** **

**SECURITIES AND EXCHANGE COMMISSIONWashington, 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, 2006 or**                                                                                                                                                                                                                                      |
|--------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   | ** **                                                                                                                                                                                                                                                                                                                                                                         |
| o      |   | **Transition report pursuant to Section 13 or  15(d) of the Securities Exchange Act of 1934 for the transition period from                       to                     ** |

 

**Commission file number001-14431**

**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 E.  Foothill Blvd, San Dimas, CA**                        |   | **91773-1207**                     |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                         |

 

**(909)394-3600**(Registrant’s Telephone Number, Including Area Code)

 

**NotApplicable**(Former Name, Former Address and Former Fiscal Year, if Changed Since LastReport)

 

**Commission file number001-12008**

**GoldenState Water Company**(Exact Name of Registrant as Specified in Its Charter)

| **California**                                                  |   | **95-1243678**                     |
|-----------------------------------------------------------------|--------|------------------------------------|
| (State or Other  Jurisdiction of Incorporation or Organization) |   | (IRS Employer  Identification No.) |
|                                                            |   |                               |
| **630 E.  Foothill Blvd, San Dimas, CA**                        |   | **91773-1212**                     |
| (Address of  Principal Executive Offices)                       |   | (Zip Code)                         |

 

**(909) 394-3600**(Registrant’s Telephone Number, Including Area Code)

** **

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

 

Indicate by check mark whetherRegistrant (1) has filed all reports required to be filed by Section 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor 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 o |
|-------------------------------|--------|-------------|
| Golden State Water Company    |   | Yes x  No o |

 

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

 

Indicate by check mark whether the Registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act)

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

 

As of August 9, 2006, the number of Common Sharesoutstanding, of American States Water Company was 16,981,858 shares.

As of August 9, 2006, all of the 122 outstanding Common Shares of GoldenState Water Company were owned by American States Water Company.

 

----

 

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

### **INDEX**

|             | ** ** | ** **                                                                                                             | ** ** | **Page No.** |
|-------------|------------|------------------------------------------------------------------------------------------------------------------------|------------|--------------|
| **Part I**  | ** ** | **Financial  Information**                                                                                             | ** ** | ** **   |
| Item 1:     |       | Financial Statements                                                                                                   |       |         |
|        |       | Consolidated  Balance Sheets of American States Water Company as of June 30, 2006 and  December 31, 2005               |       | 3-4          |
|        |       |                                                                                                                   |       |         |
|        |       | Consolidated Statements of Income of American States  Water Company for the Three Months Ended June 30, 2006 and 2005  |       | 5            |
|        |       |                                                                                                                   |       |         |
|        |       | Consolidated Statements of Income of American States  Water Company for the Six Months Ended June 30, 2006 and 2005    |       | 6            |
|        |       |                                                                                                                   |       |         |
|        |       | Consolidated Statements of Cash Flow of American  States Water Company for the Six Months Ended June 30, 2006 and 2005 |       | 7            |
|        |       |                                                                                                                   |       |         |
|        |       | Balance Sheets of Golden State Water Company as of  June 30, 2006 and December 31, 2005                                |       | 8-9          |
|        |       |                                                                                                                   |       |         |
|        |       | Statements of Income of Golden State Water Company for  the Three Months Ended June 30, 2006 and 2005                  |       | 10           |
|        |       |                                                                                                                   |       |         |
|        |       | Statements of Income of Golden State Water Company for  the Six Months Ended June 30, 2006 and 2005                    |       | 11           |
|        |       |                                                                                                                   |       |         |
|        |       | Statements of Cash Flow of Golden State Water Company  for the Six Months Ended June 30, 2006 and 2005            |       | 12           |
|        |       |                                                                                                                   |       |         |
|        |       | Notes to Consolidated Financial Statements                                                                             |       | 13           |
|        |       |                                                                                                                   |       |         |
| Item 2:     |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                            |       | 28           |
|        |       |                                                                                                                   |       |         |
| Item 3:     |       | Quantitative  and Qualitative Disclosures About Market Risk                                                            |       | 44           |
|        |       |                                                                                                                   |       |         |
| Item 4:     |       | Controls and  Procedures                                                                                               |       | 44           |
|        |       |                                                                                                                   |       |         |
| **Part II** | ** ** | **Other  Information**                                                                                                 | ** ** | ** **   |
| Item 1:     |       | Legal Proceedings                                                                                                      |       | 45           |
|        |       |                                                                                                                   |       |         |
| Item  1A:   |       | Risk  Factors                                                                                                          |       | 45           |
|        |       |                                                                                                                   |       |         |
| Item 2:     |       | Unregistered  Sales of Equity Securities and Use of Proceeds                                                           |       | 45           |
|        |       |                                                                                                                   |       |         |
| Item 3:     |       | Defaults Upon  Senior Securities                                                                                       |       | 45           |
|        |       |                                                                                                                   |       |         |
| Item 4:     |       | Submission of  Matters to a Vote of Security Holders                                                                   |       | 46           |
|        |       |                                                                                                                   |       |         |
| Item 5:     |       | Other Information                                                                                                      |       | 46           |
|        |       |                                                                                                                   |       |         |
| Item  6:    |       | Exhibits                                                                                                               |       | 46           |
|        |       |                                                                                                                   |       |         |
|        |       | Signatures                                                                                                             |       | 47           |

 

1

----

####  

**PART I**

**Item 1. FinancialStatements**

General

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

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

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

Filing Format

This quarterly report on Form 10-Q is a combinedreport being filed by two separate Registrants: American States Water Company(hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”)(formerly known as Southern California Water Company). For more information,please see Note 1 to the Notes to Consolidated Financial Statements and theheading entitled General in Item 2 - Management’s Discussion and Analysis ofFinancial Condition and Results of Operations. References in this report to “Registrant”are to AWR and GSWC collectively, unless otherwise specified. GSWC makes norepresentations as to the information contained in this report relating to AWRand its subsidiaries, other than GSWC.

**Forward-LookingInformation**

Certainmatters discussed in this report (including the documents incorporated hereinby reference) are forward-looking statements intended to qualify for the “safeharbor” from liability established by the Private Securities Litigation ReformAct of 1995. These forward-looking statements can generally be identified assuch 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 orgoals are also forward-looking statements. Such statements address futureevents and conditions concerning capital expenditures, earnings, litigation,rates, water quality and other regulatory matters, adequacy of water supplies,GSWC’s ability to recover electric, natural gas and water supply costs fromratepayers, contract operations, liquidity and capital resources, andaccounting matters. Actual results in each case could differ materially fromthose currently anticipated in such statements, by reason of factors such aschanges in utility regulation, including ongoing local, state and federalactivities; recovery of regulatory assets not yet included in rates; futureeconomic conditions, including changes in customer demand and changes in waterand energy supply costs; future climatic conditions; and legislative, legalproceedings, regulatory and other circumstances affecting anticipated revenuesand costs.

2

----

** **

**AMERICAN STATES WATERCOMPANYCONSOLIDATED BALANCE SHEETSASSETS(Unaudited)**

** **
| ** **                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(in thousands)***                                                                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Utility  Plant, at cost**                                                                            |       |              |       |                  |       |
|                                                                                                   |       |              |       |                  |       |
| Water                                                                                                  |       | $                 | 882,870    |                  | $          | 869,471 |   |
| Electric                                                                                               |       | 61,928            |       | 61,386                |       |
|                                                                                                   |       | 944,798           |       | 930,857               |       |
| Less - Accumulated depreciation                                                                        |       | (274,173          | )          | (259,915              | )          |
|                                                                                                   |       | 670,625           |       | 670,942               |       |
| Construction work in progress                                                                          |       | 60,777            |       | 42,283                |       |
| Net utility plant                                                                                      |       | 731,402           |       | 713,225               |       |
|                                                                                                   |       |              |       |                  |       |
| **Other  Property and Investments**                                                                    |       |              |       |                  |       |
| Goodwill                                                                                               |       | 11,799            |       | 11,841                |       |
| Other property and investments                                                                         |       | 9,695             |       | 9,740                 |       |
| Total other property and investments                                                                   |       | 21,494            |       | 21,581                |       |
|                                                                                                   |       |              |       |                  |       |
| **Current  Assets**                                                                                    |       |              |       |                  |       |
| Cash and cash equivalents                                                                              |       | 9,434             |       | 13,032                |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $760 in 2006 and $789 in 2005) |       | 13,207            |       | 13,341                |       |
| Unbilled revenue                                                                                       |       | 18,925            |       | 15,195                |       |
| Other accounts receivable (less allowance for  doubtful accounts of $313 in 2006 and $337 in 2005)     |       | 10,344            |       | 10,844                |       |
| Income taxes receivable                                                                                |       | 23                |       | 822                   |       |
| Materials and supplies, at average cost                                                                |       | 1,550             |       | 1,421                 |       |
| Regulatory assets - current                                                                            |       | 6,188             |       | 6,104                 |       |
| Prepayments and other current assets                                                                   |       | 2,166             |       | 2,998                 |       |
| Unrealized gain on purchased power contracts                                                           |       | 339               |       | 3,417                 |       |
| Costs and estimated earnings in excess of billings on  uncompleted contracts                           |       | 3,767             |       | —                |       |
| Deferred income taxes - current                                                                        |       | 2,785             |       | 1,692                 |       |
| Total current assets                                                                                   |       | 68,728            |       | 68,866                |       |
|                                                                                                   |       |              |       |                  |       |
| **Regulatory  and Other Assets**                                                                       |       |              |       |                  |       |
| Regulatory assets                                                                                      |       | 60,036            |       | 55,866                |       |
| Other accounts receivable                                                                              |       | 9,037             |       | 8,820                 |       |
| Deferred income taxes                                                                                  |       | 38                |       | —                |       |
| Other                                                                                                  |       | 8,322             |       | 8,419                 |       |
| Total regulatory and other assets                                                                      |       | 77,433            |       | 73,105                |       |
|                                                                                                   |       |              |       |                  |       |
| **Total Assets**                                                                                       |       | $                 | 899,057    |                  | $          | 876,777 |   |

 

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

 

3

----

 

**AMERICANSTATES WATER COMPANYCONSOLIDATED BALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**

 
| ** **                                                                   | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(in thousands)***                                                    | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Capitalization**                                                           |       |              |       |                  |       |
| Common shares, no par value, no stated value                                 |       | $                 | 172,358    |                  | $          | 166,529 |   |
| Earnings reinvested in the business                                          |       | 105,613           |       | 101,121               |       |
| Accumulated other comprehensive loss                                         |       | (3,556            | )          | (3,556                | )          |
| Total common shareholders’ equity                                       |       | 274,415           |       | 264,094               |       |
| Long-term debt                                                               |       | 268,209           |       | 268,405               |       |
| Total capitalization                                                         |       | 542,624           |       | 532,499               |       |
|                                                                         |       |              |       |                  |       |
| **Current  Liabilities**                                                     |       |              |       |                  |       |
| Notes payable to banks                                                       |       | 28,000            |       | 27,000                |       |
| Long-term debt - current                                                     |       | 571               |       | 635                   |       |
| Accounts payable                                                             |       | 20,875            |       | 19,653                |       |
| Income taxes payable                                                         |       | 2,294             |       | 1,534                 |       |
| Accrued employee expenses                                                    |       | 5,120             |       | 5,879                 |       |
| Accrued interest                                                             |       | 2,547             |       | 2,254                 |       |
| Regulatory liabilities - current                                             |       | 5,189             |       | 5,592                 |       |
| Deferred income taxes - current                                              |       | —            |       | 86                    |       |
| Other                                                                        |       | 12,071            |       | 14,952                |       |
| Total current liabilities                                                    |       | 76,667            |       | 77,585                |       |
|                                                                         |       |              |       |                  |       |
| **Other  Credits**                                                           |       |              |       |                  |       |
| Advances for construction                                                    |       | 86,642            |       | 85,168                |       |
| Contributions in aid of construction - net                                   |       | 86,153            |       | 83,976                |       |
| Deferred income taxes                                                        |       | 75,433            |       | 69,669                |       |
| Unamortized investment tax credits                                           |       | 2,473             |       | 2,518                 |       |
| Accrued pension and other postretirement benefits                            |       | 17,313            |       | 13,562                |       |
| Regulatory liabilities                                                       |       | 760               |       | 1,823                 |       |
| Billings in excess of costs and estimated earnings on  uncompleted contracts |       | 3,090             |       | 2,207                 |       |
| Other                                                                        |       | 7,902             |       | 7,770                 |       |
| Total other credits                                                          |       | 279,766           |       | 266,693               |       |
|                                                                         |       |              |       |                  |       |
| **Commitments  and Contingencies (Note 8)**                                  |       | —            |       | —                |       |
|                                                                         |       |              |       |                  |       |
| **Total  Capitalization and Liabilities**                                    |       | $                 | 899,057    |                  | $          | 876,777 |   |

 

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

 

4

----

 

**AMERICAN STATES WATER COMPANYCONSOLIDATED STATEMENTS OF INCOMEFOR THE THREE MONTHSENDED JUNE 30, 2006 AND 2005(Unaudited)**

** **
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**                | ** ** |
| ***(in thousands, except per share amounts)*** | ** ** | **2006**                         | ** ** | **2005** | ** ** |
| **Operating  Revenues**                                                 |       |                             |       |   |   |
| Water                                                                   |       | $                                | 53,122     |   | $ | 53,574 |   |
| Electric                                                                |       | 7,027                            |       | 6,091 |   |
| Other                                                                   |       | 1,989                            |       | 867 |   |
| Total operating revenues                                                |       | 62,138                           |       | 60,532 |   |
|                                                                    |       |                             |       |   |   |
| **Operating  Expenses**                                                 |       |                             |       |   |   |
| Water purchased                                                         |       | 10,916                           |       | 12,277 |   |
| Power purchased for pumping                                             |       | 2,416                            |       | 2,184 |   |
| Groundwater production assessment                                       |       | 2,239                            |       | 1,843 |   |
| Power purchased for resale                                              |       | 3,248                            |       | 2,710 |   |
| Unrealized loss (gain) on purchased power contracts                     |       | 923                              |       | (459 | ) |
| Supply cost balancing accounts                                          |       | (825                             | )          | (550 | ) |
| Other operating expenses                                                |       | 5,886                            |       | 5,218 |   |
| Administrative and general expenses                                     |       | 10,902                           |       | 11,608 |   |
| Depreciation and amortization                                           |       | 6,610                            |       | 5,725 |   |
| Maintenance                                                             |       | 3,246                            |       | 2,484 |   |
| Property and other taxes                                                |       | 2,475                            |       | 2,244 |   |
| Total operating expenses                                                |       | 48,036                           |       | 45,284 |   |
|                                                                    |       |                             |       |   |   |
| **Operating  Income**                                                   |       | 14,102                           |       | 15,248 |   |
|                                                                    |       |                             |       |   |   |
| Interest expense                                                        |       | (5,347                           | )          | (4,809 | ) |
| Interest income                                                         |       | 963                              |       | 35 |   |
|                                                                    |       |                             |       |   |   |
| **Income  from operations before income tax expense**                   |       | 9,718                            |       | 10,474 |   |
| ** **                                                              |       |                             |       |   |   |
| Income tax expense                                                      |       | 3,449                            |       | 4,739 |   |
|                                                                    |       |                             |       |   |   |
| **Net  Income**                                                         |       | $                                | 6,269      |   | $ | 5,735 |   |
|                                                                    |       |                             |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                      |       | 16,881                           |       | 16,773 |   |
| **Basic  Earnings Per Common Share**                                    |       | $                                | 0.36       |   | $ | 0.34 |   |
|                                                                    |       |                             |       |   |   |
| **Weighted  Average Number of Diluted Shares**                          |       | 16,947                           |       | 16,834 |   |
| **Fully  Diluted Earnings Per Share**                                   |       | $                                | 0.36       |   | $ | 0.34 |   |
|                                                                    |       |                             |       |   |   |
| **Dividends  Declared Per Common Share**                                |       | $                                | 0.225      |   | $ | 0.225 |   |
|                                                                    |       |                             |       |   |   |

 

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

 

5

----

 

**AMERICAN STATES WATER COMPANYCONSOLIDATED STATEMENTS OF INCOMEFOR THE SIX MONTHSENDED JUNE 30, 2006 AND 2005(Unaudited)**

** **
| ** **                                                              | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                              | ** ** | **June 30,**              | ** ** |
| ***(in thousands, except per share amounts)*** | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Operating  Revenues**                                                 |       |                           |       |   |   |
| Water                                                                   |       | $                              | 101,271    |   | $ | 95,071 |   |
| Electric                                                                |       | 15,372                         |       | 13,561 |   |
| Other                                                                   |       | 6,102                          |       | 1,713 |   |
| Total operating revenues                                                |       | 122,745                        |       | 110,345 |   |
|                                                                    |       |                           |       |   |   |
| **Operating  Expenses**                                                 |       |                           |       |   |   |
| Water purchased                                                         |       | 19,260                         |       | 19,963 |   |
| Power purchased for pumping                                             |       | 4,020                          |       | 3,671 |   |
| Groundwater production assessment                                       |       | 4,322                          |       | 3,764 |   |
| Power purchased for resale                                              |       | 7,811                          |       | 6,847 |   |
| Unrealized loss (gain) on purchased power contracts                     |       | 3,078                          |       | (3,474 | ) |
| Supply cost balancing accounts                                          |       | (338                           | )          | 528 |   |
| Other operating expenses                                                |       | 10,587                         |       | 10,287 |   |
| Administrative and general expenses                                     |       | 22,015                         |       | 21,909 |   |
| Depreciation and amortization                                           |       | 13,092                         |       | 11,389 |   |
| Maintenance                                                             |       | 5,719                          |       | 4,822 |   |
| Property and other taxes                                                |       | 5,018                          |       | 4,539 |   |
| Gain on settlement for removal of wells                                 |       | —                         |       | (760 | ) |
| Total operating expenses                                                |       | 94,584                         |       | 83,485 |   |
|                                                                    |       |                           |       |   |   |
| **Operating  Income**                                                   |       | 28,161                         |       | 26,860 |   |
|                                                                    |       |                           |       |   |   |
| Interest expense                                                        |       | (10,515                        | )          | (9,534 | ) |
| Interest income                                                         |       | 1,776                          |       | 56 |   |
|                                                                    |       |                           |       |   |   |
| **Income  from operations before income tax expense**                   |       | 19,422                         |       | 17,382 |   |
| ** **                                                              |       |                           |       |   |   |
| Income tax expense                                                      |       | 7,252                          |       | 7,883 |   |
|                                                                    |       |                           |       |   |   |
| **Net  Income**                                                         |       | $                              | 12,170     |   | $ | 9,499 |   |
|                                                                    |       |                           |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                      |       | 16,844                         |       | 16,769 |   |
| **Basic  Earnings Per Common Share**                                    |       | $                              | 0.71       |   | $ | 0.57 |   |
|                                                                    |       |                           |       |   |   |
| **Weighted  Average Number of Diluted Shares**                          |       | 16,905                         |       | 16,821 |   |
| **Fully  Diluted Earnings Per Share**                                   |       | $                              | 0.71       |   | $ | 0.56 |   |
|                                                                    |       |                           |       |   |   |
| **Dividends Declared Per Common  Share**                                |       | $                              | 0.450      |   | $ | 0.450 |   |

 

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

 

6

----

 

**AMERICAN STATES WATER COMPANYCONSOLIDATED STATEMENTS OF CASH FLOWFOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005(Unaudited)**

** **
| ** **                                                                                      | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                      | ** ** | **June 30,**              | ** ** |
| ***(in thousands)***                                                                       | ** ** | **2006**                       | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                                      |       |                           |       |   |   |
| Net income                                                                                      |       | $                              | 12,170     |   | $ | 9,499 |   |
| Adjustments for non-cash items:                                                                 |       |                           |       |   |   |
| Depreciation and amortization                                                                   |       | 13,092                         |       | 11,389 |   |
| Provision for doubtful accounts                                                                 |       | 264                            |       | 235 |   |
| Deferred income taxes, net regulatory asset for flow-through  taxes, and investment tax credits |       | 3,704                          |       | 3,219 |   |
| Unrealized loss (gain) on purchased power contracts                                             |       | 3,078                          |       | (3,474 | ) |
| Stock-based compensation expense                                                                |       | 325                            |       | 97 |   |
| Other - net                                                                                     |       | 421                            |       | (165 | ) |
| Changes in  assets and liabilities:                                                             |       |                           |       |   |   |
| Accounts receivable - customers                                                                 |       | (130                           | )          | (1,182 | ) |
| Unbilled revenue                                                                                |       | (3,730                         | )          | (3,890 | ) |
| Other accounts receivable                                                                       |       | 283                            |       | 52 |   |
| Materials and supplies                                                                          |       | (129                           | )          | 60 |   |
| Prepayments and other current assets                                                            |       | 832                            |       | 1,549 |   |
| Regulatory assets - supply cost balancing accounts                                              |       | (338                           | )          | 528 |   |
| Other assets                                                                                    |       | (6,227                         | )          | 336 |   |
| Accounts payable                                                                                |       | 1,222                          |       | 576 |   |
| Income taxes receivable/payable                                                                 |       | 1,559                          |       | 9,189 |   |
| Other liabilities                                                                               |       | 660                            |       | 4,871 |   |
| Net cash provided                                                                               |       | 27,056                         |       | 32,889 |   |
|                                                                                            |       |                           |       |   |   |
| **Cash  Flows From Investing Activities:**                                                      |       |                           |       |   |   |
| Construction expenditures                                                                       |       | (34,122                        | )          | (35,834 | ) |
| Net cash used                                                                                   |       | (34,122                        | )          | (35,834 | ) |
|                                                                                            |       |                           |       |   |   |
| **Cash  Flows From Financing Activities:**                                                      |       |                           |       |   |   |
| Proceeds from issuance of common shares                                                         |       | 1,023                          |       | 555 |   |
| Proceeds from stock option exercises                                                            |       | 3,421                          |       | — |   |
| Tax benefits from exercise of stock-based awards                                                |       | 897                            |       | — |   |
| Receipt of advances for and contributions in aid of  construction                               |       | 5,892                          |       | 8,128 |   |
| Refunds on advances for construction                                                            |       | (2,196                         | )          | (2,372 | ) |
| Repayments of long-term debt                                                                    |       | (260                           | )          | (353 | ) |
| Net change in notes payable to banks                                                            |       | 1,000                          |       | 4,000 |   |
| Cash received on financing portion of purchased  power contracts                                |       | 1,333                          |       | 1,333 |   |
| Dividend equivalent rights paid                                                                 |       | (127                           | )          | — |   |
| Tax benefits from payment of dividend equivalent  rights                                        |       | 52                             |       | — |   |
| Dividends paid                                                                                  |       | (7,567                         | )          | (7,545 | ) |
| Net cash provided                                                                               |       | 3,468                          |       | 3,746 |   |
|                                                                                            |       |                           |       |   |   |
| **Net  (decrease) increase in cash and cash equivalents**                                       |       | (3,598                         | )          | 801 |   |
| **Cash  and cash equivalents, beginning of period**                                             |       | 13,032                         |       | 4,303 |   |
| **Cash and cash equivalents, end  of period**                                                   |       | $                              | 9,434      |   | $ | 5,104 |   |

 

*The accompanying notes are an integral part of theseconsolidated financial statements*

 

7

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**GOLDEN STATE WATER COMPANYBALANCE SHEETSASSETS(Unaudited)**
| ** **                                                                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(in thousands)***                                                                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Utility Plant, at cost**                                                                             |       |              |       |                  |       |
|                                                                                                   |       |              |       |                  |       |
| Water                                                                                                  |       | $                 | 832,638    |                  | $          | 819,958 |   |
| Electric                                                                                               |       | 61,928            |       | 61,386                |       |
|                                                                                                   |       | 894,566           |       | 881,344               |       |
| Less - Accumulated depreciation                                                                        |       | (259,927          | )          | (246,649              | )          |
|                                                                                                   |       | 634,639           |       | 634,695               |       |
| Construction work in progress                                                                          |       | 58,240            |       | 38,334                |       |
| Net utility plant                                                                                      |       | 692,879           |       | 673,029               |       |
|                                                                                                   |       |              |       |                  |       |
| ** **                                                                                             |       |              |       |                  |       |
| **Other Property and Investments**                                                                     |       |              |       |                  |       |
| Other property and investments                                                                         |       | 7,318             |       | 7,364                 |       |
| Total other property and investments                                                                   |       | 7,318             |       | 7,364                 |       |
|                                                                                                   |       |              |       |                  |       |
| **Current Assets**                                                                                     |       |              |       |                  |       |
| Cash and cash equivalents                                                                              |       | 6,319             |       | 8,788                 |       |
| Accounts receivable-customers (less allowance for  doubtful accounts of $715 in 2006 and $765 in 2005) |       | 12,754            |       | 12,919                |       |
| Unbilled revenue                                                                                       |       | 18,495            |       | 14,856                |       |
| Inter-company receivable                                                                               |       | 298               |       | 263                   |       |
| Other accounts receivable (less allowance for  doubtful accounts of $310 in 2006 and $334 in 2005)     |       | 3,067             |       | 6,106                 |       |
| Materials and supplies, at average cost                                                                |       | 1,534             |       | 1,404                 |       |
| Regulatory assets - current                                                                            |       | 6,113             |       | 6,033                 |       |
| Prepayments and other current assets                                                                   |       | 1,921             |       | 2,795                 |       |
| Unrealized gain on purchased power contracts                                                           |       | 339               |       | 3,417                 |       |
| Deferred income taxes - current                                                                        |       | 2,751             |       | 1,693                 |       |
| Total current assets                                                                                   |       | 53,591            |       | 58,274                |       |
|                                                                                                   |       |              |       |                  |       |
| **Regulatory and Other Assets**                                                                        |       |              |       |                  |       |
| Regulatory assets                                                                                      |       | 59,834            |       | 55,627                |       |
| Other accounts receivable                                                                              |       | 9,037             |       | 8,820                 |       |
| Other                                                                                                  |       | 7,477             |       | 7,575                 |       |
| Total regulatory and other assets                                                                      |       | 76,348            |       | 72,022                |       |
|                                                                                                   |       |              |       |                  |       |
| **Total Assets**                                                                                       |       | $                 | 830,136    |                  | $          | 810,689 |   |

 

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

8

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**GOLDENSTATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**
| ** **                                        | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(in thousands)***                         | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **Capitalization**                                |       |              |       |                  |       |
| Common shares, no par value, no stated value      |       | $                 | 160,897    |                  | $          | 159,531 |   |
| Earnings reinvested in the business               |       | 103,045           |       | 99,645                |       |
| Accumulated other comprehensive loss              |       | (3,556            | )          | (3,556                | )          |
| Total common shareholder’s equity            |       | 260,386           |       | 255,620               |       |
| Long-term debt                                    |       | 261,344           |       | 261,540               |       |
| Total capitalization                              |       | 521,730           |       | 517,160               |       |
|                                              |       |              |       |                  |       |
| **Current Liabilities**                           |       |              |       |                  |       |
| Long-term debt - current                          |       | 301               |       | 295                   |       |
| Accounts payable                                  |       | 18,771            |       | 17,914                |       |
| Inter-company payable                             |       | 2,500             |       | —                |       |
| Income taxes payable to Parent                    |       | 4,626             |       | 2,268                 |       |
| Accrued employee expenses                         |       | 4,750             |       | 5,507                 |       |
| Accrued interest                                  |       | 2,515             |       | 2,218                 |       |
| Regulatory liabilities - current                  |       | 5,189             |       | 5,592                 |       |
| Deferred income taxes - current                   |       | —            |       | 109                   |       |
| Other                                             |       | 11,366            |       | 12,390                |       |
| Total current liabilities                         |       | 50,018            |       | 46,293                |       |
|                                              |       |              |       |                  |       |
| **Other Credits**                                 |       |              |       |                  |       |
| Advances for construction                         |       | 76,114            |       | 74,790                |       |
| Contributions in aid of construction - net        |       | 84,750            |       | 83,055                |       |
| Deferred income taxes                             |       | 70,896            |       | 65,469                |       |
| Unamortized investment tax credits                |       | 2,473             |       | 2,518                 |       |
| Accrued pension and other postretirement benefits |       | 17,313            |       | 13,562                |       |
| Regulatory liabilities                            |       | —            |       | 1,063                 |       |
| Other                                             |       | 6,842             |       | 6,779                 |       |
| Total other credits                               |       | 258,388           |       | 247,236               |       |
|                                              |       |              |       |                  |       |
| **Commitments  and Contingencies (Note 8)**       |       | —            |       | —                |       |
|                                              |       |              |       |                  |       |
| **Total Capitalization and Liabilities**          |       | $                 | 830,136    |                  | $          | 810,689 |   |
| ** **                                        |       |              |       |                  |       |

 

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

9

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**GOLDEN STATE WATER COMPANYSTATEMENTS OF INCOMEFOR THE THREE MONTHSENDED JUNE 30, 2006 AND 2005(Unaudited)**
| ** **                                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-------------------------------------------------|------------|
| ***(in thousands)***                                  | ** ** | **2006**                                        | ** ** | **2005** | ** ** |
| **Operating Revenues**                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                               | 51,073     |   | $ | 51,797 |   |
| Electric                                              |       | 7,027                                           |       | 6,091 |   |
| Other                                                 |       | 318                                             |       | 36 |   |
| Total operating revenues                              |       | 58,418                                          |       | 57,924 |   |
|                                                  |       |                                            |       |   |   |
| **Operating Expenses**                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water purchased                                       |       | 10,702                                          |       | 12,100 |   |
| Power purchased for pumping                           |       | 2,218                                           |       | 2,045 |   |
| Groundwater production assessment                     |       | 2,239                                           |       | 1,878 |   |
| Power purchased for resale                            |       | 3,248                                           |       | 2,710 |   |
| Unrealized loss (gain) on purchased power contracts   |       | 923                                             |       | (459 | ) |
| Supply cost balancing accounts                        |       | (825                                            | )          | (550 | ) |
| Other operating expenses                              |       | 4,906                                           |       | 4,697 |   |
| Administrative and general expenses                   |       | 8,910                                           |       | 9,763 |   |
| Depreciation and amortization                         |       | 6,134                                           |       | 5,444 |   |
| Maintenance                                           |       | 3,022                                           |       | 2,268 |   |
| Property and other taxes                              |       | 2,368                                           |       | 2,135 |   |
| Total operating expenses                              |       | 43,845                                          |       | 42,031 |   |
|                                                  |       |                                            |       |   |   |
| **Operating  Income**                                 |       | 14,573                                          |       | 15,893 |   |
| ** **                                            | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Interest expense                                      |       | (4,875                                          | )          | (4,481 | ) |
| Interest income                                       |       | 928                                             |       | 15 |   |
|                                                  |       |                                            |       |   |   |
| **Income  from operations before income tax expense** |       | 10,626                                          |       | 11,427 |   |
| ** **                                            | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Income tax expense                                    |       | 3,867                                           |       | 5,130 |   |
|                                                  |       |                                            |       |   |   |
| **Net  Income**                                       |       | $                                               | 6,759      |   | $ | 6,297 |   |

 

*The accompanying notes are an integral part of thesefinancial statements*

 

10

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**GOLDEN STATE WATER COMPANYSTATEMENTS OF INCOMEFOR THE SIX MONTHSENDED JUNE 30, 2006 AND 2005(Unaudited)**
| ** **                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(in thousands)***                             | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Operating Revenues**                                |       |                                          |       |   |   |
| Water                                                 |       | $                                             | 97,440     |   | $ | 91,951 |   |
| Electric                                              |       | 15,372                                        |       | 13,561 |   |
| Other                                                 |       | 2,919                                         |       | 56 |   |
| Total operating revenues                              |       | 115,731                                       |       | 105,568 |   |
|                                                  |       |                                          |       |   |   |
| **Operating Expenses**                                |       |                                          |       |   |   |
| Water purchased                                       |       | 18,877                                        |       | 19,670 |   |
| Power purchased for pumping                           |       | 3,733                                         |       | 3,457 |   |
| Groundwater production assessment                     |       | 4,322                                         |       | 3,799 |   |
| Power purchased for resale                            |       | 7,811                                         |       | 6,847 |   |
| Unrealized loss (gain) on purchased power contracts   |       | 3,078                                         |       | (3,474 | ) |
| Supply cost balancing accounts                        |       | (338                                          | )          | 528 |   |
| Other operating expenses                              |       | 9,434                                         |       | 9,310 |   |
| Administrative and general expenses                   |       | 19,094                                        |       | 18,742 |   |
| Depreciation and amortization                         |       | 12,165                                        |       | 10,830 |   |
| Maintenance                                           |       | 5,341                                         |       | 4,461 |   |
| Property and other taxes                              |       | 4,794                                         |       | 4,318 |   |
| Total operating expenses                              |       | 88,311                                        |       | 78,488 |   |
|                                                  |       |                                          |       |   |   |
| **Operating  Income**                                 |       | 27,420                                        |       | 27,080 |   |
| ** **                                            |       |                                          |       |   |   |
| Interest expense                                      |       | (9,678                                        | )          | (8,900 | ) |
| Interest income                                       |       | 1,724                                         |       | 32 |   |
|                                                  |       |                                          |       |   |   |
| **Income  from operations before income tax expense** |       | 19,466                                        |       | 18,212 |   |
| ** **                                            |       |                                          |       |   |   |
| Income tax expense                                    |       | 7,362                                         |       | 8,236 |   |
|                                                  |       |                                          |       |   |   |
| **Net  Income**                                       |       | $                                             | 12,104     |   | $ | 9,976 |   |

 

*The accompanying notes are an integral part of thesefinancial statements*

 

11

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**GOLDEN STATE WATER COMPANYCASH FLOW STATEMENTSFOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005(Unaudited)**
| ** **                                                                                      | ** ** | **Six Months Ended  June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| ***(in thousands)***                                                                       | ** ** | **2006**                                      | ** ** | **2005** | ** ** |
| **Cash  Flows From Operating Activities:**                                                      |       |                                          |       |   |   |
| Net income                                                                                      |       | $                                             | 12,104     |   | $ | 9,976 |   |
| Adjustments for  non-cash items:                                                                |       |                                          |       |   |   |
| Depreciation and amortization                                                                   |       | 12,165                                        |       | 10,830 |   |
| Provision for doubtful accounts                                                                 |       | 239                                           |       | 218 |   |
| Deferred income taxes, net regulatory asset for flow-through  taxes, and investment tax credits |       | 3,417                                         |       | 2,782 |   |
| Unrealized loss (gain) on purchased power contracts                                             |       | 3,078                                         |       | (3,474 | ) |
| Stock-based compensation expense                                                                |       | 310                                           |       | 97 |   |
| Other - net                                                                                     |       | 346                                           |       | 37 |   |
| Changes in  assets and liabilities:                                                             |       |                                          |       |   |   |
| Accounts receivable - customers                                                                 |       | (74                                           | )          | (1,181 | ) |
| Unbilled revenue                                                                                |       | (3,639                                        | )          | (3,789 | ) |
| Other accounts receivable                                                                       |       | 2,822                                         |       | 172 |   |
| Materials and supplies                                                                          |       | (130                                          | )          | 63 |   |
| Prepayments and other current assets                                                            |       | 874                                           |       | 1,503 |   |
| Regulatory assets - supply cost balancing accounts                                              |       | (338                                          | )          | 528 |   |
| Other assets                                                                                    |       | (2,446                                        | )          | 501 |   |
| Accounts payable                                                                                |       | 857                                           |       | 234 |   |
| Inter-company receivable/payable                                                                |       | (35                                           | )          | (2,423 | ) |
| Income taxes receivable/payable from/to Parent                                                  |       | 2,358                                         |       | 7,979 |   |
| Other liabilities                                                                               |       | (200                                          | )          | 3,920 |   |
| Net cash provided                                                                               |       | 31,708                                        |       | 27,973 |   |
|                                                                                            |       |                                          |       |   |   |
| **Cash  Flows From Investing Activities:**                                                      |       |                                          |       |   |   |
| Construction expenditures                                                                       |       | (33,116                                       | )          | (33,437 | ) |
| Net cash used                                                                                   |       | (33,116                                       | )          | (33,437 | ) |
|                                                                                            |       |                                          |       |   |   |
| **Cash  Flows From Financing Activities:**                                                      |       |                                          |       |   |   |
| Tax benefits from exercise of stock-based awards                                                |       | 897                                           |       | — |   |
| Receipt of advances for and contributions in aid of  construction                               |       | 5,241                                         |       | 7,013 |   |
| Refunds on advances for construction                                                            |       | (2,173                                        | )          | (2,377 | ) |
| Repayments of long-term debt                                                                    |       | (190                                          | )          | (184 | ) |
| Net change in inter-company borrowings                                                          |       | 2,500                                         |       | 8,300 |   |
| Cash received on financing portion of purchased  power contracts                                |       | 1,333                                         |       | 1,333 |   |
| Dividend equivalent rights paid                                                                 |       | (116                                          | )          | — |   |
| Tax benefits from payment of dividend equivalent  rights                                        |       | 47                                            |       | — |   |
| Dividends paid                                                                                  |       | (8,600                                        | )          | (8,000 | ) |
| Net cash (used) provided                                                                        |       | (1,061                                        | )          | 6,085 |   |
|                                                                                            |       |                                          |       |   |   |
| **Net  (decrease) increase in cash and cash equivalents**                                       |       | (2,469                                        | )          | 621 |   |
| **Cash  and cash equivalents, beginning of period**                                             |       | 8,788                                         |       | 2,702 |   |
| **Cash and cash equivalents, end  of period**                                                   |       | $                                             | 6,319      |   | $ | 3,323 |   |

 

*Theaccompanying notes are an integral part of these financial statements*

12

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**AMERICAN STATES WATER COMPANYANDGOLDEN STATE WATER COMPANYNOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Unaudited)**

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

General/ Nature of Operations: American States Water Company (“AWR”)is the parent company of Golden State Water Company (“GSWC”), American StatesUtility Services, Inc. (“ASUS”) (and its subsidiaries: Fort Bliss WaterServices Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”) and OldDominion Utility Services, Inc. (“ODUS”)), and Chaparral City Water Company (“CCWC”).  More than 90% of AWR’s assets consist of thecommon stock of GSWC and its revenues and operations are primarily those ofGSWC. GSWC is a public utility engaged principally in the purchase, production,distribution and sale of water in California serving approximately 254,000water customers. GSWC also distributes electricity in several Californiamountain communities serving approximately 23,000 electric customers. TheCalifornia Public Utilities Commission (“CPUC”) regulates GSWC’s water andelectric businesses, including properties, rates, services, facilities andother matters. CCWC is a public utilityregulated by the Arizona Corporation Commission (“ACC”) serving approximately 13,000 customers in thetown of Fountain Hills, Arizona and a portion of the City of Scottsdale,Arizona. ASUS performs water-related services and operations on acontract basis. There is no direct regulatory oversight by either the CPUC orthe ACC of the operation or rates of the contracted services provided by ASUSand its wholly owned subsidiaries or by AWR.

FBWSoperates the water and wastewater systems at Fort Bliss located near El Paso,Texas pursuant to the terms of a 50-year contract with the U.S. Government.FBWS holds a certificate of convenience and necessity from the Texas Commissionon Environmental Quality (“TCEQ”).  TUStook over the operation and maintenance of the water and wastewater systems atAndrews Air Force Base in Maryland on February 1, 2006 and commenced operationof these systems on that date pursuant to the terms of a 50-year contract withthe U.S. Government.  On December 14,2005, the Maryland Public Service Commission determined it was in the publicinterest and consistent with public convenience and necessity to conditionallyapprove the right of TUS to operate in accordance with the terms and conditionsof the contract with the U.S. Government. Furthermore, ODUS took over the operation and maintenance of thewastewater systems at Fort Lee in Virginia on February 23, 2006 and the waterand wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginiaon April 3, 2006 and commenced operation and maintenance of these systems onthose dates pursuant to the terms of a 50-year contract with the U.S. Government.  The Virginia State Corporation Commissionexercises jurisdiction over ODUS as a public service company.

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Form 10-K for the year ended December 31, 2005 filed with the SEC.  Certain prior-period amounts were reclassified to conform to the June 30, 2006 financial statement presentation.

13

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GSWC’s Related PartyTransactions: GSWC and other subsidiaries provide and receivevarious services to and from their parent, AWR, and among themselves. Inaddition, AWR has an $85 million syndicated credit facility. AWR borrows underthis facility and provides funds to its subsidiaries, including GSWC, insupport of their operations. Amounts owed to AWR for borrowings under thisfacility represent the majority of GSWC’s inter-company payables on GSWC’sbalance sheets as of June 30, 2006 and December 31, 2005. The interest ratecharged to GSWC is sufficient to cover AWR’s interest cost under the creditfacility. GSWC also allocates certain corporate office administrative andgeneral costs to its affiliates using agreed upon allocation factors.

**Note 2 — Regulatory Matters:**

In accordance withaccounting principles for rate-regulated enterprises, Registrant recordsregulatory assets, which represent probable future revenues associated withcertain costs that will be recovered from customers through the ratemakingprocess, and regulatory liabilities, which represent probable future reductionsin revenues associated with amounts that are to be credited to customersthrough the ratemaking process. At June 30, 2006, Registrant had $9.4million of regulatory assets not accruing carrying costs. Of this amount, $7.7million represents deferred income taxes due to accelerated tax benefitspreviously flowed-through to ratepayers, which will be included in ratesconcurrently with recognition of the associated tax expense. In addition, $1.7million in deferred charges for rate case applications was recorded as otherregulatory assets that Registrant recovers in rates over a short period and forwhich no recovery of carrying costs is earned.

Regulatoryassets, less regulatory liabilities, included in the consolidated balancesheets are as follows:

| ** **                                             | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------|------------|-------------------|------------|-----------------------|------------|
| ***(In thousands)***                              | ** ** | **2006**          | ** ** | **2005**              | ** ** |
| **GSWC**                                               |       |              |       |                  |       |
| Supply cost balancing accounts                         |       | $                 | 18,518     |                  | $          | 19,624 |   |
| Supply cost memorandum accounts net  under-collections |       | 4,668             |       | 3,151                 |       |
| Costs deferred for future recovery on Aerojet case     |       | 21,346            |       | 21,109                |       |
| Flow-through taxes, net                                |       | 7,737             |       | 6,939                 |       |
| Electric transmission line abandonment costs           |       | 3,355             |       | 3,428                 |       |
| Asset retirement obligations                           |       | 3,102             |       | 2,928                 |       |
| Low income balancing accounts                          |       | 3,212             |       | 2,846                 |       |
| General rate case memorandum accounts                  |       | —            |       | 209                   |       |
| Refund of water rights lease revenues                  |       | (3,902            | )          | (6,474                | )          |
| Other regulatory assets                                |       | 2,722             |       | 1,245                 |       |
| Total GSWC                                             |       | $                 | 60,758     |                  | $          | 55,005 |   |
| **CCWC**                                               |       |              |       |                  |       |
| Asset retirement obligations                           |       | 46                |       | 44                    |       |
| Other regulatory assets/liabilities, net               |       | (529              | )          | (494                  | )          |
| Total AWR                                              |       | $                 | 60,275     |                  | $          | 54,555 |   |

 

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

***Electric Supply Cost Balancing Account*** — Electric power costsincurred by GSWC’s Bear Valley Electric division continue to be charged to itselectric supply cost balancing account. The under-collection in the electricsupply cost balancing account is $20.5 million at June 30, 2006. The balance inthe electric supply balancing account is primarily impacted by (i) a surchargeto decrease previously under-collected energy costs; (ii) changes in purchasedenergy costs; and (iii) changes in power system delivery costs.

The CPUC has authorizedGSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hourthrough August 2011, to enable GSWC to recover an under-collection ofapproximately $23.1 million at the end of 2001 which had been incurred duringthe energy crisis in late 2000 and 2001. GSWC sold 34,381,187 and 30,120,267kilowatt hours of electricity to its Bear Valley Electric division customersfor the three months ended June 30, 2006 and 2005, respectively, and 77,075,265and 70,314,814 kilowatt hours for the six months ended June 30, 2006 and 2005,respectively. As a result, the supply cost balancing account was reduced byapproximately $761,000 and $667,000 for the three months ended June 30, 2006and 2005, respectively, and approximately $1,706,000 and $1,557,000 for the sixmonths ended June 30, 2006 and 2005, respectively. Approximately $13.6 

14

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million of the under-collection incurred during theenergy crisis in late 2000 and 2001 has been recovered through thissurcharge.  GSWC anticipates thesurcharge, based on electricity sales, to be sufficient for it to recover theamount of the under-collected balance incurred during the energy crisis byAugust 2011.

The purchased energycosts that are recorded in the supply cost balancing account are subject to aprice cap by terms of the 2001 settlement with the CPUC. GSWC is allowed toinclude up to a weighted average annual energy purchase cost of $77 permegawatt-hour (“MWh”) through August 2011 in its electric supply cost balancingaccount for purchased energy costs. To the extent that the actual weightedaverage annual cost for power purchased exceeds the $77 per MWh amount, GSWCwill not be able to include these amounts in its balancing account and suchamounts will be expensed. During the three months ended June 30, 2006 and 2005, there was no expense overthe $77 per MWh cap because of increases in GSWC’s sales of surplus energy intothe spot market.  During the six monthsended June 30, 2006 and 2005, GSWC expensed approximately $40,000 and $48,000for costs over $77 per MWh, respectively.

Charges to GSWC bySouthern California Edison (Edison) associated with the transportation ofenergy over Edison’s power system and the abandonment of a transmission lineupgrade have increased under Edison’s tariff to levels that exceed the amountsauthorized by the CPUC in Bear Valley Electric’s retail power rates to itscustomers.  The incremental cost increaseto GSWC from this tariff above the amounts included in rates is $38,137 permonth, or approximately $114,000 and $229,000 for the three and six monthsended June 30, 2006 and 2005, respectively, both of which do not includeprepayments. These increases have been included in the balancing account forsubsequent recovery from customers.  The incoming power systemdelivery costs are not subject to any price caps.

Other components,such as interest accrued on cumulative under-collected balance and power lossduring transmission, also affect the balance of the electric supply costbalancing account.

***Water Supply Cost Memorandum/BalancingAccounts -***In a CPUC decision issued on June 19, 2003 related to memorandum supply costaccounts, all water utilities regulated by the CPUC were required to seekreview of under- and over- collections by filing an advice letter annually andthe utility’s recovery of such expenses has been reduced by the amountexceeding the authorized rate of return. On April 13, 2006, the CPUC approved adecision eliminating the earnings test adopted in the June 2003 decision.  The recent decision also eliminated the needto make an annual filing.  Pursuantto this order, GSWC recognized a cumulative under-collection of approximately$636,000 to the supply cost memorandum account provisions in the second quarterof 2006 for the under-collected balances not recognized at March 31, 2006 andbegan recording under- and over- collections on a monthly basis thereaftercommencing with the second quarter of 2006.  In addition, forthe three months ended June 30, 2006 and 2005, approximately $599,000 and$1,141,000 of under-collections, respectively, were recorded in the watersupply cost memorandum/balancing accounts, net of amortization of approximately$283,000 and $172,000.  For the sixmonths ended June 30, 2006 and 2005, approximately $361,000 and $799,000 ofunder-collections were recorded in the memorandum/balancing accounts,respectively, net of amortization of approximately $520,000 and $291,000,respectively.

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

In 1999, GSWC sued Aerojet-GeneralCorporation (“Aerojet”) for contaminating the Sacramento County GroundwaterBasin, which affected certain GSWC wells. On a related matter, GSWC also fileda lawsuit against the State of California (the “State”). The CPUC authorizedmemorandum accounts to allow for recovery, from customers, of costs incurred byGSWC in prosecuting the cases against Aerojet and the State, less any recoveryfrom the defendants or others.

OnJuly 21, 2005, the CPUC authorized GSWC to collect approximately $21.3 millionof the Aerojet litigation memorandum account, through a rate surcharge, whichwill continue for no longer than 20 years. Beginning in October 2005, new rateswent into effect to begin amortizing the memorandum account over a 20-yearperiod.   A rate surcharge generatingapproximately $289,000 and $499,000 was billed to customers during the threeand six months ended June 30, 2006, respectively. GSWC will keep the Aerojetmemorandum account open until it is fully amortized. However, no costs will be addedto the memorandum account, other than on-going interest charges approved by thedecision.

Itis management’s intention to offset any settlement proceeds from Aerojet thatmay occur pursuant to the settlement agreement against the balance in the memorandumaccount, with the exception of an $8 million payment (for capital investments)with interest due GSWC guaranteed by Aerojet, to be paid in full over 5 years,beginning in 

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2009.  Pursuant to such settlement agreement,Aerojet has agreed to reimburse GSWC $17.5 million, plus interest accruing fromJanuary 1, 2004, for its past legal and expert costs. The recovery of the $17.5 million is contingent upon the issuance of landuse approvals for development in a defined area within Aerojet property in EasternSacramento County and the receipt of certain fees in connection withsuch development.  On April 7, 2006, GSWCfiled an advice letter with the CPUC to incorporate the Westborough developmentinto the Arden Cordova service area and to provide water service to that newdevelopment.  The City of Folsom filed aprotest of GSWC’s advice letter on April 27, 2006.  GSWC has until September 15, 2006 to respondto the protest.  GSWC cannot predict theoutcome of the City’s protest nor the future development within Aerojet’sproperty.

***Refund of Water Rights Lease Revenues:***

In1994, GSWC entered into a contract to lease to the City of Folsom, 5,000acre-feet per year of water rights from the American River. GSWC included allassociated revenues in a nonoperating income account. In a decision issued onMarch 16, 2004, the CPUC ordered GSWC to refund 70 percent of the total amountof lease revenues received since 1994, plus interest, to customers. Pursuant tothe order, refunds of approximately $144,000 and $150,000 were provided tocustomers during the three months ended June 30, 2006 and 2005, respectively,and approximately $255,000 and $269,000 were provided to customers during thesix months ended June 30, 2006 and 2005, respectively. The refunds will be madeover a 9-year period which commenced in June 2004.

Pursuantto the March 2004 CPUC order, the apportionment of any lease revenues that GSWCcollects commencing in January 2004 was to be determined by a later decision.Pending that later decision and beginning in the first quarter of 2004, allamounts billed to the City of Folsom had been included in a regulatoryliability account and no amounts were recognized as revenue until uncertaintiesabout this matter were resolved with the CPUC. On April 13, 2006, the CPUCauthorized GSWC to reinvest all lease revenues received from the City of Folsomsince January, 2004, inclusive of the balances in the regulatory liabilityaccounts, in water system infrastructure and to include such investments in therate base upon which GSWC earns a rate of return.  As a result, GSWC transferred approximately$2.3 million of water rights lease revenues received from the City of Folsom in2004 and 2005 from the regulatory liability account into other operatingrevenues in the first quarter of 2006. GSWC also recorded additional otheroperating revenues of approximately $299,000 and $598,000 reflecting waterrights revenues for the three and six months ended June 30, 2006, respectively.

***Outside Services Memorandum Account:***

InApril 2006, the CPUC approved GSWC’s Region II advice letter which requestedrecovery of the expenses recorded in the Outside Services Memorandum Account (“OSMA”),as of December 31, 2005.  The decision authorized the recovery of thismemorandum account to record costs incurred while working with the WaterReplenishment District (“WRD”), WRD Technical Advisory Committee, Central andWest Basin Municipal Water Districts, Metropolitan Water District, West BasinWater Association and Central Basin Water Association on water supplyreliability and rate-related issues in Region II. GSWC incurred approximately$374,000 and $345,000 in the OSMA in 2004 and 2005, respectively.  GSWCsought and received authorization to amortize the cumulative total ofapproximately $719,000 over a 12-month period through customer rates.   Accordingly, GSWC recorded a regulatoryasset for this amount in April of 2006 with an offset and reduction to outsidelegal services recorded in administrative and general expenses for the threemonths ended June 30, 2006.  A surchargewent into effect in April of 2006 and accordingly, GSWC began amortizing theOSMA account. Revenues of approximately $104,000 were received from customersduring the three months ended June 30, 2006 relating to this surcharge. GSWCalso booked the amortization for these amounts received to its OSMA memorandumaccount; therefore, there was no net impact on earnings. The surcharge will bein place for a 12-month period from the effective date.

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

In accordance with theEmerging Issues Task Force (“EITF”) No. 03-06, *“ParticipatingSecurities and the Two-Class Method under FASB Statement No. 128”*,Registrant uses the “two-class” method of computing earnings per share (“EPS”).The “two-class” method is an earnings allocation formula that determines EPSfor each class of common stock and participating security. AWR hasparticipating securities related to stock options and restricted stock unitsthat earn dividend equivalents on an equal basis with AWR’s Common Shares (the “CommonShares”) that have been issued under AWR’s 2000 Stock Incentive Plan and 2003Non-Employee Directors Stock Plan.  Inapplying the “two-class” method, undistributed earnings are allocated to bothcommon shares and participating securities. The following is a reconciliation of Registrant’s net income andweighted average Common Shares outstanding for calculating basic net income pershare:

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| ***Basic***                                                             | ** ** | **For The Three Months   Ended June 30,** | ** ** | **For The Six Months   Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ***(in thousands, except per share amounts)*** | ** ** | **2006**                                                                | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Net income                                                              |       | $                                                                       | 6,269      |                                                                  | $          | 5,735 |   | $ | 12,170 |   | $ | 9,499 |   |
| Less:  distributed earnings to common shareholders (a)                  |       | 3,798                                                                   |       | 3,774                                                                 |       | 7,580 |   | 7,546 |   |
|  distributed  earnings to participating securities                 |       | 79                                                                      |       | —                                                                |       | 154 |   | — |   |
| Undistributed  earnings                                                 |       | 2,392                                                                   |       | 1,961                                                                 |       | 4,436 |   | 1,953 |   |
|                                                                    |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Undistributed  earnings allocated to common (b)                         |       | 2,345                                                                   |       | 1,961                                                                 |       | 4,348 |   | 1,953 |   |
| Undistributed  earnings allocated to participating                      |       | 48                                                                      |       | —                                                                |       | 88 |   | — |   |
|                                                                    |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Total income  available to common shareholders, basic (a)+(b)           |       | $                                                                       | 6,143      |                                                                  | $          | 5,735 |   | $ | 11,928 |   | $ | 9,499 |   |
|                                                                    |       |                                                                    |       |                                                                  |       |   |   |   |   |
| Weighted average  Common Shares outstanding, basic                      |       | 16,881                                                                  |       | 16,773                                                                |       | 16,844 |   | 16,769 |   |
| **Basic earnings per Common Share**                                     |       | $                                                                       | 0.36       |                                                                  | $          | 0.34 |   | $ | 0.71 |   | $ | 0.57 |   |

 

Diluted EPS is based uponthe weighted average number of Common Shares including both outstanding sharesand shares potentially issuable in connection with stock options and restrictedstock units granted under Registrant’s 2000 Stock Incentive Plan and 2003Non-Employee Directors Stock Plan, and net income.  At June 30, 2006 and 2005 there were 645,389and 688,045 options outstanding, respectively, under these Plans.  At June 30, 2006 and 2005, there were also47,129 and 30,300 restricted stock units outstanding, respectively.   The following is a reconciliation ofRegistrant’s net income and weighted average Common Shares outstanding forcalculating diluted net income per share:

| ***Diluted***                                                           | ** ** | **For The Three Months  Ended June 30,** | ** ** | **For The Six Months   Ended June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ***(in thousands, except per share amounts)*** | ** ** | **2006**                                                          | ** ** | **2005**                                                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| Common  shareholders earnings, basic                                    |       | $                                                                 | 6,143      |                                                                  | $          | 5,735 |   | $ | 11,928 |   | $ | 9,499 |   |
| Undistributed  earnings for dilutive stock options (1)                  |       | —                                                            |       | —                                                                |       | — |   | — |   |
| Total common  shareholders earnings, diluted                            |       | $                                                                 | 6,143      |                                                                  | $          | 5,735 |   | $ | 11,928 |   | $ | 9,499 |   |
|                                                                    |       |                                                              |       |                                                                  |       |   |   |   |   |
| Weighted average  Common Shares outstanding, basic                      |       | 16,881                                                            |       | 16,773                                                                |       | 16,844 |   | 16,769 |   |
| Stock-based  compensation (2)                                           |       | 66                                                                |       | 61                                                                    |       | 61 |   | 52 |   |
| Weighted average  Common Shares outstanding, diluted                    |       | 16,947                                                            |       | 16,834                                                                |       | 16,905 |   | 16,821 |   |
| ** **                                                              |       |                                                              |       |                                                                  |       |   |   |   |   |
| **Diluted earnings per Common  Share**                                  |       | $                                                                 | 0.36       |                                                                  | $          | 0.34 |   | $ | 0.71 |   | $ | 0.56 |   |

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

(2)          Inapplying the treasury stock method of reflecting the dilutive effect ofoutstanding stock-based compensation in calculation of diluted EPS, 241,962stock options at June 30, 2006 were deemed to be outstanding in accordance withStatement of Financial Accounting Standards (“SFAS”) No. 128, *“Earnings Per Share”*. All of the stock options and restricted stock units at June 30, 2005were included in the calculation of diluted EPS for the three and six monthsended June 30, 2005.

Stock options of 403,427 and restricted stock units of47,129 were outstanding at June 30, 2006, but not included in the computationof diluted EPS because they were antidilutive.

The Company has aShareholder Rights Plan designed to protect the Company’s shareholders in theevent of an unsolicited unfair offer to acquire the Company.  The rights for Junior Participating PreferredShares (the “Rights”) are exercisable based solely on “a non-market-basedcontingency”, and are not contingent upon the market price of the Company’sstock.  Therefore, the shares that wouldbe issued if the Rights are exercised are not included in the calculation ofdiluted earnings per share.

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Duringthe three months ended June 30, 2006 and 2005, Registrant issued 13,245 and8,588 Common Shares, for approximately $494,000 and $237,000, respectively,under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”),and the 401(k) Plan. During the six months ended June 30, 2006 and 2005,Registrant issued 29,102 and 20,685 Common Shares, for approximately $1,023,000and $555,000, respectively, under the Registrant’s DRP and 401(k) Plan.  In addition, during the three and six monthsended June 30, 2006, Registrant issued 140,588 and 148,832 Common Shares forapproximately $3,231,000 and $3,421,000, respectively, as a result of theexercise of stock options. None of the cash proceeds received by AWR as aresult of the exercise of these stock options have been distributed to anysubsidiaries of AWR.

Inaddition, during the three months ended June 30, 2006 and 2005, Registrantpurchased 10,737 and 12,897, respectively, Common Shares on the open marketunder the Registrant’s DRP and 401(k) Plan, which were used to satisfy therequirements of these plans and programs. During the six months ended June 30, 2006 and 2005, Registrant purchased24,821 and 21,506, respectively, Common Shares on the open marketunder the Registrant’s DRP and 401(k) Plan, for the same reason.

During the three months ended June 30, 2006 and 2005,AWR paid quarterly dividends to shareholders, totaling approximately $3.8million or $0.225 per share.  During thesix months ended June 30, 2006 and 2005, AWR paid quarterly dividends toshareholders, totaling approximately $7.6 million and $7.5 million,respectively, or $0.450 per share.

**Note 4 — Derivative Instruments:**

Registrant has certainblock-forward purchase power contracts that are subject to SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*,as amended by SFAS Nos. 138 and 149. A derivative financial instrument or othercontract derives its value from another investment or designated benchmark.SFAS No. 133 requires companies to record derivatives on the balance sheet asassets and liabilities, and to measure those instruments at their fair value.Certain of these contracts qualify as an exception provided under SFAS No. 133for activities that are considered normal purchases and normal sales. Thesecontracts are reflected in the statements of income at the time of contractsettlement.

During 2002, GSWC becamea party to block-forward purchase power contracts that qualified as derivativeinstruments under SFAS No. 133. Contracts with Pinnacle West CapitalCorporation (“PWCC”) which became effective in November 2002 have not beendesignated as normal purchases and normal sales.  As a result, on a monthly basis, the relatedasset or liability is adjusted to reflect the fair market value at the end ofthe month. For the three months ended June 30, 2006 and 2005, GSWC recognized apretax unrealized loss of approximately $923,000 and a pretax unrealized gainof approximately $459,000, respectively. For the six months ended June 30, 2006 and 2005, GSWC recognized apretax unrealized loss of approximately $3,078,000 and a pretax unrealized gainof approximately $3,474,000, respectively. As this contract is settled, the realized gains or losses are recordedin power purchased for resale, and the unrealized gains or losses are reversed.These contracts have been recognized at fair market value on the balance sheetsresulting in a cumulative unrealized gain of approximately $339,000 as of June30, 2006 since the inception of the contracts.

The market prices used to determine the fair value for thisderivative instrument were estimated based on independent sources such asbroker quotes and publications. Settlement of this contract occurs on a cash ornet basis through 2006 and by physical delivery through 2008.  Registrant has no other derivative financialinstruments.

**Note 5 —Taxes:**

As a regulated utility, GSWC treats certaintemporary differences as flow-through adjustments incomputing its income tax provision consistent with the income taxapproach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in oneperiod, with an offsetting increase or decrease occurring in anotherperiod.  Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal income tax rate in anygiven period than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.  During the second quarter of 2005, therecognition of the federal effect of state taxes was adjusted to conform to theflow-through method reflected in the tax calculation for ratemaking purposes,which partially defers the recognition of the effect to the subsequent taxyear. This reduced income tax expense by approximately $63,000 and $204,000 forthe three and six months ended June 30, 2006, respectively. During thethird quarter of 2005, AWR filed an amended tax return for 2001 with theInternal Revenue Service (“IRS”) which was subject to IRS and CongressionalJoint Committee of Taxation (“JCT”) review. During the second quarter of 2006, the IRS and JCT reviews werecompleted and AWR received a refund in the amount of its original claim of $3.0million, with 

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interest. Consequently, in the second quarter of 2006, AWR recorded a tax benefitof approximately $400,000, of which $351,000 was attributable to GSWC.

In June 2006, theFinancial Accounting Standards Board (“FASB”) issued FASB Interpretation No.48, “*Accounting for Uncertainty in IncomeTaxes: an interpretation of FASB Statement No. 109*.”  This Interpretation prescribes a recognitionthreshold and measurement attribute for the financial statement recognition andmeasurement of a tax position taken or expected to be taken in a tax return,and provides guidance on derecognition, classification, interest and penalties,accounting in interim periods, disclosure, and transition.  This Interpretation is effective for fiscalyears beginning after December 31, 2006. Registrant is currently assessing the impact of the Interpretation onits financial statements.

In March 2006, the FASB Emerging Issues Task Forceissued EITF No. 06-03, *“How Sales Taxes Collectedfrom Customers and Remitted to Governmental Authorities Should Be Presented inthe Income Statement (That Is, Gross Versus Net Presentation)”*,which provides clarifying guidance on how to present sales taxes in the incomestatement.  This guidance is effective for periods beginning afterDecember 15, 2006, with early application of the guidance permitted.  Registrant is currently assessing the impactof the Issue on its financial statements.

**Note 6 —Stock-Based Compensation:**

***Summary Description ofStock Incentive Plans***

AWR currently has two primary stockincentive plans for employee and non-employee directors: the 2000 StockIncentive Plan (the “2000 Employee Stock Plan”) and the 2003 Non-EmployeeDirectors Stock Plan (the “Directors Stock Plan”), more fully described below.

*2000 Employee Stock Plan***— AWR adopted the2000 Employee Stock Plan at the annual meeting of shareholders in 2000 toprovide stock-based incentive awards in the form of stock options, andrestricted stock to employees as a means of promoting the success of theCompany by attracting, retaining and aligning the interests of employees withthose of shareholders generally. The 2000 Employee Stock Plan was amended inJanuary 2006 to also permit the grant of restricted stock units. There are1,050,000 Common Shares reserved for issuance under the 2000 Employee StockPlan, 278,500 of which remain available for issuance as of June 30, 2006.The 2000 Employee Stock Plan is administered by the Compensation Committee ofthe Board of Directors (the “Committee”). For stock options, the Committeedetermines, among other things, the date of grant, the form, term, optionexercise price, vesting and exercise terms of each option. Stock optionsgranted by AWR have been in the form of nonqualified stock options, expire tenyears from the date of grant, vest over a period of three years and are subjectto earlier termination as provided in the form of option agreement approved bythe Committee.

The option price per share is determined by the Committee atthe time of grant, but may not be less than 100% of the fair market value ofCommon Shares on the date of grant.  In addition, AWR may grant employeesreceiving a grant of stock options the right to receive cash dividends pursuantto the terms of a dividend equivalent rights agreement for a period of up tothree years from the date of the option grant.  For restricted stock, theCommittee determines, among other things, the dividend, voting and other rightsprior to vesting and the restrictions (which may be based on performancecriteria, passage of time or other factors) imposed on the shares. Forrestricted stock units, the Committee determines, among other things, thevesting terms and form of pay-out.  Eachemployee who receives a grant of a restricted stock unit is also generallyentitled to dividend equivalents rights in the form of additional restrictedstock units until vesting of the restricted stock units. The restricted stockunits are a non-voting unit of measurement relative to one Common Share.

*Directors StockPlan***—** On May 20, 2003,the Board of Directors adopted the Directors Stock Plan, subject to shareholderapproval. The shareholders approved the Directors Stock Plan at the May 2004Annual Meeting. The Directors Stock Plan provides the non-employee directorswith supplemental stock-based compensation and encourages them to increasetheir stock ownership in AWR. There are 250,000 Common Shares reserved forissuance under the Directors Stock Plan, 169,300 of which remain available forissuance as of June 30, 2006. Pursuant to the Directors Stock Plan,non-employee directors are entitled to receive options to purchase 3,000 CommonShares at each annual meeting of shareholders commencing with the 2005 annualmeeting of shareholders. AWR also granted options to each non-employee directorto purchase 1,000 Common Shares at its annual shareholder meetings in 2003 and2004. In addition, each non-employee director with no more than ten years ofservice with AWR is entitled to receive restricted stock units at each annualmeeting in an amount equal to the then current annual retainer payable by AWRto each non-employee director divided by the fair market value of Common Shareson the last trading day prior to 

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the annual meeting. All grants ofstock options and restricted stock units are entitled to dividend equivalentspayable in the form of additional restricted stock units under the terms of theDirectors Stock Plan.

Thestock options granted under the Directors Stock Plan are 10-year nonqualifiedstock options. The exercise price of the stock options must be 100% of the fairmarket value of Common Shares on the date of grant. Stock options granted underthe Directors Stock Plan are fully vested and exercisable upon the date of grant.The restricted stock units are anon-voting unit of measurement relative to one Common Share. Restricted stock units with respect to dividendequivalent rights on stock options credited to the non-employee director arepayable in Common Shares on the earlier of the date on which the stock optionis exercised and three years from the date of grant of the stock option.Restricted stock units granted at each annual meeting of shareholders andrestricted stock units with respect to dividend equivalent rights with respectthereto are payable solely in Common Shares on the date that theparticipant terminates service as a director. Restrictedstock units credited to each non-employeedirector’s account are at all times fully vested and non-forfeitable.

***Change in AccountingPrinciple***

Prior to January 1,2006, Registrant accounted for share-based compensation to employees inaccordance with Accounting Principles Board Opinion (“APB”) No. 25, “*Accounting for Stock Issued to Employees*,” and relatedinterpretations.  Registrant alsofollowed the disclosure requirements of SFAS No. 123, “*Accountingfor Stock-Based Compensation*”, as amended by SFAS No. 148, “*Accounting for Stock-Based Compensation—Transition and Disclosure*”.  Except for costs related to restricted stock unitsand restricted stock granted to directors and employees, no stock-basedcompensation cost was recognized in net income.

Effective January 1,2006, the Company adopted the provisions of SFAS No. 123(R), “*Share-Based Payment*,” which requires the recognition ofcompensation expense related to the fair value of stock-based compensationawards. Under the provisions of SFAS No. 123(R), share-based compensationcost is measured by the Registrant at the grant date, based on the calculatedfair value of the award, and is recognized as an expense over the employee’srequisite service period (generally the vesting period of the equity grant).Registrant elected to adopt the modified prospective transition method asprovided by SFAS No. 123(R). Accordingly, financial statement amounts forthe prior periods presented in this Form 10-Q have not been restated toreflect the fair value method of expensing share-based compensation.

***Effectof Stock-Based Compensation on Net Income***

Prior to January 1,2006, Registrant had previously adopted the “disclosure-only” provisions ofSFAS No. 123, as amended by SFAS No. 148. Had Registrant accounted forstock-based compensation plans using the fair value based accounting methoddescribed by SFAS No. 123 for the periods prior to fiscal year 2006,Registrant’s net income and earnings per share for the three and six monthsended June 30, 2005 would have been changed to the pro forma amounts indicatedbelow:

| ***(dollars in thousands, except EPS)***                                          | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended   June 30, 2005** | ** ** |
|-------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| Net income, as reported                                                                               |       | $                                                     | 5,735      |                                                      | $          | 9,499 |   |
| Add: Stock-based compensation expense included in  reported net income, net of tax                    |       | 52                                                    |       | 57                                                        |       |
| Less: Stock-based compensation expense determined under  the fair-value accounting method, net of tax |       | (106                                                  | )          | (672                                                      | )          |
|  Pro forma                                                                                       |       | $                                                     | 5,681      |                                                      | $          | 8,884 |   |
|                                                                                                  |       |                                                  |       |                                                      |       |
| Basic earnings per share:                                                                             |       |                                                  |       |                                                      |       |
| As  reported                                                                                          |       | $                                                     | 0.34       |                                                      | $          | 0.57 |   |
| Pro forma                                                                                             |       | $                                                     | 0.34       |                                                      | $          | 0.53 |   |
|                                                                                                  |       |                                                  |       |                                                      |       |
| Diluted earnings per share:                                                                           |       |                                                  |       |                                                      |       |
| As  reported                                                                                          |       | $                                                     | 0.34       |                                                      | $          | 0.56 |   |
| Pro forma                                                                                             |       | $                                                     | 0.34       |                                                      | $          | 0.53 |   |

 

 

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Therewere no material differences between the consolidated 2005 pro formadisclosures for AWR and the 2005 pro forma disclosures for GSWC.

The following tablepresents share-based compensation expenses for the three and six months endedJune 30, 2006 and 2005 and included in administrative and general expenses inAWR and GSWC’s statements of income resulting from stock options, restrictedstock and restricted stock units:
| ** **                                                                 | ** ** | **AWR**                                     | ** ** | **GSWC**                                      | ** ** |
|----------------------------------------------------------------------------|------------|---------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** | **Three Months  Ended  June 30,** | ** ** | **Six Months  Ended  June 30,** | ** ** |
| ***(in  thousands)***                                                      | ** ** | **2006**                                    | ** ** | **2005**                                      | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| Stock-based compensation related to:                                       |       |                                        |       |                                          |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Stock  options granted to employees and directors                          |       | $                                           | 182        |                                          | $          | — |   | $ | 219 |   | $ | — |   | $ | 176 |   | $ | — |   | $ | 209 |   | $ | — |   |
| Restricted  stock units granted to employees                               |       | 55                                          |       | —                                        |       | 78 |   | — |   | 52 |   | — |   | 73 |   | — |   |
| Restricted  stock units granted to directors                               |       | 28                                          |       | 87                                            |       | 28 |   | 97 |   | 28 |   | 87 |   | 28 |   | 97 |   |
| Stock-based compensation recognized in the income  statement, before taxes |       | $                                           | 265        |                                          | $          | 87 |   | $ | 325 |   | $ | 97 |   | $ | 256 |   | $ | 87 |   | $ | 310 |   | $ | 97 |   |
| Income tax benefit                                                         |       | (106                                        | )          | (35                                           | )          | (130 | ) | (40 | ) | (102 | ) | (35 | ) | (124 | ) | (40 | ) |
| Total stock-based compensation after income taxes                          |       | $                                           | 159        |                                          | $          | 52 |   | $ | 195 |   | $ | 57 |   | $ | 154 |   | $ | 52 |   | $ | 186 |   | $ | 57 |   |

 

Compensationcost capitalized as part of utility plant for the three and six months endedJune 30, 2006 was approximately $106,000 and $127,000, respectively.  In addition, pursuant to SFAS No. 123(R),dividend equivalent rights paid in cash in the amount of $127,000 and $116,000for AWR and GSWC, respectively, for the six months ended June 30, 2006were recognized as a reduction to retained earnings, net of tax benefit of$52,000 and $47,000, respectively.

With the adoption ofSFAS No. 123(R), Registrant elected to amortize stock-based compensation forawards granted on or after the adoption of SFAS No. 123(R) on January 1, 2006on a straight-line basis over the requisite (vesting) period for the entireaward.  Registrant did not recognizecompensation expense for employee share-based awards for the three and sixmonths ended June 30, 2005, when the exercise price of Registrant’s employeestock awards equaled the market price of the underlying stock on the date ofgrant. Registrant did recognize compensation expense under APB No. 25 relatingto restricted stock units granted to directors. Non-vested stock optionsgranted to employees prior to January 1, 2006 have terms that provide for thecontinuation of vesting upon termination of employment.  Accordingly, these awards were deemed to begranted for past services from an accounting standpoint and any measuredcompensation cost was recognized in full in the pro forma disclosures at thedate of grant.   Therefore, uponimplementation of SFAS No. 123(R), there was no remaining compensation cost tobe recognized for these options granted prior to, but not yet vested as ofJanuary 1, 2006.

***Valuationof Stock Options***

Registrantestimated the fair value of stock options granted during the three and sixmonths ended June 30, 2006 and 2005 using the Black-Scholes valuation model.Key input assumptions used to estimate the fair value of stock options includethe exercise price of the award, the expected option term, the expectedvolatility of the Registrant’s stock over the option’s expected term, therisk-free interest rate over the option’s expected term, and the Registrant’sexpected annual dividend yield. Registrant believes that the valuationtechnique and the approach utilized to develop the underlying assumptions areappropriate in calculating the fair values of Registrant’s stock optionsgranted during the three and six months ended June 30, 2006 and 2005. Estimatesof fair value are not intended to predict actual future events or the valueultimately realized by persons who receive equity awards.  The fair value of stock units and restrictedstock was determined based on the closing trading price of Common Shares on thegrant date.

21

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The fair value of each option grant during the threeand six months ended June 30, 2006 and 2005 was estimated on the grant dateusing the Black-Scholes option-pricing model with the following assumptions:

|                                               | ** ** | **2006**        | ** ** | **2005** |
|-----------------------------------------------|------------|-----------------|------------|----------|
| Weighted-average fair value of option granted |       | $8.01 - $10.60  |       | $5.63    |
| Risk-free interest rate                       |       | 4.40% - 5.02%   |       | 3.93%    |
| Expected annual dividend yield                |       | 2.77% - 3.08%   |       | 3.68%    |
| Expected volatility factor                    |       | 25.09% - 26.40% |       | 26.23%   |
| Expected  option term (in years)              |       | 6               |       | 7        |

 

*Summary of key assumptions***—**The risk-free interest rate for periods equal to the expected term of the shareoption was based on the U.S. Treasury yield curve in effect at the time ofgrant.  Dividend yield reflects thecurrent dividend of $0.225 per share per quarter. The stock volatility for eachgrant is measured using the weighted average of historical monthly and dailyprice changes of the Common Shares over the most recent period equal to theexpected option life of the grant. For the three and six months ended June 30,2006, the option term was determined using the simplified method for estimatingexpected option life, which qualify as “plain-vanilla” options and is derivedfrom the average midpoint between vesting and the contractual term, asdescribed in SEC’s Staff Accounting Bulletin No. 107, “*Share-BasedPayment*.”  As permitted bySFAS No. 123(R), underlying assumptions used for stock options granted prior toJanuary 1, 2005 were retained.

SFAS No. 123(R) requires entitiesto estimate the number of forfeitures expected to occur and record expensebased upon the number of awards expected to vest.  Prior to adoption, the Company accounted forforfeitures as they occurred as permitted under previous accountingstandards.  The cumulative effect ofadopting the change in estimating forfeitures was not material to the Company’sfinancial statements for the six months ended June 30, 2006.

*Stock Options*****—**A summary ofstock option activity as of June 30, 2006, and changes during the six monthsended June 30, 2006, is presented below:
| ** **                             | ** ** | **Number of  Options** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Weighted Average  Remaining  Contractual Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------|------------|-----------------------------|------------|--------------------------------------------|------------|-------------------------------------------------------------|------------|-------------------------------------|------------|
| Options outstanding at January 1, 2006 |       | 684,304                     |       | $                                          | 24.32      |                                                        |       |                                |       |   |
| Granted                                |       | 109,917                     |       | 34.85                                      |       |                                                        |       |                                |       |
| Exercised                              |       | (148,832                    | )          | 22.99                                      |       |                                                        |       |                                |       |
| Forfeited  or expired                  |       | —                      |       | —                                     |       |                                                        |       |                                |       |
| Options outstanding at June 30, 2006   |       | 645,389                     |       | $                                          | 26.41      |                                                        | 7.58       |                                | $          | 5,965,622 |   |
| Options exercisable at June 30, 2006   |       | 387,105                     |       | $                                          | 24.89      |                                                        | 6.80       |                                | $          | 4,163,579 |   |

 

The weighted-average grant-date fair value of optionsgranted by Registrant during the three and six months ended June 30, 2006 was$10.60 and $9.31, respectively. The aggregate intrinsic value in the tableabove represents the total pretax intrinsic value (i.e., the difference betweenthe closing price of the Common Shares on the last trading day of the secondquarter of 2006 and the exercise price, times the number of shares) that wouldhave been received by the option holders had all option holders exercised theiroption on June 30, 2006.  This amountchanges if the fair market value of the Common Shares changes.  The total intrinsic value of options exercisedduring the three and six months ended June 30, 2006 was approximately$2,091,000 and $2,201,000, respectively. During the three and six months ended June 30, 2006, Registrant receivedapproximately $3,231,000 and $3,421,000, respectively, in cash proceeds fromthe exercise of its stock options and realized approximately $852,000 and$897,000, respectively, of tax benefit for the tax deduction from awardsexercised.  As of June 30, 2006,approximately $623,000 of total unrecognized compensation cost related to stockoptions is expected to be recognized over a weighted-average period of 2.59years.

22

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*RestrictedStock and Stock Units -*A summary of the status ofRegistrant’s outstanding restricted stock units to employees and directors asof June 30, 2006, and changes during the six months ended June 30, 2006, ispresented below:

|                                           | ** ** | **Number of  Restricted Share  Units** | ** ** | **Weighted Average  Grant-Date Value** | ** ** |
|-------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|
| Restricted share units at January 1, 2006 |       | 31,166                                           |       | $                                                | 25.02      |   |
| Granted                                   |       | 16,565                                           |       | 34.31                                            |       |
| Vested                                    |       | (602                                             | )          | 26.68                                            |       |
| Forfeited                                 |       | —                                           |       | —                                           |       |
| Restricted share units at June 30, 2006   |       | 47,129                                           |       | $                                                | 28.26      |   |

 

As of June 30, 2006,there was approximately $396,000 of total unrecognized compensation costrelated to restricted stock units granted under Registrant’s employee anddirector’s stock plans. That cost is expected to be recognized over aweighted-average period of 2.59 years.

AWR has no restricted stockoutstanding as of June 30, 2006.

**Note 7 — Employee Benefit Plans:**

The components of net periodic benefit costs, beforeallocation to the overhead pool, for Registrant’s pension plan, postretirementplan, and Supplemental Executive Retirement Plan (“SERP”) for the three and sixmonths ended June 30, 2006 and 2005 are as follows:
| ** **                                     | ** ** | **For The Three Months Ended June 30, 2006 and 2005** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                                                                          | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| ***(dollars in thousands****)*       | ** ** | **2006**                                                                                           | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                                                                                               |       |   |   |   |   |   |   |   |   |   |   |
| Service Cost                                   |       | $                                                                                                  | 991        |   | $ | 933 |   | $ | 107 |   | $ | 109 |   | $ | 32 |   | $ | 32 |   |
| Interest Cost                                  |       | 1,175                                                                                              |       | 1,088 |   | 155 |   | 151 |   | 35 |   | 28 |   |
| Expected Return  on Plan Assets                |       | (984                                                                                               | )          | (922 | ) | (50 | ) | (74 | ) | — |   | — |   |
| Amortization of  Transition                    |       | —                                                                                             |       | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization of  Prior Service Cost            |       | 41                                                                                                 |       | 41 |   | (50 | ) | (50 | ) | 37 |   | 38 |   |
| Amortization of  Actuarial Loss (Gain)         |       | 292                                                                                                |       | 313 |   | 37 |   | 41 |   | (3 | ) | (10 | ) |
| Net Periodic  Pension Cost                     |       | $                                                                                                  | 1,515      |   | $ | 1,453 |   | $ | 304 |   | $ | 282 |   | $ | 101 |   | $ | 88 |   |

 
| ** **                                     | ** ** | **For The Six Months Ended June 30, 2006 and 2005** | ** ** |
|------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension  Benefits**                                                                            | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| ***(dollars in thousands)***         | ** ** | **2006**                                                                                         | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** | **2006** | ** ** | **2005** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                                                                                             |       |   |   |   |   |   |   |   |   |   |   |
| Service Cost                                   |       | $                                                                                                | 1,982      |   | $ | 1,866 |   | $ | 214 |   | $ | 218 |   | $ | 64 |   | $ | 64 |   |
| Interest Cost                                  |       | 2,350                                                                                            |       | 2,176 |   | 310 |   | 302 |   | 70 |   | 56 |   |
| Expected Return  on Plan Assets                |       | (1,968                                                                                           | )          | (1,844 | ) | (100 | ) | (148 | ) | — |   | — |   |
| Amortization of  Transition                    |       | —                                                                                           |       | — |   | 210 |   | 210 |   | — |   | — |   |
| Amortization of  Prior Service Cost            |       | 82                                                                                               |       | 82 |   | (100 | ) | (100 | ) | 74 |   | 76 |   |
| Amortization of  Actuarial Loss (Gain)         |       | 584                                                                                              |       | 626 |   | 74 |   | 82 |   | (6 | ) | (20 | ) |
| Net Periodic  Pension Cost                     |       | $                                                                                                | 3,030      |   | $ | 2,906 |   | $ | 608 |   | $ | 564 |   | $ | 202 |   | $ | 176 |   |

 

Registrantexpects to contribute approximately $4,414,000 and $800,000 to pension andpostretirement plans in 2006, respectively. No contributions were made duringthe three and six months ended June 30, 2006.

23

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The Board of Directors approved anamendment to the SERP for executive officers of the Company. Under the SERP,the formula for calculating benefits was revised to provide that the benefit iscalculated based on 2% of compensation per year of credited service before 2006and 3% of compensation per year of credited service after 2005 up to a combinedmaximum of 60% of compensation, except that participants who were employed withthe Company on January 1, 2006 are entitled to receive the greater of thebenefit calculated under the new formula or the benefit calculated under theprevious formula. The Board’s approval of the new SERP formula is subject tothe receipt of a confirming example, showing the effect of the change on anexecutive officer.

**Note8 — Contingencies:**

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

In1997, GSWC was named as a defendant in nineteen lawsuits that alleged that GSWCand other water utilities delivered unsafe water to their customers in the SanGabriel Valley and Pomona Valley areas of Los Angeles County. Plaintiffs inthese actions sought damages, including general, special, and punitive damages,as well as attorney’s fees on certain causes of action, costs of suit, andother unspecified relief.

OnAugust 4, 2004, GSWC was dismissed from all nineteen Los Angeles County cases.The order was issued by the Trial Judge presiding over these matters, andfollowed a lengthy legal proceeding dating back to April 1997 when the first ofthe cases was filed by over 140 customers in the San Gabriel Valley. The Courtfound GSWC did not violate established water quality standards and dismissedthe cases after allowing reasonable time and opportunity for the plaintiffs toprove otherwise. GSWC has long asserted that it provides water within thestandards established by the health authorities. On September 21, 2004, GSWCreceived notice that several plaintiffs filed an appeal to the trial court’sorder to dismiss GSWC. Briefs and reply briefs on the appeal have been filed.On February 7, 2006, the Second Appellate District in which the briefs werefiled moved the California Supreme Court to transfer the appeal to the FirstAppellate District, the District in which prior appeals regarding these caseshad been heard. GSWC is unable to predict the outcome of this appeal.

GSWC is subject to self-insuredretention (deductible) provisions in its applicable insurance policies and haseither expensed the self-insured amounts or has reserved against payment ofthese amounts as appropriate. GSWC’s various insurance carriers have, to date,provided reimbursement for much of the costs incurred above the self-insuredamounts for defense against these lawsuits, subject to a reservation of rights.In addition, the CPUC has issued certain decisions, which authorize GSWC toestablish a memorandum account to accumulate costs for future recovery.

Perchlorate and/orVolatile Organic Compounds (“VOC”) have been detected in five wells servicingGSWC’s San Gabriel System. GSWC filed suit in federal court, along with twoother affected water purveyors and the San Gabriel Basin Water QualityAuthority (“WQA”), against some of those allegedly responsible for thecontamination. Some of the other potential defendants settled with GSWC, otherwater purveyors and the WQA (the “Water Entities”) on VOC related issues prior tothe filing of the lawsuit. In response to the filing of the Federal lawsuit,the Potentially Responsible Party (“PRP”) defendants filed motions to dismissthe suit or strike certain portions of the suit. The judge issued a ruling onApril 1, 2003 granting in part and denying in part the defendant’s motions.

A key ruling of the courtwas that the water purveyors, including the Registrant, by virtue of theirownership of wells contaminated with hazardous chemicals are themselves PRPsunder the Comprehensive Environmental Response, Compensation, and Liability Act(“CERCLA”).

Registrant has, pursuantto permission of the court, amended its suit to claim certain affirmativedefenses as an “innocent” party under CERCLA. Registrant is presently unable topredict the outcome of this ruling on its ability to fully recover from thePRPs future costs associated with the treatment of these wells. In this samesuit, the PRPs have filed cross-complaints against the Water Entities, theMetropolitan Water District, the Main San Gabriel Basin Watermaster and otherson the theory that they arranged for and did transport contaminated water intoMain San Gabriel Basin for use by Registrant and the other two affected waterpurveyors and for other related claims.

On August 29, 2003, the US EnvironmentalProtection Agency (“EPA”) issued Unilateral Administrative Orders (“UAO”)against 41 parties deemed responsible for polluting the groundwater in thatportion of the San Gabriel Valley from which two of GSWC’s impacted wells drawwater. GSWC was not named as a party to the 

24

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UAO.The UAO requires that these parties remediate the contamination. The judge inthe Federal lawsuit has appointed a special master to oversee mandatorysettlement discussions between the PRPs and the Water Entities. EPA is alsoconducting settlement discussions with several PRPs regarding the UAO. TheWater Entities and EPA are working to coordinate their settlement discussionsunder the special master in order to arrive at a complete resolution of allissues affecting the Federal lawsuits and the UAO. Registrant is presentlyunable to predict the ultimate outcome of these settlement discussions.

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

***Condemnation of Properties:***

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

Although the City ofClaremont, California located in GSWC’s Region III, has not initiated theformal condemnation process pursuant to California law, the City has expressedvarious concerns to GSWC about the rates charged by GSWC and the effectivenessof the CPUC’s rate setting procedures. The City hired a consultant to performan appraisal of the value of Registrant’s water system serving the City. Thevalue was estimated in 2004 by the consultant at $40 - $45 million. GSWCdisagrees with the City’s valuation assessment. As of June 30, 2006, managementbelieves that the fair market value of the system exceeds the $37.2 millionrecorded net book value and also exceeds the consultant’s estimates of theClaremont water system.

On April 12, 2005, theTown Council of the Town of Apple Valley located in GSWC’s Region III, voted5-0 to authorize Town staff to prepare a Request for Proposal for an evaluationof the feasibility and estimated cost of and a timeframe for the potentialtakeover of GSWC’s Apple Valley water systems as well as the water systems ofanother utility serving the Town. On April 11, 2006 the Town Councilunanimously decided to move forward with efforts to acquire all the watersystems serving the Town, based on a study authorized by the Town Council.  GSWC has not received any formal notice fromthe Town of its intention to condemn the Registrant’s Apple Valley water systems.Management will vigorously represent Registrant’s interests in any condemnationproceeding to ensure that the Company receives full value for assets thatbecome subject to condemnation.  As ofJune 30, 2006, management believes that the fair market value of GSWC’s systemexceeds the recorded net book value of the Apple Valley water systems.

Except for the City ofClaremont and the Town of Apple Valley, Registrant has not been, within thelast three years, involved in activities related to the condemnation of any ofits water customer service areas or in its Bear Valley Electric customerservice area.

***Santa Maria Groundwater BasinAdjudication:***

In 1997, the Santa MariaValley Water Conservation District (“plaintiff”) filed a lawsuit againstmultiple defendants, including GSWC, the City of Santa Maria, and several otherpublic water purveyors. The plaintiff’s lawsuit seeks an adjudication ofthe Santa Maria Groundwater Basin.

As of June 30, 2006, GSWChas incurred costs of approximately $6.2 million in defending its rightsin the Santa Maria Basin, including legal and expert witness fees, which havebeen deferred in Utility Plant for rate recovery. In February 2006, GSWC filedwith the CPUC for recovery of these costs. Management believes that therecovery of these costs through rates is probable. However, the stipulationbetween the parties requires GSWC to go to the CPUC to seek recovery of thesecosts that have been incurred by GSWC in this lawsuit. A settlement of thelawsuit has been reached, subject to CPUC approval. The settlement, among otherthings, if approved, would preserve GSWC’s historical pumping rights and securesupplemental water rights for use in case of drought or other reductions in thenatural yield of the Basin. There are also a small number of nonsettlingparties, and the case is going forward as to these parties.  Thestipulation, if approved, would preserve GSWC’s position with the settlingparties independent of the outcome of the case as it moves forward with thenonsettling parties.  GSWC cannot predict the outcome of the case as tothe nonsettling parties.

25

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***Other Litigation:***

Registrantis also subject to ordinary routine litigation incidental to its business.Other than those disclosed above, no other legal proceedings are pending, whichare believed to be material. Management believes that rate recovery, properinsurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinarycourse of business.

**Note9 — Business Segments:**

AWR has three reportable segments, water,electric and contracts operations, whereas GSWC has two, water andelectric.  Within the segments, AWR hasthree principal business units: water and electric service utility operationsconducted through GSWC, a water-service utility operation conducted throughCCWC, and a contracted services unit through ASUS and its subsidiaries. Allactivities of GSWC are geographically located within California. All activitiesof CCWC are located in the state of Arizona. All activities of ASUS areconducted in Arizona, California, Maryland, New Mexico, Texas and Virginia.Both GSWC and CCWC are regulated utilities. On a stand-alone basis, AWR has nomaterial assets other than its investments in its subsidiaries. The tablesbelow set forth information relating to GSWC’s operating segments, CCWC andother matters which includes ASUS and its subsidiaries. Certain assets,revenues and expenses have been allocated in the amounts set forth. Theidentifiable assets are net of respective accumulated provisions fordepreciation. Capital additions reflect capital expenditures paid in cash andexclude property installed by developers and conveyed to GSWC or CCWC.
| ***(dollars in thousands)*** | ** ** | **As of and for The Three Months Ended June 30, 2006** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                        | 51,391     | (1) | $ | 7,027 |   | $ | 2,049 |   | $ | 1,671 |   | $ | 62,138 |   |
| Operating income  (loss)               |       | 14,669                                                                                                   |       | (96) (2) |   | 393 |   | (864 | ) | 14,102 |   |
| Interest  expense, net                 |       | 3,655                                                                                                    |       | 292 |   | 154 |   | 283 |   | 4,384 |   |
| Identifiable  assets                   |       | 651,440                                                                                                  |       | 41,439 |   | 37,603 |   | 920 |   | 731,402 |   |
| Depreciation and  amortization expense |       | 5,593                                                                                                    |       | 541 |   | 422 |   | 54 |   | 6,610 |   |
| Capital additions                      |       | 13,765                                                                                                   |       | 543 |   | 486 |   | — |   | 14,794 |   |
|                                        |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ***(dollars in thousands)*** | ** ** | **As of and for the Three Months Ended June 30, 2005** | ** ** |
|----------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                        | 51,833     | (1) | $ | 6,091 |   | $ | 1,753 |   | $ | 890 |   | $ | (35 | ) | $ | 60,532 |   |
| Operating income  (loss)               |       | 15,003                                                                                                   |       | 890 | (2) | 286 |   | (931 | ) |   |   | 15,248 |   |
| Interest  expense, net                 |       | 4,056                                                                                                    |       | 410 |   | 104 |   | 204 |   |   |   | 4,774 |   |
| Identifiable  assets                   |       | 610,249                                                                                                  |       | 39,995 |   | 36,488 |   | 692 |   |   |   | 687,424 |   |
| Depreciation and  amortization expense |       | 4,932                                                                                                    |       | 512 |   | 264 |   | 17 |   |   |   | 5,725 |   |
| Capital additions                      |       | 14,628                                                                                                   |       | 682 |   | 1,450 |   | 248 |   |   |   | 17,008 |   |
|                                        |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

*                    *Includes amounts from AWR and ASUS’ and its subsidiaries’ contractedservices (including FBWS, ODUS and TUS for the three months ended June 30,2006 and FBWS for the three months ended June 30, 2005.)*

(1)             For the three monthsended June 30, 2006, it includes $318,000 of GSWC other operating revenues,$299,000 of which reflects water rights lease revenues received from the Cityof Folsom (Note 2). For the three months ended June 30, 2005, it also includes$36,000 of GSWC other operating revenues.

(2)             Includes$923,000 and ($459,000) unrealized loss (gain) on purchased power contracts forthe three months ended June 30, 2006 and 2005, respectively.

26

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| ***(dollars in thousands)*** | ** ** | **As of and for The Six Months Ended June 30, 2006** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                      | 100,359    | (3) | $ | 15,372 |   | $ | 3,831 |   | $ | 3,183 |   | $ | 122,745 |   |
| Operating income  (loss)               |       | 28,601                                                                                                 |       | (1,181) (4) |   | 725 |   | 16 |   | 28,161 |   |
| Interest expense,  net                 |       | 7,365                                                                                                  |       | 589 |   | 264 |   | 521 |   | 8,739 |   |
| Identifiable  assets                   |       | 651,440                                                                                                |       | 41,439 |   | 37,603 |   | 920 |   | 731,402 |   |
| Depreciation and  amortization expense |       | 11,089                                                                                                 |       | 1,076 |   | 838 |   | 89 |   | 13,092 |   |
| Capital additions                      |       | 31,740                                                                                                 |       | 1,376 |   | 804 |   | 202 |   | 34,122 |   |
|                                        |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ***(dollars in thousands)*** | ** ** | **As of and for the Six Months Ended June 30, 2005** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSCW**                                                                                               | ** ** | **CCWC** | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| ** **                             | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                      | 92,007     | (3) | $ | 13,561 |   | $ | 3,096 |   | $ | 1,716 |   | $ | (35 | ) | $ | 110,345 |   |
| Operating income  (loss)               |       | 22,738                                                                                                 |       | 4,342 | (4) | 1,266 |   | (1,486 | ) |   |   | 26,860 |   |
| Interest  expense, net                 |       | 8,054                                                                                                  |       | 814 |   | 224 |   | 386 |   |   |   | 9,478 |   |
| Identifiable  assets                   |       | 610,249                                                                                                |       | 39,995 |   | 36,488 |   | 692 |   |   |   | 687,424 |   |
| Depreciation and  amortization expense |       | 9,823                                                                                                  |       | 1,007 |   | 525 |   | 34 |   |   |   | 11,389 |   |
| Capital additions                      |       | 32,077                                                                                                 |       | 1,360 |   | 2,038 |   | 359 |   |   |   | 35,834 |   |
|                                        |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

*                    *Includes amounts from AWR and ASUS’ and its subsidiaries’ contractedservices (including FBWS, ODUS and TUS for the six months ended June 30,2006 and FBWS for the six months ended June 30, 2005.)*

(3)             Forthe six months ended June 30, 2006, it also includes $2,919,000 of GSWC otheroperating revenues, $2,879,000 of which reflects water rights lease revenuesreceived from the City of Folsom (Note 2). For the six months ended June 30,2005, it also includes $56,000 of GSWC other operating revenues.

(4)             Includes$3,078,000 and ($3,474,000) unrealized loss (gain) on purchased power contractsfor the six months ended June 30, 2006 and 2005, respectively.

27

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** **

**Item2. Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

# **General**

AmericanStates Water Company (“AWR”) is the parent company of Golden State WaterCompany (“GSWC”), Chaparral City Water Company (“CCWC”) and American StatesUtility Services, Inc. (“ASUS”) and its subsidiaries, Fort Bliss Water ServicesCompany (“FBWS”), Terrapin Utility Services, Inc. (“TUS”) and Old DominionUtility Services, Inc. (“ODUS”).  AWR wasincorporated as a California corporation in 1998 as a holding company for itssubsidiaries.

GSWCis a California public utility company engaged principally in the purchase,production and distribution of water. GSWC also distributes electricity in onecustomer service area. GSWC is regulated by the California Public UtilitiesCommission (“CPUC”) and was incorporated as a California corporation onDecember 31, 1929. GSWC is organized into one electric customer service areaand three water service regions operating within 75 communities in 10 countiesin the State of California and provides water service in 21 customer serviceareas. Region I consists of 7 customer service areas in northern and centralCalifornia; Region II consists of 4 customer service areas located in LosAngeles County; and Region III consists of 10 customer service areas in easternLos Angeles County, Orange, San Bernardino and Imperial counties. GSWC alsoprovides electric service to the City of Big Bear Lake and surrounding areas inSan Bernardino County through its Bear Valley Electric Service division.

GSWC served 253,740water customers and 23,101 electric customers at June 30, 2006, or a total of276,841 customers, compared with 274,390 total customers at June 30, 2005. GSWC’sutility operations exhibit seasonal trends. Although GSWC’s water utilityoperations have a diversified customer base, residential and commercialcustomers account for the majority of GSWC’s water sales and revenues. Revenuesderived from commercial and residential water customers accounted forapproximately 87.4% oftotal water revenues for the three monthsended June 30, 2006, ascompared to 83.0% for the three months ended June 30, 2005. Revenues derived from commercial and residential water customersaccounted for approximately 88.8% oftotal water revenues for the six monthsended June 30, 2006, ascompared to 87.9% for the six months ended June 30, 2005.

CCWC is an Arizona public utilitycompany serving 13,219 customers as of June 30, 2006, compared with 12,813customers at June 30, 2005. Located in the town of Fountain Hills, Arizona anda portion of the City of Scottsdale, Arizona, the majority of CCWC’s customersare residential. The Arizona Corporation Commission (“ACC”) regulates CCWC.

ASUS contracts, eitherdirectly or through wholly-owned subsidiaries, with various municipalities, theU.S. Government and private entities to provide water and wastewater services,including billing and meter reading, water marketing and the operation andmaintenance of water and wastewater systems. On October 1, 2004, ASUS commencedoperation of the water and wastewater systems at Fort Bliss located near ElPaso, Texas, through FBWS, pursuant to the terms of a 50 year contract with theU.S. Government. ASUS commenced operation and maintenance of the water andwastewater systems at Andrews Air Force Base in Maryland on February 1, 2006through TUS pursuant to the terms of a 50 year contract. ASUS commencedoperation and maintenance of the wastewater systems at Fort Lee in Virginiathrough ODUS on February 23, 2006 pursuant to the terms of a 50 year contract.ASUS also commenced operation of the water and wastewater systems at FortEustis, Fort Story and Fort Monroe in Virginia through ODUS on April 3, 2006pursuant to the terms of a 50 year contract. These contracts are each subject to termination for convenience by theU.S. Government. The contract price for each of these contracts is subject tore-determination two years after commencement of operations and every threeyears thereafter to the extent provided in each of the contracts. Prices arealso subject to equitable adjustment based upon changes in circumstances andchanges in wages and fringe benefits to the extent provided in each of thecontracts.

ASUSand GSWC have been pursuing an opportunity to provide retail water serviceswithin the service area of the Natomas Central Mutual Water Company (“Natomas”). Natomas is a California mutual water company which currently provides waterservice to its shareholders, primarily for agricultural irrigation in portionsof Sacramento and Sutter counties in northern California.

InAugust 2004, Natomas granted ASUS the exclusive right to market water that hasbecome “temporarily surplus” that may arise under water rights permits andcontracts owned or controlled by it, to third parties outside the Natomasservice area.  On January 31, 2006, ASUS entered into a water purchaseagreement to acquire 5,000 acre-feet of permanent Sacramento River waterdiversion rights from Natomas.  Pursuant to the terms of this agreement,Natomas will sell, transfer and convey to ASUS, in perpetuity, water rights andentitlements to divert

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from theSacramento River up to 5,000 acre-feet of water per year, subject to certainregulatory approvals.  Terms of the acquisition, among other things,include a base price of $2,500 per acre-foot of water, with payments contingenton meeting specific milestones and events over a 10-year period.  Natomaswill pay to ASUS a commission of 16% of the sale price over the same 10-yearperiod under an existing agreement between the two companies.  At the sametime that the water sale agreement was completed, Natomas and ASUS also enteredinto a settlement agreement that released Natomas from previously establishedreimbursement obligations under existing agreements.  ASUS may use this5,000 acre-feet of water rights acquired from Natomas to engage intransactional opportunities with developers.

GSWChas also entered into a water transfer agreement with Natomas for 30,000acre-feet of water to be used exclusively by GSWC to serve Sutter County,California. Additionally, GSWC filed for a Certificate of Public Convenienceand Necessity with the CPUC on May 31, 2006 to provide retail water service inSutter County, California, subject to completion of an environmental assessmentwhich we anticipate will be completed in the fourth quarter of 2006.  In addition, both agreements are subject toand become effective upon various regulatory approvals.

**Overview**

Our revenues, income, andcash flows are earned primarily through delivering potable water to homes andbusinesses. Rates charged to customers of GSWC and CCWC are determined byeither the CPUC or ACC. These rates are intended to allow recovery of operatingcosts and a fair rate of return on capital. Factors recently affecting our financialperformance include the process and timing of setting rates charged tocustomers; our ability to recover, and the process for recovering, the costs ofwater and electricity in rates; weather; the impact of increased water qualitystandards on the cost of operations and capital expenditures; pressures onwater supply caused by population growth, more stringent water qualitystandards, deterioration in water quality and water supply from a variety ofcauses; capital expenditures needed to upgrade water systems and increasedcosts and risks associated with litigation relating to water quality and watersupply, including suits initiated by the Company to protect its water supply.

For the three monthsended June 30, 2006, net income was $6.3 million compared to $5.7 million forthe same period in 2005, an increase of 9.3%. Basic and diluted earnings pershare for the second quarter of 2006 were $0.36 when compared to the $0.34 forthe second quarter of 2005.

For the six months endedJune 30, 2006, net income was $12.2 million compared to $9.5 million for thesame period in 2005, an increase of 28.1%. Basic and diluted earnings per sharefor the six months ended June 30, 2006 were $0.71, compared to $0.57 and $0.56for the same period of 2005, respectively. The increase in earnings per share was primarily due to a decisionissued by the CPUC regarding GSWC’s water rights lease revenues received fromthe City of Folsom, increased rates approved by the CPUC and ACC, and anincrease in water consumption over the prior period. Partially offsetting theincreases was a significant decline in the cumulative unrealized gain onpurchased power contracts in the first and second quarters of 2006 related toour Bear Valley Electric division due to decreased energy prices since December31, 2005.

We plan to continue toseek additional rate increases in future years to recover our operating andsupply costs and receive reasonable returns on invested capital. Capitalexpenditures in future years are expected to remain at much higher levels thandepreciation expense. Cash solely from operations is not expected to besufficient to fund our needs for capital expenditures, dividends, investmentsin our contract business and other cash needs. We expect to fund these needsthrough a combination of debt and common share offerings in the next fiveyears.

Unless specificallynoted, the following discussion and analysis provides information on AWR’sconsolidated operations and assets. For the three and six months ended June 30,2006 and 2005, there is generally no material difference between theconsolidated operations and assets of AWR and the operations and assets ofGSWC. However, where necessary, the following discussion and analysis includesreferences specifically to AWR’s other subsidiaries — CCWC and ASUS and itssubsidiaries.

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***ConsolidatedResults of Operations — Three Months Ended June 30, 2006 and 2005***
| ** **                                          | ** ** | **3 Mos** | ** ** | **3 Mos** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**      | ** ** | **Ended**      | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                          | ** ** | **6/30/2006**  | ** ** | **6/30/2005**  | ** ** | **Change** | ** ** | **Change** | ** ** |
| OPERATING REVENUES                                  |       |           |       |           |       |       |       |       |       |
| Water                                               |       | $              | 53,122     |           | $          | 53,574     |       | $          | (452       | ) | -0.8 | % |
| Electric                                            |       | 7,027          |       | 6,091          |       | 936        |       | 15.4       | %          |
| Other                                               |       | 1,989          |       | 867            |       | 1,122      |       | 129.4      | %          |
| Total operating revenues                            |       | 62,138         |       | 60,532         |       | 1,606      |       | 2.7        | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| OPERATING EXPENSES                                  |       |           |       |           |       |       |       |       |       |
| Water purchased                                     |       | 10,916         |       | 12,277         |       | (1,361     | )          | -11.1      | %          |
| Power purchased for pumping                         |       | 2,416          |       | 2,184          |       | 232        |       | 10.6       | %          |
| Groundwater production assessment                   |       | 2,239          |       | 1,843          |       | 396        |       | 21.5       | %          |
| Power purchased for resale                          |       | 3,248          |       | 2,710          |       | 538        |       | 19.9       | %          |
| Unrealized loss (gain) on purchased power contracts |       | 923            |       | (459           | )          | 1,382      |       | 301.1      | %          |
| Supply cost balancing accounts                      |       | (825           | )          | (550           | )          | (275       | )          | -50.0      | %          |
| Other operating expenses                            |       | 5,886          |       | 5,218          |       | 668        |       | 12.8       | %          |
| Administrative and general expenses                 |       | 10,902         |       | 11,608         |       | (706       | )          | -6.1       | %          |
| Depreciation and amortization                       |       | 6,610          |       | 5,725          |       | 885        |       | 15.5       | %          |
| Maintenance                                         |       | 3,246          |       | 2,484          |       | 762        |       | 30.7       | %          |
| Property and other taxes                            |       | 2,475          |       | 2,244          |       | 231        |       | 10.3       | %          |
| Total operating expenses                            |       | 48,036         |       | 45,284         |       | 2,752      |       | 6.1        | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| OPERATING INCOME                                    |       | 14,102         |       | 15,248         |       | (1,146     | )          | -7.5       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| Interest expense                                    |       | (5,347         | )          | (4,809         | )          | 538        |       | 11.2       | %          |
| Interest income                                     |       | 963            |       | 35             |       | 928        |       | 2651.4     | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| INCOME FROM  OPERATIONS BEFORE INCOME TAX EXPENSE   |       | 9,718          |       | 10,474         |       | (756       | )          | -7.2       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| Income tax expense                                  |       | 3,449          |       | 4,739          |       | (1,290     | )          | -27.2      | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| NET INCOME                                          |       | $              | 6,269      |           | $          | 5,735      |       | $          | 534        |   | 9.3 | % |

 

Net income for the secondquarter ended June 30, 2006 increased by 9.3% to $6.3 million, equivalent to$0.36 per common share on both a basic and fully diluted basis, compared to$5.7 million or $0.34 per share for the three months ended June 30, 2005.Impacting the comparability in the results of the two periods are the followingsignificant items:

·                  A significantdecline in the cumulative unrealized gain on purchased power contracts due todecreasing energy prices when compared to same period last year. This reductionin the cumulative unrealized gain on purchased power contracts decreased pretaxincome by approximately $923,000, or $0.03 per share, for the three monthsended June 30, 2006, as compared to an increase in the cumulative unrealizedgain on purchased power contracts of $459,000, or $0.02 per share increase toincome, for the same period in 2005.

·                  A 6.3% decreasein billed water consumption in the three months ended June 30, 2006 as comparedto the same period in 2005 due to changes in weather conditions. The lowerconsumption decreased earnings by approximately $0.04 per share in the secondquarter of 2006. This was offset by water rate

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increases which contributed approximately $1.2 million to revenues, or$0.04 per share for the second quarter of 2006. The increase in water rates was partially offset by higher expenses asdiscussed below.

·                  An overall netdecrease in administrative and general expenses resulting primarily from the CPUC’s approval in April 2006of Region II’s outside services memorandum account totaling approximately$709,000.  Upon approval by the CPUC,these legal costs, which were incurred in prior periods, were reversed in thesecond quarter of 2006 and recorded as a regulatory asset increasing earningsby $0.02 per share.

·                  A lowereffective tax rate increased 2006 earnings by $0.06 per share resulting from:(i) a $400,000 tax benefit relating to an Internal Revenue Service (“IRS”)refund received in May 2006; and (ii) differences between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements.

***Operating Revenues***

Forthe three months ended June 30, 2006, revenues from water operations decreasedby 0.8% to $53.1 million, compared to $53.6 million for the three months endedJune 30, 2005. A decrease of 6.3% in billed water consumption resulting fromchanges in weather conditions decreased revenues by approximately $1.7million.  This was partially offset byhigher water revenues reflecting rate increases since the third quarter of 2005covering almost all water customers, which contributed $1.2 million inincreased revenues for the second quarter of 2006. Differences in temperatureand rainfall in Registrant’s service areas impact sales of water to customers,causing fluctuations in Registrant’s revenues and earnings between comparableperiods.

Forthe three months ended June 30, 2006, revenues from electric operationsincreased by 15.4% to $7.0 million compared to $6.1 million for the threemonths ended June 30, 2005. The increase primarily reflects a 14.1% increase inkilowatt-hour (“KWh”) consumption due to changes in weatherconditions.  The cooler weather ascompared to same period last year allowed the ski resorts (industrialcustomers) to remain open well into May, operating their lifts and somesnow-making in the evening hours. Newrates for the 8.4 megawatt (“MW”) natural gas-fueled generation facility alsocontributed slightly to the increase for the three months ended June 30,2006.   The new rates went into effect onApril 15, 2005 and are expected to generate approximately $2.7 million inadditional annual revenues, subject to refund pending CPUC’s final costreview.  The new rates have beenrecognized in revenues as management believes it is probable that the finalCPUC cost review will not result in refunds to the customer.

Registrant relies upon rate approvals by state regulatoryagencies in California and Arizona, in order to recover operating expenses andprovide for a return on invested and borrowed capital used to fund utilityplant. Without such adequate rate relief granted in a timely manner, revenuesand earnings can be negatively impacted.

For the three months ended June 30,2006, other operating revenues increased by 129.4% to $2.0 million compared to$867,000 for the three months ended June 30, 2005 due primarily to anadditional $841,000 of revenues generated by ASUS from operating the water andwastewater systems pursuant to new contracts at military bases.  In addition, revenues increased due to adecision issued by the CPUC on April 13, 2006 enabling GSWC to record waterrights lease revenues from the City of Folsom subsequent to January 2004 asincome.  Prior to this decision, theapportionment of any lease revenues that GSWC collected in 2004 and 2005 hadbeen included in a regulatory liability account and no amounts were recognizedas revenues until uncertainties about this matter were resolved. For the secondquarter 2006, Registrant recorded additional water lease revenues of $299,000.

***Operating Expenses***

For the three months ended June 30,2006, purchased water costs decreased by 11.1% to $10.9 million compared to$12.3 million for the three months ended June 30, 2005. The decrease is dueprimarily to a decrease in customer demand resulting from lower consumption anda favorable change in the supply mix caused by less purchased water needed toreplace contaminated groundwater supply or wells temporarily out of service.For the three months ended June 30, 2006, 43.9% of Registrant’s supply mix waspurchased water as compared to 46.9% purchased water for the three months endedJune 30, 2005. During the same period last year, there were additionalpurchases of water needed to replace contaminated groundwater supply lost dueto wells being removed from service resulting from water quality issues andmechanical problems, particularly in GSWC’s Foothill district. The cost ofpurchased water in this district decreased by approximately $836,000 for thethree months ended June 30, 2006 as a result of the wells being returned tooperation in 2006.

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For the three months ended June 30,2006, the cost of power purchased for pumping increased by 10.6% to $2.4million compared to $2.2 million for the three months ended June 30, 2005 dueto an increase in KWh usage by Registrant caused by higher pumping volume dueto the favorable supply mix change discussed above, partially offset by adecrease in consumption.

For the three months ended June 30,2006, groundwater production assessments increased by 21.5% to $2.2 million ascompared to $1.8 million for the three months ended June 30, 2005 due toincreases in well production resulting from the supply mix change.  There were also increases in assessment rateslevied against groundwater production, effective July 2005. Average pump taxrates increased in GSWC’s Regions II and III by approximately 5% and 20%,respectively.

Changesin the water resource mix between water supplied from purchased sources andthat supplied from Registrant’s own wells can increase/decrease actualsupply-related costs relative to that approved for recovery through rates,thereby impacting earnings either negatively or positively. Registrant has theopportunity to change the supply-related costs recovered through rates byapplication to the appropriate regulatory body. Registrant believes that itsapplications for recovery of supply-related costs accurately reflect the watersupply situation as it is known at the time. However, without additionalregulatory mechanisms, it is impossible to adequately protect earnings fromadverse changes in supply costs related to unforeseen contamination or otherloss of water supply.

Forthe three months ended June 30, 2006, cost of power purchased for resale tocustomers in GSWC’s Bear Valley Electric division increased by 19.9% to $3.2million compared to $2.7 million for the three months ended June 30, 2005,reflecting higher customer demand during the second quarter of 2006.

Unrealizedloss (gain) on purchased power contracts represents losses and gains recordedfor GSWC’s purchased power agreements with Pinnacle West Capital Corporation(“PWCC”), which qualify as derivative instruments under SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities”*.The $923,000 pretax unrealized loss on purchased power contract for the threemonths ended June 30, 2006 is due to a decrease in the current forward marketprices since March 31, 2006.  There was a$459,000 pretax unrealized gain on purchased power contracts for the threemonths ended June 30, 2005. Unrealized gains and losses at Bear Valley Electricwill continue to impact earnings during the life of the contract with PWCC,which terminates in 2008.

A decrease of $275,000 during the three months ended June30, 2006 in the provision for supply cost balancing accounts as compared to thethree months ended June 30, 2005 was primarily due to:  (i) the recording of a $247,000 refundreceived in May 2005 from Mirant Americas Energy Marketing (“Mirant”) with nocorresponding amount booked in the same period of 2006; (ii) the recording of a$1.3 million under-collection in the 2006 second quarter related to the 2006year to date supply cost memorandum account resulting from the elimination ofthe earnings test, authorized by the CPUC in April 2006; and (iii) therecording in April 2006 of an additional $181,000 under-collection for 2005’ssupply cost memorandum account due to the elimination by the CPUC of theearnings test.  These decreases wereoffset by: (i) the approval by the CPUC and recording in June 2005 of $1.3million under-collection related to Region III’s 2004 supply cost memorandumaccount; (ii) an increase of $150,000 in the second quarter of 2006 primarilyin the amortization of water supply cost balancing accounts approved by theCPUC in June and August 2005; and (iii) an increase of $53,000 expensed in theelectric supply cost balancing account resulting from amounts in excess of the$77 per megawatt-hour (“MWh”) recovery cap authorized by the CPUC.

For the three months ended June 30, 2006, other operatingexpenses increased by 12.8% to $5.9 million compared to $5.2 million for thethree months ended June 30, 2005 due primarily to higher operating expenses of$586,000 at ODUS and TUS due to the commencement of the operations of the waterand wastewater systems pursuant to new contracts at new military bases inMaryland and Virginia.

For thethree months ended June 30, 2006, administrative and general expenses decreasedby 6.1% to $10.9 million compared to $11.6 million for the three months endedJune 30, 2005 due to: (i) a decrease of $1 million in outside servicesresulting primarily from the CPUC’s approval in April 2006 of Region II’soutside services memorandum account totaling approximately $709,000.  Upon approval by the CPUC, these legal costs,which were incurred in prior periods, were reversed in the second quarter of2006 and recorded as a regulatory asset; (ii) a decrease in the dividendequivalent rights (“DERs”) expense of approximately $101,000. Upon adoption ofSFAS No. 123(R) effective January 1, 2006, DERs are now recorded as a reductionto retained earnings whereas in prior years they were recorded as additionalcompensation expense; and (iii) a decrease in the bonus accrual of

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approximately$306,000 primarily as a result of changes to the Company’s bonus plan. Thesedecreases were offset by increases in: (i) pensions and benefits of $68,000 dueto actuarial assumption changes in the mortality tables; (ii) stock-basedcompensation expense of $178,000 due to the adoption of SFAS No. 123(R)effective January 1, 2006; and (iii) labor costs of $466,000 due to higherwages.

For the three monthsended June 30, 2006, depreciation and amortization expense increased by 15.5%to $6.6 million compared to $5.7 million for the three months ended June 30,2005 reflecting, among other things, the effects of closing approximately $100million of additions to utility plant during 2005, depreciation on which beganin January 2006. Registrant anticipates that depreciation expense will continueto increase due to Registrant’s on-going construction program at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

For the three months ended June 30, 2006, maintenanceexpense increased by 30.7% to $3.2 million compared to $2.5 million for thethree months ended June 30, 2005 due principally to an increase in requiredmaintenance on GSWC’s wells and water supply sources in all three Regions.  There were also increases in well treatmentand emergency repair costs.

Forthe three months ended June 30, 2006, property and other taxes increased by10.3% to $2.5 million compared to $2.2 million for the three months ended June30, 2005 reflecting additional property taxes resulting from higher assessedvalues, and increases in payroll taxes based on increased labor costs.

***Interest Expense***

For thethree months ended June 30, 2006, interest expense increased by 11.2% to $5.3million compared to $4.8 million for the three months ended June 30, 2005reflecting primarily increases in long-term debt interest expense of $585,000due to $40.0 million of additional private placement notes issued in October2005.  Partially offsetting this increasewas a decrease in short-term cash borrowings. Average bank loan balances outstanding under an AWR credit facility forthe second quarter of 2006 were approximately $31.0 million, as compared to anaverage of $47.0 million during the same period of 2005.  However, the decrease in short-term bank loanbalances was also partially offset by higher interest rates.

***Interest Income***

Interestincome increased to $963,000 for the three months ended June 30, 2006 due to(i) interest income of $110,000 with respect to interest accrued on an $8.0million settlement with Aerojet General Corporation (“Aerojet”) which will bepaid over a five year period beginning in December 2009; (ii) interest accruedon the uncollected balance of the Aerojet litigation memorandum accountauthorized by the CPUC of $270,000; (iii) interest income of $381,000 relatedto a $3.0 million Internal Revenue Service refund received in May 2006; and(iv) interest earned on short-term cash surplus.

***Income Tax Expense***

For the three months ended June 30,2006, income tax expense decreased by 27.2% to $3.4 million comparedto $4.7 million for the three months ended June 30, 2005 due, in part, toa decrease in pretax income of 7.2%. In addition, theeffective tax rate (“ETR”) for the three months ended June 30,2006 decreased by 9.7 percentage points to 35.5% as compared to a 45.2%ETR applicable to the three months ended June 30, 2005. The variancebetween the ETR and the statutory tax rate is primarily the result of differencesbetween book and taxable income that are treated as flow-through adjustments inaccordance with regulatory requirements. Flow-through adjustments increaseor decrease tax expense in one period, with an offsetting increase or decreaseoccurring in another period. During the second quarter of 2005, the recognitionof the federal effect of state taxes was adjusted to conform to theflow-through method reflected in the tax calculation for ratemaking purposes,which partially defers the recognition of the effect to the subsequent taxyear. This reduced income tax expense by $63,000 for the three months endedJune 30, 2006. During the third quarter of 2005, AWR filed an amended taxreturn for 2001with the Internal Revenue Service (“IRS”) which was subject to IRSand Congressional Joint Committee of Taxation (“JCT”) review.  During the second quarter of 2006, the IRSand JCT reviews were completed and AWR received a refund in the amount of itsoriginal claim of $3.0 million, with interest. Consequently, in the second quarter of 2006, AWR recorded a tax benefitof $400,000, of which $351,000 was attributable to GSWC.  The refund-claim benefit contributed 4.1 ofthe 9.7 percentage point ETR reduction referred to, above.

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***Consolidated Results of Operations — Six Months Ended June 30, 2006 and2005***

*** ***
| ** **                                          | ** ** | **6 Mos** | ** ** | **6 Mos** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|----------------|------------|----------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**      | ** ** | **Ended**      | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                          | ** ** | **6/30/2006**  | ** ** | **6/30/2005**  | ** ** | **Change** | ** ** | **Change** | ** ** |
| OPERATING REVENUES                                  |       |           |       |           |       |       |       |       |       |
| Water                                               |       | $              | 101,271    |           | $          | 95,071     |       | $          | 6,200      |   | 6.5 | % |
| Electric                                            |       | 15,372         |       | 13,561         |       | 1,811      |       | 13.4       | %          |
| Other                                               |       | 6,102          |       | 1,713          |       | 4,389      |       | 256.2      | %          |
| Total operating revenues                            |       | 122,745        |       | 110,345        |       | 12,400     |       | 11.2       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| OPERATING EXPENSES                                  |       |           |       |           |       |       |       |       |       |
| Water purchased                                     |       | 19,260         |       | 19,963         |       | (703       | )          | -3.5       | %          |
| Power purchased for pumping                         |       | 4,020          |       | 3,671          |       | 349        |       | 9.5        | %          |
| Groundwater production assessment                   |       | 4,322          |       | 3,764          |       | 558        |       | 14.8       | %          |
| Power purchased for resale                          |       | 7,811          |       | 6,847          |       | 964        |       | 14.1       | %          |
| Unrealized loss (gain) on purchased power contracts |       | 3,078          |       | (3,474         | )          | 6,552      |       | 188.6      | %          |
| Supply cost balancing accounts                      |       | (338           | )          | 528            |       | (866       | )          | -164.0     | %          |
| Other operating expenses                            |       | 10,587         |       | 10,287         |       | 300        |       | 2.9        | %          |
| Administrative and general expenses                 |       | 22,015         |       | 21,909         |       | 106        |       | 0.5        | %          |
| Depreciation and amortization                       |       | 13,092         |       | 11,389         |       | 1,703      |       | 15.0       | %          |
| Maintenance                                         |       | 5,719          |       | 4,822          |       | 897        |       | 18.6       | %          |
| Property and other taxes                            |       | 5,018          |       | 4,539          |       | 479        |       | 10.6       | %          |
| Gain on settlement for removal of wells             |       | —         |       | (760           | )          | 760        |       | -100.0     | %          |
| Total operating expenses                            |       | 94,584         |       | 83,485         |       | 11,099     |       | 13.3       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| OPERATING INCOME                                    |       | 28,161         |       | 26,860         |       | 1,301      |       | 4.8        | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| Interest expense                                    |       | (10,515        | )          | (9,534         | )          | 981        |       | 10.3       | %          |
| Interest income                                     |       | 1,776          |       | 56             |       | 1,720      |       | 3071.4     | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| INCOME FROM  OPERATIONS BEFORE INCOME TAX EXPENSE   |       | 19,422         |       | 17,382         |       | 2,040      |       | 11.7       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| Income tax expense                                  |       | 7,252          |       | 7,883          |       | (631       | )          | -8.0       | %          |
|                                                |       |           |       |           |       |       |       |       |       |
| NET INCOME                                          |       | $              | 12,170     |           | $          | 9,499      |       | $          | 2,671      |   | 28.1 | % |
|                                                |       |           |       |           |       |       |       |       |       |

 

Net income for the sixmonths ended June 30, 2006 increased by 28.1% to $12.2 million, equivalent to$0.71 per common share on both a basic and fully diluted basis, compared to$9.5 million or $0.57 and $0.56 per share on a basic and fully diluted basis,respectively, for the six months ended June 30, 2005. Impacting thecomparability in the results of the two periods are the following significantitems:

·                  A decisionissued by the CPUC on April 13, 2006 regarding the treatment of GSWC’s waterrights lease revenues added about $2.9 million to pretax income for the sixmonths ended June 30, 2006 or approximately $0.10 per share. In this decision,the CPUC authorized GSWC to reinvest all lease revenues since January 2004,inclusive of the balances in the regulatory liability accounts established byGSWC for this matter, in water system infrastructure. These investments will beincluded in the rate base upon which GSWC earns a rate of return. In accordancewith California law, GSWC will have 8 years in which to reinvest the proceeds.As a result, GSWC transferred about $2.3 million of water rights lease revenuesreceived from the City of Folsom in 2004 and 2005 from the regulatory liability

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account into otheroperating revenues.  GSWC also recordedpretax income of $598,000 reflecting water rights lease revenues for the firstand second quarter of 2006.

·                  A significantdecline in the cumulative unrealized gain on purchased power contracts due todecreasing energy prices. This reduction in the cumulative unrealized gain onpurchased power contracts decreased pretax income by approximately $3.1million, or $0.11 per share, for the six months ended June 30, 2006, ascompared to an increase in the cumulative unrealized gain on purchased powercontracts of $3.5 million, or a $0.12 per share increase to income, for thesame period in 2005.

·                  Water rateincreases contributed approximately $4.9 million to revenues, or $0.17 pershare for the six months ended June 30, 2006. This was partially offset by higher expenses as described below.

·                  An increase inASUS’s pretax operating income of $1.6 million, or $0.05 per share, as comparedto the same period of 2005 by operating and maintaining the water andwastewater systems for the U.S. Government. The increases included revenuerecognized for certain special projects and reimbursement of various operatingcosts incurred during the transition periods.

·                  A $1.7 millionincrease in interest income, or $0.06 per share, resulting primarily from interest accrued on theuncollected balance of the Aerojet litigation memorandum account authorized bythe CPUC and interest income related to a $3.0 million Internal Revenue Servicerefund received in May 2006.

·                  A lowereffective tax rate increased earnings by $0.09 per share resulting primarilyfrom: (i) a $400,000 tax benefit relating to a $3.0 million IRS refund receivedin May 2006; and (ii) differences between book and taxable income that aretreated as flow-through adjustments in accordance with regulatory requirements.

***Operating Revenues***

Forthe six months ended June 30, 2006, revenues from water operations increased by6.5% to $101.3 million, compared to $95.1 million for the six months ended June30, 2005. Higher water revenues reflect rate increases since the second quarterof 2005 covering almost all water customers, which contributed $4.9 million inincreased revenues. In addition, an increase of about 2.3% in billed waterconsumption resulting from changes in weather conditions also increasedrevenues by approximately $1.3 million. Differences in temperature and rainfallin Registrant’s service areas impact sales of water to customers, causingfluctuations in Registrant’s revenues and earnings between comparable periods.

Forthe six months ended June 30, 2006, revenues from electric operations increasedby 13.4% to $15.4 million compared to $13.6 million for the six months endedJune 30, 2005. The increase reflects primarily a 9.7% increase in KWhconsumption due to changes in weather conditions which increased the usage ofsnow-making machines in 2006.  New ratesfor the 8.4 MW natural gas-fueled generation facility also contributed to theincrease.   The new rates went intoeffect on April 15, 2005 and are expected to generate approximately $2.7million in additional annual revenues, subject to refund pending CPUC’s finalcost review.  The new rates have beenrecognized in revenues as management believes it is probable that the finalCPUC cost review will not result in refunds to the customer.

Registrant relies upon rate approvals by state regulatoryagencies in California and Arizona, in order to recover operating expenses andprovide for a return on invested and borrowed capital used to fund utilityplant. Without such adequate rate relief granted in a timely manner, revenuesand earnings can be negatively impacted.

For the six months ended June 30,2006, other operating revenues increased by 256.2% to $6.1 million compared to$1.7 million for the six months ended June 30, 2005 due primarily to a decisionissued by the CPUC on April 13, 2006 enabling GSWC to record water rights leaserevenues from the City of Folsom from January 2004 to June 2006 of $2.9 millionin total, as revenues.  Prior to thisdecision, the apportionment of any lease revenues that GSWC collected in 2004and 2005, totaling $2.3 million, had been included in a regulatory liabilityaccount and no amounts were recognized as revenues until uncertainties aboutthis matter were resolved. Registrant also recorded additional revenue of$598,000, reflecting the first and second quarter of the 2006 water rightslease revenues.   In addition, anincrease of $1.5 million in revenues as compared to the first six months of2005 reflects: (i) the recording of FBWS revenue of approximately $565,000during the six months ended June 30, 2006 based on the

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percentage of completion method for contract revenuerecognition for several projects at Fort Bliss; and (ii) additional revenuestotaling $1.1 million generated from operating the water and wastewater systemsat Andrews Air Force Base which began operation on February 1, 2005, at FortEustis, Fort Monroe and Fort Story all of which began operations on April 3,2006, and the wastewater systems at Fort Lee which began operations on February23, 2006.

***Operating Expenses***

For the six months ended June 30,2006, purchased water costs decreased by 3.5% to $19.3 million compared to$20.0 million for the six months ended June 30, 2005. The decrease is dueprimarily to a change in the supply mix caused by less purchased water neededto replace groundwater supply lost.  Forthe six months ended June 30, 2006, 43.6% of Registrant’s supply mix waspurchased water as compared to 45.7% purchased water for the six months endedJune 30, 2005. During the same period last year, there were additionalpurchases of water needed to replace groundwater supply lost due to wells beingremoved from service. The wells were removed from service as a result of waterquality issues and mechanical problems, particularly in GSWC’s Foothilldistrict. The cost of purchased water in this district decreased byapproximately $1.1 million as a result of the wells being returned to operationin 2006. This decrease was partially offset by an increase in customer demandresulting from higher consumption and increased water rates by purchased watersuppliers.

Forthe six months ended June 30, 2006, the cost of power purchased for pumpingincreased by 9.5% to $4.0 million compared to $3.7 million for the six monthsended June 30, 2005 due to an increase in KWh usage by Registrant caused byhigher customer water demand and an increase in pumping volume due to thesupply mix change discussed above.

For the six months ended June 30,2006, groundwater production assessments increased by 14.8% to $4.3 million ascompared to $3.8 million for the six months ended June 30, 2005 due toincreases in well production to meet higher customer demand. There were alsoincreases in assessment rates levied against groundwater production, effectiveJuly 2005. Average pump tax rates increased in Regions II and III byapproximately 5% and 20%, respectively.

Changesin the water resource mix between water supplied from purchased sources andthat supplied from Registrant’s own wells can increase/decrease actualsupply-related costs relative to that approved for recovery through rates,thereby impacting earnings either negatively or positively.

Forthe six months ended June 30, 2006, cost of power purchased for resale tocustomers in GSWC’s Bear Valley Electric division increased by 14.1% to $7.8million compared to $6.8 million for the six months ended June 30, 2005,reflecting higher customer demand during the six months ended June 30, 2006.

Unrealizedloss (gain) on purchased power contracts represents losses and gains recordedfor GSWC’s purchased power agreements with PWCC, which qualify as derivativeinstruments under SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”*. The $3.1 million pretaxunrealized loss on purchased power contracts for the six months ended June 30,2006 is due to a decrease in the current forward market prices since December31, 2005.  There was a $3.5 millionpretax unrealized gain on purchased power contracts for the six months endedJune 30, 2005. Unrealized gains and losses at Bear Valley Electric willcontinue to impact earnings during the life of the contract with PWCC, whichterminates in 2008.

A decrease of $866,000 during the six months ended June 30,2006 in the provision for supply cost balancing accounts as compared to the sixmonths ended June 30, 2005 was primarily due to: (i) the recording of anover-collection of $223,000 in the first quarter of 2005 as a regulatoryliability with a corresponding charge booked to the supply cost balancingaccount provision; (ii) the recording of a $247,000 refund received in May 2005from Mirant with no corresponding amount booked in the same period of 2006;(iii) the recording of a $1.3 million under-collection in the second quarter of2006 related to the 2006 year to date supply cost memorandum account resultingfrom the elimination of the earnings test by the CPUC in April 2006; (iv) therecording in April 2006 of an additional $181,000 under-collection for 2005’ssupply cost memorandum account due to the elimination by the CPUC of the earningstest; and (v) a $391,000 decrease in the amortization of the electric balancingaccount.  These decreases were offset by:(i) the approval by the CPUC and recording in June 2005 of $1.3 millionunder-collection related to Region III’s 2004 supply cost memorandum account;and (ii) an increase of $229,000 primarily in the amortization of water supplycost balancing accounts approved by the CPUC in June and August 2005.

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For the six months ended June 30, 2006, other operatingexpenses increased by 2.9% to $10.6 million compared to $10.3 million for thesix months ended June 30, 2005 due primarily to higher operating expenses of$728,000 at ODUS and TUS due to the commencement of operation of the water andwastewater systems at military bases in Maryland and Virginia. There was also anet increase of $122,000 at GSWC primarily due to increases in water treatmentcosts.  These increases were partiallyoffset by the reimbursement of $546,000 by the U.S. Government and a contractorfor operating expenses incurred at Fort Bliss. FBWS was hired as a subcontractor for certain special projects requestedby the U.S. Government, in addition to the services provided under the terms ofthe primary contract.

For the sixmonths ended June 30, 2006, administrative and general expenses remainedrelatively unchanged compared to the same period in 2005.  There were increases in: (i) pensions andbenefits of $136,000 due to actuarial assumption changes in the mortalitytables, and increases of approximately $492,000 in various other benefit costsdue primarily to increases in medical and labor costs; (ii) stock-basedcompensation expense of $237,000 due to the adoption of SFAS No. 123(R)effective January 1, 2006, (iii) labor costs of $753,000 due to higher wages;(iv) general liability related costs of approximately $115,000; and (v) variousoffice and other expenses of approximately $602,000 primarily at ODUS and TUSdue to the commencement of operation of the water and wastewater systems atmilitary bases in Maryland and Virginia. These increases were offset by (i) the recovery of transition periodoperating expenses of about $672,000 at military bases in Maryland and Virginiaby subsidiaries of ASUS; (ii) reimbursement of indirect capital cost of$340,000 incurred by FBWS in the first and second quarters of 2006; (iii) adecrease in the DERs expense of approximately $202,000. Upon adoption of SFASNo. 123(R) effective January 1, 2006, DERs are now recorded as a reduction toretained earnings whereas in prior years they were recorded as additionalcompensation expense; (iv) a decrease in the bonus accrual of approximately$306,000 primarily as a result of changes to the Company’s bonus plan; and (v)the recovery of outside services resulting from the CPUC’s approval in April2006 of Region II’s outside services memorandum account totaling approximately$709,000.  Upon approval by the CPUC,these legal costs, which were incurred in prior periods, were reversed in thesecond quarter of 2006 and recorded as a regulatory asset.

For the six months endedJune 30, 2006, depreciation and amortization expense increased by 15.0% to$13.1 million compared to $11.4 million for the six months ended June 30, 2005reflecting, among other things, the effects of closing approximately $100million of additions to utility plant during 2005, depreciation on which beganin January 2006. Registrant anticipates that depreciation expense will continueto increase due to Registrant’s on-going construction program at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

Forthe six months ended June 30, 2006, maintenance expense increased by 18.6% to$5.7 million compared to $4.8 million for the six months ended June 30, 2005due principally to an increase in required maintenance on GSWC’s wells andwater supply sources at all Regions. There were also increases in well treatment and emergency repair costs.

Forthe six months ended June 30, 2006, property and other taxes increased by 10.6%to $5.0 million compared to $4.5 million for the six months ended June 30, 2005reflecting additional property taxes resulting from higher assessed values, andincreases in payroll taxes based on increased labor costs.

Forthe six months ended June 30, 2005, Registrant recorded a net pre-tax gain of$760,000 on a settlement reached with the Fountain Hills Sanitary District (“FHSD”)in February 2005 for the capping of two CCWC wells in order to facilitate FHSD’sability to secure certain permits. Pursuant to the settlement agreement, CCWCagreed to permanently remove from service and cap one of its wells, and capanother well which had never been used as a potable source of supply. There wasno similar gain in the same period of 2006.

***Interest Expense***

For the sixmonths ended June 30, 2006, interest expense increased by 10.3% to $10.5million compared to $9.5 million for the six months ended June 30, 2005primarily reflecting increases in long-term debt interest expense of $1.2million due to $40.0 million of additional private placement notes issued inOctober 2005.  Partially offsetting thisincrease was a decrease in short-term cash borrowings.  Average bank loan balances outstanding underan AWR credit facility for the six months ended June 30, 2006 wereapproximately $30.0 million, as compared to an average of $48.0 million duringthe same period of 2005.  However, thedecrease in short-term bank loan balances was also partially offset by higherinterest rates.

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*** ***

***Interest Income***

Interestincome increased to $1.8 million for the six months ended June 30, 2006 due to(i) interest income of $218,000 with respect to interest accrued on an $8.0million settlement with Aerojet General Corporation (“Aerojet”) which will bepaid over a five year period beginning in December 2009; (ii) interest accruedon the uncollected balance of the Aerojet litigation memorandum accountauthorized by the CPUC of $862,000; (iii) interest income of $381,000 relatedto a $3.0 million Internal Revenue Service refund received in May 2006; and(iv) interest earned on short-term cash surplus.

***Income Tax Expense***

Althoughpretax income increased by 11.7% for the six months ended June 30, 2006,income tax expense decreased by 8.0% to $7.3 million compared to $7.9million for the six months ended June 30, 2005. This was as a result offlow-through adjustments and a refund claim, as discussed further,below. The effective tax rate (“ETR”) for the six months endedJune 30, 2006 decreased by approximately 8.0 percentage points to37.3% as compared to a 45.4% ETR applicable to the six months endedJune 30, 2005. The variance between the ETR and the statutory tax rate isprimarily the result of differences between book and taxable income that aretreated as flow-through adjustments in accordance with regulatoryrequirements. Flow-through adjustments increase or decrease tax expense inone period, with an offsetting increase or decrease occurring in anotherperiod. During the second quarter of 2005, the recognition of the federaleffect of state taxes was adjusted to conform to the flow-through methodreflected in the tax calculation for ratemaking purposes, which partiallydefers the recognition of the effect to the subsequent tax year. This reducedincome tax expense by $204,000 for the six months ended June 30, 2006.During the third quarter of 2005, AWR filed an amended tax return for 2001 withthe Internal Revenue Service (“IRS”) which was subject to IRS and CongressionalJoint Committee of Taxation (“JCT”) review. During the second quarter of 2006, the IRS and JCT reviews werecompleted and AWR received a refund in the amount of its original claim of $3.0million, with interest.  Consequently, inthe second quarter of 2006, AWR recorded a tax benefit of $400,000, of which$351,000 was attributable to GSWC.  Therefund-claim benefit contributed to 2.0 of the 8.0 percentage point ETRreduction referred to, above.

**Critical Accounting Policies and Estimates**

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

The critical accounting policies used in the preparation of the Registrant’s financial statements that we believe affect the more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in our Annual Report on Form 10-K for the year ended December 31, 2005. Except for the adoption of SFAS No. 123(R), *“Share-Based Payment”*, there have been no material changes to the critical accounting policies.  Effective January 1, 2006, Registrant began accounting for employee and directors stock-based compensation costs in accordance with SFAS No. 123(R) which requires the recognition of compensation expense in the financial statements based on fair values of the stock awards.  Registrant elected to adopt the modified prospective transition method as provided by SFAS No. 123(R) and, accordingly, financial statement amounts for the prior periods presented in the Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.  Registrant utilized the Black-Scholes option pricing model to estimate the fair value of employee stock based compensation at the date of grant, which requires the input of highly subjective assumptions, including expected volatility and expected life.  Further, as required under SFAS No. 123(R), Registrant now estimates forfeitures for options granted, which are not expected to vest. The cumulative effect of adopting the change in estimating forfeitures is not material to Registrant’s financial statements for the six months ended June 30, 2006. Changes in these inputs and assumptions can materially affect the measure of estimated fair value of Registrants share-based compensation.  The adoption of SFAS No. 123(R) did not have a material affect on Registrant’s consolidated financial position, results of operations and cash flows for the three and six months ended June 30, 2006.

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**Liquidity and Capital Resources**

***AWR***

AWR funds its operatingexpenses and pays dividends on its outstanding Common Shares primarily throughdividends from GSWC.

Net cash provided byoperating activities was $27.1 million for the six months ended June 30, 2006as compared to $32.9 million for the same period ended June 30, 2005. Thedecrease of $5.8 million was primarily attributable to: (i) approximately$3.8 million incurred in 2006 of costs and estimated earnings in excess ofbillings on uncompleted contracts primarily at Fort Bliss; (ii) approximately$812,000 of increases in general rate case costs associated with the filing ofRegion II and the General Office rate cases; and (iii) the receipt of a $3.0million federal tax refund received in May 2006 as compared to a $5.0 millionfederal tax refund in April 2005, as well as differences in the timing ofremitting taxes which resulted in an additional $3.9 million of taxes paidduring the six months ended June 30, 2006. These decreases were partially offset by the receipt in June 2006 of$2.6 million from Aerojet for reimbursement of costs incurred on certaincapital projects which resulted in a decrease to other accounts receivable, andby improved earnings for the six months ended June 30, 2006. The timing of cashreceipts and disbursements related to other working capital items also affectedthe changes in net cash provided by operating activities.

Net cash used in investing activities decreased to $34.1 million forthe six months ended June 30, 2006 as compared to $35.8 million for the sameperiod ended June 30, 2005.

Net cash provided by financing activities was $3.5 million for the sixmonths ended June 30, 2006 as compared to $3.7 million for the same period in2005. The decrease in net cash provided by financing activities was primarilycaused by a decrease of about $2.2 million in advances for and contributions inaid of construction and a $3.0 million net decrease in the net change in notespayable to banks. These decreases were offset by a $3.9 million increase inproceeds from stock option exercises and the issuance of Common Shares underthe Registrant’s Common Share Purchase and Dividend Reinvestment Plan and401(k) Plan. Cash flows from financing activities also increased by $897,000from the tax benefits associated with the exercise of the aforementioned stockoptions.

In June 2005, AWR amended and restated its credit agreement whichincreased its borrowing limit under this facility to $85 million and extendedthe maturity date to June 2010. Up to $20 million of this facility may be usedfor letters of credit. As of June 30, 2006, an aggregate of $28 million in cashborrowings were included in current liabilities and approximately $11.2 millionof letters of credit were outstanding under this facility. AWR also has aRegistration Statement on file with the Securities and Exchange Commission forthe sale from time to time of debt and equity securities. As of June 30, 2006,approximately $6.5 million was available for issuance under this RegistrationStatement.

Registrant anticipates that interest costs will increase infuture periods due to potential market interest rate increases and the need foradditional external capital to fund its construction program.  In December of 2005, S&P revised AWR’srating from A- negative to A- stable.  S&P debt ratings range from AAA (highest rating possible) to D(obligation is in default). Securities ratings are not recommendations to buy,sell or hold a security and are subject to change or withdrawal at any time bythe rating agency. Registrant believes that costs associated with capital usedto fund construction at its regulated subsidiaries will continue to berecovered in water and electric rates charged to customers.

***GSWC***

Net cash provided by operatingactivities was $31.7 million for the six months ended June 30, 2006 as comparedto $28.0 million for the same period in 2005. The increase of $3.7 million was primarily attributable to thereceipt in June 2006 of $2.6 million from Aerojet for reimbursement of costsincurred on certain capital projects which resulted in a decrease to otheraccounts receivable and by improved earnings for the six months endedJune 30, 2006. These increases were offset by higher general rate casecosts, lower tax refunds received in 2006 as compared to the same period in2005 as well as differences in the timing of remitting taxes, and various otherchanges in the timing of cash receipts and disbursements related to otherworking capital items that affected the net cash provided by operatingactivities.

Netcash used in investing activities decreased slightly to $33.1 million for thesix months ended June 30, 2006 as compared to $33.4 million for the same periodin 2005.

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Net cash used byfinancing activities was $1.1 million for the six months ended June 30, 2006 ascompared to net cash provided by financing activities of $6.1 million for thesame period in 2005. The decrease reflects a $1.8 million decrease in thereceipt of advances for and contributions in aid of construction, and a netdecrease of $5.8 million in intercompany borrowings.

GSWC funds the majority of its operating expenses, payments on itsdebt, and dividends on its outstanding common shares through internal sources.Internal sources of cash flow are provided primarily by retention of a portionof earnings from operating activities. Internal cash generation is influencedby factors such as weather patterns, environmental regulation, litigation,changes in supply costs and regulatory decisions affecting GSWC’s ability torecover these supply costs, and timing of rate relief.

GSWC also relies on externalsources, including equity investments and short-term borrowings from AWR,long-term debt, contributions in aid of construction, advances for constructionand install-and-convey advances to fund the majority of its constructionexpenditures. GSWC has a Registration Statement on file with the SEC forissuance from time to time, of up to $100.0 million of debt securities. As ofJune 30, 2006, $50.0 million remained for issuance under this RegistrationStatement, subject to regulatory approval from the CPUC for issuance ofadditional debt.

On October 11, 2005, CoBank, ACB purchased a5.87% Senior Note due December 20, 2028 in the aggregate principal amountof $40.0 million from GSWC. The proceeds were used to pay down GSWC’sintercompany short-term borrowings.

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

***CCWC***

CCWC funds the majority of itsoperating expenses, payments on its debt and dividends, if any, throughinternal operating sources or short-term borrowings from AWR. CCWC also relieson external sources, including long-term debt, contributions in aid ofconstruction, advances for construction and install-and-convey advances, tofund the majority of its construction expenditures.

***ASUS***

ASUSfunds its operating expenses primarily through management fees and investmentsby or loans from AWR.  ASUS, in turn,provides funding to its subsidiaries.

**ContractualObligations and Other Commitments**

Registranthas various contractual obligations which are recorded as liabilities in theconsolidated financial statements.  Otheritems, such as certain purchase commitments and operating leases are notrecognized as liabilities in the consolidated financial statements, but arerequired to be disclosed.

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

There have been no material changes to AWR’s contractual obligations and other commitments since December 31, 2005. See*”Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Contractual Obligations and Other Commitments”*section of the Registrant’s Form 10-K for the year-ended December 31, 2005 for a detailed discussion of contractual obligations and other commitments.

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** **

**RegulatoryMatters**

GSWC is subject toregulation by the CPUC, which has broad powers with respect to service andfacilities, rates, classification of accounts, valuation of properties, thepurchase, disposition and mortgaging of properties necessary or useful inrendering public utility service, the issuance of securities, the granting ofcertificates of public convenience and necessity as to the extension ofservices and facilities and various other matters. CCWC is subject toregulation by the ACC.

Rates that GSWC and CCWCare 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 costof capital, as projected for a future test year in California and using anhistorical test year, as adjusted, in Arizona. Rates charged to customers varyaccording to customer class and rate jurisdiction and are generally set atlevels allowing for recovery of prudently incurred costs, including a fairreturn on rate base. Rate base generally consists of the original cost ofutility plant in service, plus certain other assets, such as working capitaland inventory, less accumulated depreciation on utility plant in service,deferred income tax liabilities and certain other deductions.

GSWC is required to file a general rate case (“GRC”)application every three years for each of its water rate-making areas accordingto a schedule established by the CPUC. GRCs typically include an increase in year one and step increases forthe second and third years. Rates are based on a forecast of expenses andcapital investments. GRCs have a typical regulatory processing time of oneyear.   In California, rates may beincreased by offsets for certain expense increases, including but not limitedto supply cost offset and balancing account amortization, and advice letterfilings related to certain plant additions and other operating cost increases.Offset rate increases and advice letter filings typically have a two to fourmonth regulatory lag.

Neither the operations nor rates of AWR and ASUS aredirectly regulated by the CPUC or the ACC. The CPUC and the ACC do, however,regulate certain transactions between GSWC and its affiliates.

The amounts charged by the subsidiaries of ASUS forwater and wastewater services at military bases are based upon the terms of50-year contracts with the U.S. Government. Prices will be re-determined at theend of two years after commencement of operations at each military base andgenerally every three years thereafter. In addition, prices may be equitablyadjusted for changes in law, wage and benefit increases and othercircumstances.

***Recent Changes in Rates***

On January 12, 2006, the CPUC approved Region III’srate case. The authorized rate increase for 2006 was made effective January 19,2006 and is expected to provide GSWC additional annual revenue approximating$5.4 million in 2006 based on a return on equity of 9.8%.  For the second and the third year of thisthree-year GRC, the CPUC approved an annual increase of approximately $1.9million and $2.3 million, respectively, subject to certain earnings tests.

On November 14, 2005,GSWC filed advice letters with the CPUC for step increases for Region I in anamount of approximately $0.6 million and an attrition increase of approximately$5.2 million for Region II, both of which were approved and became effective onJanuary 1, 2006.

***PendingRate Changes in 2006***

In February 2006, GSWCfiled an application with the CPUC for rate increases in Region II and to covergeneral office expenses. If approved as filed, the rate increases are expectedto generate approximately $14.9 million in annual revenues starting in 2007,with additional increases of $4.7 million in 2008 and $6.9 million in2009.  A decision on this application isexpected in late 2006.  Management isunable to predict the ultimate outcome of this rate case.

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***Other Regulatory Matters***

*Memorandum Supply Cost Accounts*

In a CPUC decision issuedon June 19, 2003 related to memorandum supply cost accounts, all waterutilities regulated by the CPUC were required to seek review of under- andover- collections by filing an advice letter annually. In addition, the utility’srecovery of such expenses was reduced by the amount exceeding the authorizedrate-of return (earnings test). On April 13, 2006, the CPUC issued a decisionto remove these requirements. Pursuant to this order, GSWC recognized acumulative under-collection of approximately $636,000 to the supply costmemorandum account provisions in the second quarter of 2006 for theunder-collected balances not recognized at March 31, 2006 and began recordingunder- and over- collections on a monthly basis thereafter.

GSWC intends to file forrecovery of the net under-collected supply costs with the CPUC in 2006 or insubsequent general rate case proceedings. Management believes that it is probable that the CPUC will permit GSWCto recover in rates the net under-collections in supply costs.

*Santa Maria Groundwater BasinAdjudication*

In 1997, the Santa MariaValley Water Conservation District (“plaintiff”) filed a lawsuit againstmultiple defendants, including GSWC, the City of Santa Maria, and several otherpublic water purveyors. The plaintiff’s lawsuit seeks an adjudication ofthe Santa Maria Groundwater Basin. As of June 30, 2006, GSWC has incurredcosts of approximately $6.2 million in defending its rights in the SantaMaria Basin, including legal and expert witness fees, which have been deferredin Utility Plant for rate recovery.  InFebruary 2006, GSWC filed for recovery of these costs with the CPUC.  Management believes that the recovery ofthese costs through rates is probable. A settlement of the lawsuit has beenreached, subject to CPUC approval. The settlement, among other things, ifapproved by the CPUC, would preserve GSWC’s historical pumping rights andsecure supplemental water rights for use in case of drought or other reductionsin the natural yield of the Santa Maria Basin. There are also a small number of nonsettling parties, and the case isgoing forward as to their claims. The stipulation, if approved, wouldpreserve GSWC’s position with the settling parties independent of the outcomeof the case as it moves forward with the nonsettling parties.  GSWC cannot predict the outcome of the case as to the nonsettling parties.

*Refund of Water Rights LeaseRevenues*

In1994, GSWC entered into a contract to lease to the City of Folsom, 5,000acre-feet per year of water rights from the American River. GSWC included allassociated revenues in a nonoperating income account. In a decision issued onMarch 16, 2004, the CPUC ordered GSWC to refund 70 percent of the total amountof lease revenues received since 1994, plus interest, to customers.  On April 13, 2006, the CPUC authorized GSWCto reinvest all lease revenues received from the City of Folsom since January,2004, inclusive of the balances in the regulatory liability accounts, in watersystem infrastructure and to include such investments in the rate base uponwhich GSWC earns a rate of return.  As aresult, GSWC transferred about $2.3 million of water rights lease revenuesreceived from the City of Folsom in 2004 and 2005 from the regulatory liabilityaccount into income and recorded an additional pretax income of $299,000 and$598,000 reflecting the three and six months ended June 30, 2006, respectively,water rights lease revenues.

*Recovery of cost of tree removaland mitigation for Bark Beetle Infestation*

In a Proclamation issuedon March 7, 2003 former Governor Gray Davis declared a State of Emergency withrespect to a severe fire risk caused by dead and dying trees plagued by droughtand a major bark beetle infestation in the counties of Riverside, SanBernardino, and San Diego. On April 3, 2003, the CPUC issued an order requiringSouthern California Edison Company, San Diego Gas & Electric Company andBear Valley Electric to take all reasonable and necessary actions to mitigatethe increased fire hazard by removing dead, dying or diseased trees fromfalling or contacting distribution and transmission lines within their rightsof way and to ensure compliance with existing vegetation clearance statutes andregulations. The utilities, including Bear Valley Electric, are authorized tomake annual advice letter filings requesting recovery of the costs of complyingwith this order.   On April 13, 2006, theCPUC approved GSWC’s request for the amortization of about $351,000 for costsincurred through June 30, 2005 plus interest in the Bark Beetle CatastrophicEvent Memorandum Account.  At June 30, 2006, approximately $636,000, whichincludes the $351,000, has been incurred and is recorded as a regulatory asseton the balance sheets.

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* *

*Outside Services MemorandumAccount*

InApril 2006, the CPUC approved GSWC’s Region II advice letter which requestedrecovery of the expenses recorded in the Outside Services Memorandum Account (“OSMA”),as of December 31, 2005.  The decision authorized the recovery of thismemorandum account to record costs incurred while working with the WaterReplenishment District (“WRD”), WRD Technical Advisory Committee, Central andWest Basin Municipal Water Districts, Metropolitan Water District, West BasinWater Association and Central Basin Water Association on water supplyreliability and rate-related issues in Region II. GSWC incurred approximately$374,000 and $345,000 in the OSMA in 2004 and 2005, respectively.  GSWCsought and received authorization to amortize the cumulative total ofapproximately $719,000 over a 12-month period through customer rates.   Accordingly, GSWC recorded a regulatoryasset for this amount in April of 2006 with an offset and reduction to outsidelegal services for the three months ended June 30, 2006.  A surcharge went into effect in April of 2006and accordingly, GSWC began amortizing the OSMA account. Revenues of approximately$104,000 were received from customers during the three months ended June 30,2006 relating to this surcharge. The surcharge will be in effect over a12-month period.

**EnvironmentalMatters**

Registrant’s subsidiariesare subject to increasingly stringent environmental regulations including the1996 amendments to the Federal Safe Drinking Water Act; enhancedsurface water treatment rules; regulation of disinfectant/disinfectionby-products; and the long-termenhanced surface water treatment rules; groundwater treatment rule; contaminant regulation of radon and arsenic; and unregulatedcontaminants monitoring rule.

Additionalinformation on these requirements and other significant environmental mattersare described in *“Management’s Discussion and Analysis of**Financial Condition and Results of Operation”*included in our 2005 Annual Report on Form 10-K for the year endedDecember 31, 2005.  There have beenno material changes in any of the environmental matters discussed in the Form10-K since December 31, 2005.

**WaterSupply**

The adequacy of Registrant’swater supplies varies from year to year depending upon a variety of factors,including rainfall, availability of Colorado River water and imported waterfrom northern California, the amount of water stored in reservoirs andgroundwater basins, the amount of water used by Registrant’s customers andothers, water quality and legal limitations on use.

Population growth and increases in the amount of waterused have increased limitations on use in order to prevent over-drafting ofgroundwater basins. The importation of water from the Colorado River, one ofGSWC’s important sources of supply, is expected to decrease in future years dueto the requirements of the Central Arizona Project (“CAP”) and otherlimitations on the amount of water that the Metropolitan Water District ofSouthern California (“MWD”) is entitled to take from the Colorado River. MWD isexpected to increase its efforts to secure additional supplies fromconservation, desalination and water exchanges with the agricultural waterusers.

CCWC obtains its water supply from operating wells andfrom the Colorado River through the CAP. CCWC’s water supply may be subject tointerruption or reduction if there is an interruption or reduction in CAPwater. In addition, CCWC’s ability to provide water service to new real estatedevelopments is dependent upon its ability to meet the requirements of theArizona Department of Water Resources regarding its assured water supplyaccount.

The U.S. Government is responsible for supplying wateron military bases under the terms of contracts of the subsidiaries of ASUS withthe U.S. Government.

**New Accounting Pronouncements**

Registrant is subject tonewly issued requirements as well as changes in existing requirements issued bythe Financial Accounting Standards Board. See *Notes to Consolidated Financial Statements*for disclosure on new accounting pronouncements.

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** **

**Item 3. Quantitative andQualitative Disclosures About Market Risk**

Registrant is exposed tocertain market risks, including fluctuations in interest rates, and commodityprice risk primarily relating to changes in the market price of electricity.Market risk is the potential loss arising from adverse changes in prevailingmarket rates and prices. Therehave been no material changes regarding Registrant’s market risk position fromthe information provided in its Annual Report on Form 10-K for the year endedDecember 31, 2005. The quantitative and qualitative disclosures about marketrisk are discussed in *Item 7A-Quantitative andQualitative Disclosures About Market Risk*, contained in Registrant’sAnnual Report on Form 10-K.

**Item4. Controls and Procedures**

**(a) Evaluation of DisclosureControls and Procedures**

Asrequired by Rule 13a-15(b) under the Securities and Exchange Act of 1934(the “Exchange Act”), we have carried out an evaluation, under the supervisionand with the participation of our management, including our Chief ExecutiveOfficer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness,as of the end of the fiscal quarter covered by this report, of the design andoperation of our “disclosure controls and procedures” as defined inRule 13a-15(e) and 15d-15(e) promulgated by the Securities and ExchangeCommission (SEC) under the Exchange Act. Based upon that evaluation, the CEOand the CFO concluded that disclosure controls and procedures, as of the end ofsuch fiscal quarter, were adequate and effective to ensure that informationrequired to be disclosed by us in the reports that we file or submit under theExchange Act is recorded, processed, summarized and reported within the timeperiods specified in the SEC’s rules and forms and that such information isaccumulated and communicated to our management, including our CEO and CFO, asappropriate to allow timely decisions regarding required disclosure.

**(b) Changes in Internal Controlsover Financial Reporting**

Therehas been no change in our internal control over financial reporting during thequarter ended June 30, 2006, that has materially affected or is reasonablylikely to materially affect our internal control over financial reporting.

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** **

**PART II**

**Item 1. Legal Proceedings**

There have been no material developments in any of thelegal proceedings described in our 2005 Annual Report on Form 10-K.

Registrant is subject toordinary routine litigation incidental to its business. Other than those disclosedin Registrant’s Form 10-K for the year ended December 31, 2005, no other legalproceedings are pending, which are believed to be material. Management believesthat rate recovery, proper insurance coverage and reserves are in place toinsure against property, general liability and workers’ compensation claimsincurred in the ordinary course of business.

**Item 1A. Risk Factors**

Therehave been no significant changes in the risk factors disclosed in our 2005Annual Report on Form 10-K.

## **Item2. Unregistered Sales of Equity Securities and Use of Proceeds**

Theshareholders of AWR have approved the material features of all equitycompensation plans under which AWR directly issues equity securities. AWR didnot directly issue any unregistered equity securities during the second quarterof 2006.

Thefollowing table provides information about repurchases of Common Shares by AWRduring the second quarter of 2006:
| **Period**          | ** ** | **Total Number of  Shares Purchased** | ** ** | **Average Price  Paid per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|---------------------|------------|------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 -  30, 2006 |       | 131                                                  | (3)        | $                                                | 37.79      |                                                                                                                                | —     |                                                                                                                                | NA(4)      |   |
| May 1 -  31, 2006   |       | 153                                                  | (3)        | $                                                | 39.22      |                                                                                                                                | —     |                                                                                                                                | NA(4)      |   |
| June 1 -  30, 2006  |       | 10,453                                               | (2)        | $                                                | 36.46      |                                                                                                                                | —     |                                                                                                                                | NA(4)      |   |
| Total               |       | 10,737                                               |       | $                                                | 36.51      |                                                                                                                                | —     |                                                                                                                                | NA(4)      |   |

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(1)             Noneof the Common Shares were purchased pursuant to any publicly announced stockrepurchase program.

(2)             Of this amount,10,295 Common Shares were acquired on the open market for employees pursuant tothe Company’s 401(k) plan. The remainder of the Common Shares was acquired onthe open market for new participants in the Company’s Common Share Purchase andDividend Reinvestment Plan.

(3)             All of these Common Shares were acquired onthe open market for new participants in the Company’s Common Share Purchase andDividend Reinvestment Plan.

(4)             Noneof these plans contain a maximum number of Common Shares that may be purchasedin the open market under the plans.

**Item 3. Defaults Upon Senior Securities**

None

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**Item 4. Submission of Matters toa Vote of Security Holders**

Theannual meeting of shareholders was held on May 9, 2006. The following tablepresents the voting results of the election of Class II directors at thismeeting:

| Name             | ** ** | **“Votes For”** | ** ** | **“Votes Withheld”** | ** ** |
|------------------|------------|--------------------------------|------------|-------------------------------------|------------|
| N.P. Dodge, Jr.  |       | 14,337,357                     |       | 89,829                              |       |
| Robert F. Kathol |       | 14,337,818                     |       | 89,368                              |       |
| Lloyd E. Ross    |       | 14,317,458                     |       | 109,727                             |       |

 

Registrant has one other class ofdirectors, James L. Anderson, Anne M. Holloway and Floyd E. Wicks, whose termswill expire at the annual meeting in 2007.

Registrant’s shareholders alsoratified the appointment of PricewaterhouseCoopers LLP as the independentregistered public accounting firm, with 14,366,838 voting in favor of theappointment, 32,037 opposing the appointment, 28,310 abstaining from voting onthe appointment and 1 share not voting on the proposal.

**Item 5. Other Information**

(a)  On July 31, 2006, the Board of Directors ofRegistrant declared a regular quarterly dividend of $0.225 per common share.The dividend will be paid September 1, 2006 to shareholders of record as of theclose of business on August 14, 2006.

The Board of Directors hasapproved an amendment to the Supplemental Executive Retirement Plan (“SERP”)for executive officers of the Company and a revised form of Restricted StockUnit Agreement.  Under the SERP, theformula for calculating benefits was revised to provide that the benefit iscalculated based on  2% of compensationper year of credited service before 2006 and 3% of compensation  per year ofcredited service after 2005 up to a combined maximum of  60% of compensation, except that participantswho were employed with the Company on January 1, 2006  are entitled to receive the greater of thebenefit calculated under the  new formulaor the benefit calculated under the previous formula.  The Board's approval of the new SERP formulais subject to the receipt of a confirming example, showing the effect of thechange on an executive officer.  TheRestricted Stock Unit Agreement has been revised to provide that a restrictedstock unit will vest upon termination of employment if the employee is at least55 and his or her age and years of service with the Company and/or itssubsidiaries equals at least 75.  Priorto the amendment, the Restricted Stock Unit Agreement provided for vesting upontermination of employment if the employee was at least 55 and had at least 20years of service with the Company and/or its subsidiaries.

(b)  There have been no material changes duringthe second quarter of 2006 to the procedures by which shareholders may nominatepersons to the Board of Directors of AWR.

## **Item6. Exhibits**

(a) The followingdocuments are filed as Exhibits to this report:

| 10.1   |   | Amended Southern California Water Company Pension  Restoration Plan (1)(3)                                       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------|
| 10.2   |   | Revised Form of Restricted Stock Unit Agreement (1)(3)                                                           |
| 31.1   |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
| 31.1.1 |   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
| 31.2.1 |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |

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(1) Filed concurrently herewith

(2) Furnished concurrently herewith

(3) Compensatorybenefit agreement

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#### **SIGNATURE**

Pursuant to the requirements ofSecurities Exchange Act of 1934, the Registrant has duly caused this report tobe signed on its behalf by the undersigned thereunto duly authorized and as itsprincipal financial officer.
|        | AMERICAN STATES WATER COMPANY  and its subsidiary  GOLDEN STATE WATER COMPANY |
|--------|-------------------------------------------------------------------------------|
|   |                                                                          |   |
|   |                                                                          |   |
|   | By:                                                                           | /s/ Robert J. Sprowls |
|   |                                                                          | Robert J. Sprowls Senior Vice President-Finance,  Chief Financial Officer, Treasurer and Corporate Secretary |

 

Dated: August 9, 2006

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