##### Table of Contents



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

|  |  |                                                                                        
|- |  | ---------------------------------------------------------------------------------------
|x |  | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



| | For the quarterly period ended June 30, 2002 or
| | -----------------------------------------------

|  |  |                                                                                         
|- |  | ----------------------------------------------------------------------------------------
| ̈ |  | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934



| | For the transition period from  __________ to __________
| | --------------------------------------------------------

Commission file number   333-47647

American States Water Company

(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 East Foothill Boulevard, San Dimas   |  | 91773     
|                                         |  |           
|(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 000-01121

Southern California Water Company




(Exact Name of Registrant as Specified in Its Charter)


|                                                               |  |                                  
|-------------------------------------------------------------- |  | ---------------------------------
|California                                                     |  | 95-1243678                       
|                                                               |  |                                  
|(State or Other Jurisdiction of
Incorporation or Organization) |  | (IRS Employer Identification No.)

|
|
|
|
|
|

(909) 394-3600




(Registrants Telephone Number, Including Area Code)


Not Applicable




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


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

American States Water Company          Yes x No  ̈

Southern California Water Company     Yes x No  ̈

As of August 14, 2002, the number of Common Shares outstanding, no par value
with stated value of $2.50, of American States Water Company was
15,152,714
shares.

As of August 14, 2002, all of the 110 outstanding Common Shares of Southern
California Water Company are owned by American States Water Company.





---

TABLE OF CONTENTS



|           |                                                                                              |                                   |  |  |  |  |  | 
|---------- | -------------------------------------------------------------------------------------------- | --------------------------------- |  |  |  |  |  | 
|PART I    
|           | Item 1. Financial Statements                                                                
|           |                                                                                              | CONSOLIDATED BALANCE SHEETS      
|           |                                                                                              | CONSOLIDATED BALANCE SHEETS      
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED CASH FLOW STATEMENTS
|           |                                                                                              | CONSOLIDATED BALANCE SHEETS      
|           |                                                                                              | CONSOLIDATED BALANCE SHEETS      
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED STATEMENTS OF INCOME
|           |                                                                                              | CONSOLIDATED CASH FLOW STATEMENTS
|           |                                                                                              | NOTES TO FINANCIAL STATEMENTS    
|           | Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operation
|           | Item 3. Quantitative and Qualitative Disclosures About Market Risk                          
|PART II   
|           | Item 1. Legal Proceedings                                                                   
|           | Item 2. Changes in Securities                                                               
|           | Item 3. Defaults Upon Senior Securities                                                     
|           | Item 4. Submission of Matters to a Vote of Security Holders                                 
|           | Item 5. Other Information                                                                   
|           | Item 6. Exhibits and Reports on Form 8-K                                                    
|SIGNATURES



---



##### Table of Contents



AMERICAN STATES WATER COMPANY
and
SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q
INDEX

|        |  |                                                                                      |  |                                                                                                                                    |       |          |       | 
|------- |  | ------------------------------------------------------------------------------------ |  | ---------------------------------------------------------------------------------------------------------------------------------- | ----- | -------- | ----- | 
|        |  |                                                                                      |  |                                                                                                                                    |       | Page No.
|        |  |                                                                                      |  |                                                                                                                                    |       |         
|Part I  |  | Financial Information                                                                |  |                                                                                                                                    |       |         
|Item 1: |  | Financial Statements                                                                 |  |                                                                                                                                    | 1     |         
|        |  |                                                                                      |  | Consolidated Balance Sheets of American States Water Company as of
June 30, 2002 and December 31, 2001                             |       |          | 2-3   | 
|        |  |                                                                                      |  | Consolidated Statements of Income of American States Water Company for the
Three Months Ended June 30, 2002 and June 30, 2001      |       |          | 4     | 
|        |  |                                                                                      |  | Consolidated Statements of Income of American States Water Company for the
Six Months Ended June 30, 2002 and June 30, 2001        |       |          | 5     | 
|        |  |                                                                                      |  | Consolidated Statements of Income of American States Water Company for the
Twelve Months Ended June 30, 2002 and June 30, 2001     |       |          | 6     | 
|        |  |                                                                                      |  | Consolidated Statements of Cash Flow of American States Water Company for
the Six Months Ended June 30, 2002 and June 30, 2001     |       |          | 7     | 
|        |  |                                                                                      |  | Consolidated Balance Sheets of Southern California Water Company as of
June 30, 2002 and December 31, 2001                         |       |          | 8-9   | 
|        |  |                                                                                      |  | Consolidated Statements of Income of Southern California Water Company for the
Three Months Ended June 30, 2002 and June 30, 2001  |       |          | 10    | 
|        |  |                                                                                      |  | Consolidated Statements of Income of Southern California Water Company for the
Six Months Ended June 30, 2002 and June 30, 2001    |       |          | 11    | 
|        |  |                                                                                      |  | Consolidated Statements of Income of Southern California Water Company for the
Twelve Months Ended June 30, 2002 and June 30, 2001 |       |          | 12    | 
|        |  |                                                                                      |  | Consolidated Statements of Cash Flow of Southern California Water Company
for the Six Months Ended June 30, 2002 and June 30, 2001 |       |          | 13    | 
|        |  |                                                                                      |  | Notes to Financial Statements                                                                                                      |       |          | 14-18 | 
|Item 2: |  | Managements Discussion and Analysis of Financial Condition and Results of Operation |  |                                                                                                                                    | 19-43 |         
|Item 3: |  | Quantitative and Qualitative Disclosures About Market Risks                          |  |                                                                                                                                    | 43    |         
|Part II |  | Other Information                                                                    |  |                                                                                                                                    |       |         
|Item 1: |  | Legal Proceedings                                                                    |  |                                                                                                                                    | 44-46 |         
|Item 2: |  | Changes in Securities                                                                |  |                                                                                                                                    | 46-47 |         
|Item 3: |  | Defaults Upon Senior Securities                                                      |  |                                                                                                                                    | 47    |         
|Item 4: |  | Submission of Matters to a Vote of Security Holders                                  |  |                                                                                                                                    | 47    |         
|Item 5: |  | Other Information                                                                    |  |                                                                                                                                    | 47    |         
|Item 6: |  | Exhibits and Reports on Form 8-K                                                     |  |                                                                                                                                    | 47    |         

i



---



##### Table of Contents






PART I




Item 1. Financial Statements

General

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

Certain information and footnote disclosures normally included in
financial statements, prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to such rules and
regulations, although Registrant believes that the disclosures are adequate to
make the information presented not misleading. In the opinion of management,
all adjustments necessary for a fair statement of results for the interim
period have been made.

It is suggested that these financial statements be read in conjunction
with the financial statements and notes thereto in the latest Annual Report on
Form 10-K of American States Water Company and its wholly owned subsidiary,
Southern California Water Company.

Filing Format

This quarterly report on Form 10-Q is a combined report being filed by two
separate Registrants: American States Water Company (hereinafter AWR) and
Southern California Water Company (hereinafter SCW). For more information,
please see Note 1 to the Notes to Financial Statementsand the heading entitled
Generalin Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operation.References in this report to Registrant are to AWR
and SCW, collectively unless otherwise specified. SCW makes no representations
as to the information contained in this report relating to AWR and its
subsidiaries, other than SCW.

1



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

|                               |                                         |                                                             |              |          |                |         |              |          |        |         | 
|------------------------------ | --------------------------------------- | ----------------------------------------------------------- | ------------ | -------- | -------------- | ------- | ------------ | -------- | ------ | ------- | 
|                               |                                         |                                                             |              |          | June 30,       |         | December 31,
|                               |                                         |                                                             |              |          | 2002           |         | 2001        
|                               |                                         |                                                             |              |          |                |         |             
|                               |                                         |                                                             |              |          | (in thousands)
|UTILITY PLANT, at cost         |                                         |                                                             |              |          |                |         |              |         
|                               | Water                                   |                                                             | $            | 663,550  |                |         | $            | 645,185  |       
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               | Electric                                |                                                             |              | 38,525   |                |         |              | 38,525   |       
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | 702,075      |          |                |         | 683,710      |         
|                               | Less  Accumulated depreciation         |                                                             |              | (200,393 | )              |         |              | (190,656 | )     
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | 501,682      |          |                |         | 493,054      |         
|                               | Construction work in progress           |                                                             |              | 49,072   |                |         |              | 46,788   |       
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | 550,754      |          |                |         | 539,842      |         
|                               |                                         |                                                             |              |          |                |         |              |          |       
|OTHER PROPERTY AND INVESTMENTS |                                         |                                                             | 24,063       |          |                |         | 24,104       |         
|                               |                                         |                                                             |              |          |                |         |              |          |       
|CURRENT ASSETS                 |                                         |                                                             |              |          |                |         |              |         
|                               | Cash and cash equivalents               |                                                             |              | 11,469   |                |         |              | 30,496   |       
|                               | Accounts receivable -                   |                                                             |              |          |                |         |              |          |       
|                               |                                         | Customers, less reserves of $1,004 in 2002 and $972 in 2001 |              |          | 11,325         |         |              |          | 10,557 |        
|                               |                                         | Other                                                       |              |          | 5,475          |         |              |          | 5,306  |        
|                               | Unbilled revenue                        |                                                             |              | 13,984   |                |         |              | 12,141   |       
|                               | Materials and supplies, at average cost |                                                             |              | 1,052    |                |         |              | 970      |       
|                               | Supply cost balancing accounts          |                                                             |              | 31,857   |                |         |              | 25,826   |       
|                               | Prepayments and other                   |                                                             |              | 2,036    |                |         |              | 2,493    |       
|                               | Accumulated deferred income taxes  net |                                                             |              |         |                |         |              |         |       
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | 77,198       |          |                |         | 87,789       |         
|                               |                                         |                                                             |              |          |                |         |              |          |       
|DEFERRED CHARGES               |                                         |                                                             |              |          |                |         |              |         
|                               | Regulatory tax-related assets           |                                                             |              | 15,033   |                |         |              | 15,843   |       
|                               | Other deferred charges                  |                                                             |              | 18,684   |                |         |              | 16,186   |       
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | 33,717       |          |                |         | 32,029       |         
|                               |                                         |                                                             |              |          |                |         |              |          |       
|                               |                                         |                                                             | TOTAL ASSETS |          | $              | 685,732 |              |          | $      | 683,764 | 
|                               |                                         |                                                             |              |          |                |         |              |          |       

The accompanying notes are an integral part of these financial statements.

2



---



##### Table of Contents






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

|                    |                                                               |                                      |         |                |         |              |         |         |         | 
|------------------- | ------------------------------------------------------------- | ------------------------------------ | ------- | -------------- | ------- | ------------ | ------- | ------- | ------- | 
|                    |                                                               |                                      |         | June 30,       |         | December 31,
|                    |                                                               |                                      |         | 2002           |         | 2001        
|                    |                                                               |                                      |         |                |         |             
|                    |                                                               |                                      |         | (in thousands)
|CAPITALIZATION      |                                                               |                                      |         |                |         |              |         |        
|                    | Common shareholders equity                                   |                                      | $       | 203,206        |         |              | $       | 199,982 |        
|                    | Preferred shares                                              |                                      |         |               |         |              |         | 1,600   |        
|                    | Preferred shares subject to mandatory
redemption requirements |                                      |         |               |         |              |         | 280     |        
|                    | Long-term debt                                                |                                      |         | 245,372        |         |              |         | 245,692 |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|                    |                                                               |                                      | 448,578 |                |         |              | 447,554 |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|CURRENT LIABILITIES |                                                               |                                      |         |                |         |              |         |        
|                    | Notes payable to banks                                        |                                      |         | 13,000         |         |              |         | 20,000  |        
|                    | Long-term debt and preferred shares
due within one year       |                                      |         | 760            |         |              |         | 800     |        
|                    | Accounts payable                                              |                                      |         | 16,837         |         |              |         | 13,931  |        
|                    | Taxes payable                                                 |                                      |         | 5,461          |         |              |         | 5,389   |        
|                    | Accrued interest                                              |                                      |         | 1,924          |         |              |         | 1,945   |        
|                    | Other accrued liabilities                                     |                                      |         | 22,300         |         |              |         | 21,571  |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|                    |                                                               |                                      | 60,282  |                |         |              | 63,636  |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|OTHER CREDITS       |                                                               |                                      |         |                |         |              |         |        
|                    | Advances for construction                                     |                                      |         | 68,464         |         |              |         | 69,436  |        
|                    | Contributions in aid of construction                          |                                      |         | 44,946         |         |              |         | 43,723  |        
|                    | Accumulated deferred income taxes  net                       |                                      |         | 57,508         |         |              |         | 53,444  |        
|                    | Unamortized investment tax credits                            |                                      |         | 2,837          |         |              |         | 2,882   |        
|                    | Regulatory tax-related liability                              |                                      |         | 1,750          |         |              |         | 1,773   |        
|                    | Other                                                         |                                      |         | 1,367          |         |              |         | 1,316   |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|                    |                                                               |                                      | 176,872 |                |         |              | 172,574 |        
|                    |                                                               |                                      |         |                |         |              |         |         |        
|                    |                                                               | TOTAL CAPITALIZATION AND LIABILITIES |         | $              | 685,732 |              |         | $       | 683,764 | 
|                    |                                                               |                                      |         |                |         |              |         |         |        

The accompanying notes are an integral part of these financial statements.

3



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                                              |                                     |   |                       |        |      |   |        |        |  
|--------------------------------------------- | ----------------------------------- | - | --------------------- | ------ | ---- | - | ------ | ------ | -
|                                              |                                     |   | Three Months Ended   
|                                              |                                     |   | June 30,             
|                                              |                                     |   |                      
|                                              |                                     |   | 2002                  |        | 2001
|                                              |                                     |   |                       |        |     
|                                              |                                     |   | (in thousands, except
|                                              |                                     |   | per share amounts)   
|OPERATING REVENUES                            |                                     |   |                       |        |      |   |        |       
|                                              | Water                               |   | $                     | 48,765 |      |   | $      | 46,495 |  
|                                              | Electric                            |   |                       | 3,839  |      |   |        | 3,176  |  
|                                              | Other                               |   |                       | 198    |      |   |        | 199    |  
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              |                                     |   | 52,802                |        |      |   | 49,870 |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|OPERATING EXPENSES                            |                                     |   |                       |        |      |   |        |       
|                                              | Water purchased                     |   |                       | 10,746 |      |   |        | 10,658 |  
|                                              | Power purchased for pumping         |   |                       | 2,465  |      |   |        | 1,896  |  
|                                              | Power purchased for resale          |   |                       | 5,512  |      |   |        | 2,615  |  
|                                              | Groundwater production assessment   |   |                       | 1,801  |      |   |        | 1,954  |  
|                                              | Supply cost balancing accounts      |   |                       | (3,489 | )    |   |        | (2,293 | )
|                                              | Other operating expenses            |   |                       | 4,152  |      |   |        | 4,508  |  
|                                              | Administrative and general expenses |   |                       | 8,879  |      |   |        | 8,938  |  
|                                              | Depreciation                        |   |                       | 4,538  |      |   |        | 4,493  |  
|                                              | Maintenance                         |   |                       | 2,194  |      |   |        | 2,086  |  
|                                              | Taxes on income                     |   |                       | 4,135  |      |   |        | 4,125  |  
|                                              | Other taxes                         |   |                       | 1,983  |      |   |        | 1,877  |  
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              |                                     |   | 42,916                |        |      |   | 40,857 |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              | Operating income                    |   |                       | 9,886  |      |   |        | 9,013  |  
|OTHER INCOME/(LOSS)                           |                                     |   | (87                   | )      |      |   | 16     |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              | Income before interest charges      |   |                       | 9,799  |      |   |        | 9,029  |  
|INTEREST CHARGES                              |                                     |   | 4,364                 |        |      |   | 3,976  |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|NET INCOME                                    |                                     |   | 5,435                 |        |      |   | 5,053  |       
|DIVIDENDS ON PREFERRED SHARES                 |                                     |   | (8                    | )      |      |   | (21    | )     
|                                              |                                     |   |                       |        |      |   |        |        |  
|EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $ | 5,427                 |        |      | $ | 5,032  |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |   | 15,131                |        |      |   | 15,120 |       
|Basic Earnings Per Common Share               |                                     | $ | 0.36                  |        |      | $ | 0.33   |       
|WEIGHTED AVERAGE NUMBER OF DILUTED SHARES     |                                     |   | 15,386                |        |      |   | 15,257 |       
|Fully Diluted Earnings Per Share              |                                     | $ | 0.35                  |        |      | $ | 0.33   |       
|Dividends Declared Per Common Share           |                                     | $ | 0.22                  |        |      | $ | 0.21   |       

The accompanying notes are an integral part of these financial statements.

4



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                                              |                                     |   |                       |        |      |   |        |        |  
|--------------------------------------------- | ----------------------------------- | - | --------------------- | ------ | ---- | - | ------ | ------ | -
|                                              |                                     |   | Six Months Ended     
|                                              |                                     |   | June 30,             
|                                              |                                     |   |                      
|                                              |                                     |   | 2002                  |        | 2001
|                                              |                                     |   |                       |        |     
|                                              |                                     |   | (in thousands, except
|                                              |                                     |   | per share amounts)   
|OPERATING REVENUES                            |                                     |   |                       |        |      |   |        |       
|                                              | Water                               |   | $                     | 87,856 |      |   | $      | 82,640 |  
|                                              | Electric                            |   |                       | 9,045  |      |   |        | 7,133  |  
|                                              | Other                               |   |                       | 386    |      |   |        | 388    |  
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              |                                     |   | 97,287                |        |      |   | 90,161 |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|OPERATING EXPENSES                            |                                     |   |                       |        |      |   |        |       
|                                              | Water purchased                     |   |                       | 18,318 |      |   |        | 17,150 |  
|                                              | Power purchased for pumping         |   |                       | 4,440  |      |   |        | 3,426  |  
|                                              | Power purchased for resale          |   |                       | 10,328 |      |   |        | 10,348 |  
|                                              | Groundwater production assessment   |   |                       | 3,596  |      |   |        | 3,427  |  
|                                              | Supply cost balancing accounts      |   |                       | (5,815 | )    |   |        | (8,560 | )
|                                              | Other operating expenses            |   |                       | 7,928  |      |   |        | 8,636  |  
|                                              | Administrative and general expenses |   |                       | 16,443 |      |   |        | 15,518 |  
|                                              | Depreciation                        |   |                       | 9,106  |      |   |        | 8,977  |  
|                                              | Maintenance                         |   |                       | 4,086  |      |   |        | 4,299  |  
|                                              | Taxes on income                     |   |                       | 7,148  |      |   |        | 6,838  |  
|                                              | Other taxes                         |   |                       | 3,905  |      |   |        | 3,866  |  
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              |                                     |   | 79,483                |        |      |   | 73,925 |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              | Operating income                    |   |                       | 17,804 |      |   |        | 16,236 |  
|OTHER INCOME/(LOSS)                           |                                     |   | 169                   |        |      |   | (170   | )     
|                                              |                                     |   |                       |        |      |   |        |        |  
|                                              | Income before interest charges      |   |                       | 17,973 |      |   |        | 16,066 |  
|INTEREST CHARGES                              |                                     |   | 8,731                 |        |      |   | 7,896  |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|NET INCOME                                    |                                     |   | 9,242                 |        |      |   | 8,170  |       
|DIVIDENDS ON PREFERRED SHARES                 |                                     |   | (29                   | )      |      |   | (42    | )     
|                                              |                                     |   |                       |        |      |   |        |        |  
|EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $ | 9,213                 |        |      | $ | 8,128  |       
|                                              |                                     |   |                       |        |      |   |        |        |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |   | 15,126                |        |      |   | 15,120 |       
|Basic Earnings Per Common Share               |                                     | $ | 0.61                  |        |      | $ | 0.54   |       
|WEIGHTED AVERAGE NUMBER OF DILUTED SHARES     |                                     |   | 15,358                |        |      |   | 15,257 |       
|Fully Diluted Earnings Per Share              |                                     | $ | 0.60                  |        |      | $ | 0.53   |       
|Dividends Declared Per Common Share           |                                     | $ | 0.43                  |        |      | $ | 0.43   |       

The accompanying notes are an integral part of these financial statements.

5



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|------------------ | --------------------------------------------- | ----------------------------------- | ------- | --------------------- | ------- | ---- | ------- | ------ | ------- | -
|                   |                                               |                                     |         | Twelve Months Ended  
|                   |                                               |                                     |         | June 30,             
|                   |                                               |                                     |         |                      
|                   |                                               |                                     |         | 2002                  |         | 2001
|                   |                                               |                                     |         |                       |         |     
|                   |                                               |                                     |         | (in thousands, except
|                   |                                               |                                     |         | per share amounts)   
|OPERATING REVENUES |                                               |                                     |         |                       |         |      |         |       
|                   |                                               | Water                               |         | $                     | 186,691 |      |         | $      | 174,760 |  
|                   |                                               | Electric                            |         |                       | 17,163  |      |         |        | 14,331  |  
|                   |                                               | Other                               |         |                       | 787     |      |         |        | 853     |  
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   |                                               |                                     | 204,641 |                       |         |      | 189,944 |       
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   | OPERATING EXPENSES                            |                                     |         |                       |         |      |         |        |        
|                   |                                               | Water purchased                     |         |                       | 38,777  |      |         |        | 39,863  |  
|                   |                                               | Power purchased for pumping         |         |                       | 10,606  |      |         |        | 7,885   |  
|                   |                                               | Power purchased for resale          |         |                       | 19,642  |      |         |        | 17,433  |  
|                   |                                               | Groundwater production assessment   |         |                       | 7,016   |      |         |        | 6,644   |  
|                   |                                               | Supply cost balancing accounts      |         |                       | (11,935 | )    |         |        | (13,498 | )
|                   |                                               | Other operating expenses            |         |                       | 16,453  |      |         |        | 17,151  |  
|                   |                                               | Administrative and general expenses |         |                       | 36,035  |      |         |        | 29,743  |  
|                   |                                               | Depreciation                        |         |                       | 18,080  |      |         |        | 16,708  |  
|                   |                                               | Maintenance                         |         |                       | 8,427   |      |         |        | 9,433   |  
|                   |                                               | Taxes on income                     |         |                       | 15,690  |      |         |        | 16,251  |  
|                   |                                               | Other taxes                         |         |                       | 7,591   |      |         |        | 7,515   |  
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   |                                               |                                     | 166,382 |                       |         |      | 155,128 |       
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   |                                               | Operating income                    |         |                       | 38,259  |      |         |        | 34,816  |  
|                   | OTHER INCOME/(LOSS)                           |                                     |         | (172                  | )       |      |         | (228   | )      
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   |                                               | Income before interest charges      |         |                       | 38,087  |      |         |        | 34,588  |  
|                   | INTEREST CHARGES                              |                                     |         | 16,569                |         |      |         | 15,146 |        
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   | NET INCOME                                    |                                     |         | 21,518                |         |      |         | 19,442 |        
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   | DIVIDENDS ON PREFERRED SHARES                 |                                     |         | (71                   | )       |      |         | (85    | )      
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   | EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $       | 21,447                |         |      | $       | 19,357 |        
|                   |                                               |                                     |         |                       |         |      |         |        |         |  
|                   | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |         | 15,123                |         |      |         | 14,907 |        
|                   | Basic Earnings Per Common Share               |                                     | $       | 1.42                  |         |      | $       | 1.30   |        
|                   | WEIGHTED AVERAGE NUMBER OF DILUTED SHARES     |                                     |         | 15,307                |         |      |         | 15,009 |        
|                   | Fully Diluted Earnings Per Share              |                                     | $       | 1.40                  |         |      | $       | 1.29   |        
|                   | Dividends Declared Per Common Share           |                                     | $       | 0.87                  |         |      | $       | 0.86   |        

The accompanying notes are an integral part of these financial statements.

6



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|--------------------------------------- | ---------------------------------------------------- | ------------------------- | ------------------------------------------------------------------- | ------------------------------------------------ | ------- | ---------------- | ------- | ----- | ------- | ------ | ------- | -
|                                        |                                                      |                           |                                                                     |                                                  |         | Six Months Ended
|                                        |                                                      |                           |                                                                     |                                                  |         | June 30,        
|                                        |                                                      |                           |                                                                     |                                                  |         |                 
|                                        |                                                      |                           |                                                                     |                                                  |         | 2002             |         | 2001 
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |      
|                                        |                                                      |                           |                                                                     |                                                  |         | (in thousands)  
|CASH FLOWS FROM  Operating Activities: |                                                      |                           |                                                                     |                                                  |         |                  |         |      
|                                        |                                                      |                           |                                                                     | Net income                                       |         | $                | 9,242   |       |         | $      | 8,170   |  
|                                        |                                                      |                           | Adjustments for non-cash items:                                     |                                                  |         |                  |         |       |         |        |        
|                                        |                                                      |                           |                                                                     | Depreciation and amortization                    |         |                  | 9,106   |       |         |        | 8,977   |  
|                                        |                                                      |                           |                                                                     | Deferred income taxes and investment tax credits |         |                  | 4,358   |       |         |        | 5,082   |  
|                                        |                                                      |                           |                                                                     | Other  net                                      |         |                  | (755    | )     |         |        | (1,198  | )
|                                        |                                                      |                           | Changes in assets and liabilities:                                  |                                                  |         |                  |         |       |         |        |        
|                                        |                                                      |                           |                                                                     | Accounts receivable                              |         |                  | (768    | )     |         |        | (783    | )
|                                        |                                                      |                           |                                                                     | Prepayments                                      |         |                  | 457     |       |         |        | 613     |  
|                                        |                                                      |                           |                                                                     | Supply cost balancing accounts                   |         |                  | (6,031  | )     |         |        | (8,560  | )
|                                        |                                                      |                           |                                                                     | Accounts payable                                 |         |                  | 2,906   |       |         |        | 2,893   |  
|                                        |                                                      |                           |                                                                     | Taxes payable                                    |         |                  | 72      |       |         |        | (1,751  | )
|                                        |                                                      |                           |                                                                     | Unbilled revenue                                 |         |                  | (1,843  | )     |         |        | (1,579  | )
|                                        |                                                      |                           |                                                                     | Other                                            |         |                  | 458     |       |         |        | 1,941   |  
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        |                                                      |                           |                                                                     | Net Cash Provided                                |         |                  | 17,202  |       |         |        | 13,805  |  
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|Investing Activities:                   |                                                      |                           |                                                                     |                                                  |         |                  |         |      
|                                        |                                                      | Construction expenditures |                                                                     |                                                  | (20,677 | )                |         |       | (22,407 | )     
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        |                                                      |                           |                                                                     | Net Cash Used                                    |         |                  | (20,677 | )     |         |        | (22,407 | )
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        | Financing Activities:                                |                           |                                                                     |                                                  |         |                  |         |       |        
|                                        |                                                      |                           | Issuance of securities                                              |                                                  |         | 565              |         |       |         | 20,000 |        
|                                        |                                                      |                           | Receipt of advances and contributions                               |                                                  |         | 2,266            |         |       |         | 2,014  |        
|                                        |                                                      |                           | Repayments of long-term debt, net of
redemption of preferred shares |                                                  |         | (2,240           | )       |       |         | (287   | )      
|                                        |                                                      |                           | Refunds on advances for construction                                |                                                  |         | (2,560           | )       |       |         | (2,238 | )      
|                                        |                                                      |                           | Changes in notes payable to banks                                   |                                                  |         | (7,000           | )       |       |         | (3,000 | )      
|                                        |                                                      |                           | Common and preferred dividends paid                                 |                                                  |         | (6,583           | )       |       |         | (6,594 | )      
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        |                                                      |                           |                                                                     | Net Cash Provided (Used)                         |         |                  | (15,552 | )     |         |        | 9,895   |  
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        | Net Increase (Decrease) in Cash and Cash Equivalents |                           |                                                                     | (19,027                                          | )       |                  |         | 1,293 |        
|                                        | Cash and Cash Equivalents, Beginning of period       |                           |                                                                     | 30,496                                           |         |                  |         | 5,808 |        
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  
|                                        | Cash and Cash Equivalents, End of period             |                           | $                                                                   | 11,469                                           |         |                  | $       | 7,101 |        
|                                        |                                                      |                           |                                                                     |                                                  |         |                  |         |       |         |        |         |  

The accompanying notes are an integral part of these financial statements.

7



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

|                               |                                         |                                                            |              |          |                |         |              |          |        |         | 
|------------------------------ | --------------------------------------- | ---------------------------------------------------------- | ------------ | -------- | -------------- | ------- | ------------ | -------- | ------ | ------- | 
|                               |                                         |                                                            |              |          | June 30,       |         | December 31,
|                               |                                         |                                                            |              |          | 2002           |         | 2001        
|                               |                                         |                                                            |              |          |                |         |             
|                               |                                         |                                                            |              |          | (in thousands)
|UTILITY PLANT, at cost         |                                         |                                                            |              |          |                |         |              |         
|                               | Water                                   |                                                            | $            | 626,353  |                |         | $            | 607,988  |       
|                               | Electric                                |                                                            |              | 38,525   |                |         |              | 38,525   |       
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | 664,878      |          |                |         | 646,513      |         
|                               | Less  Accumulated depreciation         |                                                            |              | (190,648 | )              |         |              | (181,371 | )     
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | 474,230      |          |                |         | 465,142      |         
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               | Construction work in progress           |                                                            |              | 47,944   |                |         |              | 46,042   |       
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | 522,174      |          |                |         | 511,184      |         
|                               |                                         |                                                            |              |          |                |         |              |          |       
|OTHER PROPERTY AND INVESTMENTS |                                         |                                                            | 9,417        |          |                |         | 9,446        |         
|                               |                                         |                                                            |              |          |                |         |              |          |       
|CURRENT ASSETS                 |                                         |                                                            |              |          |                |         |              |         
|                               | Cash and cash equivalents               |                                                            |              | 6,797    |                |         |              | 26,079   |       
|                               | Accounts receivable -                   |                                                            |              |          |                |         |              |          |       
|                               |                                         | Customers, less reserves of $973 in 2002, and $951 in 2001 |              |          | 10,684         |         |              |          | 10,228 |        
|                               |                                         | Other                                                      |              |          | 5,354          |         |              |          | 5,202  |        
|                               | Intercompany receivable                 |                                                            |              | 9,340    |                |         |              |         |       
|                               | Unbilled revenue                        |                                                            |              | 13,705   |                |         |              | 11,940   |       
|                               | Materials and supplies, at average cost |                                                            |              | 1,018    |                |         |              | 883      |       
|                               | Supply cost balancing accounts          |                                                            |              | 31,857   |                |         |              | 25,826   |       
|                               | Prepayments and other                   |                                                            |              | 2,006    |                |         |              | 2,310    |       
|                               | Accumulated deferred income taxes  net |                                                            |              |         |                |         |              |         |       
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | 80,761       |          |                |         | 82,468       |         
|                               |                                         |                                                            |              |          |                |         |              |         
|DEFERRED CHARGES               |                                         |                                                            |              |          |                |         |              |         
|                               | Regulatory tax-related assets           |                                                            |              | 15,033   |                |         |              | 15,843   |       
|                               | Other deferred charges                  |                                                            |              | 17,950   |                |         |              | 15,433   |       
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | 32,983       |          |                |         | 31,276       |         
|                               |                                         |                                                            |              |          |                |         |              |          |       
|                               |                                         |                                                            | TOTAL ASSETS |          | $              | 645,335 |              |          | $      | 634,374 | 
|                               |                                         |                                                            |              |          |                |         |              |          |       

The accompanying notes are an integral part of these financial statements.

8



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited)

|                    |                                                         |                                      |         |                |         |              |         |         |         | 
|------------------- | ------------------------------------------------------- | ------------------------------------ | ------- | -------------- | ------- | ------------ | ------- | ------- | ------- | 
|                    |                                                         |                                      |         | June 30,       |         | December 31,
|                    |                                                         |                                      |         | 2002           |         | 2001        
|                    |                                                         |                                      |         |                |         |             
|                    |                                                         |                                      |         | (in thousands)
|CAPITALIZATION      |                                                         |                                      |         |                |         |              |         |        
|                    | Common shareholders equity                             |                                      | $       | 199,116        |         |              | $       | 196,107 |        
|                    | Long-term debt                                          |                                      |         | 236,618        |         |              |         | 236,804 |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|                    |                                                         |                                      | 435,734 |                |         |              | 432,911 |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|CURRENT LIABILITIES |                                                         |                                      |         |                |         |              |         |        
|                    | Notes payable to banks                                  |                                      |         |               |         |              |         |        |        
|                    | Long-term debt and preferred shares due within one year |                                      |         | 260            |         |              |         | 300     |        
|                    | Accounts payable                                        |                                      |         | 16,554         |         |              |         | 13,548  |        
|                    | Intercompany payable                                    |                                      |         |               |         |              |         | 26      |        
|                    | Taxes payable                                           |                                      |         | 6,070          |         |              |         | 5,599   |        
|                    | Accrued interest                                        |                                      |         | 1,847          |         |              |         | 1,877   |        
|                    | Other accrued liabilities                               |                                      |         | 22,043         |         |              |         | 21,320  |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|                    |                                                         |                                      | 46,774  |                |         |              | 42,670  |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|OTHER CREDITS       |                                                         |                                      |         |                |         |              |         |        
|                    | Advances for construction                               |                                      |         | 57,561         |         |              |         | 58,570  |        
|                    | Contributions in aid of construction                    |                                      |         | 44,691         |         |              |         | 43,493  |        
|                    | Accumulated deferred income taxes  net                 |                                      |         | 55,988         |         |              |         | 52,075  |        
|                    | Unamortized investment tax credits                      |                                      |         | 2,837          |         |              |         | 2,882   |        
|                    | Regulatory tax-related liability                        |                                      |         | 1,750          |         |              |         | 1,773   |        
|                    | Other                                                   |                                      |         |               |         |              |         |        |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|                    |                                                         |                                      | 162,827 |                |         |              | 158,793 |        
|                    |                                                         |                                      |         |                |         |              |         |         |        
|                    |                                                         | TOTAL CAPITALIZATION AND LIABILITIES |         | $              | 645,335 |              |         | $       | 634,374 | 
|                    |                                                         |                                      |         |                |         |              |         |         |        

The accompanying notes are an integral part of these financial statements.

9



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                                              |                                     |   |                         |        |      |   |        |        |  
|--------------------------------------------- | ----------------------------------- | - | ----------------------- | ------ | ---- | - | ------ | ------ | -
|                                              |                                     |   | Three Months Ended     
|                                              |                                     |   | June 30,               
|                                              |                                     |   |                        
|                                              |                                     |   | 2002                    |        | 2001
|                                              |                                     |   |                         |        |     
|                                              |                                     |   | ($ in thousands, except
|                                              |                                     |   | per share amounts)     
|                                              |                                     |   |                        
|OPERATING REVENUES                            |                                     |   |                         |        |      |   |        |       
|                                              | Water                               |   | $                       | 47,068 |      |   | $      | 44,834 |  
|                                              | Electric                            |   |                         | 3,839  |      |   |        | 3,176  |  
|                                              |                                     |   |                         |        |      |   |        |        |  
|                                              |                                     |   | 50,907                  |        |      |   | 48,010 |       
|                                              |                                     |   |                         |        |      |   |        |        |  
|OPERATING EXPENSES                            |                                     |   |                         |        |      |   |        |       
|                                              | Water purchased                     |   |                         | 10,559 |      |   |        | 10,648 |  
|                                              | Power purchased for pumping         |   |                         | 2,353  |      |   |        | 1,814  |  
|                                              | Power purchased for resale          |   |                         | 5,512  |      |   |        | 2,615  |  
|                                              | Groundwater production assessment   |   |                         | 1,801  |      |   |        | 1,954  |  
|                                              | Supply cost balancing accounts      |   |                         | (3,489 | )    |   |        | (2,293 | )
|                                              | Other operating expenses            |   |                         | 3,908  |      |   |        | 4,223  |  
|                                              | Administrative and general expenses |   |                         | 7,888  |      |   |        | 8,649  |  
|                                              | Depreciation                        |   |                         | 4,310  |      |   |        | 4,183  |  
|                                              | Maintenance                         |   |                         | 2,138  |      |   |        | 2,033  |  
|                                              | Taxes on income                     |   |                         | 4,265  |      |   |        | 3,987  |  
|                                              | Other taxes                         |   |                         | 1,871  |      |   |        | 1,792  |  
|                                              |                                     |   |                         |        |      |   |        |        |  
|                                              |                                     |   | 41,116                  |        |      |   | 39,605 |       
|                                              |                                     |   |                         |        |      |   |        |        |  
|                                              | Operating income                    |   |                         | 9,791  |      |   |        | 8,405  |  
|OTHER INCOME/(LOSS)                           |                                     |   | (115                    | )      |      |   | (13    | )     
|                                              |                                     |   |                         |        |      |   |        |        |  
|                                              | Income before interest charges      |   |                         | 9,676  |      |   |        | 8,392  |  
|INTEREST CHARGES                              |                                     |   | 4,080                   |        |      |   | 3,579  |       
|                                              |                                     |   |                         |        |      |   |        |        |  
|NET INCOME                                    |                                     |   | 5,596                   |        |      |   | 4,813  |       
|DIVIDENDS ON PREFERRED SHARES                 |                                     |   |                        |        |      |   |       |       
|                                              |                                     |   |                         |        |      |   |        |        |  
|EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $ | 5,596                   |        |      | $ | 4,813  |       
|                                              |                                     |   |                         |        |      |   |        |        |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |   | 110                     |        |      |   | 110    |       
|Basic Earnings Per Common Share               |                                     | $ | 50,873                  |        |      | $ | 43,755 |       
|Dividends Declared Per Common Share           |                                     | $ | 30,000                  |        |      | $ | 30,000 |       

The accompanying notes are an integral part of these financial statements.

10



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|------------------ | --------------------------------------------- | ----------------------------------- | ------ | ----------------------- | ------ | ---- | ------ | ------ | ------ | -
|                   |                                               |                                     |        | Six Months Ended       
|                   |                                               |                                     |        | June 30,               
|                   |                                               |                                     |        |                        
|                   |                                               |                                     |        | 2002                    |        | 2001
|                   |                                               |                                     |        |                         |        |     
|                   |                                               |                                     |        | ($ in thousands, except
|                   |                                               |                                     |        | per share amounts)     
|OPERATING REVENUES |                                               |                                     |        |                         |        |      |        |       
|                   |                                               | Water                               |        | $                       | 84,802 |      |        | $      | 79,639 |  
|                   |                                               | Electric                            |        |                         | 9,045  |      |        |        | 7,133  |  
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   |                                               |                                     | 93,847 |                         |        |      | 86,772 |       
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   | OPERATING EXPENSES                            |                                     |        |                         |        |      |        |        |       
|                   |                                               | Water purchased                     |        |                         | 17,974 |      |        |        | 16,996 |  
|                   |                                               | Power purchased for pumping         |        |                         | 4,257  |      |        |        | 3,287  |  
|                   |                                               | Power purchased for resale          |        |                         | 10,328 |      |        |        | 10,348 |  
|                   |                                               | Groundwater production assessment   |        |                         | 3,596  |      |        |        | 3,427  |  
|                   |                                               | Supply cost balancing accounts      |        |                         | (5,815 | )    |        |        | (8,560 | )
|                   |                                               | Other operating expenses            |        |                         | 7,450  |      |        |        | 8,121  |  
|                   |                                               | Administrative and general expenses |        |                         | 14,716 |      |        |        | 14,963 |  
|                   |                                               | Depreciation                        |        |                         | 8,651  |      |        |        | 8,356  |  
|                   |                                               | Maintenance                         |        |                         | 3,960  |      |        |        | 4,180  |  
|                   |                                               | Taxes on income                     |        |                         | 7,415  |      |        |        | 6,579  |  
|                   |                                               | Other taxes                         |        |                         | 3,673  |      |        |        | 3,689  |  
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   |                                               |                                     | 76,205 |                         |        |      | 71,386 |       
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   |                                               | Operating income                    |        |                         | 17,642 |      |        |        | 15,386 |  
|                   | OTHER INCOME/(LOSS)                           |                                     |        | 148                     |        |      |        | (222   | )     
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   |                                               | Income before interest charges      |        |                         | 17,790 |      |        |        | 15,164 |  
|                   | INTEREST CHARGES                              |                                     |        | 8,180                   |        |      |        | 7,423  |       
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   | NET INCOME                                    |                                     |        | 9,610                   |        |      |        | 7,741  |       
|                   | DIVIDENDS ON PREFERRED SHARES                 |                                     |        |                        |        |      |        |       |       
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   | EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $      | 9,610                   |        |      | $      | 7,741  |       
|                   |                                               |                                     |        |                         |        |      |        |        |        |  
|                   | WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |        | 110                     |        |      |        | 105    |       
|                   | Basic Earnings Per Common Share               |                                     | $      | 87,364                  |        |      | $      | 73,724 |       
|                   | Dividends Declared Per Common Share           |                                     | $      | 60,000                  |        |      | $      | 62,857 |       

The accompanying notes are an integral part of these financial statements.

11



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE TWELVE MONTHS
ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                                              |                                     |   |                         |         |      |   |         |         |  
|--------------------------------------------- | ----------------------------------- | - | ----------------------- | ------- | ---- | - | ------- | ------- | -
|                                              |                                     |   | Twelve Months Ended    
|                                              |                                     |   | June 30,               
|                                              |                                     |   |                        
|                                              |                                     |   | 2002                    |         | 2001
|                                              |                                     |   |                         |         |     
|                                              |                                     |   | ($ in thousands, except
|                                              |                                     |   | per share amounts)     
|OPERATING REVENUES                            |                                     |   |                         |         |      |   |         |        
|                                              | Water                               |   | $                       | 180,368 |      |   | $       | 170,493 |  
|                                              | Electric                            |   |                         | 17,163  |      |   |         | 14,331  |  
|                                              |                                     |   |                         |         |      |   |         |         |  
|                                              |                                     |   | 197,531                 |         |      |   | 184,824 |        
|                                              |                                     |   |                         |         |      |   |         |         |  
|OPERATING EXPENSES                            |                                     |   |                         |         |      |   |         |        
|                                              | Water purchased                     |   |                         | 38,090  |      |   |         | 39,567  |  
|                                              | Power purchased for pumping         |   |                         | 10,140  |      |   |         | 7,679   |  
|                                              | Power purchased for resale          |   |                         | 19,642  |      |   |         | 17,433  |  
|                                              | Groundwater production assessment   |   |                         | 7,016   |      |   |         | 6,644   |  
|                                              | Supply cost balancing accounts      |   |                         | (11,935 | )    |   |         | (13,498 | )
|                                              | Other operating expenses            |   |                         | 15,439  |      |   |         | 16,335  |  
|                                              | Administrative and general expenses |   |                         | 33,683  |      |   |         | 28,919  |  
|                                              | Depreciation                        |   |                         | 17,005  |      |   |         | 15,834  |  
|                                              | Maintenance                         |   |                         | 8,191   |      |   |         | 9,239   |  
|                                              | Taxes on income                     |   |                         | 15,902  |      |   |         | 15,687  |  
|                                              | Other taxes                         |   |                         | 7,073   |      |   |         | 7,237   |  
|                                              |                                     |   |                         |         |      |   |         |         |  
|                                              |                                     |   | 160,246                 |         |      |   | 151,076 |        
|                                              |                                     |   |                         |         |      |   |         |         |  
|                                              | Operating income                    |   |                         | 37,285  |      |   |         | 33,748  |  
|OTHER INCOME                                  |                                     |   | (253                    | )       |      |   | (321    | )      
|                                              |                                     |   |                         |         |      |   |         |         |  
|                                              | Income before interest charges      |   |                         | 37,032  |      |   |         | 33,427  |  
|INTEREST CHARGES                              |                                     |   | 15,335                  |         |      |   | 14,901  |        
|                                              |                                     |   |                         |         |      |   |         |         |  
|NET INCOME                                    |                                     |   | 21,697                  |         |      |   | 18,526  |        
|DIVIDENDS ON PREFERRED SHARES                 |                                     |   |                        |         |      |   |        |        
|                                              |                                     |   |                         |         |      |   |         |         |  
|EARNINGS AVAILABLE FOR COMMON SHAREHOLDERS    |                                     | $ | 21,697                  |         |      | $ | 18,526  |        
|                                              |                                     |   |                         |         |      |   |         |         |  
|WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING |                                     |   | 110                     |         |      |   | 103     |        
|Basic Earnings Per Common Share               |                                     | $ | 197,245                 |         |      | $ | 179,864 |        
|Dividends Declared Per Common Share           |                                     | $ | 123,000                 |         |      | $ | 128,155 |        

The accompanying notes are an integral part of these financial statements.

12



---



##### Table of Contents






SOUTHERN CALIFORNIA WATER COMPANY
CONSOLIDATED CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2002 AND 2001
(Unaudited)

|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|----------------- | ---------------------------------------------------- | ------------------------------------------------------------------- | ------------------------ | ------- | ------- | ---------------- | - | ----- | ------- | ------- | - | 
|                  |                                                      |                                                                     |                          |         |         | Six Months Ended
|                  |                                                      |                                                                     |                          |         |         | June 30,        
|                  |                                                      |                                                                     |                          |         |         |                 
|                  |                                                      |                                                                     |                          |         |         | 2002             |   | 2001 
|                  |                                                      |                                                                     |                          |         |         |                  |   |      
|                  |                                                      |                                                                     |                          |         |         | (in thousands)  
|CASH FLOWS FROM  |                                                      |                                                                     |                          |         |         |                  |   |      
|                  | Operating Activities:                                |                                                                     |                          |         |         |                  |   |       |        
|                  |                                                      | Net income                                                          |                          | $       | 9,610   |                  |   | $     | 7,741   |        
|                  |                                                      | Adjustments for non-cash items:                                     |                          |         |         |                  |   |       |         |        
|                  |                                                      | Depreciation and amortization                                       |                          |         | 8,651   |                  |   |       | 8,356   |        
|                  |                                                      | Deferred income taxes an investment tax credits                     |                          |         | 4,655   |                  |   |       | 5,111   |        
|                  |                                                      | Other  net                                                         |                          |         | (1,290  | )                |   |       | (1,346  | )      
|                  | Changes in assets and liabilities:                   |                                                                     |                          |         |         |                  |   |       |        
|                  |                                                      | Accounts receivable                                                 |                          |         | (456    | )                |   |       | (500    | )      
|                  |                                                      | Prepayments                                                         |                          |         | 304     |                  |   |       | 463     |        
|                  |                                                      | Supply cost balancing accounts                                      |                          |         | (6,031  | )                |   |       | (8,560  | )      
|                  |                                                      | Accounts payable                                                    |                          |         | 3,006   |                  |   |       | 3,270   |        
|                  |                                                      | Taxes payable                                                       |                          |         | 471     |                  |   |       | (1,689  | )      
|                  |                                                      | Unbilled revenue                                                    |                          |         | (1,765  | )                |   |       | (1,470  | )      
|                  |                                                      | Other                                                               |                          |         | (8,961  | )                |   |       | (2,673  | )      
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  |                                                      |                                                                     | Net Cash Provided        |         |         | 8,194            |   |       |         | 8,703   |  
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  | Investing Activities:                                |                                                                     |                          |         |         |                  |   |       |        
|                  |                                                      | Construction expenditures                                           |                          |         | (20,294 | )                |   |       | (22,195 | )      
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  |                                                      |                                                                     | Net Cash Used            |         |         | (20,294          | ) |       |         | (22,195 | )
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  | Financing Activities:                                |                                                                     |                          |         |         |                  |   |       |        
|                  |                                                      | Issuance of securities                                              |                          |         |        |                  |   |       | 45,000  |        
|                  |                                                      | Receipt of advances and contributions                               |                          |         | 2,204   |                  |   |       | 2,014   |        
|                  |                                                      | Repayments of long-term debt, net of redemption of preferred shares |                          |         | (226    | )                |   |       | (164    | )      
|                  |                                                      | Refunds on advances for construction                                |                          |         | (2,560  | )                |   |       | (2,238  | )      
|                  |                                                      | Changes in notes payable to banks                                   |                          |         |        |                  |   |       | (23,000 | )      
|                  |                                                      | Common and preferred dividends paid                                 |                          |         | (6,600  | )                |   |       | (6,600  | )      
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  |                                                      |                                                                     | Net Cash Provided (Used) |         |         | (7,182           | ) |       |         | 15,012  |  
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  | Net Increase (Decrease) in Cash and Cash Equivalents |                                                                     |                          | (19,282 | )       |                  |   | 1,520 |        
|                  | Cash and Cash Equivalents, Beginning of period       |                                                                     |                          | 26,079  |         |                  |   | 1,545 |        
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 
|                  | Cash and Cash Equivalents, End of period             |                                                                     | $                        | 6,797   |         |                  | $ | 3,065 |        
|                  |                                                      |                                                                     |                          |         |         |                  |   |       |         |         |   | 

The accompanying notes are an integral part of these financial statements.

13



---



##### Table of Contents






AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY

NOTES TO FINANCIAL STATEMENTS
(Unaudited)

American States Water Company (AWR), incorporated in 1998, is the parent
company of Southern California Water Company (SCW), American States Utility
Services, Inc. (ASUS) and Chaparral City Water Company (CCWC). More than 90% of
AWRs assets consist of the common stock of Southern California Water Company.
SCW is a public utility company engaged principally in the purchase,
production, distribution and sale of water, and the distribution and sale of
electric energy in several mountain communities in California. Unless otherwise
stated in this report, the term Registrant applies to both AWR and SCW,
collectively.



|1. |  | The consolidated financial statements included herein have been prepared
by AWR, 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 generally accepted accounting principles 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 presentation 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 2001 Form 10-K filed with the SEC on March 5,
2002.
|-- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|2. |  | Basic earnings per common share are calculated pursuant to SFAS No. 128 -
Earnings per Share- and are based on the weighted average number of
common shares outstanding during each period and net income after
deducting preferred dividend requirements. Under the American States Water
Company 2000 Stock Incentive Plan, stock options representing 68,153
common shares were granted to certain eligible employees on May 1, 2000,
stock options representing an additional 68,486 common shares were granted
on January 2, 2001, and stock options representing 116,775 common shares
and 1,050 restricted stock shares were granted on February 4, 2002. As a
result, fully diluted earnings per share amounts are shown. Earnings per
share also reflect a three-for-two split of Registrants common stock
payable on June 7, 2002 to holders of record on May 15, 2002.                                                                                                                                                                                                                                                                                                                                                                  
|  
|3. |  | New water rates with an annual increase of approximately $321,600 for
four of seven ratemaking districts in SCWs Region I were implemented in
January 2002. SCW is planning to submit a Notice of Intent to file an
application for the customer service areas in SCWs Region III in the
third quarter of 2002 for new water rates effective July of 2003, if
approved by the CPUC. There are no active regulatory proceedings
affecting CCWC or its operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  
|  
|4. |  | As permitted by the CPUC, SCW has historically maintained water and
electric supply balancing accounts to account for under-collections and
over-collections of revenues designed to recover such costs. Costs have
been recorded in income and charged to balancing accounts when such costs
were incurred. The balancing accounts were reversed when such costs were
recovered through rate adjustments or through refunds of previously
incurred costs. SCW accrued interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     

14



---



##### Table of Contents





| |  | on its supply cost balancing accounts at the rate prevailing for 90-day
commercial paper. CCWC does not maintain a supply cost balancing account.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
| |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  | Water Balancing Account On November 29, 2001, the CPUC ordered water
utilities with existing water supply balancing accounts to cease booking
amounts to such accounts. In its place, water utilities are now required
to establish a memorandum account that works in a manner similar to the
balancing account. As a result, the income statements of SCW will no
longer include entries reflecting differences between actual unit water
supply costs included in rates and actual water supply costs. SCW will
not be entitled to recover any deferred costs for providing water service
unless it is within its general rate case cycle and is earning less than
its authorized rate of return on a weather normalized basis. As a result,
any changes in water supply costs as well as any future authorized
revenue increases for supply expenses may directly impact earnings. SCW
may not be able to recover the under-collection of supply costs if it is
earning a rate of return in excess of that allowed. SCW had a net
under-collection position of $3.1 million in its water supply balancing
account at June 30, 2002 principally related to pre-November 29, 2001
activities. Of this amount, approximately $1 million is currently
included in rates. SCW anticipates recovering the remaining amount as
part of a general rate case filing planned for the third quarter of 2002.
SCW doesnt recognize memorandum accounts until a rate mechanism is
established for the recovery.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| |  | Electric Balancing Account Electric power costs incurred by SCWs Bear
Valley Electric division continue to be charged to a balancing account.
The amount of the under-collection in the electric balancing account has
increased to $28.6 million at June 30, 2002. This is a result of the
cumulative differences between wholesale purchased power costs and the
$24 per megawatt hour (MWh) authorized in rates for collection of
purchased power costs from customers. The CPUC has approved two of SCWs
Advice Letters for recovery, over a five-year period, of approximately
$11.1 million in aggregate in under-collected power costs. In approving
the $0.022 per kilowatt-hour surcharge, which resulted in an overall rate
increase of 29% for customers of BVE, the CPUC also imposed a condition
of conducting a subsequent audit on the electric balancing account. The
audit was completed and submitted to the CPUC in October of 2001. On
August 17, 2001, SCW filed an application with the CPUC seeking recovery
of an average cost of $87 per MWh for electric energy purchased pursuant
to power purchase contracts with Mirant Americas Energy Marketing, LP and
Pinnacle West Capital Corporation. On February 8, 2002, a settlement
agreement among SCW, all intervening parties and the Office of Ratepayer
Advocates (ORA) was filed with the CPUC that will permit SCW to recover
$77 per MWh of purchased power costs through rates. SCW will only be
allowed to include up to a weighted annual energy purchase cost of $77
per MWh each year for 10 years in its balancing account. To the extent
SCWs actual average annual weighted cost for purchased power is less
than $77 per MWh, the differential will recover amounts included in the
electric supply balancing account. Conversely, to the extent that actual
average annual weighted costs for power purchased exceed the $77 per MWh
amount, SCW will not be able to include these amounts in its balancing
account and such amounts will be expensed against income. SCW has
established approximately $8.2 million in reserves as of June 30, 2002
against potential non-recovery of electric power costs. In addition, the
settlement extended the previously approved surcharges for an additional
five years to allow SCW an opportunity to collect amounts remaining in
its electric cost balancing account. Based on estimates, management
believes that continuation of the $0.022 per kilowatt-hour surcharge will
allow for full recovery of amounts included in the electric balancing
account. On July 17, 2002, the CPUC approved the settlement agreement,
with new tariffs in effect immediately thereafter. See the sections
entitled Liquidity and Capital Resources, Electric Energy Situation in
California, and Regulatory Matters included in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation for information on actions being taken by SCW to recover these
costs.

15



---



##### Table of Contents





|   |  | CCWC, subject to regulation by the Arizona Corporation Commission (ACC),
does not maintain balancing accounts and increases in costs are normally
recovered through general rate case applications.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|-- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|5. |  | On October 2000, AWR completed the acquisition of the common stock of
CCWC for an aggregate value of $31.2 million, including assumption of
approximately $12 million in debt. As of June 30, 2002, Registrant has
$12,285,000 in goodwill included in Other Property and Investments. The
amount represents the difference between the purchase price of the common
equity of CCWC and CCWCs book equity at the time of closing and was being
amortized over a period of 40 years. Registrant ceased amortization on
January 1, 2002 pursuant to the adoption of SFAS No. 142, Goodwill and
Other Intangible Assets, as discussed below. In 2001, $331,073 was
amortized against the goodwill.                                                                                                                                                                                                                                                                                                                                                                                                                       
|  
|   |  | In July 2001, the Financial Accounting Standards Board issued SFAS No.
141, Business Combinations, and SFAS No. 142, Goodwill and Other
Intangible Assets. SFAS No. 141 eliminated the pooling-of-interests
method of accounting, effective June 30, 2001. After that, all business
combinations must be recorded under the purchase method of accounting.
SFAS No. 142 primarily addresses the accounting for goodwill and
intangible assets subsequent to their initial recognition. The major
provisions of SFAS No. 142 (i) prohibit the amortization of goodwill and
indefinite-lived intangible assets, (ii) require that goodwill and
indefinite-lived intangibles assets be tested annually for impairment
(and in interim periods if certain events occur indicating that the
carrying value of goodwill and/or indefinite-lived intangible assets may
be impaired), (iii) require that reporting units be identified for the
purpose of assessing potential future impairments of goodwill, and (iv)
remove the forty-year limitation on the amortization period of intangible
assets that have finite lives.
|  
|   |  | On October 2000, AWR completed the acquisition of the common stock of
CCWC for an aggregate value of $31.2 million, including assumption of
approximately $12 million in debt. As of June 30, 2002, Registrant has
$12,285,000 in goodwill included in Other Property and Investments.
Registrants reporting units are generally consistent with the principal
business units identified in Note 6. The amount represents the
difference between the purchase price of the common equity of CCWC and
CCWCs book equity at the time of closing and was being amortized over a
period of 40 years. Registrant adopted the provisions of SFAS 142 on
January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|  
|   |  | SFAS No. 142 requires that goodwill be tested annually for impairment
using a two-step process. The first step is to identify a potential
impairment and, in transition, this step must be measured as of the
beginning of the fiscal year. The second step of the goodwill impairment
test measures the amount of the impairment loss, which is also measured
as of January 1, 2002, if any. Registrant completed this two-step
process in the first quarter ended March 31, 2002 and has determined that
no impairment of this goodwill exists. In 2001, $331,073 was amortized
against the goodwill. Registrant has ceased amortizing this goodwill,
effective January 1, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                     
|  
|   |  | The following table reflects Registrants net income and earnings per
share adjusted to amortizations for the three, six and twelve months
ended June 30, 2002, and 2001, respectively:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

16



---



##### Table of Contents



|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|--------------------------------------------- |  | -------------- | ----- | -------------- |  | -------------- | ----- | ---- |  | ---- | ----- | ---- |  | - | ----- | - |  | - | ------ | - |  | - | ------ | -
|                                              |  | Three Months   |       | Six Months     |  | Twelve Months 
|                                              |  | Ended June 30, |       | Ended June 30, |  | Ended June 30,
|                                              |  |                |       |                |  |               
|($000s except for earnings per share amounts) |  | 2002           |       | 2001           |  | 2002           |       | 2001 |  | 2002 |       | 2001
|                                              |  |                |       |                |  |                |       |      |  |      |       |     
|Earnings available for common shareholders:   |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Reported earnings                             |  | $              | 5,427 |                |  | $              | 5,032 |      |  | $    | 9,213 |      |  | $ | 8,128 |   |  | $ | 21,447 |   |  | $ | 19,357 |  
|Add back Goodwill amortization                |  |                |      |                |  |                | 83    |      |  |      |      |      |  |   | 166   |   |  |   | 166    |   |  |   | 230    |  
|Less: Tax                                     |  |                |      |                |  |                | (37   | )    |  |      |      |      |  |   | (75   | ) |  |   | (75    | ) |  |   | (104   | )
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Adjusted earnings                             |  | $              | 5,427 |                |  | $              | 5,078 |      |  | $    | 9,213 |      |  | $ | 8,219 |   |  | $ | 21,538 |   |  | $ | 19,483 |  
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Basic earnings per share:                     |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Reported basic earnings per share             |  | $              | 0.36  |                |  | $              | 0.33  |      |  | $    | 0.61  |      |  | $ | 0.54  |   |  | $ | 1.42   |   |  | $ | 1.30   |  
|Add amortization net of taxes                 |  |                |      |                |  |                | 0.01  |      |  |      |      |      |  |   |      |   |  |   |       |   |  |   | 0.01   |  
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Adjusted basic earnings per share             |  | $              | 0.36  |                |  | $              | 0.34  |      |  | $    | 0.61  |      |  | $ | 0.54  |   |  | $ | 1.42   |   |  | $ | 1.31   |  
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Diluted earnings per share:                   |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Reported diluted earnings per share           |  | $              | 0.35  |                |  | $              | 0.33  |      |  | $    | 0.60  |      |  | $ | 0.53  |   |  | $ | 1.40   |   |  | $ | 1.29   |  
|Add amortization net of taxes                 |  |                |      |                |  |                |      |      |  |      |      |      |  |   | 0.01  |   |  |   | 0.01   |   |  |   | 0.01   |  
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  
|Adjusted diluted earnings per share           |  | $              | 0.35  |                |  | $              | 0.33  |      |  | $    | 0.60  |      |  | $ | 0.54  |   |  | $ | 1.41   |   |  | $ | 1.30   |  
|                                              |  |                |       |                |  |                |       |      |  |      |       |      |  |   |       |   |  |   |        |   |  |   |        |  



|   |  | Registrant believes that it will be subject to the provisions of FASB No.
143 and is currently analyzing the impact that implementation of FASB No.
143, Accounting for Asset Retirement Obligations, might have on its
future financial statement presentation. The new rule requires businesses
to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the
carrying amount of the related long-lived asset. Over time, the liability
is accreted to its present value each period, and the capitalized cost is
depreciated over the useful life of the related asset. Upon settlement of
the liability, an entity either settles the obligation for its recorded
amount or incurs a gain or loss upon settlement. FASB No. 143 is
effective for fiscal years beginning after June 15, 2002.                                        
|-- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|  
|6. |  | AWR has three principal business units: water and electric distribution
units, through its SCW subsidiary, a water service utility operation
conducted through its Chaparral City Water Company (CCWC) unit, and a
non-regulated activity unit through the American States Utilities
Services, Inc. (ASUS) subsidiary. All activities of SCW currently are
geographically located within California. All activities of CCWC are
located in the state of Arizona. Both SCW and CCWC are regulated
utilities. On a stand-alone basis, AWR has no material assets other than
its investments in its subsidiaries. The tables below set forth
information relating to SCWs water and electric operating segments, CCWC,
and non-regulated businesses, consisting of ASUS and AWR corporate
expenses. Included in the amounts set forth, certain assets, revenues and
expenses have been allocated. The identifiable assets are net of
respective accumulated provisions for depreciation.

17



---



##### Table of Contents



|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |      |   |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | ---- | - |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 47,068  |          |  | $     | 3,839  |              |  | $   | 1,697  |  |  | $ | 198  |   |  | $ | 52,802  | 
|Operating income
before income taxes |  |                                          | 13,824  |          |  |       | 232    |              |  |     | 602    |  |  |   | (637 | ) |  |   | 14,021  | 
|Identifiable assets                  |  |                                          | 494,807 |          |  |       | 27,367 |              |  |     | 28,580 |  |  |   |     |   |  |   | 550,754 | 
|Depreciation expense                 |  |                                          | 3,943   |          |  |       | 367    |              |  |     | 228    |  |  |   |     |   |  |   | 4,538   | 
|Capital additions                    |  | $                                        | 11,740  |          |  | $     | 587    |              |  | $   | 252    |  |  | $ |     |   |  | $ | 12,579  | 

|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |     |  |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | --- |  |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 44,834  |          |  | $     | 3,176  |              |  | $   | 1,661  |  |  | $ | 199 |  |  | $ | 49,870  | 
|Operating income
before income taxes |  |                                          | 13,345  |          |  |       | (953   | )            |  |     | 696    |  |  |   | 50  |  |  |   | 13,138  | 
|Identifiable assets                  |  |                                          | 467,143 |          |  |       | 26,766 |              |  |     | 28,783 |  |  |   |    |  |  |   | 522,692 | 
|Depreciation expense                 |  |                                          | 3,821   |          |  |       | 362    |              |  |     | 310    |  |  |   |    |  |  |   | 4,493   | 
|Capital additions                    |  | $                                        | 11,128  |          |  | $     | 497    |              |  | $   | 86     |  |  |   |    |  |  | $ | 11,711  | 

|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |        |   |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 84,802  |          |  | $     | 9,045  |              |  | $   | 3,054  |  |  | $ | 386    |   |  | $ | 97,287  | 
|Operating income
before income taxes |  |                                          | 24,005  |          |  |       | 1,052  |              |  |     | 922    |  |  |   | (1,027 | ) |  |   | 24,952  | 
|Identifiable assets                  |  |                                          | 494,807 |          |  |       | 27,367 |              |  |     | 28,580 |  |  |   |       |   |  |   | 550,754 | 
|Depreciation expense                 |  |                                          | 7,916   |          |  |       | 735    |              |  |     | 455    |  |  |   |       |   |  |   | 9,106   | 
|Capital additions                    |  | $                                        | 19,872  |          |  | $     | 967    |              |  | $   | 382    |  |  |   |       |   |  | $ | 21,221  | 

|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |     |  |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | --- |  |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 79,639  |          |  | $     | 7,133  |              |  | $   | 3,001  |  |  | $ | 388 |  |  | $ | 90,161  | 
|Operating income
before income taxes |  |                                          | 21,651  |          |  |       | 314    |              |  |     | 1,014  |  |  |   | 95  |  |  |   | 23,074  | 
|Identifiable assets                  |  |                                          | 467,143 |          |  |       | 26,766 |              |  |     | 28,783 |  |  |   |    |  |  |   | 522,692 | 
|Depreciation expense                 |  |                                          | 7,634   |          |  |       | 722    |              |  |     | 621    |  |  |   |    |  |  |   | 8,977   | 
|Capital additions                    |  | $                                        | 22,187  |          |  | $     | 1,062  |              |  | $   | 216    |  |  |   |    |  |  | $ | 23,465  | 

|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |        |   |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | ------ | - |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 180,368 |          |  | $     | 17,163 |              |  | $   | 6,322  |  |  | $ | 788    |   |  | $ | 204,641 | 
|Operating income
before income taxes |  |                                          | 56,390  |          |  |       | (3,203 | )            |  |     | 1,824  |  |  |   | (1,062 | ) |  |   | 53,949  | 
|Identifiable assets                  |  |                                          | 494,807 |          |  |       | 27,367 |              |  |     | 28,580 |  |  |   |       |   |  |   | 550,754 | 
|Depreciation expense                 |  |                                          | 15,546  |          |  |       | 1,459  |              |  |     | 1,075  |  |  |   |       |   |  |   | 18,080  | 
|Capital additions                    |  | $                                        | 45,127  |          |  | $     | 2,161  |              |  | $   | 717    |  |  |   |       |   |  | $ | 48,005  | 

|                                     |  |                                          |         |          |  |       |        |              |  |     |        |  |  |   |     |  |  |   |         | 
|------------------------------------ |  | ---------------------------------------- | ------- | -------- |  | ----- | ------ | ------------ |  | --- | ------ |  |  | - | --- |  |  | - | ------- | 
|                                     |  | For The Three Months Ended June 30, 2002
|                                     |  |                                         
|                                     |  | SCW                                      |         |          |  |       |        |              |  |     |        |  |  |  
|                                     |  |                                          |         | CCWC     |  | Non-  |        | Consolidated
|(dollars in thousands)               |  | Water                                    |         | Electric |  | Water |        | Regulated    |  | AWR
|                                     |  |                                          |         |          |  |       |        |              |  |    
|Operating revenues                   |  | $                                        | 170,493 |          |  | $     | 14,331 |              |  | $   | 4,267  |  |  | $ | 853 |  |  | $ | 189,944 | 
|Operating income
before income taxes |  |                                          | 46,730  |          |  |       | 2,705  |              |  |     | 1,312  |  |  |   | 320 |  |  |   | 51,067  | 
|Identifiable assets                  |  |                                          | 467,143 |          |  |       | 26,766 |              |  |     | 28,783 |  |  |   |    |  |  |   | 522,692 | 
|Depreciation expense                 |  |                                          | 14,412  |          |  |       | 1,422  |              |  |     | 874    |  |  |   |    |  |  |   | 16,708  | 
|Capital additions                    |  | $                                        | 45,686  |          |  | $     | 2,453  |              |  | $   | 413    |  |  |   |    |  |  | $ | 48,552  | 

18



---



##### Table of Contents






Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operation

Forward-Looking Information

Certain matters discussed in this report (including the documents
incorporated herein by reference) are forward-looking statements intended to
qualify for the safe harbor from liability established by the Private
Securities Litigation Reform Act of 1995. These forward-looking statements can
generally be identified as such because the context of the statement will
include words such as Registrant believes, anticipates, expects or words
of similar import. Similarly, statements that describe Registrants future
plans, objectives, estimates or goals are also forward-looking statements. Such
statements address future events and conditions concerning capital
expenditures, earnings, litigation, rates, water quality, regulatory matters,
adequacy of water supplies, the California energy crisis, liquidity and capital
resources, opportunities related to operations and maintenance of water systems
owned by governmental entities and other utilities and providing related
services, and accounting matters. Actual results in each case could differ
materially from those currently anticipated in such statements, by reason of
factors such as utility restructuring, including ongoing local, state and
federal activities; future economic conditions, including changes in customer
demand and changes in water and energy supply cost; future climatic conditions;
litigation developments; and legislative, regulatory and other circumstances
affecting anticipated revenues and costs. See the section entitled Risk
Factors for more information.

General

American States Water Company (AWR), incorporated in 1998, is engaged in
the business of holding, for investment, the stock primarily of utility
companies. AWRs principal investment is the stock of Southern California Water
Company (SCW). SCW is a California public utility company engaged principally
in the purchase, production, distribution and sale of water (SIC No. 4941). SCW
also distributes electricity in one customer service area (SIC No. 4911). SCW
is regulated by the Public Utilities Commission of the State of California
(CPUC) and was incorporated on December 31, 1929. SCW is organized into three
water service regions and one electric customer service area operating within
75 communities in 10 counties in the State of California and provides water
service in 21 customer service areas. Region I incorporates 7 customer service
areas in northern and central California; Region II has 4 customer service
areas located in Los Angeles County; Region III incorporates 10 water customer
service areas in eastern Los Angeles County, and in Orange, San Bernardino and
Imperial counties. SCW also provides electric service to the City of Big Bear
Lake and surrounding areas in San Bernardino County through its Bear Valley
electric service division.

SCW served 247,950 water customers and 21,900 electric customers at June
30, 2002, or a total of 269,850 customers, compared with 267,304 total
customers at June 30, 2001.

SCWs utility operations exhibit seasonal trends. Although SCWs water
utility operations have a diversified customer base, revenues derived from
commercial and residential water customers accounted for approximately 85.8%,
89.7% and 90.9% of total water revenues for the three, six and twelve months
ended June 30, 2002, respectively, as compared to 85.1%, 90.4% and 91.2% for
the three, six and twelve months ended June 30, 2001, respectively.

AWR also owns two other subsidiaries. American States Utility Services,
Inc. (ASUS) contracts to lease, operate and maintain water and wastewater
systems owned by others and to provide related services, such as billing and
meter reading, to approximately 90,000 accounts. Chaparral City Water Company
(CCWC) is an Arizona public utility company serving 11,656 customers as of June
30, 2002, compared with 11,342 customers at June 30, 2001, in the town of
Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. The
Arizona Corporation Commission (ACC) regulates CCWC.

19



---



##### Table of Contents



Neither AWR nor ASUS is directly regulated by either the CPUC or the ACC.

Results of Operation

Basic earnings per common share for the three months ended June 30, 2002
increased by 9.1% to $0.36 per share as compared to $0.33 per share for the
comparable period last year. As compared to the six months ended June 30, 2001,
basic earnings increased by 13.0% to $0.61 per share from $0.54 per share.
Basic earnings per common share for the twelve months ended June 30, 2002 also
increased by 9.2% to $1.42 per share from $1.30 per share as compared to the
twelve months ended June 30, 2001. The increases in the recorded results
primarily reflect the impact of various rate increases authorized by the Public
Utilities Commission of the State of California (CPUC) for SCW, additional
revenues generated by CCWC, improvement in operating margins and, to some
extent Registrants Cash Preservation Plan (CPP) as discussed below. Earnings
per shares reflect the three-for-two split of Registrants common stock to
holders of record on May 15, 2002.

Fully diluted earnings for the three, six and twelve months ended June 30,
2002 were $0.35, $0.60 and $1.40 per share, respectively, as compared to $0.33,
$0.53 and $1.29 per share for the comparable periods of 2001. For further
information, see the section entitled Liquidity and Capital Resources
included in Part I, Item 2 in Managements Discussion and Analysis of Financial
Condition and Results of Operation.

As compared to the three and six months ended June 30, 2001, revenues from
water operations increased by 4.9% and 6.3%, respectively, for the same periods
ended June 30, 2002. The increases were due to consumption increases of 4.8%
and 4.3%, respectively, and various increases in rates authorized by the CPUC.
Step increases in the customer service areas that comprise SCWs Region I were
effective January 1, 2002. The six-month comparison is also affected by the
fact that attrition increases for the customer service areas that comprise
SCWs Region II were not effective until January 27, 2001 and rate increases to
recover increased electric power costs incurred for pumping of water were also
not in effect until after the first quarter of 2001. For the twelve months
ended June 30, 2002, revenues from water operations increased by 6.8% over the
twelve months ended June 30, 2001 reflecting various rate increases effective
at several of SCWs customer service areas as well as an additional $2.1
million in revenues generated by CCWC. See the section entitled Regulatory
Matters included in Part I, Item 2 in Managements Discussion and Analysis of
Financial Condition and Results of Operation for more information.

Revenues from electric operations increased by 20.9%, 26.8% and 19.8%,
respectively, for the three, six and twelve months ended June 30, 2002 as
compared to the same periods ended June 30, 2001. The increases reflect a rate
increase of 12.5% effective May 24, 2001 and an additional 14.8% increase
effective August 23, 2001 authorized by the CPUC to recover previously
under-collected energy costs. The six-month increases in electric revenues also
reflect a 2% increase in sales due to higher utilization of snow making
machines at ski resorts in the area during the first quarter this year. The
twelve-month increase in revenues from electric operations was partially offset
by a decrease of 3.3% in usage for the twelve months ended June 30, 2002 due to
energy conservation efforts by all classes of customers in 2001. See the
section entitled Regulatory Mattersand Electric Energy Situation in
Californiaincluded in Part I, Item 2 in Managements Discussion and Analysis
of Financial Condition and Results of Operation for more information.

Purchased water costs increased by 0.8% and 6.8%, respectively, for the
three and six months ended June 30, 2002 as compared to the same periods ending
in 2001 due to increases in the volume of purchased water, partially offset by
decreased amortization of leased water rights in the second quarter of 2002.
During the periods, additional purchased water was necessary to replace supply
lost due to wells being removed from service as a result of water quality
issues and mechanical problems, particularly in

20



---



##### Table of Contents



SCWs Orange County and San Dimas customer service areas. As compared to
the twelve months ended June 2001, purchased water costs decreased by 2.7%
reflecting a decrease in the amortization of leased water rights as well as
refunds received from Registrants wholesale water suppliers in December 2001
of approximately $770,000, partially offset by an increase in purchased water
volume in Registrants supply mix as discussed. There was no similar refund in
the twelve months ended March 2001.

Cost of power purchased for pumping increased by 30.0%, 29.6% and 34.5%
for the three, six and twelve months ended June 30, 2002, respectively, due to
the rate increases implemented in the first quarter of 2001 by SCWs energy
suppliers, in particular Southern California Edison and Pacific Gas and
Electric Company. In 2001, the CPUC approved SCWs Advice Letters to increase
revenues by approximately $1.4 million annually to recover the costs of
purchased power for certain of its water ratemaking districts. For further
information, see the sections entitled Regulatory Matters and Electric
Energy Situation in California included in Part I, Item 2 in Managements
Discussion and Analysis of Financial Condition and Results of Operation. The
twelve-month comparison was also impacted by the inclusion of approximately
$261,000 in costs for power purchased to pump water at Registrants CCWC unit.

Costs of power purchased for resale to customers in SCWs Bear Valley
Electric division increased by 110.8% and 12.7%, respectively, for the three
and twelve months ended June 30, 2002, and decreased by 0.2% for the six months
ended June 30, 2002. The variances were due primarily to (i) additional
accruals of $2.2 million for purchased power costs based on adjusted invoices
received in April of 2002 from Dynegy Power Marketing, Inc. for purchased power
incurred during prior periods, (ii) a one-time sale of energy on the spot
market, resulting from a one-month overlap of energy purchase agreements, that
generated a $644,000 gain in April 2001, and (iii) significant reductions in
wholesale market prices for energy in the State of California during the first
two quarters of 2002. As compared to the average cost of approximately $0.17
per kilowatt-hour for the six months ended June 30, 2001, costs for the six
months ended June 30, 2002 averaged approximately $0.12 per Kwh. For further
information, see the sections entitled Liquidity and Capital Resources,
Regulatory Matters and Electric Energy Situation in California included in
Part I, Item 2 in Managements Discussion and Analysis of Financial Condition
and Results of Operation.

Groundwater production assessments for the three months ended June 30,
2002 decreased by 7.8% as costs were partially offset by revenues from leases
of unused water rights to third parties in Registrants Barstow customer
service area. For the six and twelve months ended June 30, 2002, groundwater
production assessments increased by 4.9% and 5.6%, respectively as compared to
the same periods in 2001 reflecting increased sales volumes provided from
pumped water sources, increased groundwater production assessments, and a
one-time adjustment made in the first quarter of 2002 to account for a
retroactive billing by water purveyors for rate increases effective July of
2001, offset partially by the leases of unused water rights as mentioned.

A positive entry for the provision for supply cost balancing accounts
reflects recovery of previously under-collected supply costs. Conversely, a
negative entry for the provision for supply cost balancing accounts reflects an
under-collection of previously incurred supply costs. The negative entries for
2001 and 2002 primarily reflect untimely-recovery of electric power costs
discussed previously. At June 30, 2002, Registrant had a combined net
under-collected position of $31.6 million in both its water and electric
balancing accounts primarily due to the increases in energy costs. For further
information, see the sections entitled Accounting for Supply Costs,
Liquidity and Capital Resources, Regulatory Matters and Electric Energy
Situation in California included in Part I, Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operation.

Other operating expenses decreased by 7.9%, 8.2% and 4.1%, respectively,
for the three, six and twelve months ended June 30, 2002 as compared to the
same periods of last year. The decreases were

21



---



##### Table of Contents



primarily due to a refund for a sewer service overpayment, a payment
received during the second quarter from one of the settling parties as part of
clean-up efforts in San Gabriel basin to meet water quality compliance, and a
decrease in the accrual for bad debt during the first quarter of 2002. The
twelve-month comparison reflected additional costs related to the inclusion of
CCWC.

Administrative and general expenses increased by 6.0% for the six months
ended June 30, 2002 reflecting an increase in the accrual for pension plan
expense, an accrual for payroll expense deferred pursuant to the CPP
implementation, and outside service expenses at Registrants ASUS unit. For
the three months ended June 30, 2002, expense decreased slightly by 0.6% due to
the reserves booked from April 2001 for potential non-recovery of electric
power costs as discussed below, offset by the increases impacting the six-month
comparison. As compared to the twelve months ended June 30, 2001, the
administrative and general expense increased by 21.2% primarily due to the
accrual of $6.6 million in reserves booked during the period for potential
non-recovery of electric power costs incurred to serve customers at SCWs Bear
Valley Electric customer service area. The reserves, $8.2 million in total,
were established to offset future impacts to earnings for the difference
between the authorized rates and SCWs actual costs under its energy purchase
agreements. For further information, see the sections entitled Regulatory
Matters and Electric Energy Situation in Californiain Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

Depreciation expense increased by 1.0% and 1.4%, respectively, for the
three and six months ended June 30, 2002 reflecting, among other things, the
effects of recording approximately $50 million in capital additions at SCW
during 2001, depreciation on which began in January 2002. The comparisons were
also impacted by the elimination, effective January 1, 2002, of amortization of
the goodwill recorded in Registrants acquisition of CCWC. For further
information, see Notes 6 and 7 of the Notes to Financial Statementsincluded in
Part I, Item 1 in Financial Statements. Depreciation expense increased by 8.2%
for the twelve months ended June 30, 2002 as compared to the twelve months
ended June 30, 2001 due to plant additions, additional depreciation associated
with utility plant at Registrants CCWCs unit, and amortization of goodwill as
discussed previously.

As compared to the six and twelve months ended June 30, 2001, maintenance
expense decreased by 5.0% and 10.7%, respectively, due primarily to the
implementation of Registrants CPP in April 2001. The CPP was implemented to
control costs and temporarily limit capital and maintenance expenditures
principally to those projects that were believed necessary to meet public
safety and health requirements or otherwise provide for continued service
pending CPUC approval of rate increases that would permit SCW to begin recovery
of power costs incurred during the California energy crisis. The CPP impacted
both the electric and water businesses of SCW. For the three months ended June
30, 2002, maintenance expense increased by 5.2% principally for projects
necessary to be carried out to meet public safety and health requirements. For
further information, see the sections Electric Energy Situation in California
and Regulatory Matters included in Part I, Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operation.

Taxes on income increased by 0.2% and 4.5%, respectively, as compared to
the three and six months ended June 30, 2001, and decreased by 3.5% for the
twelve months ended June 30, 2002. The variances were due to an increase in
pre-tax operating income of 5.4%, 6.9% and 4.1%, respectively, for the
comparable periods ended June 30, 2002, offset partially by lower effective tax
rates. The twelve-month comparison was also affected by a one-time adjustment
recorded in December 2001 to true up 2000 taxes.

Other taxes increased by 5.6%, for the three months ended June 30, 2002
reflecting additional property taxes accrued in the second quarter reflecting
higher assessed values. For the six months ended June 30, 2002, other taxes
increased by 1% due to the mentioned increases in property taxes, partially
offset by lower payroll taxes due to company-wide hiring freeze pursuant to CPP
implemented from

22



---



##### Table of Contents



April 2001. The twelve-month comparison also reflected additional
property and payroll taxes at CCWC.

As compared to the three, six and twelve months ended June 30, 2001,
respectively, the change in other income for the same periods ended June 30,
2002 reflects the sale of a parcel of non-operating property in SCWs
Metropolitan customer service area in the first quarter of 2002 and one-time
reclassification of income taxes on connection fees to this category during the
second quarter. The twelve-month comparison was also impacted by the write-off
of expenses associated with the termination of the acquisition of Peerless
Water Company in the fourth quarter of 2001.

Interest expense increased by 9.8%, 10.6% and 9.4%, respectively, for the
three, six and twelve months ended June 30, 2002 as compared to the same
periods ended June 30, 2001. The increases reflected the issuance of $50
million in long-term debt by SCW in December 2001, partially offset by a
reduction in short-term borrowing. The twelve-month comparison was also
impacted by the issuance of $20 million in long-term debt by SCW in January
2001, and the inclusion of long-term debt at Registrants CCWC unit.

Accounting for Supply Costs

As permitted by the CPUC, SCW has historically maintained water and
electric supply balancing accounts to account for under-collections and
over-collections of revenues designed to recover such costs. Costs have been
recorded in income and charged to balancing accounts when such costs were
incurred. The balancing accounts were reversed when such costs were recovered
through rate adjustments or through refunds of previously incurred costs. SCW
accrued interest on its supply cost balancing accounts at the rate prevailing
for 90-day commercial paper. CCWC does not maintain a supply cost balancing
account.

On November 29, 2001, the CPUC ordered water utilities with existing water
supply balancing accounts to cease booking amounts to such accounts. In its
place, water utilities are now required to establish a memorandum account that
works in a manner similar to the balancing account. As a result, the income
statements of SCW will no longer include entries reflecting differences between
actual unit water supply costs included in rates and actual water supply costs.
SCW will not be entitled to recover any deferred costs for providing water
service unless it is within its general rate case cycle and is earning less
than its authorized rate of return on a weather normalized basis. As a result,
any changes in water supply costs as well as any future authorized revenue
increases for supply expenses may directly impact earnings. SCW may not be able
to recover the under-collection of supply costs if it is earning a rate of
return in excess of that allowed. SCW had a net under-collection position of
$3.1 million in its water supply balancing account at June 30, 2002 related to
pre-November 29, 2001 activities. Of this amount, approximately $1 million is
currently included in rates. SCW anticipates recovering the remaining amount
as part of a rate case filing planned for the third quarter of 2002.

Electric power costs incurred by SCWs Bear Valley Electric division will
continue to be charged to a balancing account. Resulting from the
unanticipated and dramatic increases in electricity prices since the fourth
quarter of 2000, the amount of the under-collection in the electric balancing
account has increased from $2.8 million at December 31, 1999, to $8.6 million
at December 31, 2000, to $22.4 million at December 31, 2001, and $28.6 million
at June 30, 2002. On July 17, 2002, the CPUC approved a settlement agreement
among SCW, all intervening parties and the Office of Ratepayer Advocates, which
allows SCW to recover up to a weighted annual energy purchase cost of $77 per
megawatt hour each year for 10 years in its balancing account. For further
information, see the sections entitled Regulatory Matters and Electric
Energy Situation in California included in Part I, Item 2 in Managements
Discussion and Analysis of Financial Condition and Results of Operation.

23



---



##### Table of Contents



Critical Accounting Policies

Critical accounting policies are those that are important to the portrayal
of the financial condition and results of Registrant, and require the most
difficult, subjective or complex judgments of management. The need to make
estimates about the effect of items that are uncertain is what makes these
judgments difficult, subjective and/or complex. Management makes subjective
judgments about the accounting and regulatory treatment of many items. The
following are examples of accounting policies that are critical to the
financial statements of Registrant. For more information regarding the
significant accounting policies of Registrant, see Notes to Financial
Statementsin Part 1, Item 1.

Management believes that regulation and the effects of regulatory
accounting have the most significant impact on the financial statements. When
Registrant files for adjustment to rates, capital assets, operating costs and
other matters are subject to review, and disallowances could occur. Regulatory
disallowances in the past have not been frequent but have on occasion
significantly impacted Registrants results of operations.



| |  |  | Water and electric operations of Registrant in the State of
California are subject to regulation by the CPUC and, in the State of
Arizona the ACC regulates the water operations of Registrant. The
accounting policies of Registrant conform to generally accepted
accounting principles applicable to rate-regulated enterprises and
reflect the effects of the ratemaking process. As such, Registrant is
allowed to defer as regulatory assets, certain costs that otherwise
would have been expensed if it is probable future recovery from
customers will occur. If rate recovery is no longer probable, due to
competition or the actions of regulators, Registrant would be required
to write off the related regulatory asset.                                                                                                                                                                                                              
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Registrants income tax calculations require estimates due
principally to the regulated nature of its operations, the multiple
states in which Registrant operates, and potential future tax rate
changes. Registrant uses the asset and liability method of accounting
for income taxes under which deferred tax assets and liabilities are
recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are
expected to be recovered or settled. A change in the regulatory
treatment, or significant changes in tax-related estimates or
assumptions, could have a material impact on the financial position and
results of operations of Registrant.
|
| |  |  | Depreciation is computed at composite rates considered sufficient
to amortize costs over the estimated remaining lives of assets.
Depreciation studies are performed periodically and prospective changes
in rates are estimated to make up for past differences. These studies
are reviewed and approved by either the CPUC or the ACC. Changes in
estimates of depreciable lives or changes in depreciation rates
mandated by regulations could impact results of operations of
Registrant in periods subsequent to the change.                                                                                                                                                                                                                                                                                                                                                                                                                    
|
| |  |  | As prescribed by the CPUC under its Uniform System of Accounts for
Water Utilities, SCW is allowed to capitalize a portion of general
costs such as engineering, supervision, general office salaries and
expenses, legal expenses, insurance, injuries and damages, pensions and
benefits, taxes and allowance for funds used during construction, as
overhead construction costs included in Registrants Utility Plant.
All overhead construction costs are charged to jobs on the basis of the
amounts of such overheads reasonably applicable thereto, so that each
job bears its equitable proportion of such costs and its direct costs.                                                                                                                                                                                                                                                                                                      

24



---



##### Table of Contents



Liquidity and Capital Resources

AWR

AWR funds its operating expenses and pays dividends on its outstanding
Common Shares primarily through dividends from its subsidiaries, principally
SCW. AWR has a Registration Statement on file with the Securities and Exchange
Commission (SEC) for issuance, from time to time, of up to $60 million in
Common Shares, Preferred Shares and/or debt securities. As of June 30, 2002,
approximately $31.1 million remained for issuance under this Registration
Statement. During 2001, AWR maintained a $25 million credit facility, $20
million of which was outstanding at December 31, 2001. This credit facility
expired on January 2, 2002. In June 2002, AWR secured a 3-year syndicated
credit facility of $75 million. The revolving facility, which matures in June
2005, will be utilized to fund AWR and all of its subsidiaries as needed. As of
June 30, 2002, $13 million was then outstanding, all of which was used to fund
SCWs operations. On April 19, 2002, AWR completed the redemption of all of its
outstanding 4%, 4-1/4% and 5% series of preferred shares.

SCW

SCW funds the majority of its operating expenses, payments on its debt,
and dividends on its outstanding Common Shares through internal sources.
Internal sources of cash flow are provided primarily by retention of a portion
of earnings, amortization of deferred charges and depreciation expense.
Internal cash generation is influenced by factors such as weather patterns,
environmental regulation, litigation, changes in supply costs, and timing of
rate relief. For further information, see the sections entitled Risk Factors
and Electric Energy Situation in California included in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

SCW also relies on external sources, including equity investments from
AWR, long-term debt, contributions-in-aid-of-construction, advances for
construction and install-and-convey advances, to fund the majority of its
construction expenditures. In January 2001, SCW issued $20 million of long-term
debt in a public offering with the proceeds used to reduce then outstanding
bank borrowing. On March 30, 2001, AWR made an additional $25 million equity
investment in SCW. On November 14, 2001, SCW filed a Registration Statement
with the SEC for issuance, from time to time, of up to $100 million in debt
securities. In December 2001, SCW issued $50 million of long-term debt under
this Registration Statement that initially reduced bank borrowing incurred to
fund capital expenditures and power purchase costs.

CCWC

CCWC funds the majority of its operating expenses, payments on its debt
and dividends, if any, through internal sources. CCWC also relies on external
sources, including long-term debt, contributions-in-aid-of-construction,
advances for construction and install-and-convey advances, to fund the majority
of its construction expenditures.

ASUS

ASUS funds its operating expenses primarily through contractual management
fees.

Contractual Obligations and Other Commitments

In addition to contractual maturities, Registrant has certain debt
instruments that contain annual sinking fund or other principal payments.
Registrant believes that it will be able to refinance debt

25



---



##### Table of Contents



instruments at their maturity through public issuance, or private
placement, of debt or equity. Annual principal payments are generally made from
cash flow from operations.

The following table reflects Registrants contractual obligations and
commitments to make future payments pursuant to contracts as of June 30, 2002.
All obligations and commitments are obligations and commitments of SCW unless
otherwise noted.

|                                |  |                                        |          |        |  |           |  |           |        |         |  |        |  |       |         | 
|------------------------------- |  | -------------------------------------- | -------- | ------ |  | --------- |  | --------- | ------ | ------- |  | ------ |  | ----- | ------- | 
|                                |  | Payments/Commitments Due by Period (1)
|                                |  |                                       
|                                |  |                                        |          |        |  | Less than |  |           |        |         |  |        |  | After
|($ in thousands)                |  | Total                                  |          | 1 Year |  | 1-3 Years |  | 4-5 Years |        | 5 Years
|                                |  |                                        |          |        |  |           |  |           |        |        
|Notes/Debentures(2)             |  |                                        | $185,595 |        |  |          |  | $         | 12,500 |         |  |       |  | $     | 173,095 | 
|Private Placement Notes(3)      |  |                                        | 28,000   |        |  |          |  |           |       |         |  |       |  |       | 28,000  | 
|Tax-Exempt Obligations(4)       |  |                                        | 20,726   |        |  | 87        |  |           | 285    |         |  | 218    |  |       | 20,136  | 
|Other Debt Instruments(5)       |  |                                        | 2,557    |        |  | 174       |  |           | 584    |         |  | 451    |  |       | 1,348   | 
|Other Commitments(6)            |  |                                        | 76,796   |        |  |          |  |           |       |         |  |       |  |       |        | 
|Chaparral City Water Company(7) |  |                                        | 9,254    |        |  | 499       |  |           | 1,684  |         |  | 620    |  |       | 6,451   | 
|TOTAL                           |  |                                        | $322,928 |        |  | $760      |  | $         | 15,053 |         |  | $1,289 |  | $     | 229,030 | 
|                                |  |                                        |          |        |  |           |  |           |        |         |  |        |  |       |         | 



---

|(1) |  | Excludes interest, dividends, commitment and facility fees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(2) |  | The Notes and Debentures are issued under an Indenture dated as of
September 1, 1993. The Notes and Debentures do not contain any financial
covenants that Registrant believes to be material or cross default provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|   
|   
|   
|   
|(3) |  | The private placement notes are issued pursuant to the terms of Note
Agreements with substantially similar terms. The Note Agreements contain
restrictions on the payment of dividends, minimum interest coverage
requirements, maximum debt to capitalization ratio and a negative pledge.
Pursuant to the Note Agreements, SCW must maintain a minimum interest coverage
ratio of two times interest expense. SCW does not currently have any
outstanding mortgages or other encumbrances on its properties. For further
information on the dividend restrictions, see discussion included in Part II,
Item 2 in Changes in Securities.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|   
|   
|   
|   
|(4) |  | Consists of obligations under a loan agreement supporting $8 million in
debt issued by the California Pollution Control Financing Authority, $6 million
in obligations supporting $6 million in certificates of participation issued by
the Three Valleys Municipal Water District and $7 million of obligations
incurred by SCW with respect to its 500 acre foot entitlement to water from the
State Water Project (SWP). Except as described below, these obligations do not
contain any financial covenants believed to be material to Registrant or any
cross default provisions. SCWs obligations with respect to the certificates of
participation issued by the Three Valleys Municipal Water District are
supported by a letter of credit issued by Bank of America. SCW intends to
replace this letter of credit in November 2002. In regards to the obligations
incurred to its SWP entitlement, SCW has entered into an agreement with a
developer for committing 350 acre-feet of its entitlement to water from the
SWP. For further information, see the section entitled Regulatory
Matters-Disallowance of Costsincluded in Part I, Item 2 in Managements
Discussion and Analysis of Financial Condition and Results of Operation.
|   
|   
|   
|   
|(5) |  | Consists of $1.6 million outstanding under a fixed rate obligation incurred
to fund construction of water storage and delivery facilities with the Three
Valleys Municipal Water District, $0.6 million outstanding under a variable
rate obligation incurred to fund construction of water delivery facilities with
the Three Valleys Municipal Water District and an aggregate of $0.4 million
outstanding under capital lease obligations. These obligations do not contain
any financial covenants believed to be material to Registrant or any cross
default provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

26



---



##### Table of Contents



|(6) |  | Other commitments consist of (i) $75 million syndicated revolving credit
facility, expiring in June 2005, (ii) a $966,534 irrevocable letter of credit
that expires in April 2003 for its self-insured workers compensation plan,
(iii) an amount of $296,000 with respect to a $6,296,000 irrevocable letter of
credit issued by Bank of America to support the certificates of participation
of Three Valleys Municipal Water District (the other $6,000,000 is reflected
under tax-exempt obligations), (iv) an irrevocable letter of credit in the
amount of $250,000 that expires on October 1, 2002 for the deductible in
Registrants business automobile insurance policy (v) an irrevocable letter of
credit that expires June 30, 2005 for its energy scheduling agreement with
Automated Power Exchange; the amount of the credit is $585,000 for the months
from November to March, and $270,000 to cover the months from April to October,
and (vi) outstanding performance bonds of $14,790 to secure performance under
franchise agreements with governmental agencies. The syndicated revolving
credit facility contains restrictions on prepayments, deposition of property,
mergers, liens and negative pledges, indebtedness and guaranty obligations,
transactions with affiliates, minimum interest coverage requirements, a maximum
debt to capitalization ratio, and a minimum debt rating. Pursuant to the
Credit Agreement, AWR must maintain a minimum interest coverage ratio of 3.25
interest expense, a maximum total funded debt ratio of 0.65 to 1.00 and a
minimum debt rating of Baa1 or BBB+.
|--- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|   
|   
|   
|(7) |  | Consists of $8.1 million of obligations under a loan agreement supporting
Industrial Development Revenue Bonds due in 2006 and a $1.1 million repayment
obligation to the United States Bureau of Reclamation. The loan agreement
contains provisions that establishes a maximum of 65% debt in the capital
structure, limits cash distributions when the percentage of debt in the capital
structure exceeds 55% and requires a debt service coverage ratio of two times.
The Bureau of Reclamation obligation does not contain any financial covenants
believed to be material to Registrant or any cross default provisions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                

Under the terms of its power purchase contracts with Mirant Americas Energy
Marketing, LP and Pinnacle West Capital Corporation, SCW is required to post
security, at the request of the seller, if SCW is in default under the terms of
the contract and the future value of the contract is greater than the future
value of contracts of a similar term on the date of default. SCW will be in
default under the terms of these contracts if its debt is rated less than BBB-
by Standard & Poors Ratings Service (S&P) or Fitch, Inc. (Fitch) or less
than Baa3 by Moodys Investor Services, Inc (Moodys). SCW currently has a
rating of A+ by S & P and A2 by Moodys. Fitch does not rate SCW.

S&P debt ratings range from AAA (highest rating possible) to D (obligation is
in default). Moodys debt ratings range from Aaa (best quality) to C (lowest
quality). Securities ratings are not recommendations to buy, sell or hold a
security and are subject to change or withdrawal at any time by the rating
agency.

Electric Energy Situation in California

Background Information

The electric energy environment in California has changed as a result of
the December 1995 CPUC decision on restructuring of Californias electric
utility industry and state legislation passed in 1996. On September 23, 1996,
the State of California enacted legislation to provide a transition to a
competitive market structure, which was expected to provide competition and
customer choice, beginning January 1, 1998, with all consumers ultimately
participating by 2002. SCWs Bear Valley electric customer service area was
exempted by the CPUC from compliance with most of the provisions of the CPUC
order and the state legislation.

On January 17, 2001, the Governor of the State of California proclaimed a
state of emergency in California due to shortages of electricity available to
certain of Californias utilities (resulting in blackouts), the unanticipated
and dramatic increases in electricity prices and the insufficiency of

27



---



##### Table of Contents



electricity available from certain of Californias utilities to prevent
disruption of electric service in California. The Federal Energy Regulatory
Commission (FERC) also implemented a number of changes to the tariff for the
California Independent Operator System (Cal ISO) beginning in December 15,
2000 in an attempt to stabilize the market. The reasons for the high cost of
energy are under investigation but are reported to include, among other things,
limited supply caused by a lack of investment in new power plants to meet
growth in demand, planned and unplanned outages of power plants, decreased
availability of hydroelectric power from the Pacific Northwest due to lower
than usual precipitation and higher demand for electricity in the region,
transmission line constraints, increased prices for natural gas, the fuel used
in many of the power plants serving the region, and a dysfunctional power
market.

On July 17, 2002, the FERC extended and modified the mitigation measures
that were set to expire on September 30, 2002, citing delays in construction of
new generation resources in California and throughout the West, delays in
adopting a new market design and market rules by the Cal ISO, transmission line
constraints, constraints on natural gas pipeline capacity and a dysfunctional
power market. It remains unclear how long the FERC will leave its mitigation
measures in place. The premature termination of such mitigation measures could
result in a substantial increase in spot market prices and the prices of
long-term contracts for power and capacity. In addition, FERC has proposed a
number of market reforms, such as the imposition of an available capacity
obligation (ACAP) on all load-serving entities. The purpose of the ACAP
obligation is to ensure that all load-serving entities have sufficient power
resources to meet their maximum possible load. If an ACAP obligation of the
type proposed by FERC is adopted, SCW could be required to procure substantial
additional power and capacity. The cost of procuring this additional power and
capacity could have a material adverse impact on SCW if SCW is not permitted to
recover the costs of procuring this additional power and capacity from its
ratepayers on a timely basis.

Power Supply Arrangements

All electric energy sold by SCW to customers in its BVE customer service
area is purchased from others. Historically, SCW purchased electric energy from
the Southern California Edison unit of Edison International. However, in order
to keep electric power costs as low as possible, SCW began to enter into energy
brokerage contracts to purchase energy in May 1996.

In May 2000, SCW entered into a one-year, block forward purchase contract
with Dynegy Power Marketing, Inc. (DYPM) for 12 MWs of electric energy for its
BVE customer service area at a price of $35.50 per MWh. This contract expired
April 30, 2001.

SCW entered into a five-year, block forward purchase contract with Mirant
Americas Energy Marketing LP (Mirant) to supply its BVE customer service area
with 15 MWs of electric energy at a price of $95 per MWh beginning April 1,
2001 through December 31, 2006. On December 20, 2001, SCW filed a complaint
with FERC seeking to reduce the amount charged by Mirant under the terms of
this contract due to a just and reasonable price. A hearing is scheduled on
this matter in October 2002. Management is unable to predict the outcome of
this complaint.

In June 2001, SCW executed an agreement with Pinnacle West Capital for an
additional 8 MWs of electric energy to meet BVEs peak winter demands. The
contract provides for pricing of $75 per MWh from November 1, 2001 to June 30,
2002, $48 per MWh from November 1, 2002 to June 30, 2003, and $36 per MWh from
November 1, 2003 to June 30, 2004. The average minimum load at SCWs Bear
Valley Electric customer service area has been approximately 12 MWs. The
average winter load has been 18 MWs with a winter peak of 38 MWs when the
snowmaking machines at the ski resorts are operating. Under the terms of a
contract with DYPM that expired on April 30, 2002, DYPM provided electric
energy to SCW in excess of the amounts it purchased under the forward block
purchase contracts

28



---



##### Table of Contents



previously described, acted as scheduling coordinator and provided other
ancillary services. DYPM has requested payment of an additional $5.6 million
for these services for the period June 1, 2000 to February 28, 2002, primarily
due to what DYPM contends were billing errors. This request for payment is
included in the electric supply balancing account, but no payment has been made
by SCW pending resolution of certain disputes with DYPM.

SCW is a party to the FERC proceedings in which refunds are being sought
on purchases of power from the California Power Exchange and the California
Independent Operator System. Management is unable to predict whether or not it
will receive any refunds in these proceedings.

Transmission Constraints

Demand for energy in SCWs Bear Valley Electric customer service area
generally has been increasing. However, the ability of SCW to deliver purchased
power to these customers is limited by the ability of the transmission
facilities owned by Southern California Edison Company to transmit this power.
For further information, see Legal Proceedings in Part II for a discussion of
litigation between Edison and SCW regarding Edisons obligations to upgrade
these transmission facilities. In order to meet these increasing energy
demands, SCW is considering the construction of a gas-fueled generator facility
owned by SCW. An Advice Letter was filed to seek the CPUCs authorization. If
approved, it will result in further increases in electric energy prices for
customers of SCWs BVE customer service area. For more information, see the
section entitled Rate Matters-Changes in Rates included in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

Construction Program

SCW maintains an ongoing distribution main replacement program throughout
its customer service areas; based on the priority of leaks detected, fire
protection enhancement and a reflection of the underlying replacement schedule.
In addition, SCW upgrades its electric and water supply facilities in
accordance with industry standards, local requirements and CPUC requirements.
SCWs Board of Directors has approved anticipated net capital expenditures of
approximately $55.4 million for 2002.

CCWC has a net capital budget of $1.4 million for 2002. AWR and ASUS have
no material capital commitments. However, ASUS actively seeks opportunities to
own, lease or operate water and wastewater systems for governmental entities,
which may involve significant capital commitments.

Regulatory Matters

Rate Regulation

SCW is subject to regulation by the CPUC, which has broad powers with
respect to service and facilities, rates, classifications of accounts,
valuation of properties, the purchase, disposition and mortgaging of properties
necessary or useful in rendering public utility service, the issuance of
securities, the granting of certificates of public convenience and necessity as
to the extension of services and facilities and various other matters. CCWC is
subject to regulation by the ACC.

Rates that SCW and CCWC are authorized to charge are determined by the
CPUC and the ACC, respectively, in general rate cases and are derived using
rate base, cost of service and cost of capital, as projected for a future test
year in California and using an historical test year, as adjusted in Arizona.
Rates charged to customers vary according to customer class and rate
jurisdiction and are generally set at levels allowing for all prudently
incurred costs, including a return on rate base sufficient to pay principal and
interest on debt securities, preferred stock distributions and a reasonable
rate of return on equity. Rate base generally consists of the original cost of
utility plant in service, plus certain other assets, such

29



---



##### Table of Contents



as working capital and inventory, less accumulated depreciation on utility
plant in service, deferred income tax liabilities and certain other deductions.
Adjustments for purchased water and power are permitted in California, to a
certain extent, but generally not Arizona. For further information, see the
section entitled Accounting for Supply Costsincluded in Part I, Item 2 in
Managements Discussion and Analysis of Financial Condition and Results of
Operation.

Neither AWR nor ASUS are directly regulated by the CPUC. The CPUC does,
however, regulate certain transactions between SCW and its affiliates. The ACC
also regulates certain transactions between CCWC and its affiliates.

The 22 customer service areas of SCW are grouped into 9 water districts
and 1 electric district for ratemaking purposes. Water rates vary among the 9
ratemaking districts due to differences in operating conditions and costs. SCW
monitors operations on a regional basis in each of these districts so that
applications for rate changes may be filed, when warranted. Under the CPUCs
practices, rates may be increased by three methods: (i) general rate case
increases (GRCs), (ii) offsets for certain expense increases including but not
limited to supply cost offset and balancing account amortization, and (iii)
advice letter filings related to certain plant additions and other operating
cost increases. GRCs are typically for three-year periods, which include step
increases for the second and third year. Rates are based on a forecast of
expenses and capital costs. GRCs have a typical regulatory lag of one year.
Offset rate increases and advice letter filings typically have a two to four
month regulatory lag.

Changes in Rates

New water rates with an annual increase of approximately $321,600 for four
of the seven ratemaking districts in SCWs Region I were implemented in January
2002. SCW is planning to submit a Notice of Intent to file a GRC for the
customer service areas in SCWs Region III in the third quarter of 2002 for new
water rates effective July of 2003, if approved by the CPUC.

As of June 30, 2002, SCW had accrued approximately $28.6 million in
under-collected purchased power costs included in the electric balancing
account. In May 2000, SCW filed an Advice Letter with the CPUC for recovery
over a five-year period of approximately $2.4 million in under-collected power
costs and removal of a negative amortization authorized by the CPUC in 1997.
The CPUC issued a final order on May 24, 2001 authorizing an overall rate
increase of 12.5%, with a condition of conducting a subsequent audit on the
expenses included in the electric balancing account. The audit has been
conducted and provided to the CPUC.

On August 23, 2001, the CPUC also approved a second Advice Letter filed by
SCW on April 9, 2001 seeking recovery, over five years, of an additional
under-collection of $8.7 million for energy costs. Rates in SCWs BVE customer
service area have increased by approximately 14.8% as a result.

On May 11, 2001, SCW filed with the CPUC for an additional increase in
electric rates to recover energy costs under the purchase agreement with
Mirant. SCW subsequently withdrew the Advice Letter and filed an application on
August 17, 2001 with the CPUC, along with a motion requesting immediate
recovery of these costs, subject to refund after completion of the review
process. The CPUC rejected SCWs motion for immediate recovery.

On February 8, 2002, a settlement agreement among SCW, all intervening
parties and the Office of Ratepayer Advocates (ORA) was filed with the CPUC
that will permit SCW to recover $77 per MWh of purchased power costs through
rates. SCW will be allowed to include its actual purchased power costs up to an
average annual weighted cost of $77 per MWh each year for 10 years in its
balancing account. To the extent SCWs actual average annual weighted cost for
purchased power is less than $77 per MWh, the differential will offset amounts
included in the electric supply balancing account. Conversely,

30



---



##### Table of Contents



to the extent that actual average annual weighted costs for power
purchased exceed the $77 per MWh amount, SCW will not be able to include these
amounts in its balancing account and such amounts will be expensed against
income. SCW has established approximately $8.2 million in reserves as of June
30, 2002 against potential non-recovery of electric power costs. In addition,
the settlement extended the previously approved surcharges for an additional
five years to allow SCW an opportunity to collect amounts remaining in its
electric cost balancing account. Management believes that the settlement will
allow for full recovery of amounts included in the balancing account. The
settlement also requires SCW to pursue its complaint filed with FERC in which
SCW has requested FERC to reduce the prices in its power purchase contract with
Mirant to a just and reasonable price. On July 17, 2002, CPUC approved the
settlement agreement with new rates effective immediately thereafter. For
further information, see the sections entitled Liquidity and Capital
Resources and Electric Energy Situation in California included in Part I,
Item 2 in Managements Discussion and Analysis of Financial Condition and
Results of Operation.

In March 2001, the CPUC approved SCWs Advice Letters to increase costs of
purchased power incurred to pump water for its water customers by $761,351
included in base water rates for each of its ratemaking districts. In April
2001, SCW filed additional Advice Letters by ratemaking areas to increase water
rates by approximately $2.3 million company-wide to recover additional electric
base rate increases, authorized recently by the CPUC for the Southern
California Edison Company and the Pacific Gas and Electric Company. The CPUC
approved in the fourth quarter of 2001 increases of approximately $672,900 in
base water rates. For further information, see the section Electric Energy
Situation in Californiaincluded in Part I, Item 2 in Managements Discussion
and Analysis of Financial Condition and Results of Operation. The remaining
Advice Letters filed by SCW to recover increased power costs used for pumping
were rejected by the CPUC due to the change in procedures for collections of
water supply costs on November 29, 2001. See the section entitled Accounting
for Supply Costs included in Part I, Item 2 in Managements Discussion and
Analysis of Financial Condition and Results of Operation.

Pending Rate Changes

An Advice Letter filed by SCW on November 13, 2001 requests the authority
to increase rates in its Metropolitan district by $3.1 million annually to
offset an increase in rate base due to its infrastructure replacement program
and offset increased costs by using a price index. SCW has filed a motion to
amend a prior decision to clarify certain contradictory paragraphs in that
order that would allow for the requested increase. Management is unable to
predict when or if the CPUC will authorize recovery of any or all of the
increases filed by SCW.

In April 2002, SCW filed for a Certificate of Public Convenience and
Necessity (CPCN) seeking the CPUCs authorization to construct an 8.4 MW
natural gas-fueled generator facility on a portion of its BVE property in the
City of Big Bear Lake to ensure the reliability of service, eliminate
transmission constraints and meet increasing demand in the areas. The capital
cost of the generator facility is estimated to be approximately $13 million,
which, if approved by the CPUC, will generate an annual revenue increase of
about $2.4 million. Management is unable to predict when or if the CPUC will
approve the CPCN.

In July 2002, SCW filed a Notice of Intent to increase water rates in the
customer service areas that comprise Region III. In addition, a separate
Notice of Intent, applicable to all of SCWs customer base, was filed to
recover costs associated with the general office functions of SCW. Management
is unable to predict if the CPUC will authorize all or any of the requested
increase in rates. In any event, a final decision on these applications is not
anticipated until the second quarter of 2003.

In 1993, the CPUC disallowed $1.6 million of costs incurred in
construction of a water treatment facility in SCWs Clearlake customer service
area and Registrant wrote off the disallowed amount at that

31



---



##### Table of Contents



time. Based on new water quality standards, in 2000, SCW re-applied to the
CPUC for inclusion of the disallowed amount in rate base. A draft decision
issued on March 30, 2001 by the CPUC allows SCW to include $500,000 of the $1.6
million in the regulated rate base, although an alternate draft decision issued
by one of the CPUC Commissioners proposed to deny the relief sought by SCW in
its application. An Administrative Law Judge subsequently reopened the
proceeding in August 2001 requiring additional information. A final order is
not anticipated until the fourth quarter of 2002.

Other Regulatory Matters

In December 1999, Registrant agreed to acquire Peerless Water Co., a
privately owned water company in Bellflower, California, subject to
satisfaction of certain conditions, including CPUC approval. The transaction,
however, was denied by the CPUC on November 29, 2001. As a result, the
acquisition agreement with Peerless Water Co. has been terminated.

There are no active regulatory proceedings affecting CCWC or its
operations.

Environmental Matters

1996 Amendments to Federal Safe Drinking Water Act

On August 6, 1996, amendments (the 1996 SDWA amendments) to the Safe
Drinking Water Act (the SDWA) were signed into law. The 1996 SDWA revised the
1986 amendments to the SDWA with a new process for selecting and regulating
contaminants. The U. S. Environmental Protection Agency (EPA) can only regulate
contaminants that may have adverse health effects, are known or likely to occur
at levels of public health concern, and the regulation of which will provide a
meaningful opportunity for health risk reduction. The EPA has published a list
of contaminants for possible regulation and must update that list every five
years. In addition, every five years, the EPA must select at least five
contaminants on that list and determine whether to regulate them. The new law
allows the EPA to bypass the selection process and adopt interim regulations
for contaminants in order to address urgent health threats. Current
regulations, however, remain in place and are not subject to the new
standard-setting provisions. The DOHS, acting on behalf of the EPA, administers
the EPAs program in California.

The 1996 SDWA amendments allow the EPA to base primary drinking water
regulations on risk assessment and cost/benefit considerations and on
minimizing overall risk. The EPA must base regulations on best available,
peer-reviewed science and data from best available methods. For proposed
regulations that involve the setting of maximum contaminant levels (MCLs), the
EPA must use, and seek public comment on, an analysis of quantifiable and
non-quantifiable risk-reduction benefits and costs for each such MCL.

SCW and CCWC currently test their wells and water systems according to
requirements listed in the SDWA. Water from wells found to contain levels of
contaminants above the established MCLs is treated to reduce contaminants to
acceptable levels before it is delivered to customers or the wells are shut
down. Since the SDWA became effective, SCW has experienced increased operating
costs for testing to determine the levels, if any, of the constituents in SCWs
sources of supply and additional expense to lower the level of any contaminants
in order to meet the MCL standards. Such costs and the costs of controlling any
other contaminants may cause SCW to experience additional capital costs as well
as increased operating costs. The CPUC and ACC ratemaking processes provide
SCW and CCWC with the opportunity to recover prudently incurred capital and
operating costs associated with water quality. Management believes that such
incurred and expected future costs will be authorized for recovery by the CPUC
and ACC, as appropriate.

32



---



##### Table of Contents



Proposed Enhanced Surface Water Treatment Rule

On July 29, 1994, the EPA proposed an Enhanced Surface Water Treatment
Rule (ESWTR), which would require increased surface-water treatment to decrease
the risk of microbial contamination. The EPA has proposed several versions of
the ESWTR for promulgation. The version selected for promulgation will be
determined based on data collected by certain water suppliers and forwarded to
the EPA pursuant to EPAs Information Collection Rule, which requires such
water suppliers to monitor microbial and other contaminants in their water
supplies and to conduct certain tests in respect of such contaminants. The EPA
has adopted an Interim ESWTR applicable only to systems serving greater than
10,000 persons. On April 10, 2000, EPA published the proposed Long Term 1
Enhanced Surface Water Treatment Rule and Filter Backwash Rule (LT1ESWTR) in
the Federal Register. The final Long-Term 1 Enhanced Surface Water Treatment
Rule was published in the January 14th Federal Register and applies to all
public water systems that use surface water or ground water under the direct
influence of surface water (GWUDI) and serve fewer than 10,000 persons. This
proposed rule will apply to each of SCWs five surface water treatment plants
and the CCWCs surface water treatment plant. It basically extends the
requirements of the ESWTR to systems serving less than 10,000 persons and will
require some systems to institute changes to the return of recycled filter
backwash flows within the treatment process to reduce the effects of recycled
water on compromising microbial control. Registrant is presently unable to
predict the ultimate impact of the LT1ESWTR, but it is anticipated that all
plants will achieve compliance within the three year to five-year time frames
identified by EPA.

Regulation of Disinfectant/Disinfection By-Products

SCW and CCWC are also subject to regulations concerning
disinfectant/disinfection by-products (DBPs). Stage I of the regulations were
effective in November 1998 with full compliance required for systems serving
10,000 or more persons by 2002 and for systems serving fewer than 10,000
persons by 2004. Stage I requires reduction of trihalomethane contaminants from
100 micrograms per liter to 80 micrograms per liter. Two of SCWs systems are
immediately impacted by this rule. SCW implemented modifications to the
treatment process in its Bay Point and Cordova systems to achieve compliance
and a third SCW plant will require treatment modifications in order to comply
with this rule by 2004. SCW is conducting studies to determine the best
treatment methods to comply with this rule.

The EPA is not allowed to use the new cost/benefit analysis provided for
in the 1996 SDWA amendments for establishing the Stage II rules applicable to
DBPs but may utilize the regulatory negotiating process provided for in the
1996 SDWA amendments to develop the Stage II rule. The final rule is expected
in 2002.

Ground Water Rule

On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR),
which establishes multiple barriers to protect against bacteria and viruses in
drinking water systems that use ground water. The proposed rule will apply to
all U.S. public water systems that use ground water as a source. The proposed
GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for
undisinfected systems, source water microbial monitoring by systems that do not
disinfect and draw from hydrogeologically sensitive aquifer or have detected
fecal indicators within the systems distribution system; corrective action; and
compliance monitoring for systems which disinfect to ensure that they reliably
achieve 4-log (99.99%) inactivation or removal of viruses. The GWR is scheduled
to be issued as a final regulation in 2002. While no assurance can be given as
to the nature and cost of any additional compliance measures, if any, SCW and
CCWC do not believe that such regulations will impose significant compliance
costs, since they already currently engage in disinfection of their groundwater
systems.

33



---



##### Table of Contents



Regulation of Radon and Arsenic

The regulation on arsenic was published in January 2001 with a new federal
standard of 10 parts per billion (ppb). Compliance with an MCL of 10 ppb will
require implementation of wellhead treatment remedies for eight affected wells
in SCWs system and three wells in CCWCs system. However, the EPA subsequently
withdrew the pending arsenic standard for a sixty-day review to seek
independent reviews of both the science behind the standard and of the cost
estimates to communities of implementing the rule. On October 31, 2001, EPA
announced that the arsenic standard in drinking water would be 10 parts per
billion (ppb). The effective date for utilities to comply with the standard
will be January 2006. In California, the Office of Environmental Health Hazard
Assessment is currently preparing a Public Health Goal for arsenic that may
result in California adopting a lower MCL for arsenic. It is not clear what
will happen between now and the current effective date of the arsenic
regulation. No further actions by EPA would simply make this regulation become
effective as of that date.

The EPA has proposed new radon regulations following a National Academy of
Sciences risk assessment and study of risk-reduction benefits associated with
various mitigation measures. The National Academy of Sciences study is in
agreement with much of EPAs original findings but has slightly reduced the
ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative
MCL of 4000 Pico Curies per liter, based upon potential mitigation measures for
overall radon reduction. The final rule has been delayed and most likely will
not be published until late 2002. SCW and CCWC currently monitor their wells
for radon in order to determine the best treatment appropriate for affected
wells.

Voluntary Efforts to Exceed Minimum Surface Water Treatment Requirements

SCW is a voluntary member of the EPAs Partnership for Safe Water, a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic organisms. As a volunteer in the program,
SCW commits to exceed minimum operating requirements governing surface water
treatment, optimize surface water treatment plant operations and ensure that
its surface water treatment facilities are performing as efficiently as
possible.

Unregulated Contaminants Monitoring Rule

EPA has revised the Unregulated Contaminant Monitoring Rule (UCMR), as required
by the 1996 Amendments to the Safe Drinking Water Act. The rule was published
on September 17, 1999 and supplemented on March 2, 2000 and January 11, 2001.
The data generated by the new UCMR will be used to evaluate and prioritize
contaminants on the Drinking Water Contaminant Candidate List, a list of
contaminants EPA is considering for possible new drinking water standards. This
data will help to ensure that future decisions on drinking water standards are
based on sound science.

A tiered approach will be utilized with the three monitoring lists to
provide the maximum capability to monitor up to the statutory limit of no more
than 30 contaminants in any 5-year monitoring cycle. Therefore, as List 3
contaminants are found to occur in PWS, they may move up to List 2, and
likewise, List 2 contaminants may move up to List 1, in 2004, when the UCMR is
revised again. The law requires that EPA publish a new contaminant monitoring
list every 5 years. Registrant is presently unable to predict the ultimate
impact of the UCMR, but it is anticipated that all monitoring required would be
conducted within the frames identified by EPA.

Voluntary Efforts to Exceed Minimum Surface Water Treatment Requirements

SCW is a voluntary member of the EPAs Partnership for Safe Water, a
national program designed to further protect the public from diseases caused by
cryptosporidium and other microscopic

34



---



##### Table of Contents



organisms. As a volunteer in the program, SCW commits to exceed minimum
operating requirements governing surface water treatment, optimize surface
water treatment plant operations and ensure that its surface water treatment
facilities are performing as efficiently as possible.

Fluoridation of Water Supplies

SCW is subject to State of California Assembly Bill 733, which requires
fluoridation of water supplies for public water systems serving more than
10,000 service connections. Although the bill requires affected systems to
install treatment facilities only when public funds have been made available to
cover capital and operating costs, the bill requires the CPUC to authorize cost
recovery through rates should public funds for operation of the facilities,
once installed, become unavailable in future years.

Ammonium Perchlorate Action Level Activities

The California Department of Health Services (DOHS) recently reduced the
action level for ammonium perchlorate. Although neither the EPA nor the DOHS
have established a drinking water standard for ammonium perchlorate. In January
1997 DOHS established an action level of 18 parts per billion (ppb). Action
levels are advisory in nature and are not enacted into law. In January 2002,
SCW was informed that DOHS has reduced the action level from 18 ppb to a level
of 4 ppb, based upon new reference dosage for health risk information from EPA.
SCW has removed eight wells from service in four separate systems since they
contained ammonium perchlorate in amounts in excess of this reduced action
level. On March 8, 2002, the California Office of Environmental Health Hazard
Assessment (OEHHA) published a draft Public Health Goal for perchlorate at 6
ppb. This is the first step to establishment of an MCL in California. SCW is
continuing to periodically monitor all its wells to determine that levels of
perchlorate are below the action level currently in effect.

Matters Relating to SCWs Arden-Cordova Water System

In January 1997, SCW was notified that ammonium perchlorate in amounts
above the state-determined action level had been detected in three of its wells
serving its Rancho-Cordova water system. Aerojet-General Corp. has, in the
past, used ammonium perchlorate in oxidizing rocket fuels. SCW took the three
wells detected with ammonium perchlorate in excess of the 1997 action levels
out of service. In April 1997, SCW found ammonium perchlorate in three
additional wells and, at that time, removed those wells from service until it
was determined that the levels were below the state-determined action level.
Those wells were returned to service. SCW periodically monitors these wells to
determine that levels of ammonium perchlorate are below the action level
currently in effect. In January 2002, SCW was informed that DOHS was reducing
the action level from 18 ppb to 4 ppb and subsequently removed three wells from
service since they contained ammonium perchlorate in amounts in excess of this
reduced action level.

In February 1998, SCW was informed that nitrosodimethylamine (NDMA) had
been detected in amounts in excess of the EPA reference dosage for health risks
in four of its wells in its Rancho-Cordova water system. The wells have been
removed from service. An additional well was also removed from service in
September 1999 due to the contamination and another well was removed from
service in January 2002. The DOHS established an initial action level of 2
parts per trillion (ppt). In February 2002, DOHS increased the action level to
10 ppt. Management is investigating the impact, if any, that the increase in
the action level may have on its abilities to put certain wells back into
service. NDMA is an additional by-product from the production of rocket fuel
and it is believed that such contamination is related to the activities of
Aerojet. Aerojet has reimbursed SCW for constructing a pipeline to interconnect
with the City of Folsom water system to provide an alternative source of water
supply in SCWs Rancho-Cordova customer service area and has reimbursed SCW for
costs associated with the drilling and equipping of two new wells. As of June
30, 2002, Aerojet had previously reimbursed SCW

35



---



##### Table of Contents



$4.5 million of the approximately $19.5 million in costs SCW has incurred.
The remainder of the costs is subject to further reimbursement, including
interest. Reimbursements received from Aerojet will reduce SCWs utility plant
and costs of purchased water.

For further information regarding litigation related to contamination of
ground water in Sacramento County, see the section entitled Other Water
Quality Litigation included in Part II, Item 1 in Legal Proceedings.

Matters Relating to SCWs Culver City Water System

The compound, methyl tertiary butyl ether (MTBE), an oxygenate used in
reformulated fuels, has been detected in the Charnock Basin, located in the
city of Santa Monica and within SCWs Culver City customer service area. At the
request of the Regional Water Quality Control Board, the City of Santa Monica
and the California Environmental Protection Agency, SCW removed two of its
wells in the Culver City water system from service in October 1996 to help in
efforts to avoid further spread of the MTBE contamination plume. Neither of
these wells has been found to be contaminated with MTBE. SCW is purchasing
water from the Metropolitan Water District of Southern California (MWD) at an
increased cost to replace the water supply formerly pumped from the two wells
removed from service.

On September 22, 1999, the U.S. EPA and the Los Angeles Regional Water
Quality Control Board ordered Shell Oil Company, Shell Oil Products Company and
Equilon Enterprises LLC to provide replacement drinking water to both SCW and
the City of Santa Monica due to MTBE contamination of the Charnock Basin
drinking water. The EPA has ordered Shell Oil to reimburse SCW for water
replacement costs. The agencies are continuing to investigate the causes of
MTBE pollution and intend to ensure that all responsible parties contribute to
its clean up. SCW is unable to predict the outcome of the EPAs enforcement
efforts.

On April 25, 2001, Registrant filed a lawsuit against all the potentially
responsible parties, who stored, transported and dispensed gasoline containing
methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or
other related infrastructure. MTBE polluted and contaminated water existed in
areas of the basin from which SCW has pumped water through its Charnock Well
Field. As a result, SCW ceased operation of its Charnock Well Field in October
1996. In March 2002, Registrant has reached an agreement in this matter with
the City of Santa Monica that assigns the prosecution of litigation against the
potentially responsible parties to the City of Santa Monica, California (Santa
Monica). As part of the agreement executed on March 19, 2002 and in exchange
for an assignment payment, SCW granted its water rights in the Charnock Basin
to Santa Monica and Santa Monica took over the prosecution against the
potentially responsible parties. For further information, see section entitled
Other Water Quality Litigation included in Part II, Item 1 in Legal
Proceedings.

Matters Relating to SCWs Yorba Linda Water System

The compound MTBE has been detected in three wells serving SCWs Yorba
Linda water system. Two of the wells are standby wells and the third well has
not shown MTBE above the DOHS secondary standard of 5.0 ppb at this time. SCW
has constructed an interconnection with the MWD to provide for additional
supply in the event the third well experiences levels of detection in excess of
the DOHS standard.

SCW has met with the Regional Water Quality Control Board, the Orange
County Water District, the City of Anaheim, the DOHS and three potentially
responsible parties (PRPs) to define the extent of the MTBE contamination
plume and assess the contribution from the PRPs. The PRPs have voluntarily
initiated a work plan for regional investigation. While there have not been
significant

36



---



##### Table of Contents



disruptions to the water supply in Yorba Linda at this point in time, no
assurances can be given that MTBE contamination will not increase in the
future.

Matters Relating to SCWs Los Osos Water System

The compound MTBE has been detected in a well serving SCWs Los Osos water
system. For some time SCW has been working with the Regional Water Quality
Control Board as well as the owner of a service station. Although the owner of
the service station has attempted remediation with funds provided through the
California Underground Storage Tank Fund (CUSTF), it appears there will be
insufficient funds from the CUSTF to complete remediation sufficient to return
the well to service. In order to prevent the running of the statute of
limitations, on August 12, 2002 SCW filed suit in Superior Court of the State
of California for the County of San Luis Obispo against the operators and
owners of the service station facility, and Chevron USA Products, Inc., the
supplier. Management is currently unable to predict either the financial
impact or the ultimate result of this lawsuit.

Security Issues

Since the tragic events of September 11, 2001, water utilities, including
Registrant, have been advised to increase security at key facilities in order
to avoid contamination of water supplies and other disruptions of service.
Registrant has implemented a number of steps to address this concern, including
the engagement of a security firm to develop further protection measures and an
ongoing review of new industry and regulatory agency security measures.
Although Registrant has not experienced any material increase in costs related
to these measures, management is unable to predict what, if any, additional
measures will be implemented and what such measures may cost. Registrant
intends to seek recovery of any such costs from the CPUC and the ACC.
Management is unable to predict if these regulatory bodies will authorize
recovery of any or all of these costs.

Water Supply

SCWs Water Supply

For the three months ended June 30, 2002, SCW supplied a total of
23,531,000 ccf of water as compared to 22,834,000 ccf for the three months
ended June 30, 2001. Of the total 23,531,000 ccf of water supplied during the
first quarter of 2002, approximately 55.0% came from pumped sources and 41.7%
was purchased from others, principally the Metropolitan Water District of
Southern California (MWD) and its member agencies. The remaining 3.3% of total
supply came from the United States Bureau of Reclamation (the Bureau). For the
three months ended June 30, 2001, 59.1%, 38.5% and 2.4% was supplied from
pumped sources, purchased from MWD and the Bureau, respectively.

For the six months ended June 30, 2002, SCW supplied a total of 40,743,000
ccf of water, 58.1% of which came from pumped sources, 39.9% was purchased and
2% was supplied by the Bureau. During the six months ended June 30, 2001, SCW
produced 38,422,000 ccf of water. Of this amount 61.2% came from pumped
sources, 37.4% was purchased and the remainder was provided by the Bureau.

During the twelve months ended June 30, 2002, SCW supplied 86,424,000 ccf
of water as compared to 85,233,000 ccf supplied during the twelve months ended
June 30, 2001. During the twelve months ended June 30, 2002, pumped sources
provided 57.1% of total supply, 40.7% was purchased from MWD and its member
agencies. The remaining 2.2% of total supply came from the United States Bureau
of Reclamation (the Bureau) under a no-cost contract. For the twelve months
ended June 30, 2001, 57.2%, 40.8% and 2.0%, respectively, was supplied from
pumped sources, purchased from MWD and the Bureau.

37



---



##### Table of Contents



The MWD is a water district organized under the laws of the State of
California for the purpose of delivering imported water to areas within its
jurisdiction. Registrant has 57 connections to the water distribution
facilities of MWD and other municipal water agencies. MWD imports water from
two principal sources: the Colorado River and the State Water Project (SWP).
Available water supplies from the Colorado River and the SWP have historically
been sufficient to meet most of MWDs requirements and MWDs supplies from
these sources are anticipated to remain adequate through 2002. MWDs import of
water from the Colorado River is expected to decrease in future years due to
the requirements of the Central Arizona Project (CAP). In response, MWD has
taken a number of steps to secure additional storage capacity and to increase
available water supplies, by effecting transfers of water rights from other
sources.

Registrants water supply and revenues are significantly affected, both in
the short-run and the long run, by changes in meteorological conditions. The
average current water outlook for California is near normal levels with the
snow pack at 95% of average and statewide precipitation at 70% of normal.
However averages can be deceiving. Northern California areas are at 100% or
better of normal precipitation levels while Southern California is suffering
through a drought with the South Coast area at 30% of average, South Lahontan
region at 25%, and the Colorado River-Desert at only 5% of normal. So far this
water year the LA Civic Center has gotten only 21% of normal rainfall whereas
last year the LA Civic Center had received 127% of normal.

Water storage appears to be adequate given statewide levels are at 100% of
capacity for this time of year. In Northern California we see the reservoirs
filling due to recent precipitation and in Southern California last years
abundant rainfall helps current levels to be near or at normal. Reservoirs in
South Lahontan are at 105%, and South Coast area at 85% of average.

For the next few months the drought conditions in Southern California
should persist. Come the late summer, fall and winter there could be some
relief. The evolution towards a warm (El Nino) episode continues in the
equatorial Pacific. However, there is not yet a consensus on development of a
mature El Nino/Southern Oscillation condition.

Groundwater conditions remain at adequate levels in most of SCWs
operating areas. Certain of SCWs groundwater supplies have been affected to
varying degrees by various forms of contamination and mechanical problems
caused by low water table, which, in some cases, have caused increased reliance
on purchased water in its supply mix.

A sudden drop in water supply has severely impacted SCWs Wrightwood
Customer Service Area. In response to this emergency situation, SCW has taken
a number of steps to provide water service, including trucking water into the
area from nearby sources, bringing a formerly shut down well into service,
taking steps to increase capacity at existing wells and expediting the drilling
and equipping of a new well. In taking these steps to meet water demand, SCW
has experienced increased operating costs, most significantly associated with
the trucking of water. However, due to the actions of SCW and conservation
efforts of consumers the situation has temporarily improved. Management is
unable to predict how long this situation will continue or the extent to which
additional costs may be incurred.

CCWCs Water Supply

Northern Arizona has only received 50% of its average precipitation
placing it in extreme drought conditions. As of June 2002, Arizona reservoir
levels were at about 70% of normal and Lake Powell hit 82% of normal even with
the Colorado River inflows at only 27% of average. Outlook for the next few
months for this area indicate that the drought will persist or intensify.

38



---



##### Table of Contents



Since CCWC obtains its water supply from three operating wells and from
Colorado River water delivered by the CAP, this situation will be monitored
closely over the next few months. The majority of CCWCs water supply is
obtained from its CAP allocation and well water is used for peaking capacity in
excess of treatment plant capability, during treatment plant shutdown, and to
keep the well system in optimal operating condition. CCWC has an Assured Water
Supply designation, by decision and order of the Arizona Department of Water
Resources, providing in part that, subject to its requirements, CCWC currently
has a sufficient supply of ground water and CAP water which is physically,
continuously and legally available to satisfy current and committed demands of
its customers, plus at least two years of predicted demands, for 100 years.

Notwithstanding such a designation, CCWCs water supply may be subject to
interruption or reduction, in particular owing to interruption or reduction of
CAP water. In the event of interruption or reduction of CAP water, CCWC can
currently rely on its well water supplies for short-term periods. However, in
any event, the quantity of water CCWC supplies to some or all of its customers
may be interrupted or curtailed, pursuant to the provisions of its tariffs.

Risk Factor Summary

You should carefully read the risks described below and other information
in this Form 10-Q in order to understand certain of the risks of our business.

Our liquidity, and in certain circumstances, earnings, could be adversely
affected by increases in electricity prices in California.

Under California law, we are permitted to file for a rate increase to
recover electric power costs not being recovered in current rates. Increases in
electric power costs generally have no direct impact on profit margins, unless
recovery of these costs is disallowed, but do affect cash flows and can
therefore impact the amount of our capital resources. Electric power costs
increased substantially in California during the fall of 2000 until the summer
of 2001. As of June 30, 2002, SCW had accrued $28.6 million in unrecovered
power costs in its electric balancing accounts. On July 17, 2002, the FERC
extended and modified the mitigation measures that were set to expire on
September 30, 2002, citing delays in construction of new generation resources
in California and throughout the West, delays in adopting a new market design
and market rules by the Cal ISO, transmission line constraints, constraints on
natural gas pipeline capacity and a dysfunctional power market. It remains
unclear how long the FERC will leave its mitigation measures in place. The
premature termination of such mitigation measures could result in a substantial
increase in spot market prices and the prices of long-term contracts for power
and capacity. In addition, Cal ISO has proposed a number of market reforms
that could require us to procure substantial additional power and/or capacity.
This could also result in an increase in the level and volatility of electric
prices in California.

We had been funding these power costs from our short-term borrowing
facilities. In addition, in April 2001, we implemented a Cash Preservation Plan
to control costs and temporarily to limit capital and maintenance expenditures.

On July 17, 2002, the CPUC approved the settlement reached among SCW, the
CPUC Staff and all other intervening parties that would authorize us to include
$0.077 per kilowatt-hour (KWh) in rates to recover our electric power costs. If
our actual annual costs exceed this amount, we cannot recover the excess and
the amount will be expensed against income. If our actual annual energy costs
are less that $0.077 per KWh, we can use this difference to collect amounts
previously included in the balancing account. The new rates have been in
effect since July 17, 2002. As a result, the Cash Preservation Plan was lifted
in August 2002.

39



---



##### Table of Contents



We have established approximately $8.2 million in reserves for its Bear
Valley Electric division for possible non-recovery of power costs.

Changes in water supply costs, either unit cost change or supply mix
change, will directly impact the Companys earnings.

Prior to November 29, 2001, we recovered certain water supply costs
through a balancing account mechanism. Water supply costs include the cost of
purchased water and power and groundwater production assessments. The balancing
account was not, however, designed to insulate SCWs earnings against changes
in supply mix. As a result, SCW was not permitted to recover increased costs
due to increased use of purchased water, which is generally more expensive than
groundwater, through the balancing account mechanism.

On November 29, 2001, the CPUC ordered SCW to suspend the use of the
current water balancing account, and instead started a memorandum account for
each offsettable expense of purchased water, purchased power and pump tax for
its water service areas. We may recover certain water supply costs based on the
memorandum account if we are within our rate case cycle and we are not earning
an amount in excess of our authorized rate of return. SCW may not otherwise
recover increased costs due to increased unit cost. Additionally, changes in
water supply costs compared to the authorized amount, as well as any future
authorized offset increases may directly affect our earnings.

Significant claims have been asserted against us in water quality
litigation.

SCW and others have been sued in twenty two water quality related lawsuits
alleging personal injury and property damage as a result of the delivery of
water that was allegedly contaminated. Nineteen of the lawsuits involve
plaintiffs who received water from the San Gabriel Basin in Los Angeles County.
The other lawsuits involve plaintiffs in Sacramento County.

In March 1998, the CPUC issued an Order Instituting Investigation as a
result of water quality lawsuits being filed against water utilities in
California. On November 2, 2000, the CPUC issued a final order concluding that
the CPUC has jurisdiction to regulate the service of water utilities with
respect to the health and safety of that service; that DOHS requirements
governing drinking water quality adequately protect the public health and
safety; and that regulated water utilities, including SCW, have satisfactorily
complied with past and present drinking water quality requirements.

On February 5, 2002, the California Supreme Court ruled that water
utilities regulated by the CPUC might be sued for damages based on allegations
that the utility failed to comply with federal and state safe drinking water
requirements. As a result, plaintiffs may proceed on their claims against SCW
to the extent that these claims are based on violations of federal and state
law.

SCW is unable to predict the outcome of any of this litigation or the
extent to which it will be able to recover its litigation costs from ratepayers
or other third parties.

Our operating costs have increased and are expected to continue to
increase as a result of groundwater contamination.

SCWs operations have been impacted by groundwater contamination in
certain of its service territories. We have taken a number of steps to address
this contamination, including the removal of wells from service, the
construction of water treatment facilities and securing alternatives sources of
supply from other areas not affected by the contamination.

40



---



##### Table of Contents



In some cases, potentially responsible parties have reimbursed us for our
costs. In other cases, we have taken legal action against parties that we
believe to be potentially responsible for the contamination.

Certain government officials have suggested that water producers, such as
SCW and CCWC, may have liability under certain environmental statutes if their
pumping operations affect the movement of the contamination. SCW has been
required to remove certain wells from service because its pumping activities
might affect the movement of contamination in other service areas. Currently,
neither the Environmental Protection Agency nor any other governmental agency
has identified the Company or, to our knowledge, any other water producer, as a
potentially responsible party. We cannot assure you, however, that SCW or CCWC
will not be identified as a potentially responsible party in the future. Our
future results of operations could be adversely affected if either SCW or CCWC
is required to pay clean-up costs and is not allowed to recover such costs in
rates.

Environmental regulation has increased, and is expected to continue to
increase, our operating costs.

SCW and CCWC are subject to increasingly stringent environmental
regulations that will result in increasing capital and operating costs. These
regulations include:



| |  |  | The 1996 amendments to the Safe Drinking Water Act that
require increased testing and treatment of water to reduce
specified contaminants to maximum contaminant levels                                     
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Approved regulations requiring increased surface-water
treatment to decrease the risk of microbial contamination; these
regulations will affect SCWs five surface water treatment plants
and one CCWC plant
|
| |  |  | Additional regulation of disinfection/disinfection
byproducts expected to be adopted before the end of 2002; these
regulations will potentially affect two of SCWs systems                                 
|
| |  |  | Additional regulations expected to be adopted requiring
disinfection of certain groundwater systems                                                                                                         
|
| |  |  | Currently pending regulation of arsenic and radon                                                                                                                                                           
|
| |  |  | California customer requirements to fluoridate public
water systems serving over 10,000 customers                                                                                                           
|
| |  |  | Reduction in the action level for ammonium perchlorate
to 4 ppb in 2002; we have removed 8 wells from service due to the
presence of ammonium perchlorate above action levels.                              

SCW and CCWC may be able to recover costs incurred to comply with these
regulations through the ratemaking process for their regulated systems. We may
also be able to recover certain of these costs under our contractual
arrangements with municipalities. In certain circumstances, we may be able to
recover costs from parties responsible or potentially responsible for
contamination.

The adequacy of our water supplies depends upon a variety of factors
beyond our control.

The adequacy of our water supplies varies from year to year depending upon
a variety of factors, including:



| |  |  | Rainfall                                            
| | - |  | ----------------------------------------------------
|
| |  |  | Availability of Colorado River water                
|
| |  |  | The amount of water stored in reservoirs            
|
| |  |  | The amount of water used by our customers and others
|
| |  |  | Water quality, and                                  
|
| |  |  | Legal limitations on use                            

41



---



##### Table of Contents



Population growth and increases in the amount of water used have increased
limitations on use to prevent over-drafting of groundwater basins. The import
of water from the Colorado River, one of SCWs important sources of supply, is
expected to decrease in future years due to the requirements of the Central
Arizona Project (CAP). We have also taken wells out of service due to
groundwater contamination.

CCWC obtains its water supply from operating wells and from the Colorado
River through the CAP. CCWCs water supply may be subject to interruption or
reduction if there is an interruption or reduction in CAP water.

Water shortages may affect us in a variety of ways:



| |  |  | They adversely affect supply mix by causing us to rely
on more expensive purchased water                                                                                                    
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | They adversely affect operating costs                                                                                                                                                       
|
| |  |  | They may result in an increase in capital expenditures
for building pipelines to connect to alternative sources of
supplies and reservoirs and other facilities to conserve or
reclaim water

We may be able to recover increased operating and construction costs for
our regulated systems through the ratemaking process. We may also be able to
recover certain of these costs under the terms of our contractual agreements
with municipalities. In certain circumstances, we may recover these costs from
third parties that may be responsible, or potentially responsible, for
groundwater contamination.

Our earnings are greatly affected by weather during different seasons.

The demand for water and electricity varies by season. Therefore, the
results of operations for one period may not indicate results to be expected in
another period. For instance, most water consumption occurs during the third
quarter of each year when weather tends to be hot and dry. On warm days, use of
water by residential and commercial customers may be significantly greater than
on cold days because of the increased use of water for outdoor landscaping.
Likewise the demand for electricity in our Big Bear service area is greatly
affected by winter snows. An increase in winter snows reduces the use of snow
making machines at ski resorts in the Big Bear area and, as a result reduces
electric revenues.

Variability of weather from normal temperatures or changes in snow or
rainfall can materially impact results of operations. As a result, weather has
been and will continue to be one of the dominant factors in our financial
performance.

Our business is heavily regulated and, as a result, decisions by
regulatory agencies and changes in laws and regulations can significantly
affect our business.

Our revenues depend substantially on the rates that we are permitted to
charge our customers and our ability to recover our costs in these rates,
including the ability to recover the costs of purchased water, groundwater
assessments and electric power costs in rates. We have an Advice Letter pending
before the CPUC to increase rates in its Metropolitan district by $3.1 million
annually to offset an increase in rate base due to its infrastructure
replacement program and offset increased costs by using a price index. We
also have filed for increased water rates to recover operating costs from
customers in Region III as well as from all customers for costs associated with
general office activities. In addition, we are seeking CPUC authorization to
construct an 8.4 MW natural gas-fueled generator facility to meet increasing
demand in our Bear Valley customer service area. The facility, if approved by
the CPUC, will generate an annual revenue increase of about $2.4 million.

42



---



##### Table of Contents



We have been adversely affected by electric restructuring in California
and the escalation of energy costs attributable thereto. The California
Department of Water Resources has attempted to alleviate the crisis by
purchasing electricity for Pacific Gas and Electric Company, Southern
California Edison Company and San Diego Gas and Electric Company, but does not
purchase any electricity for our Bear Valley electric division. FERC has taken
certain actions intended to stabilize the energy market in the West.

FERC has proposed additional market reforms that may substantially
increase the costs of SCW. This could have a material adverse impact on SCW if
SCW is unable to recover these increased costs from its ratepayers.

SCW has filed a complaint with FERC seeking a reduction of the rates in
its power purchase contract with Mirant to a just and reasonable price.
Registrant is unable to predict the outcome of this proceeding.

Our business requires significant capital expenditures.

The utility business is capital intensive. On an annual basis, we spend
significant sums for additions to or replacement of property, plant and
equipment. During calendar years 2001, 2000 and 1999, we spent $50,253,000,
$45,982,000, and $51,578,000, respectively, for these purposes. Our budgeted
capital expenditures for calendar year 2002 for these purposes are
approximately $56,774,000.

We obtain funds for these capital projects from operations, contributions
by developers and others and advances from developers (which must be repaid).
We also periodically borrow money or issue equity for these purposes. In
addition, we secured a syndicated bank facility that we can use for these
purposes. We cannot assure you that these sources will continue to be adequate
or that the cost of funds will remain at levels permitting us to remain
profitable.

Accounting Standard

In June of 2001, the Financial Accounting Standards Board issued SFAS No.
143, Accounting for Asset Retirement Obligations, on the accounting for
obligations associated with the retirement of long-lived assets. Registrant
believes that it will be subject to the provisions of SFAS No. 143 and is
currently analyzing the impact that implementation of FASB No. 143 might have
on its future financial statement presentation. The new rule requires
businesses to record the fair value of a liability for an asset retirement
obligation in the period in which it is incurred. When the liability is
initially recorded, the entity capitalizes a cost by increasing the carrying
amount of the related long-lived asset. Over time, the liability is accreted to
its present value each period, and the capitalized cost is depreciated over the
useful life of the related asset. Upon settlement of the liability, an entity
either settles the obligation for its recorded amount or incurs a gain or loss
upon settlement. SFAS No. 143 is effective for fiscal years beginning after
June 15, 2002.




Item 3. Quantitative and Qualitative Disclosures About Market Risk

Registrant has no derivative financial instruments, financial instruments
with significant off-balance sheet risks or financial instruments with
concentrations of credit risk except for the block-forward purchase power
contracts that meet the normal purchase exception rule under FASB 133,
Accounting for Derivative Instruments and Hedging Activities. Under the terms
of its power purchase contracts with Mirant Marketing and Pinnacle West
Capital, SCW is required to post security, at the request of the seller, if SCW
is in default under the terms of the contract. In addition, SCWs liquidity,
and in certain circumstances, earnings, could be adversely affected by
increases in electricity prices in

43



---



##### Table of Contents



California. For further information, see the section entitled Contractual
Obligations and Other Commitments and Risk Factor Summaryincluded in Part
I, Item 2 in Managements Discussion and Analysis of Financial Condition and
Results of Operation.




PART II




Item 1. Legal Proceedings

Water Quality-Related Litigation

SCW is a defendant in twenty-two lawsuits involving claims pertaining to
water quality. Nineteen of the lawsuits involve customer service areas located
in Los Angeles County in the southern portion of the State of California that
have been filed in Los Angeles Superior Court: Robert Arenas, et al. v.
Suburban Water Systems, Inc., et al., Case No. KC037559, Anthony John Bell, et
al. v. City of Pomona, et al., Case No. KC038796, Adler, et al. v. Southern
California Water Company, et al., Case No. BC169892, Santamaria, et al. v.
Suburban Water Systems, et al., Case No. CIV180894, Georgianna Dominguez et al.
v. Southern California Water Company, et al., Case No. G021657, Anderson, et
al. v. Suburban Water Company, et al., Case No. KC028524, Abarca, et al. v.
City of Pomona, et al., Case No. K027795, Celi, et al. v. San Gabriel Valley
Water Company, Case No. GC020622, Boswell et al. v. Suburban Water Systems, et
al., Case No. KC027318, Demciuc et al. v. Suburban Water Systems, et al., Case
No. C028732, Antoinette Adejare, et al. v. City of Pomona, et al., Case No.
KC031096, Almelia Brooks, et al. v. Suburban Water System, et al., Case No.
KC032915, Lori Alexander, et al. v. Suburban Water Systems, et al., Case No.
KC031130, David Arnold, et al. v. City of Pomona, et al., Case No. KC034636,
Gilda Ambrose-Dubre, et al. v. City of Pomona, et al., Case No. KC032906,
Melissa Garrity Alvarado, et al. v. Suburban Water Systems et al., Case No.
KC034953 , Charles Alexander, et al. v. City of Pomona, et al., Case No
KC035526, Criner, et al. v. San Gabriel Valley Water Company, et al., Case No.
GC021658, and Donerson, et al. v. City of Pomona, et al., Case No. KC035987.
The lawsuits filed in Los Angeles County Superior Court are based on the
allegations that SCW and the other defendants have provided and continue to
provide plaintiffs with contaminated water from wells located in an area of the
San Gabriel Valley that has been designated a federal superfund site, that the
maintenance of this contaminated well water has resulted in contamination of
the soil, subsurface soil and surrounding air with trichloroethylene (TCE),
perchloroethene (PCE), carbon tetrachloride and other solvents and that
plaintiffs have been injured and their property damaged as a result. Three of
the lawsuits involve a customer service area located in Sacramento County in
northern California that have been filed in Sacramento County Superior Court:
Nathaniel Allen, Jr. v. Aerojet-General Corporation, et al., Case No.
97AS06295, Daphne Adams, et al. v. Aerojet-General Corporation, et al., Case
No. 98AS01025, and Wallace Andrew Pennington et al. v. Aerojet-General
Corporation, et al., Case No. 00AS02622. The lawsuits filed in Sacramento
County Superior Court are based on the allegations that SCW and other
defendants have delivered water to plaintiffs that is contaminated with a
number of chemicals, including, TCE, PCE, carbon tetrachloride, perchlorate,
Freon-113, hexavalent chromium and other unnamed chemicals and that plaintiffs
have been injured and their property damaged as a result.

On September 1, 1999, the Court of Appeals in San Francisco held that the
CPUC had preemptive jurisdiction over regulated public utilities with respect
to water quality matters and ordered dismissal of a series of these lawsuits.
On October 11, 1999, one group of plaintiffs appealed this decision to the
California Supreme Court. On February 4, 2002, the California Supreme Court
concluded that (i) the CPUC had preemptive jurisdiction over claims seeking
injunctive relief and claims based on the theory that a public utility
regulated by the CPUC provided unsafe drinking water even though it had
complied with federal and state drinking water standards, but (ii) the CPUC did
not have preemptive jurisdiction over damage claims based on allegations of
violations of federal and state drinking water standards by public utilities
regulated by the CPUC. As a result, damage claims based on allegations of

44



---



##### Table of Contents



violations of federal and state drinking water standards may proceed while
the other claims must be dismissed.

In light of the breadth of plaintiffs claims, the lack of factual
information regarding plaintiffs claims and injuries, if any, the impact of the
California Supreme Court decision on plaintiffs claims and the fact that no
discovery has yet been completed, SCW is unable at this time to determine what,
if any, potential liability it may have with respect to these claims. Based
upon the information currently available to it, Registrant believes that these
claims are without merit and intends to vigorously defend these claims.

SCW is subject to self-insured retention provisions in its applicable
insurance policies and has either expensed the self-insured amounts or has
reserved against payment of these amounts as appropriate. SCWs various
insurance carriers have, to date, provided reimbursement for costs incurred
above the self-insured amounts for defense against these lawsuits, subject to a
reservation of rights.

Order Instituting Investigation (OII)

In March 1998, the CPUC issued an OII to regulated water utilities in the
state of California, including SCW. The purpose of the OII was to determine
whether existing standards and policies regarding drinking water quality
adequately protect the public health and whether those standards and policies
were being uniformly complied with by those water utilities. On November 2,
2000, a final decision from the CPUC concluded that the Commission has the
jurisdiction to regulate the service of water utilities with respect to the
health and safety of that service; that the California Department of Health
Services requirements governing drinking water quality adequately protect the
public health and safety; and that regulated water utilities, including SCW,
have satisfactorily complied with past and present drinking water quality
requirements.

The CPUC had previously authorized establishment of memorandum accounts to
capture expenses related to the OII. Under the memorandum account procedure,
SCW may recover litigation costs from ratepayers to the extent authorized by
the CPUC. The CPUC has not yet authorized SCW to recover any of its litigation
costs. As of June 30, 2002, SCW had recorded a net of $889,000 in this
memorandum account. Management believes that these expenses will be fully
recovered but is unable to predict when, or if, the CPUC will authorize
recovery of all or any of the costs.

Other Water Quality Litigation

On October 25, 1999, SCW filed a lawsuit against the California Central
Valley Regional Water Quality Control Board (CRWQCB) alleging that the CRWQCB
has willfully allowed portions of the Sacramento County Groundwater Basin to be
injected with chemical pollution that is destroying the underground water
supply in SCWs Rancho Cordova customer service area. SCW and the CRWQCB have
entered into mediation regarding this matter but management cannot predict the
likely outcome of this process or the likelihood of a favorable outcome should
this matter go to trial.

In a separate case, also filed on October 25, 1999, SCW sued
Aerojet-General Corporation (Aerojet) for causing the contamination of the
Sacramento County Groundwater Basin. On March 22, 2000, Aerojet filed a cross
complaint against SCW for negligence and constituting a public nuisance.
Registrant is unable to determine at this time what, if any, potential
liability it may have with respect to the cross complaint, but intends to
vigorously defend itself against these allegations. Management cannot predict
the likely outcome of these proceedings.

The CPUC has authorized memorandum accounts to allow for recovery of costs
incurred by SCW in prosecuting the suits filed against CRWQCB and Aerojet from
customers, less any recovery

45



---



##### Table of Contents



from the defendants or others. As of June 30, 2002, approximately
$9,261,0000 has been recorded in the memorandum accounts. The CPUC has
authorized SCW to increase rates, effective April 28, 2001, for recovery over a
six-year period of approximately $1,800,000, in expenses that were incurred on
or before August 31, 2000. The remaining costs will be included in SCWs next
General Rate Case Application for its Region I customer service areas to be
filed in 2003. Management believes these costs are recoverable but cannot give
assurance that the CPUC will ultimately allow recovery of all or any of the
remaining costs through rates.

On April 25, 2001, Registrant filed a lawsuit against all the potentially
responsible parties, who stored, transported and dispensed gasoline containing
methyl tertiary butyl ether (MTBE) in underground storage tanks, pipelines or
other related infrastructure. MTBE contaminated water existing in areas of the
basin from which SCW has pumped water through its Charnock Well Field. As a
result, SCW ceased operation of its Charnock Well Field in October 1996. In
March 2002, Registrant has reached an agreement in this matter that assigns the
prosecution of litigation against the potentially responsible parties to the
City of Santa Monica, California (Santa Monica). As part of the agreement
executed on March 19, 2002 and in exchange for an assignment payment, SCW
granted its water rights in the Charnock Basin to Santa Monica and Santa Monica
prosecutes the case against the potentially responsible parties.

Electric Service Litigation

SCW has been, in conjunction with the Southern California Edison (Edison)
unit of Edison International, planning to upgrade transmission facilities to
115kv (the 115kv Project) in order to meet increased energy and demand
requirements for SCWs Bear Valley Electric Service area. On December 27, 2000,
SCW filed a lawsuit against Edison for declaratory relief and seeking damages
for breach of contract as a result of delays in the 115kv Project. Subsequently
Edison filed a cross-complaint against SCW for breach of contract, anticipatory
breach, and quantum meruit. Management cannot predict the likely outcome of
this matter.

Other Litigation

Registrant is also subject to ordinary routine litigation incidental to
its business. Other than as disclosed above, no legal proceedings are pending,
except such incidental litigation, to which Registrant is a party or of which
any of its properties is the subject, which are believed to be material.




Item 2. Changes in Securities

As of June 30, 2002, earned surplus amounted to $77,203,000. Neither AWR
nor ASUS is subject to any contractual restriction on its ability to pay
dividends. SCWs maximum ability to pay dividends is restricted by certain Note
Agreements to the sum of $21 million plus 100% of consolidated net income plus
the aggregate net cash proceeds received from capital stock offerings or other
instruments convertible into capital stock. Delays in obtaining approval of the
CPUC for recovery of energy costs in rates or disallowance of the recovery of
such costs could also affect SCWs ability to pay dividends to AWR. AWRs
ability to pay dividends on its Common Shares is dependent upon the payment of
dividends from SCW. The ability of AWR, ASUS and SCW to pay dividends is also
restricted by its retained earnings, respectively, under California law.

CCWC is subject to contractual restrictions on its ability to pay
dividends. CCWCs maximum ability to distribute dividends is limited to
maintenance of no more than 55% debt in the capital structure for the quarter
immediately preceding the distribution. The ability of CCWC to pay dividends is
also restricted by Arizona law. Under restrictions of the Arizona tests,
approximately $3.6 million was available to pay dividends to Common
Shareholders at June 30, 2002.

46



---



##### Table of Contents



There are 729,597 and 82,698 Common Shares authorized but unissued under
the DRP and the 401(k) Plan, respectively, at June 30, 2002. Shares reserved
for the 401(k) Plan are in relation to company matching contributions and for
investment purposes by participants. During the second quarter of 2002, 19,952
common shares were issued pursuant to the terms of both the DRP and the 401(k)
Plans.

There are 375,000 Common Shares reserved for issuance under Registrants
2000 Stock Incentive Plan. Under the Plan, stock options representing a total
of 253,413 Common Shares upon exercise were granted to certain eligible
employees on May 1, 2000, January 2, 2001 and February 4, 2002.

Registrant implemented a three-for-two split of Registrants common stock
payable on June 7, 2002 to holders of record on May 15, 2002. Fractional
shares were paid in cash. As a result of the stock split, the total number of
Common Shares outstanding increased from approximately 10.1 million to 15.1
million.

On April 5, 2002, Registrant redeemed the 4% and 4% series of $25
Preferred Shares at the redemption price $27.00 and $26.50 per share,
respectively, plus accrued and unpaid dividends to the redemption date.
Subsequently on April 19, 2002, the 5% Series was redeemed at $25.25 per share
plus accrued and unpaid dividends to the redemption date.




Item 3. Defaults Upon Senior Securities

None.




Item 4. Submission of Matters to a Vote of Security Holders

No items were submitted during the second quarter of the fiscal year
covered by this report to a vote of security holders through the solicitation
of proxies or otherwise.




Item 5. Other Information

On August 6, 2002, the Board of Directors of Registrant declared a regular
quarterly dividend of $0.217 per common share. The dividend will be paid
September 1, 2002 to shareholders of record as of the close of business on
August 12, 2002.

The certifications of Registrants Chief Executive Officer and Chief
Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002 were filed as correspondence with
the Securities and Exchange Commission concurrent with this Form 10-Q.




Item 6. Exhibits and Reports on Form 8-K

There are no Exhibits during the period covered by this report.

No Reports of Form 8-K were filed during the period covered by this report.

47



---



##### Table of Contents






SIGNATURES

Pursuant to the requirements of Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned duly authorized officer and chief financial officer.

| |                                                                                    |                                                                                                                       
| | ---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------
| | AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANY
|
| | By:                                                                                | /s/  McClellan Harris III                                                                                             
| |                                                                                    |                                                                                                                       
| |                                                                                    | McClellan Harris III
Vice President-Finance,
Chief Financial Officer,
Treasurer and Secretary                         
|
| | By:                                                                                | /s/  Linda J. Matlick                                                                                                 
| |                                                                                    |                                                                                                                       
| |                                                                                    | Linda J. Matlick
Controller
Southern California Water Company                                                         
|
| | By:                                                                                | /s/  Eva G. Tang                                                                                                      
| |                                                                                    |                                                                                                                       
| |                                                                                    | Eva G. Tang
Assistant Treasurer,
Financial Planning Manager and 
Assistant Secretary
Southern California Water Company

Dated: August 14, 2002

48