilities:                               |       |                           |       |   |   |
| Accounts receivable - customers                                   |       | (911                           | )          | (74 | ) |
| Unbilled revenue                                                  |       | (4,524                         | )          | (3,639 | ) |
| Other accounts receivable                                         |       | (685                           | )          | 2,822 |   |
| Materials and supplies                                            |       | (84                            | )          | (130 | ) |
| Prepayments and other current assets                              |       | 2,638                          |       | 874 |   |
| Regulatory assets - supply cost balancing accounts                |       | (1,910                         | )          | (338 | ) |
| Other assets                                                      |       | 1,937                          |       | (2,446 | ) |
| Accounts payable                                                  |       | 1,406                          |       | 857 |   |
| Inter-company receivable/payable                                  |       | 266                            |       | (35 | ) |
| Income taxes receivable/payable from/to Parent                    |       | 2,036                          |       | 2,358 |   |
| Other liabilities                                                 |       | (679                           | )          | (200 | ) |
| Net cash provided                                                 |       | 26,494                         |       | 31,708 |   |
|                                                              |       |                           |       |   |   |
| **Cash  Flows From Investing Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Construction expenditures                                         |       | (18,697                        | )          | (33,116 | ) |
| Proceeds from sale of property                                    |       | 623                            |       | — |   |
| Net cash used                                                     |       | (18,074                        | )          | (33,116 | ) |
|                                                              |       |                           |       |   |   |
| **Cash  Flows From Financing Activities:**                        | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Tax benefits from exercise of stock-based awards                  |       | 121                            |       | 897 |   |
| Receipt of advances for and contributions in aid of  construction |       | 4,124                          |       | 5,241 |   |
| Refunds on advances for construction                              |       | (3,418                         | )          | (2,173 | ) |
| Repayments of long-term debt                                      |       | (212                           | )          | (190 | ) |
| Net change in inter-company borrowings                            |       | 1,000                          |       | 2,500 |   |
| Cash received on financing portion of purchased  power contracts  |       | —                         |       | 1,333 |   |
| Dividend equivalent rights                                        |       | (61                            | )          | (116 | ) |
| Tax benefits from payment of dividend equivalent  rights          |       | 26                             |       | 47 |   |
| Dividends paid                                                    |       | (8,600                         | )          | (8,600 | ) |
| Net cash used                                                     |       | (7,020                         | )          | (1,061 | ) |
|                                                              |       |                           |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**         |       | 1,400                          |       | (2,469 | ) |
| **Cash  and cash equivalents, beginning of period**               |       | 1,735                          |       | 8,788 |   |
| **Cash and cash equivalents, end  of period**                     |       | $                              | 3,135      |   | $ | 6,319 |   |

 

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

11

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

**(Unaudited)**

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

General / Nature of 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.  More than 90% of AWR’s assets consist of thecommon stock of GSWC and its revenues and operations are primarily those ofGSWC. GSWC is 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 Californiamountain communities serving over 23,000 electric customers. The CaliforniaPublic Utilities Commission (“CPUC”) regulates GSWC’s water and electricbusiness, including properties, rates, services, facilities and other matters.CCWC is a public utility regulated by the Arizona Corporation Commission (“ACC”)serving over 13,000 customers in the town of Fountain Hills, Arizona and aportion of the City of Scottsdale, Arizona. ASUS performs water relatedservices and operations on a contract basis. There is no direct regulatoryoversight by either the CPUC or the ACC of the operation or rates of thecontracted services provided by ASUS and its wholly-owned subsidiaries or AWR.

ASUS, through its wholly-owned subsidiaries, hasentered into agreements with the U.S. government to operate and maintain thewater and wastewater systems at various military bases pursuant to 50-yearfixed price contracts.  In December 2006,ASUS, through one of its wholly-owned subsidiaries, finalized an agreement withthe U.S. government for the construction of certain improvements to theexisting wastewater infrastructure located at Fort Bliss in El Paso,Texas.  The $20.6 million project is afirm-fixed price contract and is an amendment to the original 50-year contractwith the U.S. government to manage the entire water and wastewater systems atFort Bliss.  Construction on this projectbegan in 2007 and revenues from this agreement have been recognized under thepercentage-of-completion method of accounting during the three and six monthsended June 30, 2007.  The project isscheduled to be completed by August 15, 2007 and there will be no furtherconstruction revenues associated with this amendment after that date.  Earnings and cash flows from amendments tothe original 50-year contracts with the U.S. government are sporadic and may ormay not continue in future periods.

Basis of Presentation: 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 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 revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2006 filed with the SEC. Certain prior-period amounts were reclassified to conform to the June 30, 2007 financial statement presentation.

GSWC’s Related Party Transactions:GSWC and other subsidiaries provide and receive various services to and fromtheir parent, AWR, and among themselves. In addition, AWR has an $85 millionsyndicated credit facility. AWR borrows under this facility and provides fundsto its subsidiaries, including GSWC, in support of their operations. Amountsowed to AWR for borrowings under this facility represent the majority of theinter-company payables on GSWC’s balance sheets as of June 30, 2007 andDecember 31, 2006. The interest rate charged to GSWC is equal to theamounts sufficient to cover AWR’s interest cost under the credit facility. GSWCalso allocates certain corporate office administrative and general costs to itsaffiliates using agreed upon allocation factors.

12

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Advances for Construction and Contributions in Aid ofConstruction:  ForCCWC, advances for construction represent amounts advanced by developers whichare refundable over 10 to 20 years. Refund amounts under the CCWC contracts arebased on annual revenues from the extensions, as authorized by the ACC.  After all refunds are made, any remainingbalance is transferred to contributions-in-aid of construction.  Contributions-in-aid of construction aresimilar to advances, but require no refunding and are amortized over the usefullives of the related property. During the second quarter of 2007, approximately$2.2 million of CCWC advances that expired were transferred tocontributions-in-aid of construction.

New Accounting Pronouncements:  In March 2006, the Financial AccountingStandards Board (“FASB”) Emerging Issues Task Force (“EITF”) issued EITF No.06-03, *“How Sales Taxes Collected From Customers andRemitted to Governmental Authorities Should Be Presented in the IncomeStatement.”*  A consensus wasreached that entities may adopt a policy of presenting sales taxes in theincome statement on either a gross or net basis, based on their accountingpolicy, which should be disclosed.  Ifsuch taxes are significant, and are presented on a gross basis, an entityshould also disclose the amounts of those taxes.  Effective January 1, 2007, Registrant adoptedthe guidance of EITF No. 06-03.  GSWCbills certain sales and use taxes levied by state or local governments to itscustomers. Included in these sales and use taxes are franchise fees, which GSWCpays to various municipalities (based on ordinances adopted by thesemunicipalities) in order to operate within the limits of the municipality. GSWCbills these franchise fees to its customers based on a CPUC-authorized rate.These franchise fees, which are required to be paid regardless of GSWC’sability to collect from the customer, are accounted for on a gross basis. GSWC’sfranchise fees billed to customers and recorded as operating revenue wereapproximately $619,000 and $554,000 for the three months ended June 30, 2007and 2006, respectively, and $1,352,000 and $1,132,000 for the six months endedJune 30, 2007 and 2006, respectively. When GSWC acts as an agent, and the taxis not required to be remitted if it is not collected from the customer, thetaxes are accounted for on a net basis.

In July 2006, the FASB issued FASB Interpretation No.48, *“Accounting for Uncertainty in Income Taxes, aninterpretation of FASB Statement No. 109”* (“FIN 48”).  Effective January 1, 2007, Registrant adoptedthe provisions of FIN 48.  In addition,in May 2007, the FASB Staff Position (“FSP”) issued FSP FIN 48-1, *“Definition of Settlement in FASB Interpretation No. 48”*,which amends FIN 48 to provide guidance on how an enterprise should determinewhether a tax position is effectively settled for the purpose of recognizingpreviously unrecognized tax benefits. See Note 5 for further details and information on the impact of theadoption of FIN 48 and FSP FIN 48-1 on Registrant.

In September 2006,the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, *“Fair Value Measurements”*, which defines fair value,establishes a framework for measuring fair value and expands disclosures aboutfair value measurements. This statement is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. Early adoption is encouraged, provided thatRegistrant has not yet issued financial statements for that fiscal year,including any financial statements for an interim period within that fiscalyear. Registrant will implement the new standard effective January 1, 2008.Registrant is currently evaluating the impact SFAS No. 157 may have on itsfinancial statements and disclosures.

In February 2007,the FASB issued SFAS No. 159, “*The FairValue Option for Financial Assets and Financial Liabilities”*. SFAS No. 159 allows measurement at fair value of eligible financial assets andliabilities that are not otherwise measured at fair value.  The election to measure a financial asset orliability at fair value can be made on an instrument-by-instrument basis and isirrevocable. The difference between carrying value and fair value at theelection date is recorded as a transition adjustment to opening retainedearnings. Subsequent changes in fair value are recognized in earnings.  SFAS No. 159 also establishes additionaldisclosure requirements designed to facilitate comparison between companiesthat choose different measurement attributes for similar type assets andliabilities.  SFAS No. 159 is effectivefor Registrant’s fiscal year beginning January 1, 2008.  Registrant isevaluating the potential impact that SFAS No. 159 may have on its financialstatements.

In March 2007, theFASB issued EITF 06-11, *“Accounting for Income TaxBenefits of Dividends on Share-Based Payment”,*which concludes thata realized income tax benefit from dividends or dividend equivalents that arecharged to retained earnings and are paid to employees for equity classifiednonvested equity shares, nonvested equity share units, and outstanding equityshare options should be recognized as an increase in additional paid-incapital.  Registrant will commence recognizingthis tax benefit as an increase in additional paid- in capital commencingJanuary 1, 2008. The impact of this change is not expected to be material toRegistrant’s financial statements.

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**Note 2 —Regulatory Matters:**

In accordance with accounting principles forrate-regulated enterprises, Registrant records regulatory assets, whichrepresent probable future revenue associated with certain costs that will berecovered from customers through the ratemaking process, and regulatoryliabilities, which represent probable future reductions in revenue associatedwith amounts that are to be credited to customers through the ratemakingprocess. At June 30, 2007, Registrant had $7.4 million of regulatory assets notaccruing carrying costs. Of this amount, $6.6 million relates to deferredincome tax representing accelerated tax benefits flowed-through to ratepayers,which will be included in rates concurrently with recognition of the associatedfuture tax expense. In addition, there are other expenses that Registrantrecovers in rates over a short period that do not provide for recovery ofcarrying costs. At June 30, 2007, $784,000 was recorded as other regulatoryassets for such expenses to be recovered. Regulatory assets, less regulatory liabilities, included in theconsolidated balance sheets are as follows:
| ** **                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| **(In thousands)**                                | ** ** | **2007**          | ** ** | **2006**              | ** ** |
| **GSWC**                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Supply cost balancing accounts                         |       | $                 | 18,585     |                  | $          | 17,321 |   |
| Supply cost memorandum accounts net  under-collections |       | 8,132             |       | 7,429                 |       |
| Costs deferred for future recovery on Aerojet case     |       | 21,362            |       | 21,313                |       |
| Pensions and other postretirement obligations          |       | 21,062            |       | 22,815                |       |
| Flow-through taxes, net                                |       | 6,591             |       | 7,243                 |       |
| Electric transmission line abandonment costs           |       | 3,230             |       | 3,288                 |       |
| Asset retirement obligations                           |       | 3,372             |       | 3,197                 |       |
| Low income rate assistance balancing accounts          |       | 4,247             |       | 3,807                 |       |
| Refund of water right lease revenues                   |       | (3,293            | )          | (3,565                | )          |
| Santa Maria adjudication memorandum accounts           |       | 3,928             |       | —                |       |
| Other regulatory assets                                |       | 1,884             |       | 2,126                 |       |
| Total GSWC                                             |       | $                 | 89,100     |                  | $          | 84,974 |   |
| **CCWC**                                               | ** ** | ** **        | ** ** | ** **            | ** ** |
| Asset retirement obligations                           |       | $                 | 50         |                  | $          | 48 |   |
| Other regulatory liabilities, net                      |       | (551              | )          | (565                  | )          |
| Total AWR                                              |       | $                 | 88,599     |                  | $          | 84,457 |   |

 

Regulatory matters arediscussed in detail in the consolidated financial statements and the notesthereto included in the Form 10-K for the year ended December 31,2006 filed with the SEC.  Discussionbelow focuses on significant matters and changes since December 31, 2006.

***Supply Cost Balancing andMemorandum Accounts******:***

***Electric SupplyCost Balancing Account*** — Electric power costs incurred by GSWC’s Bear ValleyElectric division continue to be charged to its electric supply cost balancingaccount. The under-collection in the electric supply cost balancing account is$18.7 million at June 30, 2007. The balance in the electric supply balancingaccount is primarily impacted by: (i) a surcharge to decrease previouslyunder-collected energy costs, (ii) changes in purchased energy costs, and (iii)changes in power system delivery costs.

The CPUC has authorized GSWC to collect a surchargefrom its customers of 2.2¢ per kilowatt hour through August 2011, to enableGSWC to recover an under-collection of approximately $23.1 million at the endof 2001 which had been incurred during the energy crisis in late 2000 and 2001.GSWC sold 30,724,243 and 33,448,999 kilowatt hours of electricity to its BearValley Electric division customers for the three months ended June 30, 2007 and2006, respectively, and  sold 73,408,022and 75,743,077 kilowatt hours of electricity to its customers for the sixmonths ended June 30, 2007 and 2006, respectively.   As a result, the supply cost balancingaccount was reduced by approximately $663,000 and $687,000 for the three monthsended June 30, 2007 and 2006, respectively, and $1,581,000 and $1,567,000 forthe six months ended June 30, 2007 and 2006, respectively.  Approximately $15.6 million of theunder-collection incurred during the energy crisis in late 2000 and 2001 hasbeen recovered through this surcharge. GSWC anticipates the surcharge, based onelectricity sales, to be sufficient for it to recover by August 2011 the amountof the under-collected balance incurred during the energy crisis.  However, in 2011, if GSWC has not fullyrecovered the amount of this under collection, GSWC will seek recovery of anyamounts not recovered through this surcharge.

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The purchased energy costs that are recorded in thesupply cost balancing account are subject to a price cap by terms of the 2001CPUC decision. The Bear Valley Electric division of GSWC is allowed to includeup to a weighted average annual purchased energy cost of $77 per megawatt-hour(“MWh”) through August 2011 in its electric supply cost balancing account.  To the extent that the actual weightedaverage annual cost for power purchased exceeds the $77 per MWh amount, GSWCwill not be able to include these amounts in its balancing account and suchamounts will be expensed. There were no amounts expensed over the $77 per MWhcap during the three months ended June 30, 2007 and 2006.  During the six months ended June 30, 2007 and2006,the amounts expensed were $29,000 and $40,000, respectively.

Charges to GSWC by Southern California Edison (“Edison”),a subsidiary of Edison International, associated with the transportation of energy over Edison’s power systemand the abandonment of a transmission line upgrade have increased under Edison’stariff to levels that exceed the amounts authorized by the CPUC in Bear ValleyElectric’s retail power rates to its customers. The incremental cost increaseto GSWC from the tariff for the abandonment of a transmission line upgrade,which is not included in rates, is $38,137 per month. These increases have beenincluded in the balancing account for subsequent recovery from customers,subject to CPUC approval. The incoming power system delivery costs are not subject tothe $77 per MWh price cap referenced above. Other components, such as interest accrued on the cumulativeunder-collected balance and power loss during transmission, also affect thebalance of the electric supply cost balancing account.

In summary, for the three months ended June 30, 2007 and 2006, theunder-collection decreased by approximately $406,000 and $367,000,respectively, and $1,189,000 and $586,000 for the six months ended June 30,2007 and 2006, respectively.

***WaterSupply Cost Memorandum/Balancing Accounts —***All water utilitiesregulated by the CPUC were required to seek review of supply cost under- andover- collections by filing an advice letter annually and to reduce the utility’srecovery of such expenses by the amount exceeding the authorized rate ofreturn. Upon approval by the CPUC, the memorandum accounts are transferred towater supply cost balancing accounts.  OnApril 13, 2006, the CPUC approved a decision eliminating the earnings test thatlimited recovery of expenses recorded in these accounts. The decision alsoeliminated the need to make an annual filing. Pursuant to this order,GSWC recognized a cumulative under-collection of approximately $636,000 to thesupply cost memorandum account provisions in the second quarter of 2006 for theunder-collected balances not recognized at March 31, 2006 and began recordingunder- and over- collections on a monthly basis thereafter commencing with thesecond quarter of 2006.  For the three months endedJune 30, 2007 and 2006, approximately, $1.6 million and $599,000 ofunder-collections, respectively, were recorded in the water supply costmemorandum/balancing accounts, including amortization of approximately $250,000over-collection and $283,000 under-collection, respectively.  For the six months ended June 30, 2007 and 2006,approximately, $3.1 million and $361,000 of under-collections, respectively,were recorded in the water supply cost memorandum/balancing accounts, includingamortization of approximately $570,000 over-collection and $520,000 under-collection,respectively.

GSWC filed advice letters with the CPUC in October2006 for review of $2.0 million net under-collections of Region I’s  2005 and 2006 water supply cost memorandumaccount balance as of August 31, 2006 and its net balance after amortization ofthe 2001-2003 balancing account.  OnJanuary 3, 2007, the CPUC approved the advice letters as filed.  As a result, the total $2.0 million netunder-collection was transferred to the water supply cost balancing account inJanuary 2007.  There was no impact toearnings in 2007 as this net under-collection was recorded as a regulatoryasset in prior periods.

***Costs Deferred for Future Recovery:***

In 1999, GSWC suedAerojet-General Corporation (“Aerojet”) for contaminating the Sacramento CountyGroundwater Basin, which affected certain GSWC wells. On a related matter, GSWCalso filed a lawsuit against the State of California (the “State”). The CPUCauthorized memorandum accounts to allow for recovery, from customers, of costsincurred by GSWC in prosecuting the cases against Aerojet and the State, lessany recovery from the defendants or others. On July 21, 2005, the CPUCauthorized GSWC to collect approximately $21.3 million of the Aerojetlitigation memorandum account, through a rate surcharge, which will continuefor no longer than 20 years. Beginning in October 2005, new rates went intoeffect to begin amortizing the memorandum account over a 20-year period.

A rate surchargegenerating approximately $285,000 and $289,000 was billed to customers duringthe three months ended June 30, 2007 and 2006, respectively, and $505,000 and$499,000 for the six months ended June 30, 2007 and 2006, respectively. GSWCwill keep the Aerojet memorandum account open until the earlier of fullamortization of the balance or 20 years. However, no costs will be added to the memorandum account, other thanon-going interest charges approved by the decision.  Pursuant to the decision, additional interestof approximately $278,000 and $554,000 was added to the Aerojet litigationmemorandum account during the three and six months ended June 30, 2007,respectively.  It is management’sintention to offset any settlement proceeds received from Aerojet pursuant tothe settlement agreement against the balance in 

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the memorandum account, with theexception of an $8.0 million payment guaranteed by Aerojet. The $8.0 millionplus interest on the unpaid balance is scheduled to be paid in installmentsover five years beginning in 2009 and is expected to be used to make certaincapital investments useful in managing the contamination which was the basis ofthe suit against Aerojet.  Pursuant tosuch settlement agreement, Aerojet has agreed to reimburse GSWC an additional$17.5 million, plus interest accruing from January 1, 2004, for GSWC’s pastlegal and expert costs. The recovery ofthe $17.5 million is contingent upon the issuance of land use approvals fordevelopment in a defined area within Aerojet property in Eastern SacramentoCounty and the receipt of certain fees in connection with suchdevelopment.

On April 7, 2006, GSWCfiled an advice letter with the CPUC to incorporate the Westboroughdevelopment, which represents a portion of the defined property, into itsRancho Cordova service area and to provide water service to that newdevelopment. The City of Folsom (the “City”) filed a protest of GSWC’s adviceletter on April 27, 2006. On January 30, 2007, the CPUC rejected the adviceletter without prejudice, and invited GSWC to refile the advice letter once theCity’s protest was resolved, or file an application for CPUC approval of theservice territory expansion.  In June2007, GSWC signed an agreement with the City. Pursuant to the agreement, the City relinquishes all claims concerningGSWC’s providing water service to the Westborough area, and as compensation tothe City to resolve its claim, GSWC has agreed to pay the City $550,000 as thesettlement payment, of which Aerojet will reimburse GSWC for 50% or $275,000.  Accordingly, as of and for the three and sixmonths ended June 30, 2007, GSWC has recorded an obligation of $550,000 to theCity, an additional receivable of $275,000 from Aerojet for the amount to bereimbursed, and a net charge to expense in the amount of $275,000 for GSWC’sshare of the settlement payment.  GSWCintends to refile the application for service territory expansion with theCPUC.

***Santa Maria Adjudication Memorandum Accounts:***

As more fully discussed in Note 7, GSWC has incurredcosts of approximately $6.5 million as of June 30, 2007, including legal andexpert witness fees, in defending its water supply from the Santa MariaBasin dedicated to customer service in Santa Barbara and San Luis ObispoCounties.  Such costs had been recorded inutility plant for rate recovery.  InFebruary 2006, GSWC filed an application with the CPUC for recovery of $5.5million of these costs, representing the amount of the costs that had beenincurred as of December 31, 2005.  In February 2007, GSWC reached asettlement with the CPUC’s Division of Ratepayer Advocates authorizing recoveryof the $5.5 million requested in GSWC’s application.  The settlementdeferred review of the remaining legal costs pending final resolution of thelawsuit.  In May 2007, the CPUC issued a decision that approved thesettlement with the Division of Ratepayer Advocates.  Pursuant to the decision, GSWC was ordered toplace in rate base $2.7 million of the $5.5 million of previously incurred litigationcosts in the Santa Maria groundwater basin adjudication.  GSWC was also ordered to amortize, withinterest, the remaining $2.8 million of the $5.5 million in rates over aten-year period.  This amount has beentransferred into a separate memorandum account included within regulatory assetsand a surcharge has been implemented in the third quarter of 2007 for recoveryof these costs.  All litigation coststhat have been incurred since December 31, 2005, totaling approximately $1.1million, have also been transferred from rate base to a separate new memorandumaccount, subject to a reasonableness review by the CPUC in a subsequent phaseof this proceeding or in a new proceeding. Management believes that these additional costs will be approved and therecovery of these costs through rates is probable.

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

On February 15, 2007, the CPUC issued a subpoena toGSWC in connection with an investigation of certain work orders and chargespaid to a specific contractor used by GSWC for numerous construction projects. The CPUC’s investigation focuses on whether these charges were approvedin customer rates and whether they were just and reasonable.  In June 2007, GSWC received notification fromthe CPUC instituting an audit.  Thepurpose of the audit will be to examine for the period 1994 to the present,GSWC’s policies, procedures, and practices throughout all of its Regionsregarding the granting or awarding of construction contracts or jobs.Management cannot predict the outcome of the investigation or audit at thistime.

On April 16, 2007, GSWC’s Bear Valley Electricdivision filed a compliance report with the CPUC regarding its purchases ofenergy from renewable energy resources. The filing included an indication that Bear Valley Electric had notachieved interim target purchase levels of renewable energy resources and thus,on its face, might be subject to a possible penalty.  GSWC has formally contested the potentialpenalty reflected in the compliance report. Management does not believe it is probable that GSWC will ultimately beassessed any penalty (which the form indicates would be as high as $592,000),and accordingly, no provision for loss has been recorded in the financialstatements.  The CPUC is considering thefuture timing and applicability of renewable energy resource requirements asthey apply to smaller energy utilities like Bear Valley Electric.  It is GSWC’s objective to comply with the 20%renewable energy requirement by the year 2010.

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

Registrant computes earnings per share (“EPS”) inaccordance with EITF No. 03-06, *“Participating Securitiesand the Two-Class Method under FASB Statement No. 128”. *EITF No. 03-06 provides theaccounting guidance for the effect of participating securities on EPScalculations and the use of the “two-class” method. The guidance requires theuse of the “two-class” method of computing EPS for companies with participatingsecurities. The “two-class” method is an earnings allocations formula thatdetermines EPS for each class of common stock and participatingsecurity.  AWR has participatingsecurities related to stock options and restricted stock units that earndividend equivalents on an equal basis with Common Shares that have been issuedunder AWR’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors StockPlan. In applying the “two-class” method, undistributed earnings are allocatedto both Common Shares and participating securities. The following is areconciliation of Registrant’s net income and weighted average Common Sharesoutstanding for calculating basic earnings per share:
| ** **                                                            | ** **                                                    | **For The Three**                       | ** ** | **For The Six Months** | ** ** |
|-----------------------------------------------------------------------|---------------------------------------------------------------|---------------------------------------------------|------------|---------------------------------------|------------|
| **Basic EPS**                                                    | ** **                                                    | **Months Ended June 30,**          | ** ** | **Ended June 30,**          | ** ** |
| **(in thousands, except per share amounts)** | ** **                                                    | **2007**                                          | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                            |                                                          | $                                                 | 7,322      |                                  | $          | 6,269 |   | $ | 14,306 |   | $ | 12,170 |   |
| Less:                                                                 | (a)                                                           | Distributed earnings to  common shareholders      |       | 4,017                                 |       | 3,798 |   | 8,021 |   | 7,580 |   |
|                                                                  |                                                          | Distributed earnings to  participating securities |       | 64                                    |       | 79 |   | 128 |   | 154 |   |
| Undistributed earnings                                                |                                                          | 3,241                                             |       | 2,392                                 |       | 6,157 |   | 4,436 |   |
|                                                                  |                                                          |                                              |       |                                  |       |   |   |   |   |
| (b)                                                                   | Undistributed earnings  allocated to common shareholders      |                                              | 3,190      |                                  | 2,345      |   | 6,061 |   | 4,348 |   |
|                                                                  | Undistributed earnings  allocated to participating securities |                                              | 51         |                                  | 48         |   | 96 |   | 88 |   |
|                                                                  |                                                          |                                              |       |                                  |       |   |   |   |   |
| Total income available  to common shareholders, basic (a)+(b)         |                                                          | $                                                 | 7,207      |                                  | $          | 6,143 |   | $ | 14,082 |   | $ | 11,928 |   |
|                                                                  |                                                          |                                              |       |                                  |       |   |   |   |   |
| Weighted average Common  Shares outstanding, basic                    |                                                          | 17,094                                            |       | 16,881                                |       | 17,066 |   | 16,844 |   |
| **Basic earnings per Common Share**                                   |                                                          | $                                                 | 0.42       |                                  | $          | 0.36 |   | $ | 0.83 |   | $ | 0.71 |   |

 

Diluted EPS is based upon the weighted average numberof Common Shares including both outstanding shares and shares potentiallyissuable in connection with stock options and restricted stock units grantedunder Registrant’s 2000 Stock Incentive Plan and 2003 Non-Employee DirectorsStock Plan, and net income available to common shareholders. At June 30, 2007and 2006 there were 580,215 and 645,389 stock options outstanding,respectively, under these Plans. At June 30, 2007 and 2006, there were alsoapproximately 61,081 and 47,129 restricted stock units outstanding,respectively. The following is a reconciliation of Registrant’s net income availableto common shareholders and weighted average Common Shares outstanding forcalculating diluted earnings per share:
| ** **                                                            | ** ** | **For The Three**              | ** ** | **For The Six Months** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------|------------|---------------------------------------|------------|
| **Diluted EPS**                                                  | ** ** | **Months Ended June 30,** | ** ** | **Ended June 30,**          | ** ** |
| **(in thousands, except per share amounts)** | ** ** | **2007**                                 | ** ** | **2006**                              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Common shareholders  earnings, basic                                  |       | $                                        | 7,207      |                                  | $          | 6,143 |   | $ | 14,082 |   | $ | 11,928 |   |
| Undistributed earnings  for dilutive stock options (1)                |       | —                                   |       | —                                |       | — |   | — |   |
| Total common  shareholders earnings, diluted                          |       | $                                        | 7,207      |                                  | $          | 6,143 |   | $ | 14,082 |   | $ | 11,928 |   |
|                                                                  |       |                                     |       |                                  |       |   |   |   |   |
| Weighted average common  shares outstanding, basic                    |       | 17,094                                   |       | 16,881                                |       | 17,066 |   | 16,844 |   |
| Stock-based  compensation (2)                                         |       | 52                                       |       | 66                                    |       | 55 |   | 61 |   |
| Weighted average common  shares outstanding, diluted                  |       | 17,146                                   |       | 16,947                                |       | 17,121 |   | 16,905 |   |
| **Diluted earnings per Common Share**                                 |       | $                                        | 0.42       |                                  | $          | 0.36 |   | $ | 0.82 |   | $ | 0.71 |   |

 

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(1)        Undistributed earningsallocated to participating securities were not included due to theirantidilutive effect on diluted earnings per share.

(2)          Inapplying the treasury stock method of reflecting the dilutive effect ofoutstanding stock-based compensation in the calculation of diluted EPS, 276,574and 241,962 stock options at June 30, 2007 and 2006, respectively, were deemedto be outstanding in accordance with SFAS No. 128, *“EarningsPer Share”*.

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Stock options of 87,041 and 94,917 were outstanding atJune 30, 2007 and 2006, respectively, but not included in the computation ofdiluted EPS because the related option exercise price was greater than theaverage market price of AWR’s Common Shares for the six months ended June 30,2007 and 2006.  Stock options of 216,600and 308,510, and restricted stock units of 61,081 and 47,129 were outstandingat June 30, 2007 and 2006, respectively, but not included in the computation ofdiluted EPS because they were antidilutive.

Registrant has a Shareholder Rights Plan designed toprotect the Company’s shareholders in the event of an unsolicited unfair offerto acquire the Company. The rights for Junior Participating Preferred Shares(the “Rights”) are exercisable based solely on “a non-market-based contingency”,and are not contingent upon the market price of AWR’s stock. Therefore, the shares that would be issued if the Rightsare exercised are not included in the calculation of diluted earnings pershare.

During the three months ended June 30, 2007 and 2006,Registrant issued 6,419 and 13,245 Common Shares, for approximately $235,000and $494,000, respectively, under the Registrant’s Common Share Purchase andDividend Reinvestment (“DRP”) Plan and the 401(k) Plan. During the six monthsended June 30, 2007 and 2006, Registrant issued 13,494 and 29,102 CommonShares, for approximately $507,000 and $1,023,000, respectively, under theRegistrant’s DRP Plan and the 401(k) Plan. In addition, during the six months ended June 30, 2007 and 2006,Registrant issued 46,787 and 148,832 Common Shares for approximately $1,127,000and $3,421,000, respectively, as a result of the exercise of stock optionsunder the Company’s stock incentive plans. No cash proceeds received by AWR as a result of the exercise of thesestock options have been distributed to any subsidiaries of AWR.

During the three months ended June 30, 2007 and 2006,Registrant purchased 3,271 and 10,737, respectively, and 3,553 and 24,821 forthe six months ended June 30, 2007 and 2006, respectively, Common Shares on theopen market under the Registrant’s DRP and 401(k) Plans, which were usedto satisfy the requirements of these plans.

During the three months ended June 30, 2007 and 2006,AWR paid quarterly dividends to the shareholders of approximately $4.0 million,or $0.235 per share, and $3.8 million, or $0.225 per share, respectively.  During the six months ended June 30, 2007 and2006, AWR paid quarterly dividends to the shareholders of approximately $8.0million, or $0.470 per share, and $7.6 million, or $0.450 per share,respectively.

**Note4 — Derivative Instruments:**

Registranthas certain block-forward purchase power contracts that are subject to SFASNo. 133, *“Accounting for Derivative Instruments andHedging Activities”*, as amended by SFAS Nos. 138 and 149. Aderivative financial instrument or other contract derives its value fromanother investment or designated benchmark. SFAS No. 133 requirescompanies to record derivatives on the balance sheet as assets and liabilities,and to measure those instruments at their fair value.  During 2002, GSWC became a party toblock-forward purchase power contracts that qualified as derivative instrumentsunder SFAS No. 133. Contracts with Pinnacle West Marketing & TradingCompany, LLC (formerly Pinnacle West Capital Corporation), which becameeffective in November 2002 have not been designated as normal purchases andnormal sales. As a result, on a monthly basis, the related asset or liabilityis adjusted to reflect the fair market value at the end of the month. For thethree months ended June 30, 2007 and 2006, GSWC recognized a pretax unrealizedloss of $236,000 and $923,000, respectively. For the six months ended June 30, 2007 and 2006, GSWC recognized apretax unrealized gain of $2,474,000 and a pretax unrealized loss of$3,078,000, respectively. As this contract is settled, the realized gains orlosses are recorded in power purchased for resale, and the previously recordedunrealized gains or losses are reversed. These contracts have been recognizedat fair market value on the balance sheets resulting in a cumulative unrealizedloss of $1,180,000 as of June 30, 2007.

The market prices used to determinethe fair value for this derivative instrument were estimated based onindependent sources such as broker quotes and publications. Settlement of thiscontract occurred on a cash or net basis through 2006 and by physical deliverythereafter through 2008. Registrant has no other derivativefinancial instruments.

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**Note 5 —Income Taxes:**

As a regulated utility, GSWC treats certaintemporary differences as flow-through adjustments incomputing its income tax provision consistent with the income taxapproach approved by the CPUC for ratemaking purposes.Flow-through adjustments increase or decrease tax expense in oneperiod, with an offsetting increase or decrease occurring in anotherperiod. Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal and state income tax ratesin any given period than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.

In July 2006, theFASB issued FIN 48.  FIN 48 clarifies theaccounting for uncertainty in income taxes by prescribing the recognitionthreshold a tax position is required to meet before being recognized in thefinancial statements.  FIN 48 alsoprovides guidance on derecognition, measurement, classification, interest andpenalties, accounting in interim periods, disclosure and transition.  Effective January 1, 2007, Registrant adoptedFIN 48. As a result of adoption,Registrant increased retained earnings by $181,000.  As of the adoption date and at June 30, 2007,Registrant’s total amount of unrecognized tax benefits was $4.8 million, ofwhich $118,000, if recognized, would affect the effective tax rate.

With the adoption of FIN 48, Registrant continued its policy ofclassifying interest on income tax over/underpayments in interestincome/expense and penalties in “other operating expenses.”  At June 30, 2007, Registrant included$404,000 of net interest receivables from taxing authorities in other assets($103,000 as current), of which $42,000 and $83,000 were included in interestincome for the three and six months ended June 30, 2007,respectively.  For the three and sixmonths ended June 30, 2006, Registrant recognized $381,000 ofincome-tax-related interest income.  AtJune 30, 2007, Registrant had no accruals for income-tax-related penalties anddid not recognize any such penalty expense during the three and six monthsended June 30, 2007 and 2006.

Registrant files federal and various state income tax returns.  The U.S. federal filings for the years 1997through 1999 and 2002 came under examination during the first quarter of 2007as a result of Registrant having filed an amended 2002 return during the thirdquarter of 2006 for which Internal Revenue Service (“IRS”) and CongressionalJoint Committee of Taxation (“JCT”) reviews are required.  The 2002 return was amended primarily as aresult of the IRS consenting to Registrant’s request for approval to change atax accounting method.  In relation tothis consent, Registrant’s total amount of unrecognized tax benefits couldsignificantly increase or decrease within twelve months of June 30,2007.  An estimate of the range of thereasonably possible change cannot be made at June 30, 2007.  Registrant is unable to anticipate when theIRS and JCT reviews will be concluded.

The California filing for 2001 also came under examination by theFranchise Tax Board during the first quarter of 2007 as a result of Registranthaving filed an amended 2001 return in the first quarter of 2006.  The Franchise Tax Board completed itsreview during July 2007 without proposing any material changes to the amendedreturn as filed by Registrant.

Registrant’s 2003 through 2005 tax years also remain subject toexamination by the IRS and its 2002 through 2005 tax years remain subject toexamination by state taxing authorities.

There were no material differences between AWR and GSWC with respect totheir accounting for income taxes.

**Note 6 —Employee Benefit Plans:**

The components of net periodic benefit costs, beforeallocation to the overhead pool, for Registrant’s pension plan, postretirementplan, and Supplemental Executive Retirement Plan (“SERP”) for the three and sixmonths ended June 30, 2007 and 2006 are as follows:
| ** **                                     | ** ** | **For The Three Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                                                            | ** ** | ** ** | ** ** | **Postretirement** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Pension Benefits**                                             | ** ** | **Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2007**                                                              | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Components  of Net Periodic Benefits Cost:** | ** ** | ** **                                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                   |       | $                                                                     | 940        |   | $ | 991 |   | $ | 105 |   | $ | 107 |   | $ | 106 |   | $ | 32 |   |
| Interest cost                                  |       | 1,243                                                                 |       | 1,175 |   | 168 |   | 155 |   | 41 |   | 35 |   |
| Expected return  on plan assets                |       | (1,133                                                                | )          | (984 | ) | (57 | ) | (50 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                                                                |       | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization of  prior service cost            |       | 41                                                                    |       | 41 |   | (50 | ) | (50 | ) | 40 |   | 37 |   |
| Amortization of  actuarial (gain) loss         |       | 154                                                                   |       | 292 |   | 25 |   | 37 |   | (6 | ) | (3 | ) |
| Net periodic  pension cost                     |       | $                                                                     | 1,245      |   | $ | 1,515 |   | $ | 296 |   | $ | 304 |   | $ | 181 |   | $ | 101 |   |

 

19

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| ** **                                     | ** ** | **For The Six Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| ** **                                     | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Other** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | ** **                                                          | ** ** | ** ** | ** ** | **Postretirement** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                                     | ** ** | **Pension Benefits**                                           | ** ** | **Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2007**                                                            | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Components  of Net Periodic Benefits Cost:** | ** ** | ** **                                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Service cost                                   |       | $                                                                   | 1,880      |   | $ | 1,982 |   | $ | 210 |   | $ | 214 |   | $ | 212 |   | $ | 64 |   |
| Interest cost                                  |       | 2,486                                                               |       | 2,350 |   | 336 |   | 310 |   | 82 |   | 70 |   |
| Expected return  on plan assets                |       | (2,266                                                              | )          | (1,968 | ) | (114 | ) | (100 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                                                              |       | — |   | 210 |   | 210 |   | — |   | — |   |
| Amortization of  prior service cost            |       | 82                                                                  |       | 82 |   | (100 | ) | (100 | ) | 80 |   | 74 |   |
| Amortization of  actuarial (gain) loss         |       | 308                                                                 |       | 584 |   | 50 |   | 74 |   | (12 | ) | (6 | ) |
| Net periodic  pension cost                     |       | $                                                                   | 2,490      |   | $ | 3,030 |   | $ | 592 |   | $ | 608 |   | $ | 362 |   | $ | 202 |   |

 

Registrant expects to contribute a minimum of approximately$4,974,000 and $800,000 to the pension and postretirement medical plans in2007, respectively.  Registrantcontributed its first payment of $1,125,000 to the pension plan during thesecond quarter of 2007.  A second paymentof $695,000 was made in July 2007.  Nocontributions to the postretirement plan were made during the three and sixmonths ended June 30, 2007.

As of December 31, 2006, Registrant’s pension obligationwas determined by an actuarial valuation using actual beginning -of-year(January 1, 2006) census data.  Duringthe second quarter of 2007, Registrant’s actuaries completed a revisedvaluation with updated census data as of December 31, 2006.  As a result of using updated data, Registrantrecorded a $1.1 million reduction to the projected benefit obligation with acorresponding decrease to the regulatory asset during the second quarter of2007.

**Note 7 — Contingencies:**

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

In 1997, GSWC was namedas a defendant in nineteen lawsuits that alleged that GSWC and other waterutilities delivered unsafe water to their customers in the San Gabriel Valleyand Pomona Valley areas of Los Angeles County. Plaintiffs in these actionssought damages, including general, special, and punitive damages, as well asattorney’s fees on certain causes of action, costs of suit, and otherunspecified relief.  On August 4, 2004,GSWC was dismissed from all nineteen Los Angeles County cases. The Court foundGSWC did not violate established water quality standards and dismissed thecases after allowing reasonable time and opportunity for the plaintiffs toprove otherwise. GSWC has long asserted that it provides water within thestandards established by the CPUC in cooperation with the health authorities.On September 21, 2004, GSWC received notice that all of the plaintiffs filed anappeal to the trial court’s order dismissing GSWC. Briefs and reply briefs werefiled in the appeal. On February 7, 2006, the Second Appellate District inwhich the briefs were filed, moved the California Supreme Court to transfer theappeal to the First Appellate District, the District in which prior appeals regardingthese cases had been heard.  The SupremeCourt granted the transfer.  Argument inthe court of appeal was held before the First Appellate District on June 20,2007, and a ruling is expected by September 20, 2007.  GSWC is unable to predict the outcome of thisappeal.

GSWC is subject to self-insured retention (deductible)provisions in its applicable insurance policies and has either expensed theself-insured amounts or has reserved against payment of these amounts asappropriate. GSWC’s various insurance carriers have, to date, providedreimbursement for much of the costs incurred above the self-insured amounts fordefense against these lawsuits, subject to a reservation of rights. Inaddition, the CPUC has issued certain decisions, which authorize GSWC toestablish a memorandum account to accumulate costs for future recovery.

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

20

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Registrant has, pursuant to permission of the court,amended its suit to claim certain affirmative defenses as an “innocent” partyunder CERCLA. Registrant is presently unable to predict the outcome of thisruling on its ability to fully recover from the PRPs future costs associatedwith the treatment of these wells. In this same suit, the PRPs have filedcross-complaints against the Water Entities, the Metropolitan Water District,the Main San Gabriel Basin Watermaster and others on the theory that theyarranged for and did transport contaminated water into the Main San GabrielBasin for use by Registrant and the other two affected water purveyors and forother related claims.

OnAugust 29, 2003, the US Environmental Protection Agency (“EPA”) issuedUnilateral Administrative Orders (“UAO”) against 41 parties deemed responsiblefor polluting the groundwater in that portion of the San Gabriel Valley fromwhich two of GSWC’s impacted wells draw water. GSWC was not named as a party tothe UAO. The UAO requires that these parties remediate the contamination. Thejudge in the lawsuit has appointed a special master to oversee mandatorysettlement discussions between the PRPs and the Water Entities. EPA is alsoconducting settlement discussions with several PRPs regarding the UAO. TheWater Entities and EPA are working to coordinate their settlement discussionsunder the special master in order to arrive at a complete resolution of allissues affecting the lawsuit and the UAO. Settlements with a number of the PRPs are being finalized; however,Registrant is presently unable to predict the ultimate outcome of thesesettlement discussions.

Registrantis unable to predict an estimate of the loss, if any, resulting from any ofthese suits or administrative proceedings.

***Condemnation of Properties:***

The laws of the State of California and the State ofArizona provide for the acquisition of public utility property by governmentalagencies through their power of eminent domain, also known as condemnation,where doing so is necessary and in the public interest. In addition, however,the laws of the State of California provide: (i) that the owner of utilityproperty may contest whether the condemnation is actually necessary and in thepublic interest, and (ii) that the owner is entitled to receive the fair marketvalue of its property if the property is ultimately taken.

Although the City of Claremont, California located inGSWC’s Region III, has not initiated the formal condemnation process pursuantto California law, the City has expressed various concerns to GSWC about therates charged by GSWC and the effectiveness of the CPUC’s rate settingprocedures. The City hired a consultant to perform an appraisal of the value ofGSWC’s water system serving the City. The value was estimated in 2004 by theCity’s consultant at $40 - $45 million. GSWC disagrees with the consultant’svaluation assessment. As of June 30, 2007, management believes that the fairmarket value of the Claremont water system exceeds the $38.3 million recordednet book value and also exceeds the consultant’s estimates of its value.  The Claremont City Council held a projectpriorities workshop in April 2007.  Thecouncil members agreed that the acquisition of GSWC’s water system was toremain a priority and authorized staff to obtain updated appraisals for thevalue of the water systems.  Requests forproposals have been sent to consulting firms.

The Town of Apple Valley is located in GSWC’s RegionIII and was evaluating the potential takeover of GSWC’s Apple Valley watersystems as well as the water systems of another utility serving the Town.  On March 13, 2007, the Town Council voted toformally abandon its review of the potential acquisitions.  GSWC was notified of the Town Council’saction by a letter from the Town Manager dated April 3, 2007.

Except for the City of Claremont and the Town of AppleValley, Registrant has not been, within the last three years, involved inactivities related to the potential condemnation of any of its other watercustomer service areas or in its Bear Valley Electric customer service area. Noformal condemnation proceedings have been filed against any of the Registrant’s  service areas during the past three years.

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

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit seeks an adjudication of the Santa MariaGroundwater Basin.  A stipulatedsettlement of the lawsuit has been reached, subject to CPUC approval. Thesettlement, among other things, if approved by the CPUC, would preserve GSWC’shistorical pumping rights and secure supplemental water rights for use in caseof drought or other reductions in the natural yield of the Basin. There arealso a few nonsettling parties, and the case is going forward as to theseparties. The settlement, if approved, would preserve GSWC’s position with thesettling parties independent of the outcome of the case as it moves forwardwith the nonsettling parties.

21

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***Air Quality Management District:***

In 1998, the SouthCoast Air Quality Management District (“AQMD”) issued a permit to GSWC for theinstallation and use of air stripping equipment at one of GSWC’s groundwatertreatment systems in its Region II service area.   In 2005, the AQMD conducted an inspection ofthis facility and issued a Notice of Violation (“NOV”) for exceeding the amountof groundwater permitted to be treated by the treatment system during calendaryear 2004.  Since receiving the NOV,changes in GSWC procedures have avoided additional violations at the facility.  The AQMD could have assessed penaltiesassociated with an NOV that can range from $10,000 up to $75,000 per day ofviolation.  GSWC estimates that it was inviolation approximately 180 days in 2004. GSWC met with AQMD on numerous occasions to resolve the NOV and toensure future compliance.  As part ofthis process, GSWC also submitted an application to amend the permit, becausean amendment may have been necessary for continued operation of the subject airstripping equipment.

GSWC finalized asettlement of the NOV with the AQMD in June 2007.  As part of the settlement, GSWC agreed towithdraw its application for an amended air discharge permit and perform aSupplemental Environmental Program (“SEP”). A SEP typically involves capital expenditures resulting in a change ofprocess, equipment, material, or indirect source reduction for the purposes ofeliminating or reducing air contaminant emissions.  The SEP prepared by GSWC involvesinstallation and operation of granular activated carbon filters at the facility.  Installation of the filters will eliminatethe use of the air stripping equipment at the facilities involved with the NOVand thus improve air quality.  The AQMDaccepted the SEP and assessed a nominal penalty of $25,000.  During the six months ended June 30, 2007,GSWC paid the penalty of $25,000 and agreed to perform its obligations underthe SEP.  It is estimated that the totalcapital cost of the SEP will be approximately $1.8 million with a requiredestimated completion date of April 30, 2009. Upon timely performance of all its obligations under the SEP, GSWC shallbe deemed released from any and all claims or penalties arising from theNOV.  Management believes that GSWC willbe able to timely fulfill its obligations under the SEP and no furtherpenalties are expected to be assessed. Management also believes it is probable that the capital costs of theSEP will be approved in rate base by the CPUC.

***OtherLitigation:***

A former officer of theCompany has asserted a potential claim against the Company for retaliationagainst the former officer and others in connection with alleged discriminatoryconduct by the Company and its Board of Directors. Although management believesthat the allegations are without merit and intends to vigorously defend againstthem, the Company retained an independent investigator to review theallegations and investigate the facts. Based upon the results of suchinvestigation, the Company does not believe that the ultimate resolution ofthis matter will have a material adverse effect on its financial position,results of operations, or cash flows.

Registrant is alsosubject to other ordinary routine litigation incidental to its business.  Management believes that rate recovery,proper insurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinarycourse of business.

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**Note 8 — Business Segments:**

AWRhas three reportable segments, water, electric and contracted services, whereasGSWC has two segments, water and electric. Within the segments, AWR has threeprincipal business units: water and electric service utility operationsconducted through GSWC, a water-service utility operation conducted throughCCWC, and a contracted services unit conducted through ASUS and itssubsidiaries. All activities of GSWC are geographically located withinCalifornia. All activities of CCWC are located in the state of Arizona.  Activities of ASUS and its subsidiaries areconducted in California, Maryland, New Mexico, Texas and Virginia.  Both GSWC and CCWC are regulated utilities.On a stand-alone basis, AWR has no material assets other than its investmentsin its subsidiaries. The tables below set forth information relating to GSWC’soperating segments, CCWC, ASUS and its subsidiaries, and other matters.  Certain assets, revenues and expenses havebeen allocated 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 June 30, 2007** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                        | 58,894     |   | $ | 6,255 |   | $ | 1,932 |   | $ | 12,165 |   | $ | — |   | $ | 79,246 |   |
| Pretax operating  income (loss)        |       | 15,812                                                                                                   |       | (40 | )(1) | 169 |   | 1,527 |   | (11 | ) | 17,457 |   |
| Interest  expense, net                 |       | 4,284                                                                                                    |       | 370 |   | 97 |   | 272 |   | (39 | ) | 4,984 |   |
| Identifiable  assets                   |       | 674,361                                                                                                  |       | 39,521 |   | 42,179 |   | 1,064 |   | — |   | 757,125 |   |
| Depreciation and  amortization expense |       | 6,111                                                                                                    |       | 534 |   | 395 |   | 48 |   | — |   | 7,088 |   |
| Capital additions                      |       | 8,524                                                                                                    |       | 634 |   | 444 |   | 313 |   | — |   | 9,915 |   |
|                                        |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Three Months Ended June 30, 2006** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                        | 51,396     |   | $ | 7,027 |   | $ | 2,048 |   | $ | 2,567 |   | $ | — |   | $ | 63,038 |   |
| Pretax operating  income (loss)        |       | 14,669                                                                                                   |       | (96 | )(1) | 393 |   | (765 | ) | (13 | ) | 14,188 |   |
| Interest  expense, net                 |       | 3,655                                                                                                    |       | 292 |   | 154 |   | 264 |   | 105 |   | 4,470 |   |
| Identifiable  assets                   |       | 651,440                                                                                                  |       | 41,439 |   | 37,603 |   | 920 |   | — |   | 731,402 |   |
| Depreciation and  amortization expense |       | 5,593                                                                                                    |       | 541 |   | 423 |   | 53 |   | — |   | 6,610 |   |
| Capital additions                      |       | 13,765                                                                                                   |       | 543 |   | 486 |   | — |   | — |   | 14,794 |   |
|                                        |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Six Months Ended June 30, 2007** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                      | 107,582    |   | $ | 15,124 |   | $ | 3,571 |   | $ | 25,239 |   | $ | — |   | $ | 151,516 |   |
| Pretax operating  income (loss)        |       | 26,791                                                                                                 |       | 3,612 | (2) | 320 |   | 3,691 |   | (106 | ) | 34,308 |   |
| Interest  expense, net                 |       | 8,422                                                                                                  |       | 718 |   | 215 |   | 557 |   | 2 |   | 9,914 |   |
| Identifiable  assets                   |       | 674,361                                                                                                |       | 39,521 |   | 42,179 |   | 1,064 |   | — |   | 757,125 |   |
| Depreciation and  amortization expense |       | 12,222                                                                                                 |       | 1,067 |   | 792 |   | 96 |   | — |   | 14,177 |   |
| Capital additions                      |       | 17,502                                                                                                 |       | 1,195 |   | 839 |   | 344 |   | — |   | 19,880 |   |
|                                        |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Six Months Ended June 30, 2006** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                      | 100,367    |   | $ | 15,372 |   | $ | 3,832 |   | $ | 7,867 |   | $ | — |   | $ | 127,438 |   |
| Pretax operating  income (loss)        |       | 28,601                                                                                                 |       | (1,181 | )(2) | 725 |   | 251 |   | (62 | ) | 28,334 |   |
| Interest  expense, net                 |       | 7,365                                                                                                  |       | 589 |   | 264 |   | 476 |   | 218 |   | 8,912 |   |
| Identifiable  assets                   |       | 651,440                                                                                                |       | 41,439 |   | 37,603 |   | 920 |   | — |   | 731,402 |   |
| Depreciation and  amortization expense |       | 11,089                                                                                                 |       | 1,076 |   | 838 |   | 89 |   | — |   | 13,092 |   |
| Capital additions                      |       | 31,740                                                                                                 |       | 1,376 |   | 804 |   | 202 |   | — |   | 34,122 |   |
|                                        |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)      Includes$236,000 and $923,000 unrealized loss on purchased power contracts for thethree months ended June 30, 2007 and 2006, respectively.

(2)      Includes$2,474,000 unrealized gain on purchased power contracts and $3,078,000unrealized loss on purchased power contracts for the six months ended June 30,2007 and 2006, respectively.

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**Item 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

# **General**

American States Water Company (“AWR”) is the parentcompany of Golden State Water Company (“GSWC”), American States UtilityServices, Inc. (“ASUS”) and its subsidiaries, and Chaparral City Water Company(“CCWC”). AWR was incorporated as a California corporation in 1998 as a holdingcompany.

GSWC is a California public utility company engagedprincipally in the purchase, production and distribution of water. GSWC alsodistributes electricity in one customer service area. GSWC is regulated by theCalifornia Public Utilities Commission (“CPUC”) and was incorporated as aCalifornia corporation on December 31, 1929. GSWC is organized into oneelectric customer service area and three water service regions consisting of 21customer service areas operating within 75 communities in 10 counties in theState of California. Region I consists of 7 customer service areas in northernand central California; Region II consists of 4 customer service areas locatedin Los Angeles County; and Region III consists of 10 customer service areas ineastern Los Angeles County, and in Orange, San Bernardino and Imperialcounties. GSWC also provides electric service to the City of Big Bear Lake andsurrounding areas in San Bernardino County through its Bear Valley Electricservice division.  GSWC served 254,880water customers and 23,213 electric customers at June 30, 2007, or a total of278,093 customers, compared with 276,841 total customers at June 30, 2006. GSWC’sutility operations exhibit seasonal trends. Although GSWC’s water utility operationshave a diversified customer base, residential and commercial customers accountfor the majority of GSWC’s water sales and revenues. Revenues derived fromcommercial and residential water customers accounted for approximately 82.7% of total water revenues forthe three months ended June 30, 2007, as compared to 87.4% for the three monthsended June 30, 2006.  Revenues derivedfrom commercial and residential water customers accounted for approximately86.1% of total waterrevenues for the six months ended June 30, 2007, as compared to 88.8%for the six months ended June 30, 2006. In addition, effective January 1, 2007, ASUS assigned service contractswith various municipalities to provide billing and meter reading services toGSWC.

CCWC is an Arizona public utility company serving13,444 customers as of June 30, 2007, compared with 13,219 customers at June30, 2006. Located in the town of Fountain Hills, Arizona and a portion of theCity of Scottsdale, Arizona, the majority of CCWC’s customers are residential.The Arizona Corporation Commission (“ACC”) regulates CCWC.

ASUS contracts, either directly or throughwholly-owned subsidiaries, with the U.S. government and various municipalitiesand private entities to provide water and wastewater services, including theoperation and maintenance of water and wastewater systems and water marketing.ASUS commenced operation and maintenance of water and wastewater systemsthrough a wholly-owned subsidiary at its first military base in Texas inOctober 2004.  Since that date, ASUScommenced operation and maintenance of water and wastewater systems at militarybases through wholly-owned subsidiaries in Maryland and Virginia in February2006. All of these contracts may be terminated, in whole or in part, prior tothe end of the 50-year term for convenience of the U.S. government or as aresult of default or nonperformance by ASUS or through its wholly-ownedsubsidiaries.  In either event, ASUSwould be made whole and shall be entitled to recover the remaining amount ofits capital investment pursuant to the terms of a termination settlement withthe U.S. government at the time of termination as provided in each of thecontracts.  The contract price for eachof these contracts is subject to redetermination two years after commencementof operations and every three years thereafter to the extent provided in eachof the contracts. However, ASUS has experienced delays in the redeterminationof prices at Fort Bliss following completion of the first two years ofoperation in October 2006.  Prices arealso subject to equitable adjustment based upon changes in circumstances andchanges in wages and fringe benefits to the extent provided in each of thecontracts.  In addition, a subsidiary ofASUS has executed a contract for the construction of infrastructureimprovements at the military base in Texas. This contract is a fixed-price contract. Prices may be increased by the execution of change orders if significantunforeseen issues are encountered during construction that would increaseoverall costs.  Revenues are recognizedunder the percentage-of-completion method of accounting for this contract.

ASUS and GSWC have been pursuing an opportunity toprovide contract services for wastewater treatment and retail water servicesrespectively, within the service area of the Natomas Central Mutual WaterCompany (“Natomas”). Natomas is a California mutual water company whichcurrently provides water service to its shareholders, primarily foragricultural irrigation in portions of Sacramento and Sutter counties innorthern California. In August 2004, Natomas and ASUS entered into a contractunder which ASUS acts as the exclusive agent for marketing water that hasbecome temporarily surplus to the internal needs of Natomas, and that arises underwater rights permits and contracts owned or controlled by Natomas, to thirdparties outside the Natomas service area. On January 31, 2006, ASUS and Natomasentered into a water purchase and sale agreement under which ASUS will acquire5,000 acre-feet of permanent Sacramento River water diversion

24

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rights from Natomas. Pursuant to the terms of thisagreement, Natomas will sell, transfer and convey to ASUS, in perpetuity, waterrights and entitlements to divert from the Sacramento River up to 5,000acre-feet of water per year, subject to certain regulatory approvals. Terms ofthe acquisition, among other things, include a base price of $2,500 peracre-foot of water, with payments contingent on achievement of specificmilestones and events over a 10-year period. Pursuant to the marketing servicesagreement described above, Natomas will pay to ASUS a commission of 16% of thesale price over the same 10-year period for any temporary surplus watersuccessfully marketed by ASUS. At the same time that the water purchaseagreement was completed, Natomas and ASUS also entered into a settlementagreement that released Natomas from previously established reimbursementobligations under prior agreements. ASUS may use the water rights acquired fromNatomas to serve existing customers, to re-sell to other beneficial users, orto pursue and serve expanded service territories.

GSWC and Natomas have also entered into a watertransfer agreement under which GSWC agreed to purchase and Natomas agreed tosell up to 30,000 acre-feet of water to be used exclusively by GSWC to servecustomers in Sutter County, California. Additionally, GSWC filed for aCertificate of Public Convenience and Necessity with the CPUC on May 31, 2006to provide retail water service in a portion of Sutter County, Californiawithin the Natomas service area.  CPUCreview of the application has been deferred pending completion of anenvironmental assessment for the proposed new water service. All of theagreements with Natomas are subject to receipt of various regulatory approvalsrequired for their full implementation.

**Overview**

Our revenues, operating income, and cash flows areearned primarily through delivering drinking water to homes and businesses over2,900 miles of water distribution pipelines. Rates charged to customers of GSWC and CCWC are determined by either theCPUC or ACC. These rates are intended to allow recovery of operating costs anda reasonable rate of return on capital. Factors recently affecting ourfinancial performance include the process and timing of setting rates chargedto customers; our ability to recover, and the process for recovering in rates,the costs of distributing water and electricity; weather; the impact ofincreased water quality standards on the cost of operations and capitalexpenditures; pressures on water supply caused by population growth, morestringent water quality standards, deterioration in water quality and watersupply from a variety of causes; capital expenditures needed to upgrade watersystems and increased costs and risks associated with litigation relating towater quality and water supply, including suits initiated by the Company toprotect its water supply.

We plan to continue to seek additional rate increasesin future years to recover our operating and supply costs and receivereasonable returns on invested capital. Capital expenditures in future yearsare expected to remain at much higher levels than depreciation expense. Cashsolely from operations is not expected to be sufficient to fund our needs forcapital expenditures, dividends, investments in our contract business and othercash requirements. We expect to fund these needs through a combination of debtand common stock offerings in the ensuing years.  AWR expects to issue equity in late 2007 orearly 2008.

Operating revenues and income from our contracted servicesare earned primarily from the operation and maintenance of water and wastewatersystems for the U.S. government at various military bases.  All of the operations and maintenancecontracts with the U.S. government are 50-year fixed-priceredetermination-prospective contracts. We also may generate revenues from the construction of infrastructureimprovements at these bases pursuant to the terms of these 50-year contracts orpursuant to supplemental contracts. Revenues generated by our contract operations are primarily dependent onthese new business activities, including military base operations and theconstruction of new and/or replacement infrastructure at these militarybases.  As a result, we are subject torisks that are different than those of our regulated water and electricactivities.   We plan to continue seekingopportunities to bid on other contracts for the privatization of water andwastewater services at military bases.

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**Summary Results by Segment**

AWRhas three reportable segments: water, electric and contracted services. Withinthe segments, AWR has three principal business units: water and electricservice utility operations conducted through GSWC, a water-service utilityoperation conducted through CCWC, and a contracted services unit conductedthrough ASUS and its subsidiaries.  

*Second Quarter Results*

Thetables below set forth summaries of the results by segment (in thousands) forthe three months ended June 30, 2007 and 2006:
| ** **             | ** ** | **Operating Revenues** | ** ** | **Pretax Operating Income** | ** ** |
|------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **3 Mos.**             | ** ** | **3 Mos.**                       | ** ** | ** ** | ** ** | ** ** | ** ** | **3 Mos.** | ** ** | **3 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**                   | ** ** | **Ended**                             | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **6/30/2007**               | ** ** | **6/30/2006**                         | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2007** | ** ** | **6/30/2006** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                           | 60,826     |                                  | $          | 53,444 |   | $ | 7,382 |   | 13.8 | % | $ | 15,981 |   | $ | 15,062 |   | $ | 919 |   | 6.1 | % |
| Electric               |       | 6,255                       |       | 7,027                                 |       | (772 | ) | -11.0 | % | (40 | ) | (96 | ) | 56 |   | 58.3 | % |
| Contracted  services   |       | 12,165                      |       | 2,567                                 |       | 9,598 |   | 373.9 | % | 1,527 |   | (765 | ) | 2,292 |   | 299.6 | % |
| AWR parent             |       | —                      |       | —                                |       | — |   | — |   | (11 | ) | (13 | ) | 2 |   | 15.4 | % |
| Totals from  operation |       | $                           | 79,246     |                                  | $          | 63,038 |   | $ | 16,208 |   | 25.7 | % | $ | 17,457 |   | $ | 14,188 |   | $ | 3,269 |   | 23.0 | % |

 

***Water -***Forthe three months ended June 30, 2007, pretax operating income for waterincreased by $919,000, or 6.1%, as a result of a $6.1 million increase in watermargin as compared to the same period of 2006 due to increased water ratesapproved by the CPUC that were effective January 1, 2007, an increase in waterconsumption over that in the prior period, and a favorable change in the watersupply mix.  This increase in margin waspartially offset by higher operating, maintenance, administrative and general,and other expenses, which decreased operating income by $5.1 million, as morefully described below.

***Electric-***For the three months ended June 30, 2007, pretaxoperating income for electric increased 58.3% primarily due to a $687,000decrease in the pretax unrealized loss on purchased power contracts.  Partially offsetting this was an 11% decreasein revenues primarily due to warmer weather during the second quarter of 2007as compared to the same period in 2006. During the second quarter of 2006, cooler weather allowed forsnow-making at the ski resorts to continue beyond the first quarter as well asprovided for higher residential usage associated with heating needs.  In 2007, temperatures began to warm up inFebruary resulting in a cessation of snow-making operations along with areduction in residential energy demand. There was also an increase in operating expenses that contributed tolower pretax operating income.

***ContractedServices -***For the three months ended June 30, 2007,pretax operating income for contracted services increased by $2.3 million.  This was primarily due to a new constructioncontract with the U.S. government.  InDecember 2006, a subsidiary of ASUS finalized an agreement with the U.S.government for the construction of certain improvements to the existingwastewater infrastructure located at Fort Bliss in El Paso, Texas.  The $20.6 million project is a firm-fixedprice contract, subject to change orders if significant issues are encounteredduring construction that would increase the overall cost of the project.  This construction project is an amendment andsupplement to the 50-year contract with the U.S. government to manage theentire water and wastewater systems at Fort Bliss.  Revenues from this agreement are beingrecognized under the percentage-of-completion method of accounting.  As a result of this new project, operatingincome increased by $2.1 million during the second quarter of 2007. The projectis scheduled to be completed by August 15, 2007 and there will be no furtherconstruction revenues associated with this amendment after that date.  Earningsand cash flows from amendments to the original 50-year contracts with the U.S.government are sporadic and may or may not continue in future periods.

26

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*Year-to-Date Results*

Thetables below set forth summaries of the results by segment (in thousands) forthe six months ended June 30, 2007 and 2006:
| ** **             | ** ** | **Operating Revenues** | ** ** | **Pretax Operating Income** | ** ** |
|------------------------|------------|-----------------------------|------------|---------------------------------------|------------|
| ** **             | ** ** | **6 Mos.**             | ** ** | **6 Mos.**                       | ** ** | ** ** | ** ** | ** ** | ** ** | **6 Mos.** | ** ** | **6 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**                   | ** ** | **Ended**                             | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **6/30/2007**               | ** ** | **6/30/2006**                         | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2007** | ** ** | **6/30/2006** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                        |       |                                  |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                           | 111,153    |                                  | $          | 104,199 |   | $ | 6,954 |   | 6.7 | % | $ | 27,111 |   | $ | 29,326 |   | $ | (2,215 | ) | -7.6 | % |
| Electric               |       | 15,124                      |       | 15,372                                |       | (248 | ) | -1.6 | % | 3,612 |   | (1,181 | ) | 4,793 |   | 405.8 | % |
| Contracted  services   |       | 25,239                      |       | 7,867                                 |       | 17,372 |   | 220.8 | % | 3,691 |   | 251 |   | 3,440 |   | 1370.5 | % |
| AWR parent             |       | —                      |       | —                                |       | — |   | — |   | (106 | ) | (62 | ) | (44 | ) | -71.0 | % |
| Totals from  operation |       | $                           | 151,516    |                                  | $          | 127,438 |   | $ | 24,078 |   | 18.9 | % | $ | 34,308 |   | $ | 28,334 |   | $ | 5,974 |   | 21.1 | % |

 

***Water -***Forthe six months ended June 30, 2007, pretax operating income for water decreasedcompared to the same period in 2006 by $2.2 million, or 7.6%, primarily due toa favorable decision issued by the CPUC on April 13, 2006 regarding GSWC’swater rights lease revenues received from the City of Folsom, which generated aone-time revenue increase in 2006.  Thisdecision added about $2.3 million of additional revenues in the first quarterof 2006 for amounts that had been received from the City of Folsom in 2004 and2005.  Prior to the decision, theseamounts had been recorded as regulatory liabilities.  The 2006 decision resulted in GSWCrecognizing $2.3 million of lease revenues in the first quarter of 2006, butthere was no corresponding revenue recognition amount in 2007.  Instead, GSWC will record in 2007 theon-going annual Folsom lease revenues of approximately $1.3 million.  Higher operating expenses as described belowalso contributed to the decrease in operating income for the water segment,offset by increased water rates approved by the CPUC that were effectiveJanuary 1, 2007, an increase in water consumption over that in the priorperiod, and a favorable change in the water supply mix.

***Electric -***Forthe six months ended June 30, 2007, pretax operating income for electricincreased by $4.8 million, due in large part to an unrealized gain on BearValley Electric’s purchased power contracts during the six months ended June30, 2007 as a result of increasing energy prices versus an unrealized loss onpurchased power contracts in the same period of 2006. The gain for the firstsix months of 2007 increased operating income by approximately $2.5 million ascompared to a loss decreasing operating income by $3.1 million for the sameperiod in 2006.  The net effect was anincrease in electric operating income by $5.6 between the two periods.  This increase was partially offset by adecrease in consumption and an increase in operating expenses.

***Contracted Services -***Forthe six months ended June 30, 2007, pretax operating income for contractedservices increased by $3.4 million.  Thiswas primarily due to a new contract with the U.S. government previouslydiscussed in the second quarter results. As a result of this new constructionproject, operating income increased by $4.3 million during the first six monthsof 2007. The project is scheduled to be completed by August 15, 2007 and therewill be no further construction revenues associated with this amendment afterthat date.  As previously mentioned, earnings and cash flows fromamendments to the original 50-year contracts with the U.S. government aresporadic and may or may not continue in future periods. Partially offsetting this increase wasthe recovery and reimbursement in 2006 of transition period operating expensesof about $672,000 as a result of operating and maintaining the water and wastewater systemsat military bases in Virginia and Maryland pursuant to the contracts with theU.S. government commencing during the six months ended June 30, 2006.  We took over the operation andmaintenance of the water and wastewater systems at Andrews Air Force Base inMaryland on February 1, 2006 and commenced operation of these systems on thatdate.  In addition, we assumed theoperation and maintenance of the wastewater systems at Fort Lee in Virginia onFebruary 23, 2006 and the water and wastewater systems at Fort Eustis, FortMonroe and Fort Story in Virginia on April 3, 2006 and commenced operation andmaintenance of these systems on those dates. Therefore, we operated these bases partially during the first six monthsof 2006 and entirely during same period of 2007.

The following discussion and analysis providesinformation on AWR’s consolidated operations and assets.  Where necessary, the following discussion andanalysis includes specific references to AWR’s individual segments and/or othersubsidiaries CCWC, ASUS and its subsidiaries.

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***Consolidated Results of Operations — Three Months Ended June 30, 2007and 2006 (in thousands):***
| ** **                                        | ** ** | **3 Mos.** | ** ** | **3 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                        | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                        | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING  REVENUES                               |       |            |       |            |       |       |       |       |       |
| Water                                             |       | $               | 60,826     |            | $          | 53,444     |       | $          | 7,382      |   | 13.8 | % |
| Electric                                          |       | 6,255           |       | 7,027           |       | (772       | )          | -11.0      | %          |
| Contracted services                               |       | 12,165          |       | 2,567           |       | 9,598      |       | 373.9      | %          |
| Total operating revenues                          |       | 79,246          |       | 63,038          |       | 16,208     |       | 25.7       | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| OPERATING  EXPENSES                               |       |            |       |            |       |       |       |       |       |
| Water purchased                                   |       | 12,077          |       | 10,916          |       | 1,161      |       | 10.6       | %          |
| Power purchased for pumping                       |       | 2,673           |       | 2,416           |       | 257        |       | 10.6       | %          |
| Groundwater production assessment                 |       | 2,549           |       | 2,239           |       | 310        |       | 13.8       | %          |
| Power purchased for resale                        |       | 2,915           |       | 3,248           |       | (333       | )          | -10.3      | %          |
| Unrealized loss on purchased power contracts      |       | 236             |       | 923             |       | (687       | )          | -74.4      | %          |
| Supply cost balancing accounts                    |       | (1,190          | )          | (825            | )          | (365       | )          | 44.2       | %          |
| Other operating expenses                          |       | 6,559           |       | 5,886           |       | 673        |       | 11.4       | %          |
| Administrative and general expenses               |       | 13,664          |       | 10,902          |       | 2,762      |       | 25.3       | %          |
| Depreciation and amortization                     |       | 7,088           |       | 6,610           |       | 478        |       | 7.2        | %          |
| Maintenance                                       |       | 4,353           |       | 3,246           |       | 1,107      |       | 34.1       | %          |
| Property and other taxes                          |       | 2,843           |       | 2,480           |       | 363        |       | 14.6       | %          |
| Construction expenses                             |       | 8,260           |       | 809             |       | 7,451      |       | 921.0      | %          |
| Net gain on sale of property                      |       | (238            | )          | —          |       | 238        |       | 100.0      | %          |
| Total operating expenses                          |       | 61,789          |       | 48,850          |       | 12,939     |       | 26.5       | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| OPERATING INCOME                                  |       | 17,457          |       | 14,188          |       | 3,269      |       | 23.0       | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| OTHER INCOME AND  EXPENSES                        |       |            |       |            |       |       |       |       |       |
| Interest expense                                  |       | (5,570          | )          | (5,433          | )          | 137        |       | 2.5        | %          |
| Interest income                                   |       | 586             |       | 963             |       | (377       | )          | -39.1      | %          |
| Other                                             |       | 63              |       | —          |       | 63         |       | 100.0      | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| INCOME FROM  OPERATIONS BEFORE INCOME TAX EXPENSE |       | 12,536          |       | 9,718           |       | 2,818      |       | 29.0       | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| Income tax expense                                |       | 5,214           |       | 3,449           |       | 1,765      |       | 51.2       | %          |
|                                              |       |            |       |            |       |       |       |       |       |
| NET INCOME                                        |       | $               | 7,322      |            | $          | 6,269      |       | $          | 1,053      |   | 16.8 | % |

 

Net income for the second quarter ended June 30, 2007increased by 16.8% to $7.3 million, equivalent to $0.42 per common share onboth a basic and fully diluted basis, compared to $6.3 million or $0.36 per  share on both a basic and diluted basis forthe three months ended June 30, 2006. Impacting the comparability in theresults of the two periods are the following significant items, which are alsodiscussed in greater detail below:

·              Anincrease in the margin for the water segment’s pretax operations of $6.1million, or $0.21 per share, as compared to the same period of 2006, due toincreased water rates approved by the CPUC that were effective January 1, 2007,an increase in water consumption over that in the prior period, and a favorablechange in the supply mix.

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·                     Anunrealized loss on purchased power contracts which decreased pretax income by$236,000, or approximately $0.01 per share for the three months ended June 30,2007, as compared to a $923,000 unrealized loss, or $0.03 per share, for thethree months ended June 30, 2006.

·                     An increasein contracted services’ pretax operating income of $2.3 million, or $0.08 pershare, as compared to the same period of 2006 for operating, maintaining and improvingthe water and wastewater systems at military bases for the U.S. government includinga special wastewater expansion project. The increases include revenuerecognized for certain special projects under the percentage-of-completion methodof accounting.

·                     Higheroperating expenses, a change in the effective tax rate, and other itemsdescribed below, resulting in a decrease of $0.25 per share compared to theresults of operations from 2006.

***Operating Revenues***

For the three months ended June 30, 2007, revenues fromwater operations increased by 13.8% to $60.8 million, compared to $53.4 millionfor the three months ended June 30, 2006. This increase was due primarily to an increase of about 17.1% in billedwater consumption resulting from warmer weather in 2007, which increasedrevenues by approximately $6.3 million. Differences in temperature and rainfallin Registrant’s service areas impact sales of water to customers, causingfluctuations in Registrant’s revenues and earnings between comparableperiods.  There were also rate increases approved by theCPUC, effective January 1, 2007, which contributed approximately $1.1 millionin increased water revenues.   Includedin these rate increases in 2007 was an interim rate increase effective January1, 2007, subject to refund, totaling approximately $260,000 for the secondquarter ($1.2 million for the entire 2007 year) due to the CPUC’s delays inprocessing GSWC’s general rate applications for rate increases in Region II andfor general office expenses at the corporate headquarters.  A proposed decision and an alternate decisionwere issued on July 24, 2007, which recommend rate increases in 2007 for RegionII ranging from $6.3 million to $6.7 million. In addition, GSWC’s Region III received an interim annual rate increaseof $135,000 effective January 1, 2007 to cover general office expenses. The proposed decision issued by the Administrative Law Judge on July 24, 2007also recommends rate increases of $3.0 million for 2007 to recover the rateincreases for general office expenses allocated to Region III.  The amounts ultimately decided by the CPUCwill be retroactive to January 1, 2007.  Once the CPUC issues its finaldecisions, GSWC will implement a temporary surcharge to recover the revenuedifference between the interim rates implemented on January 1, 2007 and thefinal rates authorized by the CPUC for the period from January 1 to theimplementation of the new final rates.  The final decisions are expectedin the third quarter of this year.

For the three months ended June 30, 2007, revenues fromelectric operations decreased by 11.0% to $6.3 million compared to $7.0 millionfor the three months ended June 30, 2006. The decrease reflects a 10.6%decrease in kilowatt-hour usage by residential and commercial customers due towarmer weather conditions during the second quarter of 2007 as compared to thesame period in 2006.  Coolerweather in the 2006 period allowed for snow-making into early second quarteralong with higher residential demand related to heating requirements.  Warmer weather in the second quarter of 2007eliminated the ability for snow-making and reduced energy demands forresidential heating purposes.

Registrant reliesupon rate approvals by state regulatory agencies in California and Arizona inorder to recover operating expenses and provide for a return on invested andborrowed capital used to fund utility plant. Without such adequate rate reliefgranted in a timely manner, revenues and earnings can be negatively impacted.  As noted above, interim rates wereimplemented due to delays by the CPUC.

Revenues from contracted services are comprised ofconstruction revenues and management fees for operating and maintaining thewater and wastewater systems at military bases. For the three months ended June30, 2007, revenues from contracted services increased by $9.6 million, or373.9%, to $12.2 million compared to $2.6 million for the three months endedJune 30, 2006 due primarily to an increaseof approximately $9.7 million related to construction revenues earned from theU.S. government recognized on the percentage-of completion method. The revenuesearned were for the construction of certain improvements, renewals andreplacements to the existing water and wastewater infrastructure at Fort Blissand at other military bases located in Virginia and Maryland pursuant to newoperation and maintenance contracts entered into in early 2006.  Certain of the construction projects arefixed-price contracts and are a supplement to ASUS’s 50-year contracts with theU.S. government.  In particular, ASUSentered into a $20.6 million project for theconstruction of certain improvements to the existing wastewater infrastructurelocated at Fort Bliss in El Paso, Texas. The $20.6 million project is a firm-fixed price contract and was anamendment and supplement to the 50-year contract with the U.S. government tomanage the entire water and wastewater systems at Fort Bliss.  Revenues from this agreement have beenrecognized under the percentage-of-completion method of accounting.  As a result of this new project, which beganin 2007, revenues for contracted services increased by $9.1 million during thesecond quarter of 2007. The project is scheduled to be completed by August 15,2007, and there will be no further construction revenues associated with thisamendment after that date.  Earnings and cash flows from amendments and modificationsto the original 50-year contracts with the U.S. government are sporadic and mayor may not continue in future periods.

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***Operating Expenses:***

***Supply Costs***

Supply costs for the water segmentconsist of purchased water, purchased power for pumping, groundwater productionassessments and water supply cost balancing accounts.  Supply costs included in electric supplycosts consist of purchased power for resale and the electric supply costbalancing account.  Water and electricmargins are computed by taking total revenues, less total supply costs.  Registrant uses these margins and relatedpercentages as an important measure in evaluating its operating results.  Registrant believes this non-GAAP measure tobe a useful internal benchmark in evaluating the utility businessperformance within its water and electric segments.   Registrant reviews these measurementsregularly and compares them to historical periods and to our operating budgetas approved.  However, this non-GAAPmeasure may not be comparable to similarly titled measures used by otherentities and should not be considered as an alternative to operating income,which is determined in accordance with GAAP, as an indicator of operatingperformance.

Total supply costs comprise the largest segment oftotal operating expenses.  Supply costsaccounted for approximately 30.8% and 36.8% of total operating expenses for thethree months ended June 30, 2007 and 2006, respectively.  The table below provides the amount ofincreases (decreases), percent changes in supply costs, and margins during thethree months ended June 30, 2007 and 2006 (amounts in thousands):
| ** **                                  | ** ** | **3 Mos.** | ** ** | **3 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                  | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING  REVENUES (1)               |       | $               | 60,826     |            | $          | 53,444     |       | $          | 7,382      |   | 13.8 | % |
| WATER SUPPLY  COSTS:                        |       |            |       |            |       |       |       |       |       |
| Water purchased (1)                         |       | 12,077          |       | 10,916          |       | 1,161      |       | 10.6       | %          |
| Power purchased for pumping (1)             |       | 2,673           |       | 2,416           |       | 257        |       | 10.6       | %          |
| Groundwater production assessment (1)       |       | 2,549           |       | 2,239           |       | 310        |       | 13.8       | %          |
| Water supply cost balancing accounts (1)    |       | (1,631          | )          | (1,235          | )          | (396       | )          | 32.1       | %          |
|                                        |       | $               | 15,668     |            | $          | 14,336     |       | $          | 1,332      |   | 9.3 | % |
| WATER MARGIN (2)                            |       | $               | 45,158     |            | $          | 39,108     |       | $          | 6,050      |   | 15.5 | % |
| PERCENT MARGIN -  WATER                     |       | 74.2            | %          | 73.2            | %          |       |       |       |       |
|                                        |       |            |       |            |       |       |       |       |       |
| ELECTRIC  OPERATING REVENUES (1)            |       | $               | 6,255      |            | $          | 7,027      |       | $          | (772       | ) | -11.0 | % |
| ELECTRIC SUPPLY  COSTS:                     |       |            |       |            |       |       |       |       |       |
| Power purchased for resale (1)              |       | 2,915           |       | 3,248           |       | (333       | )          | -10.3      | %          |
| Electric supply cost balancing accounts (1) |       | 441             |       | 410             |       | 31         |       | 7.6        | %          |
|                                        |       | $               | 3,356      |            | $          | 3,658      |       | $          | (302       | ) | -8.3 | % |
| ELECTRIC MARGIN (2)                         |       | $               | 2,899      |            | $          | 3,369      |       | $          | (470       | ) | -14.0 | % |
| PERCENT MARGIN -  ELECTRIC                  |       | 46.3            | %          | 47.9            | %          |       |       |       |       |

 

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(1)          As reportedon AWR’s Consolidated Statements of Income, except for supply cost balancingaccounts.  The sum of water and electricsupply cost balancing accounts in the table above are shown on AWR’sConsolidated Statements of Income and totaled ($1,190,000) and ($825,000) forthe three months ended June 30, 2007 and 2006, respectively.

(2)          Water andelectric margins do not include any depreciation and amortization, maintenanceexpense, or other operating expenses.

30

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Two of the principal factors affecting water supplycosts and gross margin are the amount of water produced and the source of thewater.  Generally, the cost of producingwater from wells costs less than water purchased from wholesale suppliers.  In addition, GSWC is authorized toestablish water and electric supply cost balancing/memorandum accounts forincreases and/or decreases in costs due to changes in rates charged by itssuppliers providing our purchased water and purchased power, and by agenciesassessing groundwater related pump taxes for our water service areas inCalifornia.   Higher or lower actualcosts as compared to costs authorized by the CPUC will either be recovered fromor refunded to customers in the future.  However, changes in the water resource mix between water supplied frompurchased sources and that supplied from Registrant’s own wells canincrease/decrease actual supply-related costs relative to that approved forrecovery through rates, thereby impacting earnings either negatively orpositively. GSWC has the opportunity to change the supply-related costsrecovered through rates by application to the appropriate regulatory body. GSWCbelieves that its applications for recovery of supply-related costs accuratelyreflect the water supply situation as it is known at the time. Without a “full-cost”balancing account authorized by the CPUC, it is impossible to adequatelyprotect earnings from adverse changes in supply costs related to unforeseencontamination or other loss of water supply.

For the three months ended June 30, 2007, 41.5% of theCompany’s water supply mix was purchased as compared to 43.9% purchased for thethree months ended June 30, 2006.  Thischange in mix resulted in improved margins in 2007 compared to same period in2006.

Purchasedwater costs increased by 10.6% to $12.1 million compared to $10.9 million forthe three months ended June 30, 2006. The increase is due primarily to anincrease in water supply demand resulting from higher customer consumption andincreased water rates charged by wholesale water suppliers.  In general, the supply cost memorandumaccount as discussed above allows GSWC to track incremental rate changes fromsuppliers, for future recovery in water rates.  These increases were offset by a favorable change in the supply mixdiscussed above.  Certain wells that hadbeen removed from service in 2006 as a result of water quality issues andmechanical problems were either returned to service or otherwise supplementedin 2007.

For thethree months ended June 30, 2007, the increases in power purchased for pumpingand groundwater production assessments were due to higher water supply demandand an increase in pumping volume resulting from the favorable supply mixchange as discussed. There were also increases in assessment rates leviedagainst groundwater production, effective July 2006. Average pump taxrates increased in Regions II and III by approximately 2% and 4%,respectively.  Again, the supply costmemorandum account tracks the increases in pump tax rates for future recoveryin water rates.

The supply costbalancing account tracks differences between the current cost for supply items(water, power, and pump taxes) charged by GSWC’s suppliers and the cost forthose items incorporated into GSWC’s rates. Overcollections occur when the current cost of these items is less thanthe amount in rates and have the effect of increasing the supply cost balancingaccount in the Statements of Income. Undercollections occur when the currentcost exceeds the amount in rates for these items and, conversely have theeffect of decreasing the supply cost balancing account in the Statements ofIncome.  Typically, overcollections orundercollections, when they occur, are tracked in the supply cost memorandum/balancingaccounts for future refund or recovery through a surcredit (in the event of anovercollection) or surcharge (in the event of an undercollection) on customers’bills.  Once in rates, the amortizationof surcharges that are in place to recover under-collections from customershave the effect of increasing the supply cost balancing account in theStatements of Income.  Conversely, theamortization of surcredits that are in rates to refund over-collections tocustomers have the effect of decreasing the supply cost balancing account.  A decrease of $396,000 during the threemonths ended June 30, 2007 in the water supply cost balancing account ascompared to the three months ended June 30, 2006 was primarily caused by a$533,000 decrease in the amortization of the water supply cost balancingaccounts due to the expiration in October 2006 of the surcharge that was inrates to recover Region III’s under-collection. This was partially offset by the recording of $181,000 netunder-collection adjustment relating to 2005 due to the CPUC’s earning testrequirement, which was eliminated in April 2006 by a CPUC decision.Under-collections and over-collections are now recorded on a monthly basis.

For the three months ended June 30, 2007, the cost of powerpurchased for resale to customers in GSWC’s Bear Valley Electric divisiondecreased by 10.3% to $2.9 million compared to $3.2 million for the threemonths ended June 30, 2006, reflecting primarily lower customer demand duringthe second quarter of 2007, because of a lack of snowfall in this ski resortcommunity.

31

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***Unrealized(Gain) Loss on Purchased Power Contracts***

Unrealizedgain and loss on purchased power contracts represent gains and losses recordedfor GSWC’s purchased power agreements with Pinnacle West Marketing &Trading Company, LLC (“PWMT”) (formerly Pinnacle West Capital Corporation),which qualify as derivative instruments under SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*.  The $236,000 pretax unrealized loss onpurchased power contracts for the three months ended June 30, 2007 is due to adecrease in the current forward market prices since March 31, 2007, compared toa $923,000 pretax unrealized loss on purchased power contracts for the threemonths ended June 30, 2006. Unrealized gains and losses at Bear Valley Electricwill continue to impact earnings during the life of the contract with PWMT,which terminates at the end of 2008.

***Other Operating Expenses***

The components ofother operating expenses include primarily payroll, material and supplies,chemicals and water treatment, and contract service costs of operating theregulated water systems, including the costs associated with water transmissionand distribution, pumping, water quality, meter reading, billing, andoperations of district offices.  For the three months endedJune 30, 2007 and 2006, other operating expenses by segment consisted of thefollowing (amounts in thousands):
| ** **                      | ** ** | **3 Mos.** | ** ** | **3 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                      | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                  |       | $               | 5,375      |            | $          | 4,666      |       | $          | 709        |   | 15.2 | % |
| Electric  Services              |       | 433             |       | 408             |       | 25         |       | 6.1        | %          |
| Contracted  Services            |       | 751             |       | 812             |       | (61        | )          | -7.5       | %          |
| Total other  operating expenses |       | $               | 6,559      |            | $          | 5,886      |       | $          | 673        |   | 11.4 | % |

 

For the three months ended June 30,2007, other operating expenses for water services increased by $709,000 dueprimarily to higher chemical and water treatment costs, including supplies andmaterials at GSWC’s Region II and III services areas.  In addition, these costs are being incurredthroughout the year whereas in prior years they were generally deferred to thelatter part of the year.

***Administrative and General Expenses***

Administrative and general expensesinclude payroll related to administrative and general functions, all employeebenefits charged to expense accounts, insurance expenses, outside legal andconsulting fees, regulatory utility commissions’ expenses, expenses associatedwith being a public company, and general corporate expenses.  For the three months ended June 30, 2007 and2006, administrative and general expenses by segment consisted of the following(amounts in thousands):
| ** **                                  | ** ** | **3 Mos.** | ** ** | **3 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                  | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                              |       | $               | 10,694     |            | $          | 8,249      |       | $          | 2,445      |   | 29.6 | % |
| Electric  Services                          |       | 1,531           |       | 1,168           |       | 363        |       | 31.1       | %          |
| Contracted  Services                        |       | 1,439           |       | 1,485           |       | (46        | )          | -3.1       | %          |
| Total  administratvive and general expenses |       | $               | 13,664     |            | $          | 10,902     |       | $          | 2,762      |   | 25.3 | % |

 

For the three months ended June 30,2007, administrative and general expenses increased by $2.8 million in waterand electric services compared to the three months ended June 30, 2006 due to:(i) an increase of approximately $907,000 in outside services relatingprimarily to additional tax, audit and legal services in 2007; (ii) the CPUC’sapproval in April 2006 of Region II’s outside services memorandum accounttotaling approximately $709,000; upon approval by the CPUC, these legal costs, 

32

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which were incurred in prior periods, were reversed in thesecond quarter of 2006 and recorded as a regulatory asset;  there was no such adjustment in 2007;(iii) an approximate $577,000 increase in labor costs due to higher wageslargely related to Registrant’s annual performance-based salary review program;(iv) a $225,000 increase in rent expense for office space and the telephonesystem; (v) an agreement with the City of Folsom to dismiss allopposition to service the Westborough development;  the agreement requires GSWC to pay the Cityof Folsom $550,000 with Aerojet reimbursing GSWC for 50% or $275,000 of thesettlement payment; as of and for the three months ended June 30, 2007, GSWChas recorded an obligation to the City of Folsom for $550,000, an additional receivableof $275,000 from Aerojet for the amount to be reimbursed and a net charge toadministrative and general expenses in the amount of $275,000 for its share ofthe settlement payment, and(vi) an increase of $115,000 in miscellaneous expenses.

A proposeddecision and an alternate decision on GSWC’s Region II rate case were issued onJuly 24, 2007. The final decision may result in increased administrative andgeneral expenses being allocated to contracted services.  However, management is unable to predict thefinal outcome of this rate case.

***Depreciation and Amortization***

Forthe three months ended June 30, 2007, depreciation and amortization expenseincreased by 7.2% to $7.1 million compared to $6.6 million for the three monthsended June 30, 2006 reflecting, among other things, the effects of closingapproximately $73 million of additions to utility plant during 2006,depreciation on which began in January 2007. Registrant anticipates thatdepreciation expense will continue to increase due to Registrant’s on-goingconstruction program at its regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through water and electric rates.

***Maintenance***

For the three months ended June 30,2007, maintenance expense increased by 34.1% to $4.4 million compared to $3.2million for the three months ended June 30, 2006 due principally to an increasein required and emergency maintenance on GSWC’s wells and water supply sources,primarily in its Region II and III service areas.

***Property and Other Taxes***

For the three months ended June 30, 2007, property andother taxes increased by 14.6% to $2.8 million compared to $2.5 million for thethree months ended June 30, 2006 reflecting additional property taxes resultingfrom higher assessed values, and increases in payroll taxes based on increasedlabor costs.

***Construction Expenses***

For the three months ended June 30, 2007, ASUS constructionexpenses increased to $8.3 million compared to $809,000 for the same period in2006 reflecting the costs incurred for theconstruction of various improvements, renewals and replacements to the existingwater and wastewater infrastructure at Fort Bliss and at the military baseslocated in Virginia and Maryland pursuant to new contracts entered into inearly 2006.  The increase in constructionactivity resulted from amendments to the original 50-year contracts with theU.S. government which required the construction of additional improvements atthe various military bases.  Aspreviously mentioned, ASUS entered into a $20.6 million project for theconstruction of certain improvements to the existing wastewater infrastructurelocated at Fort Bliss in El Paso, Texas.  As a result of this new project, construction expenses increased by $7.0million during the second quarter of 2007. The project is scheduled to becompleted by August 15, 2007.

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

For the three months ended June 30, 2007, Registrantrecorded a net pretax gain of $238,000 on the sale of property it owned in theCity of Claremont.  There was no similargain in the same period of 2006. Earnings and cash flows from property sales are sporadic and may or maynot continue in future periods.

***Interest Expense***

For the three months ended June 30,2007, interest expense increased by 2.5% to $5.6 million compared to $5.4million for the three months ended June 30, 2006 primarily reflecting highershort-term interest rates.  There wasalso an increase in short-term cash borrowings. Average bank loan balancesoutstanding under an AWR credit facility for the second quarter of 2007 wereapproximately $33.4 million, as compared to an average of $31.0 million duringthe same period of 2006.

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***Interest Income***

Interestincome decreased by $377,000 for the three months ended June 30, 2007 dueprimarily to the receipt of  interestamounting to $381,000 related to a $3.0 million Internal Revenue Service(“IRS”) refund in May 2006.

***Income Tax Expense***

For the three months ended June 30,2007, income tax expense increased by 51.2% to $5.2 millioncompared to $3.4 million for the three months ended June 30, 2006 due, in part,to an increase in pretax income of 29.0%. In addition, theeffective tax rate (“ETR”) for the three months ended June 30,2007 was 41.6% as compared to a 35.5% ETR applicable to the three monthsended June 30, 2006. The variance between the ETR and the statutory tax rate isprimarily the result of differences between book and taxable income that aretreated as flow-through adjustments in accordance with regulatoryrequirements. Flow-through adjustments increase or decrease tax expense inone period, with an offsetting increase or decrease occurring in anotherperiod.  In addition, during the thirdquarter of 2005, AWR filed an amended tax return for 2001 with the IRS whichwas subject to IRS and Congressional Joint Committee of Taxation (“JCT”)review. During the second quarter of 2006, the IRS and JCT reviews werecompleted and AWR received a refund in the amount of its original claim of $3.0million, with interest. Consequently, in the second quarter of 2006, AWRrecorded a tax benefit of $400,000, of which $351,000 was attributable to GSWC.The refund-claim benefit contributed 4.1 of the 6.1 percentage point ETR changereferred to, above.

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***Consolidated Results of Operations — Six Months Ended June 30, 2007 and2006 (in thousands):***
| ** **                                           | ** ** | **6 Mos.** | ** ** | **6 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|------------------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                           | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                           | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                                   |       |            |       |            |       |       |       |       |       |
| Water                                                |       | $               | 111,153    |            | $          | 104,199    |       | $          | 6,954      |   | 6.7 | % |
| Electric                                             |       | 15,124          |       | 15,372          |       | (248       | )          | -1.6       | %          |
| Contracted services                                  |       | 25,239          |       | 7,867           |       | 17,372     |       | 220.8      | %          |
| Total operating  revenues                            |       | 151,516         |       | 127,438         |       | 24,078     |       | 18.9       | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| OPERATING EXPENSES                                   |       |            |       |            |       |       |       |       |       |
| Water purchased                                      |       | 20,950          |       | 19,260          |       | 1,690      |       | 8.8        | %          |
| Power purchased for  pumping                         |       | 4,791           |       | 4,020           |       | 771        |       | 19.2       | %          |
| Groundwater production  assessment                   |       | 4,828           |       | 4,322           |       | 506        |       | 11.7       | %          |
| Power purchased for  resale                          |       | 7,196           |       | 7,811           |       | (615       | )          | -7.9       | %          |
| Unrealized (gain) loss  on purchased power contracts |       | (2,474          | )          | 3,078           |       | (5,552     | )          | -180.4     | %          |
| Supply cost balancing  accounts                      |       | (1,910          | )          | (338            | )          | (1,572     | )          | 465.1      | %          |
| Other operating  expenses                            |       | 13,156          |       | 10,587          |       | 2,569      |       | 24.3       | %          |
| Administrative and  general expenses                 |       | 26,671          |       | 22,015          |       | 4,656      |       | 21.1       | %          |
| Depreciation and  amortization                       |       | 14,177          |       | 13,092          |       | 1,085      |       | 8.3        | %          |
| Maintenance                                          |       | 7,326           |       | 5,719           |       | 1,607      |       | 28.1       | %          |
| Property and other  taxes                            |       | 5,773           |       | 5,027           |       | 746        |       | 14.8       | %          |
| Construction expenses                                |       | 17,329          |       | 4,511           |       | 12,818     |       | 284.1      | %          |
| Net gain on sale of  property                        |       | (605            | )          | —          |       | 605        |       | 100.0      | %          |
| Total operating  expenses                            |       | 117,208         |       | 99,104          |       | 18,104     |       | 18.3       | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| OPERATING INCOME                                     |       | 34,308          |       | 28,334          |       | 5,974      |       | 21.1       | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                            |       |            |       |            |       |       |       |       |       |
| Interest expense                                     |       | (11,066         | )          | (10,688         | )          | 378        |       | 3.5        | %          |
| Interest income                                      |       | 1,152           |       | 1,776           |       | (624       | )          | -35.1      | %          |
| Other                                                |       | 132             |       | —          |       | 132        |       | 100.0      | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE     |       | 24,526          |       | 19,422          |       | 5,104      |       | 26.3       | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| Income tax expense                                   |       | 10,220          |       | 7,252           |       | 2,968      |       | 40.9       | %          |
|                                                 |       |            |       |            |       |       |       |       |       |
| NET INCOME                                           |       | $               | 14,306     |            | $          | 12,170     |       | $          | 2,136      |   | 17.6 | % |

 

Net income for the six months ended June 30, 2007increased by 17.6% to $14.3 million, equivalent to $0.83 and $0.82 per commonshare on a basic and fully diluted basis, respectively, compared to $12.2million or $0.71 per basic and diluted common shares for the six months endedJune 30, 2006. Impacting the comparability in the results of the two periodsare the following significant items:

·                  There was anunrealized gain on purchased power contracts in 2007 due to increasing energyprices versus an unrealized loss on purchased power contracts in 2006. Thecumulative unrealized gain on purchased power contracts increased pretax incomeby approximately $2.5 million, or $0.09 per share, for the six months endedJune 30, 2007, as compared to a cumulative unrealized loss on purchased powercontracts that decreased pretax 

35

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income by $3.1million, or $0.11 per share, for the same period in 2006.

·                  A decisionissued by the CPUC on April 13, 2006 regarding the accounting treatment ofGSWC’s water rights lease revenues, increased pretax operating income by about$2.3 million in March 2006, or approximately $0.08 per share, whencompared to the same period in 2007. Pursuant to a March 2004 CPUC order, theapportionment of any Folsom lease revenues that GSWC may collectcommencing in January 2004 was to be determined by a later decision. Pendingthat later decision and beginning in the first quarter of 2004, all amountsbilled to the City of Folsom had been included in a regulatory liabilityaccount and no amounts were recognized as revenue until uncertainties aboutthis matter were resolved with the CPUC. On April 13, 2006, the CPUCauthorized GSWC to reinvest all lease revenues since January 2004,inclusive of the balances in the regulatory liability accounts established byGSWC for this matter, in water system infrastructure. These investments will beincluded in the rate base upon which GSWC earns a rate of return. In accordancewith California law, GSWC has eight years in which to reinvest the proceeds,after which any amount remaining would inure to the customer’s benefit. As aresult, in the second quarter of 2006, GSWC transferred about $2.3 million ofwater rights lease revenues received from the City of Folsom in 2004 and 2005from the regulatory liability account, into water revenues.

·                     An increase, excluding the $2.3million of water right lease revenues as discussed above, in the margin for thewater segment of $3.8 million, or $0.13 per share, as compared to the sameperiod of 2006 due to increased water rates approved by the CPUC that wereeffective January 1, 2007, an increase in water consumption over that in theprior period, and a favorable supply mix change.

·                  An increase inASUS’s pretax operating income of $3.4 million, or $0.12 per share, as comparedto the same period of 2006 for operating, maintaining and improving the waterand wastewater systems at military bases for the U.S. government. The increasesinclude revenue recognized for certain special projects under thepercentage-of-completion method of accounting.

·                  Higher operatingexpenses, a change in the effective income tax rate, as well as other itemsdescribed below, contributed to an overall decrease of $0.26 per basic share tothe results of operations.

***Operating Revenues***

For the six months ended June 30, 2007, revenues from wateroperations increased by 6.7% to $111.2 million, compared to $104.2 million forthe six months ended June 30, 2006. Contributing to this increase were rate increases approved by the CPUCeffective January 1, 2007, which contributed approximately $2.6 million inincreased water revenues.  As more fullydiscussed in the quarterly results, included in the rate increases in2007 was an interim rate increase effective January 1, 2007, subject to refund,totaling approximately $520,000 for the six months ended June 30, 2007 ($1.2million for the entire 2007 year) due to the CPUC’s delays in processing GSWC’sgeneral rate applications for rate increases in Region II and for generaloffice expenses at the corporate headquarters. Region III also received an interim rate increase of $135,000 effectiveJanuary 1, 2007.  In addition, an increase ofabout 9.1% in billed water consumption resulting from much warmer anddrier weather conditions increased revenues by approximately $6.6 million.  Differences in temperature and rainfall inRegistrant’s service areas impact sales of water to customers, causingfluctuations in Registrant’s revenues and earnings between comparableperiods.  Partially offsetting theseincreases was the factthat operating revenues for the first six months of 2006 were positively impactedby a CPUC decision issued on April 13, 2006 enabling GSWC to record $2.3million of water rights lease revenues from the City of Folsom for the periodfrom January 2004 to December 2005. Prior to this decision, the apportionment of any lease revenues thatGSWC collected in 2004 and 2005 had been included in a regulatory liabilityaccount and no amounts were recognized as revenues until regulatoryuncertainties about this matter were resolved. There was no such adjustment in2007.

For the six months ended June 30, 2007, revenues fromelectric operations decreased by 1.6% to $15.1 million compared to $15.4million for the six months ended June 30, 2006. The decrease reflects lowerkilowatt-hour usage by residential and commercial customers due warmer anddrier weather conditions this spring.

Registrant relies upon rate approvals by stateregulatory agencies in California and Arizona in order to recover operatingexpenses and provide for a return on invested and borrowed capital used to fundutility plant. Without such adequate rate relief granted in a timely manner,revenues and earnings can be negatively impacted.

Revenues from contracted services are comprised ofconstruction revenues and management fees for operating and maintaining thewater and wastewater systems at military bases. For the six months ended June 30, 2007, revenues from contractedservices increased by $17.4 million, or 220.8%, to $25.2 million compared to$7.9 million for the six months ended June 30, 2006 due primarily to an increase of approximately $17.0 million related toconstruction revenues earned from 

36

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the U.S. government and recognized on the percentage-ofcompletion method. The revenues earned were for the construction of certainimprovements, renewals and replacements to the existing water and wastewaterinfrastructure at Fort Bliss and at the military bases located in Virginia andMaryland pursuant to new contracts entered into in early 2006.  Certain of the construction projects arefirm, fixed-price contracts and are supplemental to ASUS’s 50-year contractswith the U.S. government. As discussed in the quarterly results,  ASUS entered into a $20.6 million project for theconstruction of certain improvements to the existing wastewater infrastructurelocated at Fort Bliss in El Paso, Texas, which was an amendment to the 50-yearcontract with the U.S. government. Revenues from this project have beenrecognized under the percentage-of-completion method of accounting.  As a result of this new project which beganin 2007, revenues for contracted services increased by $19.5 million during thesix months ended June 30, 2007. The project is scheduled to be completed byAugust 15, 2007 and there will be no further construction revenues associatedwith this amendment after that date.  Theincrease on this project was partially offset by other non-recurringconstruction projects that were completed in 2006.  Earningsand cash flows from amendments and modifications to the original 50-yearcontracts with the U.S. government are sporadic and may or may not continue infuture periods.   There were alsoadditional management fee revenues totaling $776,000 during the six monthsended June 30, 2007 generated from operating and maintaining the water and wastewatersystems under the new contracts in Virginia and Maryland.

***Operating Expenses:***

***Supply Costs***

For general discussion on supplycosts, see quarterly results.  Supplycosts accounted for approximately 30.6% and 35.4% of total operating expensesfor the six months ended June 30, 2007 and 2006, respectively.

The table belowprovides the amount of increases (decreases), percent changes in supply costs,and margins during the six months ended June 30, 2007 and 2006 (amounts inthousands):
| ** **                                  | ** ** | **6 Mos.** | ** ** | **6 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                  | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING  REVENUES (1)               |       | $               | 111,153    |            | $          | 104,199    |       | $          | 6,954      |   | 6.7 | % |
| WATER SUPPLY  COSTS:                        |       |            |       |            |       |       |       |       |       |
| Water purchased (1)                         |       | 20,950          |       | 19,260          |       | 1,690      |       | 8.8        | %          |
| Power purchased for pumping (1)             |       | 4,791           |       | 4,020           |       | 771        |       | 19.2       | %          |
| Groundwater production assessment (1)       |       | 4,828           |       | 4,322           |       | 506        |       | 11.7       | %          |
| Water supply cost balancing accounts (1)    |       | (3,157          | )          | (998            | )          | (2,159     | )          | 216.3      | %          |
|                                        |       | $               | 27,412     |            | $          | 26,604     |       | $          | 808        |   | 3.0 | % |
| WATER MARGIN (2)                            |       | $               | 83,741     |            | $          | 77,595     |       | $          | 6,146      |   | 7.9 | % |
| PERCENT MARGIN -  WATER                     |       | 75.3            | %          | 74.5            | %          |       |       |       |       |
|                                        |       |            |       |            |       |       |       |       |       |
| ELECTRIC  OPERATING REVENUES (1)            |       | $               | 15,124     |            | $          | 15,372     |       | $          | (248       | ) | -1.6 | % |
| ELECTRIC SUPPLY  COSTS:                     |       |            |       |            |       |       |       |       |       |
| Power purchased for resale (1)              |       | 7,196           |       | 7,811           |       | (615       | )          | -7.9       | %          |
| Electric supply cost balancing accounts (1) |       | 1,247           |       | 660             |       | 587        |       | 88.9       | %          |
|                                        |       | $               | 8,443      |            | $          | 8,471      |       | $          | (28        | ) | -0.3 | % |
| ELECTRIC MARGIN (2)                         |       | $               | 6,681      |            | $          | 6,901      |       | $          | (220       | ) | -3.2 | % |
| PERCENT MARGIN -  ELECTRIC                  |       | 44.2            | %          | 44.9            | %          |       |       |       |       |

 

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(1)          As reportedon AWR’s Consolidated Statements of Income, except for supply cost balancingaccounts.  The sum of water and electricsupply cost balancing accounts in the table above are shown on AWR’sConsolidated Statements of Income and totaled ($1,910,000) and ($338,000) forthe six months ended June 30, 2007 and 2006, respectively.

(2)          Water andelectric margins do not include any depreciation and amortization, maintenanceexpense, or other operating expenses.

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For the six months ended June 30, 2007, 40.4% of theCompany’s water supply mix was purchased as compared to 43.6% purchased for thesix months ended June 30, 2006.  Thischange in mix resulted in improved margins in 2007 compared to same period in2006.  Water gross margin for the sixmonths ended June 30, 2006 included the $2.3 million water rights leaserevenues from the City of Folsom.

Purchasedwater costs for the six months ended June 30, 2007 increased by 8.8% to $21.0million compared to $19.3 million for the six months ended June 30, 2006. Theincrease is due primarily to an increase in water supply demand resulting fromhigher customer consumption and increased water rates charged bysuppliers.  In general, the supply costmemorandum account as discussed above allows GSWC to track incremental ratechanges from suppliers, for future recovery in water rates.   In addition, GSWC entered into a one-timelease of pumped water rights with the City of Pomona in order to allow GSWC topump more water.  The price of this leasepaid by GSWC totaled $226,000 and was for 1,000 acre-feet of stored water ineastern Los Angeles County.  There wereno water rights leased by GSWC from others in the same period of 2006.  These increases were offset by a favorablechange in the supply mix discussed above, caused by less purchased water neededto replace groundwater supply not pumped in the prior year.  Certain wells had been removed from servicein 2006 as a result of water quality issues and mechanical problems.

For the sixmonths ended June 30, 2007, the increases in power purchased for pumping andgroundwater production assessments were due to higher water supply demand andan increase in pumping volume resulting from the favorable supply mix change asdiscussed. There were also increases in assessment rates levied againstgroundwater production, effective July 2006. Average pump tax ratesincreased in Regions II and III by approximately 2% and 4%, respectively.  Again, the supply cost memorandum accounttracks the increases in pump tax rates for future recovery in water rates.

For general discussion on increases and decreases to the supply costbalancing accounts in the Statements of Income, see quarterly results.  A decrease of $2.2 million during thesix months ended June 30, 2007 in the water supply cost balancing accountprovision as compared to the six months ended June 30, 2006 was primarily dueto a net increase of $1.3 million of net under-collections in 2007 compared tosame period in 2006 relating to memorandum accounts, caused by increased ratesin purchased water and purchased power for pumping charged by GSWC’s suppliersand increased pump tax rates.  Under-collections in the memorandumaccounts were not recorded in the first quarter of 2006 due to the CPUC’searning test requirement, which was eliminated in April 2006 by a CPUCdecision.  Under-collections are nowrecorded on a monthly basis.  There wasalso a $1.1 million decrease in amortization due to the expiration in October2006 of the surcharge that was in rates to recover Region III’sunder-collection.

For the six months ended June 30, 2007, the cost of powerpurchased for resale to customers in GSWC’s Bear Valley Electric divisiondecreased by 7.9% to $7.2 million compared to $7.8 million for the six monthsended June 30, 2006, reflecting an increase in sales to the spot market athigher energy prices.  GSWC has a 15MW purchasedpower agreement with PWMT.  Purchasedpower in excess of demand is sold into the spot market at the market price.  There was an energy price increase of about$13/MWh, resulting in higher income from sales in the spot market.  Income from the spot market sales for the sixmonths ended June 30, 2007 decreased the cost of power purchased for resale andincreased the electric supply cost balancing account provision, respectively,as compared to the same period of 2006.  The decrease in the cost of power purchased for resale was also due to lowercustomer demand during the six months ended June 30, 2007 compared to sameperiod of 2006.

***Unrealized(Gain) Loss on Purchased Power Contracts***

Unrealizedgain and loss on purchased power contracts represent gains and losses recordedfor GSWC’s purchased power agreements with PWMT, which qualify asderivative instruments under SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*. The $2.5 millionpretax unrealized gain on purchased power contracts for the six months endedJune 30, 2007 is due to an increase in the current forward market prices sinceDecember 31, 2006. There was a $3.1 million pretax unrealized loss onpurchased power contracts for the six months ended June 30, 2006. Unrealizedgains and losses at Bear Valley Electric will continue to impact earningspositively or negatively during the life of the contract with PWMT, whichterminates at the end of 2008.

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***Other Operating Expenses***

For the six months ended June 30, 2007 and 2006, otheroperating expenses by segment consisted of the following (amounts inthousands):
| ** **                      | ** ** | **6 Mos.** | ** ** | **6 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                      | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                      | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                  |       | $               | 10,827     |            | $          | 8,927      |       | $          | 1,900      |   | 21.3 | % |
| Electric  Services              |       | 823             |       | 837             |       | (14        | )          | -1.7       | %          |
| Contracted  Services            |       | 1,506           |       | 823             |       | 683        |       | 83.0       | %          |
| Total other  operating expenses |       | $               | 13,156     |            | $          | 10,587     |       | $          | 2,569      |   | 24.3 | % |

 

For the six months ended June 30,2007, other operating expenses for water services increased by $1.9 million dueprimarily to higher chemicals and water treatment costs, including supplies andmaterials, of $1.1 million in particular at GSWC’s Region II and III servicesareas.  Region II incurred additionalcosts primarily for the removal of arsenic and Volatile Organic Compounds atsix of its well sites, while Region III incurred additional costs primarily fortwo of its treatment plants.  There wasalso an increase in labor costs of $103,000 due to higher wages and relatedbenefits, an increase of $80,000 in equipment rental, an increase in outsidefees of $310,000 for services from an outside party to remove nitrate andperchlorate at treatment plants, and an increase of $307,000 in various otheroperating expenses.

There was also an increase in otheroperating expenses of $683,000 for contracted services primarily due to thecommencement of the operation of water and wastewater systems at military basesin Maryland and Virginia that began in the first four months of 2006.  ASUS fully operated these bases during thesix months ended June 30, 2007, whereas they were only operated by ASUS duringpart of the same period in 2006.

***Administrative and General Expenses***

For the six months ended June 30,2007 and 2006, administrative and general expenses by segment consisted of thefollowing (amounts in thousands):
| ** **                                  | ** ** | **6 Mos.** | ** ** | **6 Mos.** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------------------------------|------------|-----------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                  | ** ** | **Ended**       | ** ** | **Ended**       | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                  | ** ** | **6/30/2007**   | ** ** | **6/30/2006**   | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                              |       | $               | 21,358     |            | $          | 17,635     |       | $          | 3,723      |   | 21.1 | % |
| Electric  Services                          |       | 2,972           |       | 2,468           |       | 504        |       | 20.4       | %          |
| Contracted  Services                        |       | 2,341           |       | 1,912           |       | 429        |       | 22.4       | %          |
| Total  administratvive and general expenses |       | $               | 26,671     |            | $          | 22,015     |       | $          | 4,656      |   | 21.1 | % |

 

For the six months ended June 30,2007, administrative and general expenses increased by $4.2 million in waterand electric services compared to the six months ended June 30, 2006 dueprimarily to: (i) an increase of $1.9 million in outside services relatingprimarily to additional tax, audit and legal services; (ii) the CPUC’s approvalin April 2006 of Region II’s outside services memorandum account totalingapproximately $709,000 (upon approval by the CPUC, these legal costs, whichwere incurred in prior periods, were reversed in the second quarter of 2006 andrecorded as a regulatory asset; there was no such adjustment in 2007);(iii) an approximate $955,000 increase in labor costs due to higher wageslargely related to Registrant’s annual performance-based salary review program;(iv) an agreement with the City of Folsom to dismiss all opposition toservice the Westborough development; the agreement requires GSWC to pay theCity of Folsom $550,000 with Aerojet reimbursing GSWC for 50% or $275,000 ofthe settlement payment; as of and for the three months ended June 30, 2007,GSWC has recorded an obligation to the City of Folsom for $550,000, anadditional receivable of $275,000 from Aerojet for the amount to be reimbursedand a net charge to administrative and general expenses in the amount of$275,000 for its share of the settlement payment, and (v) a $422,000 increase in rent expense for officespace and the telephone system.

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There was also an increase of $429,000in contracted services administrative and general expenses due primarily to therecovery in 2006 of transition period operating expenses of about $672,000 atthe various military bases pursuant to the contracts with the U.S. government.   There was no such recovery in 2007.  This was offset by a decrease of $265,000 inoutside legal and consulting services.  Aproposed decision and an alternate decision on GSWC’s Region II rate case wereissued on July 24, 2007. The final decision may result in increasedadministrative and general expenses being allocated to contractedservices.  However, management is unableto predict the final outcome of this rate case.

***Depreciation and Amortization***

Forthe six months ended June 30, 2007, depreciation and amortization expenseincreased by 8.3% to $14.2 million compared to $13.1 million for the six monthsended June 30, 2006 reflecting, among other things, the effects of closingapproximately $73 million of additions to utility plant during 2006,depreciation on which began in January 2007. Registrant anticipates thatdepreciation expense will continue to increase due to Registrant’s on-goingconstruction program at its regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through water and electric rates.

***Maintenance***

For the six months ended June 30,2007, maintenance expense increased by 28.1% to $7.3 million compared to $5.7million for the six months ended June 30, 2006 due principally to an increasein required and emergency maintenance on GSWC’s wells and water supply sources.

***Property and Other Taxes***

For the six months ended June 30, 2007, property and othertaxes increased by 14.8% to $5.8 million compared to $5.0 million for the sixmonths ended June 30, 2006 reflecting additional property taxes resulting fromhigher assessed values, and increases in payroll taxes based on increased laborcosts.

***Construction Expenses***

For the six months ended June 30, 2007, ASUS constructionexpenses increased to $17.3 million compared to $4.5 million for the sameperiod in 2006 reflecting the costs incurred forthe construction of various improvements, renewals and replacements to theexisting water and wastewater infrastructures at Fort Bliss and at the militarybases located in Virginia and Maryland pursuant to new contracts entered intoin early 2006.  The increase inconstruction activity resulted from amendments to the original 50-yearcontracts with the U.S. government which required the construction ofadditional improvements at the various military bases.  As previously mentioned, ASUS entered into a$20.6 million project for the construction of certainimprovements to the existing wastewater infrastructure located at Fort Bliss inEl Paso, Texas.  As a result of this newproject, construction expenses increased by $15.2 million during the six monthsended June 30, 2007. The project is scheduled to be completed by August 15, 2007.   The increase in construction expensesbecause of this project was partially offset by other non-recurringconstruction projects that were completed in 2006.

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

For the six months ended June 30, 2007, Registrant recordeda net pretax gain of $605,000 on the sale of property. This gain includes asettlement of $325,000 reached with the Los Angeles Unified School District inconnection with  the condemnation of  a parcel of land  for the purpose of constructing a highschool.  This parcel of land had not beenused for a number of years in GSWC’s public utility operations.  In addition, there was a gain of $238,000related to the sale of property in the City of Claremont.  There were no similar gains in the sameperiod of 2006.  Earnings and cash flowsfrom these transactions are sporadic and may or may not continue in futureperiods.

***Interest Expense***

For the six months ended June 30,2007, interest expense increased by 3.5% to $11.1 million compared to $10.7million for the six months ended June 30, 2006 primarily reflecting higherinterest rates.  There was also anincrease in short-term cash borrowings. Average bank loan balances outstandingunder an AWR credit facility for the six months ended June 30, 2007 wereapproximately $33.9 million, as compared to an average of $30.0 million duringthe same period of 2006.

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***Interest Income***

Interest income decreased by$624,000 for the six months ended June 30, 2007 due primarily to the initialrecording in the first quarter of 2006 of interest accrued on the uncollected balanceof the Aerojet litigation memorandum account authorized by the CPUC.  As a result, the interest income accrued onthe memorandum account decreased by $309,000 between the two periods.  In addition, interest income decreasedreflecting the receipt of interest amounting to $381,000 related to a$3.0 million Internal Revenue Service refund received in May 2006.

***Income Tax Expense***

For the six monthsended June 30, 2007, income tax expense increased by 40.9% to$10.2 million compared to $7.3 million for the six months ended June 30, 2006due, in part, to an increase in pretax income of 26.3%. Inaddition, the effective tax rate (“ETR”) for the six months endedJune 30, 2007 was 41.7% as compared to a 37.3% ETR applicable to the sixmonths ended June 30, 2006. The variance between the ETR and the statutory taxrate is primarily the result of differences between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements. Flow-through adjustments increase or decrease tax expense inone period, with an offsetting increase or decrease occurring in anotherperiod.  In addition, during the thirdquarter of 2005, AWR filed an amended tax return for 2001 with the IRS whichwas subject to IRS and Congressional Joint Committee of Taxation (“JCT”)review. During the second quarter of 2006, the IRS and JCT reviews werecompleted and AWR received a refund in the amount of its original claim of $3.0million, with interest. Consequently, in the second quarter of 2006, AWRrecorded a tax benefit of $400,000, of which $351,000 was attributable to GSWC.The refund-claim benefit contributed 2.1 of the 4.4 percentage point ETR changereferred to above.

**Critical Accounting Policies and Estimates**

Critical accounting policies and estimates are thosethat are important to the portrayal of AWR’s financial condition, results ofoperations and cash flows, and require the most difficult, subjective orcomplex judgments of AWR’s management. The need to make estimates about theeffect of items that are uncertain is what makes these judgments difficult,subjective and/or complex. Management makes subjective judgments about theaccounting and regulatory treatment of many items. These judgments are based onAWR’s historical experience, terms of existing contracts, and AWR’s observanceof trends in the industry, information provided by customers and informationavailable from other outside sources, as appropriate. Actual resultsmay differ from these estimates under different assumptions or conditions.

The critical accounting policies used in the preparation of the Registrant’s financial statements that we believe affect the more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in our Annual Report on Form 10-K for the year ended December 31, 2006. Except for the adoption of FASB Interpretation No. 48, *“Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109”* (“FIN 48”), there have been no material changes to the critical accounting policies.  Effective January 1, 2007, Registrant adopted FIN 48. As a result of adoption, Registrant increased retained earnings by approximately $181,000.  As of the adoption date and at June 30, 2007, Registrant’s total amount of unrecognized tax benefits was $4.8 million, of which $118,000, if recognized, would affect the effective tax rate.  See Note 5 (Income Taxes) of *Notes to Consolidated Financial Statements*.

**Liquidity and Capital Resources**

***AWR***

AWR funds its operating expenses and pays dividends onits outstanding Common Shares primarily through dividends from GSWC.  The ability of GSWC to pay dividends to AWRis restricted by California law. Under restrictions of the California tests, atJune 30, 2007, approximately $109.4 million was available from the retainedearnings of GSWC to pay dividends to AWR. GSWC is also subject to contractual restrictions on its ability to paydividends. GSWC’s maximum ability to pay dividends is restricted by certainNote Agreements to the sum of $21 million plus 100% of consolidated net incomefrom various dates plus the aggregate net cash proceeds received from capitalstock offerings or other instruments convertible into capital stock fromvarious dates. Under the most restrictive of the Note Agreements, $216.8million was available to pay dividends to AWR as of June 30, 2007. GSWC is alsoprohibited from paying dividends if, after giving effect to the dividend, itstotal indebtedness to capitalization ratio (as defined) would be more than..6667 to 1.  Dividends in the amount of$8.6 million were paid to AWR by GSWC during each of the six months ended June30, 2007 and 2006.

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Net cash provided by operating activities was $30.3million for the six months ended June 30, 2007 as compared to $27.1 million forthe same period ended June 30, 2006. The overall increase of $3.2 millionwas primarily attributable to an increase in cash collected from the U.S.government on projects, primarily at Fort Bliss.  Increases in 2007 operating revenues for GSWCdue to increased rates and consumption were offset by higher operating costspaid during the period and the timing of cash receipts and billings from/tocustomers, resulting in an increase in receivables and unbilled revenue.  The timing of cash receipts and disbursementsrelated to other working capital items also affected the changes in net cashprovided by operating activities.

Net cash used in investing activities, which consistsprimarily of construction expenditures, decreased to $19.3 million for the sixmonths ended June 30, 2007 as compared to $34.1 million for the six monthsended June 30, 2006.  This decrease wasprimarily due to several water treatment, well and security constructionprojects that were completed in 2006 in GSWC’s Los Angeles County, Santa Mariaand Barstow areas for which significant capital expenditures were incurredduring the six months ended June 30, 2006. Also, in 2007, the capitalexpenditures were offset by $623,000 in proceeds received on the sale ofproperty.

Net cash used in financing activities was $9.0 millionfor the six months ended June 30, 2007 as compared to cash provided of $3.5million for the same period in 2006. The decrease of $12.5 million in net cashprovided by financing activities was primarily caused by: (i) a decreaseof about $2.7 million in advances for and contributions in aid of construction,net of refunds made; (ii) a decrease of $1.3 million in the cash flowsassociated with the PWMT purchased power contracts; (iii) a net decrease of$4.5 million in notes payable to banks; (iv) a $3.6 million decrease inproceeds from stock option exercises and related tax benefit, and the issuanceof Common Shares under the Registrant’s Common Share Purchase and DividendReinvestment Plan and 401(k) Plan, and (v) an increase of $450,000 in dividendspaid to shareholders.

During the six months ended June 30, 2007 and 2006,AWR paid quarterly dividends to shareholders, totaling approximately $8.0million and $7.6 million, respectively. 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 infuture years, on or about March 1, June 1, September 1 and December 1, subjectto earnings and financial condition, regulatory requirements and such other factorsas the Board of Directors may deem relevant.

In June 2005, AWR amended and restated its creditagreement which increased its borrowing limit under this facility to $85million and extended the maturity date to June 2010. Up to $20 million of thisfacility may be used for letters of credit. As of June 30, 2007, an aggregateof $28.5 million in cash borrowings were included in current liabilities andapproximately $11.2 million of letters of credit were outstanding under thisfacility.  Average bank loan balancesoutstanding under an AWR credit facility for the six months ended June 30, 2007were approximately $33.9 million, as compared to an average of $30.0 millionduring the same period of 2006.  AWRalso has a Registration Statement on file with the Securities and ExchangeCommission for the sale from time to time of debt and equity securities.  As of June 30, 2007, $156.5 million wasavailable for issuance under this Registration Statement.

Registrantanticipates that interest costs will increase in future periods due to the needfor additional external capital to fund its construction program, and potentialmarket interest rate increases. Registrant believes that costs associated withcapital used to fund construction at its regulated subsidiaries will continueto be recovered in water and electric rates charged to customers.

In February2007, Standard & Poor’s (“S&P”) revised AWR’s rating outlook fromstable to positive and affirmed the A- rating. S&P debt ratings range from AAA (highest rating possible) toD (obligation is in default). Securities ratings are not recommendations tobuy, sell or hold a security and are subject to change or withdrawal at anytime by the rating agency.

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***GSWC***

Net cash providedby operating activities was $26.5 million for the six months ended June 30,2007 as compared to $31.7 million for the same period in 2006. The decrease of$5.2 million was primarily attributable to the timing of cash receipts andbillings from/to customers resulting in an increase in receivables and unbilledrevenue.  Increases in 2007 waterrevenues mainly due to an increase in cash collected from GSWC’s customersresulting from increased rates were offset by higher operating costs paidduring the period.

Net cash used in investing activities decreased to$18.1 million for the six months ended June 30, 2007 as compared to $33.1million for the same period in 2006. This decrease was primarily due to severalwater treatment, well and security construction projects that were completed in2006 in GSWC’s Los Angeles County, Santa Maria and Barstow areas for whichsignificant capital expenditures were incurred in the six months ended June 30,2006.  GSWC anticipates that its capitalexpenditures for calendar 2007 will approximate $60 million.  Also, in 2007, the capital expenditures wereoffset by $623,000 proceeds received on the sale of property.

Net cash used by financing activities was $7.0 millionfor the six months ended June 30, 2007 as compared to $1.1 million for the sameperiod in 2006.  The decrease in net cashprovided by financing activities was primarily caused by: (i) a decreaseof about $2.4 million in advances for and contributions in aid of construction,net of refunds; (ii) a decrease of $1.3 million in the cash flows associatedfrom the PWMT purchased power contracts; (iii) a $776,000 decrease inproceeds from stock option exercises and the related tax benefit, and (iv) a$1.5 million decrease in the net change in inter-company borrowings.

GSWC funds the majority of its operating expenses, paymentson its debt, and dividends on its outstanding common shares through internalsources. Internal sources of cash flow are provided primarily by retention of aportion of earnings from operating activities. Internal cash generation isinfluenced by factors such as weather patterns, environmental regulation,litigation, changes in supply costs and regulatory decisions affecting GSWC’sability to recover these supply costs, and the timing of rate relief.

GSWCalso relies on external sources, including equity investments and short-termborrowings from AWR, long-term debt, contributions-in-aid-of-construction,advances for construction and install-and-convey advances to fund the majorityof its construction expenditures. GSWC has a Registration Statement on filewith the SEC for issuance from time to time, of up to $100 million of debtsecurities. As of June 30, 2007, $50 million remained for issuance under thisRegistration Statement.

InFebruary 2005, Moody’s Investor Services (“Moody’s”) changed the rating outlookfor $175 million of senior unsecured debt at GSWC from A2 negative to A2stable.  Moody’s debt ratings range fromAaa (best quality) to C (lowest quality). S&P changed its debt rating forGSWC from A- stable to A- positive in February 2007.  Securities ratings are not recommendations tobuy, sell or hold a security and are subject to change or withdrawal at anytime by the rating agency.

***CCWC***

CCWC funds the majority of its operating expenses, paymentson its debt and dividends, if any, through internal operating sources orshort-term borrowings from AWR. CCWC also relies on external sources, includinglong-term debt, contributions-in-aid-of-construction, advances for constructionand install-and-convey advances, to fund the majority of its constructionexpenditures.

***ASUS***

ASUS funds its operatingexpenses primarily through contracted services fees from the U.S. governmentand investments by or loans from AWR. ASUS, in turn, provides funding to its subsidiaries.

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**Contractual Obligations and Other Commitments**

Registranthas various contractual obligations which are recorded as liabilities in theconsolidated financial statements. Other items, such as certain purchasecommitments and operating leases are not recognized as liabilities in theconsolidated financial statements, but are required to be disclosed.  During the first quarter of 2007, GSWCentered into a new operating lease for a facility located in San Dimas,California that will house certain departments. The term of the lease is for seven years.  The minimum base rent will totalapproximately $2.0 million over the seven years.

In addition,during the second quarter of 2007, GSWC finalized a settlement with the SouthCoast Air Quality Management District that approved a Supplemental EnvironmentalProgram (“SEP”) which obligates GSWC to install and operate a granularactivated carbon filters at one of GSWC’s groundwater treatment facilities inRegion II.  It is estimated that thetotal capital cost of the SEP will be approximately $1.8 million with arequired estimated completion date of April 30, 2009.  Upon timely performance of all itsobligations under the SEP, GSWC shall be deemed released from any and allclaims or penalties arising from the Notice of Violation.  Management believes that GSWC will be able totimely fulfill its obligations under the SEP and no further penalties areexpected to be assessed.  Management alsobelieves it is probable that the capital costs of the SEP will be approved inrate base by the CPUC.

Inaddition to contractual maturities, Registrant has certain debt instrumentsthat contain annual sinking fund or other principal payments. Registrantbelieves that it will be able to refinance debt instruments at their maturitythrough public issuance, or private placement, of debt or equity. Annualprincipal and interest payments are generally made from cash flow fromoperations.

There have been no other material changes to AWR’s contractual obligations and other commitments since December 31, 2006. See *“Managements’ 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, 2006 for a detailed discussion of contractual obligations and other commitments.

**Regulatory Matters**

GSWC is subject to regulation by the CPUC, which hasbroad powers with respect to service and facilities, rates, classification ofaccounts, valuation of properties, the purchase, disposition and mortgaging ofproperties necessary or useful in rendering public utility service, theissuance of securities, the granting of certificates of public convenience andnecessity as to the extension of services and facilities and various othermatters. CCWC is subject to regulation by the ACC.

Rates that GSWC and CCWC are authorized to charge aredetermined by the CPUC and the ACC, respectively, in general rate cases and arederived using rate base, cost of service and cost of capital, as projected fora future test year in California and using an historical test year, asadjusted, in Arizona. Rates charged to customers vary according to customerclass and rate jurisdiction and are generally set at levels allowing forrecovery of prudently incurred costs, including a fair return on rate base.Rate base generally consists of the original cost of utility plant in service,plus certain other assets, such as working capital and inventory, lessaccumulated depreciation on utility plant in service, deferred income tax liabilitiesand certain other deductions.

GSWC is required to file a general rate case (“GRC”)application every three years for each of its water rate-making areas accordingto a schedule established by the CPUC. GRC’s typically include an increasein year one and rate changes for the second and third years. Rates are based ona forecast of expenses and capital costs, and GRC’s have a typical regulatoryprocessing time of one year.   Accordingto the new rate case plan just adopted in May 2007, GSWC rate cases, startingwith the filing in July 2008, will have an 18 month processing schedule.  In California, rates may be increased byoffsets for certain expense increases, including but not limited to supply costoffset and balancing account amortization, and advice letter filings related tocertain plant additions and other operating cost increases. Offset rateincreases and advice letter filings typically have a two to four monthregulatory lag.

Neither the operations nor rates of AWR and ASUS aredirectly regulated by the CPUC or the ACC. The CPUC and the ACC do howeverregulate certain transactions between GSWC and its affiliates. The amountscharged by the subsidiaries of ASUS for water and wastewater services atmilitary bases are based upon the terms of 50-year contracts with the U.S.government and supplemental fixed price construction contracts. The operationsand maintenance contracts provide that prices will be redetermined at the endof two years after commencement of operations at each military base and everythree years thereafter. However, ASUS has experienced delays in theredetermination of prices at Fort Bliss following completion of the first twoyears of operation in October 2006.  Inaddition, prices may be equitably adjusted for changes in law, wage andbenefit increases and other circumstances. The construction projects are fixed price.  Prices may be changed through the executionof change orders if significant unforeseen issues arise during the constructionprocess.

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***RecentChanges in Rates***

On January 12, 2006, theCPUC approved GSWC’s Region III rate case. The authorized rate increase for2006 was made effective January 19, 2006 and provided GSWC additional annualrevenue approximating $5.4 million in 2006 based on a return on equity of 9.8%.The CPUC also approved the second year increases for Region III in an estimatedamount of approximately $2.3 million, effective January 1, 2007.  In connection with this GRC, GSWC also filedan Application for Rehearing of the Region III GRC.  GSWC was granted limited re-hearing of thatdecision and was ordered to file a report. GSWC filed that report in January 2007. According to GSWC’s calculations, the adopted revenues in 2006 shouldhave been increased by approximately $326,000, and the rates in 2007 should beapproximately $285,000 higher than adopted. DRA has submitted a response to our report and now the CPUC’s waterdivision will make a final ruling.

InOctober 2006, GSWC filed advice letters with the CPUC for the third yearincreases (the attrition increases) for Region I of approximately $0.6 million,which were approved and became effective on January 1, 2007.

OnNovember 14, 2005, GSWC filed advice letters with the CPUC for step increasesfor Region I in an amount of approximately $0.6 million and an attritionincrease of approximately $5.2 million for Region II, both of which wereapproved and became effective on January 1, 2006.

***Pending Rate Changes in2007***

InJanuary 2007, GSWC filed an application with the CPUC for rate increases inRegion I. In the filing, GSWC requested rate increases which are expected togenerate approximately $10.6 million in annual revenues starting in 2008, withadditional increases of $0.5 million in 2009 and $1.0 million in 2010. Adecision on this application is expected in late 2007.

In February 2006,GSWC filed an application with the CPUC for rate increases in Region II and tocover general office expenses at the Corporate Headquarters.  Due todelays on this application, the CPUC approved an interim rate increase, subjectto refund, totaling $1.2 million that became effective January 1, 2007.  Aproposed decision issued by the Administrative Law Judge on July 24, 2007recommends rate increases of $6.3 million, $4.5 million and $4.7 million,respectively, for 2007, 2008 and 2009.  An alternate decision was alsoissued on the same day recommending GSWC rate increases of $6.7 million, $4.6million and $4.3 million, respectively, for 2007, 2008, and 2009.  Theamounts ultimately decided by the CPUC will be retroactive to January 1,2007.  Once the CPUC issues its final decision, GSWC will implement atemporary surcharge to recover the revenue difference between the interim ratesimplemented on January 1, 2007 and the final rates authorized by the CPUC forthe period from January 1 to the implementation of the new final rates. The proposed decisions also changes the revenue requirements related to theadopted rates for the supply cost memorandum accounts that will also beretroactive to January 1, 2007.  Accordingly, GSWC will re-calculate,among other items, the amount recorded in Region II’s supply cost memorandumaccount based on the new rates.  For the six months ended June 30, 2007,an amount of $1.3 million was recorded as an under-collection of supply costs which positively impactedearnings and increased regulatory assets for the period.  If eitherdecision is approved, we expect most of the under-collected amount as recordedto be reversed, partially offsetting theretroactive revenues upon a final decision.  A final decision on thisapplication is expected in the third quarter of this year.  The finaldecision may also result in increased administrative and general expenses beingallocated to ASUS, a subsidiary of AWR. Management is unable to predict the final outcome of this rate case.

The applicationfor rate increases to cover general office expenses at the CorporateHeadquarters was previously filed in 2005 with the Region III rate case and wasdeferred for one year to be combined with the Region II case asdiscussed.  GSWC and DRA agreed that when GSWC receives rate increases forgeneral office expenses, still pending, that the increases could be appliedimmediately to Region III.  Region III received an interim annual rateincrease of $135,000 effective January 1, 2007 to cover general officeexpenses.  The proposed decision issued by the Administrative Law Judge onJuly 24, 2007 also recommends rate increases of $3.0 million for 2007 torecover the rate increases for general office expenses allocated to RegionIII.   The amounts ultimately decided by the CPUC will also beretroactive to January 1, 2007.  Similarto Region II, once the CPUC issues its final decision, GSWC will implement atemporary surcharge to recover the revenue difference between the interim ratesimplemented on January 1, 2007 and the final rates authorized by the CPUC forthe period from January 1 to the implementation of the new final rates.  Afinal decision is expected in the third quarter of this year.

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CCWC plans to file its next general rate case with theACC during the third quarter of 2007, for its water system in Fountain Hills,Arizona.  The processing of this case isexpected to take approximately 18 months. CCWC filed its last rate case with the ACC in August 2004. In September2005, the ACC approved a rate increase for CCWC. The rate increase waseffective on October 1, 2005 and generated additional annual revenues ofapproximately $1.1 million, an 18% increase over 2004 revenues.   During this GRC, CCWC sought to have itsrates determined using a fair value rate base. The ACC elected not to use fairvalue in setting the rates.  CCWCappealed ACC’s use of only original cost less depreciation rate base todetermine the revenue requirement.  Because CCWC’s fair value rate base was higher, the use of original costexclusively to determine the revenue requirement deprived CCWC of a substantialamount of operating income. Following the approval of this rate case, CCWCfiled an appeal with the Arizona Court of Appeals.  On February 13, 2007, the Arizona Court ofAppeals upheld CCWC’s challenge to the ACC’s failure to use fair value ratebase in the determination of operating income.  The process the ACCutilized resulted in a lower revenue requirement and was found to be inviolation of the Arizona Constitution.  However, the Court also heldthat ACC’s determination of the return on equity, while not well-explained, wasmade based on the evidence, was a matter within the agency’ssubstantial discretion and was lawful.  The ACC sought andreceived an extension of the deadline to seek review by the ArizonaSupreme Court until May 14, 2007.  If the ACC seeks and obtains review, afinal decision will take approximately 9-12 months.  If review is notsought or is denied, the matter will return to the ACC on remand formodification of the original ACC decision consistent with the decision of theCourt of Appeals.  Remand proceedings would be expected to take at leastanother 6 months. The matter is officially on remand back to the ACC formodification of the decision in accordance with the Court’s ruling.

***New Service Territory Application***

On April 7, 2006, GSWC filed an advice letter with theCPUC to incorporate the Westborough development in Sacramento county into the RanchoCordova service area and to provide water service to that new development. TheCity of Folsom filed a protest of GSWC’s advice letter on April 27, 2006.   On January 30, 2007, the CPUC rejected theadvice letter without prejudice, and invited GSWC to re-file the advice letteronce the City of Folsom protest was resolved, or file an application for CPUCapproval of the service territory expansion. In June 2007, GSWC signed an agreement with the City of Folsom and theCity agreed not to contest GSWC’s providing water service to Westborough andrelinquished all claims concerning GSWC’s providing water service to thearea.  As compensation to the City ofFolsom to resolve its claim, GSWC has agreed to pay the City of Folsom$550,000.  Aerojet will reimburse GSWCfor 50% or $275,000 of the settlement payment. As of and for the six months ended June 30, 2007, GSWC has recorded anobligation of $550,000 to the City of Folsom, an additional receivable of$275,000 from Aerojet for the amount to be reimbursed, and a net charge toexpense in the amount of $275,000 for GSWC’s share of the settlement payment.

***Santa Maria Groundwater BasinAdjudication***

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit seeks an adjudication of the Santa MariaGroundwater Basin.  A settlement of thelawsuit has been reached, subject to CPUC approval. The settlement, among otherthings, if approved, would preserve GSWC’s historical pumping rights and securesupplemental water rights for use in case of drought or other reductions in thenatural yield of the Basin. There are also a few nonsettling parties, and thecase is going forward as to these parties. The stipulation, if approved, wouldpreserve GSWC’s position with the settling parties independent of the outcomeof the case as it moves forward with the nonsettling parties.

From 1997 through June 30, 2007, GSWC has incurredcosts of approximately $6.5 million in defending its groundwater rights inthe Santa Maria Basin, including legal and expert witness fees, which had beenrecorded in utility plant for rate recovery. In February 2006, GSWC filed an application with the CPUC for recoveryof $5.5 million of these costs, representing the amount of the costs that hadbeen incurred as of December 31, 2005.  In February 2007, GSWC reached asettlement with the CPUC’s Division of Ratepayer Advocates authorizing recoveryof the $5.5 million requested in GSWC’s application.  The settlementdeferred review of the remaining legal costs pending final resolution of thelawsuit.  In May 2007, the CPUC issued a decision that approved thesettlement with the Division of Ratepayer Advocates.  Pursuant to the decision, GSWC was ordered toplace in rate base $2.7 million of the $5.5 million of previously incurredlitigation costs in the Santa Maria groundwater basin adjudication.  GSWC was also ordered to amortize, withinterest, the remaining $2.8 million of the $5.5 million in rates over aten-year period.  This amount has beentransferred into a separate memorandum account included within regulatoryassets and a surcharge has been implemented in the third quarter for recoveryof these costs.  All litigation coststhat have been incurred after December 31, 2005, totaling approximately $1.1million, have also been transferred from rate base to a separate new memorandumaccount, subject to a reasonableness review by the CPUC in a subsequent phaseof this proceeding or in a new proceeding. Management believes that these additional costs will be approved and therecovery of these costs through rates is probable.

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***Other Regulatory Matters***

On April 16, 2007, GSWC’s Bear Valley Electric divisionfiled a compliance report with the CPUC regarding its purchases of energy fromrenewable energy resources.  The filingincluded an indication that Bear Valley Electric had not achieved interimtarget purchase levels of renewable energy resources and thus, on its face,might be subject to a possible penalty. GSWC has formally contested the potential penalty reflected in thecompliance report.  Management does notbelieve it is probable that GSWC will ultimately be assessed any penalty (whichthe form indicates would be as high as $592,000), and accordingly, no provisionfor loss has been recorded in the financial statements.  The CPUC is considering the future timing andapplicability of renewable energy resource requirements as they apply tosmaller energy utilities like Bear Valley Electric.

Except for the itemsdiscussed above, there have been no other material changes to AWR’s otherregulatory matters since December 31, 2006. See *“Managements’Discussion and Analysis of Financial Condition and Results ofOperation—Regulatory Matters”*section of the Registrant’sForm 10-K for the year-ended December 31, 2006 for a detaileddiscussion of other regulatory matters. Other regulatory matters included: New Service Territory Application,Finance Application, State-Wide Rate Application, Memorandum Supply CostAccounts, Low Income Balancing Accounts, Santa Maria Groundwater BasinAdjudication, Refund of Water Rights Lease Revenues, Recovery of Cost of TreeRemoval and Mitigation for Bark Beetle Infestation, and Outside ServicesMemorandum Account.

**Environmental Matters**

AWR’s subsidiaries are subject to increasinglystringent environmental regulations including the 1996 amendments to theFederal Safe Drinking Water Act; enhanced surface water treatmentrules; regulation of disinfectant/disinfection by-products; the long-term enhanced surface watertreatment rules; groundwater treatmentrules; contaminant regulation of radon and arsenic; and unregulatedcontaminants monitoring rules.

In 1998, the SouthCoast Air Quality Management District (“AQMD”) issued a permit to GSWC for theinstallation and use of air stripping equipment at one of GSWC’s groundwatertreatment systems in its Region II service area.   In 2005, the AQMD conducted an inspection ofthis facility and issued a Notice of Violation (“NOV”) for exceeding the amountof groundwater permitted to be treated by the treatment system during calendaryear 2004.  Since receiving the NOV,changes in GSWC procedures have avoided additional violations at the facility.  The AQMD could have assessed penaltiesassociated with an NOV that can range from $10,000 up to $75,000 per day ofviolation.  GSWC estimates that it was inviolation approximately 180 days in 2004. GSWC met with AQMD on numerous occasions to resolve the NOV and toensure future compliance.  As part ofthis process, GSWC also submitted an application to amend the permit, becausean amendment may have been necessary for continued operation of the subject airstripping equipment.

GSWC finalized asettlement of the NOV with the AQMD in June 2007.  As part of the settlement, GSWC agreed towithdraw its application for an amended air discharge permit and perform aSupplemental Environmental Program (“SEP”). A SEP typically involves capital expenditures resulting in a change ofprocess, equipment, material, or indirect source reduction for the purposes ofeliminating or reducing air contaminant emissions.  The SEP prepared by GSWC involvesinstallation and operation of granular activated carbon filters at thefacility.  Installation of the filterswill eliminate the use of the air stripping equipment at the facilitiesinvolved with the NOV and thus improve air quality.  The AQMD accepted the SEP and assessed anominal penalty of $25,000.  During thesix months ended June 30, 2007, GSWC paid the penalty of $25,000 and agreed toperform its obligations under the SEP. It is estimated that the total capital cost of the SEP will beapproximately $1.8 million with a required estimated completion date of April30, 2009.  Upon timely performance of allits obligations under the SEP, GSWC shall be deemed released from any and allclaims or penalties arising from the NOV. Management believes that GSWC will be able to timely fulfill itsobligations under the SEP and no further penalties are expected to beassessed.  Management also believes it isprobable that the capital costs of the SEP will be approved in rate base by theCPUC.

Additional information on these requirements and othersignificant environmental matters is described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in Registrant’s 2006 Annual Report onForm 10-K for the year ended December 31, 2006. There have beenno other material changes in any of the environmental matters discussed in theForm 10-K since December 31, 2006.

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**Water Supply**

Water supply andrevenues are significantly affected, both in the short-run and long-run, bychanges in weather conditions.  BothCalifornia and Arizona have been experiencing lower-than-normalprecipitation.  Severe drought conditionscontinue to grip California and Arizona. Over the last 12 months from July 2006 to June 2007, Los Angeles, Stateof California as a whole and Phoenix have experienced the 1st , 5th,and 20th driest years on record, respectively.  Phoenix had the 3rd driest year on record in 2006.

Even with the lowprecipitation,  California reservoirs atthe end of June 2007 were at 88% of average level for this time of yearresulting from the above average precipitation in 2005 and 2006.  The Colorado River storage (Lake Powell andLake Mead) was at 65% of average.  Inflowinto Lake Powell for the water year has been 72% of average which is slightlybetter than the total season prediction of 70% of average.   The Salt River system is 11% above averageand the Verde River system is only at 65% of average.  These are the two closest water storagesystems to Chaparral City Water Company.

Over the nextthree months, the National Weather Service’s Climate Prediction Center (“CPC”)expects the severe drought conditions to continue or worsen in California whileArizona should have some relief due to the summer thunderstorm season.  According to the CPC outlook for the rest ofthe year, after reviewing several weather forecasting models, it is reasonableto expect either a slower evolution towards La Nina conditions or thecontinuation of ENSO-neutral conditions. Either way, above average rainfall is not in the forecast for the restof 2007.

Registrant serves its customers’ demands for water in naturally aridparts of the country.  Recognizing this,Registrant encourages conservation of water and energy resources.   Registrant also manages its portfolio ofwater resources with the goal of reliably and affordably meeting its customers’demand for high quality water service.

The productivity of the water supplies managed by Registrant variesfrom year to year depending upon a variety of factors, including the amount andlocation of rainfall, the availability of imported water from the ColoradoRiver and from northern California, the amount of water stored in reservoirsand groundwater basins accessible by the Registrant, the amount of water usedby our customers and others, evolving challenges to water quality, and a varietyof legal limitations on use.

GSWC and CCWC own facilities and water rights thatallow us to produce locally available groundwater to serve nearly half of ourcustomers’ demand in an average year. Population growth in the regions we serve and increases in the amount ofgroundwater used have resulted in both cooperative and judicially-enforcedregimes for managing groundwater basins for long-term sustainability.  Registrant actively participates in effortsto protect groundwater basins from over-use and from contamination and toprotect its water rights.  In someperiods, such efforts require reductions in groundwater pumping and increasedreliance on alternative water resources. However, because sustainable groundwater only meets a portion ofcustomer demand, Registrant also manages a portfolio of water supplyarrangements including purchasing water from water supply wholesalers to insurethe reliability, quality and affordability of water.

***StateWater Project***

To augment local groundwater, Registrant relies onsupplemental supplies imported from distant watersheds either naturally throughriver systems or artificially through integrated systems of reservoirs andconveyance facilities. GSWC contracts, either directly or through intermediatewholesalers, for imported supplemental water supplies with a variety ofgovernmental agencies which manage water projects, including the CaliforniaDepartment of Water Resources (State Water Project).  GSWC contracts for supplemental watersupplies from the State Water Project (“SWP”) through several member agenciesof the Metropolitan Water District of Southern California (“MWD”) which act assub-wholesalers.  To receive suchsupplies, Registrant maintains physical connections to the MWD imported waterdistribution system throughout the six-county area encompassing most ofmetropolitan southern California.  Inaddition to the more generalized challenges facing all Western water projects,the SWP faces particular challenges to the operation of its pumping plantlocated at the southern end of the San Joaquin/Sacramento River Delta whichnaturally drains to the Pacific Ocean through San Francisco Bay.  Because of its diversion of water for exportto central, coastal and southern California through the pumping plant, the SWPis subject to a variety of operating limitations and permitting processesdesigned, collectively, to balance the need for water exports with the need torestore and protect the Bay/Delta environment. In the first quarter of 2007, the SWP received a court order to complywith certain endangered species permitting requirements or cease pumpingoperations.  The SWP is currentlyattempting to comply with the court order. However, because SWP operations inthe Delta threatened fish protected under state and federal Endangered SpeciesActs, pumping operations were severely curtailed at the end of May andbeginning of June.  Adequate levels ofstored water south of the Delta as well as locally available groundwater haveprevented immediate curtailments of water for distribution to GSWCcustomers.  Significant additionalrestrictions on SWP operations, however, would pose a substantial challenge tothe water use patterns throughout California. Registrant is monitoringdevelopments and working with MWD and its member agencies to safeguard thesupply and evaluate potential emergency responses to prolonged reduction in SWPdeliveries.

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***Conservation***

In light of supplyvariability and the general scarcity and value of water supplies available inthe Western U.S., Registrant  promotesactive conservation by all customer classes. However, customer conservation can result in lower water sales thanwould otherwise occur, and lower volumes of water sold can have a negativeimpact on Registrant’s earnings.  Inorder to remedy the financial disincentive associated with water conservation,Registrant has worked collaboratively with the CPUC and the  ACC to address ratestructure issues.  Currently, Registrantis actively participating in the CPUC’s Conservation Order Initiating Investigation(“OII”).  Through the Conservation OII,the CPUC proposes to eliminate disincentives to promote conservation.  Among other potential solutions beingconsidered by the CPUC are revisions to tariff structures to create increasingrate blocks, so that greater consumption will be tempered by higher unitpricing to consumers, and sales adjustment mechanisms, to essentially de-couplevolume of sales from Registrant’s revenue.

Additionalinformation on water supply issues are described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in our 2006 Annual Report onForm 10-K for the year ended December 31, 2006.

**Item 3. Quantitative and Qualitative DisclosuresAbout Market Risk**

Registrantis exposed to certain market risks, including fluctuations in interest rates,and commodity price risk primarily relating to changes in the market price ofelectricity. Market risk is the potential loss arising from adverse changes inprevailing market rates and prices. Therehave been no material changes regarding Registrant’s market risk position fromthe information provided in its Annual Report on Form 10-K for the yearended December 31, 2006. 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**

As required by Rule 13a-15(b) under theSecurities and Exchange Act of 1934 (the “Exchange Act”), we have carried outan evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer (“CEO”) and our ChiefFinancial Officer (“CFO”), of the effectiveness, as of the end of the fiscalquarter covered by this report, of the design and operation of our “disclosurecontrols and procedures” as defined in Rule 13a-15(e) and15d-15(e) promulgated by the Securities and Exchange Commission (SEC)under the Exchange Act. Based upon that evaluation, the CEO and the CFOconcluded that disclosure controls and procedures, as of the end of such fiscalquarter, were adequate and effective to ensure that information required to bedisclosed by us in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms and that such information is accumulated andcommunicated to our management, including our CEO and CFO, as appropriate toallow timely decisions regarding required disclosure.

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

There has been no change in our internal control overfinancial reporting during the quarter ended June 30, 2007, that has materiallyaffected or is reasonably likely to materially affect our internal control overfinancial reporting.

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**PART II**

**Item 1. Legal Proceedings**

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

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit seeks an adjudication of the Santa MariaGroundwater Basin.  A settlement of thelawsuit has been reached, subject to CPUC approval. The settlement, among otherthings, if approved by the CPUC, would preserve GSWC’s historical pumpingrights and secure supplemental water rights for use in case of drought or otherreductions in the natural yield of the Basin. There are also a few nonsettlingparties, and the case is going forward as to these parties. The stipulation, ifapproved, would preserve GSWC’s position with the settling parties independentof the outcome of the case as it moves forward with the nonsettling parties.

From 1997 through June 30, 2007, GSWC has incurredcosts of approximately $6.5 million in defending its groundwater rights inthe Santa Maria Basin, including legal and expert witness fees, which have beenrecorded in utility plant for rate recovery. In February 2006, GSWC filed an application with the CPUC for recoveryof $5.5 million of these costs, representing the amount of the costs that hadbeen incurred as of December 31, 2005.  In February 2007, GSWC reached asettlement with the CPUC’s Division of Ratepayer Advocates authorizing recoveryof the $5.5 million requested in GSWC’s application.  The settlementdeferred review of the remaining legal costs pending final resolution of thelawsuit.  In May 2007, the CPUC issued a decision that approved thesettlement.  Management believes that allof the legal costs will be approved and the recovery of additional future coststhrough rates is probable.

There havebeen no other material developments in any of the legal proceedings described inour 2006 Annual Report on Form 10-K.

Registrantis subject to ordinary routine litigation incidental to its business. Otherthan those disclosed in Registrant’s Form 10-K for the year endedDecember 31, 2006, no other legal proceedings are pending, which arebelieved 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 ordinarycourse of business.

**Item 1A. Risk Factors**

We commenced the operation and maintenance of our water andwastewater systems for the U.S. government at a first military base in October2004.  We began the operation andmaintenance of additional water and wastewater systems at military bases inVirginia and Maryland in 2006.  All ofthese contracts are fixed price contracts. We also commenced the construction of infrastructure improvements atthese bases in 2006 pursuant to fixed price contracts.  Revenues generated by our contract operationsare primarily dependent on these new business activities.  As a result, we are subject to risks that aredifferent than those we previously faced as a regulated utility.

***Our operations and maintenance contracts onmilitary bases create certain risks that are different from that of ourregulated utility operations.***

We have entered into contracts to provide water andwastewater services at military bases pursuant to 50-year contracts, subject totermination, in whole or in part, for the convenience of the U.S.government.  In addition, the U.S.government may stop work under the terms of the contracts, delay performance ofour obligations under the contracts or modify the contracts at its convenience.

Our contract pricing was based on a number of assumptions,including assumptions about prices and availability of labor, equipment andmaterials.  We may be unable to recoverall of our costs if any of these assumptions are inaccurate or we failed toconsider all costs that we may incur in connection with performing thework.   Our operations and maintenancecontracts are also subject to periodic price adjustments at the time of priceredetermination or in connection with requests for equitable adjustments orother changes permitted by terms of the contracts.

We are subject to audits, cost review and investigations bycontracting oversight agencies.  Duringthe course of an audit, the oversight agency may disallow costs.  Such cost disallowances may result inadjustments to previously reported revenues.

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Payment under these contracts is subject to appropriationsby Congress.  We may experience delays inreceiving payment or delays in redetermination of prices or other priceadjustments due to cancelled or delayed appropriations specific to our projectsor reductions in government spending for the military or generally.  Appropriations and the timing of payment, maybe influenced by, among other things, the state of the economy, competingpolitical priorities, budget constraints, the timing and amount of tax receiptsand the overall level of government expenditures for the military.

In addition, we must maintain the proper management ofwater and wastewater facilities and find state-certified and other qualifiedemployees to support the operation of these facilities.  Failure to do so could put us at risk of,among other things, operations errors at the military bases and for improperbilling and collection procedures as well as loss of contracts, assessment ofpenalties for operational failures and loss of revenues.

***Our contracts for the construction ofinfrastructure improvements on military bases create risks that are different,in some respects, from that of our operations and maintenance contracts.***

We have entered into contracts for the construction ofinfrastructure improvements to water and wastewater systems at militarybases.  Many of these contracts arefixed-price contracts.  Under fixed-pricecontracts, we benefit from cost savings and earnings from approved contractchange orders, but are generally unable to recover any cost overruns to theapproved contract price.

Revenues from these types of contracts are recognized usingthe percentage-of-completion method of accounting.  This accounting practice that we use resultsin our recognizing contract revenues and earnings ratably over the contractterm in proportion to our incurrence of contract costs.  The earnings or losses recognized onindividual contracts are based on periodic estimates of contract revenues, costs and profitability as theconstruction projects progress.

We establish prices for these types of fixed-pricecontracts, in part, on cost estimates that are subject to a number ofassumptions, including assumptions regarding future economic conditions.  If these estimates prove inaccurate orcircumstances change, cost overruns could have a material adverse effect on ourcontract business operations and results of operations for contracted services.

***We may be adversely affected by disputeswith the U.S. government regarding our performance of contract services onmilitary bases or by failure to properly perform the contract services.***

If there is a dispute with the U.S. government regardingperformance under these contracts or the amounts owed to us, the U.S.government may delay, reject or withhold payment to us.  If we are ultimately unable to collect thesepayments on a timely basis, our profits and cash flows will be adverselyaffected.

If we fail to comply with the terms of one or more of ourU.S. government contracts, other agreements with the U.S. government or U.S.government regulations and statutes, we could be suspended or barred fromfuture U.S. government contracts for a period of time and be subject topossible civil or criminal fines and penalties and damage to our reputation inthe water and wastewater industry.

***We are dependent upon subcontractors for theperformance of contracted services on military bases.***

We primarily rely on a single subcontractor for theoperation and maintenance of wastewater systems at military bases pursuant toour existing contracts with the U.S. government.  The failure of this subcontractor to performservices for us in accordance with the terms of our contracts with the U.S.government could result in the termination of contracts to provide wastewaterservices at these bases, a loss of revenues and increases in costs to correctthe subcontractor’s performance failures.

We also rely on third-party manufacturers as well asthird-party subcontractors to complete our construction projects.  To the extent that we cannot engagesubcontractors or acquire equipment or materials, our ability to complete aproject in a timely fashion or at a profit may be impaired.  If the amount we are required to pay forthese goods and services exceeds the amount we have estimated in bidding forfixed-price work, we could experience losses in the performance of thesecontracts.  In addition, if asubcontractor or manufacturer is unable to deliver its services, equipment ormaterials according to the negotiated terms for any reason, including thedeterioration of its financial condition, we may be required to purchase theservices, equipment of materials from another source at a higher price.  This may reduce the profit to be realized orresult in a loss on a project for which the services, equipment or materialswere needed.

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If these subcontractors fail to perform services to beprovided to us or fail to provide us with the proper equipment or materials, wemay be penalized for their failure to perform.

***We continue to incur costs associated withthe expansion of our contract activities.***

We continue to incur additional costs in connection withthe expansion of our contract operations associated with the preparation ofbids and the negotiation of the terms of new contracts.  Our ability to recover these costs and toearn a profit on our contract operations will depend upon the extent to whichwe are successful in obtaining new contracts and our ability to recover thosecosts and other costs from revenues from new contracts.

There have been no other significant changes in the riskfactors disclosed in our 2006 Annual Report on Form 10-K.

**Item 2. Unregistered Sales of Equity Securitiesand 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 2007.  Thefollowing table provides information about repurchases of Common Shares by AWRduring the second quarter of 2007:
| **Period**               | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|--------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 –  30, 2007 |       | 32                                               |       | $                                                | 36.88      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| May 1 –  31, 2007   |       | 54                                               |       | $                                                | 36.67      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| June 1 -  30, 2007       |       | 3,185                                            |       | $                                                | 34.82      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |
| Total                    |       | 3,271                                            | (2)        | $                                                | 34.87      |                                                                                                                                | —     |                                                                                                                                | NA         | (3) |

 

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(1)          None of the Common Shares were purchased pursuant toany publicly announced stock repurchase program.

(2)          Of this amount, 3,000 Common Shares were acquired on the open  market for employees pursuant to the Company’s401(k) Plan.  The remainder of the CommonShares were acquired on the open market for participants in the Company’sCommon Share Purchase and Dividend Reinvestment Plan.

(3)          None of these planscontain a maximum number of Common Shares that may be purchased in theopen market under the plans.

**Item 3. Defaults Upon Senior Securities**

None

**Item 4. Submission of Matters to a Vote of SecurityHolders**

Theannual meeting of shareholders was held on May 22, 2007. The following tablepresents the voting results of the election of Class I directors at thismeeting:
| Name                | ** ** | **“Votes For”** | ** ** | **“Votes Withheld”** | ** ** |
|---------------------|------------|--------------------------------|------------|-------------------------------------|------------|
| James L. Anderson   |       | 15,295,715                     |       | 364,357                             |       |
| Diana M. Bontá |       | 15,290,483                     |       | 369,589                             |       |
| Anne M. Holloway    |       | 15,293,248                     |       | 366,825                             |       |
| Floyd E. Wicks      |       | 15,245,580                     |       | 414,492                             |       |

 

Registrant has one other class ofdirectors, which include N.P. Dodge, Jr., Robert F. Kathol, Gary F. King and LloydE. Ross, whose terms will expire at the annual meeting in 2008.

Registrant’s shareholders alsoratified the appointment of PricewaterhouseCoopers LLP as our independentregistered public accounting firm, with 15,617,047 voting in favor of theappointment, 103,556 opposing the appointment, and 212,468 abstaining fromvoting on the appointment. 

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**Item 5. Other Information**

(a)          On July 31, 2007, the Board of Directors of AWR declared aregular quarterly dividend of $0.235 per Common Share. The dividend will bepaid September 1, 2007 to shareholders of record as of the close of business onAugust 10, 2007.

(b)         There have been no material changes during the secondquarter of 2007 to the procedures by which shareholders may nominatepersons to the Board of Directors of AWR.

## **Item 6. Exhibits**

(a)          The following documentsare filed as Exhibits to this report:
| 10.1   |   | Form of American States Water Company Three-Year  Dividend Equivalent Right Certificate(1)(3)                         |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                  |
| 10.2   |   | Golden State Water Company Pension Restoration Plan,  as amended (1)(3)                                               |
|   |   |                                                                                                                  |
| 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 concurrentlyherewith

(2)          Furnished concurrentlyherewith

(3)          Management orcompensatory contract

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#### **SIGNATURE**

Pursuant to the requirements of Securities ExchangeAct of 1934, the Registrant has duly caused this report to be signed on itsbehalf by the undersigned thereunto duly authorized and as its principalfinancial officer.

 
|        | AMERICAN STATES WATER COMPANY |
|--------|-------------------------------|
|   | and its subsidiary            |
|   | GOLDEN STATE WATER COMPANY    |
|   |                          |   |
|   |                          |   |
|   | By:                           | /s/ Robert J. Sprowls |
|   |                          | Robert J. Sprowls |
|   |                          | Senior Vice President-Finance, Chief Financial |
|   |                          | Officer, |
|   |                          | Treasurer and Corporate Secretary |

 

 

Dated:August 9, 2007

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