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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-Q (Mark One) þ
    
    Quarterly report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the quarterly period ended March 31, 2005 or
 o
    
    Transition report pursuant to
Section 13 or 15(d) of the Securities Exchange Act of 1934 for
the transition period from ________________ to ________________
 Commission file number 001-14431 American States Water Company




California
    
    95-4676679(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)630 East Foothill Boulevard, San Dimas
    
    91773(Address of Principal Executive Offices)
    
    (Zip Code)


(909) 394-3600






Not Applicable






Commission file number 001-12008

Southern California Water Company






California
    
    95-1243678(State or Other Jurisdiction of Incorporation or Organization)
    
    (IRS Employer Identification No.)630 East Foothill Boulevard, San Dimas
    
    91773(Address of Principal Executive Offices)
    
    (Zip Code)


(909) 394-3600






Not Applicable






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

American States Water
Company
    
    Yes  þ    No  oSouthern California Water Company
    
    Yes  þ    No  o


Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act.).

American States Water Company
    
    Yes  þ    No  oSouthern California Water Company
    
    Yes  o    No  þ


As of May 10, 2005, the number of Common Shares outstanding, of American States Water Company was
16,771,565 shares.

As of May 10, 2005, all of the 122 outstanding Common Shares of Southern California Water Company
were owned by American States Water Company.









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AMERICAN STATES WATER COMPANY
and SOUTHERN CALIFORNIA WATER COMPANY
FORM 10-Q INDEX Page No.Part I
    
    Financial InformationItem 1:
    
    Financial Statements
    
    
    2Consolidated Balance Sheets of American States Water Company as of March 31, 2005 and December 31, 2004
    
    
    3-4Consolidated Statements of Income of American States Water Company for the Three Months Ended March 31, 2005 and 2004
    
    
    5Consolidated Statements of Cash Flow of American States Water Company for the Three Months Ended March 31, 2005 and 2004
    
    
    6Balance Sheets of Southern California Water Company as of March 31, 2005 and December 31, 2004
    
    
    7-8Statements of Income of Southern California Water Company for the Three Months Ended March 31, 2005 and 2004
    
    
    9Statements of Cash Flow of Southern California Water Company for the Three Months Ended March 31, 2005 and 2004
    
    
    10Notes to Consolidated Financial Statements
    
    
    11-24Item 2:
    
    Managements Discussion and Analysis of Financial Condition and Results of Operation
    
    
    25-52Item 3:
    
    Quantitative and Qualitative Disclosures About Market Risks
    
    
    52Item 4:
    
    Controls and Procedures
    
    
    53Part II
    
    Other InformationItem 1:
    
    Legal Proceedings
    
    
    54Item 2:
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    54Item 3:
    
    Defaults Upon Senior Securities
    
    
    55Item 4:
    
    Submission of Matters to a Vote of Security Holders
    
    
    55Item 5:
    
    Other Information
    
    
    55Item 6:
    
    Exhibits
    
    
    55Signature
    
    
    56Exhibit 3.1Exhibit 31.1Exhibit 31.1.1Exhibit 31.2Exhibit 31.2.1Exhibit 32.1Exhibit 32.2
  1




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PART I 
 Item 1. Financial Statements General The basic financial statements included herein have been prepared by Registrant, without
audit, pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements,
prepared in accordance with accounting principles generally accepted in the United States of
America, have been condensed or omitted pursuant to such rules and regulations, although Registrant
believes that the disclosures are adequate to make the information presented not misleading. In the
opinion of management, all adjustments necessary for a fair statement of results for the interim
period have been made. It is suggested that these financial statements be read in conjunction with the financial
statements and notes thereto in the latest Annual Report on Form 10-K of American States Water
Company and its wholly owned subsidiary, Southern California Water Company. Filing Format This quarterly report on Form 10-Q is a combined report being filed by two separate
Registrants: American States Water Company (hereinafter AWR) and Southern California Water
Company (hereinafter SCW). For more information, please see Note 1 to the Notes to Financial
Statementsand the heading entitled Generalin Item 2  Managements Discussion and Analysis of
Financial Condition and Results of Operation.References in this report to Registrant are to AWR
and SCW collectively, unless otherwise specified. SCW makes no representations as to the
information contained in this report relating to AWR and its subsidiaries, other than SCW. 2




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AMERICAN STATES WATER COMPANY 
 CONSOLIDATED BALANCE SHEETS
 ASSETS
 (Unaudited)
 March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Utility Plant, at costWater
    
    $
    783,741
    
    
    $
    778,238Electric
    
    
    58,664
    
    
    
    58,667842,405
    
    
    
    836,905Less  Accumulated depreciation
    
    
    (247,778
    )
    
    
    (241,717
    )594,627
    
    
    
    595,188Construction work in progress
    
    
    82,112
    
    
    
    68,977Net utility plant
    
    
    676,739
    
    
    
    664,165Other Property and InvestmentsGoodwill
    
    
    11,903
    
    
    
    11,925Other property and investments
    
    
    9,737
    
    
    
    9,79221,640
    
    
    
    21,717Current AssetsCash and cash equivalents
    
    
    5,825
    
    
    
    4,303Accounts receivable-customers (less allowance for doubtful
accounts of $776 in 2005 and $782 in 2004)
    
    
    9,197
    
    
    
    10,970Unbilled revenue
    
    
    12,860
    
    
    
    13,743Other accounts receivable (less allowance for doubtful
accounts of $234 in 2005 and $201 in 2004)
    
    
    1,998
    
    
    
    3,384Income taxes receivable
    
    
    4,239
    
    
    
    5,833Materials and supplies, at average cost
    
    
    1,451
    
    
    
    1,496Regulatory assets  current
    
    
    6,251
    
    
    
    7,104Prepayments and other current assets
    
    
    3,486
    
    
    
    3,466Deferred income taxes  current
    
    
    1,692
    
    
    
    2,72546,999
    
    
    
    53,024Regulatory and Other AssetsRegulatory assets
    
    
    53,802
    
    
    
    54,404Other accounts receivable
    
    
    8,503
    
    
    
    8,400Other
    
    
    8,569
    
    
    
    8,567Total regulatory and other assets
    
    
    70,874
    
    
    
    71,371Total Assets
    
    $
    816,252
    
    
    $
    810,277
 The accompanying notes are an integral part of these consolidated financial statements 3




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AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited) March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004CapitalizationCommon shares, no par value, no stated value
    
    $
    165,596
    
    
    $
    165,270Earnings reinvested in the business
    
    $
    89,447
    
    
    
    89,454Accumulated other comprehensive loss
    
    
    (3,259
    )
    
    
    (3,259
    )Total common shareholders equity
    
    
    251,784
    
    
    
    251,465Long-term debt
    
    
    228,902
    
    
    
    228,902Total capitalization
    
    
    480,686
    
    
    
    480,367Current LiabilitiesNotes payable to banks
    
    
    47,000
    
    
    
    45,000Long-term debt  current
    
    
    658
    
    
    
    880Accounts payable
    
    
    14,460
    
    
    
    18,206Accrued employee expenses
    
    
    4,136
    
    
    
    4,260Accrued interest
    
    
    5,025
    
    
    
    1,670Regulatory liabilities  current
    
    
    3,701
    
    
    
    3,441Other
    
    
    10,169
    
    
    
    12,879Total current liabilities
    
    
    85,149
    
    
    
    86,336Other CreditsAdvances for construction
    
    
    84,036
    
    
    
    81,351Contributions in aid of construction  net
    
    
    74,047
    
    
    
    73,100Deferred income taxes
    
    
    59,829
    
    
    
    59,839Unamortized investment tax credits
    
    
    2,587
    
    
    
    2,609Accrued pension and other postretirement benefits
    
    
    10,609
    
    
    
    8,793Regulatory liabilities
    
    
    11,084
    
    
    
    9,731Other
    
    
    8,225
    
    
    
    8,151Total other credits
    
    
    250,417
    
    
    
    243,574Commitments and Contingencies (Note 9)
    
    
    
    
    
    
    Total Capitalization and Liabilities
    
    $
    816,252
    
    
    $
    810,277
 The accompanying notes are an integral part of these consolidated financial statements 4




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AMERICAN STATES WATER COMPANY 
 CONSOLIDATED STATEMENTS OF INCOME
 FOR THE THREE MONTHS
 ENDED MARCH 31, 2005 AND 2004
 (Unaudited)
 Three Months EndedMarch 31,(in thousands, except per share amounts)
    
    2005
    
    
    2004Operating RevenuesWater
    
    $
    41,497
    
    
    $
    38,742Electric
    
    
    7,470
    
    
    
    7,627Other
    
    
    827
    
    
    
    28249,794
    
    
    
    46,651Operating ExpensesWater purchased
    
    
    7,686
    
    
    
    8,881Power purchased for pumping
    
    
    1,487
    
    
    
    1,717Power purchased for resale
    
    
    4,137
    
    
    
    4,829Unrealized gain on purchased power contracts
    
    
    (3,015
    )
    
    
    (557
    )Gain on settlement for removal of wells
    
    
    (760
    )
    
    
    Groundwater production assessment
    
    
    1,921
    
    
    
    1,822Supply cost balancing accounts
    
    
    1,078
    
    
    
    221Other operating expenses
    
    
    5,069
    
    
    
    4,437Administrative and general expenses
    
    
    10,129
    
    
    
    9,079Depreciation and amortization
    
    
    5,635
    
    
    
    5,177Maintenance
    
    
    2,466
    
    
    
    2,327Taxes on income
    
    
    3,216
    
    
    
    942Other taxes
    
    
    2,272
    
    
    
    2,226Total operating expenses
    
    
    41,321
    
    
    
    41,101Operating Income
    
    
    8,473
    
    
    
    5,550Other Income (Loss)Other income (loss)
    
    
    (121
    )
    
    
    (182
    )Taxes on other income (loss)
    
    
    72
    
    
    
    99Total other income (loss)
    
    
    (49
    )
    
    
    (83
    )Interest ChargesInterest on long-term debt
    
    
    4,052
    
    
    
    4,050Other interest and amortization of debt expense
    
    
    608
    
    
    
    271Total interest charges
    
    
    4,660
    
    
    
    4,321Net Income
    
    $
    3,764
    
    
    $
    1,146Weighted Average Number of Shares Outstanding
    
    
    16,761
    
    
    
    15,224Basic Earnings Per Common Share
    
    $
    0.22
    
    
    $
    0.08Weighted Average Number of Diluted Shares
    
    
    16,805
    
    
    
    15,255Fully Diluted Earnings Per Share
    
    $
    0.22
    
    
    $
    0.08Dividends Declared Per Common Share
    
    $
    0.225
    
    
    $
    0.221
 The accompanying notes are an integral part of these consolidated financial statements 5




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AMERICAN STATES WATER COMPANY 
 CONSOLIDATED STATEMENTS OF CASH FLOW
 FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
 (Unaudited)
 Three Months EndedMarch 31,(in thousands)
    
    2005
    
    
    2004Cash Flows From Operating Activities:Net income
    
    $
    3,764
    
    
    $
    1,146Adjustments for non-cash items:Depreciation and amortization
    
    
    5,635
    
    
    
    5,177Provision for doubtful accounts
    
    
    145
    
    
    
    36Deferred income taxes and investment tax credits
    
    
    1,554
    
    
    
    1,018Unrealized gain on purchased power contracts
    
    
    (3,015
    )
    
    
    (557
    )Non-cash compensation expense on stock units issued
    
    
    8
    
    
    
    Other  net
    
    
    545
    
    
    
    184Changes in assets and liabilities:Accounts receivable  customers
    
    
    1,661
    
    
    
    3,057Unbilled revenue
    
    
    883
    
    
    
    1,626Other accounts receivable
    
    
    1,250
    
    
    
    9,245Materials and supplies
    
    
    45
    
    
    
    (92
    )Prepayments and other current assets
    
    
    968
    
    
    
    1,109Regulatory assets  supply cost balancing accounts
    
    
    1,078
    
    
    
    221Other assets
    
    
    741
    
    
    
    (487
    )Accounts payable
    
    
    (3,746
    )
    
    
    (5,392
    )Income taxes receivable/payable
    
    
    1,594
    
    
    
    (834
    )Other liabilities
    
    
    4,699
    
    
    
    3,661Net cash provided
    
    
    17,809
    
    
    
    19,118Cash Flows From Investing Activities:Construction expenditures
    
    
    (18,826
    )
    
    
    (13,399
    )Net cash used
    
    
    (18,826
    )
    
    
    (13,399
    )Cash Flows From Financing Activities:Proceeds from issuance of common shares
    
    
    318
    
    
    
    609Receipt of advances for and contributions in aid of construction
    
    
    4,031
    
    
    
    2,904Refunds on advances for construction
    
    
    (484
    )
    
    
    (425
    )Repayments of long-term debt
    
    
    (222
    )
    
    
    (209
    )Net change in notes payable to banks
    
    
    2,000
    
    
    
    (9,000
    )Cash received on financing portion of purchased power contracts
    
    
    667
    
    
    
    Dividends paid
    
    
    (3,771
    )
    
    
    (3,362
    )Net cash provided (used)
    
    
    2,539
    
    
    
    (9,483
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,522
    
    
    
    (3,764
    )Cash and cash equivalents, beginning of period
    
    
    4,303
    
    
    
    12,775Cash and cash equivalents, end of period
    
    $
    5,825
    
    
    $
    9,011
 The accompanying notes are an integral part of these consolidated financial statements 6




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SOUTHERN CALIFORNIA WATER COMPANY 
 BALANCE SHEETS
 ASSETS
 (Unaudited)
 March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004Utility Plant, at costWater
    
    $
    739,990
    
    
    $
    734,662Electric
    
    
    58,664
    
    
    
    58,667798,654
    
    
    
    793,329Less  Accumulated depreciation
    
    
    (235,439
    )
    
    
    (229,664
    )563,215
    
    
    
    563,665Construction work in progress
    
    
    77,746
    
    
    
    65,136Net utility plant
    
    
    640,961
    
    
    
    628,801Other Property and Investments
    
    
    7,367
    
    
    
    7,419Current AssetsCash and cash equivalents
    
    
    2,727
    
    
    
    2,702Accounts receivable-customers (less allowance for doubtful
accounts of $776 in 2005 and $758 in 2004)
    
    
    9,089
    
    
    
    10,818Unbilled revenue
    
    
    12,565
    
    
    
    13,466Inter-company receivable
    
    
    934
    
    
    
    1,126Other accounts receivable (less allowance for doubtful
accounts of $234 in 2005 and $201 in 2004)
    
    
    1,189
    
    
    
    2,465Income taxes receivable from Parent
    
    
    
    
    
    
    4,187Materials and supplies, at average cost
    
    
    1,425
    
    
    
    1,473Regulatory assets  current
    
    
    6,251
    
    
    
    7,104Prepayments and other current assets
    
    
    3,316
    
    
    
    3,248Deferred income taxes  current
    
    
    1,753
    
    
    
    2,79539,249
    
    
    
    49,384Regulatory and Other AssetsRegulatory assets
    
    
    54,274
    
    
    
    54,219Other accounts receivable
    
    
    8,503
    
    
    
    8,400Other
    
    
    8,074
    
    
    
    8,053Total regulatory and other assets
    
    
    70,851
    
    
    
    70,672Total Assets
    
    $
    758,428
    
    
    $
    756,276
 The accompanying notes are an integral part of these financial statements 7




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SOUTHERN CALIFORNIA WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited) March 31,
    
    
    December 31,(in thousands)
    
    2005
    
    
    2004CapitalizationCommon shares, no par value
    
    $
    159,298
    
    
    $
    159,290Earnings reinvested in the business
    
    
    87,496
    
    
    
    87,817Accumulated other comprehensive loss
    
    
    (3,259
    )
    
    
    (3,259
    )Total common shareholders equity
    
    
    243,535
    
    
    
    243,848Long-term debt
    
    
    221,697
    
    
    
    221,697Total capitalization
    
    
    465,232
    
    
    
    465,545Current LiabilitiesLong-term debt  current
    
    
    229
    
    
    
    282Accounts payable
    
    
    13,707
    
    
    
    17,196Inter-company payable
    
    
    22,878
    
    
    
    23,925Income taxes payable to Parent
    
    
    766
    
    
    
    Accrued employee expenses
    
    
    3,829
    
    
    
    3,951Accrued interest
    
    
    4,912
    
    
    
    1,636Regulatory liabilities  current
    
    
    3,701
    
    
    
    3,441Other
    
    
    9,783
    
    
    
    12,601Total current liabilities
    
    
    59,805
    
    
    
    63,032Other CreditsAdvances for construction
    
    
    72,449
    
    
    
    70,206Contributions in aid of construction-net
    
    
    73,226
    
    
    
    72,574Deferred income taxes
    
    
    56,288
    
    
    
    56,684Unamortized investment tax credits
    
    
    2,587
    
    
    
    2,609Accrued pension and other postretirement benefits
    
    
    10,609
    
    
    
    8,793Regulatory liabilities
    
    
    11,084
    
    
    
    9,731Other
    
    
    7,148
    
    
    
    7,102233,391
    
    
    
    227,699Commitments and Contingencies (Note 9)
    
    
    
    
    
    
    Total Capitalization and Liabilities
    
    $
    758,428
    
    
    $
    756,276
 The accompanying notes are an integral part of these financial statements 8




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##### Table of Contents



SOUTHERN CALIFORNIA WATER COMPANY 
 STATEMENTS OF INCOME
 FOR THE THREE MONTHS
 ENDED MARCH 31, 2005 AND 2004
 (Unaudited)
 Three Months EndedMarch 31,(in thousands)
    
    2005
    
    
    2004Operating RevenuesWater
    
    $
    40,154
    
    
    $
    37,461Electric
    
    
    7,470
    
    
    
    7,62747,624
    
    
    
    45,088Operating ExpensesWater purchased
    
    
    7,570
    
    
    
    8,720Power purchased for pumping
    
    
    1,412
    
    
    
    1,641Power purchased for resale
    
    
    4,137
    
    
    
    4,829Unrealized (gain) loss on power purchased contracts
    
    
    (3,015
    )
    
    
    (557
    )Groundwater production assessment
    
    
    1,921
    
    
    
    1,822Supply cost balancing accounts
    
    
    1,078
    
    
    
    221Other operating expenses
    
    
    4,613
    
    
    
    4,093Administrative and general expenses
    
    
    8,819
    
    
    
    7,736Depreciation and amortization
    
    
    5,357
    
    
    
    4,937Maintenance
    
    
    2,309
    
    
    
    2,253Taxes on income
    
    
    3,179
    
    
    
    1,336Other taxes
    
    
    2,160
    
    
    
    2,125Total operating expenses
    
    
    39,540
    
    
    
    39,156Operating Income
    
    
    8,084
    
    
    
    5,932Other Income (Loss)Other income (loss)
    
    
    (124
    )
    
    
    (188
    )Taxes on other income (loss)
    
    
    73
    
    
    
    102Total other income (loss)
    
    
    (51
    )
    
    
    (86
    )Interest ChargesInterest on long-term debt
    
    
    3,947
    
    
    
    3,935Other interest and amortization of debt expense
    
    
    407
    
    
    
    192Total interest charges
    
    
    4,354
    
    
    
    4,127Net Income
    
    $
    3,679
    
    
    $
    1,719
 The accompanying notes are an integral part of these financial statements 9




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SOUTHERN CALIFORNIA WATER COMPANY 
 CASH FLOW STATEMENTS
 FOR THE THREE MONTHS ENDED MARCH 31, 2005 AND 2004
 (Unaudited)
 Three Months EndedMarch 31,(in thousands)
    
    2005
    
    
    2004Cash Flows From Operating Activities:Net income
    
    $
    3,679
    
    
    $
    1,719Adjustments for non-cash items:Depreciation and amortization
    
    
    5,357
    
    
    
    4,937Provision for doubtful accounts
    
    
    139
    
    
    
    28Deferred income taxes and investment tax credits
    
    
    1,154
    
    
    
    915Unrealized gain on purchased power contracts
    
    
    (3,015
    )
    
    
    (557
    )Non-cash compensation expense on stock units issued
    
    
    8
    
    
    
    Other  net
    
    
    350
    
    
    
    152Changes in assets and liabilities:Accounts receivable  customers
    
    
    1,623
    
    
    
    2,872Unbilled revenue
    
    
    901
    
    
    
    1,589Other accounts receivable
    
    
    1,140
    
    
    
    9,285Materials and supplies
    
    
    48
    
    
    
    (92
    )Prepayments and other current assets
    
    
    920
    
    
    
    1,089Regulatory assets  supply cost balancing accounts
    
    
    1,078
    
    
    
    221Other assets
    
    
    950
    
    
    
    (478
    )Accounts payable
    
    
    (3,489
    )
    
    
    (4,648
    )Inter-company receivable/payable
    
    
    (2,655
    )
    
    
    983Income taxes receivable/payable from/to Parent
    
    
    4,953
    
    
    
    (415
    )Other liabilities
    
    
    3,727
    
    
    
    3,561Net cash provided
    
    
    16,868
    
    
    
    21,161Cash Flows From Investing Activities:Construction expenditures
    
    
    (18,127
    )
    
    
    (12,848
    )Net cash used
    
    
    (18,127
    )
    
    
    (12,848
    )Cash Flows From Financing Activities:Receipt of advances for and contributions in aid of construction
    
    
    3,359
    
    
    
    2,895Refunds on advances for construction
    
    
    (489
    )
    
    
    (411
    )Repayments of long-term debt
    
    
    (53
    )
    
    
    (54
    )Net change in intercompany borrowings
    
    
    1,800
    
    
    
    (12,000
    )Cash received on financing portion of purchased power contracts
    
    
    667
    
    
    
    Dividends paid
    
    
    (4,000
    )
    
    
    (3,850
    )Net cash provided (used)
    
    
    1,284
    
    
    
    (13,420
    )Net increase (decrease) in cash and cash equivalents
    
    
    25
    
    
    
    (5,107
    )Cash and cash equivalents, beginning of period
    
    
    2,702
    
    
    
    8,306Cash and cash equivalents, end of period
    
    $
    2,727
    
    
    $
    3,199
 The accompanying notes are an integral part of these financial statements 10




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##### Table of Contents



AMERICAN STATES WATER COMPANY
AND
SOUTHERN CALIFORNIA WATER COMPANY 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 (Unaudited)
 Note 1  Summary of Significant Accounting Policies General: American States Water Company (AWR) is the parent company of Southern
California Water Company (SCW), American States Utility Services, Inc. (ASUS) and its subsidiary,
Fort Bliss Water Services Company (FBWS), and Chaparral City Water Company (CCWC). More than 90%
of AWRs assets consist of the common stock of SCW. SCW is a public utility engaged principally in
the purchase, production, distribution and sale of water in California. SCW also distributes
electricity in several California mountain communities. The California Public Utilities Commission
(CPUC) regulates SCWs water and electric businesses, including properties, rates, services,
facilities and other matters. CCWC is a public utility regulated by the Arizona Corporation
Commission (ACC). ASUS performs water related services and operations on a contract basis. On
October 1, 2004, ASUSs wholly-owned subsidiary, FBWS, commenced operation of 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 Commission on Environmental Quality (TCEQ). There is no direct regulatory oversight by
either the CPUC or the ACC of the operation or rates of ASUSs contracted services or AWR. Unless
otherwise stated in this report, the term Registrant applies to both AWR and SCW, collectively. Basis of Presentation: The consolidated financial statements of AWR include the
accounts of AWR and its wholly-owned subsidiaries SCW, ASUS, FBWS and CCWC, and 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, 2004 filed with the SEC. Certain prior year amounts have been reclassified to
conform to current year presentation. None of these reclassifications had an impact on Registrants
Shareholders Equity or Net Income. SCWs Related Party Transactions: SCW and other subsidiaries provide and receive
various services to and from their parent, AWR, and among themselves. In addition, AWR has a $75
million syndicated credit facility. AWR borrows under this facility and provides funds to SCW in
support of its operations. Amounts owed to AWR for borrowings under this facility represent the
majority of SCWs inter-company payables on SCWs balance sheets as of March 31, 2005 and December
31, 2004. Interest is charged to SCW in an amount sufficient to cover AWRs interest cost under
the credit facility. SCW
also allocates certain corporate office administrative and general costs to its affiliates
using CPUC approved allocation factors. 11




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##### Table of Contents



Note 2  Regulatory Matters:In accordance with accounting principles for rate-regulated
enterprises, Registrant records regulatory assets, which represent probable future revenue
associated with certain costs that will be recovered from customers through the rate-making
process, and regulatory liabilities, which represent probable future reductions in revenue
associated with amounts that are to be credited to customers through the rate-making process. At
March 31, 2005, Registrant had $25.6 million of regulatory assets not accruing carrying costs. Of
this amount, $15.2 million relates to the regulatory asset for costs deferred on the Aerojet matter
disclosed below as a non-yielding regulatory asset. In addition, other regulatory assets not
accruing carrying costs include a deferred income tax balance of $7.2 million representing
accelerated tax benefits previously flowed-through to ratepayers, which will be included in rates
concurrently with recognition of the associated tax expense. Finally, there are other expenses that
Registrant recovers in rates over a short period that do not provide for recovery of carrying
costs. At March 31, 2005, $3.2 million was recorded as other regulatory assets for such costs to be
recovered. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets
are as follows: March 31,
    
    
    December 31,(In thousands)
    
    2005
    
    
    2004SCWSupply cost balancing accounts
    
    $
    22,710
    
    
    $
    23,537Costs deferred for future recovery on Aerojet case
    
    
    15,176
    
    
    
    15,347Flow-through taxes, net
    
    
    7,204
    
    
    
    7,733Electric transmission line abandonment costs
    
    
    3,517
    
    
    
    3,546Asset retirement obligations
    
    
    3,134
    
    
    
    3,038Low income balancing accounts
    
    
    2,274
    
    
    
    2,134General rate case memorandum accounts
    
    
    1,871
    
    
    
    2,168Refund of water right lease revenues
    
    
    (6,056
    )
    
    
    (5,889
    )Revenues subject to refund
    
    
    (3,487
    )
    
    
    (3,487
    )Supply cost memorandum accounts net over-collections
    
    
    (2,040
    )
    
    
    (1,818
    )Other regulatory assets
    
    
    1,437
    
    
    
    1,842Total SCW
    
    $
    45,740
    
    
    $
    48,151CCWCAsset retirement obligations
    
    $
    42
    
    
    $
    41Other regulatory assets/liabilities, net
    
    
    (514
    )
    
    
    144Total AWR
    
    $
    45,268
    
    
    $
    48,336
 Supply Cost Balancing and Memorandum Accounts: As permitted by the CPUC, SCW maintains electric supply balancing accounts and, prior to
November 29, 2001, maintained water supply balancing accounts to account for under-collections and
over-collections of revenues designed to recover such costs. Costs are recorded as expenses and
charged to balancing accounts when such costs are incurred. The balancing accounts are reversed
when such costs are recovered through rate adjustments or through refunds of previously incurred
costs. SCW accrues interest on its supply cost balancing accounts at the prevailing rate for 90-day
commercial paper. CCWC does not maintain a supply cost balancing account. 12




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##### Table of Contents



Note 2  Regulatory Matters (Continued): Water Memorandum Supply Cost Account On November 29, 2001, the CPUC ordered water utilities
with existing water supply balancing accounts to cease booking amounts to such accounts. In its
place, water utilities are now required to establish a memorandum supply cost account. The over- or
under-collection of water supply costs is recorded in this memorandum account in a manner similar
to the balancing account. In a decision issued on June 19, 2003 related to the memorandum supply
cost account, the CPUC concluded that: (i) if a utility is within its 3-year rate case cycle and
does not earn in excess of its authorized rate of return, the utility is entitled to recover its
costs in the memorandum supply cost account, subject to a reasonableness review by the CPUC; (ii)
if a utility is either within or outside of its rate case cycle and earns in excess of its
authorized rate-of-return, the utilitys recovery of expenses from the memorandum supply cost
account will be reduced by the amount exceeding the authorized rate-of-return, and (iii) a utility
is required to seek review of under- and over- collections by filing an advice letter annually. As of March 31, 2005, SCW has filed advice letters for Regions I and II for the period from
November 29, 2001 to December 31, 2004 with respect to an approximate $1.8 million cumulative net
over-collection, which has been recorded as a regulatory liability. An additional $223,000 of net
over-collection related to the three months ended March 31, 2005 has also been recorded as a
regulatory liability at March 31, 2005. SCW also filed advice letters with the CPUC for review of the activity in the Region III
memorandum supply cost account for the period from November 29, 2001 to December 31, 2004. Region
III had under-collected cumulative balances of $6.8 million and $6.6 million at March 31, 2005 and
December 31, 2004, respectively, which are subject to earnings tests. A regulatory asset with
respect to this under-collection will not be recorded until receipt of a CPUC decision authorizing
the recovery of the under-collection. Electric Balancing Account Electric power costs incurred by SCWs Bear Valley Electric
division continue to be charged to its electric supply cost balancing account. The under-collection
in the electric balancing account is $22.2 million at March 31, 2005 which was mostly incurred
during the energy crisis in late 2000 and early 2001. The CPUC has authorized SCW to collect a
surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable SCW to
recover the under-collection. SCW sold 40,194,547 and 40,751,889 kilowatt hours of electricity to
its Bear Valley Electric division customers for the three months ended March 31, 2005 and 2004,
respectively. SCW anticipates electricity sales to be sufficient for it to recover the amount of
the under-collection by August 2011. SCW is allowed to include only up to a weighted annual energy
purchase cost of $77 per MWh each year through August 2011 in its electric supply cost balancing
account. To the extent that the actual weighted average annual cost for power purchased exceeds the
$77 per MWh amount, SCW will not be able to include these amounts in its balancing account and such
amounts will be expensed. During the three months ended March 31, 2005, SCW expensed approximately
$101,000 for costs over $77 per MWh. Costs Deferred for Future Recovery: SCW sued Aerojet-General Corporation (Aerojet) for causing the contamination of the
Sacramento County Groundwater Basin, which affected certain SCW wells. On a related matter, SCW
also filed a lawsuit against the State of California (the State). The CPUC authorized memorandum
accounts to allow for recovery, from customers, of costs incurred by SCW in prosecuting the cases
against Aerojet and the State, less any recovery from the defendants or others. On October 30,
2003, SCW, in its Region I abbreviated general rate case, filed for recovery of the cumulative
balance of approximately $22 million in its memorandum account. This balance consisted primarily
of deferred litigation costs and carrying costs. The filing with the CPUC requested recovery of
the balance over a 20-year amortization period. 13




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##### Table of Contents



Note 2  Regulatory Matters (Continued): As of March 31, 2005 and December 31, 2004, approximately $15.2 million and $15.3 million,
respectively, had been recorded as a non-yielding regulatory asset representing primarily the legal
costs incurred to date in connection with prosecuting the cases. The difference between the amount
filed with the CPUC for recovery in rates and those recorded primarily relate to the carrying costs
pertaining to certain capital investments, which will not be recorded as a regulatory asset until
receipt of a CPUC decision authorizing the recovery of the entire memorandum account filed.
Management believes the recovery of these costs through rates is probable; however, it is
managements intention to offset any settlement proceeds from Aerojet that may occur from these
actions against the balance in the memorandum account at the time of settlement. SCW filed for
interim rate relief during the fourth quarter of 2004. This interim rate relief would have provided
for an increase in rates of approximately $6 million over a 10 year period, subject to refund. In
January 2005, a joint ruling of the assigned Commissioner and Administrative Law Judge denied SCWs
request for an interim amortization. According to the CPUCs ruling, the motion was denied
primarily because the hearing on the merits was only weeks away (March 14-15, 2005) and an expected
proposed decision, and CPUC action on it, would likely be issued soon thereafter in the second or
third quarter of 2005. Management remains of the opinion that the recovery of these costs through
rates is probable; however, management cannot give assurance that the CPUC will ultimately allow
recovery of all or any of the costs that have accumulated in this memorandum account. See Note 9
for further discussion on the Aerojet matter. Refund of Water Right Lease Revenues: In 1994, SCW entered into a contract to lease to the City of Folsom, 5,000 acre-feet per year
of water rights from the American River. SCW included all associated revenues in a non-operating
income account. In a decision issued on March 16, 2004, the CPUC ordered SCW to refund 70 percent
of the total amount of lease revenues received since 1994, plus interest, to customers. Pursuant to
the order, SCW recorded a $6.2 million regulatory liability with a corresponding charge against
non-operating income, net of taxes, during the fourth quarter of 2003. A final amount of the refund
was approved by the CPUC in June 2004 and SCW adjusted its estimate to the approved refund amount
of $5.2 million. Management disagreed with the CPUCs decision and filed an appeal to the
decision. The CPUC denied the Companys request for an appeal. The Company filed with the Supreme
Court of California to hear the matter, which was also denied in February of 2005. Pursuant to the
order, the apportionment of any lease revenues that SCW may collect in the future will be
determined by a later decision. Therefore, beginning in the first quarter of 2004, all amounts
billed to the City of Folsom are included in a regulatory liability account and no amounts have
been recognized as revenue for 2004 and 2005 until all uncertainties about this matter are resolved
with the CPUC. For the three months ended March 31, 2005, SCW recorded an additional $286,000 in
the regulatory liability account. In addition, in 2004 SCW began making refunds to customers
pursuant to the March 1, 2004 CPUC order. Approximately $119,000 was refunded to customers during
the three months ended March 31, 2005. The refunds will be made over a 9-year period. CCWC Other Regulatory Assets/Liabilities: As more fully discussed in Note 9, CCWC received $1,520,000 from the Fountain Hills Sanitary
District pursuant to a settlement agreement reached in February 2005. CCWC has recognized a net
gain of $760,000 related to this settlement agreement and has established a regulatory liability
for the remaining $760,000 pending ACCs review of this matter. There were no other significant changes in regulatory matters during the three months ended
March 31, 2005. 14




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##### Table of Contents



Note 3  Earnings Per Share / Capital Stock: Earnings per share for all periods presented have been calculated and presented in accordance
with Statement of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share. Basic
earnings per Common Share are based upon the weighted average number of Common Shares outstanding
and net income. Diluted earnings per Common Share are based upon the weighted average number of
Common Shares including both outstanding shares and shares potentially issuable in connection with
stock options and stock units granted under Registrants 2000 Stock Incentive Plan and the 2003
Non-Employee Directors Stock Plan, and net income. At March 31, 2005 and 2004 there were 673,045
and 476,254 options outstanding, respectively, under these Plans. At March 31, 2005, there were
also approximately 27,000 stock units outstanding pursuant to the 2003 Non-Employee Directors Stock
Plan. Outstanding stock options and stock unit awards, including those issued for dividend
equivalent rights, issued by the Registrant represent the only dilutive effect reflected in diluted
weighted average shares outstanding. The difference between basic and diluted EPS is the effect of
stock options and stock units that, under the treasury share method, give rise to common stock
equivalents. The following table summarizes the calculation of basic EPS and diluted EPS: March 31,(in thousands, except per share data)
    
    2005
    
    
    2004Weighted average shares outstanding
    
    
    16,761
    
    
    
    15,224Assumed exercise of stock options
    
    
    28
    
    
    
    31Assumed stock units are converted to Common Shares
    
    
    16
    
    
    
    Weighted average diluted shares
    
    
    16,805
    
    
    
    15,255Earnings available for common shareholders
    
    $
    3,764
    
    
    $
    1,146Basic earnings per share
    
    $
    0.22
    
    
    $
    0.08Diluted earnings per share
    
    $
    0.22
    
    
    $
    0.08
 During the three months ended March 31, 2005 and 2004, Registrant issued 12,097 and 24,212
common shares, which totaled approximately $318,000 and $609,000, respectively, under the
Registrants Common Share Purchase and Dividend Reinvestment Plan and 401(k) Plan. In addition
during the three months ended March 31, 2005, Registrant repurchased 8,609 common shares under the
Registrants Common Share Purchase and Dividend Reinvestment Plan, 401(k) Plan and anniversary
stock grant program, which were used to satisfy the requirements of these plans. During the three months ended March 31, 2005 and 2004, AWR paid quarterly dividends to the
shareholders, totaling approximately $3.8 million or $0.225 per share and $3.4 million or $0.221
per share, respectively. 15




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##### Table of Contents



Note 4  Derivative Instruments:Registrant has certain block-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 other contract derives
its value from another investment or designated benchmark. SFAS No. 133 requires companies to
record derivatives on the balance sheet as assets and liabilities, and to measure those instruments
at their fair value. Certain of these contracts qualify as an exception provided under SFAS No. 133
for activities that are considered normal purchases and normal sales. These contracts are reflected
in the statements of income at the time of contract settlement. During 2002, SCW became a party to
block-forward purchase power contracts that qualified as derivative instruments under SFAS No. 133.
Contracts with Pinnacle West Capital Corporation (PWCC) which became effective in November 2002
have not been designated as normal purchases and normal sales and, as a result, have been
recognized at fair market value on the balance sheets as of March 31, 2005 and December 31, 2004.
This resulted in a pre-tax unrealized gain of $3,015,000 and $557,000 for the three months ended
March 31, 2005 and 2004, respectively, due to continued increases in energy prices. On a monthly
basis, the related asset or liability is adjusted to reflect the fair market value at the end of
the month. As this contract is settled, the realized gains or losses are recorded in power
purchased for resale, and the unrealized gains or losses are reversed. The market prices used to
determine the fair value for this derivative instrument were estimated based on independent sources
such as broker quotes and publications. Settlement of this contract occurs on a cash or net basis
through 2006 and by physical delivery through 2008. Registrant has no other derivative financial
instruments. Note 5  Income Taxes Income taxes as presented on the Statements of Income were as follows: AWRFor The Three Months EndedMarch 31,(dollars in thousands)
    
    2005
    
    
    2004Income taxes included in operating expenses
    
    $
    3,216
    
    
    $
    942Income taxes included in other income and
expenses
    
    
    (72
    )
    
    
    (99
    )Total income tax expense
    
    $
    3,144
    
    
    $
    843
 The reconciliations of the effective tax rates to the federal statutory rate are as follows: AWRFor The Three Months EndedMarch 31,(dollars in thousands, except percent)
    
    2005
    
    
    2004Federal taxes on pretax income at statutory rate
    
    $
    2,418
    
    
    $
    696Increase (decrease) in taxes resulting from:State income tax, net of federal benefit
    
    
    400
    
    
    
    107Flow through on fixed assets
    
    
    81
    
    
    
    81Other flow through items
    
    
    238
    
    
    
    (54
    )Investment tax credit
    
    
    (23
    )
    
    
    (23
    )Other  net
    
    
    30
    
    
    
    36Total income tax expense
    
    $
    3,144
    
    
    $
    843Pretax income
    
    $
    6,908
    
    
    $
    1,989Effective income tax rate
    
    
    45.5
    %
    
    
    42.4
    %
 16




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##### Table of Contents



Note 5  Income Taxes (Continued): SCWFor The Three Months EndedMarch 31,(dollars in thousands)
    
    2005
    
    
    2004Income taxes included in operating expenses
    
    $
    3,179
    
    
    $
    1,336Income taxes included in other income and
expenses
    
    
    (73
    )
    
    
    (102
    )Total income tax expense
    
    $
    3,106
    
    
    $
    1,234
 SCWFor The Three Months EndedMarch 31,(dollars in thousands, except percent)
    
    2005
    
    
    2004Federal taxes on pretax income at statutory rate
    
    $
    2,375
    
    
    $
    1,034Increase (decrease) in taxes resulting from:State income tax, net of federal benefit
    
    
    406
    
    
    
    162Flow through on fixed assets
    
    
    81
    
    
    
    81Other flow through items
    
    
    238
    
    
    
    (54
    )Investment tax credit
    
    
    (23
    )
    
    
    (23
    )Other  net
    
    
    29
    
    
    
    34Total income tax expense
    
    $
    3,106
    
    
    $
    1,234Pretax income
    
    $
    6,785
    
    
    $
    2,953Effective income tax rate
    
    
    45.8
    %
    
    
    41.8
    %
 In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law and
provides a new federal income tax deduction from qualified U.S. production activities, which will
be phased in from 2005 through 2010. Under the Act, qualified production activities include
Registrants production of electricity and potable water. In December 2004, the FASB issued FASB
Staff Position No. 109-1 and proposed that the deduction should be accounted for as a special
deduction in accordance with SFAS No. 109. As such, the special deduction has no effect on
deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this
deduction will be reported in the period in which the deduction is claimed on Registrants tax
return. Regulatory treatment of the deduction has not been established and further guidance from
tax authorities (including Treasury Regulations) with respect to the deduction is pending. During
the first quarter of fiscal 2005, Registrant completed its initial evaluation of the provisions of
the Act and determined that the amount of the benefit for the three months ended March 31, 2005 was
not material. 17




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##### Table of Contents



Note 6  Stock Incentive Plans:Registrant applies Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, in accounting for its stock options under its
2000 Stock Incentive Plan. Accordingly, no compensation cost for the Plan has been recognized for
options granted at fair value at the date of grant. Registrant has also adopted the disclosure only
requirements of SFAS No. 123, Accounting for Stock-Based Compensation. At the May 2004 Annual Meeting, the shareholders adopted the 2003 Non-Employee Directors Stock
Plan (New Directors Plan). The New Directors Plan provides the non-employee directors with
supplemental stock-based compensation. Pursuant to the New Directors Plan, directors are entitled
to receive stock options and stock unit awards. As of March 31, 2005, an aggregate of 12,000 stock
options have been granted to the directors under the New Directors Plan. Registrant also applies
APB No. 25 in accounting for the directors stock options. The directors stock options were
granted at fair value at the date of grant; therefore no compensation cost has been recognized for
these options. The stock units are a non-voting unit of measurement which is deemed for bookkeeping
and payment purposes to represent outstanding AWR common shares. Upon adoption of the New
Directors Plan in May 2004, Registrant began recording compensation expense on the stock unit
awards. As of March 31, 2005, the directors have been credited with approximately 27,000 stock
units. Stock units will be paid only in AWR common shares on the date that the participant
terminates service as a director. If Registrant had elected to adopt the optional recognition provisions of SFAS No. 123 for its
stock options and stock units under the 2000 Stock Incentive Plan and the New Directors Plan, net
income and earnings per share applicable to common shareholders would have been changed to the pro
forma amounts indicated below: Three Months EndedMarch 31,(dollars in thousands, except EPS)
    
    2005
    
    
    2004Earnings available to common shareholders:As reported
    
    $
    3,764
    
    
    $
    1,146Add: Stock-based compensation expense included in
reported
net income, net of tax
    
    
    5
    
    
    
    Less: Stock-based compensation expense determined under
the fair-value accounting method, net of tax
    
    
    (566
    )
    
    
    (412
    )Pro forma
    
    $
    3,203
    
    
    $
    734Basic earnings per share:As reported
    
    $
    0.22
    
    
    $
    0.08Pro forma
    
    $
    0.19
    
    
    $
    0.05Diluted earnings per share:As reported
    
    $
    0.22
    
    
    $
    0.08Pro forma
    
    $
    0.19
    
    
    $
    0.05
 18




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##### Table of Contents



Note 7  Employee Benefit Plans:The components of net periodic benefit costs, before
allocation to the overhead pool, for Registrants pension plan, postretirement plan, and
Supplemental Executive Retirement Plan (SERP) for the three months ended March 31, 2005 and 2004
are as follows: OtherPostretirementPension Benefits
    Benefits
    
    
    
    SERP(dollars in thousands)
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004
    
    
    
    2005
    
    
    2004Components of Net Periodic BenefitsCost:Service Cost
    
    $
    927
    
    
    $
    701
    
    
    
    $
    109
    
    
    $
    101
    
    
    
    $
    32
    
    
    $
    32Interest Cost
    
    
    1,044
    
    
    
    906
    
    
    
    
    151
    
    
    
    148
    
    
    
    
    28
    
    
    
    31Expected Return on Plan Assets
    
    
    (918
    )
    
    
    (830
    )
    
    
    
    (74
    )
    
    
    (64
    )
    
    
    
    
    
    
    
    Amortization of Transition
    
    
    
    
    
    
    
    
    
    
    
    105
    
    
    
    105
    
    
    
    
    
    
    
    
    Amortization of Prior Service Cost
    
    
    41
    
    
    
    40
    
    
    
    
    (50
    )
    
    
    (50
    )
    
    
    
    38
    
    
    
    37Amortization of Actuarial (Gain) Loss
    
    
    260
    
    
    
    90
    
    
    
    
    41
    
    
    
    30
    
    
    
    
    (10
    )
    
    
    Net Periodic Pension Cost
    
    $
    1,354
    
    
    $
    907
    
    
    
    $
    282
    
    
    $
    270
    
    
    
    $
    88
    
    
    $
    100
 A decrease in the discount rate from 6.25% to 5.75%, and the update of mortality rate
tables resulted in increases in pension and other postretirement benefits between the two periods
presented. Registrant expects to contribute $4,430,000 and $933,000 to pension and postretirement
plans in 2005, respectively. No contributions were made during the three months ended March 31,
2005. Note 8  New Accounting Pronouncements: In March 2005, the Financial Accounting Standards Board (FASB) issued Interpretation No. 47,
Accounting for Conditional Asset Retirement Obligations,which clarifies that an entity is
required to recognize a liability for the fair value of a conditional asset retirement obligation
if the fair value can be reasonably estimated even though uncertainty exists about the timing and
(or) method of settlement. Registrant is required to adopt Interpretation No. 47 by the end of
2006. Registrant is currently evaluating the impact Interpretation
No. 47 will have on its results of operations and financial condition. In December 2004, the FASB issued a revision to SFAS No. 123, Share-Based Payment,(SFAS No.
123R) which is a revision of SFAS No. 123, Accounting for Stock-Based Compensation,(SFAS No.
123). SFAS No. 123R requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on fair values. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial
statement recognition. In April 2005, the Securities and Exchange Commission deferred the adoption
date of SFAS No. 123R to the beginning of the fiscal year that begins after June 15, 2005, (January
1, 2006 for calendar year companies) from a July 1, 2005 adoption date previously set by the FASB.
Registrant expects to adopt this standard on January 1, 2006. Based on stock option grants made in
2005 and currently anticipated for 2006, Registrant estimates it will (assuming the modified
prospective method is used) recognize expense for stock options for the year ending December 31,
2006 in an amount consistent to that disclosed in Note 6 which summarizes the pro forma impact of
recognizing stock expense under the fair value accounting method. In October 2004, the American Jobs Creation Act of 2004 (the Act) was signed into law and
provides a new federal income tax deduction from qualified U.S. production activities, which will
be phased in from 2005 through 2010. During the first quarter of fiscal 2005, Registrant completed
its initial evaluation of the provisions of the Act. See Note 5 for further information. 19




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Note 9  Contingencies: Water Quality-Related Litigation: In 1997, SCW was named as a defendant in nineteen lawsuits that alleged that SCW and other
water utilities, delivered unsafe water to their customers in the San Gabriel Valley and Pomona
Valley areas of Los Angeles County. Plaintiffs in these actions sought damages, including general,
special, and punitive damages, according to proof at trial, as well as attorneys fees on certain
causes of action, costs of suit, and other unspecified relief. SCW was also named as a defendant in
three lawsuits that involved a customer service area located in Sacramento County in northern
California. On August 4, 2004, SCW was ordered dismissed from all nineteen Los Angeles County cases. The
order was issued by the Trial Judge presiding over these matters, and followed a lengthy legal
proceeding dating back to April 1997 when the first of the cases was filed by over 140 customers in
the San Gabriel Valley, alleging their water had caused personal injuries of varying types and
degrees. The Court found SCW did not violate established water quality standards and dismissed the
cases after allowing reasonable time and opportunity for the Plaintiffs to prove otherwise. SCW has
long asserted that it meets or exceeds the requirements to provide water within the standards
established by the health authorities. On September 21, 2004, SCW received notice that several
plaintiffs filed an appeal to the trial courts order to dismiss SCW. SCW is unable to predict the
outcome of this appeal. As for the three lawsuits in Sacramento County, one of the three Plaintiffs filed for
dismissal in July 2004 and the case has subsequently been dismissed by the Court. On October 15,
2004, the remaining two cases were also ordered dismissed by the Court. The claims have been
permanently dismissed since the Plaintiffs failed to file a Notice of Appeal within the allotted
time of 60 days. SCW is subject to self-insured retention provisions in its applicable insurance policies and
has either expensed the self-insured amounts or has reserved against payment of these amounts as
appropriate. SCWs various insurance carriers have, to date, provided reimbursement for much of the
costs incurred above the self-insured amounts for defense against these lawsuits, subject to a
reservation of rights. In addition, the CPUC has issued certain decisions, which authorize SCW to
establish a memorandum account to accumulate costs to comply with certain contamination remediation
requirements for future recovery. Aerojet: On October 25, 1999, SCW sued Aerojet for causing the contamination of eastern portions of the
Sacramento County groundwater basin. On October 10, 2003, Registrant entered into a confidential
Memorandum of Understanding (MOU) with Aerojet for the settlement of legal actions brought by
SCW. The MOU set forth the financial terms and the structure of a settlement to cover, over time,
capital and litigation related costs incurred by SCW resulting from the contamination. The MOU and
the settlement embodied therein were found to be binding by the Sacramento Superior Court on
January 18, 2004. On October 12, 2004, Registrant reached a final settlement with Aerojet based on
the terms of the MOU. Under the terms of the settlement, Aerojet paid SCW $8.7 million in the first
quarter of 2004. Aerojet has also agreed to pay SCW an additional $8 million, plus interest
accruing beginning January 1, 2004, over a five year period beginning in December 2009. The $8.7
million payment and guaranteed future payments have been applied directly to reduce SCWs costs of
utility plant and purchased water by $16 million and $735,000, respectively. Prior to the MOU,
Aerojet had reimbursed SCW $4.3 million in capital costs and $171,000 for additional water supply
costs. Aerojet has also agreed to reimburse SCW $17.5 million, plus interest accruing from January
1, 2004, for its past legal and expert costs. The recovery of the $17.5 million is contingent upon
the issuance of land use approvals in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in
connection with such development. 20




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##### Table of Contents



Note 9  Contingencies (Continued): Aerojet will also transfer its remediated groundwater to the Sacramento County Water Agency,
which will provide treated water for distribution to SCW and other water purveyors affected by the
contamination. SCW has entered into an agreement with Sacramento County Water Agency to receive
water as outlined above. As a result of this arrangement and other mitigation measures, SCW should
have a reliable water supply for its Rancho Cordova service area. Registrant and Aerojet have also
signed three separate agreements requiring Aerojet to pay for certain transmission pipelines and
upgrades to Registrants Coloma Treatment Plant as a contingency plan, should additional wells be
impacted. The value of the three agreements approximates $6.8 million in capital improvements. The
pipelines are now in service and the treatment facilities are expected to be fully operational by
the end of 2005. In 2000, the CPUC authorized the establishment of a memorandum account into which SCW was
allowed to record costs it incurred in prosecuting the contamination suits filed against the State
and Aerojet. The CPUC also authorized SCW periodically to seek recovery of such recorded costs from
ratepayers. In that regard, SCW sought interim cost recovery and was authorized to increase rates,
effective April 28, 2001, in an amount sufficient over a six-year period to offset approximately
$1.8 million in such legal and expert costs recorded in the memorandum account that had been
incurred on or before August 31, 2000. As of March 31, 2005, approximately $15.2 million in legal
and consulting related costs, including the unamortized portion of the $1.8 million, has been
recorded as deferred charges and included in Regulatory Assets on the SCW balance sheets. In a proceeding currently pending at the CPUC, SCW has requested a twenty-year amortization of
the remaining balance of the costs recorded in the memorandum account, net of any reimbursement
amounts received from defendants, insurers and others. Given the expected timing for the issuance
of a final decision in this proceeding (third quarter 2005), SCW filed a motion seeking another
interim amortization in December 2004. In this motion, SCW proposed to amortize $6 million of the
$15.2 million of the memorandum account balance over a 10 year period, and to increase rates
accordingly, subject to refund. In January 2005, a joint ruling of the assigned Commissioner and
Administrative Law Judge denied SCWs request for an interim amortization. According to the CPUCs
ruling, the motion was denied primarily because the hearing on the merits was only weeks away
(March 14-15, 2005) and an expected proposed decision, and CPUC action on it, would likely be
issued soon thereafter in the second or third quarter of 2005. Management remains of the opinion
that the recovery of these costs through rates is probable; however, management cannot give
assurance that the CPUC will ultimately allow recovery of all or any of the costs that have
accumulated in this memorandum account. Management will continue to monitor the rate making process
for this matter and assess the probability of recovery of these costs on a quarterly basis.
Furthermore, it is managements intention to offset any settlement proceeds from Aerojet against
the balance in the memorandum account at the time of receipt of the settlement payments. Other Water Quality Litigation: Perchlorate and/or Volatile Organic Compounds (VOC) have been detected in five wells servicing
SCWs San Gabriel System. SCW filed suit, along with two other affected water purveyors and the San
Gabriel Basin Water Quality Authority (WQA), in federal court against some of those responsible for
the contamination. Some of the other potential defendants settled with SCW, other water purveyors
and the WQA (the Water Entities) on VOC related issues prior to the filing of the lawsuit. In
response to the filing of the Federal lawsuit, the Potentially Responsible Party (PRP) defendants
filed motions to dismiss the suit or strike certain portions of the suit. The judge issued a ruling
on April 1, 2003 granting in part and denying in part the defendants motions. A key ruling of the
court was that the water purveyors, including the Registrant, by virtue of their ownership of wells
contaminated with hazardous chemicals are themselves PRPs under the Comprehensive Environmental
Response, Compensation, and Liability Act (CERCLA). 21




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##### Table of Contents



Note 9  Contingencies (Continued): Registrant has, pursuant to permission of the court, amended its suit to claim certain
affirmative defenses as an innocent party under CERCLA. In this same suit, the PRPs have filed
cross-complaints against the Water Entities, the Metropolitan Water District, the Main San Gabriel
Basin Watermaster and others on the theory that they arranged for and did transport contaminated
water into the Basin for use by Registrant and the other two affected water providers and for other
related claims. Registrant is presently unable to predict the outcome of this ruling on its ability
to fully recover from the PRPs future costs associated with the treatment of these wells. On August 29, 2003, the US Environmental Protection Agency issued Unilateral Administrative
Orders (UAO) against 41 parties deemed responsible for polluting the groundwater in that portion
of the San Gabriel Valley from which two of SCWs impacted wells draw water. SCW was not named as a
party to the UAO. The UAO requires that these parties remediate the contamination. The judge in the
Federal lawsuit has appointed a special master to oversee mandatory settlement discussions between
the PRPs and the Water Entities. EPA is also conducting settlement discussions with several PRPs
regarding the UAO. The Water Entities and EPA are working to coordinate their settlement
discussions in order to arrive at a complete resolution of all issues affecting the Federal
lawsuits and the UAO. Registrant is presently unable to predict the ultimate outcome of these
settlement discussions. Condemnation of Properties The laws of the State of California and the State of Arizona provide for the acquisition of
public utility property by governmental agencies through their power of eminent domain, also known
as condemnation, where doing so is in the public interest. In addition, however, the laws of the
State of California also provide: (1) that the owner of the utility property may contest whether
the condemnation is actually in the public interest; and (2) that the owner is entitled to receive
the fair market value of its property if the property is ultimately taken. Although the City of Claremont, California located in SCWs Region III, has not initiated the
formal condemnation process pursuant to California law, the City has expressed various concerns to
the Company about the rates charged by the Company and the effectiveness of the CPUCs rate setting
procedures. The City hired a consultant to perform an appraisal of the value of Registrants water
system serving that City. Such value was determined by the consultant at $46 million. Registrant
disagrees with the Citys valuation assessment. As of March 31, 2005, the recorded net book value
of the Claremont water system is approximately $33 million. SCW has had meetings with the City to
discuss various concepts such as a public private partnership where the City and the Company could
work together to resolve the Citys concerns. While the City has publicly disclosed some of its
proposals in its City Council meetings, to date, there has been no agreement reached between the
Company and the City that alleviates the Citys concerns. Except for the City of Claremont, Registrant has not been, within the last three years,
involved in activities related to the condemnation of any of its water customer service areas or in
its Bear Valley Electric customer service area; however, on April 12, 2005, the Town Council of the
Town of Apple Valley voted 5-0 to authorize Town staff to prepare a Request for Proposal for an
evaluation of the feasibility and potential cost of and a timeframe for the potential takeover of
SCWs Apple Valley water systems as well as the water systems of another utility serving the Town.
SCW has not received any formal notice from the Town of its intention to condemn its Apple Valley
water systems. Management is unable to predict what the results of the Towns evaluation might be
and what action, if any, the Town might take as a result of the evaluation. However, SCW will
vigorously defend itself should the Town determine to proceed towards condemning its Apple Valley
water systems. 22




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##### Table of Contents



Note 9  Contingencies (Continued): Santa Maria Groundwater Basin Adjudication: In 1997, the Santa Maria Valley Water Conservation District (plaintiff) filed a lawsuit
against multiple defendants, including SCW, the City of Santa Maria, and several other public water
purveyors. The plaintiffs lawsuit seeks an adjudication of the Santa Maria Groundwater Basin.
After some procedural rulings by the superior court, the lawsuit is now a full basin adjudication
involving all entities owning 10 acres or more within the Basin boundaries  approximately 1,400
defendants. The plaintiffs stated objective in the adjudication lawsuit is to have the superior
court impose and oversee the implementation of a Basin management plan that ensures the long term
integrity and reliability of the Basin water resources. To protect its groundwater supply so that
sufficient water production rights continue to be available to meet SCWs customers needs in the
Santa Maria customer service area, SCW has been vigorously defending its water rights in the
adjudication lawsuit. As of March 31, 2005, SCW has incurred costs in defending its rights in the
Basin, including legal and expert witness fees, which have been deferred in Utility Plant for rate
recovery. Management believes that when the adjudication lawsuit is finally resolved, SCW will have
secured its right to pump groundwater from the Basin and to continue to rely on the Basin as a
source of supply for its customers needs. Management also believes that the recovery of these
costs through rates is probable; however, management cannot give assurance that the CPUC will
ultimately allow recovery of all or any of the costs that have accumulated with this lawsuit. CCWC Fountain Hills Sanitary District (FHSD) is a political subdivision of the State of Arizona
that provides sanitary sewer service to customers residing within CCWCs water service area. In
connection with its sanitary system, FHSD constructed a recharge system whereby it recharges
treated effluent through multiple aquifer storage and recovery wells. In order for FHSD to secure
an Aquifer Protection Permit for its recharge system, FHSD requested CCWC to permanently cease
using one of its wells. As a possible replacement for this well, FHSD constructed a new well
adjacent to the community center (Community Center Well). However, this well was not able to
produce an equivalent amount of water to CCWCs well that was taken out of production.
Accordingly, in February 2005, CCWC entered into an agreement with FHSD whereby CCWC agreed to
permanently remove from service this well and in return CCWC received a settlement fee of
$1,520,000 from FHSD. Pursuant to the agreement, CCWC shall: (i) permanently remove from service
and cap this well, and cap another well which had never been used as a potable source of supply;
(ii) relinquish any legal claim or interest that CCWC may otherwise possess in the Community Center
Well; and (iii) grant an option to FHSD to acquire one of the wells at a future date at fair market
value. The removal of these two wells from service did not have a significant impact on CCWCs
water supply. For the three months ended March 31, 2005, CCWC has recognized a net gain of $760,000 related
to this settlement agreement. Other Litigation: Registrant is also subject to ordinary routine litigation incidental to its business. Other
than those disclosed above, no other legal proceedings are pending, which are believed to be
material. Management believes that rate recovery, proper insurance coverage and reserves are in
place to insure against property, general liability and workers compensation claims incurred in
the ordinary course of business. 23




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##### Table of Contents



Note 10  Business Segments:AWR has three principal business units: water and electric
distribution units, through its SCW subsidiary, a water-service utility operation conducted through
its CCWC unit, and a contracted services unit through the ASUS subsidiary. All activities of SCW
are geographically located within California. All activities of CCWC are located in the state of
Arizona. All activities of ASUS are conducted in California, Arizona and Texas. Both SCW and CCWC
are regulated utilities. On a stand-alone basis, AWR has no material assets other than its
investments in its subsidiaries. The tables below set forth information relating to SCWs operating
segments, CCWC and ASUSs contract services businesses as well as the operations of its
wholly-owned subsidiary, FBWS. Included in the amounts set forth, certain assets, revenues and
expenses have been allocated. The identifiable assets are net of respective accumulated provisions
for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property
installed by developers and conveyed to the Company. (dollars in thousands)

    As of and for The Three Months Ended March 31, 2005SCWCCWC
    
    
    
    
    
    
    ConsolidatedWater
    
    
    Electric
    
    
    Water
    
    
    Other*
    
    
    AWROperating revenues
    
    $
    40,154
    
    
    $
    7,470
    
    
    $
    1,343
    
    
    $
    827
    
    
    $
    49,794Operating income (loss)
before income taxes
    
    
    7,811
    
    
    
    3,452
    
    
    
    980
    
    
    
    (554
    )
    
    
    11,689Interest expense, net
    
    
    3,950
    
    
    
    404
    
    
    
    120
    
    
    
    186
    
    
    
    4,660Identifiable assets
    
    
    601,032
    
    
    
    39,929
    
    
    
    35,317
    
    
    
    461
    
    
    
    676,739Depreciation and
amortization expense
    
    
    4,862
    
    
    
    495
    
    
    
    261
    
    
    
    17
    
    
    
    5,635Capital additions
    
    
    17,449
    
    
    
    678
    
    
    
    588
    
    
    
    111
    
    
    
    18,826
 (dollars in thousands)

    As of and for the Three Months Ended March 31, 2004SCWCCWC
    
    
    
    
    
    
    
    
    
    
    ConsolidatedWater
    
    
    Electric
    
    
    Water
    
    
    Other*
    
    
    Eliminations
    
    
    AWROperating revenues
    
    $
    37,461
    
    
    $
    7,627
    
    
    $
    1,281
    
    
    $
    305
    
    
    
    ($23
    )
    
    $
    46,651Operating income
(loss) before income
taxes
    
    
    6,350
    
    
    
    918
    
    
    
    111
    
    
    
    (887
    )
    
    
    
    
    
    
    6,492Interest expense, net
    
    
    3,789
    
    
    
    338
    
    
    
    122
    
    
    
    72
    
    
    
    
    
    
    
    4,321Identifiable assets
    
    
    540,212
    
    
    
    38,111
    
    
    
    31,767
    
    
    
    116
    
    
    
    
    
    
    
    610,206Depreciation and
amortization expense
    
    
    4,527
    
    
    
    410
    
    
    
    236
    
    
    
    4
    
    
    
    
    
    
    
    5,177Capital additions
    
    
    11,110
    
    
    
    1,738
    
    
    
    527
    
    
    
    24
    
    
    
    
    
    
    
    13,399
   *
    
    Includes amounts from AWR and ASUSs contracted services. Beginning on October 1, 2004, it
also includes ASUSs wholly-owned subsidiary FBWS. 24




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##### Table of Contents



Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operation Forward-Looking Information Certain matters discussed in this report (including the documents incorporated herein by
reference) are forward-looking statements intended to qualify for the safe harbor from liability
established by the Private Securities Litigation Reform Act of 1995. These forward-looking
statements can generally be identified as such because the context of the statement will include
words such as Registrant believes, anticipates, expects or words of similar import.
Similarly, statements that describe Registrants future plans, objectives, estimates or goals are
also forward-looking statements. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, rates, water quality and other regulatory matters,
adequacy of water supplies, SCWs ability to recover electric, natural gas and water supply costs
from ratepayers, contract operations, liquidity and capital resources, and accounting matters.
Actual results in each case could differ materially from those currently anticipated in such
statements, by reason of factors such as changes in utility regulation, including ongoing local,
state and federal activities; recovery of regulatory assets not yet included in rates; future
economic conditions, including changes in customer demand and changes in water and energy supply
cost; future climatic conditions, including the recent wet winter in the Southern California and
Phoenix areas; and legislative, legal proceedings, regulatory and other circumstances affecting
anticipated revenues and costs. General American States Water Company (AWR) is the parent company of Southern California Water
Company (SCW), American States Utility Services, Inc. (ASUS) and its subsidiary, Fort Bliss
Water Services Company (FBWS), and Chaparral City Water Company (CCWC). AWR was incorporated
as a California corporation in 1998 as a holding company for SCW. SCW is a California public utility company engaged principally in the purchase, production and
distribution of water (SIC No. 4941). SCW also distributes electricity in one customer service area
(SIC No. 4911). SCW is regulated by the Public Utilities Commission of the State of California
(CPUC) and was incorporated as a California corporation on December 31, 1929. SCW is organized into
one electric customer service area and three water service regions operating within 75 communities
in 10 counties in the State of California and provides water service in 21 customer service areas.
Region I consists of 7 customer service areas in northern and central California; Region II
consists of 4 customer service areas located in Los Angeles County; and Region III consists of 10
customer service areas in eastern Los Angeles County, and in Orange, San Bernardino and Imperial
counties. SCW also provides electric service to the City of Big Bear Lake and surrounding areas in
San Bernardino County through its Bear Valley Electric Service division. SCW served 251,715 water customers and 22,675 electric customers at March 31, 2005, or a total
of 274,390 customers, compared with 272,891 total customers at March 31, 2004. SCWs utility
operations exhibit seasonal trends. Although SCWs water utility operations have a diversified
customer base, residential and commercial customers account for the majority of SCWs water sales
and revenues. Revenues derived from commercial and residential water customers accounted for
approximately 94.4% of total water revenues for the three months ended March 31, 2005, as compared
to 95.7% for the three months ended March 31, 2004. CCWC is an Arizona public utility company serving 12,645 customers as of March 31, 2005,
compared with 12,258 customers at March 31, 2004. Located in the town of Fountain Hills, Arizona
and a 25




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##### Table of Contents



portion of the City of Scottsdale, Arizona, the majority of CCWCs customers are residential.
The Arizona Corporation Commission (ACC) regulates CCWC. ASUS contracts, either directly or through wholly-owned subsidiaries, with various
municipalities, the U.S. Government and private entities to provide water and wastewater services,
including billing and meter reading, water marketing and the operation and maintenance of water and
wastewater systems. ASUS had approximately 94,670 billing accounts under contract as of March 31,
2005 compared to 125,770 billing accounts under contract as of March 31, 2004 as a result of a
decision by the City of Chino Hills to no longer outsource meter reading. The term of our meter
reading contract with the City of Chino Hills for 20,100 billing accounts expired in March 2005. On October 1, 2004, ASUS commenced operation of the water and wastewater systems at Fort Bliss
located near El Paso, Texas, through FBWS, pursuant to the terms of a 50-year contract with the
U.S. Government. This contract is subject to termination for convenience of the U.S. Government.
The contract price is subject to re-determination on October 1, 2006 and every three years
thereafter to the extent provided in the contract. Prices are also subject to equitable adjustment
based upon changes in circumstances and changes in wages and fringe benefits to the extent provided
in the contract. ASUS is also a participant in bidding on other contracts for the privatization of
water and wastewater services at military bases. ASUS continues to pursue opportunities to expand its contract operations. ASUS is also
pursuing an opportunity to provide retail water services to a mutual water company that is located
in Sacramento and Sutter counties in northern California which currently provides water service
only to agricultural customers. In August 2004, this mutual water company granted ASUS the
exclusive right to market surplus surface water rights that may arise under water rights and
contracts owned or controlled by it to third parties. 26




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##### Table of Contents



Consolidated Results of Operations  Three Months Ended March 31, 2005 and 2004 3 MOS
    
    
    3 MOSENDED
    
    
    ENDED
    
    
    $
    
    
    %3/31/2005
    
    
    3/31/2004
    
    
    CHANGE
    
    
    CHANGEOPERATING REVENUESWater
    
    $
    41,497
    
    
    $
    38,742
    
    
    $
    2,755
    
    
    
    7.1
    %Electric
    
    
    7,470
    
    
    
    7,627
    
    
    
    (157
    )
    
    
    -2.1
    %Other
    
    
    827
    
    
    
    282
    
    
    
    545
    
    
    
    193.3
    %Total operating revenues
    
    
    49,794
    
    
    
    46,651
    
    
    
    3,143
    
    
    
    6.7
    %OPERATING EXPENSESWater purchased
    
    
    7,686
    
    
    
    8,881
    
    
    
    (1,195
    )
    
    
    -13.5
    %Power purchased for pumping
    
    
    1,487
    
    
    
    1,717
    
    
    
    (230
    )
    
    
    -13.4
    %Groundwater production assessment
    
    
    1,921
    
    
    
    1,822
    
    
    
    99
    
    
    
    5.4
    %Power purchased for resale
    
    
    4,137
    
    
    
    4,829
    
    
    
    (692
    )
    
    
    -14.3
    %Unrealized gain on purchased power contracts
    
    
    (3,015
    )
    
    
    (557
    )
    
    
    (2,458
    )
    
    
    441.3
    %Gain on setlement for removal of wells
    
    
    (760
    )
    
    
    
    
    
    
    (760
    )
    
    
    -100.0
    %Supply cost balancing accounts
    
    
    1,078
    
    
    
    221
    
    
    
    857
    
    
    
    -387.8
    %Other operating expenses
    
    
    5,069
    
    
    
    4,437
    
    
    
    632
    
    
    
    14.2
    %Administrative and general expenses
    
    
    10,129
    
    
    
    9,079
    
    
    
    1,050
    
    
    
    11.6
    %Depreciation and amortization
    
    
    5,635
    
    
    
    5,177
    
    
    
    458
    
    
    
    8.8
    %Maintenance
    
    
    2,466
    
    
    
    2,327
    
    
    
    139
    
    
    
    6.0
    %Taxes on income
    
    
    3,216
    
    
    
    942
    
    
    
    2,274
    
    
    
    241.4
    %Other taxes
    
    
    2,272
    
    
    
    2,226
    
    
    
    46
    
    
    
    2.1
    %Total operating expenses
    
    
    41,321
    
    
    
    41,101
    
    
    
    220
    
    
    
    0.5
    %Operating income
    
    
    8,473
    
    
    
    5,550
    
    
    
    2,923
    
    
    
    52.7
    %OTHER INCOME (LOSS)  NET
    
    
    (49
    )
    
    
    (83
    )
    
    
    34
    
    
    
    -41.0
    %INTEREST CHARGES
    
    
    4,660
    
    
    
    4,321
    
    
    
    339
    
    
    
    7.8
    %NET INCOME
    
    $
    3,764
    
    
    $
    1,146
    
    
    $
    2,618
    
    
    
    228.4
    %
 Net income for the three months ended March 31, 2005 increased 228.4% to $3.8 million,
equivalent to $0.22 per common share on a basic and fully diluted basis, compared to $1.1 million
or $0.08 per share for the three months ended March 31, 2004. The increase in recorded results
reflects the significant increase in the unrealized gain on purchased power contracts due to
increasing energy prices. This unrealized gain for the three months ended March 31, 2005 added
approximately $0.10 per share to the first quarter of 2005, as compared to the unrealized gain of
$0.02 per share for the same period of 2004. Additionally, rate increases in most of SCWs service
areas contributed to higher water revenues. 27




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Operating Revenues For the three months ended March 31, 2005, revenues from water operations increased by 7.1% to
$41.5 million, compared to $38.7 million for the three months ended March 31, 2004. Higher water
revenues reflect rate increases since late first quarter of 2004 and additional increases in the
first quarter of 2005 covering almost all of SCWs water customers which contributed $4.1 million
in increased revenues. This was partially offset by a decrease of 6.7% in billed water consumption
resulting from changes in weather conditions that resulted in a decrease in revenues of
approximately $1.3 million. Differences in temperature and rainfall in Registrants service areas
impact sales of water to customers, causing fluctuations in Registrants revenues and earnings
between comparable periods. For the three months ended March 31, 2005, revenues from electric operations decreased by 2.1%
to $7.5 million compared to $7.6 million for the three months ended March 31, 2004. The decrease
reflects primarily a 1.4% decrease in kilowatt-hour consumption due to recent weather conditions
which decreased the usage of snow-blowing machines and prevented customers from reaching their Big
Bear homes due to road closures. Registrant relies upon rate approval by state regulatory agencies in California and Arizona,
in order to recover operating expenses and provide for a return on invested and borrowed capital
used to fund utility plant. Without such adequate rate relief granted in a timely manner, revenues
and earnings can be negatively impacted. For the three months ended March 31, 2005, other operating revenues increased by 193.3% to
$827,000 compared to $282,000 for the three months ended March 31, 2004 due primarily to
approximately $543,000 of additional revenues associated with the operation of the water and
wastewater systems at Fort Bliss, located near El Paso, Texas that commenced on October 1, 2004
pursuant to the terms of a 50-year contract with the U.S. Government. Operating Expenses For the three months ended March 31, 2005, 42.8% of the Companys supply mix was purchased
water as compared to 44.9% purchased water for the three months ended March 31, 2004. Purchased
water costs decreased by 13.5% to $7.7 million compared to $8.9 million for the three months ended
March 31, 2004. The decrease is due primarily to a decline in customer demand resulting from lower
consumption and a change in the supply mix caused by less purchased water needed to replace
groundwater supply lost due to wells that were removed from service in the prior year but are now
pumping again. For the three months ended March 31, 2005, the cost of power purchased for pumping decreased
by 13.4% to $1.5 million compared to $1.7 million for the three months ended March 31, 2004 due to
a decrease in KWh usage caused by a decrease in customer demand. This decrease was partially
offset by an increase in pumping compared to the prior year due to several wells that were back
online as discussed above. For the three months ended March 31, 2005, groundwater production assessments increased by
5.4% as compared to the three months ended March 31, 2004 due to increases in well production in
Region II resulting from wells coming online. There were also increases in assessment rates levied
against groundwater production, effective July 2004. Pump tax rates increased in Regions II and III
by approximately 11% and 15%, respectively. These increases were partially offset by a reduction
in well production in Region III caused by a decrease in customer demand. 28




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Changes in the water resource mix between water supplied from purchased sources and that
supplied from Registrants own wells can increase/decrease actual supply-related costs relative to
that approved for recovery through rates, thereby impacting earnings either negatively or
positively. Registrant has the opportunity to change the supply-related costs recovered through
rates by application to the appropriate regulatory body. Registrant believes that its applications
for recovery of supply-related costs accurately reflect the water supply situation as it is known
at the time. However, it is impossible to adequately protect earnings from adverse changes in
supply costs related to unforeseen contamination or other loss of water supply. For the three months ended March 31, 2005, cost of power purchased for resale to
customers in SCWs Bear Valley Electric division decreased by 14.3% to $4.1 million compared to
$4.8 million for the three months ended March 31, 2004. The decrease was due primarily to the
reversal in the first quarter of 2004 of a $644,000 gain generated from a one-time sale of energy
on the spot market in April 2001. The gain, which was previously recorded in April 2001 to the
supply cost balancing account, was ordered by the Federal Energy Regulatory Commission (FERC) in
March 2004 to be refunded, plus interest, to Mirant Americas Energy Marketing, Inc. (Mirant
Marketing). This refund increased the cost of power purchased for resale, with a corresponding
decrease in the supply cost balancing account included in the statement of income. There was no net
impact on earnings. The sale of excess energy on the spot market in 2001 resulted from a one-month
overlap of energy purchase agreements. Unrealized gain and loss on purchased power contracts represents gains and losses recorded for
SCW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 $3,015,000 pretax unrealized gain on purchased power contracts for the three
months ended March 31, 2005 is due to an increase in the current forward market prices since
December 31, 2004. Unrealized gains and losses at Bear Valley Electric will continue to impact
earnings during the life of the contract with PWCC, which terminates in 2008. For the three months ended March 31, 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
recapping of two CCWC wells in order to facilitate FHSDs ability to secure certain permits.
Pursuant to the settlement agreement, CCWC agreed to permanently remove from service and cap one of
its wells, and cap another well which had never been used as a potable source of supply. An increase of $857,000 during the three months ended March 31, 2005 in the provision for
supply cost balancing accounts as compared to the three months ended March 31, 2004 primarily
reflects the $644,000 refund to Mirant Marketing in March 2004, previously discussed in cost of
power purchased for resale. In addition, there was the recording of $223,000 net over-collection in
the water memorandum supply cost accounts as a regulatory liability during the first quarter of
2005, with a corresponding charge booked to the provision for supply cost balancing account. The
recording of this net over-collection resulted from SCWs filing of advice letters related to the
memorandum supply cost accounts which began during the second quarter of 2004. As a result, in May
2004, SCW began recording the net over-collections as regulatory liabilities. There was also an
increase of approximately $101,000 resulting from amounts over $77 per MWh that were expensed.
These increases were partially offset by a decrease of $110,000 in amortization primarily related
to pre-November 2001 water supply cost balancing accounts. For the three months ended March 31, 2005, other operating expenses increased by 14.2% to $5.1
million compared to $4.4 million for the three months ended March 31, 2004 due primarily to: (i)
higher labor costs which increased by approximately $411,000; (ii) higher operating expenses of
$130,000 at ASUS due to the commencement of operations of the water and wastewater system at Fort
Bliss; and (iii) increases in various other operating expenses. 29




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For the three months ended March 31, 2005, administrative and general expenses increased by
11.6% to $10.1 million compared to $9.1 million for the three months ended March 31, 2004 due to:
(i) approximately $389,000 increase in outside services primarily related to Sarbanes-Oxley
compliance requirements, (ii) approximately $263,000 increase in pensions and benefits due to
actuarial assumption changes in the discount rate and mortality tables, and increases in various
benefit costs, (iii) approximately $261,000 increase in labor costs, and (iv) approximately
$183,000 increase in general rate case expenses. Registrant believes that prudent administrative
expenses approved in advance by state regulators to be incurred in the operation and management of
its regulated subsidiaries will be recovered through water and electric rates. Amounts included in
each general rate case are estimated for future years. Overages from those estimates are not
covered in rates. For the three months ended March 31, 2005, depreciation and amortization expense increased by
8.8% to $5.6 million compared to $5.2 million for the three months ended March 31, 2004 reflecting,
among other things, the effects of recording approximately $71 million in additions to utility
plant during 2004, depreciation on which began in January 2005. Registrant anticipates that
depreciation expense will continue to increase due to Registrants on-going construction program at
its regulated subsidiaries. Registrant believes that depreciation expense related to property
additions approved by the appropriate regulatory agency will be recovered through water and
electric rates. For the three months ended March 31, 2005, maintenance expense increased by 6.0% to $2.5
million compared to $2.3 million for the three months ended March 31, 2004 due principally to an
increase in required maintenance on SCWs wells and water supply sources, acceleration of certain
scheduled maintenance projects and increases in maintenance expenses for ASUS due to the Fort Bliss
operations which began in October 2004. Maintenance expense increases for regulated activities are
included in each general rate case and are covered in rates, unless disallowed as not reasonable or
prudent. FBWS bears the risk of increases in maintenance and all other costs above those authorized in
the contract for operation of Fort Bliss, unless FBWS is entitled to an equitable adjustment for
such matters as an increase in labor rates, changes in circumstances or differing site conditions
from those anticipated at the time of execution of the contract. For the three months ended March 31, 2005, taxes on operating income increased by 241.4% to
$3.2 million compared to $942,000 for the three months ended March 31, 2004 due, in part, to an
increase in pretax operating income of 247%. In addition, the effective income tax rate (ETR)
applicable to the three months ended March 31, 2005 reflects an increase of approximately three
percentage points to 45.5% as compared to a 42.4% ETR applicable to the three months ended March
31, 2004. Associated with this increase was a net positive increase in differences (principally
related to compensatory, bad debts and deferred rate case expenses) between book and taxable income
that are treated as flow-through items. Positive flow-through differences increase tax expense in
one year, with an offsetting decrease in tax expense occurring in another year. For the three months ended March 31, 2005, other taxes increased by 2.1% to $2.3 million
compared to $2.2 million for the three months ended March 31, 2004 reflecting additional property
taxes resulting from higher assessed values, and increases in payroll taxes based on increased
labor costs. Interest Charges For the three months ended March 31, 2005, interest expense increased by 7.8% to $4.7 million
compared to $4.3 million for the three months ended March 31, 2004 due primarily to increases in
short-term borrowings. In addition, during the first quarter of 2004 SCW recorded the recovery of
carrying costs of approximately $168,000 on the costs incurred in the water quality Order
Instituting Investigation matter authorized by the CPUC in March 2004. There was no corresponding
recovery in 2005. 30




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Critical Accounting Policies Critical accounting policies are those that are important to the portrayal of AWRs financial
condition, results of operations and cash flows, and require the most difficult, subjective or
complex judgments of AWRs management. The need to make estimates about the effect of items that
are uncertain is what makes these judgments difficult, subjective and/or complex. Management makes
subjective judgments about the accounting and regulatory treatment of many items. These judgments
are based on AWRs historical experience, terms of existing contracts, AWRs observance of trends
in the industry, information provided by customers and information available from other outside
sources, as appropriate. Actual results may differ from these estimates under different assumptions
or conditions. The critical accounting policies used in the preparation of the Registrants financial
statements that we believe affect the more significant judgments and estimates used in the
preparation of our consolidated financial statements presented in this report are described in
Managements Discussion and Analysis of Financial Condition and Results of Operationincluded in
our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material
changes to the critical accounting policies. Liquidity and Capital Resources AWR AWR funds its operating expenses and pays dividends on its outstanding Common Shares primarily
through dividends from its subsidiaries, principally SCW. Net cash provided by operating activities was $17.8 million for the three months ended March
31, 2005 as compared to $19.1 million for the three months ended March 31, 2004. The decrease of
$1.3 million was primarily attributable to the receipt in the first quarter of 2004 of $8.7 million
from Aerojet in connection with the Memorandum of Understanding (MOU) which accounted for the
change in other accounts receivable. This decrease was offset by: (i) a reduction of $2.4 million
in taxes paid in the first quarter of 2005 as compared to first quarter of 2004; (ii) the receipt
in the first quarter of 2005 of $1.5 million by CCWC in connection with a settlement agreement with
the Fountain Hills Sanitary District; and (iii) changes in the timing of cash receipts from
customers accounts receivable and disbursements related to other working capital items. Net cash used in investing activities was $18.8 million for the three months ended March 31,
2005 as compared to $13.4 million for the three months ended March 31, 2004 due to higher capital
expenditures consistent with budgeted increases. Net cash provided by (used in) financing activities was $2.5 million for the three months
ended March 31, 2005 as compared to ($9.5 million) for the three months ended March 31, 2004. The
increase in net cash provided was due primarily to an increase of $11 million in short-term bank
borrowing against the revolving credit line and by a $1.1 million increase in receipt of advances
for and contributions in aid of construction. These increases were offset by a $291,000 decrease in
proceeds from the issuance of common shares. In June 2002, AWR established a $75 million revolving credit facility, which matures in June
2005. Up to $15 million of this facility may be used for letters of credit. As of March 31, 2005,
an aggregate of $47 million in cash borrowing included in current liabilities and approximately
$11.2 million of letters of credit were outstanding under this facility. AWR plans to renew and
possibly increase the revolving credit facility prior to its expiration. 31




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Registrant anticipates that interest costs will increase in future periods due to the need for
additional external capital to fund its construction program, potential general market interest
rate increases and the April, 2004 downgrade of AWRs credit rating by Standard & Poors Ratings
Service (S&P) from A+ to A- with a negative outlook. 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 by the rating
agency. Registrant believes that costs associated with capital used to fund construction at its
regulated subsidiaries will continue to be recovered in water and electric rates charged to
customers. SCW Net cash provided by operating activities was $16.9 million for the three months ended March
31, 2005 as compared to $21.2 million for the three months ended March 31, 2004. The decrease of
$4.3 million in cash provided by operations was primarily attributable to the receipt in the first
quarter of 2004 of $8.7 million from Aerojet in connection with the MOU. This was offset by a $5.4
million decrease in taxes paid in the first quarter of 2005 as compared to 2004. There were also
changes in the timing of cash receipts from customers accounts receivable and disbursements related
to other working capital items. Net cash used in investing activities increased to $18.1 million for the three months ended
March 31, 2005 as compared to $12.8 million for the same period of 2004 due to increased capital
expenditures consistent with budgeted increases. Net cash provided by (used in) financing activities was $1.3 million for the three months
ended March 31, 2005 as compared to ($13.4 million) for the three months ended March 31, 2004,
reflecting primarily an increase of $13.8 million in inter-company borrowings. There was also a
$464,000 increase in receipt of advances for and contributions in aid of construction. SCW funds the majority of its operating expenses, payments on its debt, and dividends on its
outstanding Common Shares through internal sources. Internal sources of cash flow are provided
primarily by retention of a portion of earnings from operating activities. Internal cash generation
is influenced by factors such as weather patterns, environmental regulation, litigation, changes in
supply costs and regulatory decisions affecting SCWs ability to recover these supply costs, and
timing of rate relief. SCW also relies on external sources, including equity investments and short-term borrowings
from AWR, long-term debt, contributions-in-aid-of-construction, advances for construction and
install-and-convey advances, to fund the majority of its construction expenditures. SCW has a
Registration Statement on file with the SEC for issuance from time to time, of up to $100 million
of debt securities. As of March 31, 2005, $50 million remained for issuance under this Registration
Statement. Depending on market conditions, SCW plans to issue debt under this Registration
Statement during the second or third quarter of 2005 to pay down borrowings from AWR. AWR intends
to use any funds received from SCW to pay down its borrowings under the revolving credit facility. In February 2005, Moodys Investor Services (Moodys) changed the rating outlook for $175
million of senior unsecured debt at SCW from A2 negative to A2 stable. Moodys debt ratings range
from Aaa (best quality) to C (lowest quality). SCW currently has a debt rating of A- with negative
outlook by S&P. Securities ratings are not recommendations to buy, sell or hold a security and are
subject to change or withdrawal at any time by the rating agency. 32




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CCWC CCWC funds the majority of its operating expenses, payments on its debt and dividends, if any,
through internal operating sources. CCWC also relies on external sources, including long-term debt,
contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to
fund the majority of its construction expenditures. ASUS ASUS funds its operating expenses primarily through management fees and investments by or
loans from AWR. In addition, ASUSs wholly-owned subsidiary, FBWS, commenced operation of the
water and wastewater systems at Fort Bliss pursuant to the terms of the 50-year contract with the
U.S. Government. The amounts charged by FBWS for water and wastewater services at U.S. Army Fort
Bliss are based upon the terms of the 50-year contract between FBWS and the U.S. Government. Under
the terms of this agreement, FBWS has agreed to own, operate and maintain the water and wastewater
systems at Fort Bliss for a net fixed price of $181,206 for operation and maintenance, and $147,146
for renewals and replacements per month for a period of two years. Prices will be re-determined at
the end of the two year period and every three years thereafter. In addition, prices may be
equitably adjusted for changes in law and other circumstances. Contractual Obligations and Other Commitments In addition to contractual maturities, Registrant has certain debt instruments that contain
annual sinking fund or other principal payments. Registrant believes that it will be able to
refinance debt instruments at their maturity through public issuance, or private placement, of debt
or equity. Annual principal and interest payments are generally made from cash flow from
operations. The following table reflects Registrants contractual obligations and commitments to make
future payments pursuant to contracts as of March 31, 2005. All obligations and commitments are
obligations and commitments of SCW unless otherwise noted. ($ in thousands)
    Payments/Commitments Due by Period (1)Less than 1Total
    
    
    Year
    
    
    1-3 Years
    
    
    4-5 Years
    
    
    After 5 YearsNotes/Debentures(2)
    
    $
    173,100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    173,100Private Placement Notes(3)
    
    
    28,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    28,000Tax-Exempt Obligations(4)
    
    
    18,816
    
    
    
    72
    
    
    
    160
    
    
    
    181
    
    
    
    18,403Other Debt Instruments(5)
    
    
    2,010
    
    
    
    157
    
    
    
    445
    
    
    
    460
    
    
    
    948Interest on
Long-Term Debt(6)
    
    
    394,338
    
    
    
    15,780
    
    
    
    32,814
    
    
    
    32,726
    
    
    
    313,018Advances for Construction(7)
    
    
    84,036
    
    
    
    3,038
    
    
    
    6,257
    
    
    
    5,627
    
    
    
    69,114Purchased Power Contracts(8)
    
    
    44,212
    
    
    
    11,973
    
    
    
    23,947
    
    
    
    8,292
    
    
    
    Purchase Obligations(9)
    
    
    26,826
    
    
    
    26,826
    
    
    
    
    
    
    
    
    
    
    
    Water
Purchase Agreements
(10)
    
    
    64,876
    
    
    
    16,972
    
    
    
    30,310
    
    
    
    5,773
    
    
    
    11,821Operating Leases(11)
    
    
    4,728
    
    
    
    1,910
    
    
    
    2,248
    
    
    
    570
    
    
    
    Employer Contributions(12)
    
    
    19,260
    
    
    
    5,363
    
    
    
    9,954
    
    
    
    3,943
    
    
    
    Chaparral City Water Co. (13)
    
    
    14,344
    
    
    
    1,718
    
    
    
    1,011
    
    
    
    1,001
    
    
    
    10,614SUB-TOTAL
    
    $
    874,546
    
    
    $
    83,809
    
    
    $
    107,146
    
    
    $
    58,573
    
    
    $
    625,018Other Commitments(14)
    
    
    52,192TOTAL
    
    $
    926,738
 33




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##### Table of Contents



(1)
    
    Excludes dividends and facility fees.(2)
    
    The Notes and Debentures are issued under an Indenture dated as of
September 1, 1993. The Notes and Debentures do not contain any financial covenants that
Registrant believes to be material, or cross default provisions.(3)
    
    The private placement notes were issued pursuant to the terms of Note
Agreements with substantially similar terms. The Note Agreements contain restrictions on the
payment of dividends, minimum interest coverage requirements, a maximum debt to capitalization
ratio and a negative pledge. Pursuant to the Note Agreements, SCW must maintain a minimum
interest coverage ratio of two times interest expense. SCW does not currently have any
outstanding mortgages or other encumbrances on its properties.(4)
    
    Consist of obligations under a loan agreement supporting $7.9 million in
outstanding debt issued by the California Pollution Control Financing Authority, $6 million in
obligations supporting $6 million in certificates of participation issued by the Three Valleys
Municipal Water District and $4.9 million of obligations incurred by SCW with respect to its
500 acre foot entitlement to water from the State Water Project (SWP). These obligations do
not contain any financial covenants believed to be material to Registrant or any cross default
provisions. SCWs obligations with respect to the certificates of participation issued by the
Three Valleys Municipal Water District are supported by a letter of credit issued by Wells
Fargo Bank. In regards to its SWP entitlement, SCW has entered into agreements with various
developers for 422 acre-feet, in aggregate, of its 500 acre-foot entitlement to water from the
SWP.(5)
    
    Consists of $1.3 million outstanding under a fixed rate obligation
incurred to fund construction of water storage and delivery facilities with the Three Valleys
Municipal Water District, $0.5 million outstanding under a variable rate obligation incurred
to fund construction of water delivery facilities with the Three Valleys Municipal Water
District and an aggregate of $0.2 million outstanding under capital lease obligations. These
obligations do not contain any financial covenants believed to be material to Registrant or
any cross default provisions.(6)
    
    Consists of expected interest expense payments assuming Registrants
long-term debt remains outstanding until maturity. Current interest rates were used to
estimate expected interest expense payments on variable long-term debt.(7)
    
    Advances for construction represent annual contract refunds to developers
for the cost of water systems paid for by the developers. The advances are generally
refundable at rates ranging from 10% to 22% of the revenue received from the installation for
which funds were advanced or in equal annual installments over periods of time ranging from 10
to 40-year periods.(8)
    
    Consists of the remaining balance of the purchased power contracts through
December 2008.(9)
    
    Consists of non-cancelable commitments primarily for capital projects
under signed contracts.(10)
    
    Water purchase agreements consist of (i) contracts with various
governmental entities to purchase imported water for an aggregate remaining commitment of
$57.7 million which expire on an agreement-by-agreement basis between 2008 and 2012; (ii) a
remaining amount of $3 million under an agreement with the City of Claremont to lease water
rights that were ascribed to the City as part of the Six Basins adjudication (the initial term
expires in 2028 with an option to renew this agreement for 10 more years); and (iii) an
aggregate amount of $4.2 million of other water purchase commitments with other third parties.
In some cases, the amount of the commitment is estimated based on current rates per acre-foot
of water purchased. These rates may be changed annually.(11)
    
    Reflects Registrants future minimum payments under non-cancelable
operating leases.(12)
    
    Consists of Registrants expected contributions (all by employer) for its
pension and postretirement plans. These amounts are subject to change based on, among other
things, the limits established for federal tax deductibility (pension
plan). The estimated minimum required contributions to the pension
plan were
computed by our actuary and are subject to change based on the significant impact
that return on plan assets and changes in discount rates might have on such amounts.(13)
    
    Consists of $7.4 million of outstanding obligations under a loan
agreement supporting Industrial Development Revenue Bonds due in 2006 and a $0.2 million
outstanding repayment obligation to the 34




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United States Bureau of Reclamation (Bureau). The loan agreement contains provisions that
establish a maximum of 65% debt in the capital structure, limits cash distributions when the
percentage of debt in the capital structure exceeds 55% and requires a debt service coverage
ratio of two times. The Bureau obligation does not contain any financial covenants believed to be
material to Registrant or any cross default provisions. In addition, CCWC has a long-term water
supply contract with the Central Arizona Conservation District (the District) through September
2033, and is entitled to take 6,978 acre feet of water per year from Central Arizona Project. The
maintenance rate for such water delivered is set by the District and is subject to annual
increases. The estimated remaining commitment under this contract is $5.6 million as of March
31, 2005. Furthermore, CCWC has entered into a commitment with the District to purchase 1,931
acre feet per year of additional water rights for an estimated amount of $1.1 million as of March
31, 2005. The price is subject to further adjustment and is expected to increase annually until
final written agreement is executed which is expected in 2005.(14)
    
    Other commitments consist of (i) $75 million syndicated revolving credit
facility, expiring in October 2005 of which $47.0 million is outstanding as of March 31, 2004,
(ii) an amount of $296,000 with respect to a $6,296,000 irrevocable letter of credit issued by
Wells Fargo Bank to support the certificates of participation of Three Valleys Municipal Water
District (the other $6,000,000 is reflected under tax-exempt obligations), (iii) an
irrevocable letter of credit in the amount of $700,000 that expires in October 2005 for the
deductible in Registrants business automobile insurance policy, (iv) an irrevocable letter of
credit that expires October 5, 2005 for its energy scheduling agreement with Automated Power
Exchange as security for the purchase of power; the amount of the credit is $585,000, (v)
outstanding performance bonds of $10,550 to secure performance under franchise agreements with
governmental agencies, and (vi) an irrevocable letter of credit in the amount of $3,600,000
pursuant to a settlement agreement with Southern California Edison Company (Edison) to cover
Registrants commitment to pay the settlement amount. All of the letters of credit are issued
pursuant to the syndicated revolving credit facility. The syndicated revolving credit facility
contains restrictions on prepayments, disposition of property, mergers, liens and negative
pledges, indebtedness and guaranty obligations, transactions with affiliates, minimum interest
coverage requirements, a maximum debt to capitalization ratio, and a minimum debt rating.
Pursuant to the Credit Agreement, AWR must maintain a minimum interest coverage ratio of 3.25
times interest expense, a maximum total funded debt ratio of 0.65 to 1.00 and a minimum debt
rating of Baa1 or BBB+. Under the terms of its power purchase contracts with Mirant Marketing and PWCC, SCW is required to
post security, at the request of the seller, if SCW is in default under the terms of the contract
and the future value of the contract is greater than the future value of contracts of a similar
term on the date of default. SCW will be in default under the terms of these contracts if its debt
is rated less than BBB- by S&P or Fitch, Inc. (Fitch) or less than Baa3 by Moodys Investor
Services, Inc (Moodys). SCW currently has a senior unsecured debt rating of A- with negative
outlook by S & P and A2 with a recent upgrade from negative to stable outlook by Moodys. Fitch
does not rate SCW. S&P debt ratings range from AAA (highest rating possible) to D (obligation is in default). Moodys
debt ratings range from Aaa (best quality) to C (lowest quality). Securities ratings are not
recommendations to buy, sell or hold a security and are subject to change or withdrawal at any time
by the rating agency. 35




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Bear Valley Electric Service of SCW As of March 31, 2005, SCW had accrued $22.2 million in under-collected power costs, mostly
incurred during the energy crisis in late 2000 and 2001 in connection with providing service to its
Bear Valley Electric customers. SCW is authorized to include up to a weighted annual energy
purchase cost of $77 per MWh each year through August, 2011 in its electric supply cost balancing
account. To the extent that actual weighted average annual costs for power purchased exceeds the
$77 per MWh amount, SCW will not be able to include these amounts in its balancing account and such
amounts will be expensed, unless the CPUC approves the adjustments. Power Supply Arrangements at SCWs Bear Valley Electric Service Area Most of the electric energy sold by SCW to customers in its Bear Valley Electric customer
service area is purchased from others. Beginning April 1, 2001, SCW entered into a five-year and
nine-month, block forward purchase contract with Mirant Marketing for 15 MWs of electric energy at
a price of $95 per MWh through December 31, 2006. On July 14, 2003, Mirant Marketing announced that, to facilitate its financial restructuring,
it filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code.
Registrant has not experienced any interruption in the delivery of electric energy under the Mirant
Marketing contract. At this time, Registrant expects no interruption in the delivery of electric
energy under the contract. In June 2001, SCW executed an agreement with PWCC for an additional 8 MWs of electric energy
to meet peak winter demands. The contract provided for pricing of $75 per MWh from November 1, 2001
to March 31, 2002, $48 per MWh from November 1, 2002 to March 31, 2003 and $36 per MWh from
November 1, 2003 to March 31, 2004. In September 2002, SCW entered into a series of purchased power contracts with PWCC. Under the
agreements, SCW will sell 15 MWs to PWCC of electric energy at a price of $95 per MWh beginning
November 1, 2002 through December 31, 2006, and the 8 MWs of electric energy covered under the
energy purchase agreement with PWCC discussed previously. In return, PWCC agreed to supply SCW with
15 MWs of electric energy at a price of $74.65 per MWh beginning November 1, 2002 through December
31, 2008, and an additional 8 MWs at $74.65 per MWh beginning on November 1, 2002 through March 31,
2003 and each succeeding November 1 through March 31 period through March 31, 2008, and for the
period November 1, 2008 through December 31, 2008. Settlement of these contracts occurs on a net or
cash basis through 2006 and by physical delivery through 2008. The average minimum monthly load at SCWs Bear Valley Electric customer service area has been
approximately 12 MWs. The average winter load has been 18 MWs with a winter peak of 39 MWs when the
snowmaking machines at the ski resorts are operating. In addition to the power purchase contracts,
SCW buys additional energy from the spot market to meet peak demand and sells surplus power to the
spot market as well. The average cost of power purchased, including the transactions in the spot
market, was approximately $79.13 per MWh for the three months ended March 31, 2005 as compared to
$81.30 per MWh for the same period of 2004. SCWs average energy costs are impacted by pricing
fluctuations on the spot market. 36




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Transmission Constraints Demand for energy in SCWs Bear Valley Electric customer service area generally has been
increasing. However, the ability of SCW to deliver purchased power to these customers is limited by
the ability of the transmission facilities owned by Edison to transmit this power. On December 27,
2000, SCW filed a lawsuit against Edison for breach of contract as a result of delays in upgrading
these transmission facilities as well as for violations of good faith and fair dealing, negligent
misrepresentation, intentional misrepresentation and unjust enrichment. In March 2004, SCW and Edison agreed to settle this suit. Under the terms of the settlement,
SCW agreed to pay a $5 million project abandonment fee to Edison. Edison filed an application to
the FERC for approval to treat the entire $5 million settlement payment as abandoned project cost
to be included in Edisons wholesale rate charged to SCW. In addition, Edison sold the Goldhill
substation and associated transmission line to SCW at its book value. SCW made an initial lump sum
payment of $1.4 million to Edison during the first quarter of 2004 and agreed to pay Edison the
remaining $3.6 million over a 15 year term through 180 equal monthly payments of $38,137. In August
2004, the FERC approved Edisons application and SCW recorded the $1.4 million payment in the
supply cost balancing account. This amount was previously recorded as a regulatory asset pending
FERC approval of Edisons application. In addition, monthly payments totaling $114,411 made to
Edison during the three months ended March 31, 2005 have also been included in the electric supply
cost balancing account. New Generation Facility As a means of meeting the increasing demands for energy and limiting SCWs exposure to changes
in spot market prices, SCW has constructed a natural gas-fueled 8.4 MW generation facility. The
generator went on line during the third quarter of 2004. SCW filed for recovery of these costs in
rates in the third quarter of 2004, using a special filing called a Major Additions Adjustment
Clause or MAAC. The rate increase requested by SCW was approved by the CPUC and was made
effective on April 15, 2005, which is expected to result in an annual rate increase of
approximately $2.7 million. See the section entitled Regulatory Matters included in Part I, Item
2 in Managements Discussion and Analysis of Financial Condition and Results of Operationsfor more
details. Construction Program SCW maintains an ongoing water distribution main replacement program throughout its customer
service areas based on the priority of leaks detected, fire protection enhancement and an
underlying replacement schedule. In addition, SCW upgrades its electric and water supply facilities
in accordance with industry standards, local requirements and CPUC requirements. As of March 31,
2005, SCW has unconditional purchase obligations for capital projects of approximately $26.8
million. In addition, SCWs Board of Directors also approved the 2005 net capital budget of
approximately $57.8 million primarily for upgrades to its water supply and distribution facilities.
During the three months ended March 31, 2005 and 2004, Registrant spent $18,127,000 and
$12,848,000, respectively, for these purposes. CCWCs Board of Directors also approved the 2005 net capital budget of approximately
$1.4 million. AWR and ASUS have no material capital commitments. However, ASUS actively seeks opportunities
to own, lease or operate water and wastewater systems for governmental entities, which may involve
significant capital commitments. FBWS has capital commitments that are expected to be paid from
payments made by the U.S. Government under the terms of the 50-year contract for Fort Bliss. 37




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Regulatory Matters Rate Regulation SCW is subject to regulation by the CPUC, which has broad powers with respect to service and
facilities, rates, classifications of accounts, valuation of properties, the purchase, disposition
and mortgaging of properties necessary or useful in rendering public utility service, the issuance
of securities, the granting of certificates of public convenience and necessity as to the extension
of services and facilities and various other matters. CCWC is subject to regulation by the ACC. Rates that SCW and CCWC are authorized to charge are determined by the CPUC and the ACC,
respectively, in general rate cases and are derived using rate base, cost of service and cost of
capital, as projected for a future test year in California and using an historical test year, as
adjusted in Arizona. Rates charged to customers vary according to customer class and rate
jurisdiction and are generally set at levels allowing for recovery of prudently incurred costs,
including a return on rate base. Rate base generally consists of the original cost of utility plant
in service, construction work-in-progress, plus certain other assets, such as working capital and
inventory, less accumulated depreciation on utility plant in service, deferred income tax
liabilities and certain other deductions such as advances and contributions in aid of construction. Neither AWR nor ASUS are directly regulated by the CPUC. The CPUC does, however, regulate
certain transactions between SCW and its affiliates. The ACC also regulates certain transactions
between CCWC and its affiliates. For rate-making purposes, the 22 customer service areas of SCW are grouped into 9 water
districts and 1 electric district. Water rates vary among the 9 water ratemaking districts due to
differences in operating conditions and costs. SCW monitors operations on a regional basis in each
of these districts so that applications for rate changes may be filed, when warranted. Under the
CPUCs practices, rates may be increased by three methods: (i) general rate case increases (GRCs),
(ii) offsets for certain expense increases including but not limited to supply cost offset and
balancing account amortization, and (iii) advice letter filings related to certain plant additions
and other operating cost increases. Under new procedures adopted by the CPUC in 2004, all class A
water utilities, including SCWC, must file for a general rate case proceeding every once every
three years. SCWs 9 ratemaking districts are organized into three regions, and each region is on
its own three-year rate case cycle. GRCs establish rates for a three year period, which include
step increases for the second and third year. Rates are based on a forecast of expenses and capital
costs. GRCs have a typical regulatory lag of one year. Offset rate increases and advice letter
filings typically have a two to four month regulatory lag. Changes in Rates On November 2, 2004, SCW filed advice letters with the CPUC for step increases for Region II
in an amount of approximately $2.8 million and attrition increases of approximately $2.4 million
for Region III that were approved and became effective January 1, 2005. On July 10, 2003, the CPUC approved the Certificate of Public Convenience and Necessity (CPCN)
for construction of an 8.4 MW natural gas-fueled generation facility on a portion of its property
in the City of Big Bear Lake. The capital cost of the generating facility was approximately $13
million. SCW filed for increased rates in the third quarter of 2004, using a special filing called
a Major Additions Adjustment Clause or MAAC filing. This request was approved by the CPUC and
the new rates became effective on April 15, 2005, which should result in an estimated annual
revenue increase of approximately $2.7 million. 38




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Pending Rate Changes SCW and the Office of Ratepayers Advocates have mutually agreed to a rate adjustment plan for
Region I for 2005 to 2007. A proposed decision issued by an Administrative Law Judge authorized
rate increases of $2.3 million in annual revenues for 2005 and $1 million and $1.2 million in 2006
and 2007, respectively. We expect the decision will be finalized in the second quarter of 2005. In February 2005, SCW filed an application with the CPUC for rate increases in Region III and
the general office. If approved as filed, rates are expected to increase by $19 million, $1.5
million and $1.5 million in 2006, 2007 and 2008, respectively. A decision on this application is
expected later in 2005. In 2000, the CPUC authorized the establishment of a memorandum account into which SCW was
allowed to record costs it incurred in prosecuting the contamination suits filed against the State
and Aerojet. The CPUC also authorized SCW periodically to seek recovery of such recorded costs from
ratepayers. In that regard, SCW sought interim cost recovery and was authorized to increase rates,
effective April 28, 2001, in an amount sufficient over a six-year period to offset approximately
$1.8 million in such legal and expert costs recorded in the memorandum account that had been
incurred on or before August 31, 2000. As of March 31, 2005, approximately $15.2 million in legal
and consulting related costs, including the unamortized portion of the $1.8 million, has been
recorded as deferred charges and included in Regulatory Assets on the SCW balance sheets. In a proceeding currently pending at the CPUC, SCW has requested a twenty-year amortization of
the remaining balance of the costs recorded in the memorandum account, net of any reimbursement
amounts received from defendants, insurers and others. Given the expected timing for the issuance
of a final decision in this proceeding (third quarter 2005), SCW filed a motion seeking another
interim amortization. In this motion, SCW proposed to amortize $6 million of the $15.2 million of
the memorandum account balance over a 10 year period, and to increase rates accordingly, subject to
refund. In January 2005, a joint ruling of the assigned Commissioner and Administrative Law Judge
denied SCWs request for an interim amortization. The motion was denied primarily because the CPUC
did not consider interim relief to be needed when the hearing on the merits was only weeks away
(March 14-15, 2005) and an expected proposed decision, and CPUC action on it, would likely be
issued as soon as the second or third quarter of 2005. Management remains of the opinion that the
recovery of these costs through rates is probable; however, management cannot give assurance that
the CPUC will ultimately allow recovery of all or any of the costs that have accumulated in this
memorandum account. Management will continue to monitor the rate making process for this matter
and assess the probability of recovery of these costs on a quarterly basis. Furthermore, it is
managements intention to offset any settlement proceeds from Aerojets proposed land development,
first against the guaranteed $8 million note from Aerojet and then against the balance in the
memorandum account at the time of receipt of the settlement payments. Other Regulatory Matters In a decision issued on June 19, 2003 on supply cost memorandum accounts, the CPUC concluded
that (i) if a utility is within its rate case cycle and does not earn over its authorized rate of
return, the utility is permitted to recover its costs in the memorandum supply cost account subject
to reasonableness review by the CPUC; (ii) if a utility is either within or outside of its rate
case cycle and earns over the authorized return, the utilitys recovery of expenses from the
memorandum supply cost account will be reduced by the amount exceeding the authorized rate of
return; and (iii) a utility is required to seek review of under and over collections by filing an
advice letter annually. As of March 31, 2005, SCW has filed advice letters for Regions I and II
for the period from November 29, 2001 to December 31, 2004 with respect to an approximate $1.8
million cumulative net over-collection, which has been recorded as a regulatory liability. An
additional $223,000 of net over-collection related to the 39




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three months ended March 31, 2005 has also been recorded as a regulatory liability at March
31, 2005. Furthermore, SCW also filed advice letters with the CPUC for review of the activity in
the Region III memorandum supply cost account for the period from November 29, 2001 to December 31,
2004. Region III had a cumulative under-collected balance of $6.8 million and $6.6 million at March
31, 2005 and December 31, 2004, respectively, which are subject to earnings tests. A regulatory
asset with respect to this under-collection will not be recorded until receipt of a CPUC decision
authorizing the recovery of the under-collection. On September 2, 2004, the CPUC issued an order instituting rulemaking (OIR) on Gain on Sale.
The stated intention of the OIR is to establish clear guidelines for the disposition of capital
gains from the sale of utility property. The draft of the OIR indicates that the CPUC is
considering a sharing formula, with shareholders receiving between 5 and 50 percent of the gain.
There is no schedule for evidentiary hearings and/or workshops at this time. Management is unable
to predict the outcome of this OIR. CCWC filed its rate case with the ACC in August 2004. CCWC is expecting the new rates will be
approved and effective in early 2006. The filed rate request, if approved by the ACC, would
increase CCWCs revenue requirement by approximately 29%. Environmental Matters 1996 Amendments to Federal Safe Drinking Water Act The U.S. Environmental Protection Agency (EPA) may only regulate contaminants that may have
adverse health effects, are known or likely to occur at levels of public health concern, and the
regulation of which will provide a meaningful opportunity for health risk reduction. The EPA has
published a list of contaminants for possible regulation and must update that list every five
years. In addition, every five years, the EPA must select at least five contaminants on that list
and determine whether to regulate them. The EPA has authority to bypass the selection process and
adopt interim regulations for contaminants in order to address urgent health threats. The
Department of Health Services (DOHS), acting on behalf of the EPA, administers the EPAs program
in California. The Arizona Department of Environmental Quality (ADEQ) administers EPAs program in
Arizona. The Texas Commission on Environmental Quality (TCEQ) administers the EPAs program in
Texas. The EPA may base primary drinking water regulations on risk assessment and cost/benefit
considerations and on minimizing overall risk. The EPA must base regulations on best available,
peer-reviewed science and data from best available methods. For proposed regulations that involve
the setting of maximum contaminant levels (MCLs), the EPA must use, and seek public comment on, an
analysis of quantifiable and non-quantifiable risk-reduction benefits and costs for each such MCL. SCW, CCWC and FBWS currently test their wells and water systems according to requirements
listed in the Safe Drinking Water Act (SDWA). Water from wells found to contain levels of
contaminants above the established MCLs is treated to reduce contaminants to acceptable levels
before it is delivered to customers. If treatment is not possible, the wells are shut down. Since
the SDWA became effective, SCW and CCWC have experienced increased operating costs for testing to
determine the levels, if any, of the constituents in their sources of supply and additional expense
to treat contaminants in order to meet the MCL standards. Treatment costs may cause SCW and/or CCWC
to experience additional capital costs as well as increased operating costs. The CPUC and ACC
ratemaking processes provide SCW and CCWC with the opportunity to recover prudently incurred
capital and operating costs in future filings associated with water quality. Management believes
that such incurred and expected future costs should be authorized for recovery by the CPUC and ACC,
as applicable. FBWS may recover additional capital costs associated with a change in law or changes
in circumstances from the U. S. Government as an equitable adjustment to the fee for providing
services on Fort Bliss. 40




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Enhanced Surface Water Treatment Rules The EPA has adopted the Enhanced Surface Water Treatment Rule (ESWTR), which requires
increased surface-water treatment to decrease the risk of microbial contamination. These rules
apply to each of SCWs five surface water treatment plants and CCWCs surface water treatment
plant. Registrant anticipates that all plants will achieve compliance within the three-year to
five-year time frames identified by EPA. Registrant is required to be in compliance by June 1,
2006. SCW has initiated phased construction of a new treatment plant in the Calipatria-Niland
customer service area (see further discussion below under Regulation of Disinfectant/Disinfection
By-Products) to bring that facility into compliance. Once this project is completed, all the
surface water plants in SCW and CCWC will be in compliance with these rules. Regulation of Disinfectant/Disinfection By-Products SCW and CCWC are also subject to regulations concerning disinfectant/disinfection by-products
(DBPs). Stage I of the regulations was effective in November 1998 with full compliance required
for systems serving 10,000 or more persons by 2002 and for systems serving fewer than 10,000
persons by 2004. Stage I requires reduction of total trihalomethane contaminants from 100
micrograms per liter to 80 micrograms per liter on a system wide running annual average. Upgrades
to the Calipatria and Nilan plants were completed by the third quarter of 2004. Further
modifications to the Calipatria and Nilan plants are expected to be in place by the end of May 2005
to ensure continued compliance. The Stage 2 Disinfectant/Disinfection By-Products Rule and the Long-Term 2 Enhanced Surface
Water Treatment Rule The Long-Term 2 Enhanced Surface Water Treatment Rule (LT2ESWTR) was published in the Federal
Registeron August 11, 2003, and the Stage 2 Disinfectant/Disinfection By-Products Rule (DBPR) was
published shortly thereafter on August 18. These proposed Rules are very complex and EPA has asked
for comments on hundreds of technical issues. The comment period expired in January 2004.
Registrant is currently waiting for the EPA to finalize these proposed rules to determine the
impact. It is currently estimated that these rules will be formally proposed by the EPA during the
fall of 2005. Ground Water Rule On May 10, 2000, the EPA published the proposed Ground Water Rule (GWR), which establishes
multiple barriers to protect against bacteria and viruses in drinking water systems that use ground
water. The proposed rule applies to all U.S. public water systems that use ground water as a
source. The proposed GWR includes system sanitary surveys conducted by the state to identify
significant deficiencies; hydrogeologic sensitivity assessments for undisinfected systems; source
water microbial monitoring by systems that do not disinfect and draw from hydrogeologically
sensitive aquifers or have detected fecal indicators within a distribution system; corrective
action; and compliance monitoring for systems which disinfect to ensure that they reliably achieve
4-log (99.99%) inactivation or removal of viruses. On March 29, 2005, EPA asked that the rule be
temporarily withdrawn from review to allow the Agency time for further consideration of the rule.
No estimate has been made when final regulations will be adopted. While no assurance can be given
as to the nature and cost of any additional compliance measures, if any, SCW and CCWC do not
believe that such regulations will impose significant compliance costs, since they already
currently engage in disinfection of the majority of their groundwater systems. 41




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Regulation of Radon and Arsenic On October 31, 2001, EPA established an arsenic MCL at 10 parts per billion (ppb). Compliance
with an MCL of 10 ppb will require implementation of wellhead treatment remedies for eight affected
wells in SCWs system and two wells in CCWCs system. The effective date for utilities to comply
with the standard is January 2006. Company wells used to supply SCWs and CCWCs systems are
expected to be in compliance with this standard by the end of 2005 or will be removed from service
until the standard is met. The California DOHS Office of Environmental Health Hazard Assessment (OEHHA) published the
final Public Health Goal (PHG) of 4.0 parts per trillion in April 2004. This is the first step for
California to adopt its own MCL for arsenic. The DOHS MCL process is expected to take up to a year
(even as an emergency regulation). If the DOHS establishes a limit that is more stringent than the
limit established by the EPA, SCW will be required to comply with this more stringent requirement. The EPA has proposed new radon regulations following a National Academy of Sciences risk
assessment and study of risk-reduction benefits associated with various mitigation measures. The
National Academy of Sciences study is in agreement with much of EPAs original findings but has
slightly reduced the ingestion risk initially assumed by EPA. EPA established an MCL of 300 Pico
Curies per liter based on the findings and has also established an alternative MCL of 4000 Pico
Curies per liter, based upon potential mitigation measures for overall radon reduction. Registrant
is currently waiting for the EPA to establish a MCL to determine the impact. Voluntary Efforts to Provide Treated Surface Water below Minimum Surface Water Treatment
Requirements SCW is a voluntary member of the EPAs Partnership for Safe Water, a national program designed
to further protect the public from diseases caused by cryptosporidium and other microscopic
organisms. As a volunteer in the program, SCW commits to treat surface water to levels much lower
than the minimum operating requirements governing surface water treatment, optimize surface water
treatment plant operations and seeks to have its surface water treatment facilities perform as
efficiently as possible. Unregulated Contaminants Monitoring Rule EPA has revised the Unregulated Contaminant Monitoring Rule (UCMR). The data generated by the
UCMR will be used to evaluate and prioritize contaminants on the Drinking Water Contaminant
Candidate List, a list of contaminants EPA is considering for possible new drinking water
standards. This data will help to ensure that future decisions on drinking water standards are
based on sound science. A tiered approach will be utilized with the three monitoring lists to provide the maximum
capability to monitor up to the statutory limit of no more than 30 contaminants in any 5-year
monitoring cycle. Therefore, as List 3 contaminants are found to occur in public water systems,
they may move up to List 2, and likewise, List 2 contaminants may move up to List 1, when the UCMR
is revised again later this year. The law requires that EPA publish a new contaminant-monitoring
list every 5 years.When the EPA adds contaminants to their list, they will also include a
compliance date. Registrant will evaluate the impact and necessary actions as additions are made to
the contaminant lists. 42




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Perchlorate Notification Level Activities In January 2002, DOHS reduced the Perchlorate notification level (formerly termed the action
level) from 18 ppb to a level of 4 ppb, based upon new information from the EPA. A revised PHG of 6
ppb was adopted by OEHHA in the first quarter of 2004 after which DOHS revised the state
notification level for perchlorate from 4 ppb to 6 ppb. This is the first step in the establishment
of an MCL in California. SCW has removed eight wells from service in its Rancho Cordova system and six additional wells
in various other systems since they contained perchlorate in amounts in excess of the notification
level of 6 ppb. In January 2005, the National Academy of Sciences issued a report evaluating EPAs reference
dose for health risk information. This report concluded that a higher reference was appropriate.
It is not certain what effect, if any, this report will have on Californias MCL. The California
MCL for perchlorate is expected to be finalized in 2005. SCW is continuing to periodically monitor
all of its water supplies to determine that levels of perchlorate are below the action level
currently in effect. Matters Relating to SCWs Arden-Cordova Water System In SCWs Rancho Cordova system, four wells have been removed from service and destroyed due to
contamination from perchlorate. The supply has been replaced for three of these wells. An
additional three wells are currently out of service due to perchlorate levels above the EPA trigger
level of 4 ppb as defined in the EPAs Administrative Orders, and two wells are out of service due
to detectable levels of nitrosodimethylamine (NDMA) above the action level. SCW continues to
monitor all of its active groundwater wells in the Rancho Cordova system for perchlorate and NDMA. Aerojet has, in the past, used ammonium perchlorate in oxidizing rocket fuels. NDMA is an
additional by-product from the production of rocket fuels and it is believed that contamination in
SCWs Rancho Cordova service area is also related to the activities of Aerojet. In 2000, SCW filed
suit against Aerojet for contamination of SCWs ground water supply in its Rancho Cordova system. On October 12, 2004, Registrant reached a final settlement with Aerojet of litigation relating
to this contamination. Under the terms of the settlement, Aerojet paid SCW $8.7 million in the
first quarter of 2004. Aerojet will pay an additional $8 million, plus interest accruing beginning
January 1, 2004, over a period of five years commencing in December 2009. These payments reduce
SCWs costs of utility plant and purchased water by $16 million and $735,000, respectively. Aerojet
had previously reimbursed SCW $4.3 million in capital costs and $171,000 for additional water
supply. In addition, Aerojet has agreed to reimburse SCW $17.5 million, plus interest accruing from
January 1, 2004, for its past legal and expert costs. The source of these later reimbursements is
solely from connection fees anticipated to be received by Aerojet in a new development area owned
by Aerojet adjacent to the SCWs Rancho Cordova system. Aerojet has transferred its remediated groundwater to the Sacramento County Water Agency,
which will provide treated water for distribution to SCW and other water purveyors affected by the
contamination. This arrangement, together with other mitigation measures, should afford SCW a
reliable and safe water supply for its Rancho Cordova customers. Registrant and Aerojet have also
signed three separate agreements requiring Aerojet to pay for certain transmission pipelines and
upgrades to the Coloma Treatment Plant as a contingency plan, should additional wells be impacted.
The value of the three agreements approximates $6.8 million in capital improvements and the
projects are expected to be completed by the third quarter of 2005. 43




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Matters Relating to SCWs Yorba Linda Water System The compound MTBE has been detected in a well serving SCWs Yorba Linda water system. To date,
the well has not shown MTBE above the DOHS secondary standard of 5.0 ppb. SCW has constructed an
interconnection with the Metropolitan Water District of Southern California to provide the needed
water supply for this system in the event the well experiences levels of detection in excess of the
DOHS standard. SCW met with the Regional Water Quality Control Board, the Orange County Water District
(OCWD), the City of Anaheim, the DOHS and three potentially responsible parties (PRPs) to define
the extent of the MTBE contamination plume and assess the contribution from the PRPs. The PRPs
voluntarily initiated a work plan for regional investigation. While there have not been significant
disruptions to the water supply in Yorba Linda to this point in time, no assurances can be given
that MTBE contamination will not increase in the future. In December 2003, a settlement was reached
between SCW and the PRPs. Under the settlement agreement, the PRPs paid SCW $581,250 in January
2004 for reimbursement of costs related to the issue, and will pay up to $260,000 per year for five
years (through 2008) for incremental supply costs should the MTBE level in the well exceed the DOHS
secondary standard. Matters Relating to SCWs San Gabriel Water Systems Perchlorate and/or Volatile Organic Compounds (VOC) have been detected in five wells servicing
SCWs San Gabriel System. SCW filed suit, along with two other affected water purveyors and the San
Gabriel Basin Water Quality Authority (WQA), in federal court against some of those responsible for
the contamination. Some of the other potential defendants settled with SCW, other water purveyors
and the WQA (the Water Entities) on VOC related issues prior to the filing of the lawsuit
resulting in reimbursement to SCW of the $1 million in capital cost of VOC treatment facilities and
contribution of approximately $380,000 towards future operating and maintenance costs of the
facilities. In response to the filing of the Federal lawsuit, the PRP defendants filed motions to dismiss
the suit or strike certain portions of the suit. Following a hearing on these motions on March 31,
2003, the judge issued a ruling on April 1, 2003 granting in part and denying in part the
defendants motions. A key ruling of the court was that the water purveyors, including the
Registrant, by virtue of their ownership of wells contaminated with hazardous chemicals are
themselves PRPs under the Comprehensive Environmental Response, Compensation, and Liability Act
(CERCLA). Registrant has, pursuant to permission of the court, amended its suit to claim certain
affirmative defenses as an innocent party under CERCLA. In this same suit, the PRPs have filed
cross-complaints against the Registrant, the other two affected water purveyors, the WQA and the
Metropolitan Water District, the Main San Gabriel Basin Watermaster and others on the theory that
they arranged for and did transport contaminated water into the San Gabriel Valley Groundwater
Basin for use by Registrant and the other two affected water providers and for other related
claims. Registrant is presently unable to predict the outcome of this ruling on its ability to
fully recover from the PRPs future costs associated with the treatment of these wells. On August 29, 2003, the US Environmental Protection Agency (EPA) issued Unilateral
Administrative Orders (UAO) against 41 parties deemed responsible for polluting the groundwater in
that portion of the San Gabriel Valley from which two of SCWs impacted wells draw water. SCW was
not named as a party to the UAO. The UAO requires that these parties remediate the contamination.
The judge in the Federal lawsuit has appointed a special master to oversee mandatory settlement
discussions between the PRPs and the Water Entities. EPA is also conducting settlement discussions
with several PRPs, including those that previously settled with the Water Entities on VOC matters,
regarding the UAO. The Water Entities and EPA are working to coordinate their settlement
discussions in order to arrive at a complete resolution of all issues affecting the Federal
lawsuits and the UAO. Registrant is presently unable to predict the ultimate outcome of any of
these settlement discussions. 44




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Three other wells serving customers in SCWs San Gabriel customer service area are also
impacted by VOC contamination. A settlement with several PRPs together with federal funds
administered by WQA resulted in reimbursement of 100% of the $1.1 million in capital costs,
$205,000 of past operations and maintenance costs and 100% of future operations and maintenance
costs for a period of up to 30 years for VOC treatment facilities at these wells. Bark Beetle Infestation in SCWs Bear Valley Electric Service Area In a Proclamation issued on March 7, 2003 former Governor Gray Davis declared a State of
Emergency with respect to a severe fire risk caused by dead and dying trees plagued by drought and
a major bark beetle infestation in the counties of Riverside, San Bernardino, and San Diego. On
April 3, 2003, the CPUC issued an order requiring Edison, San Diego Gas & Electric Company and Bear
Valley Electric to take all reasonable and necessary actions to mitigate the increased fire hazard
by removing dead, dying or diseased trees from falling or contacting distribution and transmission
lines within their rights of way and to ensure compliance with existing vegetation clearance
statutes and regulations. The utilities, including Bear Valley Electric, are authorized to make
annual advice letter filings requesting recovery of the costs of removal and mitigation. SCW
expects that current and future costs incurred in remediation of bark beetle infestation will be
recoverable in rates through the annual advice letter filings, as the April 2003 order issued by
the CPUC contained cost recovery provisions. As of March 31, 2005, approximately $326,000 has been
incurred and is recorded as a regulatory asset on the balance sheets. Security Issues Since the tragic events of September 11, 2001, water utilities, including Registrant, have
been advised to increase security at key facilities in order to avoid contamination of water
supplies and other disruptions of service. In compliance with The Public Health Security and
Bioterrorism Preparedness Act of 2002 (HR 3448),Registrant has continued to implement measures to
increase security, which includes a vulnerability assessment of its large systems. In addition to
large system assessments, all systems operated by Registrant were assessed to identify potential
areas requiring enhancements. These assessments resulted in a prioritized listing of recommended
facility upgrades to enhance the safety of water system operations to be made over a period of six
years. Costs associated with capital improvements of approximately $15 million were identified as a
result of the assessment process. SCW has begun to make these improvements. In March 2004, the CPUC
approved security plan amounts 2003 and 2004 consistent with the six-year plan. The CPUC will
evaluate the remaining costs in future general rate cases. 45




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Water Supply SCWs Water Supply During
the three months ended March 31, 2005, SCW supplied a total of
14,853,000 CCF of water,
or approximately 123 million gallons per day on average. Of this amount, approximately 57.3% came
from pumped sources and 42.1% was purchased from others, principally the Metropolitan Water
District of Southern California (MWD). The remaining was surface water principally supplied by
the Bureau of Reclamation (the Bureau) under a no-cost contract and by the Sacramento Municipal
Utility District (SMUD), the cost of which is reimbursed by Aerojet-General Corp. pursuant to the
October 2004 settlement agreement. For more information, please see the section entitled
Environmental Matters included in Part I, Item 2 in Managements Discussion and Analysis of
Financial Condition and Results of Operation.During the three months ended March 31, 2004, SCW
supplied 16,863,000 CCF of water, 53.8% of which came from pumped sources, 45.0% was purchased
principally from MWD, and the Bureau and SMUD supplied the remainder. The MWD is a water district organized under the laws of the State of California for the
purpose of delivering imported water to areas within its jurisdiction. Registrant has 58
connections to the water distribution facilities of MWD and other municipal water agencies. MWD
imports water from two principal sources: the Colorado River and the State Water Project. Available
water supplies from the Colorado River and the State Water Project have historically been
sufficient to meet most of MWDs requirements. On October 17, 2003 Federal government, State government, and four Southern California water
agency officials, including the MWD, met to sign the Quantification Settlement Agreement (QSA) that
allocates to each state a share of the Colorado River. Under the QSA, MWD will have access (as in
the past) to Colorado River water and up to 1.6 million acre feet of additional water that the
Imperial Irrigation District proposes to conserve and sell to the state. With the signing of this
agreement California once again has access to excess Colorado River water for the next 13 years.
MWD has also publicly stated that it is stepping up a number of efforts including desalination,
conservation, recycling, transfer and storage, to increase water supplies. SCWs water supply and revenues are significantly affected, both in the short-run and the
long-run, by changes in meteorological conditions. The water supply outlook for California in 2005
is positive. Significant storms in late December 2004 and through March of 2005 resulted in well
above average snow pack in California mountains. The National Weather Services Climate Prediction
Center is forecasting a warmer than normal spring, summer, and fall with normal levels of
precipitation, which would result in a more than adequate water supply for 2005. For the water-year from October 2004 to date, precipitation has been well above average. Based
on information from the California Department of Water Resources, most of California has received
between 110% and over 150% of average levels with some parts of Southern California receiving over
300%. Snow pack level in California is at 165% of average. Reservoir levels have likewise
improved with increased precipitation. Statewide California reservoirs, while not near full
levels, are generally at 100% of average for early in the year. With the winter snow pack levels at or near records highs (147% of average in California and
152% of average in Arizona) spring runoff is expected to be more than adequate. In many areas
flooding is a real possibility and concern. Again from Sacramento to the Colorado River desert the
runoff outlook is for 110% to 180% of average and central Arizona runoff from 90% to 120% of
average. Statewide Californias reservoirs are at 105% of their historic average. 46




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Although overall groundwater conditions are presently at adequate levels, certain of SCWs
groundwater supplies have been affected to varying degrees by various forms of contamination which,
in some cases, has caused SCW to increase its reliance on purchased water in its supply mix. For
further information, see Part II, Item 1 in Legal Proceedings. To continue meeting its water supply needs, SCW has contracts with various governmental
entities and other parties to purchase water or water rights for an aggregate amount of $64.9
million. Included in this amount as of March 31, 2005 is $57.7 million that remains outstanding
under purchase agreements with governmental entities which expire on an agreement-by-agreement
basis between 2008 and 2012. Each of these contracts contain minimum take or pay provisions with
the terms and conditions for pricing under each contract varying. SCW plans to continue to
purchase and use at least the minimum water requirement under the respective contracts in the
future. The amount of the remaining obligations was estimated based on current rates per
acre-foot. These rates may be changed annually. Also included in the $64.9 million is a remaining
commitment of $3.0 million under an agreement with the City of Claremont to lease water rights that
were ascribed to the City as part of the Six Basins adjudication. The initial term of the
agreement expires in 2028. SCW has an option to renew this agreement for 10 more years. CCWCs Water Supply Similar to California, the water supply outlook for Arizona is optimistic. Most of Arizona has
experienced precipitation levels over 150% of average. Phoenix from January to March of 2005 had
5.22 of rain which is 196% of average. The Colorado River desert has had 313% of average
precipitation so far this water year. Precipitation has been over 300% of average in some parts of
Northern Arizona. In Arizona, the snow pack level at the Salt River Basin is at 118% and the Verde
River Basin at 165% of average. Based on information from the Arizona Department of Water Resources, statewide Arizona
reservoirs are at 84% of average for this time of the year. The Colorado River Basin lakes, such
as Lake Powell, Mead, Mohave and Havasu, are at 25.8 million acre-feet or approximately 60% of
average, as compared to 48% of average in the previous water year. The spring and summer runoff
for the Salt River Basin and Verde River Basin in Arizona are expected to be over 160% of average.
For this water year so far, 1.35 million acre-feet of water has flowed into Lake Powell which is
104% of average. The April-July inflow to Lake Powell is expected to be 9.0 million acre-feet or
115% of average. At the end of March 2005, the Verde and Salt system reservoirs in central
Arizona were at 95% of capacity versus 48% last year. Large reservoirs such as Lake Powell will
take several years to recover from the drought. Currently Lake Powell is at 42% of average with
inflow this water year at 109% of average or 3.03 million AF. CCWC has been given an M&I (Municipal and Industrial) designation for purposes of determining
priority for allocations of water from the Central Arizona Project (CAP). The first curtailment
of CAP deliveries in the event of shortage would occur to non-Indian agricultural users. Such users
accounted for a third of CAP deliveries in 2004, creating a buffer for M&I users such as CCWC.
Though it is difficult to predict drought conditions with certainty, the priority for users of CAP,
such as CCWC, provides an improved outlook for CCWC supplies. CCWC obtains its water supply from two operating wells and from Colorado River water delivered
by the CAP. The majority of CCWCs water supply is obtained from its CAP allocation and well water
is used for peaking capacity in excess of treatment plant capability, during treatment plant
shutdown, and to keep the well system in optimal operating condition. CCWC has an Assured Water Supply designation, by decision and order of the Arizona Department
of Water Resources (ADWR), providing in part that, subject to its requirements, CCWC has a 47




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sufficient supply of ground water and CAP water which is physically, continuously and legally
available to satisfy current and committed demands of its customers, plus at least two years of
predicted demands, for 100 years. On April 7, 2004 ADWR issued a decision confirming that CCWC has demonstrated the physical,
legal and continuous availability of CAP water and groundwater, in an aggregate volume of 9,828
acre-feet per year for a minimum of 100 years which is greater than CCWCs projected demand for the
calendar year 2014 of approximately 8,000 acre-feet. The 9,828 acre-feet is comprised of our
existing CAP allocation of 6,978 acre-feet per year, 350 acre-feet per year groundwater allowance,
incidental recharge credits of 500 acre-feet per year, and our Central Arizona Groundwater
Replenishment District (CAGRD) contract of 2,000 acre-feet per year. Our existing groundwater
account balance of 35,829 acre-feet provides approximately 350 acre-feet per year for a hundred
years. The Arizona Water Settlement Act was signed into law in December of 2004. This legislation
provides for an additional CAP allocation to CCWC in the amount of 1,931 acre-feet per year. In
order to receive this additional allocation, CCWC must enter into a revised contract with the
Central Arizona Water Conservation District (the District). CCWC expects agreement to be reached
on this revised contract during 2005. Once a revised contract with the District is executed, CCWC
intends to apply to ADWR to modify and increase its Designation of Assured Supply from 9,828
acre-feet per year to 11,759 acre-feet per year. CCWC has entered into a commitment with the
District to purchase the 1,931 acre feet of water per year of additional CAP water rights for an
estimated amount of $1.1 million as of March 31, 2005. The price will be subject to further
adjustment and is expected to increase until final written agreement is executed. In addition, CCWC has a long-term water supply contract with the District through September
2033, and is entitled to take 6,978 acre feet of water per year from CAP. The maintenance rate for
such water delivered is set by the District and is subject to annual increases. The estimated
remaining commitment under this contract is $5.6 million as of March 31, 2005 with $195,000 paid
each year. Notwithstanding an assured water supply designation, CCWCs water supply may be subject to
interruption or reduction, in particular owing to interruption or reduction of CAP water. In the
event of interruption or reduction of CAP water, CCWC can currently rely on its well water supplies
for short-term periods. However, in any event, the quantity of water CCWC supplies to some or all
of its customers may be interrupted or curtailed, pursuant to the provisions of its tariffs. CCWC
also has the physical capability to deliver water far in excess of that which is currently
accounted for in CCWCs assured water supply account. Risk Factor Summary You should carefully read the risks described below and other information in this Form 10-Q in
order to understand certain of the risks of our business. Our liquidity and earnings could be adversely affected by changes in water supply costs On November 29, 2001, the CPUC ordered us to suspend the use of the current water balancing
account, and instead start a memorandum account for each offsettable expense of purchased water,
purchased power and pump tax for our water service areas. Changes in water supply costs compared to
the authorized amount, as well as any future authorized offset increases may directly affect our
earnings. In a decision issued on June 19, 2003 for memorandum supply accounts, the CPUC concluded that
our recovery of deferred water supply costs for providing water service will be reduced if we are
earning more than our authorized rate of return. Pursuant to this decision, we are required to file
advice letters annually with respect to over- and under- collections in the memorandum supply
accounts in each 48




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of our rate-making jurisdictions. We also record the amount of net
over-collections in each region, but do
not record under-collections that are uncertain for recovery, unless the CPUC approves
recovery of these under-collections. Our recovery of deferred water supply costs for providing
water service is reduced if we are earning more than our authorized rate of return in a rate-making
jurisdiction or the CPUC determines that our water supply costs are not reasonable. Our business entails a significant risk of litigation, brought on a variety of legal
theories, alleging that we have caused personal injury and property damage as a result of
the delivery of contaminated water We were sued, along with others, in nineteen water quality related lawsuits in Los Angeles
Superior Court alleging personal injury and property damage as a result of the delivery of water
that was allegedly contaminated. Although the trial court dismissed these suits in August 2004,
several plaintiffs filed an appeal on September 21, 2004. SCW is unable to predict the outcome of
the appeal. Persons that are potentially responsible for causing the contamination of groundwater supplies
have also been increasingly asserting claims against water distributors on a variety of theories
and have thus far successfully brought the water distributors (including us) within the class of
potentially responsible parties in Federal court actions pending in Los Angeles county. This
increases the costs of seeking recovery from the potentially responsible parties and the risks
associated with seeking recovery of these costs. Management believes that rate recovery, proper
insurance coverage and reserves are in place to appropriately manage against these types of claims.
However, such claims, if ultimately resolved unfavorably to us, could, in the aggregate, have a
material adverse effect on our results of operations and financial condition. Our operating costs have increased and are expected to continue to increase as a result of
groundwater contamination Our operations have been impacted by groundwater contamination in certain of our service
territories. We have taken a number of steps to address this contamination, including the removal
of wells from service, decreasing the amount of groundwater pumped from wells in our service area
in order to slow the movement of plumes of contaminated water, construction of water treatment
facilities and securing alternative sources of supply from other areas not affected by the
contamination. In some cases, potentially responsible parties have reimbursed us for our costs. In other
cases, we have taken legal action against parties that we believe to be potentially responsible for
the contamination. To date, the CPUC has also permitted SCW to establish memorandum accounts for
recovery of these types of costs. However, we can give no assurance regarding the outcome of
litigation arising out of this contamination or our ability to recover these costs in the future. Environmental regulation has increased, and is expected to continue to increase our
operating costs Our regulated subsidiaries are subject to increasingly stringent environmental regulations
that will result in increasing capital and operating costs. These regulations include:  
    The 1996 amendments to the Safe Drinking Water Act that require increased
testing, reporting and treatment of water to reduce specified contaminants to
maximum contaminant levels
    Additional regulation of disinfect ants/ disinfection by products
    Additional regulations requiring disinfection of certain groundwater systems
    Regulation of arsenic and radon 49




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
    Changes in the notification level relating to, and the proposed adoption of
maximum contamination levels for, perchlorate and other by products of the
production of rocket fuel SCW and CCWC may be able to recover costs incurred to comply with these regulations through
the ratemaking process. We may also be able to recover certain of these costs under certain of our
contractual arrangements. In certain circumstances, we may be able to recover costs from parties
responsible or potentially responsible for contamination, either voluntarily or through specific
court action. However, our ability to recover these types of costs depends upon a number of factors
beyond our control, including approval of rate increases, and we can give no assurance regarding
the adequacy of any such recovery. The adequacy of our water supplies depends upon a variety of factors beyond our control The adequacy of our water supplies varies from year to year depending upon a variety of
factors, including:  
    Rainfall
    Availability of Colorado River water and imported water from northern California
    The amount of water stored in reservoirs and groundwater basins
    The amount of water used by our customers and others
    Water quality
    Legal limitations on use Population growth and increases in the amount of water used have increased limitations on use
to prevent over-drafting of groundwater basins. The importation of water from the Colorado River,
one of SCWs important sources of supply, is expected to decrease in future years due to the
requirements of the Central Arizona Project (CAP) and other limitations on the amount of water
that the Metropolitan Water District of Southern California is entitled to take from the Colorado
River. MWD is expected to increase its efforts to secure additional supplies from conservation,
desalination and water exchanges with the agricultural water users. CCWC obtains its water supply from operating wells and from the Colorado River through the
CAP. CCWCs water supply may be subject to interruption or reduction if there is an interruption or
reduction in CAP water. In addition, CCWCs ability to provide water service to new real estate
developments is dependent upon CCWCs ability to meet the requirements of the Arizona Department of
Water Resources regarding its assured water supply account. Water shortages may affect us in a variety of ways:  
    They adversely affect supply mix by causing us to rely on more expensive
purchased water.  
    They adversely affect operating costs.  
    They may result in an increase in capital expenditures for building pipelines to
connect to alternative sources of supply, new wells to replace those that are no
longer in service or are otherwise inadequate to meet the needs of our customers
and reservoirs and other facilities to conserve or reclaim water. We may be able to recover increased operating and construction costs for our regulated systems
through the ratemaking process. We may also be able to recover certain of these costs from third
parties that may be responsible, or potentially responsible, for groundwater contamination. We may
also be able to recover certain of these costs from third parties that may be responsible, or
potentially responsible, for groundwater contamination. 50




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Our earnings are greatly affected by weather during different seasons The demand for water and electricity varies by season. Therefore, the results of operations
for one period may not indicate results to be expected in another period. For instance, most water
consumption occurs during the third quarter of each year when weather tends to be hot and dry. The
demand for electricity in our Bear Valley Electric service area is greatly affected by winter
snows. An increase in winter snows reduces the use of snow making machines at ski resorts in the
Big Bear area and, as a result reduces electric revenues. Likewise, unseasonably warm weather
during a skiing season may result in temperatures too high for snowmaking conditions which also
reduces electric revenues. Variability of weather from normal temperatures or changes in snow or rainfall can materially
impact results of operations. As a result, weather has been and will continue to be one of the
dominant factors in our financial performance. Our business is heavily regulated and, as a result, decisions by regulatory agencies and
changes in laws and regulations can significantly affect our business Our revenues depend substantially on the rates that we are permitted to charge our customers
and our ability to recover our costs in these rates on a timely basis, including the ability to
recover the costs of purchased water, groundwater assessments, electric power and natural gas
costs, costs incurred in connection with increased environmental regulation, recovery of costs
incurred in connection with pursuing parties responsible for contamination of our groundwater
systems, requirements to increase security at our water facilities and requirements to mitigate
fire hazard risks in our Bear Valley Electric service area arising out of the drought and a major
bark beetle infestation in rates. We have filed for increased water rates to recover operating
costs from customers in certain of our water regions. In addition, we have filed with the ACC for
increased water rates in CCWCs customer service areas in Arizona. Any delays by either the CPUC or
the ACC in granting rate relief to cover increased operating and capital costs may adversely affect
our financial performance. Regulatory decisions can also impact prospective revenues and earnings, affect the timing of
the recognition of revenues and expenses and may overturn past decisions. Our liquidity, and in certain circumstances, earnings, could be adversely affected by
increases in electricity and natural gas prices in California Our liquidity, and in certain circumstances, earnings, could be adversely affected by
increases in electricity and natural gas prices in California. Most of our electric energy sold to
customers in our Bear Valley Electric customer service area is purchased from others under
contracts that expire at the end of 2008 at an average price of $74.65 per MWh. In addition to the
power purchase contracts, we also buy additional energy from the spot market to meet peak demand
and sell surplus power to the spot market. We also operate a natural gas-fueled 8.4 MW generator. We are currently authorized by the CPUC to recover up to a weighted annual energy purchase of
$77 per MWh each year through August 2011 from ratepayers. SCW is required to write-off costs in
excess of this cap. As a result, SCW is currently at risk for increases in spot market prices of
electricity that it purchases and for decreases in spot market prices for electricity that it
sells. In addition, SCW is permitted to collect an additional surcharge from its customers of 2.2¢
per kilowatt hour through August 2011 to recover the under-collection in the electric balancing
account, with a current balance of $22.2 million, incurred by SCW during the energy crisis in late
2000 through 2001. In 2011, amounts not recovered through this surcharge may be subject to
regulatory risk. 51




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Unexpected outages at the generator that we operate, or a failure to perform by any of the
counterparties to our electric and natural gas purchase contracts could further increase our
exposure to fluctuating natural gas and electric prices. Our business requires significant capital expenditures The utility business is capital intensive. On an annual basis, we spend significant sums of
money for additions to or replacement of property, plant and equipment. Registrant spent $18.8
million for these purposes in the first quarter of 2005, out of a total of approximately $59.8
million budgeted for 2005. We obtain funds for these capital projects from operations, contributions by developers and
others and advances from developers (which must be repaid). We also periodically borrow money or
issue equity for these purposes. In addition, we have a syndicated bank facility that we can use
for these purposes. We cannot assure you that these sources will continue to be adequate or that
the cost of funds will remain at levels permitting us to earn a reasonable rate of return. The expansion of our contract operations will expose us to different risks than those
associated with our utility operations We are incurring additional costs in connection with the expansion of our contract operations
associated with the preparation of bids, the negotiation of the terms of new contracts and start-up
activities associated with new contracts. Our ability to recover these costs and to earn a profit
on our contract operations will depend upon the extent to which we are successful in obtaining new
contracts and our ability to recover those costs and other costs from revenues from new contracts.
Furthermore, under the new military contract, FBWS bears the risk of increases in operating costs
above those authorized in the contract for operation of Fort Bliss, unless FBWS is entitled to an
equitable adjustment for such matters as an increase in labor rates, changes in circumstances or
differing site conditions from those anticipated at the time of execution of the contract. In addition, we must maintain the proper management and find state-certified and qualified
employees to support the operation of water and wastewater facilities. Failure to do so could put
us at risk of, among other things, operations errors at these facilities and for improper billing
and collection procedures as well as loss of contracts, assessment of penalties for operational
failures and loss of revenues. New Accounting Pronouncements Registrant is subject to newly issued as well as changes in existing requirements issued by
the Financial Accounting Standard Board. Differences in financial reporting between periods could
occur unless and until the CPUC and the ACC approve such changes for conformity through regulatory
proceedings. See Note 8of Notes to Consolidated Financial Statements. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Registrant is exposed to certain market risks, including fluctuations in interest rates, and
commodity price risk primarily relating to changes in the market price of electricity. Market risk
is the potential loss arising from adverse changes in prevailing market rates and prices. There
have been no material changes regarding Registrants market risk position from the information
provided in its Annual Report on Form 10-K for the year ended December 31, 2004. The quantitative
and qualitative disclosures about market risk are discussed in Item 7A-Quantitative and Qualitative
Disclosures About Market Risk, contained in Registrants Annual Report on Form 10-K. 52




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Item 4. Controls and Procedures (a) Evaluation of Disclosure Controls and Procedures As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the
Exchange Act), we have carried out an evaluation, under the supervision and with the
participation of our management, including our Chief Executive Officer (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 and operation of our disclosure controls and procedures as defined in
Rule 13a-15(e) and 15d-15(e) promulgated by the Securities and Exchange Commission (SEC) under the Exchange Act. Based upon that evaluation, the CEO
and the CFO concluded that disclosure controls and procedures, as of the end of such fiscal
quarter, were adequate and effective to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is recorded, processed, summarized and
reported within the time periods specified in the SECs rules and forms and that such
information is accumulated and communicated to our management, including our CEO and CFO, as
appropriate to allow timely decisions regarding required disclosure. (b) Changes in
Internal Controls over Financial Reporting There has been no change in our internal control over financial reporting during the quarter
ended March 31, 2005, that has materially affected or is reasonably likely to materially affect our
internal control over financial reporting. 53




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PART II 
 Item 1. Legal Proceedings Registrant is subject to ordinary routine litigation incidental to its business. Other than
those disclosed in Registrants Form 10-K for the year ended December 31, 2004, no other legal
proceedings are pending, which are believed to be material. Management believes that rate recovery,
proper insurance coverage and reserves are in place to insure against property, general liability
and workers compensation claims incurred in the ordinary course of business. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The shareholders of AWR have approved the material features of all equity compensation plans
under which AWR directly issues equity securities. AWR did not directly issue any unregistered
equity securities during the first quarter of 2005. The following table provides information about repurchases of Common Shares by AWR during the
first quarter of 2005: Maximum NumberTotal Number of
    
    
    
    of Shares ThatShares Purchased
    
    
    
    May Yet BeTotal Number
    
    
    
    
    
    
    
    
    as Part of Publicly
    
    
    
    Purchased underShares of
    
    
    
    Average Price Paid
    
    
    
    Announced Plans
    
    
    
    the Plans orPeriod
    
    
    Purchased
    
    
    
    per Share
    
    
    
    or Programs(1)
    
    
    
    ProgramsJanuary 1 - 31, 2005
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    February 1 - 28, 2005
    
    
    
    175
    (3)
    
    
    $
    26.07
    
    
    
    
    
    
    
    
    NA
    (2)March 1 - 31, 2005
    
    
    
    8,434
    (4)
    
    
    $
    25.10
    
    
    
    
    
    
    
    
    NA
    (2)Total
    
    
    
    8,609
    
    
    
    $
    25.12
    
    
    
    
    
    
    
    
    NA
    (2)
   (1)     None of the Common Shares were purchased pursuant to any publicly announced stock repurchase
program.(2)     None of these plans contain a maximum number of Common Shares that may be purchased in the open
market under the plans.(3)     All of these Common Shares were acquired on the open market for employees pursuant to an
employee benefit plan of the Company. All of the Common Shares needed to meet the requirements of
this plan were purchased in the open market.(4)     Of this amount, 8,113 Common Shares were acquired on the open market for employees pursuant to
the Companys 401(k) plan. All of the Common Shares needed to meet the requirements of this plan
were purchased in the open market. The remainder of the Common Shares was acquired on the open
market for new participants in the Companys Common Share Purchase and Dividend Reinvestment Plan. 54




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Item 3. Defaults Upon Senior Securities None 
 Item 4. Submission of Matters to a Vote of Security Holders No items were submitted during the first quarter of the fiscal year covered by this report to
a vote of security holders through the solicitation of proxies or otherwise. However, on or about
April 12, 2005, common shareholders of AWR were mailed a Notice of Annual Meeting and a Proxy
Statement. Shareholders were requested to vote their shares to: (1) elect three Class I directors
to the Board of Directors to serve until their successors are elected and qualified; (2) approve
amendments to the 2003 Non-Employee Directors Stock Plan; (3) approve an amendment to the 2000
Stock Incentive Plan; (4) ratify the appointment of PricewaterhouseCoopers, LLP as the independent
auditors; and (5) transact any other business, which may properly come before the meeting or any
adjournment thereof. The Annual Meeting of Shareholders will be held on May 17, 2005. 
 Item 5. Other Information (a) On April 28, 2005, the Board of Directors of Registrant declared a regular quarterly
dividend of $0.225 per common share. The dividend will be paid June 1, 2005 to shareholders of
record as of the close of business on May 10, 2005. (b) There have been no material changes during the first quarter of 2005 to the procedures by
which shareholders may nominate persons to the Board of Directors of AWR. 
 Item 6. Exhibits (a) The following documents are filed as Exhibits to this report: 3.1
    
    Amended By-Laws of American States
Water Company incorporated herein by reference to Registrants
Form 8-K, dated April 3, 2005 (1)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 SCW (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 SCW (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)
   (1)
    
    Filed concurrently herewith(2)
    
    Furnished concurrently herewith.
 55




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SIGNATURE Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly
caused this report to be signed on its behalf by the undersigned thereunto duly authorized and as
its principal financial officer. AMERICAN STATES WATER COMPANY
and its subsidiary
SOUTHERN CALIFORNIA WATER COMPANYBy:
    
    /s/ Robert J. SprowlsRobert J. Sprowls
Senior Vice President-Finance, Chief FinancialOfficer,
Treasurer and Corporate SecretaryDated: May 10, 2005
 56