**Table of Contents**

** **

 

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

 

| x                                                 | ** ** | **Quarterly report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934**  |
|---------------------------------------------------|------------|-----------------------------------------------------------------------------------------------|
| ** **                                        |
| **for the quarterly  period ended June 30, 2009** |
| ** **                                        |
| **or**                                            |
| ** **                                        |
| **o**                                             | ** ** | **Transition report  pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934** |

** **

**forthe transition period from                    to               **

** **

**Commissionfile number   001-14431**

** **

**AmericanStates Water Company**

(Exact Name of Registrant as Specified in ItsCharter)

 

| **California**                                                 | ** ** | **95-4676679**                    |
|----------------------------------------------------------------|------------|-----------------------------------|
| (State or Other Jurisdiction of Incorporation or Organization) |       | (IRS Employer Identification No.) |
| ** **                                                     | ** ** | ** **                        |
| **630 E. Foothill Blvd, San Dimas, CA**                        | ** ** | **91773-1212**                    |
| (Address of Principal Executive Offices)                       |       | (Zip Code)                        |

** **

**(909) 394-3600**

(Registrant’s TelephoneNumber, Including Area Code)

** **

**Not Applicable**

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

 

**Commission file number   001-12008**

 

**GoldenState Water Company**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

** **

**(909) 394-3600**

(Registrant’sTelephone Number, Including Area Code)

** **

**Not Applicable**

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

 

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

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

 

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

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

 

Indicate by check mark whether the Registrant isa large accelerated filer, an accelerated filer, a non-accelerated filer, or asmaller reporting company. See definition of “large accelerated filer”, “acceleratedfiler” and smaller reporting company” in Rule 12b-2 of the Exchange Act.(Check one):

 

**American States Water Company**

 
| Large accelerated filer o |   | Accelerated filer x |   | Non-accelerated filer o |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

**Golden State Water Company**

 
| Large accelerated filer o |   | Accelerated filer o |   | Non-accelerated filer x |   | Smaller reporting company o |
|---------------------------|--------|---------------------|--------|-------------------------|--------|-----------------------------|

 

Indicateby check mark whether the Registrant is a shell company (as defined in Rule 12b-2of the Exchange Act)

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

 

Asof August 5, 2009, the number of Common Shares outstanding, of AmericanStates Water Company was 18,499,423 shares. As of August 5, 2009, all ofthe 134 outstanding Common Shares of Golden State Water Company were owned byAmerican States Water Company.

 

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

 

 

 

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**AMERICAN STATES WATER COMPANY**

**and**

**GOLDEN STATE WATER COMPANY**

**FORM 10-Q**

 

### **INDEX**

 
| **Part I**  | **Financial  Information**                                                                                                         |   |
|------------------|------------------------------------------------------------------------------------------------------------------------------------|--------|
|             |                                                                                                                               |   |
| Item 1:          | Financial  Statements                                                                                                              | 1      |
|             |                                                                                                                               |   |
|             | Consolidated Balance Sheets of American States Water  Company as of June 30, 2009 and December 31, 2008                  | 2      |
|             |                                                                                                                               |   |
|             | Consolidated Statements of Income of American States  Water Company for the Three Months Ended   June 30, 2009 and 2008  | 4      |
|             |                                                                                                                               |   |
|             | Consolidated Statements of Income of American States  Water Company for the Six Months Ended   June 30, 2009 and 2008    | 5      |
|             |                                                                                                                               |   |
|             | Consolidated Statements of Cash Flow of American  States Water Company for the Six Months Ended   June 30, 2009 and 2008 | 6      |
|             |                                                                                                                               |   |
|             | Balance Sheets of Golden State Water Company as  of  June 30, 2009 and December 31,  2008                           | 7      |
|             |                                                                                                                               |   |
|             | Statements of Income of Golden State Water Company for  the Three Months Ended June 30, 2009 and 2008                         | 9      |
|             |                                                                                                                               |   |
|             | Statements of Income of Golden State Water Company for  the Six Months Ended June 30, 2009 and 2008                           | 10     |
|             |                                                                                                                               |   |
|             | Statements  of Cash Flow of Golden State Water Company for the Six Months Ended June 30,  2009 and 2008                       | 11     |
|             |                                                                                                                               |   |
|             | Notes to Consolidated Financial Statements                                                                                         | 12     |
|             |                                                                                                                               |   |
| Item 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        | 29     |
|             |                                                                                                                               |   |
| Item 3:          | Quantitative  and Qualitative Disclosures About Market Risk                                                                        | 66     |
|             |                                                                                                                               |   |
| Item 4:          | Controls and  Procedures                                                                                                           | 66     |
|             |                                                                                                                               |   |
| Item 4T:         | Controls and  Procedures                                                                                                           | 66     |
|             |                                                                                                                               |   |
| **Part II** | **Other  Information**                                                                                                             |   |
|             |                                                                                                                               |   |
| Item 1:          | Legal Proceedings                                                                                                                  | 67     |
|             |                                                                                                                               |   |
| Item  1A:        | Risk  Factors                                                                                                                      | 67     |
|             |                                                                                                                               |   |
| Item 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                       | 67     |
|             |                                                                                                                               |   |
| Item 3:          | Defaults  Upon Senior Securities                                                                                                   | 67     |
|             |                                                                                                                               |   |
| Item 4:          | Submission  of Matters to a Vote of Security Holders                                                                               | 67     |
|             |                                                                                                                               |   |
| Item 5:          | Other Information                                                                                                                  | 68     |
|             |                                                                                                                               |   |
| Item  6:         | Exhibits                                                                                                                           | 68     |
|             |                                                                                                                               |   |
|             | Signatures                                                                                                                         | 69     |

 

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#### **PART I**

####  

**Item 1.Financial Statements**

 

General

 

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

 

Certain information andfootnote disclosures normally included in financial statements, prepared inaccordance with accounting principles generally accepted in the United Statesof America, have been condensed or omitted pursuant to such rules andregulations. In the opinion of management, all adjustments consisting of normalrecurring items and estimates necessary for a fair statement of results for theinterim period have been made.

 

It is suggested thatthese financial statements be read in conjunction with the financial statementsand notes thereto in the latest Annual Report on Form 10-K of AmericanStates Water Company and its wholly-owned subsidiary, Golden State WaterCompany.

 

Filing Format

 

American States WaterCompany (hereinafter “AWR”) is the parent company of Golden State Water Company(hereinafter “GSWC”), Chaparral City Water Company (hereinafter “CCWC”) andAmerican States Utility Services, Inc. (hereinafter “ASUS”) and its subsidiaries.

 

This quarterly report on Form 10-Qis a combined report being filed by two separate Registrants: AWR and GSWC. Formore information, please see Note 1 to the Notes to Consolidated FinancialStatements and the heading entitled General in Item 2 - Management’s Discussionand Analysis of Financial Condition and Results of Operations. References inthis report to “Registrant” are to AWR and GSWC collectively, unless otherwisespecified. GSWC makes no representations as to the information contained in thisreport relating to AWR and its subsidiaries, other than GSWC.

 

**Forward-Looking Information**

 

This Form 10-Q contains forward-looking statementsintended to qualify for the “safe harbor” from liability established by thePrivate Securities Litigation Reform Act of 1995.  Forward-looking statements include statementsregarding our goals, beliefs, plans or current expectations, taking intoaccount the information currently available to management.  Forward-looking statements are not statementsof historical facts.  For example, whenwe use words such as “believes,” “anticipates,” “expects, “ “plans”, “estimates,”“intends,” “may” and other words that convey uncertainty of future events oroutcomes, we are making forward-looking statements. Such statements addressfuture events and conditions concerning such matters as our ability to raisecapital, capital expenditures, earnings, litigation, rates, water sales, waterquality and other regulatory matters, adequacy of water supplies, our abilityto recover electric, natural gas and water supply costs from ratepayers,contract operations, liquidity and capital resources, and accounting matters.We caution you that any forward-looking statements made by us are notguarantees of future performance and that actual results may differ materiallyfrom those currently anticipated in such statements, by reason of factors suchas: changes in utility regulation; recovery of regulatory assets not yetincluded in rates; future economic conditions which affect changes in customerdemand and changes in water and energy supply costs; repayment of amounts owedto us; changes in pension and postretirement benefit plan costs; futureclimatic conditions; delays in customer payments or price redeterminations orequitable adjustments on contracts executed by ASUS and its subsidiaries;potential assessments for failure to meet interim targets for the purchase ofrenewable energy; and legislative, legal proceedings, regulatory and othercircumstances affecting anticipated revenues and costs.

 

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**AMERICAN STATES WATER COMPANY**

**CONSOLIDATED BALANCE SHEETS**

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

 
| **(in thousands)**                                                                                        | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Utility Plant**                                                                                              | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Utility  plant, at cost                                                                                        |       | $                       | 1,208,720  |                        | $          | 1,171,284 |   |
| Less  - Accumulated depreciation                                                                               |       | (360,871                | )          | (346,022                    | )          |
| Net  utility plant                                                                                             |       | 847,849                 |       | 825,262                     |       |
|                                                                                                           |       |                    |       |                        |       |
| **Other Property and Investments**                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Goodwill                                                                                                       |       | 4,610                   |       | 4,610                       |       |
| Other  property and investments                                                                                |       | 11,484                  |       | 10,689                      |       |
| Total  other property and investments                                                                          |       | 16,094                  |       | 15,299                      |       |
|                                                                                                           |       |                    |       |                        |       |
| **Current Assets**                                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash  and cash equivalents                                                                                     |       | 9,754                   |       | 7,283                       |       |
| Accounts  receivable — customers (less allowance for doubtful accounts of $642 in 2009  and $656 in 2008) |       | 15,906                  |       | 14,315                      |       |
| Unbilled  revenue                                                                                              |       | 24,904                  |       | 17,958                      |       |
| Receivable  from the U.S. government (less allowance for doubtful accounts of $67 in 2009  and $121 in 2008)   |       | 6,470                   |       | 8,094                       |       |
| Other  accounts receivable (less allowance for doubtful accounts of $456 in 2009 and  $474 in 2008)            |       | 4,290                   |       | 6,341                       |       |
| Income  taxes receivable                                                                                       |       | 115                     |       | 1,526                       |       |
| Materials  and supplies, at average cost                                                                       |       | 1,772                   |       | 2,109                       |       |
| Regulatory  assets — current                                                                              |       | 15,062                  |       | 16,071                      |       |
| Prepayments  and other current assets                                                                          |       | 2,236                   |       | 2,950                       |       |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                                   |       | 14,336                  |       | 11,836                      |       |
| Deferred  income taxes — current                                                                          |       | 2,571                   |       | 2,131                       |       |
| Total  current assets                                                                                          |       | 97,416                  |       | 90,614                      |       |
|                                                                                                           |       |                    |       |                        |       |
| **Regulatory and Other Assets**                                                                                | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                             |       | 113,717                 |       | 104,521                     |       |
| Other  accounts receivable                                                                                     |       | 8,369                   |       | 8,167                       |       |
| Costs  and estimated earnings in excess of billings on uncompleted contracts                                   |       | 7,054                   |       | 6,897                       |       |
| Deferred  income taxes                                                                                         |       | 307                     |       | 254                         |       |
| Other                                                                                                          |       | 10,273                  |       | 10,273                      |       |
| Total  regulatory and other assets                                                                             |       | 139,720                 |       | 130,112                     |       |
|                                                                                                           |       |                    |       |                        |       |
| **Total Assets**                                                                                               |       | $                       | 1,101,079  |                        | $          | 1,061,287 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICAN STATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**CAPITALIZATION AND LIABILITIES****(Unaudited)**

 
| **(in thousands)**                                                      | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Capitalization**                                                           | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Common  shares, no par value, no stated value                                |       | $                       | 221,242    |                        | $          | 185,499 |   |
| Earnings  reinvested in the business                                         |       | 132,737                 |       | 125,004                     |       |
| Total  common shareholders’ equity                                      |       | 353,979                 |       | 310,503                     |       |
| Long-term  debt                                                              |       | 306,346                 |       | 266,536                     |       |
| Total  capitalization                                                        |       | 660,325                 |       | 577,039                     |       |
|                                                                         |       |                    |       |                        |       |
| **Current Liabilities**                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Notes  payable to banks                                                      |       | 10,850                  |       | 74,700                      |       |
| Long-term  debt — current                                               |       | 644                     |       | 636                         |       |
| Accounts  payable                                                            |       | 39,622                  |       | 36,582                      |       |
| Income  taxes payable                                                        |       | 598                     |       | 974                         |       |
| Accrued  employee expenses                                                   |       | 7,346                   |       | 5,625                       |       |
| Accrued  interest                                                            |       | 3,224                   |       | 2,463                       |       |
| Unrealized  loss on purchased power contracts                                |       | 8,547                   |       | —                      |       |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |       | 4,420                   |       | 2,094                       |       |
| Other                                                                        |       | 13,612                  |       | 14,323                      |       |
| Total  current liabilities                                                   |       | 88,863                  |       | 137,397                     |       |
|                                                                         |       |                    |       |                        |       |
| **Other Credits**                                                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Advances  for construction                                                   |       | 85,611                  |       | 86,816                      |       |
| Contributions  in aid of construction — net                             |       | 102,912                 |       | 101,593                     |       |
| Deferred  income taxes                                                       |       | 86,673                  |       | 84,750                      |       |
| Unamortized  investment tax credits                                          |       | 2,200                   |       | 2,245                       |       |
| Accrued  pension and other postretirement benefits                           |       | 54,890                  |       | 52,235                      |       |
| Regulatory  liabilities                                                      |       | 423                     |       | 425                         |       |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |       | 10,299                  |       | 9,866                       |       |
| Other                                                                        |       | 8,883                   |       | 8,921                       |       |
| Total  other credits                                                         |       | 351,891                 |       | 346,851                     |       |
|                                                                         |       |                    |       |                        |       |
| **Commitments and Contingencies (Note 8)**                                   |       | —                  |       | —                      |       |
|                                                                         |       |                    |       |                        |       |
| **Total Capitalization and Liabilities**                                     |       | $                       | 1,101,079  |                        | $          | 1,061,287 |   |

 

*The accompanying notes are an integral part of these consolidatedfinancial statements*

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THETHREE MONTHSENDED JUNE 30, 2009 AND 2008(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                        | ** ** | **2008** | ** ** |
| **Operating Revenues**                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                               | 74,157     |   | $ | 65,370 |   |
| Electric                                                              |       | 5,888                                           |       | 6,208 |   |
| Contracted  services                                                  |       | 13,508                                          |       | 8,735 |   |
| Total  operating revenues                                             |       | 93,553                                          |       | 80,313 |   |
|                                                                  |       |                                            |       |   |   |
| **Operating Expenses**                                                | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Water  purchased                                                      |       | 12,257                                          |       | 13,079 |   |
| Power  purchased for pumping                                          |       | 2,688                                           |       | 2,655 |   |
| Groundwater  production assessment                                    |       | 2,857                                           |       | 2,890 |   |
| Power  purchased for resale                                           |       | 2,403                                           |       | 2,595 |   |
| Unrealized  gain on purchased power contracts                         |       | —                                          |       | (1,664 | ) |
| Supply  cost balancing accounts                                       |       | 3,332                                           |       | (672 | ) |
| Other  operating expenses                                             |       | 7,165                                           |       | 7,053 |   |
| Administrative  and general expenses                                  |       | 15,522                                          |       | 14,943 |   |
| Depreciation  and amortization                                        |       | 8,387                                           |       | 7,810 |   |
| Maintenance                                                           |       | 3,887                                           |       | 4,770 |   |
| Property  and other taxes                                             |       | 2,712                                           |       | 2,839 |   |
| Construction  expenses                                                |       | 7,829                                           |       | 4,434 |   |
| Total  operating expenses                                             |       | 69,039                                          |       | 60,732 |   |
|                                                                  |       |                                            |       |   |   |
| **Operating Income**                                                  |       | 24,514                                          |       | 19,581 |   |
|                                                                  |       |                                            |       |   |   |
| **Other Income and Expenses**                                         | ** ** | ** **                                      | ** ** | ** ** | ** ** |
| Interest  expense                                                     |       | (5,659                                          | )          | (5,294 | ) |
| Interest  income                                                      |       | 296                                             |       | 775 |   |
| Other                                                                 |       | 82                                              |       | 7 |   |
| Total  other income and expenses                                      |       | (5,281                                          | )          | (4,512 | ) |
|                                                                  |       |                                            |       |   |   |
| **Income from operations before income tax expense**                  |       | 19,233                                          |       | 15,069 |   |
|                                                                  |       |                                            |       |   |   |
| Income  tax expense                                                   |       | 7,734                                           |       | 5,786 |   |
|                                                                  |       |                                            |       |   |   |
| **Net Income**                                                        |       | $                                               | 11,499     |   | $ | 9,283 |   |
|                                                                  |       |                                            |       |   |   |
| **Weighted Average Number of Shares Outstanding**                     |       | 17,861                                          |       | 17,248 |   |
| **Basic Earnings Per Common Share**                                   |       | $                                               | 0.64       |   | $ | 0.54 |   |
|                                                                  |       |                                            |       |   |   |
| **Weighted Average Number of Diluted Shares**                         |       | 17,987                                          |       | 17,325 |   |
| **Fully Diluted Earnings Per Share**                                  |       | $                                               | 0.64       |   | $ | 0.53 |   |
| ** **                                                            |       |                                            |       |   |   |
| **Dividends Declared Per Common Share**                               |       | $                                               | 0.25       |   | $ | 0.25 |   |

 

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

 

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**AMERICAN STATES WATER COMPANY**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE SIX MONTHS****ENDED JUNE 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                            | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Operating Revenues**                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                             | 130,951    |   | $ | 117,459 |   |
| Electric                                                              |       | 14,520                                        |       | 15,011 |   |
| Contracted  services                                                  |       | 27,691                                        |       | 16,785 |   |
| Total  operating revenues                                             |       | 173,162                                       |       | 149,255 |   |
|                                                                  |       |                                          |       |   |   |
| **Operating Expenses**                                                | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water  purchased                                                      |       | 20,471                                        |       | 21,032 |   |
| Power  purchased for pumping                                          |       | 4,376                                         |       | 4,335 |   |
| Groundwater  production assessment                                    |       | 5,374                                         |       | 5,265 |   |
| Power  purchased for resale                                           |       | 6,365                                         |       | 6,834 |   |
| Unrealized  gain on purchased power contracts                         |       | —                                        |       | (4,507 | ) |
| Supply  cost balancing accounts                                       |       | 6,860                                         |       | (779 | ) |
| Other  operating expenses                                             |       | 14,318                                        |       | 15,049 |   |
| Administrative  and general expenses                                  |       | 32,387                                        |       | 29,770 |   |
| Depreciation  and amortization                                        |       | 16,748                                        |       | 15,603 |   |
| Maintenance                                                           |       | 7,960                                         |       | 8,542 |   |
| Property  and other taxes                                             |       | 6,112                                         |       | 5,759 |   |
| Construction  expenses                                                |       | 16,274                                        |       | 8,309 |   |
| Net  gain on sale of property                                         |       | (15                                           | )          | — |   |
| Total  operating expenses                                             |       | 137,230                                       |       | 115,212 |   |
|                                                                  |       |                                          |       |   |   |
| **Operating Income**                                                  |       | 35,932                                        |       | 34,043 |   |
|                                                                  |       |                                          |       |   |   |
| **Other Income and Expenses**                                         | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Interest  expense                                                     |       | (10,953                                       | )          | (10,672 | ) |
| Interest  income                                                      |       | 498                                           |       | 1,136 |   |
| Other                                                                 |       | 52                                            |       | 121 |   |
| Total  other income and expenses                                      |       | (10,403                                       | )          | (9,415 | ) |
|                                                                  |       |                                          |       |   |   |
| **Income from operations before income tax expense**                  |       | 25,529                                        |       | 24,628 |   |
|                                                                  |       |                                          |       |   |   |
| Income  tax expense                                                   |       | 9,098                                         |       | 10,041 |   |
|                                                                  |       |                                          |       |   |   |
| **Net Income**                                                        |       | $                                             | 16,431     |   | $ | 14,587 |   |
|                                                                  |       |                                          |       |   |   |
| **Weighted Average Number of Shares Outstanding**                     |       | 17,588                                        |       | 17,243 |   |
| **Basic Earnings Per Common Share**                                   |       | $                                             | 0.93       |   | $ | 0.84 |   |
|                                                                  |       |                                          |       |   |   |
| **Weighted Average Number of Diluted Shares**                         |       | 17,718                                        |       | 17,362 |   |
| **Fully Diluted Earnings Per Share**                                  |       | $                                             | 0.92       |   | $ | 0.84 |   |
|                                                                  |       |                                          |       |   |   |
| **Dividends Declared Per Common Share**                               |       | $                                             | 0.50       |   | $ | 0.50 |   |

 

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

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THESIX MONTHS ENDED JUNE 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                                   | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                                      | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net  income                                                                  |       | $                                             | 16,431     |   | $ | 14,587 |   |
| Adjustments  for non-cash items:                                             |       |                                          |       |   |   |
| Depreciation  and amortization                                               |       | 16,748                                        |       | 15,603 |   |
| Provision  for doubtful accounts                                             |       | 530                                           |       | 406 |   |
| Deferred  income taxes and investment tax credits                            |       | 1,108                                         |       | 4,415 |   |
| Unrealized  gain on purchased power contracts                                |       | —                                        |       | (4,507 | ) |
| Stock-based  compensation expense                                            |       | 825                                           |       | 618 |   |
| Other  — net                                                            |       | 771                                           |       | 279 |   |
| Changes  in assets and liabilities:                                          |       |                                          |       |   |   |
| Accounts  receivable — customers                                        |       | (2,121                                        | )          | (1,854 | ) |
| Unbilled  revenue                                                            |       | (6,946                                        | )          | (5,646 | ) |
| Other  accounts receivable                                                   |       | 1,849                                         |       | 354 |   |
| Receivable  from the U.S. government                                         |       | 1,624                                         |       | 2,526 |   |
| Materials  and supplies                                                      |       | 337                                           |       | (107 | ) |
| Prepayments  and other current assets                                        |       | 714                                           |       | 723 |   |
| Regulatory  assets — supply cost balancing accounts                     |       | 6,860                                         |       | (779 | ) |
| Costs  and estimated earnings in excess of billings on uncompleted contracts |       | (2,657                                        | )          | (6,081 | ) |
| Other  assets                                                                |       | (6,950                                        | )          | (1,790 | ) |
| Accounts  payable                                                            |       | 1,271                                         |       | 5,102 |   |
| Income  taxes receivable/payable                                             |       | 1,035                                         |       | (1,876 | ) |
| Billings  in excess of costs and estimated earnings on uncompleted contracts |       | 2,759                                         |       | 2,899 |   |
| Accrued  pension and other postretirement benefits                           |       | 2,655                                         |       | 2,629 |   |
| Other  liabilities                                                           |       | 2,286                                         |       | 153 |   |
| Net  cash provided                                                           |       | 39,129                                        |       | 27,654 |   |
|                                                                         |       |                                          |       |   |   |
| **Cash Flows From Investing Activities:**                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Construction  expenditures                                                   |       | (36,940                                       | )          | (38,822 | ) |
| Business  acquisition                                                        |       | —                                        |       | (2,298 | ) |
| Net  cash used                                                               |       | (36,940                                       | )          | (41,120 | ) |
|                                                                         |       |                                          |       |   |   |
| **Cash Flows From Financing Activities:**                                    | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Proceeds  from issuance of Common Shares, net of issuance costs              |       | 34,887                                        |       | 424 |   |
| Proceeds  from stock option exercises                                        |       | 10                                            |       | 53 |   |
| Receipt  of advances for and contributions in aid of construction            |       | 852                                           |       | 3,776 |   |
| Refunds  on advances for construction                                        |       | (2,389                                        | )          | (2,709 | ) |
| Repayments  of long-term debt                                                |       | (181                                          | )          | (198 | ) |
| Proceeds  from issuance of long-term debt, net of issuance costs             |       | 39,777                                        |       | — |   |
| Net  change in notes payable to banks                                        |       | (63,850                                       | )          | 19,550 |   |
| Dividends  paid                                                              |       | (8,660                                        | )          | (8,621 | ) |
| Other  — net                                                            |       | (164                                          | )          | (136 | ) |
| Net  cash provided                                                           |       | 282                                           |       | 12,139 |   |
| **Net increase (decrease) in cash and cash  equivalents**                    |       | 2,471                                         |       | (1,327 | ) |
| **Cash and cash equivalents, beginning of period**                           |       | 7,283                                         |       | 1,698 |   |
| **Cash and cash equivalents, end of period**                                 |       | $                                             | 9,754      |   | $ | 371 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY**

**BALANCE SHEETS**

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

 
| **(in thousands)**                                                                                 | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Utility Plant**                                                                                       | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Utility  plant, at cost                                                                                 |       | $                       | 1,140,427  |                        | $          | 1,103,932 |   |
| Less  - Accumulated depreciation                                                                        |       | (339,428                | )          | (326,089                    | )          |
| Net  utility plant                                                                                      |       | 800,999                 |       | 777,843                     |       |
|                                                                                                    |       |                    |       |                        |       |
| **Other Property and Investments**                                                                      |       | 8,508                   |       | 7,719                       |       |
|                                                                                                    |       |                    |       |                        |       |
| **Current Assets**                                                                                      | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Cash  and cash equivalents                                                                              |       | 3,888                   |       | 3,812                       |       |
| Accounts  receivable-customers (less allowance for doubtful accounts of $610 in 2009  and $632 in 2008) |       | 15,528                  |       | 13,969                      |       |
| Unbilled  revenue                                                                                       |       | 24,517                  |       | 17,641                      |       |
| Inter-company  receivable                                                                               |       | 360                     |       | 309                         |       |
| Other  accounts receivable (less allowance for doubtful accounts of $443 in 2009 and  2008)             |       | 4,161                   |       | 4,348                       |       |
| Materials  and supplies, at average cost                                                                |       | 1,656                   |       | 1,543                       |       |
| Regulatory  assets — current                                                                       |       | 15,044                  |       | 16,018                      |       |
| Prepayments  and other current assets                                                                   |       | 1,986                   |       | 2,714                       |       |
| Deferred  income taxes — current                                                                   |       | 2,690                   |       | 2,144                       |       |
| Total  current assets                                                                                   |       | 69,830                  |       | 62,498                      |       |
|                                                                                                    |       |                    |       |                        |       |
| **Regulatory and Other Assets**                                                                         | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                      |       | 113,717                 |       | 104,521                     |       |
| Other  accounts receivable                                                                              |       | 8,369                   |       | 8,167                       |       |
| Other                                                                                                   |       | 9,534                   |       | 9,402                       |       |
| Total  regulatory and other assets                                                                      |       | 131,620                 |       | 122,090                     |       |
|                                                                                                    |       |                    |       |                        |       |
| **Total Assets**                                                                                        |       | $                       | 1,010,957  |                        | $          | 970,150 |   |

 

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

 

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**GOLDEN STATE WATER COMPANYBALANCE SHEETSCAPITALIZATION AND LIABILITIES(Unaudited)**

 
| **(in thousands)**                            | ** ** | **June 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **Capitalization**                                 | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Common  shares, no par value, no stated value      |       | $                       | 195,394    |                        | $          | 194,728 |   |
| Earnings  reinvested in the business               |       | 124,976                 |       | 129,805                     |       |
| Total  common shareholder’s equity            |       | 320,370                 |       | 324,533                     |       |
| Long-term  debt                                    |       | 300,371                 |       | 260,561                     |       |
| Total  capitalization                              |       | 620,741                 |       | 585,094                     |       |
|                                               |       |                    |       |                        |       |
| **Current Liabilities**                            | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Long-term  debt — current                     |       | 334                     |       | 326                         |       |
| Accounts  payable                                  |       | 30,845                  |       | 25,897                      |       |
| Inter-company  payable                             |       | 1,900                   |       | 18,392                      |       |
| Income  taxes payable to Parent                    |       | 4,142                   |       | 2,794                       |       |
| Accrued  employee expenses                         |       | 6,443                   |       | 4,940                       |       |
| Accrued  interest                                  |       | 3,190                   |       | 2,391                       |       |
| Deferred  income taxes — current              |       | 3                       |       | 39                          |       |
| Unrealized  loss on purchased power contracts      |       | 8,547                   |       | —                      |       |
| Other                                              |       | 12,791                  |       | 13,245                      |       |
| Total  current liabilities                         |       | 68,195                  |       | 68,024                      |       |
|                                               |       |                    |       |                        |       |
| **Other Credits**                                  | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Advances  for construction                         |       | 79,385                  |       | 80,977                      |       |
| Contributions  in aid of construction - net        |       | 91,132                  |       | 89,519                      |       |
| Deferred  income taxes                             |       | 86,176                  |       | 83,765                      |       |
| Unamortized  investment tax credits                |       | 2,200                   |       | 2,245                       |       |
| Accrued  pension and other postretirement benefits |       | 54,890                  |       | 52,235                      |       |
| Other                                              |       | 8,238                   |       | 8,291                       |       |
| Total  other credits                               |       | 322,021                 |       | 317,032                     |       |
|                                               |       |                    |       |                        |       |
| **Commitments and Contingencies (Note 8)**         |       | —                  |       | —                      |       |
|                                               |       |                    |       |                        |       |
| **Total Capitalization and Liabilities**           |       | $                       | 1,010,957  |                        | $          | 970,150 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY**

**STATEMENTS OF INCOME**

**FOR THE THREE MONTHS****ENDED JUNE 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended  June 30, 2009** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands)**                              | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Operating Revenues**                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Water                                                |       | $                                                    | 72,295     |   | $ | 63,413 |   |
| Electric                                             |       | 5,888                                                |       | 6,208 |   |
| Total  operating revenues                            |       | 78,183                                               |       | 69,621 |   |
|                                                 |       |                                                 |       |   |   |
| **Operating Expenses**                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Water  purchased                                     |       | 11,955                                               |       | 12,896 |   |
| Power  purchased for pumping                         |       | 2,535                                                |       | 2,497 |   |
| Groundwater  production assessment                   |       | 2,857                                                |       | 2,890 |   |
| Power  purchased for resale                          |       | 2,403                                                |       | 2,595 |   |
| Unrealized  gain on purchased power contracts        |       | —                                               |       | (1,664 | ) |
| Supply  cost balancing accounts                      |       | 3,332                                                |       | (672 | ) |
| Other  operating expenses                            |       | 6,215                                                |       | 5,628 |   |
| Administrative  and general expenses                 |       | 12,289                                               |       | 11,934 |   |
| Depreciation  and amortization                       |       | 7,721                                                |       | 7,252 |   |
| Maintenance                                          |       | 2,996                                                |       | 3,795 |   |
| Property  and other taxes                            |       | 2,357                                                |       | 2,648 |   |
| Total  operating expenses                            |       | 54,660                                               |       | 49,799 |   |
|                                                 |       |                                                 |       |   |   |
| **Operating Income**                                 |       | 23,523                                               |       | 19,822 |   |
|                                                 |       |                                                 |       |   |   |
| **Other Income and Expenses**                        |       |                                                 |       |   |   |
| Interest  expense                                    |       | (5,423                                               | )          | (4,965 | ) |
| Interest  income                                     |       | 296                                                  |       | 729 |   |
| Other                                                |       | 63                                                   |       | 5 |   |
| Total  other income and expenses                     |       | (5,064                                               | )          | (4,231 | ) |
|                                                 |       |                                                 |       |   |   |
| **Income from operations before income tax expense** |       | 18,459                                               |       | 15,591 |   |
|                                                 |       |                                                 |       |   |   |
| Income  tax expense                                  |       | 7,545                                                |       | 5,985 |   |
|                                                 |       |                                                 |       |   |   |
| **Net Income**                                       |       | $                                                    | 10,914     |   | $ | 9,606 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY**

**STATEMENTS OF INCOME**

**FOR THE SIX MONTHS**

**ENDED JUNE 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                              | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Operating Revenues**                               | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water                                                |       | $                                             | 127,473    |   | $ | 113,919 |   |
| Electric                                             |       | 14,520                                        |       | 15,011 |   |
| Total  operating revenues                            |       | 141,993                                       |       | 128,930 |   |
|                                                 |       |                                          |       |   |   |
| **Operating Expenses**                               | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Water  purchased                                     |       | 19,942                                        |       | 20,683 |   |
| Power  purchased for pumping                         |       | 4,102                                         |       | 4,072 |   |
| Groundwater  production assessment                   |       | 5,374                                         |       | 5,265 |   |
| Power  purchased for resale                          |       | 6,365                                         |       | 6,834 |   |
| Unrealized  gain on purchased power contracts        |       | —                                        |       | (4,507 | ) |
| Supply  cost balancing accounts                      |       | 6,860                                         |       | (779 | ) |
| Other  operating expenses                            |       | 12,284                                        |       | 11,744 |   |
| Administrative  and general expenses                 |       | 26,098                                        |       | 23,601 |   |
| Depreciation  and amortization                       |       | 15,434                                        |       | 14,494 |   |
| Maintenance                                          |       | 6,037                                         |       | 7,119 |   |
| Property  and other taxes                            |       | 5,366                                         |       | 5,409 |   |
| Net  gain on sale of property                        |       | (15                                           | )          | — |   |
| Total  operating expenses                            |       | 107,847                                       |       | 93,935 |   |
|                                                 |       |                                          |       |   |   |
| **Operating Income**                                 |       | 34,146                                        |       | 34,995 |   |
|                                                 |       |                                          |       |   |   |
| **Other Income and Expenses**                        |       |                                          |       |   |   |
| Interest  expense                                    |       | (10,419                                       | )          | (10,017 | ) |
| Interest  income                                     |       | 495                                           |       | 1,086 |   |
| Other                                                |       | 41                                            |       | 91 |   |
| Total  other income and expenses                     |       | (9,883                                        | )          | (8,840 | ) |
|                                                 |       |                                          |       |   |   |
| **Income from operations before income tax expense** |       | 24,263                                        |       | 26,155 |   |
|                                                 |       |                                          |       |   |   |
| Income  tax expense                                  |       | 9,656                                         |       | 10,631 |   |
|                                                 |       |                                          |       |   |   |
| **Net Income**                                       |       | $                                             | 14,607     |   | $ | 15,524 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY**

**STATEMENTS OF CASH FLOW**

**FOR THESIX MONTHS ENDED JUNE 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                           | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2009**                                      | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Net  income                                                          |       | $                                             | 14,607     |   | $ | 15,524 |   |
| Adjustments  for non-cash items:                                     |       |                                          |       |   |   |
| Depreciation  and amortization                                       |       | 15,434                                        |       | 14,494 |   |
| Provision  for doubtful accounts                                     |       | 507                                           |       | 367 |   |
| Deferred  income taxes and investment tax credits                    |       | 1,509                                         |       | 4,395 |   |
| Unrealized  gain on purchased power contracts                        |       | —                                        |       | (4,507 | ) |
| Stock-based  compensation expense                                    |       | 621                                           |       | 515 |   |
| Other  — net                                                    |       | 502                                           |       | 175 |   |
| Changes  in assets and liabilities:                                  |       |                                          |       |   |   |
| Accounts  receivable — customers                                |       | (2,066                                        | )          | (1,809 | ) |
| Unbilled  revenue                                                    |       | (6,876                                        | )          | (5,562 | ) |
| Other  accounts receivable                                           |       | (15                                           | )          | (200 | ) |
| Materials  and supplies                                              |       | (113                                          | )          | (35 | ) |
| Prepayments  and other current assets                                |       | 728                                           |       | 791 |   |
| Regulatory  assets — supply cost balancing accounts             |       | 6,860                                         |       | (779 | ) |
| Other  assets                                                        |       | (6,981                                        | )          | (1,642 | ) |
| Accounts  payable                                                    |       | 2,976                                         |       | 6,093 |   |
| Inter-company  receivable/payable                                    |       | (343                                          | )          | 115 |   |
| Income  taxes receivable/payable from/to Parent                      |       | 1,348                                         |       | (1,280 | ) |
| Accrued  pension and other postretirement benefits                   |       | 2,655                                         |       | 2,629 |   |
| Other  liabilities                                                   |       | 2,346                                         |       | 90 |   |
| Net  cash provided                                                   |       | 33,699                                        |       | 29,374 |   |
|                                                                 |       |                                          |       |   |   |
| **Cash Flows From Investing Activities:**                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Construction  expenditures                                           |       | (35,966                                       | )          | (36,004 | ) |
| Net  cash used                                                       |       | (35,966                                       | )          | (36,004 | ) |
|                                                                 |       |                                          |       |   |   |
| **Cash Flows From Financing Activities:**                            | ** ** | ** **                                    | ** ** | ** ** | ** ** |
| Receipt  of advances for and contributions in aid of construction    |       | 852                                           |       | 3,585 |   |
| Refunds  on advances for construction                                |       | (2,369                                        | )          | (2,614 | ) |
| Proceeds  from the issuance of long-term debt, net of issuance costs |       | 39,777                                        |       | — |   |
| Repayments  of long-term debt                                        |       | (182                                          | )          | (198 | ) |
| Net  change in inter-company borrowings                              |       | (16,200                                       | )          | 9,360 |   |
| Dividends  paid                                                      |       | (19,400                                       | )          | (4,400 | ) |
| Other  — net                                                    |       | (135                                          | )          | (127 | ) |
| Net  cash provided                                                   |       | 2,343                                         |       | 5,606 |   |
|                                                                 |       |                                          |       |   |   |
| **Net increase (decrease) in cash and cash  equivalents**            |       | 76                                            |       | (1,024 | ) |
| **Cash and cash equivalents, beginning of period**                   |       | 3,812                                         |       | 1,389 |   |
| **Cash and cash equivalents, end of period**                         |       | $                                             | 3,888      |   | $ | 365 |   |

 

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

 

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**AMERICAN STATES WATER COMPANY****AND****GOLDEN STATE WATER COMPANY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 — Summary of SignificantAccounting Policies:**

 

General / Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), Chaparral City Water Company (“CCWC”) and American States Utility Services, Inc. (“ASUS”) and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”).

 

GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 255,000 water customers. GSWC also distributes electricity in several San Bernardino Mountain communities serving approximately 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’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”) serving over 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona.  ASUS performs water and wastewater related services and operations on a contract basis. Through its wholly-owned subsidiaries, ASUS has agreements with the U.S. government to operate and maintain the water and/or wastewater systems at various military bases pursuant to 50-year fixed price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of either the contracted services provided by ASUS and its wholly owned subsidiaries or AWR.  AWR’s assets, revenues and operations are primarily those of GSWC.

 

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. Investments in partially-owned affiliates are accounted for by the equity method when Registrant’s ownership interest exceeds 20%. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with Registrant’s consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2008 filed with the SEC.

 

GSWC’s RelatedParty Transactions:GSWC and other subsidiaries provide and receive various services to and fromtheir parent, AWR, and among themselves. In addition, AWR has a $115 millionsyndicated credit facility. AWR borrows under this facility and provides fundsto its subsidiaries, including GSWC, in support of their operations. Amountsowed to AWR for borrowings under this facility are included in inter-companypayables on GSWC’s balance sheets as of June 30, 2009 and December 31,2008. The interest rate charged to GSWC and other affiliates is sufficient tocover AWR’s interest cost under the credit facility. GSWC also allocatescertain corporate office administrative and general costs to its affiliatesusing allocation factors agreed upon by the CPUC.

 

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

 

Sales and UseTaxes:  GSWC bills certain sales and use taxes leviedby state or local governments to its customers. Included in these sales and usetaxes are franchise fees, which GSWC pays to various municipalities (based onordinances adopted by these municipalities) in order to use public right of wayfor utility purposes. GSWC bills these franchise fees to its customers based ona CPUC-authorized rate. These franchise fees, which are required to be paidregardless of GSWC’s ability to collect from the customer, are accounted for ona gross basis. GSWC’s franchise fees billed to customers and recorded asoperating revenue were approximately $708,000 and $635,000 for the three monthsended June 30, 2009 and 2008, respectively, and $1,334,000 and $1,333,000for the six months ended June 30, 2009 and 2008, respectively. When GSWCacts as an agent, and the tax is not required to be remitted if it is notcollected from the customer, the taxes are accounted for on a net basis.

 

Depending on the state inwhich the operations are conducted, ASUS and its subsidiaries are also subjectto certain state non-income tax assessments generally computed on a “grossreceipts” or “gross revenues” basis. These non-income tax assessments are required to be paid regardless ofwhether the subsidiary is reimbursed by the U.S. government for theseassessments under its 50-year contracts with the U.S. government.  The non-income tax assessments are accountedfor on a gross basis and totaled $159,000 during the three months ended June 30,2009 and $329,000 for the six months ended June 30, 2009.

 

New Accounting Pronouncements:   In December 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 141(R) (revised 2007), “*Business Combinations”* which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations that Registrant may engage in subsequent to that date will be recorded and disclosed under the new standard.

 

In December 2007,the FASB also issued SFAS No. 160, “*NoncontrollingInterests in Consolidated Financial Statements—an amendment of ARB No. 51*”.The objective of SFAS No. 160 is to improve the relevance, comparability,and transparency of the financial information that a reporting entity providesin its consolidated financial statements by establishing accounting andreporting standards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary. SFAS No. 160 is effective for financial statements issued forfiscal years beginning after December 15, 2008.  The adoption of SFAS No. 160 didnot have any impact on Registrant’s consolidated financial position, results ofoperations or cash flows.

 

In March 2008, theFASB issued SFAS No. 161, *“Disclosures aboutDerivative Instruments and Hedging Activities,”*.  SFAS No. 161amends and expands the disclosure requirements of SFAS No. 133, *“Accounting for Derivative Instruments and Hedging Activities.”* SFAS No. 161 requires qualitative disclosures about objectives andstrategies for using derivatives, quantitative disclosures about fair valueamounts of gains and losses on derivative instruments and disclosures aboutcredit-risk-related contingent features in derivative agreements.  Thisstatement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2008.  The adoption of SFAS No. 161did not have any impact on Registrant’s consolidated financial position,results of operations or cash flows.  Theadoption of the standard did result in enhanced qualitative disclosure ofRegistrant’s derivative instrument as discussed in Note 4.

 

In December 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “*Employers’ Disclosures about Postretirement Benefit Plan Assets”*.  FSP No. FAS 132(R)-1 amends SFAS No. 132(R), *Employers’ Disclosures about Pensions and Other Postretirement Benefits”*, to require additional disclosures about plan assets held in an employer’s defined benefit pension or other postretirement plan, and to provide users of financial statements with an understanding of (i) how investment allocation decisions are made, including the factors 

 

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that are pertinent to an understanding of investment policies and strategies, (ii) the major categories of plan assets, (iii) the inputs and valuation techniques used to measure the fair value of plan assets including the level within the fair value hierarchy, using the guidance in SFAS No. 157, *“Fair Value Measurements”*, and (iv) significant concentrations of risk within plan assets. FSP No. FAS 132(R)-1 is effective for financial statements issued for fiscal years ending after December 15, 2009.  Registrant is evaluating the potential impact of FSP No. FAS 132(R)-1.

 

In April 2009, theFASB issued FSP SFAS No. 107-1 and APB No. 28-1, *“InterimDisclosures about Fair Value of Financial Instruments”.*  This position requires disclosures beginningin the second quarter of 2009 about the fair value of all financialinstruments, for which it is practicable to estimate that fair value, forinterim and annual reporting periods. Since FSP SFAS No. 107-1 and APB No. 28-1impacts disclosure only, the adoption of this position will not have an impacton Registrant’s consolidated results of operations, financial position or cashflows.  This enhanced disclosure isprovided in Note 5.

 

In May 2009, theFASB issued SFAS No. 165, “*Subsequent Events*”.  The new standard establishes generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before the financial statements are issued or areavailable to be issued. The statement requires disclosure of the date throughwhich an entity has evaluated subsequent events and the basis for that date,that is, whether that date represents the date the financial statements wereissued or available to be issued. This statement is effective for interim andannual periods ending after June 15, 2009. This statement impacts disclosure only. Registrant has performed an evaluation of subsequent events through August 7,2009, which is the date the financial statements were issued.

 

In June 2009, theFASB issued SFAS No. 166,  “*Accounting for Transfers of Financial Assets*. SFAS No.166 isa revision of SFAS No.140, *“Accounting for Transfersand Servicing of Financial Assets and Extinguishment of Liabilities*”,enhances information reported to users of financial statements by providinggreater transparency about transfers of financial assets and a company’scontinuing involvement in transferred assets. It removes the concept ofqualifying special—purpose entity from US GAAP, changes the requirements forderecognizing financial assets and requires additional disclosures about atransferor’s continuing involvement in transferred financial assets. Thisstatement is effective for financial statements issued for fiscal yearsbeginning after November 15, 2009. Registrant is currently evaluating thepotential impact of SFAS No.166.

 

In June 2009, theFASB issued SFAS No. 167, “*Amendments to FASBInterpretation (FIN) No. 46(R)*”, amending existingconsolidation guidance for variable interest entities. The new standardrequires a company to perform a qualitative analysis when determining whetherit must consolidate a variable interest entity. SFAS 167 also amends certain guidance for determining whether an entityis a variable interest entity. A company must now disclose how its involvementwith a variable interest entity affects the company’s financial statements anddisclose any significant judgments and assumptions made in determining whetherit must consolidate a variable interest entity. This statement is effective forfinancial statements issued for fiscal years beginning after November 15,2009. Registrant is currently evaluating the potential impact of SFAS No.167.

 

In June 2009, theFASB issued SFAS No. 168, “*The FASB AccountingStandards Codification and the Hierarchy of Generally Accepted AccountingPrinciples*”, a replacement of SFAS No. 162, “*The Hierarchy of Generally Accepted Accounting Principles”*.  The FASB Accounting Standards Codificationwill become the source of authoritative GAAP recognized by the FASB to beapplied by nongovernmental entities. Rules and interpretive releases ofthe Securities and Exchange Commission (“SEC”) under authority of federalsecurities laws are also sources of authoritative GAAP for SEC registrants. Onthe effective date of this statement, the Codification will supersede allthen-existing accounting and reporting standards, other than rules andinterpretative releases issued by the SEC. This statement is effective forfinancial statements issued for interim and annual periods ending after September 15,2009.

 

Other accountingstandards that have been issued or proposed by the FASB or otherstandards-setting bodies that do not require adoption until a future date arenot expected to have a material impact on Registrant’s consolidated financialstatements upon adoption.

 

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**Note 2 — Regulatory Matters:**

 

In accordance withaccounting principles for rate-regulated enterprises, Registrant recordsregulatory assets, which represent probable future revenue associated withcertain costs that will be recovered from customers through the ratemaking process,and regulatory liabilities, which represent probable future reductions inrevenue associated with amounts that are to be credited to customers throughthe ratemaking process. At June 30, 2009, Registrant had approximately$23.8 million of regulatory assets not accruing carrying costs. Of this amount,$7.4 million relates to deferred income taxes representing accelerated taxbenefits flowed-through to ratepayers, which will be included in ratesconcurrently with recognition of the associated future tax expense, $8.5million relates to a memorandum account authorized by the CPUC to trackunrealized gains and losses on GSWC’s purchased power contracts, and $3.2million relates to general rate case memorandum accounts to be recovered over12 - 24 months.  The remainder relates toother expenses that do not provide for recovery of carrying costs thatRegistrant expects to recover in rates over a short period.

 

Regulatory assets, lessregulatory liabilities, included in the consolidated balance sheets are asfollows:

 
| **(In thousands)**                                                           | ** ** | **June 30,********2009** | ** ** | **December 31,    2008** | ** ** |
|------------------------------------------------------------------------------|------------|-------------------------------|------------|-------------------------------|------------|
| **GSWC**                                                                     |       |                          |       |                          |       |
| Electric  supply cost balancing account                                      |       | $                             | 14,100     |                          | $          | 16,077 |   |
| Water  supply cost balancing accounts                                        |       | 8,811                         |       | 11,807                        |       |
| Water  revenue adjustment mechanism, net of modified cost balancing accounts |       | 5,591                         |       | 825                           |       |
| Water  conservation memorandum accounts                                      |       | 2,586                         |       | —                        |       |
| Costs  deferred for future recovery on Aerojet case                          |       | 20,183                        |       | 20,613                        |       |
| Pensions  and other postretirement obligations                               |       | 39,546                        |       | 40,939                        |       |
| Flow-through  taxes, net                                                     |       | 7,409                         |       | 7,134                         |       |
| Electric  transmission line abandonment costs                                |       | 2,916                         |       | 3,001                         |       |
| Asset  retirement obligations                                                |       | 3,816                         |       | 3,646                         |       |
| Low  income rate assistance balancing accounts                               |       | 4,362                         |       | 4,758                         |       |
| General  rate case memorandum accounts                                       |       | 3,245                         |       | 4,922                         |       |
| Santa  Maria adjudication memorandum accounts                                |       | 3,984                         |       | 4,011                         |       |
| Derivative  losses (gains) memorandum account                                |       | 8,547                         |       | —                        |       |
| Refund  of water right lease revenues                                        |       | (2,107                        | )          | (2,360                        | )          |
| Other  regulatory assets, net                                                |       | 5,772                         |       | 5,166                         |       |
| Total  GSWC                                                                  |       | $                             | 128,761    |                          | $          | 120,539 |   |
| **CCWC**                                                                     |       |                          |       |                          |       |
| Asset  retirement obligations                                                |       | $                             | 57         |                          | $          | 55 |   |
| Other  regulatory liabilities, net                                           |       | (462                          | )          | (427                          | )          |
| Total  AWR                                                                   |       | $                             | 128,356    |                          | $          | 120,167 |   |

 

Regulatorymatters are discussed in detail in the consolidated financial statements andthe notes thereto included in the Form 10-K for the year ended December 31,2008 filed with the SEC.  The discussionbelow focuses on significant matters and changes since December 31, 2008.

 

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

 

***Electric Supply Cost Balancing Account***—Electric power costs incurred by GSWC’sBear Valley Electric Service (“BVES”) division continue to be charged to itselectric supply cost balancing account. The under-collection in the electricsupply cost balancing account is $14.1 million and $16.1 million at June 30,2009 and December 31, 2008, respectively, a reduction in theunder-collection of $2.0 million during the six months ended June 30,2009.  As of June 30, 2009, theelectric supply cost balancing account consists of under-collections incurredduring the energy crisis in late 2000 and 2001, costs of abandonment of atransmission line upgrade and increases in purchased energy and power systemdelivery costs discussed below.

 

The CPUC has authorizedGSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hourthrough August 2011, to enable GSWC to recover an under-collection ofapproximately $23.1 million at the end of

 

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2001 which had beenincurred during the energy crisis in late 2000 and 2001. GSWC sold 28,828,792and 29,717,109 kilowatt hours of electricity to its BVES customers for thethree months ended June 30, 2009 and 2008, respectively, and sold70,436,119 and 73,414,752 kilowatt hours of electricity to its customers forthe six months ended June 30, 2009 and 2008, respectively.  As a result of the surcharge, the supply costbalancing account was reduced by approximately $641,000 and $667,000 for thethree months ended June 30, 2009 and 2008, respectively, and $1,565,000and $1,641,000 for the six months ended June 30, 2009 and 2008,respectively.  Approximately $21.7 millionof the $23.1 million under-collection incurred during the energy crisis in late2000 and 2001 has been recovered through this surcharge.  Therefore, as of June 30, 2009approximately $1.4 million related to the energy crisis remains to be recoveredthrough this surcharge.  GSWC anticipatesthe surcharge, based on projected electricity sales, to be sufficient for it torecover by August 2011 the amount of the under-collected balance incurredduring the energy crisis. However, in 2011, if GSWC has not fully recovered theamount of this under collection, GSWC will seek additional recovery from theCPUC of any amounts not recovered through this surcharge.

 

Changes in purchasedenergy and power system delivery costs as compared to CPUC authorized rateshave also impacted the electric supply cost balancing account by $9.1 millionas of June 30, 2009. The purchased energy costs that are recorded in thesupply cost balancing account are subject to a price cap by terms of a 2001settlement which was subsequently approved in a CPUC decision. The BVESdivision of GSWC is allowed to include its actual recorded purchased energycosts up to a weighted annual average cost of $77 per megawatt-hour (“MWh”)through August 2011 in its electric supply cost balancing account.  To the extent that the actual weighted averageannual cost for power purchased exceeds the $77 per MWh amount, GSWC will notbe able to include these amounts in its balancing account and such amounts willbe expensed.  There were no amountsexpensed over the $77 per MWh cap during the three months and six months ended June 30,2009 and 2008.

 

Charges to GSWC bySouthern California Edison (“Edison”) associated with the transportation ofenergy over Edison’s power system and the abandonment of a transmission lineupgrade have increased under Edison’s tariff to levels that exceed the amountsauthorized by the CPUC in BVES retail power rates to its customers. Theincremental cost increase to GSWC from the tariff for the abandonment of atransmission line upgrade, which is not currently included in rates, is $38,137per month.  The incremental costs of $3.6million at June 30, 2009 not included in rates have been included in thebalancing account at June 30, 2009 for subsequent recovery from customers,subject to CPUC approval.

 

Power system deliverycosts are not subject to the $77 per MWh price cap referenced above.  Other components, such as interest accrued onthe cumulative under-collected balance and power lost during transmission, alsoaffect the balance of the electric supply cost balancing account.

 

***Water Supply Cost Balancing Accounts—***As permitted by the CPUC, Registrantmaintains water supply cost balancing accounts for GSWC to account forunder-collections and over-collections of revenues designed to recover suchcosts.  The supply cost balancingaccounts track differences between the current cost for supply items (water,power and pump taxes) charged by GSWC’s suppliers and the cost for those itemsincorporated into GSWC’s rates. Under-collections (recorded as regulatoryassets) occur when the current cost exceeds the amount in rates for these itemsand, conversely, over-collections (recorded as regulatory liabilities) occurwhen the current cost of these items is less than the amount in rates.  Typically, under-collections orover-collections, when they occur, are tracked in the supply cost balancingaccounts for future recovery or refund through a surcharge (in the event of anunder-collection) or through a surcredit (in the event of an over-collection)on customers’ bills.  Registrant accruesinterest on its supply cost balancing accounts at the rate prevailing for90-day commercial paper.  Registrant doesnot maintain a supply cost balancing account for CCWC.

 

For the three monthsended June 30, 2009 and 2008, approximately $483,000 and $1.5 million ofunder-collections (including interest), respectively, were recorded in thewater supply cost balancing accounts. For the six months ended June 30, 2009 and 2008, approximately$764,000 and $2.4 million of under-collections (including interest),respectively, were recorded in the water supply cost balancing accounts.Amortization of surcharges that are in rates to recover under-collections fromcustomers and surcredits that are in rates to refund over-collections tocustomers also increased or decreased the water supply cost balancing accounts,as applicable.  During the three monthsended June 30, 2009 and 2008, approximately $2.2 million and $49,000,respectively, of surcharges were billed to customers to decrease previouslyincurred under-collections in the water supply cost balancing accounts.  During the six months ended June 30,2009 approximately $3.8 million of surcharges were billed to customers todecrease previously incurred under-collections in the water supply costbalancing accounts. 

 

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During the six months ended June 30, 2008, approximately $247,000was credited to customers to decrease the previously incurred over-collectionin the supply cost balancing accounts.

 

As of June 30, 2009,there is a net under-collection of approximately $8.8 million in the watersupply cost balancing accounts.  Of thisamount, approximately $5.4 million relates to GSWC’s Region III customerservice area.  In May 2008, the CPUCapproved a surcharge to begin recovering Region III’s under-collection over 24months.  At the end of the 24 months, any remaining balances for RegionIII will be included for recovery in a future filing.  The remaining $3.4 million netunder-collections in the water supply cost balancing accounts relate to GSWC’sRegion I net under-collection of $2.4 million and Region II’s netunder-collection of $1.0 million. Currently, there are surcharges in place in Region I expiring in 2009and 2010 to recover this under-collection. Effective January and February 2009,the CPUC approved surcharges in GSWC’s Regions II and III to recoverunder-collections in supply costs.

 

On August 21, 2008,the CPUC issued a final decision which approved a settlement agreement betweenGSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”) regardingconservation rate design.  As a result ofthis decision, GSWC is permitted to establish a Modified Cost Balancing Account(“MCBA”) that will permit GSWC to recover supply costs related to changes inwater supply mix in addition to rate changes by GSWC’s suppliers. GSWCimplemented this MCBA in November 2008 for Regions II and III.  This account replaces the current watersupply cost balancing account procedure for costs incurred after the modifiedsupply cost balancing account was implemented.

 

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

 

Effective November 25,2008 with the adoption of the WRAM and the MCBA, GSWC began recording thedifference between what is billed to its regulated customers in Regions II andIII and that which is authorized by the CPUC. Under the WRAM, GSWC records theadopted level of volumetric revenues as authorized by the CPUC for meteredaccounts (adopted volumetric revenues). While the WRAM tracks volumetric-based revenues, the revenuerequirements approved by the CPUC include service charges, flat rate charges,and other items that are not subject to the WRAM. The adopted volumetricrevenues considers the seasonality of consumption of water based uponhistorical averages. The variance between adopted volumetric revenues andactual billed volumetric revenues for metered accounts is recorded as acomponent of revenue with an offsetting entry to a regulatory asset orliability balancing account (tracked individually for Region II and III).  The variance amount may be positive (under-collection)or negative (over-collection) and represents amounts that will be billed orrefunded to customers in the future.

 

Under the MCBA, GSWCbegan tracking adopted expense levels for purchased water, purchased power andpump taxes, as established by the CPUC. Variances (which include the effects ofchanges in both rate and volume) between adopted and actual purchased water,purchased power, and pump tax expenses are recorded as a component of thesupply cost balancing account provision, as the amount of such variances willbe recovered from or refunded to GSWC’s customers at a later date. This isreflected with an offsetting entry to a regulatory asset or liability balancingaccount (tracked individually for Regions II and III).

 

The balances in the WRAMand MCBA assets and liabilities accounts will fluctuate on a monthly basisdepending upon the variance between adopted and actual results. The recovery orrefund of the WRAM is netted against the MCBA over-or under-collection for thecorresponding Region and is interest bearing at the current 90 daycommercial paper rate. When the net amount for Regions II and III achieves apre-determined level (i.e., at least 2.5 percent over-or under-recovery of theapproved revenue requirement), GSWC will seek approval from the CPUC to refundor collect the balance in the accounts. Account balances less than those levelsmay be refunded or collected in GSWC’s general rate case proceedings oraggregated with future calendar year balances for comparison with thepre-determined recovery level of 2.5 percent of adopted revenues. As of June 30,2009, GSWC has a net aggregated regulatory asset of $5.6 million which iscomprised of a $7.9 million under-collection in the WRAM accounts and $2.3million over-collection in the MCBA accounts. The revenue requirement and volumetric revenues are adopted as part of aGeneral Rate Case (“GRC”) every three years.  Regions II and III’s nextGRC will be filed in July of 2011 with rates effective January 2013.As part of the GRC, the CPUC will adopt new volumetric revenues based onhistorical usage patterns and the revenue requirement adopted in that GRC.

 

On May 7, 2009, theCPUC approved tiered rates for Region I and the establishment of a WRAM andMCBA which will go into effect on or about September 1, 2009.

 

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***WaterConservation Memorandum Accounts (“WCMA”)***

 

The CPUC also approved anadvice letter filing in a separate proceeding to allow GSWC to create andimplement a Water Conservation Memorandum Account (“WCMA”) to track theextraordinary expenses and revenue shortfall associated with conservationmeasures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008and was used to track the revenue shortfall and extraordinary expenses untilthe WRAM was implemented on November 25, 2008 for Regions II and III.  On November 24, 2008, approximately $2.0million of net under-collections were included in the WCMA for Regions II andIII prior to the implementation of the WRAM. On April 16, 2009, the CPUC approved the advice letter filed byGSWC to recover the $2.0 million through a 12-month surcharge to customers’bills. The surcharge went into effect on April 21, 2009.  Accordingly, GSWC established a $2.0 millionregulatory asset for Regions II and III during the three months ended June 30,2009.  In addition, GSWC established an$852,000 regulatory asset for Region I’s WCMA balance incurred during the periodof August 18, 2008 through June 30, 2009 which is also now probableof recovery.  GSWC will file an adviceletter for recovery of Region I’s WCMA, through a 12-month surcharge, once theWRAM and MCBA become effective on or about September 1, 2009 for theperiod of August 18, 2008 through August 31, 2009.

 

***CostsDeferred for Future Recovery******:***

 

In 1999, GSWC suedAerojet-General Corporation (“Aerojet”) for contaminating the Sacramento CountyGroundwater Basin, which affected certain GSWC wells. On a related matter, GSWCalso filed a lawsuit against the State of California (the “State”). The CPUCauthorized memorandum accounts to allow for recovery, from customers, of costsincurred by GSWC in prosecuting the cases against Aerojet and the State, lessany recovery from the defendants or others. On July 21, 2005, the CPUC authorized GSWC to collect approximately$21.3 million of the Aerojet litigation memorandum account, through a ratesurcharge, which will continue for no longer than 20 years. Beginning in October 2005,new rates went into effect to begin amortizing the memorandum account over a20-year period.  A rate surchargegenerating approximately $252,000 and $277,000 was billed to customers duringthe three months ended June 30, 2009 and 2008, respectively, and $463,000and $490,000 during the six months ended June 30, 2009 and 2008,respectively.  GSWC will keep the Aerojetmemorandum account open until the earlier of full amortization of the balanceor 20 years.  However, no costs willbe added to the memorandum account, other than on-going interest chargesapproved by the CPUC decision. Pursuant to the decision, additional interest ofapproximately $13,000 and $109,000 was added to the Aerojet litigationmemorandum account during the three months ended June 30, 2009 and 2008,respectively, and $33,000 and $256,000 during the six months ended June 30,2009 and 2008, respectively.

 

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

 

***Pensionsand Other Postretirement Obligations******:***

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs during 2009.  InMarch 2009, GSWC filed an advice letter with the CPUC requesting authorizationto establish a Pension Costs Memorandum Account.  If this account is approved, GSWC will trackthe difference between the pension costs authorized by the CPUC and included incustomer rates, and actual pension costs.  GSWC will not record theamounts in this account as a regulatory asset until they are reviewed andapproved by the CPUC.  If approved by the CPUC, GSWC will then establish aregulatory asset with a corresponding increase to earnings. Until then,Registrant expects that earnings will be negatively affected by increasingpension costs. In April 2009, the CPUC’s Water Division rejected GSWC’sfiling.  GSWC has filed an appeal;however, at this time, management cannot predict the outcome of this matter asit relates to 2009.  GSWC also amendedits current rate case application to request a two-way balancing account totrack fluctuations in the forecasted annual pension expense adopted in ratesand the actual annual expense to be recorded by GSWC in 2010, 2011 and 2012 inaccordance with SFAS No. 87, *“Employers’ Accounting for Pensions”*.  If approved as filed, GSWC will establish aregulatory asset with a corresponding increase to earnings in those years, forany shortfalls.

 

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

 

As described in Note 4,in October 2008 GSWC executed a new purchased power contract.  GSWC began receiving power under thiscontract on January 1, 2009 at a fixed cost over three and five year termsdepending on the amount of power and period during which the power will bepurchased under the contract.  The newcontract is also subject to SFAS No. 133,*”Accountingfor Derivative Instruments and Hedging Activities”*, as amended bySFAS Nos. 138 and 149, and requires mark-to-market derivative accounting.  In May 2009, the CPUC issued a finaldecision approving the new purchased power contract.  In the decision, the CPUC also authorized theestablishment of a regulatory asset and liability memorandum account to offsetthe entries required by SFAS No. 133. Accordingly, all unrealized gains and losses generated from the newpurchased power contract will be deferred on a monthly basis into anon-interest bearing regulatory memorandum account that would track the changesin fair value of the derivative throughout the term of the contract.  As of June 30, 2009, $8.5 million ofcumulative unrealized losses have been included in this memorandum account.

 

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

 

On February 15,2007, the CPUC issued a subpoena to GSWC in connection with an investigation ofcertain work orders and charges paid to a specific contractor used by GSWC fornumerous construction projects totaling approximately $24.0 million. The CPUC’sinvestigation focuses on whether GSWC was overcharged for these constructionprojects and whether these overcharges were approved in customer rates.  The construction projects completed by this specificcontractor related primarily to work on water treatment and pumping plantswhich have been placed in service and are used and useful.  In June 2007, GSWC received notificationfrom the CPUC that it was instituting an audit. The purpose of the audit was toexamine for the period 1994 to the present, GSWC’s policies, procedures, andpractices throughout all of its Regions regarding the granting or awarding ofconstruction contracts or jobs.  GSWC iscurrently responding to data requests submitted by the CPUC including recentdata requests which asked for information prior to 1994.  Management cannot predict the outcome of theinvestigation or audit at this time.

 

In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with theACC staff and has provided responsive materials that are relevant to CCWC.  Management cannot predict the outcome of theACC’s request and whether it could affect the processing of CCWC’s pendinggeneral rate case.

 

GSWC’s BVES division hasbeen regularly filing compliance reports with the CPUC regarding its purchasesof energy from renewable energy resources. The filings indicated that BVES hadnot achieved interim target purchase levels of renewable energy resources andthus, on its face, might have a potential penalty. The CPUC considered thefuture timing and applicability of renewable energy resource requirements asthey apply to smaller energy utilities like BVES and on May 30, 2008, theCPUC issued its final decision regarding the renewable responsibilities ofsmall utilities (including BVES).  Thefinal decision affirmed the renewable obligation targets for the smallutilities but also allowed for the small utilities to defer compliance underthe CPUC’s flexible compliance rules. BVES is continuing its efforts to procure renewable resources each yeargoing forward, and where that may prove difficult because the market for suchresources is very constrained,  BVES willbe required to describe in detail the problems that warrant further deferral,in accordance with the CPUC’s flexible compliance rules. Because the finaldecision deferred BVES’ interim target purchase levels for the years 2004through 2007, management believes that the CPUC’s decision effectivelyforecloses any exposure to financial penalties for the year 2007 andearlier.  For the 2008 year, BVES did notmeet the interim targets and expects that the CPUC will waive any potentialfines in accordance with the flexible compliance rules.  Accordingly, no provision for loss has beenrecorded in the financial statements as of June 30, 2009.  At this time, management has determined thatinterim targets for the 2009 year will not be met but expects the CPUC to waiveany potential fines in accordance with the flexible compliance rules.

 

In June 2009, GSWCimplemented water conservation and rationing inits Bay Point customer service area. GSWC has also filed advice letters with the CPUC to implement mandatoryconservation and rationing in its Simi Valley, Orange County, Metropolitan,Claremont, San Dimas and San Gabriel Valley customer service areas.  Reduction goals range from 6% to 15%depending on the area.  GSWC willconsider similar action in other customer service areas as needed.

 

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**Note 3 — Earnings perShare/Capital Stock:**

 

Registrant computesearnings per share (“EPS”) in accordance with Emerging Issues Task Force (“EITF”)No. 03-06, *“Participating Securities and the Two-Class Methodunder FASB Statement No. 128”. *EITFNo. 03-06 provides the accounting guidance for the effect of participatingsecurities on EPS calculations and the use of the “two-class” method. Theguidance requires the use of the “two-class” method of computing EPS forcompanies with participating securities. The “two-class” method is an earningsallocations formula that determines EPS for each class of common stock andparticipating security.  AWR hasparticipating securities related to stock options that earn dividendequivalents on an equal basis with Common Shares that have been issued underAWR’s 2003 Non-Employee Directors Stock Plan and restricted stock units underAWR’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003Non-Employee Directors Stock Plan.  Inapplying the “two-class” method, undistributed earnings are allocated to bothCommon Shares and participating securities. The following is a reconciliationof Registrant’s net income and weighted average Common Shares outstanding forcalculating basic net income per share:

 
| **Basic**                                                                                                                                    | ** ** | **For The Three Months********Ended June 30,** | ** ** | **For The Six Months********Ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share amounts)**                                                                        | ** ** | **2009**                                                                | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                                                                                                                  |       | $                                                                       | 11,499     |                                              | $          | 9,283 |   | $ | 16,431 |   | $ | 14,587 |   |
| Less:  (a)  Distributed earnings to common shareholders                                                                                 |       | 4,465                                                                   |       | 4,312                                             |       | 8,794 |   | 8,622 |   |
|                  Distributed earnings to participating securities |       | 23                                                                      |       | 23                                                |       | 43 |   | 43 |   |
| Undistributed  earnings                                                                                                                      |       | 7,011                                                                   |       | 4,948                                             |       | 7,594 |   | 5,922 |   |
|                                                                                                                                         |       |                                                                    |       |                                              |       |   |   |   |   |
| (b)   Undistributed earnings allocated to common shareholders                                                                           |       | 6,976                                                                   |       | 4,922                                             |       | 7,558 |   | 5,893 |   |
|         Undistributed earnings allocated to participating securities                                           |       | 35                                                                      |       | 26                                                |       | 36 |   | 29 |   |
|                                                                                                                                         |       |                                                                    |       |                                              |       |   |   |   |   |
| Total  income available to common shareholders, basic (a)+(b)                                                                                |       | $                                                                       | 11,441     |                                              | $          | 9,234 |   | $ | 16,352 |   | $ | 14,515 |   |
|                                                                                                                                         |       |                                                                    |       |                                              |       |   |   |   |   |
| Weighted  average Common Shares outstanding, basic                                                                                           |       | 17,861                                                                  |       | 17,248                                            |       | 17,588 |   | 17,243 |   |
| **Basic earnings per Common Share**                                                                                                          |       | $                                                                       | 0.64       |                                              | $          | 0.54 |   | $ | 0.93 |   | $ | 0.84 |   |

 

Diluted EPS is based uponthe weighted average number of Common Shares, including both outstanding sharesand shares potentially issuable in connection with stock options and restrictedstock units granted under the Registrant’s 2000 and 2008 Stock Incentive Plans,and the 2003 Non-Employee Directors Stock Plan, and net income. At June 30,2009 and 2008 there were 680,758 and 569,155 options outstanding, respectively,under these Plans. At June 30, 2009 and 2008, there were also 92,502 and76,373 restricted stock units outstanding, respectively.

 

The following is areconciliation of Registrant’s net income and weighted average Common Sharesoutstanding for calculating diluted net income per share:

 
| **Diluted**                                                           | ** ** | **For The Three Months********Ended June 30,** | ** ** | **For The Six Months********Ended June 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                                                | ** ** | **2008**                                          | ** ** | **2009** | ** ** | **2008** | ** ** |
| Common  shareholders earnings, basic                                  |       | $                                                                       | 11,441     |                                              | $          | 9,234 |   | $ | 16,352 |   | $ | 14,515 |   |
| Undistributed  earnings for dilutive stock options                    |       | 35                                                                      |       | —                                            |       | 36 |   | 29 |   |
| Total  common shareholders earnings, diluted                          |       | $                                                                       | 11,476     |                                              | $          | 9,234 |   | $ | 16,388 |   | $ | 14,544 |   |
|                                                                  |       |                                                                    |       |                                              |       |   |   |   |   |
| Weighted  average common shares outstanding, basic                    |       | 17,861                                                                  |       | 17,248                                            |       | 17,588 |   | 17,243 |   |
| Stock-based  compensation (1)                                         |       | 126                                                                     |       | 77                                                |       | 130 |   | 119 |   |
| Weighted  average common shares outstanding, diluted                  |       | 17,987                                                                  |       | 17,325                                            |       | 17,718 |   | 17,362 |   |
| **Diluted earnings per Common Share**                                 |       | $                                                                       | 0.64       |                                              | $          | 0.53 |   | $ | 0.92 |   | $ | 0.84 |   |

 

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(1)      In applying the treasury stock method of reflectingthe dilutive effect of outstanding stock-based compensation in the calculationof diluted EPS, 329,975 and 356,923 stock options at June 30, 2009 and2008, respectively, were deemed to be outstanding in accordance with SFAS No. 128,*“Earnings Per Share”*.  All of the 92,502 and 76,373 restricted stockunits at June 30, 2009 and 2008, respectively, were included in thecalculation of diluted EPS for the three and six months ended June 30,2009 and 2008.

 

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Stock options of 346,349and 194,232 were outstanding at June 30, 2009 and 2008, respectively, butnot included in the computation of diluted EPS because the related optionexercise price was greater than the average market price of AWR’s Common Sharesfor the six months ended June 30, 2009 and 2008.  Stock options of 4,434 and 18,000 wereoutstanding at June 30, 2009 and 2008, respectively, but not included inthe computation of diluted EPS because they were antidilutive.

 

During the six monthsended June 30, 2009 and 2008, Registrant issued 37,573 and 19,896 CommonShares, for approximately $904,000 and $424,000, respectively, under Registrant’sCommon Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, andthe stock incentive plans.

 

In May 2009, AWRcompleted a public offering of 1,150,000 shares of its Common Shares, including150,000 shares issued upon exercise of an option granted to the underwriters tocover over-allotments, at a price to the public of $31 per share. The netproceeds from the offering were $34.0 million, after deductions of underwritingcommissions and discounts, and direct legal and accounting fees. The Companyused the proceeds of the offering to repay short-term debt.

 

In addition, Registrantpurchased 13,593 Common Shares on the open market during the six months ended June 30,2009 under Registrant’s Common Share Purchase and Dividend Reinvestment Planand 24,837 Common Shares during the six months ended June 30, 2008,under Registrant’s Common Share Purchase and Dividend Reinvestment Planand 401(k) Plan.  The Common Sharespurchased by Registrant were used to satisfy the requirements of these plans.

 

During each of the threemonths ended June 30, 2009 and 2008, AWR paid quarterly dividends toshareholders of approximately $4.3 million, or $0.25 per share. During the sixmonths ended June 30, 2009 and 2008, AWR paid quarterly dividends toshareholders of approximately $8.7 million and $8.6 million, or $0.50 pershare, respectively.

 

**Note 4 — Derivative Instruments:**

 

Most of the electricenergy sold by BVES to its customers is purchased from others.  To mitigate exposure to spot-market prices,Registrant has entered into purchased power contracts, which are subject toderivative accounting, to serve its BVES customer service area.  By entering into these fixed-priced purchasedpower contracts, Registrant has been able to limit the amount of risk anduncertainty due to spot-market price variability.  Changes in electricity costs are outside ofmanagement’s control, therefore, the purpose of entering into these fixed pricecontracts is to stabilize purchased power costs.  Except for the resale of small amounts ofpower in the spot market that are in excess of BVES’ customers’ needs, thepower purchased under the contracts is only used to service BVES customers’ demand.

 

Registrant had certain block-forward purchasedpower contracts that were subject to SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*, as amended bySFAS Nos. 138 and 149. During 2002, GSWC became a party to block-forwardpurchased power contracts that qualified as derivative instruments under SFAS No. 133.  As a result, unrealized gains and losses wererecorded to earnings on a monthly basis to reflect the fair market value of thederivative at the end of each month. These contracts expired on December 31, 2008.  During the three and six months ended June 30,2008, $1.7 million and $4.5 million, respectively, of unrealized gains onpurchased power contracts were recorded to GSWC’s earnings.

 

In October 2008, GSWC executed a newpurchased power contract.  GSWC beganreceiving power under this contract on January 1, 2009 at a fixed costover three and five year terms depending on the amount of power and periodduring which the power will be purchased under the contract. The new contractwas subject to CPUC approval and, in May 2009, the CPUC issued a finaldecision approving the contract.  The newcontract is also subject to SFAS No. 133 and requires mark-to-marketderivative accounting.  In connectionwith the filing to review and approve the new contract, BVES also requested andthe CPUC authorized the establishment of a regulatory asset and liabilitymemorandum account to offset the entries required by SFAS No. 133.  Accordingly, all unrealized gains and lossesgenerated from the new purchased power contract will be deferred on a monthlybasis into the non-interest bearing regulatory memorandum account that willtrack the changes in fair value of the derivative throughout the term of thecontract.  As a result, unrealized derivativegains and losses from the new contract will not affect GSWC’s earnings, andwill have no impact on power purchased for resale due to regulatory accountingtreatment.

 

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As a result of the new purchased power contract,on a monthly basis, the related asset or liability is adjusted to reflect thefair market value at the end of the month. Registrant adopted SFAS No. 157 effective January 1, 2008 forfinancial assets and liabilities measured on a recurring basis.  SFAS No. 157 applies to all financialassets and financial liabilities that are being measured and reported on a fairvalue basis. There was no impact in the adoption of SFAS No. 157 to theconsolidated financial statements. However, SFAS No. 157 requiresdisclosure that establishes a framework for measuring fair value and expandsdisclosure about fair value measurements. The statement requires fair valuemeasurements to be classified and disclosed in one of the following threecategories:

 

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

 

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

 

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

 

Registrant’s valuation model utilizes variousinputs that include quoted market prices for energy over the duration of thecontracts. The market prices used to determine the fair value for thisderivative instrument were estimated based on independent sources such asbroker quotes and publications that are not observable in or corroborated bythe market.  Registrant receives onebroker quote to determine the fair value of its derivative instrument.  When such inputs have a significant impact onthe measurement of fair value, the instrument is categorized in Level 3.  Accordingly, the valuation of the derivativeon Registrant’s new purchased power contract has been classified as Level 3 forall periods presented.

 

The following tables present changes in the fairvalue of the derivative for the three and six months ended June 30, 2009and 2008.

 
| ** **                                           | ** ** | **For The Three  Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| **(dollars in thousands)**                      | ** ** | **2009**                                                          | ** ** | **2008** | ** ** |
| Balance,  at beginning of the period                 |       | $                                                                 | (8,428     | ) | $ | 1,289 |   |
| Unrealized  (loss) gain on purchased power contracts |       | (119                                                              | )          | 1,664 |   |
| Balance,  at end of the period                       |       | $                                                                 | (8,547     | ) | $ | 2,953 |   |

 
| ** **                                           | ** ** | **For The Six Months Ended June 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| **(dollars in thousands)**                      | ** ** | **2009**                                                            | ** ** | **2008** | ** ** |
| Balance,  at beginning of the period                 |       | $                                                                   | —     |   | $ | (1,554 | ) |
| Unrealized  (loss) gain on purchased power contracts |       | (8,547                                                              | )          | 4,507 |   |
| Balance,  at end of the period                       |       | $                                                                   | (8,547     | ) | $ | 2,953 |   |

 

For the three and sixmonths ended June 30, 2009, the unrealized losses were included inregulatory assets.  For the three and sixmonths ended June 30, 2008, the unrealized gains were included inoperating expenses.

 

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

 

For cash and cashequivalents, accounts receivable, accounts payable and short-term debt, thecarrying amount is assumed to approximate fair value due to the short-termnature of the amounts. The table below estimates the fair value of long-termdebt held by the utility subsidiaries. Rates available to the utility subsidiariesat June 30, 2009 and December 31, 2008 for debt with similar termsand remaining maturities were used to estimate fair value for long-term debt.Changes in the assumptions will produce differing results.

 
| ** **                           | ** ** | **June 30, 2009**   | ** ** | **December 31, 2008** | ** ** |
|--------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| **(dollars in thousands)** | ** ** | **Carrying Amount** | ** ** | **Fair Value**        | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| Financial  liabilities:              |       |                     |       |                       |       |   |   |   |   |
| Long-term  debt—GSWC            |       | $                        | 300,705    |                       | $          | 329,146 |   | $ | 260,887 |   | $ | 304,069 |   |
| Long-term  debt—CCWC            |       | 6,285                    |       | 5,875                      |       | 6,285 |   | 6,123 |   |
| Total  AWR                           |       | $                        | 306,990    |                       | $          | 335,021 |   | $ | 267,172 |   | $ | 310,192 |   |

 

In March 2009, GSWC issued a 6.7% Senior Note dueMarch 10, 2019 with an aggregate principal amount of $40.0 million.

 

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**Note 6— Income Taxes:**

 

Asa regulated utility, GSWC treats certain temporary differences asflow-through adjustments in computing its income tax provision consistentwith the income tax approach approved by the CPUC for ratemaking purposes.Flow-through adjustments increase or decrease tax expense in oneperiod, with an offsetting increase or decrease occurring in anotherperiod. Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal income tax rate in anygiven period than would otherwise exist if GSWC were not required to accountfor its income taxes as a regulated enterprise.

 

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

 

OnFebruary 20, 2009, California’s governor signed two bills into law that amendedand added several new provisions to California’s Revenue and TaxationCode.  One of the provisions in thesebills changed the manner by which most taxpayers may compute the portion oftheir income derived from multiple jurisdictions that is subject to Californiataxation.  During the first quarter of2009, AWR applied the change in tax law resulting from enactment of the billsbased on its understanding of the legislature’s intent, which is to permittaxpayers to apply an alternative apportionment method commencing with the 2011tax year.  As a result of management’sintention to apply the alternative method, AWR adjusted its deferred taxbalances at March 31, 2009 to reflect the expected amount at which it willrealize its California deferred taxes consistent with the change in tax law, aswell as refining certain related estimates. This resulted in the recording of a benefit of approximately $918,000during the first quarter of 2009. While the effect of the tax law change willcontinue to affect AWR’s state taxes, the future effects may be beneficial ordetrimental depending on a combination of the profitability of AWR’snon-California activities as well as the relative proportion of the factor(s) appliedby its apportionment method.  Quarterly,management will assess its intention to apply the alternative method and willadjust its deferred tax balances accordingly.

 

GSWCcontinues to compute its state tax provision as if it were autonomous and not amember of AWR’s unitary group.  Thisapproach is consistent with the methodology used for ratemaking purposes.  Given that 100 percent of GSWC’s activitiesare conducted within California, GSWC’s state tax provision does not reflectapportionment of its income; consequently, the change in California law has hadno effect upon GSWC’s state taxes.

 

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**Note 7— Employee Benefit Plans:**

 

Thecomponents of net periodic benefit costs, before allocation to the overheadpool, for Registrant’s pension plan, postretirement plan, and SupplementalExecutive Retirement Plan (“SERP”) for the three and six months ended June 30,2009 and 2008 are as follows:

 
| ** **                                     | ** ** | **For The Three Months Ended June 30,** | ** **  |
|------------------------------------------------|------------|----------------------------------------------|-------------|
| ** **                                     | ** ** | **Pension Benefits**                    | ** **  | **Other Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2009**                                     | ** **  | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                                         |        |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                            |  1,119 |   | $ |  896 |   | $ |  85 |   | $ |  86 |   | $ |  82 |   | $ |  60 |   |
| Interest cost                                  |       | 1,426                                        |        | 1,350 |   | 161 |   | 161 |   | 80 |   | 63 |   |
| Expected return on plan assets                 |       | (974                                         | )           | (1,235 | ) | (52 | ) | (63 | ) | — |   | — |   |
| Amortization of transition                     |       | —                                       |        | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization of prior service cost (benefit)   |       | 29                                           |        | 30 |   | (50 | ) | (50 | ) | 40 |   | 230 |   |
| Amortization of actuarial loss (gain)          |       | 572                                          |        | — |   | — |   | — |   | — |   | (14 | ) |
| Net periodic pension cost                      |       | $                                            |  2,172 |   | $ |  1,041 |   | $ |  249 |   | $ |  239 |   | $ |  202 |   | $ |  339 |   |

 
| ** **                                     | ** ** | **For The Six Months Ended June 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                  | ** ** | **Other Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2009**                                   | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Components of Net Periodic  Benefits Cost:** |       |                                       |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                          | 2,238      |   | $ |  1,792 |   | $ |  171 |   | $ |  172 |   | $ |  175 |   | $ |  120 |   |
| Interest cost                                  |       | 2,852                                      |       | 2,700 |   | 321 |   | 322 |   | 166 |   | 126 |   |
| Expected return on plan assets                 |       | (1,948                                     | )          | (2,470 | ) | (104 | ) | (126 | ) | — |   | — |   |
| Amortization of transition                     |       | —                                     |       | — |   | 210 |   | 210 |   | — |   | — |   |
| Amortization of prior service cost (benefit)   |       | 58                                         |       | 60 |   | (100 | ) | (100 | ) | 80 |   | 460 |   |
| Amortization of actuarial loss (gain)          |       | 1,144                                      |       | — |   | — |   | — |   | — |   | (28 | ) |
| Net periodic pension cost                      |       | $                                          | 4,344      |   | $ |  2,082 |   | $ |  498 |   | $ |  478 |   | $ |  421 |   | $ |  678 |   |

 

Registrant expects tocontribute a minimum of approximately $8,583,000 and $995,000 to the pensionand postretirement medical plans in 2009, respectively.  During the three and six months ended June 30,2009, $1,154,000 was contributed to the pension plan.  In May 2009, the Board of Directorsapproved the establishment of a Rabbi Trust created for the SERP plan. Acontribution of $842,000 was made to the trust on June 15, 2009.

 

Therewas a significant increase in the underfunded status of the pension plan during2008.  This was primarily due to asignificant decrease in the fair value of plan assets due to market conditionsduring 2008.  The increase in theunderfunded status of the pension plan resulted in higher pension costs duringthe three and six months ended June 30, 2009 compared to the same periodin 2008.  However, during the sevenmonths ended July 31, 2009, the fair value of the pension plan assets haveincreased by approximately 9.8% since December 31, 2008.

 

**Note 8 — Contingencies:**

 

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

 

Perchlorateand/or Volatile Organic Compounds (“VOC”) have been detected in five wellsservicing GSWC’s South San Gabriel System. GSWC filed suit in federal court,along with two other affected water purveyors and the San Gabriel Basin WaterQuality Authority (“WQA”), against some of those allegedly responsible for thecontamination of two of these wells. Some of the potential defendants settledwith GSWC, other water purveyors and the WQA (the “Water Entities”), on VOCrelated issues prior to the filing of the lawsuit. In response to the filing ofthe lawsuit, the Potentially Responsible Party (“PRP”) defendants filed motionsto dismiss the suit or strike certain portions of the suit. The judge issued aruling on April 1, 2003 granting in part and denying in part the PRP’smotions. A key ruling of the court was that the water purveyors, includingGSWC, by virtue of their ownership of wells contaminated with hazardouschemicals are themselves PRPs under the Comprehensive Environmental Response,Compensation, and Liability Act (“CERCLA”).

 

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GSWChas, pursuant to permission of the court, amended its suit to claim certainaffirmative defenses as an “innocent” party under CERCLA. Registrant ispresently unable to predict the outcome of this ruling on its ability to fullyrecover from the PRP’s future costs associated with the treatment of thesewells. In this same suit, the PRP’s have filed cross-complaints against theWater Entities, the Metropolitan Water District, the Main San Gabriel BasinWatermaster and others on the theory that they arranged for and did transportcontaminated water into the Main San Gabriel Basin for use by GSWC and theother two affected water purveyors and for other related claims.

 

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

 

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

 

Thelaws of the State of California and the State of Arizona provide for theacquisition of public utility property by governmental agencies through theirpower of eminent domain, also known as condemnation, where doing so isnecessary and in the public interest. In addition, however, the laws ofCalifornia provide: (i) that the owner of utility property may contestwhether the condemnation is actually necessary and in the public interest, and (ii) thatthe owner is entitled to receive the fair market value of its property if theproperty is ultimately taken.

 

Althoughthe City of Claremont, California (the “City”) located in GSWC’s Region III,has not initiated the formal condemnation process pursuant to California law,the City has expressed various concerns to GSWC about the rates charged by GSWCand the effectiveness of the CPUC’s rate-setting procedures. The City hired aconsultant to perform an appraisal of the value of GSWC’s water system servingthe City. The value was estimated in 2004 by the City’s consultant at $40 -$45 million. GSWC disagrees with the consultant’s valuation assessment. Asof June 30, 2009, management believes that the fair market value of theClaremont water system exceeds the $42.1 million recorded net book value andalso exceeds the consultant’s estimates of its value. The council membersagreed that the acquisition of GSWC’s water system was to remain a priority andauthorized staff to obtain updated appraisals for the value of the watersystems.  In meetings held in 2008 and2009, the Claremont City Council stated that they had decided to authorizeadditional studies of the acquisition of GSWC’s water system and planned tomove forward on this matter.

 

TheTown of Apple Valley (the “Town”) had abandoned its activities related to apotential condemnation of GSWC’s water system serving the Town in 2007.However, in April 2009, the Town announced that it will again consider apotential takeover of GSWC’s Apple Valley water systems as well as those ofanother privately-owned utility.  TheTown Council has directed staff to research the costs associated with updatingthe previously prepared financial feasibility study for the acquisition ofGSWC’s water system.

 

Exceptfor the City of Claremont and the Town of Apple Valley, Registrant has notbeen, within the last three years, involved in activities related to thepotential condemnation of any of its water customer service areas or in itsBVES customer service area. No formal condemnation proceedings have been filedagainst any of the Registrant’s service areas during the past three years.

 

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

 

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, includingGSWC, the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit sought an adjudication of the Santa Maria Groundwater Basin(the “Basin”). A stipulated settlement of the lawsuit has been reached, subjectto CPUC approval.  The settlement, amongother things, if approved by the CPUC, would preserve GSWC’s historical pumpingrights and secure supplemental water rights for use in case of drought or otherreductions in the natural yield of the Basin. GSWC, under the stipulation, hasa right to 10,000 acre-feet of groundwater replenishment provided by theTwitchell Project, a storage and flood control reservoir project operated by theSanta Maria Valley Conservation District.  A monitoring and annualreporting program has been established to allow the parties to responsiblymanage the Basin and to respond to shortage conditions.  If severe watershortage conditions are found over a period of five years, the management areaengineer will make findings and 

 

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recommendations to alleviate such shortages.  Inthe case that the Basin experiences severe shortage conditions, the courthas the authority to limit GSWC’s groundwaterproduction to 10,248 acre-feet per year, based on developedwater in the Basin.

 

On February 11, 2008, the court issued its finaljudgment, which approves and incorporates the stipulation.  The judgmentawards GSWC prescriptive rights to groundwater against the non-stipulatingparties.  In addition, the judgment grants GSWC the right to use the Basinfor temporary storage and to recapture 45 percent of the return flows thatare generated from its importation of State Water Project water.  Pursuantto this judgment, the court retains jurisdiction over all of the parties tomake supplemental orders or to amend the judgment as necessary.  On March 20, 2008, the non-stipulatingparties filed notices of appeal. Registrant is unable to predict the outcome of the appeal.

 

***Aerojet Note Receivable:***

 

Pursuantto the settlement agreement with Aerojet, GSWC has an $8.0 million notereceivable, plus $2.5 million of accrued interest, guaranteed by Aerojet.  This note, plus interest on the unpaidbalance, is scheduled to be paid by Aerojet in installments over five yearsbeginning in December 2009.  In January 2009,Moody’s Investors Service downgraded the corporate family ratings of GenCorpInc., Aerojet’s parent, further to B3 from B2 and its probability of defaultrating to Caa1 from B2.  Obligationsrated “B” by Moody’s are considered speculative by Moody’s and are, in Moody’sview, subject to high credit risk and have generally poor credit quality.  Obligations rated Caa1 are judged by Moody’sto be of poor credit standing and are, in Moody’s view, subject to very highcredit risk and have extremely poor credit quality.  On March 31, 2009, Standard &Poor’s Ratings Services, or S&P, lowered its ratings on GenCorp to CCC+from B+ with a developing outlook.  AnS&P rating of “CCC” indicates a current identifiable vulnerability todefault by S&P that is, in S&P’s view, dependent upon favorable business,financial and economic conditions to meet timely payment of interest andrepayment of principal.  At this time,management believes the note receivable from Aerojet is still fully collectibleand has not provided a reserve for uncollectible amounts as of June 30,2009.  GSWC will continue to assessrecoverability of this note receivable.

 

***Air Quality Management District******:***

 

In1998, the South Coast Air Quality Management District (“AQMD”) issued a permitto GSWC for the installation and use of air stripping equipment at one ofGSWC’s groundwater treatment systems in its Region II service area. In 2005,the AQMD conducted an inspection of this facility (“Watson Well”) and issued aNotice of Violation (“NOV”) for exceeding the amount of groundwater permittedto be treated by the treatment system during calendar year 2004. In 2007, GSWCreached a settlement of the NOV with the AQMD. As part of the settlement, GSWC agreed to perform a SupplementalEnvironmental Program (“SEP”) that included installation and operation ofgranular activated carbon (“GAC”) filters at the facility.  The AQMD accepted this agreement and assesseda nominal penalty.  In February 2009,GSWC began operating the permanent GAC treatment system at the WatsonPlant.  GSWC submitted a final report tothe AQMD indicating the completion of the SEP in April 2009.  AQMD has acknowledged the completion of theSEP and therefore, management believes that GSWC has fulfilled its obligationsunder the settlement with AQMD and no further penalties are expected to beassessed.  GSWC has spent approximately$892,000 as of June 30, 2009 on the GAC treatment system. Management alsobelieves it is probable that the capital costs incurred on this project will beapproved in rate-base by the CPUC.

 

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

 

Chadron Plant: GSWC has been involved in environmentalremediation and clean-up at a plant site (“Chadron Plant”) that contained anunderground storage tank which was used to store gasoline for its vehicles.This tank was removed from the ground in July 1990 along with thedispenser and ancillary piping. Since then, GSWC has been involved in variousremediation activities at this site. After the completion of a multi-phase extraction cleanup program, GSWC is continuing the monitoring programand evaluating cleanup options for the second phase. GSWC still expects remediation to take at least two more years,followed by two years of monitoring and reporting, although costs ofremediation may be higher than originally estimated.

 

As of June 30,2009, the total spent to clean-up and remediate GSWC’s plant facility isapproximately $2.3 million, of which $1.5 million has been paid by theState of California Underground Storage Tank Fund and $800,000 has beenincluded in rate-base and approved by the CPUC for recovery. As of June 30,2009, GSWC has an accrued liability for the estimated additional cost of $1.2million to complete the clean-up at the site. The ultimate cost may vary asthere are many unknowns in remediation of underground gasoline spills and thisis an estimate 

 

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based on currentlyavailable information. Management also believes it is probable that theadditional costs of remediation will be approved in rate-base by the CPUC.

 

Ballona Plant: During the first quarter of 2008,hydrocarbon contaminated soil was found at a plant site (“Ballona Plant”)located in GSWC’s Southwest customer service area where an abandoned water tankwas demolished.  An initial investigationand characterization of the contaminated area has been conducted.  The investigation report indicates thatcontamination levels are below normal cleanup goals.  However, GSWC contacted a local agency to getdirection on what cleanup, if any, is required. The local agency inspected the site in July 2009 and recommendedexcavation and cleanup of the soil.  Atthis time, management is unable to estimate the cost of cleanup for thissite.  Historically, the cost for thistype of cleanup has been included in rates as approved by the CPUC.

 

***Mirant Settlement:***

 

GSWChad previously filed a complaint with the Federal Energy Regulatory Commission(“FERC”) seeking to reduce the $95 per MWh rate in a contract entered into in2001 with Mirant Americas Energy Marketing (“Mirant Marketing”) to a just andreasonable price.  In May 2009, GSWCreached a settlement agreement with Mirant Energy Trading, LLC, which acquiredthe power contract from Mirant Marketing as a result of bankruptcyreorganization. Pursuant to that settlement agreement, GSWC filed with the FERCa notice of the withdrawal of its complaint. The settlement agreement requiredMirant Energy Trading to pay $1 million as a cash settlement to GSWC after thewithdrawal of the complaint at the FERC became effective. On May 26, 2009,the $1 million cash settlement was received and GSWC recorded a correspondingreduction to previously incurred legal costs, which increased pretax earningsduring the three and six months ended June 30, 2009.

 

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

 

Twoformer officers of GSWC filed a lawsuit against both AWR and GSWC allegingamong other things, wrongful termination and retaliation against the formerofficers. Management believes that the allegations are without merit andintends to vigorously defend against them. Based on management’s understandingof all the claims, management does not believe that the ultimate resolution ofthis matter will have a material adverse effect on AWR’s and GSWC’s financialposition, results of operations, or cash flows.

 

Registrantis also subject to other ordinary routine litigation incidental to itsbusiness. Management believes that rate recovery, proper insurance coverage andreserves are in place to insure against property, general liability andworkers’ compensation claims incurred in the ordinary course of business.Registrant is unable to predict an estimate of the loss, if any, resulting fromany pending suits or administrative proceedings.

 

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**Note 9 — Business Segments:**

 

AWRhas three reportable segments, water, electric and contracted services, whereasGSWC has two segments, water and electric. Within the segments, AWR has threeprincipal business units: water and electric service utility operationsconducted through GSWC, a water-service utility operation conducted throughCCWC, and a contracted services unit conducted through ASUS and itssubsidiaries. All activities of GSWC are geographically located withinCalifornia. All activities of CCWC are located in the state of Arizona.Activities of ASUS and its subsidiaries are presently conducted in California,Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Both GSWC and CCWC are rate-regulatedutilities.  ASUS’ wholly-ownedsubsidiaries are regulated by the respective state in which the military baseon which they operate is primarily located. On a stand-alone basis, AWR has no material assets other than itsinvestments in its subsidiaries. The tables below set forth informationrelating to GSWC’s operating segments, CCWC, ASUS and its subsidiaries, and AWRParent. Certain assets, revenues and expenses have been allocated in theamounts set forth. The identifiable assets are net of respective accumulatedprovisions for depreciation. Capital additions reflect capital expenditurespaid in cash and exclude property installed by developers and conveyed to GSWCor CCWC.

 
| ** **                            | ** ** | **As Of And For The Three Months Ended June 30, 2009** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**  | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                    |       | $                                                                                                        | 72,295     |   | $ | 5,888 |   | $ | 1,862 |   | $ | 13,508 |   | $ | — |   | $ | 93,553 |   |
| Operating income (loss)               |       | 23,451                                                                                                   |       | 72 |   | (13 | ) | 1,015 |   | (11 | ) | 24,514 |   |
| Interest expense, net                 |       | 4,584                                                                                                    |       | 543 |   | 103 |   | 90 |   | 43 |   | 5,363 |   |
| Identifiable assets                   |       | 763,879                                                                                                  |       | 37,120 |   | 44,778 |   | 2,072 |   | — |   | 847,849 |   |
| Depreciation and amortization expense |       | 7,157                                                                                                    |       | 564 |   | 509 |   | 157 |   | — |   | 8,387 |   |
| Capital additions                     |       | 18,512                                                                                                   |       | 278 |   | 336 |   | 132 |   | — |   | 19,258 |   |
|                                       |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **As Of And For The Three Months Ended June 30, 2008** | ** ** |
|---------------------------------------|------------|----------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **GSWC**                                                                                                 | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**  | ** ** | **Water**                                                                                                | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                    |       | $                                                                                                        | 63,413     |   | $ | 6,208 |   | $ | 1,957 |   | $ | 8,735 |   | $ | — |   | $ | 80,313 |   |
| Operating income (loss)               |       | 18,149                                                                                                   |       | 1,673 | (1) | 380 |   | (608 | ) | (13 | ) | 19,581 |   |
| Interest expense, net                 |       | 3,894                                                                                                    |       | 342 |   | 116 |   | 206 |   | (39 | ) | 4,519 |   |
| Identifiable assets                   |       | 716,964                                                                                                  |       | 38,051 |   | 43,736 |   | 2,700 |   | — |   | 801,451 |   |
| Depreciation and amortization expense |       | 6,699                                                                                                    |       | 553 |   | 461 |   | 97 |   | — |   | 7,810 |   |
| Capital additions                     |       | 19,615                                                                                                   |       | 350 |   | 547 |   | 1,091 |   | — |   | 21,603 |   |
|                                       |            |                                                                                                          |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)          Includes $1,664,000unrealized gain on purchased power contracts

 
| ** **                            | ** ** | **As Of And For The Six Months Ended June 30, 2009** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**  | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                    |       | $                                                                                                      | 127,473    |   | $ | 14,520 |   | $ | 3,478 |   | $ | 27,691 |   | $ | — |   | $ | 173,162 |   |
| Operating income (loss)               |       | 34,618                                                                                                 |       | (472 | ) | (236 | ) | 2,083 |   | (61 | ) | 35,932 |   |
| Interest expense, net                 |       | 8,870                                                                                                  |       | 1,054 |   | 208 |   | 189 |   | 134 |   | 10,455 |   |
| Identifiable assets                   |       | 763,879                                                                                                |       | 37,120 |   | 44,778 |   | 2,072 |   | — |   | 847,849 |   |
| Depreciation and amortization expense |       | 14,305                                                                                                 |       | 1,129 |   | 995 |   | 319 |   | — |   | 16,748 |   |
| Capital additions                     |       | 35,377                                                                                                 |       | 589 |   | 824 |   | 150 |   | — |   | 36,940 |   |
|                                       |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                            | ** ** | **As Of And For The Six Months Ended June 30, 2008** | ** ** |
|---------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
| ** **                            | ** ** | **GSWC**                                                                                               | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**  | ** ** | **Water**                                                                                              | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating revenues                    |       | $                                                                                                      | 113,919    |   | $ | 15,011 |   | $ | 3,540 |   | $ | 16,785 |   | $ | — |   | $ | 149,255 |   |
| Operating income (loss)               |       | 29,911                                                                                                 |       | 5,084 | (2) | 313 |   | (1,149 | ) | (116 | ) | 34,043 |   |
| Interest expense, net                 |       | 8,073                                                                                                  |       | 858 |   | 234 |   | 435 |   | (64 | ) | 9,536 |   |
| Identifiable assets                   |       | 716,964                                                                                                |       | 38,051 |   | 43,736 |   | 2,700 |   | — |   | 801,451 |   |
| Depreciation and amortization expense |       | 13,389                                                                                                 |       | 1,105 |   | 921 |   | 188 |   | — |   | 15,603 |   |
| Capital additions                     |       | 35,455                                                                                                 |       | 549 |   | 1,418 |   | 1,400 |   | — |   | 38,822 |   |
|                                       |            |                                                                                                        |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(2) **  **Includes $4,507,000unrealized gain on purchased power contracts

 

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**Item 2.Management’s Discussion and Analysis of Financial Condition and Results ofOperations**

 

# **General**

# ** **

AmericanStates Water Company (“AWR”) is the parent company of Golden State WaterCompany (“GSWC”), Chaparral City Water Company (“CCWC”) and American StatesUtility Services, Inc. (“ASUS”) and its subsidiaries (Fort Bliss WaterServices Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old DominionUtility Services, Inc. (“ODUS”), Palmetto State UtilityServices, Inc. (“PSUS”) and Old North Utility Services, Inc.(“ONUS”)). AWR was incorporated as a California corporation in 1998 as aholding company.  AWR has threereportable segments: water, electric and contracted services. Within thesegments, AWR has three principal business units: water and electric serviceutility operations conducted through GSWC, a water-service utility operationconducted through CCWC, and a contracted services unit conducted through ASUSand its subsidiaries. FBWS, TUS, ODUS, PSUS and ONUS may be referred to hereincollectively as the “Military Utility Privatization Subsidiaries”.

 

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

 

GSWCserved 254,730 water customers and 23,002 electric customers at June 30,2009, or a total of 277,732 customers, compared with 254,479 water customersand 23,056 electric customers, or a total of 277,535 customers at June 30,2008. GSWC’s utility operations exhibit seasonal trends. Although GSWC’s waterutility operations have a diversified customer base, residential and commercialcustomers account for the majority of GSWC’s water sales and revenues. Revenuesderived from commercial and residential water customers accounted forapproximately 90% oftotal water revenues for the three months and six months endedJune 30, 2009 and 2008.

 

CCWCis an Arizona public utility company serving 13,392 customers at June 30,2009, compared with 13,485 customers at June 30, 2008. Located in the townof Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona,the majority of CCWC’s customers are residential. The Arizona CorporationCommission (“ACC”) regulates CCWC.

 

ASUS,through its wholly-owned subsidiaries, has contracted with the U.S. governmentto provide water and/or wastewater services, including both the operation andmaintenance and, in most cases, the renewal and replacement of the water and/orwastewater systems pursuant to 50-year fixed price contracts, which are subjectto periodic prospective price redeterminations and modifications for changes incircumstances.  All of the contracts withthe U.S. government may be terminated, in whole or in part, prior to the end ofthe 50-year term for convenience of the U.S. government or as a result ofdefault or nonperformance by the subsidiary performing the contract. In eitherevent, the Military Utility Privatization Subsidiary is entitled to recover theremaining amount of its capital investment pursuant to the terms of atermination settlement with the U.S. government at the time of termination as providedfor in each of the contracts. The contract price for each of these contracts issubject to redetermination two years after commencement of operations and everythree years thereafter under the terms of these contracts. Prices are subjectto equitable adjustment based upon changes in circumstances, changes in lawsand/or regulations, and changes in wages and fringe benefits to the extentprovided in each of the contracts.  AWRguarantees performance on all of ASUS’ military contracts.  Pursuant to the terms of these contracts, theMilitary Utility Privatization Subsidiaries operate, as of the effective dateof their respective contracts, the following water and wastewater systems:

 

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

 

·                  TUS - water andwastewater systems at Andrews Air Force Base in Maryland effectiveFebruary 1, 2006;

 

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·                  ODUS -wastewater systems at Fort Lee in Virginia effective February 23, 2006 andthe water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story inVirginia effective April 3, 2006 (collectively, the “TRADOC bases”);

 

·                  PSUS - waterand wastewater systems at Fort Jackson in South Carolina effectiveFebruary 16, 2008; and

 

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

 

ASUSand GSWC have also been pursuing opportunities to provide retail water serviceswithin the service area of the Natomas Central Mutual Water Company(“Natomas”).  Natomas is a California mutual water company which currentlyprovides water service to its shareholders, primarily for agriculturalirrigation in portions of Sacramento and Sutter counties in northernCalifornia. GSWC and Natomas have entered into various agreements including thepurchase of certain water and water rights that may allow GSWC the ability toserve portions of Sutter County in the future.

 

**Overview**

 

Registrant’srevenues, operating income and cash flows are earned primarily throughdelivering potable water to homes and businesses through approximately 2,900miles of water distribution pipelines and the delivery of electricity in theBig Bear area of San Bernardino County. Rates charged to customers of GSWC andCCWC are determined by the CPUC and ACC, respectively. These rates are intendedto allow recovery of operating costs and a reasonable rate of return oncapital.  Factors affecting financialperformance of our regulated utilities include the process and timing ofsetting rates charged to customers; the ability to recover, and the process forrecovering in rates, the costs of distributing water and electricity and ouroverhead costs; weather; the impact of increased water quality standards andenvironmental regulations on the cost of operations and capital expenditures;pressures on water supply caused by population growth, more stringent waterquality standards, deterioration in water quality and water supply from avariety of causes; capital expenditures needed to upgrade water systems andincreased costs; and risks associated with litigation relating to water qualityand water supply, including suits initiated by Registrant to protect its watersupply.

 

Operatingrevenues and income from contracted services at ASUS and its subsidiaries areearned primarily from the operation and maintenance and renewal and replacementof the water and/or wastewater systems for the U.S. government at variousmilitary bases. All of the operations and maintenance contracts with the U.S.government are 50-year firm, fixed-price contracts with prospective price redeterminations.ASUS also may generate revenues from the construction of infrastructureimprovements at these bases pursuant to the terms of these 50-year contracts orpursuant to contract modifications. Additional revenues generated by contract operations are primarilydependent on these new construction activities. As a result, ASUS is subject to risks that are different than those ofRegistrant’s regulated water and electric utilities.  ASUS plans to continue seeking contracts forthe operation and maintenance and renewal and replacement of water and/orwastewater services at military bases. Factors affecting the financial performance of our Military UtilityPrivatization Subsidiaries include delays in receiving payments from the U.S.government and the redetermination and equitable adjustment of prices undercontracts with the U.S. government.

 

Registrantplans to continue to seek additional rate increases in future years to recoveroperating and supply costs and receive reasonable returns on invested capital.Capital expenditures in future years are expected to remain at much higherlevels than depreciation expense. Cash solely from operations is not expectedto be sufficient to fund Registrant’s needs for capital expenditures,investments in Registrant’s contract business and other cash requirements.Registrant expects to fund a portion of these needs through common stockofferings, as well as from long- and short- term borrowings. In May 2009,AWR completed a public offering of 1,150,000 shares of its Common Shares,including 150,000 shares issued upon exercise of an option granted to theunderwriters to cover over-allotments, at a price to the public of $31 pershare. The net proceeds from the offering were $34.0 million, after deductionsof underwriting commissions and discounts, and direct legal and accountingfees. The Company used the proceeds of the offering to repay short-termdebt.  Inaddition, a senior note was issued by GSWC on March 10, 2009, to CoBank,ACB (“CoBank”). Under the terms of this senior note, CoBank purchased a 6.7%Senior Note due March 10, 2019 in the aggregate principal amount of $40.0million from GSWC. The proceeds from the sale of the note to CoBank have beenused to pay down short-term borrowings, pending their use to fund capitalexpenditures.

 

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Forthe three months ended June 30, 2009, net income was $11.5 millioncompared to $9.3 million in the same period of 2008, an increase of 23.9%.Diluted earnings per share for the three months ended June 30, 2009 were$0.64 compared to $0.53 in the same period of 2008, an increase of $0.11 pershare.  Impacting the comparability inthe results of the two periods on a diluted per share basis are the followingsignificant items, all of which are more fully discussed later: (i) a $1.7million pretax unrealized gain on purchased power contracts, or $0.06 pershare, for the three months ended June 30, 2008 with no corresponding gainin 2009; (ii) an increase in the dollar water margin of $5.7 million, or$0.19 per share, partially offset by a decrease in the dollar electric marginof $270,000, or $0.01 per share; (iii) an increase in other operatingexpenses, including higher pension costs, at GSWC of $1.3 million, or $0.04 pershare; (iv) the improved financial performance of the Military UtilityPrivatization Subsidiaries resulting in an increase in ASUS’ pretax operatingincome of $1.6 million, or $0.05 per share; (v) a settlement agreementreached with Mirant Energy Trading LLC (“Mirant Trading”) and the recording of$1.0 million in proceeds received in the settlement which reduced previouslyincurred legal costs, or $0.03 per share; (vi) an increase in interestexpense of $365,000, or $0.01 per share; (vii) a decrease in interestincome resulting from GSWC’s recording of $480,000 interest income, or $0.02per share, during the second quarter of 2008 in connection with the InternalRevenue Service’s (“IRS’s”) examination of AWR’s 2002 income tax return, and(viii) an overall increase in the effective income tax rate, or $0.02 pershare.

 

Forthe six months ended June 30, 2009, net income was $16.4 million comparedto $14.6 million in the same period of 2008, an increase of 12.6%.  Diluted earnings per share for the six monthsended June 30, 2009 were $0.92 compared to $0.84 in the same period of2008, an increase of $0.08 per share. Impacting the comparability in the results of the two periods on adiluted per share basis are the following significant items, all of which aremore fully discussed later: (i) a $4.5 million pretax unrealized gain onpurchased power contracts, or $0.15 per share, for the six months endedJune 30, 2008 with no corresponding gain in 2009; (ii) an increase inthe dollar water margin of $6.5 million, or $0.22 per share, partially offsetby a decrease in the dollar electric margin of $260,000, or $0.01 per share;(iii) an increase in other operating expenses at GSWC of $3.8 million, or$0.13 per share, as well as higher operating expenses of $234,000, or $0.01 pershare, at CCWC; (iv) the improved financial performance of the MilitaryUtility Privatization Subsidiaries resulting in an increase in ASUS’ pretaxoperating income of $3.2 million, or $0.11 per share; (v) a settlementagreement reached with Mirant Trading and the recording of $1.0 million inproceeds, or $0.03 per share; (vi) an increase in interest expense of$281,000, or $0.01 per share; (vii) a decrease in interest incomeresulting from GSWC’s recording of $480,000 interest income, or $0.02 pershare, during the second quarter of 2008 in connection with the IRS’sexamination of AWR’s 2002 income tax return, and (viii) a tax benefit of$918,000,  or $0.05 per share, recordedduring the first quarter of 2009 due to changes in state apportionment laws.

 

Unrealizedgains and losses on previous purchased power contracts impacted GSWC’s earningssince the contracts qualified as derivative instruments under SFASNo. 133, *“Accounting for Derivative Instruments andHedging Activities.”* Purchased power contracts that qualified asderivative instruments terminated at December 31, 2008. GSWC filed an application with the CPUC toreview its new purchased power contract, effective after December 31,2008.  This purchased power contract wassubject to CPUC approval and is also subject to derivative accounting.  In connection with thefiling to review and approve the new contract, GSWC also requested that theCPUC authorize the establishment of a memorandum account to track the changes in the fairmarket value of the contracts resulting in unrealized gains and losses.

 

In May 2009,the CPUC issued a final decision approving the new purchase power contract andauthorizing GSWC to establish the memorandum account to track unrealized gainsand losses on the new contract throughout the term of the contract.  Accordingly, at June 30, 2009 there wasan $8.5 million cumulative unrealized loss which has been included in thememorandum account, therefore not impacting GSWC’s earnings.  There were $1.7 million and$4.5 million of pretax unrealized gains on purchased power contracts includedin earnings for the three and six months ended June 30, 2008,respectively.  Diluted earnings for thethree months ended June 30, 2008 were $0.53 per share, and dilutedearnings for the six months ended June 30, 2009 were $0.84 per share.Eliminating the effects of the unrealized derivative gains, adjusted dilutedearnings per share for the three and six months ended June 30, 2008would have decreased by $0.06 and $0.15 per share, respectively, to $0.47 and$0.69 per share, respectively.

 

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**SummaryResults by Segment**

 

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

 

*SecondQuarter Results*

 

Thetables below set forth summaries of the results by segment (amounts inthousands):

 
| ** **             | ** ** | **Operating  Revenues** | ** **   | **Pretax  Operating Income** | ** ** |
|------------------------|------------|-------------------------|--------------|------------------------------|------------|
| ** **             | ** ** | **3  Months**           | ** **   | **3  Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**               | ** **   | **Ended**                    | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **6/30/2009**           | ** **   | **6/30/2008**                | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                    |         |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                       |  74,157 |                         | $          |  65,370 |   | $ |  8,787 |   | 13.4 | % | $ |  23,438 |   | $ |  18,529 |   | $ |  4,909 |   | 26.5 | % |
| Electric               |       | 5,888                   |         | 6,208                        |       | (320 | ) | -5.2 | % | 72 |   | 1,673 |   | (1,601 | ) | -95.7 | % |
| Contracted services    |       | 13,508                  |         | 8,735                        |       | 4,773 |   | 54.6 | % | 1,015 |   | (608 | ) | 1,623 |   | -266.9 | % |
| AWR parent             |       | —                  |         | —                       |       | — |   | — |   | (11 | ) | (13 | ) | 2 |   | -15.4 | % |
| Totals from operations |       | $                       |  93,553 |                         | $          |  80,313 |   | $ |  13,240 |   | 16.5 | % | $ |  24,514 |   | $ |  19,581 |   | $ |  4,933 |   | 25.2 | % |

 

***Water -***For the three months endedJune 30, 2009, pretax operating income for water increased by $4.9million, or 26.5% primarily due to a $5.7 million increase in the water dollarmargin as compared to the same period in 2008, partially offset by an increasein operating expenses including higher pension costs.  The dollar water margin increased due tohigher water rates approved by the CPUC subsequent to June 30, 2008.  These higher water rates increased waterrevenue by $2.4 million, partially offset by lower actual consumption.  In addition, as a result of implementing theWater Revenue Adjustment Mechanism (“WRAM”) accounts in Regions II and III inlate November 2008, GSWC recorded $2.9 million of additional revenues forthe three months ended June 30, 2009. The revenue requirement and volumetric revenues are adopted as part of aGeneral Rate Case (“GRC”) every three years. Regions II and III’s next GRC willbe filed in July of 2011 with rates effective January 2013.  Aspart of the GRC, the CPUC will adopt new volumetric revenues based onhistorical usage patterns and the revenue requirement adopted in that GRC.

 

Although the recording of the WRAMadded $2.9 million of water revenues, this favorable impact to earnings wasreduced by $0.7 million of water supply over-collection costs tracked in theModified Cost Balancing Account (“MCBA”) account, also implemented in lateNovember 2008 for Regions II and III. The over-collection in the MCBA account is due to: (i) lowerconsumption in the second quarter 2009 as compared to the consumption leveladopted by the CPUC, and (ii) a lower percentage of purchased water in thesupply mix during 2009 when compared to the supply mix included in customerrates, partially offset by increases in rates charged by GSWC’s suppliers.  On May 7, 2009,the CPUC approved tiered rates for Region I and the establishment of a WRAM andMCBA which will go into effect on or about September 1, 2009.  Theimplementation of the WRAM and MCBA help mitigate fluctuations in the Company’searnings caused by changes in the volume of water sold and supply costs.

 

TheCPUC also approved an advice letter filing in a separate proceeding to allowGSWC to create and implement a Water Conservation Memorandum Account (“WCMA”)to track the extraordinary expenses and revenue shortfall associated withconservation measures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008and was used to track the revenue shortfall until the WRAM was implemented forRegions II and III on November 25, 2008. At November 24, 2008, approximately $2.0 million of netunder-collections was included in the WCMA for Regions II and III prior to theimplementation of the WRAM.  OnApril 16, 2009, the CPUC approved the advice letter filed by GSWC torecover the $2.0 million included in the WCMA for Regions II and III andauthorized GSWC to establish a 12-month surcharge to customers’ bills. Thesurcharge went into effect on April 21, 2009.  Accordingly, GSWC established a $2.0 millionregulatory asset, which was recorded as additional water revenues during thesecond quarter of 2009. In addition, GSWC established an $852,000 regulatoryasset for Region I’s WCMA balance incurred during the period of August 18,2008 through June 30, 2009 which is also now probable of recovery.  GSWC will file an advice letter for 

 

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recoveryof Region I’s WCMA, through a 12-month surcharge, once the WRAM and MCBA becomeeffective on or about September 1, 2009 for the period of August 18,2008 through August 31, 2009.

 

***Electric —***For the three months endedJune 30, 2009, pretax operating income from electric operations decreasedby $1.6 million due in large part to a decrease of $1.7 million in the pretaxunrealized gain on purchased power contracts. The unrealized gain on purchased power contracts increased operatingincome by approximately $1.7 million during the second quarter of 2008, or$0.06 per share, with no corresponding gain in 2009.  As previously discussed, the purchased powercontract that resulted in unrealized gains and losses to BVES’ earningsterminated at December 31, 2008. There were also increases in operating expenses including higher outside consulting and legal costs related to the purchasedpower contract.  However, these increaseswere offset by the recording of the $1.0 million in proceeds received in thesettlement agreement with Mirant Trading in May 2009, which reducedpreviously incurred legal costsduring the second quarter of 2009.

 

***Contracted Services -***For the threemonths ended June 30, 2009, pretax operating income for contractedservices increased by $1.6 million, or $0.05 per share.  This was primarily due to an interim increasein operations and maintenance revenues at Fort Bliss and construction projectrevenues at Fort Bliss and the military bases in Virginia coupled with loweroperating expenses. As a result, pretax operating income increased $835,000 atthese bases.  During the three monthsended June 30, 2009, Fort Jackson continued to operate at a loss; however,the losses decreased by $678,000 as compared to the same period in 2008 dueprimarily to excess transition costs included in the prior year that did notrecur in 2009, as well as lower maintenance and other operating costs.  During the three months ended June 30,2009, Fort Bragg also had an increase of $336,000 to pretax operatingincome.  These increases were partiallyoffset by lower pretax income of $163,000 at Andrews Air Force base due tolower construction activities.

 

InSeptember 2008, PSUS submitted a Request for Equitable Adjustment (“REA”)for the water and wastewater systems at Fort Jackson, South Carolina requestinga contract modification for initial capital upgrades and emergency constructioncosts incurred during 2008 due to pre-existing conditions that were not anticipatedat the time the contract was executed. The aggregate value of the REA relating to construction work isapproximately $1.6 million.  In addition,the REA included a request to increase prospectively the annual revenues by$1.6 million for operating and maintaining the system to adequately reflect theamount of assets included in the infrastructure at Fort Jackson.  The REA has not yet been approved by the U.S.government. Earnings and cash flows from amendments andmodifications to the original 50-year contracts with the U.S. government aresporadic and may or may not continue in the future periods.

 

Thetimely receipt of price redeterminations continues to be critical in order forASUS to recover increasing costs for operating and maintaining the water andwastewater systems at the military bases. In addition, higher allocations of corporate headquarters’ expenses toASUS and its wholly-owned subsidiaries by the CPUC were not contemplated at thetime the contracts with the U.S. government were negotiated and will beaddressed in future price redeterminations. Under the terms of these contracts, the contract price is subject toprice redetermination two years after commencement of operations and everythree years thereafter.  Redeterminationshave been submitted and are under review by the U.S. government for operationsof ODUS and TUS in Virginia and Maryland, respectively.  The price redeterminations are expected to becompleted in late 2009 or early 2010. Pending redetermination of prices, ASUS has received interim inflationadjustments during 2008 to the management fees for operating and maintainingthe water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe inVirginia, and the wastewater system at Fort Lee also in Virginia effective onthe second anniversary of the date when ASUS began operating these bases(February 23, 2008 for Fort Lee and April 3, 2008 for the other threebases).  In March 2009, ONUS filedan REA related to a joint inventory report at Fort Bragg, North Carolina.  The report indicated the quantity of the FortBragg infrastructure to be about 40% greater than what was assumed under theoriginal 50-year contract.  The REA isexpected to be resolved by the third quarter of 2009.

 

FBWS has experienced delays in the redeterminationof prices at Fort Bliss following completion of the first two years ofoperation in October 2006.  At FortBliss, management fees for operation and maintenance of the water andwastewater systems are based on cost levels prevailing in 2003 when thecontract with the U.S. government was bid. Further, the contract pricing was also based on assumptions about thesize and age of the infrastructure to be operated and maintained over the50-year contract.  An REA has been filedas a claim with the U.S. government to adequately reflect the amount of assetsincluded in the infrastructure at Fort Bliss, which is substantially more thanoriginally estimated by the U.S. government as part of its solicitation forthis contract.  In December 2008,the U.S. government approved an interim adjustment at Fort Bliss whichincreased the monthly water and wastewater fees by 50% and 59%, respectively,related to operating and maintaining the Fort Bliss 

 

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systems. The increase was retroactive to October 1, 2008 and wasextended by the U.S. government through September 30, 2009.  FBWS is continuing negotiations with FortBliss to finalize the adjustment necessary due to the increased infrastructure.FBWS also intends to file its first price redetermination request for FortBliss during the third quarter of 2009 followed by the second redeterminationrequest in the fourth quarter of 2009. First price redetermination filings for Fort Jackson and Fort Bragg arealso expected to be filed by PSUS and ONUS, respectively, during the fourthquarter of 2009.

 

These price redeterminations and equitableadjustments, which include adjustments to reflect changes in operatingconditions and infrastructure levels from that assumed at the time of theexecution of the contracts, as well as inflation in costs, are expected toprovide added revenues prospectively to help offset increased costs and provideRegistrant the opportunity to generate positive operating income at itsMilitary Utility Privatization Subsidiaries. As of June 30, 2009, ASUS has $1.1 million of goodwill, which maybe at risk for potential impairment if requested price redeterminations andequitable adjustments that have not yet been approved, are not received.

 

*Year-to-DateResults*

 

Thetables below set forth summaries of the results by segment (amounts inthousands):

 
| ** **             | ** ** | **Operating  Revenues** | ** ** | **Pretax  Operating Income** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **6  Months**           | ** ** | **6  Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**               | ** ** | **Ended**                    | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **6/30/2009**           | ** ** | **6/30/2008**                | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                       | 130,951    |                         | $          | 117,459 |   | $ | 13,492 |   | 11.5 | % | $ | 34,382 |   | $ | 30,224 |   | $ | 4,158 |   | 13.8 | % |
| Electric               |       | 14,520                  |       | 15,011                       |       | (491 | ) | -3.3 | % | (472 | ) | 5,084 |   | (5,556 | ) | -109.3 | % |
| Contracted services    |       | 27,691                  |       | 16,785                       |       | 10,906 |   | 65.0 | % | 2,083 |   | (1,149 | ) | 3,232 |   | -281.3 | % |
| AWR parent             |       | —                  |       | —                       |       | — |   | — |   | (61 | ) | (116 | ) | 55 |   | -47.4 | % |
| Totals from operations |       | $                       | 173,162    |                         | $          | 149,255 |   | $ | 23,907 |   | 16.0 | % | $ | 35,932 |   | $ | 34,043 |   | $ | 1,889 |   | 5.5 | % |

 

***Water -***Pretax operating income forwater increased by $4.2 million, or 13.8%, primarily due to a $6.5 millionincrease in the dollar water margin as compared to the same period in 2008, partiallyoffset by an increase in operating expenses including higher pensioncosts.  The dollar water margin increaseddue to higher water rates approved by the CPUC subsequent to June 30,2008.  These higher water rates increasedwater revenue by $4.8 million, partially offset by lower actualconsumption.  In addition, as a result ofimplementing the WRAM accounts in Regions II and III in lateNovember 2008, GSWC recorded $6.6 million of additional revenues for thesix months ended June 30, 2009.  Aspreviously discussed, GSWC also recorded $2.8 million included in the WCMAaccounts for all of its water regions.

 

Althoughthe recording of the WRAM added $6.6 million of water revenues, this favorableimpact to earnings was reduced by $1.8 million of water supply over-collectioncosts tracked in the MCBA account, also implemented in lateNovember 2008.  The over-collectionin the MCBA account is due to: (i) lower consumption for the six monthsended June 30, 2009 as compared to the consumption level approved by theCPUC, and (ii) a lower percentage of purchased water in the supply mixduring 2009 when compared to the supply mix included in customer rates,partially offset by increases in rates charged by GSWC’s suppliers. Theimplementation of the WRAM and MCBA help mitigate fluctuations in the Company’searnings caused by changes in the volume of water sold and supply costs.

 

***Electric —***For the six months endedJune 30, 2009, pretax operating income from electric operations decreasedby $5.6 million due in large part to a decrease of $4.5 million in the pretaxunrealized gain on purchased power contracts. The unrealized gain on purchased power contracts increased operatingincome by approximately $4.5 million during the six months of 2008, or $0.15per share, with no corresponding gain in 2009. As previously discussed, the purchased power contract that resulted inunrealized gains and losses to BVES’ earnings terminated at December 31,2008.  The remainder of the decrease inpretax operating income was due to an increase in operating expenses includinghigher outside consulting and legalcosts related to the general rate case and the purchased power contract.  However, these increases in operating costswere partially offset by the recording of the $1.0 million in proceedsreceived in the settlement agreement with Mirant Trading in May 2009,which reduced previously incurred legal costs.

 

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***Contracted Services -***For the sixmonths ended June 30, 2009, pretax operating income for contractedservices increased by $3.2 million, or $0.11 per share.  This was primarily due to an increase in newconstruction projects at Fort Bliss and the military bases in Virginia.  As a result, pretax operating incomeincreased by $2.4 million at these bases. Earnings and cash flows from amendments and modifications to theoriginal 50-year contracts with the U.S. government are sporadic and may or maynot continue in the future periods. During the six months ended June 30, 2009, Fort Jackson and FortBragg continued to operate at a loss; however, the losses decreased by $695,000as compared to same period in 2008 due primarily to lower maintenance and otheroperating costs.

 

Thefollowing discussion and analysis provides information on AWR’s consolidatedoperations and assets and where necessary, includes specific references toAWR’s individual segments and/or other subsidiaries: GSWC, CCWC, ASUS and itssubsidiaries.

 

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***ConsolidatedResults of Operations — Three Months Ended June 30, 2009 and 2008 (amountsin thousands):***

*** ***
| ** **                                       | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                       | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                               |       |          |       |          |       |       |       |       |       |
| Water                                            |       | $             | 74,157     |          | $          | 65,370     |       | $          | 8,787      |   | 13.4 | % |
| Electric                                         |       | 5,888         |       | 6,208         |       | (320       | )          | -5.2       | %          |
| Contracted services                              |       | 13,508        |       | 8,735         |       | 4,773      |       | 54.6       | %          |
| Total operating revenues                         |       | 93,553        |       | 80,313        |       | 13,240     |       | 16.5       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                               |       |          |       |          |       |       |       |       |       |
| Water purchased                                  |       | 12,257        |       | 13,079        |       | (822       | )          | -6.3       | %          |
| Power purchased for pumping                      |       | 2,688         |       | 2,655         |       | 33         |       | 1.2        | %          |
| Groundwater production assessment                |       | 2,857         |       | 2,890         |       | (33        | )          | -1.1       | %          |
| Power purchased for resale                       |       | 2,403         |       | 2,595         |       | (192       | )          | -7.4       | %          |
| Unrealized gain on purchased power contracts     |       | —        |       | (1,664        | )          | 1,664      |       | -100.0     | %          |
| Supply cost balancing accounts                   |       | 3,332         |       | (672          | )          | 4,004      |       | -595.8     | %          |
| Other operating expenses                         |       | 7,165         |       | 7,053         |       | 112        |       | 1.6        | %          |
| Administrative and general expenses              |       | 15,522        |       | 14,943        |       | 579        |       | 3.9        | %          |
| Depreciation and amortization                    |       | 8,387         |       | 7,810         |       | 577        |       | 7.4        | %          |
| Maintenance                                      |       | 3,887         |       | 4,770         |       | (883       | )          | -18.5      | %          |
| Property and other taxes                         |       | 2,712         |       | 2,839         |       | (127       | )          | -4.5       | %          |
| ASUS construction expenses                       |       | 7,829         |       | 4,434         |       | 3,395      |       | 76.6       | %          |
| Total operating expenses                         |       | 69,039        |       | 60,732        |       | 8,307      |       | 13.7       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                 |       | 24,514        |       | 19,581        |       | 4,933      |       | 25.2       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                        |       |          |       |          |       |       |       |       |       |
| Interest expense                                 |       | (5,659        | )          | (5,294        | )          | (365       | )          | 6.9        | %          |
| Interest income                                  |       | 296           |       | 775           |       | (479       | )          | -61.8      | %          |
| Other                                            |       | 82            |       | 7             |       | 75         |       | 1071.4     | %          |
|                                             |       | (5,281        | )          | (4,512        | )          | (769       | )          | 17.0       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE |       | 19,233        |       | 15,069        |       | 4,164      |       | 27.6       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| Income tax expense                               |       | 7,734         |       | 5,786         |       | 1,948      |       | 33.7       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| NET INCOME                                       |       | $             | 11,499     |          | $          | 9,283      |       | $          | 2,216      |   | 23.9 | % |

 

Net income for the threemonths ended June 30, 2009 was $11.5 million, equivalent to $0.64 percommon share on a basic and fully diluted basis, compared to $9.3 million or$0.54 and $0.53 per common share on a basic and fully diluted basis,respectively, for the three months ended June 30, 2008, an increase in netincome of 23.9%.

 

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

 

·      An unrealized gain on purchased power contracts in2008 which increased pretax income by $1.7 million, or $0.06 per share.  These purchased power contracts expired on December 31,2008 and GSWC began taking delivery of power under a new contract effective January 1,2009.  As previously discussed, the CPUCissued a decision approving the new contract and authorizing GSWC to establish the memorandum account to track unrealizedgains and losses on the new contract throughout the term of the contract.  Accordingly, during the three months ended June 30,2009, there was a $119,000 unrealized loss which has been included in thememorandum account, therefore not impacting GSWC’s earnings.

 

·      The water and electric margin increased by $5.5million, or $0.18 per share, during the three months ended June 30, 2009as compared to the same period in 2008 due primarily to:  (i) higher water rates approved by theCPUC effective January 1, 2009; (ii)  the water margin impact ofrecording the WRAM and MCBA of approximately $2.2 million, or $0.07 per share,and (iii) the recording of $2.8 million of additional revenues due to theCPUC’s approval in April 2009 of the Water Conservation Memorandum Accounts.These increases were partially offset by lower water consumption of 4.2% whencompared to same period in 2008.

 

·      GSWC reached a settlement agreement with MirantTrading and recorded the proceeds of $1.0 million, or $0.03 per share, as areduction to legal costs. There was no similar gain in the same period of 2008.

 

·      Excluding the settlement agreement withMirant Trading, other operating expenses (including administrative and generalexpenses), increased at GSWC by $1.3 million, or $0.04 per share, for thesecond quarter of 2009 due to an increase of $855,000 in pension expensesresulting from an increase in the underfunded position of the pension plan, andan increase of $469,000 in depreciation expense.

 

·      Pretax operating income for contractedservices increased by $1.6 million, or $0.05 per share, during the three monthsended June 30, 2009 due primarily to an increase in special constructionprojects at Fort Bliss and military bases in Virginia, and improved performanceat PSUS and ONUS as compared to the prior year.

 

·      An increase in interest expense of$365,000, or $0.01 per share, due to an increase in long-term debt resultingfrom the issuance of $40.0 million of notes in March 2009.

 

·      A decrease in interest income resulting from GSWC’srecording of $480,000 interest income, or $0.02 per share, during the secondquarter of 2008 in connection with the Internal Revenue Service’s (“IRS’s”)examination of AWR’s 2002 income tax return.

 

·      An increase in the effective income taxrate (“ETR”) during the three months ended June 30, 2009 as compared tothe same period in 2008, negatively impacted earnings by $0.02 per share, dueprimarily to changes between book and taxable income that are treated asflow-through adjustments in accordance with regulatory requirements.

 

***Operating Revenues***

 

*Water*

 

Forthe three months ended June 30, 2009, revenues from water operationsincreased by 13.4% to $74.2 million, compared to $65.4 million for the threemonths ended June 30, 2008. Contributing to this increase were rateincreases approved by the CPUC effective January 1, 2009, which addedapproximately $2.4 million in the second quarter of 2009 to waterrevenues.  In addition, as a result of the implementation ofthe WRAM account for Regions II and III in late November of 2008, GSWCrecorded $2.9 million of additional revenues to adjust the 2009 second quarterrevenues to the consumption levels adopted by the CPUC. Furthermore, GSWCrecorded $2.8 million included in the WCMA conservation memorandum accounts ateach of GSWC’s water regions.  Finally,there was an increase in water revenues of $2.1 million due to surchargesapproved by the CPUC in effect to recover under-collections in supply costs. These increases were partially offset by $1.3 millionresulting from a decrease in actual consumption of 4.2% whencompared to the second quarter of 2008.

 

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The revenue requirementand volumetric revenues are adopted as part of a GRC every three years. Regions II and III’s next GRC will be filed in July of 2011 withrates effective January 2013.  As part of the GRC, the CPUC willadopt new volumetric revenues based on historical usage patterns and therevenue requirement adopted in that GRC.

 

*Electric*

 

For the three monthsended June 30, 2009, revenues from electric operations decreased by 5.2%to $5.9 million compared to $6.2 million for the three months ended June 30,2008 due primarily to a decrease in electric usage.

 

*ContractedServices*

 

Revenuesfrom contracted services are comprised of construction revenues (includingrenewals and replacements) and management fees for operating and maintainingthe water and/or wastewater systems at military bases.  For the three months ended June 30,2009, revenues from contracted services increased by $4.8 million, or 54.6%, to$13.5 million compared to $8.7 million for the three months ended June 30,2008 primarily due to higher construction revenues.  Construction revenues increased by $4.4million primarily related to special projects at Fort Bliss, ODUS, and ONUS.  Construction revenues at these bases increasedcollectively by $4.9 million (including the construction revenues from specialprojects) as compared to the second quarter of 2008.  Construction revenues at these bases werepartially offset by lower construction revenues of $0.4 million at Andrews AirForce Base and Fort Jackson.  Earnings andcash flows from amendments and modifications to the original 50-year contractswith the U.S. government are sporadic and may or may not continue in futureperiods.

 

Forthe three months ended June 30, 2009, management fees for operating andmaintaining the various systems totaled $3.4 million as compared to $3.0million for the three months ended June 30, 2008.  In December 2008, the U.S. governmentauthorized an interim adjustment at Fort Bliss which increased the monthlywater and wastewater fees by 50% and 59%, respectively, pending resolution ofFBWS’s REA filed as a claim, due to inventory adjustments.  This resulted in an increase of approximately$294,000 to Fort Bliss’ management fees for operating and maintaining thesystem for the second quarter of 2009 as compared to the second quarter of2008.

 

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

 

***Operating Expenses:***

 

***Supply Costs***

 

Supply costs for thewater segment consist of purchased water, purchased power for pumping,groundwater production assessments and water supply cost balancing accounts.Supply costs for the electric segment consist of purchased power for resale(including the cost of natural gas) and the electric supply cost balancingaccount*.* Water and electric margins arecomputed by taking total revenues and deducting total supply costs. Registrantuses these margins and related percentages as an important measure inevaluating its operating results. Registrant believes this measure is a usefulinternal benchmark in evaluating the utility business performance within itswater and electric segments. Registrant reviews these measurements regularlyand compares them to historical periods and to our operating budget asapproved. However, this measure, which is not presented in accordance withGenerally Accepted Accounting Principles (“GAAP”), may not be comparable tosimilarly titled measures used by other entities and should not be consideredas an alternative to operating income, which is determined in accordance withGAAP, as an indicator of operating performance.

 

Total supply costscomprise the largest segment of total operating expenses. Supply costsaccounted for approximately 34% of total operating expenses for the threemonths ended June 30, 2009 and 2008, respectively.

 

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The table below providesthe amount of increases (decreases), percent changes in supply costs, andmargins during the three months ended June 30, 2009 and 2008 (amounts inthousands):

 
| ** **                                      | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                      | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                |       | $             | 74,157     |          | $          | 65,370     |       | $          | 8,787      |   | 13.4 | % |
| WATER SUPPLY COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                         |       | $             | 12,257     |          | $          | 13,079     |       | $          | (822       | ) | -6.3 | % |
| Power purchased for pumping **(1)**             |       | 2,688         |       | 2,655         |       | 33         |       | 1.2        | %          |
| Groundwater production assessment **(1)**       |       | 2,857         |       | 2,890         |       | (33        | )          | -1.1       | %          |
| Water supply cost balancing accounts **(1)**    |       | 2,421         |       | (1,441        | )          | 3,862      |       | -268.0     | %          |
| TOTAL WATER SUPPLY COSTS                        |       | $             | 20,223     |          | $          | 17,183     |       | $          | 3,040      |   | 17.7 | % |
| WATER MARGIN**(2)**                             |       | $             | 53,934     |          | $          | 48,187     |       | $          | 5,747      |   | 11.9 | % |
| PERCENT MARGIN - WATER                          |       | 72.7          | %          | 73.7          | %          |       |       |       |       |
|                                            |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**             |       | $             | 5,888      |          | $          | 6,208      |       | $          | (320       | ) | -5.2 | % |
| ELECTRIC SUPPLY COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(1)**              |       | $             | 2,403      |          | $          | 2,595      |       | $          | (192       | ) | -7.4 | % |
| Electric supply cost balancing accounts **(1)** |       | 911           |       | 769           |       | 142        |       | 18.5       | %          |
| TOTAL ELECTRIC SUPPLY COSTS                     |       | $             | 3,314      |          | $          | 3,364      |       | $          | (50        | ) | -1.5 | % |
| ELECTRIC MARGIN **(2)**                         |       | $             | 2,574      |          | $          | 2,844      |       | $          | (270       | ) | -9.5 | % |
| PERCENT MARGIN - ELECTRIC                       |       | 43.7          | %          | 45.8          | %          |       |       |       |       |

 

----

(1)           As reported on AWR’s Consolidated Statements ofIncome, except for supply cost balancing accounts. The sum of water andelectric supply cost balancing accounts in the table above are shown on AWR’sConsolidated Statements of Income and totaled $3,332,000 and ($672,000) for thethree months ended June 30, 2009 and 2008, respectively.

 

(2)           Water and electric margins do not include anydepreciation and amortization, maintenance expense, unrealized gains and losseson purchased power contracts, or other operating expenses.

 

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

 

Prior to November 2008,changes in the water resource mix between water supplied from purchased sourcesand that supplied from Registrant’s wells would increase/decrease actualsupply-related costs relative to the mix approved for recovery through rates,thereby impacting earnings either negatively or positively.  On August 21, 2008, the CPUC issued afinal decision for Regions II and III which approved the establishment of amodified cost balancing account that allows recovery of supply costs forchanges in water supply mix.  GSWC implementedthe MCBA in November 2008 prospectively in connection with the newconservation rate design and the implementation of a WRAM.  Under the MCBA, GSWC began tracking adoptedexpense levels for purchased 

 

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water, purchased powerand pump taxes, as established by the CPUC. Variances (which include theeffects of changes in both rate and volume) between adopted and actualpurchased water, purchased power, and pump tax expenses are recorded as acomponent of the supply cost balancing account provision.  The amount of such variances will berecovered from or refunded to GSWC’s customers at a later date. This isreflected with an offsetting entry to a regulatory asset or liability balancingaccount (tracked individually for Regions II and III).

 

For the three monthsended June 30, 2009, 38.9% of the Company’s water supply mix was purchasedas compared to 41.8% purchased for the three months ended June 30,2008.  However, as noted above, in November 2008GSWC implemented the MCBA for Regions II and III which prospectively eliminatesthe effects on earnings of changes in the water supply mix.  The adopted percentage of purchased water forthe three months ended June 30, 2009 at Regions II and III was 61.3% and41.8%, respectively, as compared to actual purchased water of 42.6% and 42.5%,respectively, for the second quarter of 2009. The significant improvement in Region II’s actual mix compared to themix approved by the CPUC resulted in an over-collection in the MCBA account.This contributed to the overall decrease in the water margin percent to 72.7%in the second quarter of 2009 compared to 73.7% in the same period of 2008 sinceGSWC no longer receives any benefit from a more favorable supply mix in RegionsII and III than that approved by the CPUC.

 

Purchased water costs forthe three months ended June 30, 2009 decreased by 6.3% to $12.3 million ascompared to $13.1 million in the same period of 2008.  The decrease in purchased water costs was dueto lower customer usage, partially offset by higher water rates charged fromwholesale suppliers.

 

For the three monthsended June 30, 2009, power purchased for pumping remained flat at $2.7million.  Increases in supplier rates andchanges in the actual supply mix, as discussed above, were offset by lowercustomer demand.  Groundwater productionassessments were slightly reduced by 1.1% due to lower customer demandpartially offset by increases in assessment rates (pump tax rates) leviedagainst groundwater production, effective July 2008.  Average pump tax rates increased in RegionsII and III by approximately 3% and 6%, respectively, between the twoperiods.  The MCBA tracks the increasesin pump tax rates for future recovery in water rates.

 

An increase of $3.9million in the water supply cost balancing account provision during the threemonths ended June 30, 2009 as compared to the same period in 2008 wasprimarily caused by: (i) a $2.1 million increase in the amortization ofthe water supply cost balancing accounts for surcharges currently in effect; (ii) therecording of $735,000 in the MCBA accounts, and (iii) a net decrease of$1.0 million of under-collections in 2009 (only related to Region I in 2009)compared to the same period in 2008.

 

For the three monthsended June 30, 2009, the cost of power purchased for resale to customersin GSWC’s BVES division decreased by 7.4% to $2.4 million compared to $2.6million for the three months ended June 30, 2008 reflectinglower customer demand.  In addition, GSWC began receiving powerunder a new purchased power contract in January 1, 2009.  The main product under the new contractprovides for 13 MWs of electric energy at a fixed price of $63.75 per MWhduring 2009 as compared to $74.65 during 2008. The decrease in the price of purchased power is reflected in theelectric supply cost balancing account resulting in no change to thedollar margin for electric services.

 

***Unrealized Gain on Purchased Power Contracts***

 

Pursuant to SFAS No. 133,the unrealized gain on purchased power contracts during 2008 represented gainsrecorded for GSWC’s purchased power agreements with Morgan Stanley CapitalGroup, Inc. There was a $1.7 million pretax unrealized gain on purchasedpower contracts for the three months ended June 30, 2008. These contractsterminated at December 31, 2008. GSWC filed an application with the CPUC to review the new purchased powercontracts, effective after December 31, 2008.  GSWC also sought the CPUC’s authorization ofa memorandum account to track the changes in the fair market value of thecontracts resulting in unrealized gains and losses.  In May 2009, the CPUC issued a finaldecision approving the contract and authorizing the memorandum account to trackunrealized gains and losses. Accordingly, a cumulative unrealized loss of $8.5 million as of June 30,2009 has been included in the memorandum account and did not impact GSWC’searnings.

 

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***Other Operating Expenses***

 

The primary components ofother operating expenses include payroll, materials and supplies, chemicals andwater treatment, and outside service costs of operating the regulated watersystems, including the costs associated with water transmission anddistribution, pumping, water quality, meter reading, billing, and operations ofdistrict offices.  Registrant’s electricand contracted services operations incur many of the same types of costs aswell.  For the three months ended June 30,2009 and 2008, other operating expenses by segment consisted of the following(amounts in thousands):

 
| ** **                     | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 5,908      |          | $          | 5,294      |       | $          | 614        |   | 11.6 | % |
| Electric Services              |       | 550           |       | 499           |       | 51         |       | 10.2       | %          |
| Contracted Services            |       | 707           |       | 1,260         |       | (553       | )          | -43.9      | %          |
| Total other operating expenses |       | $             | 7,165      |          | $          | 7,053      |       | $          | 112        |   | 1.6 | % |

 

For the three months ended June 30, 2009, otheroperating expenses for water services increased by 11.6% due primarily to:  (i) higher chemicals and water treatmentcosts, including supplies and materials, of approximately $249,000, largely inRegion III;  (ii) an increase inoutside services of $244,000; (iii) an increase of $48,000 in labor costsand other miscellaneous employee benefits, and (iv) an increase of $85,000in postage costs. These increases were partially offset by a decrease in otheroperating expense of $12,000.

 

There was an increase of $51,000 in other operatingexpenses for electric services primarily due to higher wages and relatedbenefits of $35,000.  Other operating expensesincreased by $30,000.  These increases werepartially offset by a decrease in $14,000 in bad debt expense.

 

Contractedservices experienced decreases in other operating expenses of $553,000primarily due to a decrease in outside services of $349,000, primarily relatedto PSUS and ONUS.  In addition,transition costs of $206,000 were incurred in the second quarter of 2008 due tothe commencement of the operation of water and wastewater systems at militarybases in North Carolina and South Carolina, which are non-recurring.

 

***Administrative and General Expenses***

 

Administrative and generalexpenses include payroll related to administrative and general functions, allemployee benefits charged to expense accounts, insurance expenses, outsidelegal and consulting fees, regulatory utility commission expenses, expensesassociated with being a public company, and general corporate expenses. For thethree months ended June 30, 2009 and 2008, administrative and generalexpenses by segment, including AWR (parent), consisted of the following(amounts in thousands):

 
| ** **                                | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 11,709     |          | $          | 10,843     |       | $          | 866        |   | 8.0 | % |
| Electric Services                         |       | 1,075         |       | 1,558         |       | (483       | )          | -31.0      | %          |
| Contracted Services                       |       | 2,727         |       | 2,529         |       | 198        |       | 7.8        | %          |
| AWR (parent)                              |       | 11            |       | 13            |       | (2         | )          | -15.4      | %          |
| Total administrative and general expenses |       | $             | 15,522     |          | $          | 14,943     |       | $          | 579        |   | 3.9 | % |

 

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For thethree months ended June 30, 2009, administrative and general expensesincreased by $866,000 in water services compared to the three months ended June 30,2008 due primarily to an increase of $813,000 in pension expenses resultingfrom a reduction in the fair value of plan assets in 2008 caused by marketconditions at the time.  There was alsoan increase in: (i) labor costs and other employee benefits of $232,000 due to higher wages largelyrelated to Registrant’s annual performance-based salary review program, and (ii) andapproximately $16,000 in other expenses. These increases were partially offset by a decrease of $197,000 inoutside services including legal, tax and consulting costs.

 

For the three monthsended June 30, 2009, administrative and general expenses decreased by$483,000 in electric services compared to the three months ended June 30,2008 due primarily to the recording of $1.0 million received from MirantTrading in connection with a settlement agreement reached in May 2009.  The amount received from Mirant Trading wenttowards reducing previously incurred legal costs.  Excluding this one-timegain, administrative and general expenses increased by $517,000 in electricservices due to higher outside legal and consulting costs of $397,000associated with the new purchased power contract.  There was also an$86,000 increase in wages and related benefits.

 

For thethree months ended June 30, 2009 administrative and general expensesincreased by $198,000 for contracted services compared to the three monthsended June 30, 2008 due primarily to an increase in labor costs and otherbenefits of $325,000 due to higher wages and an increase in headcount, anincrease of $83,000 in pension expense and other miscellaneous expenses of$14,000.  These increases were partiallyoffset by decreases in vehicle and travel expenses of $140,000 and loweroutside service costs of $84,000.

 

***Depreciation and Amortization***

 

For the three monthsended June 30, 2009 and 2008, depreciation and amortization by segmentconsisted of the following (amounts in thousands):

 
| ** **                          | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 7,666      |          | $          | 7,160      |       | $          | 506        |   | 7.1 | % |
| Electric Services                   |       | 564           |       | 553           |       | 11         |       | 2.0        | %          |
| Contracted Services                 |       | 157           |       | 97            |       | 60         |       | 61.9       | %          |
| Total depreciation and amortization |       | $             | 8,387      |          | $          | 7,810      |       | $          | 577        |   | 7.4 | % |

 

For the three monthsended June 30, 2009, depreciation and amortization expense for water andelectric services increased by $517,000 to $8.2 million compared to $7.7million for the three months ended June 30, 2008 reflecting, among otherthings,  approximately $73.6 million ofadditions to utility plant during 2008, depreciation on which began in January 2009.  Registrant anticipates that depreciationexpense will continue to increase due to ongoing construction at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

 

There were also increases of approximately $60,000 for the contracted services segment dueto the addition of fixed assets.

 

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***Maintenance***

 

For the three months endedJune 30, 2009 and 2008, maintenance expense by segment consisted of thefollowing (amounts in thousands):

 
| ** **          | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 2,939      |          | $          | 3,709      |       | $          | (770       | ) | -20.8 | % |
| Electric Services   |       | 162           |       | 156           |       | 6          |       | 3.8        | %          |
| Contracted Services |       | 786           |       | 905           |       | (119       | )          | -13.1      | %          |
| Total maintenance   |       | $             | 3,887      |          | $          | 4,770      |       | $          | (883       | ) | -18.5 | % |

 

For the three months ended June 30, 2009,maintenance expense for water and electric services decreased by $764,000 to$3.1 million compared to $3.9 million for the three months ended June 30,2008 due principally to a decrease in unplanned and emergency maintenance onGSWC’s wells, water supply and distribution facilities.  In addition, certain planned maintenance hasbeen deferred to later in the 2009 year, which will increase maintenanceexpense during the remaining quarters of 2009. GSWC’s maintenance expense at its three water regions decreased by$797,000 during the three months ended June 30, 2009 compared to the sameperiod in 2008. This decrease was partially offset by an increase of $33,000 inmaintenance expense at CCWC.

 

There was a decrease of$119,000 in contracted services maintenance expense due primarily to reducedemergency related work on the water and wastewater system at Fort Jackson inSouth Carolina. Maintenance expense at Fort Jackson decreased by $247,000during the three months ended June 30, 2009 as compared to the same periodin 2008. This decrease was partially offset by an increase of $128,000 inmaintenance expense at other military bases.

 

***Property and Other Taxes***

 

For the three monthsended June 30, 2009 and 2008, property and other taxes by segmentconsisted of the following (amounts in thousands):

 
| ** **                     | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 2,276      |          | $          | 2,656      |       | $          | (380       | ) | -14.3 | % |
| Electric Services              |       | 151           |       | 71            |       | 80         |       | 112.7      | %          |
| Contracted Services            |       | 285           |       | 112           |       | 173        |       | 154.5      | %          |
| Total property and other taxes |       | $             | 2,712      |          | $          | 2,839      |       | $          | (127       | ) | -4.5 | % |

 

For the three monthsended June 30, 2009, property and other taxes for water and electricservices decreased by $300,000 due to a tax refund of $488,000 resulting fromlower reassessed property values from an examination, partially offset byhigher payroll taxes and franchise fees based on increased labor costs andsales volume.

 

Property and other taxeswere higher in contracted services due to higher gross receipt taxes of$165,000, associated with the increase in revenues. There was also an increasein payroll taxes of $20,000 due to higher labor costs.

 

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***Construction Expenses***

 

For the three monthsended June 30, 2009, construction expenses were $7.8 million, increasing$3.4 million compared to the same period in 2008 due primarily to newconstruction projects at Fort Bliss and the military bases in Virginia, whichhad increases of $1.2 million and $1.8 million, respectively, over the sameperiod in 2008.  Construction expense atthe two bases in North Carolina and South Carolina also increased by $423,000collectively during the three months ended June 30, 2009 as compared tothe same period in 2008.  These increaseswere partially offset by a $57,000 decrease in construction expense at AndrewsAir Force Base.

 

***Interest Expense***

 

For the three monthsended June 30, 2009 and 2008, interest expense by segment, including AWR(parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 5,523      |          | $          | 5,081      |       | $          | 442        |   | 8.7 | % |
| Contracted Services         |       | 90            |       | $             | 209        |       | (119       | )          | -56.9      | % |
| AWR (parent)                |       | 46            |       | 4             |       | 42         |       | 1050.0     | %          |
| Total interest expense      |       | $             | 5,659      |          | $          | 5,294      |       | $          | 365        |   | 6.9 | % |

 

Overall, interest expense increasedin 2009 reflecting an increase in long-term debt, partially offset by lowerinterest rates and a decrease in short-term borrowings. On March 10, 2009,GSWC issued a senior note in the amount of $40.0 million to CoBank due March 10, 2019.  There was adecrease in short-term cash borrowings. Average bank loan balances outstandingunder the AWR credit facility for the three months ended June 30, 2009were approximately $30 million, as compared to an average of $55 million duringthe same period of 2008.  The averageinterest rate on short-term borrowings for the three months ended June 30,2009 was 1.2% as compared to an average of 3.3% during the same period of 2008.

 

***Interest Income***

 

For the three monthsended June 30, 2009 and 2008, interest income by segment, including AWR(parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 293        |          | $          | 729        |       | $          | (436       | ) | -59.8 | % |
| Contracted Services         |       | —        |       | $             | 3          |       | (3         | )          | -100.0     | % |
| AWR (parent)                |       | 3             |       | 43            |       | (40        | )          | -93.0      | %          |
| Total interest income       |       | $             | 296        |          | $          | 775        |       | $          | (479       | ) | -61.8 | % |

 

Interest income decreasedby $479,000 for the three months ended June 30, 2009 due primarily to therecording of $480,000 in interest income during the second quarter of 2008 inconnection with the IRS’s examination of the 2002 income tax return.

 

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***Other***

 

For the three months ended June 30, 2009 and 2008,Registrant recorded other income of $82,000 and $7,000, respectively, as aresult of Registrant’s equity interest in an investment.

 

***Income Tax Expense***

 

For the three months June 30,2009 and 2008, income tax expense by segment, including AWR (parent), consistedof the following (amounts in thousands):

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 7,499      |          | $          | 6,088      |       | $          | 1,411      |   | 23.2 | % |
| Contracted Services         |       | 327           |       | (313          | )          | 640        |       | -204.5     | %          |
| AWR (parent)                |       | (92           | )          | 11            |       | (103       | )          | -936.4     | %          |
| Total income tax expense    |       | $             | 7,734      |          | $          | 5,786      |       | $          | 1,948      |   | 33.7 | % |

 

For the three monthsended June 30, 2009, income tax expense for water and electric increasedby 23.2% to $7.5 million compared to $6.1 million for the three months ended June 30,2008 due primarily to an increase in pretax income, and a higher effective taxrate (“ETR”).  The ETR for the threemonths ended June 30, 2009 was 40.9% as compared to a 38.4% ETR applicableto the three months ended June 30, 2008. The ETR deviates from the federal statutory rate primarily due to statetaxes and changes between book and taxable income that are treated asflow-through adjustments in accordance with regulatory requirements(principally plant-, rate-case- and compensation-related items).  Flow-through adjustments increase or decreasetax expense in one period, with an offsetting increase or decrease occurring inanother period.

 

Income tax expense forcontracted services increased to $327,000 compared to a tax benefit of $313,000for the three months ended June 30, 2008 due primarily to an increase inpretax income.  The ETR for contractedservices for the three months ended June 30, 2009 was 35.3% as compared toa 38.5% ETR applicable to the three months ended June 30, 2008.

 

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***ConsolidatedResults of Operations — Six Months Ended June 30, 2009 and 2008 (amountsin thousands):***

 
| ** **                                       | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                       | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                               |       |          |       |          |       |       |       |       |       |
| Water                                            |       | $             | 130,951    |          | $          | 117,459    |       | $          | 13,492     |   | 11.5 | % |
| Electric                                         |       | 14,520        |       | 15,011        |       | (491       | )          | -3.3       | %          |
| Contracted services                              |       | 27,691        |       | 16,785        |       | 10,906     |       | 65.0       | %          |
| Total operating revenues                         |       | 173,162       |       | 149,255       |       | 23,907     |       | 16.0       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                               |       |          |       |          |       |       |       |       |       |
| Water purchased                                  |       | 20,471        |       | 21,032        |       | (561       | )          | -2.7       | %          |
| Power purchased for pumping                      |       | 4,376         |       | 4,335         |       | 41         |       | 0.9        | %          |
| Groundwater production assessment                |       | 5,374         |       | 5,265         |       | 109        |       | 2.1        | %          |
| Power purchased for resale                       |       | 6,365         |       | 6,834         |       | (469       | )          | -6.9       | %          |
| Unrealized gain on purchased power contracts     |       | —        |       | (4,507        | )          | 4,507      |       | -100.0     | %          |
| Supply cost balancing accounts                   |       | 6,860         |       | (779          | )          | 7,639      |       | -980.6     | %          |
| Other operating expenses                         |       | 14,318        |       | 15,049        |       | (731       | )          | -4.9       | %          |
| Administrative and general expenses              |       | 32,387        |       | 29,770        |       | 2,617      |       | 8.8        | %          |
| Depreciation and amortization                    |       | 16,748        |       | 15,603        |       | 1,145      |       | 7.3        | %          |
| Maintenance                                      |       | 7,960         |       | 8,542         |       | (582       | )          | -6.8       | %          |
| Property and other taxes                         |       | 6,112         |       | 5,759         |       | 353        |       | 6.1        | %          |
| ASUS construction expenses                       |       | 16,274        |       | 8,309         |       | 7,965      |       | 95.9       | %          |
| Net gain on sale of property                     |       | (15           | )          | —        |       | (15        | )          | -100.0     | %          |
| Total operating expenses                         |       | 137,230       |       | 115,212       |       | 22,018     |       | 19.1       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                 |       | 35,932        |       | 34,043        |       | 1,889      |       | 5.5        | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                        |       |          |       |          |       |       |       |       |       |
| Interest expense                                 |       | (10,953       | )          | (10,672       | )          | (281       | )          | 2.6        | %          |
| Interest income                                  |       | 498           |       | 1,136         |       | (638       | )          | -56.2      | %          |
| Other                                            |       | 52            |       | 121           |       | (69        | )          | -57.0      | %          |
|                                             |       | (10,403       | )          | (9,415        | )          | (988       | )          | 10.5       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE |       | 25,529        |       | 24,628        |       | 901        |       | 3.7        | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| Income tax expense                               |       | 9,098         |       | 10,041        |       | (943       | )          | -9.4       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| NET INCOME                                       |       | $             | 16,431     |          | $          | 14,587     |       | $          | 1,844      |   | 12.6 | % |

 

Netincome for the six months ended June 30, 2009 was $16.4 million,equivalent to $0.93 and $0.92 per common share on a basic and fully dilutedbasis, respectively, compared to $14.6 million or $0.84 per common share on abasic and fully diluted basis for the six months ended June 30, 2008, anincrease in net income of 12.6%.

 

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Impactingthe comparability in the results of the two periods on a diluted per sharebasis are the following significant items:

 

·                  An unrealized gain on purchased power contracts in2008 which increased pretax income by $4.5 million, or $0.15 per share.  As previously mentioned, these purchasedpower contracts that impacted GSWC’s earnings expired on December 31, 2008and GSWC began taking delivery of power under a new contract effective January 1,2009.  Accordingly, during the six months ended June 30, 2009, there was $8.5million of unrealized losses which have been included in the memorandumaccount, therefore not impacting GSWC’s earnings.

 

·                  The water and electric margin increased by $6.2million, or $0.21 per share, during the six months ended June 30, 2009compared to the same period of 2008 due primarily to:  (i) higher water rates approved by theCPUC effective January 1, 2009; (ii)  the water margin impact ofrecording the WRAM and MCBA of approximately $4.8 million, or $0.16 per share,and (iii) the recording of $2.8 million of additional revenues due to theCPUC’s approval in April 2009 of the Water Conservation MemorandumAccounts. These increases were partially offset by lower water consumption of7.4% when compared to the same period in 2008.

 

·                  GSWC reached a settlement agreement withMirant Trading and recorded the proceeds of $1.0 million, or $0.03 per share,as a reduction to legal costs during the second quarter of 2009. There was nosimilar gain in the same period of 2008.

 

·                  Excluding the gain from the settlementagreement with Mirant Trading, other operating expenses (includingadministrative and general expenses), increased by $4.1 million at the Company’sutility businesses, or $0.14 per share, for the first six months of 2009 due toan increase in pension expenses, labor and other related benefits, and anincrease in outside services costs.

 

·                  Pretax operating income for contractedservices increased by $3.2 million, or $0.11 per share, during the six monthsended 2009 due primarily to an increase in special construction projects atFort Bliss and the military bases in Virginia, and improved performance at PSUSand ONUS as compared to the prior year.

 

·                  An increase in interest expense of$281,000, or $0.01 per share, due to an increase in long-term debt from theissuance of $40.0 million of notes in March 2009.

 

·                  A decrease in interest income resulting from GSWC’srecording of $480,000 interest income, or $0.02 per share, during the secondquarter of 2008 in connection with the Internal Revenue Service’s (“IRS’s”)examination of AWR’s 2002 income tax return.

 

·                  A tax benefit of $918,000 recorded in thefirst quarter of 2009 resulting from new California apportionment laws as wellas refining certain related estimates, favorably impacted earnings by $0.05 pershare.

 

***Operating Revenues***

 

*Water*

 

Forthe six months ended June 30, 2009, revenues from water operationsincreased by 11.5% to $131.0 million, compared to $117.5 million for thesix months ended June 30, 2008. Contributing to this increase were rateincreases approved by the CPUC effective January 1, 2009, which addedapproximately $4.8 million in the first six months of 2009 to waterrevenues.  In addition, as a result of the implementation ofthe WRAM account for Regions II and Region III in late November of2008,GSWC recorded $6.6 million of additional revenues to adjust the 2009 revenuesto the consumption levels approved by the CPUC. Furthermore, GSWC recorded $2.8 million included in the WCMAconservation memorandum accounts at each of GSWC’s water regions.  Finally, there was an increase in waterrevenues of $4.0 million due to surcharges approved by the CPUC in effect torecover under-collections in supply costs. These increases were partially offset by $4.8 millionresulting from a decrease in actual consumption of 7.4% whencompared to the first sixmonths of 2008.  Although precipitation was overall lowerduring the first six months of 2009 compared to the same period in 2008, waterconsumption was down due to the continued effects of state-wide customerconservation efforts.

 

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*Electric*

 

Forthe six months ended June 30, 2009, revenues from electric operationsdecreased by 3.3% to $14.5 million compared to $15.0 million for the six monthsended June 30, 2008 due primarily to a decrease in electric usage.

 

*ContractedServices*

 

Revenuesfrom contracted services are comprised of construction revenues (includingrenewals and replacements) and management fees for operating and maintainingthe water and/or wastewater systems at military bases.  For the six months ended June 30, 2009,revenues from contracted services increased by $10.9 million, or 65.0%, to$27.7 million compared to $16.8 million for the six months ended June 30,2008 primarily due to higher construction revenues.  Construction revenues increased by $9.3million primarily related to special projects at Fort Bliss and the TRADOCbases which increased by $5.8 million and $5.7 million, respectively.  Construction revenues for the six monthsended June 30, 2009 at ONUS increased $443,000.  Construction revenues at these bases werepartially offset by lower construction revenues of $2.7 million at Andrews AirForce Base.  Earnings and cash flows fromamendments and modifications to the original 50-year contracts with the U.S.government are sporadic and may or may not continue in future periods.

 

Forthe six months ended June 30, 2009, management fees for operating andmaintaining the various systems totaled $6.7 million as compared to $5.1 millionfor the six months ended June 30, 2008. In December 2008, the U.S.government authorized an interim adjustment at Fort Bliss which increased themonthly water and wastewater fees by 50% and 59%, respectively, pendingresolution of FBWS’s REA filed as a claim, due to inventory adjustments.  This resulted in an increase of approximately$588,000 to Fort Bliss’ management fees for operating and maintaining thesystem for the first six months of 2009 as compared to the same period of 2008.There were also additional revenues during 2009 generated from operating andmaintaining the water and wastewater systems under the two most recentcontracts in North Carolina and South Carolina, both of which began during thefirst quarter of 2008.  Approximately$933,000 in new revenue was generated from management fees for operating andmaintaining the water and wastewater systems under these two contracts,reflecting a full six months of operations in 2009.

 

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

 

***Operating Expenses:***

 

***Supply Costs***

 

Supply costs for thewater segment consist of purchased water, purchased power for pumping,groundwater production assessments and water supply cost balancing accounts.Supply costs for the electric segment consist of purchased power for resale(including the cost of natural gas) and the electric supply cost balancingaccount*.* Water and electric margins arecomputed by taking total revenues, less total supply costs. Registrant usesthese margins and related percentages as an important measure in evaluating itsoperating results. Registrant believes this measure is a useful internalbenchmark in evaluating the utility business performance within its water andelectric segments. Registrant reviews these measurements regularly and comparesthem to historical periods and to our operating budget as approved. However, thismeasure, which is not presented in accordance with Generally AcceptedAccounting Principles (“GAAP”), may not be comparable to similarly titledmeasures used by other entities and should not be considered as an alternativeto operating income, which is determined in accordance with GAAP, as anindicator of operating performance.

 

Total supply costscomprise the largest segment of total operating expenses. Supply costsaccounted for approximately 32% of total operating expenses for the six monthsended June 30, 2009 and 2008, respectively.

 

The table below providesthe amount of increases (decreases), percent changes in supply costs, andmargins during the six months ended June 30, 2009 and 2008 (amounts inthousands):

 

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| ** **                                      | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                      | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                |       | $             | 130,951    |          | $          | 117,459    |       | $          | 13,492     |   | 11.5 | % |
| WATER SUPPLY COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                         |       | $             | 20,471     |          | $          | 21,032     |       | $          | (561       | ) | -2.7 | % |
| Power purchased for pumping **(1)**             |       | 4,376         |       | 4,335         |       | 41         |       | 0.9        | %          |
| Groundwater production assessment **(1)**       |       | 5,374         |       | 5,265         |       | 109        |       | 2.1        | %          |
| Water supply cost balancing accounts **(1)**    |       | 4,798         |       | (2,603        | )          | 7,401      |       | -284.3     | %          |
| TOTAL WATER SUPPLY COSTS                        |       | $             | 35,019     |          | $          | 28,029     |       | $          | 6,990      |   | 24.9 | % |
| WATER MARGIN******(2)**                         |       | $             | 95,932     |          | $          | 89,430     |       | $          | 6,502      |   | 7.3 | % |
| PERCENT MARGIN - WATER                          |       | 73.3          | %          | 76.1          | %          |       |       |       |       |
|                                            |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**             |       | $             | 14,520     |          | $          | 15,011     |       | $          | (491       | ) | -3.3 | % |
| ELECTRIC SUPPLY COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(1)**              |       | $             | 6,365      |          | $          | 6,834      |       | (469       | )          | -6.9 | % |
| Electric supply cost balancing accounts **(1)** |       | 2,062         |       | 1,824         |       | 238        |       | 13.0       | %          |
| TOTAL ELECTRIC SUPPLY COSTS                     |       | $             | 8,427      |          | $          | 8,658      |       | $          | (231       | ) | -2.7 | % |
| ELECTRIC MARGIN **(2)**                         |       | $             | 6,093      |          | $          | 6,353      |       | $          | (260       | ) | -4.1 | % |
| PERCENT MARGIN - ELECTRIC                       |       | 42.0          | %          | 42.3          | %          |       |       |       |       |

 

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(1)                                  As reported on AWR’s ConsolidatedStatements of Income, except for supply cost balancing accounts. The sum ofwater and electric supply cost balancing accounts in the table above are shownon AWR’s Consolidated Statements of Income and totaled $6,860,000 and($779,000) for the six months ended June 30, 2009 and 2008, respectively.

 

(2)                                  Water and electric margins do not includeany depreciation and amortization, maintenance expense, unrealized gains andlosses on purchased power contracts, or other operating expenses.

 

For the six months ended June 30,2009, 38.2% of the Company’s water supply mix was purchased as compared to40.6% purchased for the six months ended June 30, 2008.  However, as noted previously, in November 2008GSWC implemented the MCBA for Regions II and III which eliminates the effectson earnings of changes in the water supply mix prospectively.  The adopted percentage of purchased water forthe six months ended June 30, 2009 at Regions II and III was 60.0% and40.1%, respectively, as compared to actual purchased water of 41.2% and 39.8%,respectively, for the six months of 2009. The improvement in Regions II and III’s actual mix compared to the mixapproved by the CPUC resulted in an over-collection in the MCBA account. Thiscaused an overall decrease in the water margin percent to 73.3% for the firstsix months of 2009 compared to 76.1% in the same period of 2008 since GSWC nolonger receives any benefit from a more favorable supply mix in Regions II andIII than that approved by the CPUC.

 

Purchased water costs forthe six months ended June 30, 2009 decreased by 2.7% to $20.5 million ascompared to $21.0 million in the same period of 2008.  The decrease in purchased water costs was dueto lower customer usage, partially offset by higher water rates charged fromwholesale suppliers.

 

For the six months ended June 30,2009, power purchased for pumping increased slightly to $4.4 million, comparedto $4.3 million for the same period of 2008. Increases in supplier rates were offset by lower customer demand. Therewere also changes in the actual supply mix, as discussed above.  Groundwater production assessments were

 

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higher by 2.1% due toincreased pumped volume and increases in assessment rates (pump tax rates)levied against groundwater production, effective July 2008.  Average pump tax rates increased in RegionsII and III by approximately 3% and 6%, respectively, between the twoperiods.  These increases in groundwaterproduction assessments were partially offset by lower customer demand.  The MCBA tracks the increases in pump taxrates for future recovery in water rates.

 

An increase of $7.4million in the water supply cost balancing account provision during the sixmonths ended June 30, 2009 as compared to the same period in 2008 wasprimarily caused by: (i) a $4.0 million increase in the amortization ofthe water supply cost balancing accounts for surcharges currently in effect; (ii) therecording of $1.8 million in the MCBA accounts effective November 25,2008, and (iii) a net decrease of $1.6 million of under-collections in2009 (only related to Region I in 2009) compared to the same period in 2008.

 

For the six months ended June 30,2009, the cost of power purchased for resale to customers in GSWC’s BVESdivision decreased by 6.9% to $6.4 million compared to $6.8 million for the sixmonths ended June 30, 2008 reflectinglower customer demand.  In addition, GSWC began receiving powerunder a new purchased power contract in January 1, 2009.  The main product under the new contractprovides for 13 MWs of electric energy at a fixed price of $63.75 per MWhduring 2009 as compared to $74.65 during 2008. The decrease in the price of purchased power is reflected in theelectric supply cost balancing account resulting in no change to thedollar margin for electric services.

 

***Unrealized Gain on Purchased Power Contracts***

 

Pursuant to SFAS No. 133,the unrealized gain on purchased power contracts during 2008 represented gainsrecorded for GSWC’s purchased power agreements with Morgan Stanley CapitalGroup, Inc. There was a $4.5 million pretax unrealized gain on purchasedpower contracts for the six months ended June 30, 2008. These contractsterminated at December 31, 2008. GSWC filed an application with the CPUC to review the new purchased powercontracts, effective after December 31, 2008.  GSWC also sought the CPUC’s authorization ofa memorandum account to track the changes in the fair market value over theterm of the new contract (effective January 1, 2009), resulting inunrealized gains and losses.  In May 2009,the CPUC issued a final decision approving the contract and authorizing thememorandum account to track unrealized gains and losses.  Accordingly, a cumulative unrealized loss of$8.5 million as of June 30, 2009 has been included in the memorandumaccount and did not impact earnings.

 

***Other Operating Expenses***

 

The primary components ofother operating expenses include payroll, materials and supplies, chemicals andwater treatment, and outside service costs of operating the regulated watersystems, including the costs associated with water transmission anddistribution, pumping, water quality, meter reading, billing, and operations ofdistrict offices.  Registrant’s electricand contracted services operations incur many of the same types of costs aswell.  For the six months ended June 30,2009 and 2008, other operating expenses by segment consisted of the following(amounts in thousands):

 
| ** **                     | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 11,530     |          | $          | 10,996     |       | $          | 534        |   | 4.9 | % |
| Electric Services              |       | 1,191         |       | 1,086         |       | 105        |       | 9.7        | %          |
| Contracted Services            |       | 1,597         |       | 2,967         |       | (1,370     | )          | -46.2      | %          |
| Total other operating expenses |       | $             | 14,318     |          | $          | 15,049     |       | $          | (731       | ) | -4.9 | % |

 

For the six months ended June 30, 2009, otheroperating expenses for water and electric services increased by $639,000primarily due to an increase in labor and related benefits of $441,000, anincrease in bad debt expense of $139,000, and an increase in outside servicescosts of $332,000.  There was also anincrease of $100,000 in other 

 

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miscellaneous operating expenses. These increases werepartially offset by a decrease of $373,000 in water treatment costs includingsupplies and materials.

 

Contracted services experienced decreases in otheroperating expenses of $1.4 million primarily due to transition costs (some ofwhich exceeded transition revenues recovered, pursuant to contract and all ofwhich is non-recurring) of $907,000 incurred during the six months ending June 30,2008 due to the commencement of the operation of water and wastewater systemsat military bases in North Carolina and South Carolina.  There was also a decrease of approximately$523,000 in outside services costs partly attributable to payments to a subcontractor that provided wastewaterservices to certain of ASUS’ subsidiaries in 2008. On January 31, 2008,ASUS and its subsidiaries agreed to buy out all current and future rights whichthis subcontractor had to provide wastewater services at any bases operated byASUS and any of its present and/or future subsidiaries.  For the sixmonths ended June 30, 2009, most of these services were performedinternally, some of which is recorded in labor costs within maintenanceexpense.

 

***Administrative and General Expenses***

 

Administrative andgeneral expenses include payroll related to administrative and generalfunctions, all employee benefits charged to expense accounts, insurance expenses,outside legal and consulting fees, regulatory utility commission expenses,expenses associated with being a public company, and general corporateexpenses. For the six months ended June 30, 2009 and 2008, administrativeand general expenses by segment, including AWR (parent), consisted of thefollowing (amounts in thousands):

 
| ** **                                | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 23,646     |          | $          | 21,585     |       | $          | 2,061      |   | 9.5 | % |
| Electric Services                         |       | 3,512         |       | 3,080         |       | 432        |       | 14.0       | %          |
| Contracted Services                       |       | 5,169         |       | 4,990         |       | 179        |       | 3.6        | %          |
| AWR (parent)                              |       | 60            |       | 115           |       | (55        | )          | -47.8      | %          |
| Total administrative and general expenses |       | $             | 32,387     |          | $          | 29,770     |       | $          | 2,617      |   | 8.8 | % |

 

For the sixmonths ended June 30, 2009, administrative and general expenses increasedby $2.1 million in water services compared to the six months ended June 30,2008 due primarily to an increase of $1.5 million in pension expenses resultingfrom a reduction in the fair value of plan assets in 2008 caused by marketconditions at the time.  There was alsoan increase in labor costs and other employee benefits of $405,000 due to higher wages largelyrelated to Registrant’s annual performance-based salary review program and anincrease of $69,000 in regulatory commission expenses.

 

For the six months ended June 30, 2009, administrativeand general expenses increased by $432,000 in electric services compared to thesix months ended June 30, 2008 due primarily to: (i) a $930,000increase in outside consulting, legal and other services resulting from thecurrent general rate case and the new purchased power contract; (ii) a$279,000 increase in labor costs and employee related benefits as discussedabove in water services; (iii) an increase of $84,000 in regulatorycommission expenses, and (iv) an increase of $138,000 in allocation ofcosts from the corporate headquarters’ to BVES. These increases were partially offset by the recording of $1.0 millionagainst legal costs in connection with a settlement agreement reached with Mirant Trading, previously discussed.

 

There was an increase of$179,000 in contracted services administrative and general expenses dueprimarily to an increase of $743,000 in labor costs and related employeebenefits due to higher wages and an increase in headcount. This increase waspartially offset by a decrease in legal and consulting services of $444,000 anda decrease of $120,000 in other miscellaneous expenses.

 

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***Depreciation and Amortization***

 

For the six months ended June 30,2009 and 2008, depreciation and amortization by segment consisted of thefollowing (amounts in thousands):

 
| ** **                          | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 15,300     |          | $          | 14,310     |       | $          | 990        |   | 6.9 | % |
| Electric Services                   |       | 1,129         |       | 1,105         |       | 24         |       | 2.2        | %          |
| Contracted Services                 |       | 319           |       | 188           |       | 131        |       | 69.7       | %          |
| Total depreciation and amortization |       | $             | 16,748     |          | $          | 15,603     |       | $          | 1,145      |   | 7.3 | % |

 

For the six months ended June 30,2009, depreciation and amortization expense for water and electric servicesincreased by $1.0 million to $16.4 million compared to $15.4 million for thesix months ended June 30, 2008 reflecting, among other things, theapproximately $73.6 million of additions to utility plant during 2008,depreciation on which began in January 2009.  Registrant anticipates that depreciationexpense will continue to increase due to ongoing construction at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

 

There was also anincrease in depreciation and amortization expense for contracted services dueprimarily to the addition of fixed assets.

 

***Maintenance***

 

For the six months ended June 30,2009 and 2008, maintenance expense by segment consisted of the following(amounts in thousands):

 
| ** **          | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 5,955      |          | $          | 6,935      |       | $          | (980       | ) | -14.1 | % |
| Electric Services   |       | 364           |       | 329           |       | 35         |       | 10.6       | %          |
| Contracted Services |       | 1,641         |       | 1,278         |       | 363        |       | 28.4       | %          |
| Total maintenance   |       | $             | 7,960      |          | $          | 8,542      |       | $          | (582       | ) | -6.8 | % |

 

For the six months ended June 30, 2009,maintenance expense for water services decreased by $980,000 to $6.0 millioncompared to $6.9 million for the six months ended June 30, 2008 dueprincipally to a decrease in unplanned and emergency maintenance on GSWC’swells, water supply and distribution facilities, previously mentioned.  In addition, as previously mentioned, certainplanned maintenance has been deferred to later in the 2009 year, which willincrease maintenance expense during the remaining quarters of 2009.  GSWC’s maintenance expense at its three waterregions decreased by $1.1 million during the six months ended June 30,2009 compared to the same period in 2008. This decrease was partially offset byan increase of $136,000 in maintenance expense at CCWC.

 

There was an increase of $35,000 in maintenanceexpenses for electric services related to the 8.4 MW natural gas-fueledgeneration plant.

 

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There was an increase of$363,000 in contracted services maintenance expense due primarily to thecommencement of the operation of water andwastewater systems at military bases in North Carolina and South Carolina thatbegan during the first quarter of 2008, which added $209,000 in maintenanceexpense for the six months ended June 30, 2009 compared to the same periodin 2008.  The level of maintenance costsat these bases also reflects the size, age and condition of the infrastructureat these bases.  There was also increasedmaintenance expense of $128,000 at Fort Bliss due primarily to higher internallabor costs associated with wastewater activity previously provided by thesubcontractor that provided wastewater services prior to February 2008.

 

***Property and Other Taxes***

 

For the six months ended June 30,2009 and 2008, property and other taxes by segment consisted of the following(amounts in thousands):

 
| ** **                     | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 5,137      |          | $          | 5,386      |       | $          | (249       | ) | -4.6 | % |
| Electric Services              |       | 369           |       | 178           |       | 191        |       | 107.3      | %          |
| Contracted Services            |       | 606           |       | 195           |       | 411        |       | 210.8      | %          |
| Total property and other taxes |       | $             | 6,112      |          | $          | 5,759      |       | $          | 353        |   | 6.1 | % |

 

For the six months ended June 30,2009, property and other taxes for water and electric services slightlydecreased by $58,000 due to a tax refund of $488,000 resulting from lowerreassessed property values from an examination, partially offset by increasesin payroll taxes and franchise fees based on increased labor costs and salesvolume.

 

Property and other taxeswere higher in contracted services due to thecommencement of the operation of water and wastewater systems at military basesin North Carolina and South Carolina that began during the first quarter of2008.  As a result of these new bases,property and other taxes increased by $175,000 during the six months ended June 30,2009 as compared to the same period in 2008. There was also an increase of$236,000 at the other bases primarily from higher payroll taxes and grossreceipt taxes.

 

***Construction Expenses***

 

For the six months ended June 30,2009 construction expenses were $16.3 million, increasing $8.0 million comparedto the same period in 2008 due primarily to new construction projects at FortBliss and the military bases in Virginia, which had increases of $4.9 millionand $4.2 million, respectively, over the same period in 2008.  This increase was partially offset by a $2.1million decrease in construction expense at Andrews Air Force Base.  Construction expense at the two bases in NorthCarolina and South Carolina increased $953,000 collectively during the sixmonths ended June 30, 2009 as compared to the same period in 2008.

 

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

 

For the six months ended June 30, 2009, water servicesrecorded a pre-tax gain of $15,000 on the sale of property.  There was no similar gain in the same periodof 2008.  Earnings and cash flows fromthese transactions are sporadic and may or may not continue in future periods.

 

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***Interest Expense***

 

For the six months ended June 30,2009 and 2008, interest expense by segment, including AWR (parent) consisted ofthe following (amounts in thousands):

 
| ** **                  | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 10,624     |          | $          | 10,254     |       | $          | 370        |   | 3.6 | % |
| Contracted Services         |       | 192           |       | 439           |       | (247       | )          | -56.3      | %          |
| AWR (parent)                |       | 137           |       | (21           | )          | 158        |       | -752.4     | %          |
| Total interest expense      |       | $             | 10,953     |          | $          | 10,672     |       | $          | 281        |   | 2.6 | % |

 

Overall, interest expense increasedin 2009 reflecting an increase in long-term and short-term borrowings,partially offset by lower interest rates. On March 10, 2009, GSWC issued asenior note in the amount of $40.0 million to CoBank due March 10,2019.  There was also an increase inshort-term cash borrowings. Average bank loan balances outstanding under theAWR credit facility for the six months ended June 30, 2009 wereapproximately $52 million, as compared to an average of $49 million during thesame period of 2008.  These increaseswere partially offset by lower interest rates. The average interest rates onshort-term borrowings for the six months ended June 30, 2009 was 1.3% ascompared to an average of 3.7% during the same period of 2008.

 

***Interest Income***

 

For the six months ended June 30,2009 and 2008, interest income by segment, including AWR (parent) consisted ofthe following (amounts in thousands):

 
| ** **                  | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 492        |          | $          | 1,089      |       | $          | (597       | ) | -54.8 | % |
| Contracted Services         |       | 3             |       | 4             |       | (1         | )          | -25.0      | %          |
| AWR (parent)                |       | 3             |       | 43            |       | (40        | )          | -93.0      | %          |
| Total interest income       |       | $             | 498        |          | $          | 1,136      |       | $          | (638       | ) | -56.2 | % |

 

Interest income decreasedby $638,000 for the six months ended June 30, 2009 due primarily to therecording in 2008 of $480,000 in interest income in connection with the IRS’sexamination of the 2002 income tax return, but no similar income in the sameperiod of 2009. Also, there was a decrease of $223,000 in interest accrued onthe uncollected balance of the Aerojet litigation memorandum account authorizedby the CPUC due to lower interest rates.

 

***Other***

 

For the six months ended June 30, 2009 and 2008,Registrant recorded other income of $52,000 and $121,000, respectively, as aresult of Registrant’s equity interest in an investment.

 

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***Income Tax Expense***

 

For the six months ended June 30,2009 and 2008, income tax expense by segment, including AWR (parent), consistedof the following (amounts in thousands):

 
| ** **                  | ** ** | **6  Months** | ** ** | **6  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **6/30/2009** | ** ** | **6/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 9,481      |          | $          | 10,661     |       | $          | (1,180     | ) | -11.1 | % |
| Contracted Services         |       | 687           |       | (611          | )          | 1,298      |       | -212.4     | %          |
| AWR (parent)                |       | (1,070        | )          | (9            | )          | (1,061     | )          | 11788.9    | %          |
| Total income tax expense    |       | $             | 9,098      |          | $          | 10,041     |       | $          | (943       | ) | -9.4 | % |

 

For the six months ended June 30,2009, income tax expense for water and electric services decreased by 11.1% to$9.5 million compared to $10.7 million for the six months ended June 30,2008 due primarily to a decrease in pretax income and a lower effective taxrate (“ETR”).  The ETR for water andelectric services for the six months ended June 30, 2009 was 39.8% ascompared to a 40.6% ETR applicable to the six months ended June 30,2008.  The ETR deviates from the federal statutoryrate primarily due to state taxes and changes between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements (principally plant-, rate-case- and compensation-related items).  Flow-through adjustments increase or decreasetax expense in one period, with an offsetting increase or decrease occurring inanother period.

 

Income tax expense forcontracted services increased to $687,000 compared to a tax benefit of $611,000for the six months ended June 30, 2008 due primarily to an increase inpretax income.  The ETR for contractedservices for the six months ended June 30, 2009 was 36.3% as compared to a38.6% ETR applicable to the six months ended June 30, 2008.

 

AWR (parent) receives atax benefit for expenses incurred at the parent-company level.  For the six months ended June 30, 2009,the taxes recorded at AWR (parent) also include the effect of a change inCalifornia law during the first quarter of 2009.  On February 20, 2009, California’s governorsigned two bills into law that amended and added several new provisions toCalifornia’s Revenue and Taxation Code. One of the provisions in these bills changed the manner by which mosttaxpayers may compute the portion of their income derived from multiplejurisdictions that is subject to California taxation.  During the first quarter of 2009, AWR appliedthe change in tax law resulting from enactment of the bills based on itsunderstanding of the legislature’s intent, which is to permit taxpayers toapply an alternative apportionment method commencing with the 2011 tax year. Asa result of management’s intention to apply the alternative method, AWRadjusted its deferred tax balances in the first quarter of 2009 to reflect theexpected amount at which it will realize its California deferred taxesconsistent with the change in tax law, as well as refining certain relatedestimates.  This resulted in therecording of a benefit of approximately $918,000, or $0.05 per share, duringthe six months ended June 30, 2009. While the effect of the tax law changewill continue to affect AWR’s state taxes, the future effects may be beneficialor detrimental depending on a combination of the profitability of AWR’snon-California activities as well as the relative proportion of the factor(s) appliedby its apportionment method.  On aquarterly basis, management will assess its intention to apply the alternativemethod and will adjust its deferred tax balances accordingly.  Absent this tax benefit, the consolidated ETRfor the six months ended June 30, 2009 would have been 39.2%.

 

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**CriticalAccounting Policies and Estimates**

 

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

 

The critical accounting policies used in the preparation of the Registrant’s financial statements that it believes affect the more significant judgments and estimates used in the preparation of its consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008. There have been no material changes to the critical accounting policies.

 

**Liquidityand Capital Resources**

 

***AWR***

 

Registrant’s regulated business (primarily that ofGSWC), is capital intensive and requires considerable capital resources. Aportion of these capital resources are provided by internally generated cashflows from operations. When necessary, Registrant obtains funds from external sourcesin the capital markets and through bank borrowings. Access to externalfinancing on reasonable terms depends on Registrant’s credit ratings andcurrent business conditions, including that of the water utility industry ingeneral as well as conditions in the debt or equity capital markets. If thesebusiness and market conditions deteriorate to the extent that AWR no longer hasaccess to the capital markets at reasonable terms, Registrant has access to a$115 million revolving credit facility that is currently utilized to supportoperations.  Up to$20 million of this facility may be used for letters of credit. As of June 30,2009, an aggregate of $10.9 million in cash borrowings were included in currentliabilities and approximately $11.3 million of letters of credit wereoutstanding under this facility.  As of June 30, 2009,AWR had approximately $92.8 million available to borrow under the creditfacility.

 

AWR also has aRegistration Statement on file with the Securities and Exchange Commission (“SEC”)for the sale from time to time of debt and equity securities. As of June 30,2009, $114.4 million was available for issuance under this RegistrationStatement which will expire in August 2009.  AWR anticipates filing a new RegistrationStatement with the SEC prior to the expiration of this RegistrationStatement.  In May 2009, AWRcompleted a public offering of 1,150,000 shares of its Common Shares, including150,000 shares issued upon exercise of an option granted to the underwriters tocover over-allotments, at a price to the public of $31 per share. The netproceeds from the offering were $34.0 million, after deductions of underwritingcommissions and discounts, and direct legal and accounting fees. The Companyused the proceeds of the offering to repay short-term debt.

 

In addition, a senior note was issued by GSWC on March 10,2009, to CoBank, ACB(“CoBank”). Under the terms of this senior note, CoBank purchased a 6.7% SeniorNote due March 10, 2019 in the aggregate principal amount of $40.0 millionfrom GSWC. This note bears interest at the rate of 6.7%.  Under the terms of the note, GSWC shares inthe profits of CoBank under a patronage arrangement.  If CoBank continues to pay the current amountof patronage, the annual cost of the note will be at or below 6.0%. Theproceeds from the sale of the note to CoBank have been used to pay downshort-term borrowings and to fund capital expenditures.

 

InJuly 2009, Standard & Poor’s Ratings Services improved itsoutlook on AWR and GSWC to positive from stable.  At the same time, S&P affirmed the ‘A’corporate credit rating on AWR and GSWC. S&P debt ratings range from AAA(highest rating possible) to D (obligation is in default).  Securities ratings are not recommendations tobuy, sell or hold a security and are subject to change or withdrawal at anytime by the rating agency.

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs and cash contributions during 2009.  However, during the seven months ended July 31,2009, the fair value of the pension plan assets have increased by approximately9.8% since December 31, 2008.

 

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*CashFlows from Operating Activities*:

 

Net cash provided byoperating activities was $39.1 million for the six months ended June 30,2009 as compared to $27.7 million for the same period ended June 30, 2008.The overall increase of $11.4 million was primarily attributable to an increasein water revenues at GSWC due to higher water rates charged to customers thatwere approved by the CPUC, and an increase in construction revenues at ASUSprimarily for new projects at Fort Bliss and the Virginia bases. The timing ofcash receipts and disbursements related to working capital items, includingrate recovery from customers of regulatory assets and changes in days salesoutstanding, also affected the changes in net cash provided by operating activities.  Changes in cash flows from operatingactivities were generally consistent with changes in the results of operationsas adjusted by changes in working capital in the normal course of business.

 

*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities, which consists primarily of capital expenditures at GSWC,decreased to $36.9 million for the six months ended June 30, 2009 ascompared to $41.1 million for the same period in 2008.  The decrease was due in part to a businessacquisition in 2008.  In the firstquarter of 2008, ASUS completed the acquisition of contracts with asubcontractor and substantially all assets of the subcontractor used to providewastewater services for certain of the Military Utility Privatization Subsidiariesfor an aggregate purchase price of $2.3 million. Capital expenditures werelower by $1.9 million as compared to 2008 but are consistent with Registrant’scapital investment plan for 2009.

 

Cash flows used ininvesting activities are expected to remain at similar levels during 2009.Capital expenditures are expected to be approximately $75 million during 2009.Registrant intends to invest capital prudently to provide essential services toits regulated customer base, while working with its regulators to have theopportunity to earn a fair rate of return on investment. Registrant’sinfrastructure investment plan consists of both infrastructure renewalprograms, where infrastructure is replaced, as needed, and major capitalinvestment projects, where new water treatment and delivery facilities will beconstructed.  Projected capitalexpenditures and other investments are subject to periodic review and revisionto reflect changes in economic conditions and other factors.

 

*CashFlows from Financing Activities*:

 

Net cash provided byfinancing activities was $0.3 million for the six months ended June 30,2009 as compared to $12.1 million for the same period in 2008. The decrease of$11.9 million in net cash provided by financing activities was primarily due tothe decrease of $83.4 million in notes payable to banks and $2.9 million inadvances for and contributions in aid of construction, partially offset by theissuance of $39.8 million in long-term debt, net of issuance costs, and anincrease in net proceeds of $34.0 million from the issuance of Common Shares.

 

***GSWC***

 

GSWC funds the majority of its operating expenses, payments on itsdebt, and dividends on its outstanding common shares and a portion of itsconstruction expenditures through internal sources and short-term and long-termborrowings. Internal sources of cash flow are provided primarily by retentionof a portion of earnings from operating activities. Internal cash generation isinfluenced by factors such as weather patterns, environmental regulation,litigation, changes in supply costs and regulatory decisions affecting GSWC’sability to recover these supply costs, timing of rate relief, increases inmaintenance expenses and capital expenditures. GSWC has $60 million available for issuance of debt or equity securitiesunder a Registration Statement as of June 30, 2009.

 

*CashFlows from Operating Activities*:

 

Net cash provided byoperating activities was $33.7 million for the six months ended June 30,2009 as compared to $29.4 million for the same period in 2008. The increase of$4.3 million is primarily attributable to increased water revenues resultingfrom higher water rates charged to customers that were approved by the CPUC,and the timing of cash receipts and disbursements related to working capitalitems affecting the changes in net cash provided by operating activities,including rate recovery from customers of GSWC’s regulatory assets and changesto the days sales outstanding.  Changesin cash flows from operating activities were generally consistent with changesin the results of operations in the normal course of business.

 

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*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities, which consists primarily of capital expenditures,remained consistent at about $36 million. Capital expenditures are consistent with Registrant’s capital investmentplan for 2009.

 

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*CashFlows from Financing Activities*:

 

Net cash provided byfinancing activities was $2.3 million for the six months ended June 30,2009 as compared to $5.6 million for the same period in 2008. The decrease of$3.3 million in net cash provided by financing activities was primarily due toa decrease of $25.6 million in inter-company borrowings and an increase of$15.0 million in dividends paid, partially offset by the issuance of $39.8million in long-term debt.

 

***CCWC and ASUS***

 

CCWC funds the majority of its operating expenses, paymentson its debt and dividends, if any, through internal operating sources orshort-term borrowings from AWR. CCWC also relies on external sources, includinglong-term debt, contributions-in-aid-of-construction, advances for constructionand install-and-convey advances, to fund the majority of its constructionexpenditures. ASUSfunds its operating expenses primarily through management fees and investmentsby or loans from AWR.  ASUS, in turn,provides funding to its subsidiaries.

 

**Contractual Obligations and OtherCommitments**

 

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

 

On March 10, 2009, GSWC issued a 6.7% senior notein the amount of $40.0 million due on March 10, 2019.

 

In May 2009, GSWC entered into contracts topurchase software and provide implementation services for a new CustomerInformation/Customer Relationship Management System (CIS/CRM). The estimatedcosts of these contracts is $9.3 million over a period of 22 months.

 

There have been no other material changes to AWR’s contractual obligations and other commitments since December 31, 2008. See *“Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Contractual Obligations, Commitments and Off Balance Sheet Arrangements”*section of the Registrant’s Form 10-K for the year-ended December 31, 2008 for a detailed discussion of contractual obligations and other commitments.

 

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**RegulatoryMatters**

 

***Recent Changes in Rates***

 

*Rate increases in 2009:*

 

In January 2009, the CPUC approvedescalation/attrition year rate increases for all three GSWC water ratemakingareas effective January 1, 2009. The authorized rate increases are expected to provide GSWC withadditional annual revenues of approximately $256,000 for Region I.  The authorized rate changes are expected toprovide GSWC additional annual revenues of approximately $5.1 million forRegion II, representing the third year of a three-year rate case increaseapproved by the CPUC in 2007. The interim rate changes for Region III areexpected to provide GSWC with additional revenues of approximately $4.0 millionin 2009. These estimates of additional revenues are based upon normalized saleslevels approved by the CPUC, effective January 1, 2009.

 

The CPUC also issued its final decision in the cost ofcapital proceeding in June 2009.  In thatdecision, the CPUC authorized a 10.2% Return on Equity (“ROE”), and a correspondingReturn on Rate Base (“RORB”) of 8.90% to be implemented into rates for all GSWCwater ratemaking areas.  Implementationof the cost of capital decision is expected to result in a net annual increasein revenues of approximately $670,000.

 

During the third quarterof 2008, BVES filed an amended application to request CPUC approval of a newpurchased power contract addressing the revenue requirement for the purchasedpower component of rates and also requesting regulatory accounting treatmentfor all unrealized gains and losses on the new contract due to derivativeaccounting.  A final decision on thisapplication was issued in May 2009 approving the contract and authorizingthe memorandum account to track derivative gains and losses.

 

*Rate increases in 2008:*

 

In January 2008, the CPUC approved rate increasesof $6.4 million for the seven ratemaking areas in the Region I customer servicearea, which includes an authorized return on equity of 10.2%.  On March 3, 2008, the CPUC’s Division ofRatepayer Advocates (“DRA”) filed an application for rehearing of the Region IGeneral Rate Case (“GRC”) decision on various legal grounds.  As permitted by the CPUC, GSWC filed aresponse to DRA’s application.  In September 2008,the CPUC granted a limited rehearing in order to consider whether it isreasonable to include in Region I’s rate base approximately $3.7 million ofcosts incurred in connection with the La Serena Plant Improvement Project.  The project is currently in rate base and theearnings have been included in rates since January 1, 2008.  Thisissue was consolidated into the ongoing Regions II and III GRC and is expectedto be decided as part of the final decision in that case. The final resolutionof this issue is expected in the fourth quarter of 2009.  At this time, management believes it isprobable that the costs of this project will be allowed to remain in rate base.

 

In January 2008, the CPUC also approved attritionyear rate increases for Region II and Region III customer service areaseffective January 1, 2008 designed to generate annual revenues ofapproximately $3.6 million and $3.0 million based on an authorized return onequity of 10.1% and 9.8%, respectively.

 

The combined rate increases for Regions I, II andIII discussed above are designed to generate approximately $13.0 million inrevenues annually, based upon normalized sales levels approved by the CPUC,effective January 1, 2008.

 

***PendingRate Requests***

 

*GSWC*

 

GSWC filed its generalrate case for Regions II and III plus the general office on July 1,2008.  The new rates are to be effective for 2010, 2011 and 2012. In thefiling, GSWC requested rate increases that would be expected to generateapproximately $20.3 million in annual revenues starting in 2010, $2.6 millionin 2011 and $4.2 million in 2012 for Region II, and increases of $30.0 millionstarting in 2010, $1.7 million in 2011 and $3.7 million in 2012 for Region III,if approved as filed.  During the course of the proceeding, GSWC hasagreed to reduce or eliminate certain requests.  As a result, the revisedrequested increase that was submitted to the CPUC would result in increasedannual revenues of $17.6 million in 2010, $2.3 million in 2011 and $3.2 millionin 2012 for Region II, and increases of $24.6 million in 2010, $1.2 million in2011 and $2.6 million in 2012 for Region III if approved by the CPUC.  Atthe time that the CPUC issues its final decision, certain cost increaseprojections will be updated to reflect more current inflation rates and themost current purveyor rates for purchased power, purchased water and pumptaxes.  These updates could have a positive or negative impact on thefinal increases.

 

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In June 2008, GSWC’sBVES division filed its general rate case with the CPUC’s electricdivision.  The filing was the first fullgeneral rate case for BVES since 1996.  Costs incurred in connection with theconstruction of BVES’ 8.4 megawatt generating facility are expected to bereviewed by the CPUC as part of the 2008 general rate case.  The filing requests an overall annual revenue increase of $6.8million for 2009.  In addition to the2009 increases, there are incremental increases for the years 2010, 2011 and2012 which, if approved, are expected to generate approximately $3.7 million ofrevenues through 2012.  All of theincrease is to the rate base portion of BVES’ rates.  The $6.8 millionincrease represents an overall increase of approximately 23% over currentrates.  BVES has included a request for aphased-in implementation of the rate increase. The proposed phase in plan would recognize the full rate increase in thefirst year for financial reporting purposes, but defer the revenue recovery toa subsequent year.  In the application,BVES had requested an ROE of 11.7%. However, in connection with settlement discussions held with the DRAduring this GRC proceeding, certain items have been settled.  As a result of the settlement,  the requested increase has been revised toapproximately $4.8 million in estimated annual revenues with an estimatedeffective date of September 2009, and an ROE of 10.5% witha corresponding RORBof 9.15%.

 

In June 2009, theCPUC denied GSWC’s motion for an interim rate increase for its BVES generaloffice costs. GSWC was, however, authorized to track the difference betweencosts that are currently being incurred and the currently authorized generaloffice allocation for BVES in a memorandum account effective June 4, 2009.To the extent needed, the disposition of the memorandum account will beaddressed in the final decision expected later this year.

 

*CCWC*

 

CCWC filed a rate casewith the ACC in August 2004 for its water system in Fountain Hills,Arizona. In September 2005, the ACC approved a rate increase for CCWC. Therate increase was effective on October 1, 2005 and was expected togenerate additional annual revenues of approximately $1.1 million, an 18%increase over 2004 revenues. During this GRC, CCWC sought to have its ratesdetermined using a fair value rate base. The ACC elected not to use fair valuein setting the rates. CCWC appealed the ACC’s use of only original cost lessdepreciation rate base to determine the revenue requirement with the ArizonaCourt of Appeals. Because CCWC’s fair value rate base was higher, the use oforiginal cost exclusively to determine the revenue requirement deprived CCWC ofa substantial amount of operating income. On February 13, 2007, theArizona Court of Appeals upheld CCWC’s challenge to the ACC’s failure to usefair value rate base in the determination of operating income. The process theACC utilized was found to be in violation of the Arizona Constitution. However,the Court also held that the ACC’s determination of the return on equity, whilenot well-explained, was made based on the evidence, was a matter within theagency’s substantial discretion and was lawful. The ACC decided not to seek review, and the matter was returned to theACC on remand for modification of the original ACC decision consistent with thedecision of the Court of Appeals. Testimony was filed by ACC staff and theResidential Utility Consumer Office.  TheACC conducted evidentiary hearings on the remanded case in January 2008.  The ACC rendered its final decision on July 17,2008.  The decision reduced the ROE fromthe 9.3% in the original decision by 200 basis points resulting in a return onfair value rate base of only 6.4%. Under this decision, CCWC’s annual revenueswould only be expected to increase by $12,000. CCWC has filed an appeal of this decision.

 

During the course ofremand proceedings in the 2004 rate case, in the fourth quarter of 2007, CCWCfiled its new general rate case with the ACC. Unlike California, there is not a three-year cycle in Arizona.  The only filing requirement is that a utilitycannot have two applications pending at the same time.  In the 2007 filing, CCWC requested rateincreases which are expected to generate approximately $2.9 million inadditional annual revenues. The processing of this case was expected to takeapproximately 18 months.  However,the ACC suspended processing of the 2007 rate case until completion of theproceedings on remand of the 2004 rate case. Evidentiary hearings on the 2007 GRC filing were held in December 2008for all issues other than the rate of return. Evidentiary hearings on the rateof return issue were held in January 2009. Parties have submitted briefs and reply briefs.

 

As of June 30, 2009,CCWC has $3.5 million of goodwill which may be at risk for potential impairmentif the requested rate increases are not granted or further delayed by the ACC.

 

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***Other Regulatory Matters***

 

See *“Managements’ Discussion and Analysis of Financial Condition andResults of Operation—Regulatory Matters”*section of theRegistrant’s Form 10-K for the year-ended December 31, 2008 for adetailed discussion of other regulatory matters. The discussion below focuseson significant matters and changes since December 31, 2008.

 

**Cost of Capital**

 

Under the new rate caseplan adopted by the CPUC in May 2007, GSWC is required to file a separateapplication to review the rate of return authorized by the CPUC.  In prior years, the rate of return wasdetermined as part of the general rate case process along with all otheroperating costs.  This new procedure toseparate the rate of return from the general rate case is the same process thatthe CPUC utilizes to determine the rate of return for energy companies underCPUC jurisdiction.

 

GSWC filed its first costof capital application under the new rate case plan on May 1, 2008.  The application requests the CPUC to adopt anROE of 12.1%.  The scoping memo for thisproceeding bifurcated the proceeding into two phases.  Phase I will establish ROEs.  Phase II will address automatic adjustmentmechanisms for ROE and RORB between rate cases. In May 2009, the CPUC issued a final decision in the Phase I costof capital proceeding.  The finaldecision authorized an ROE of 10.2%.  In January 2009,the CPUC issued a revised scoping memo for Phase II of the proceeding whichdirected the parties to submit testimony addressing the effect of the currentfinancial market crisis on the utilities ability to attract and retaincapital.  On July 30, 2009, the CPUCapproved Phase II of the cost of capital application which adopts an automaticadjustment mechanism to adjust ROE and RORB between the three year cost ofcapital proceedings.

 

**ConservationRate Design and Revenue Adjustment Mechanisms**

 

On August 21, 2008,the CPUC issued a final decision which authorized GSWC to implement anincreasing block rate design in GSWC’s Regions II and III as a means toencourage water conservation.  It alsodirected GSWC to file a tiered rate design for Region I, which has been filedby GSWC.  In addition, GSWC wasauthorized to establish a WRAM to track revenue shortfalls for subsequentrecovery from customers, and an MCBA that would include recovery for changes inthe water supply mix. The decision further defers to the cost of capitalproceeding, the issue of whether the adoption of the WRAM should affect GSWC’sROE.

 

In accordance with theCPUC’s administrative processing rules, GSWC implemented two-tiered increasingblock rates in late November 2008 and began recording in the WRAM accountsthe difference between what is billed to its regulated customers in Regions IIand III and that which is authorized by the CPUC. GSWC has provided customerswith conservation rate notices as a bill insert and explained to customers theimpact of conservation rates on customers’ bills.

 

GSWC also implemented theMCBA for Regions II and III in November 2008 that will permit GSWC torecover supply costs related to changes in water supply mix. This accountreplaced the water supply cost balancing account procedure for costs incurredafter the modified supply cost balancing account was implemented.

 

The CPUC also approved anadvice letter filing in a separate proceeding to allow GSWC to create andimplement a Water Conservation Memorandum Account (“WCMA”) to track theextraordinary expenses and revenue shortfall associated with the conservationmeasures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008and was used to track the revenue shortfall until the WRAM was implemented on November 25,2008.  At November 24, 2008,approximately $2.0 million of net under-collection had been included in theWCMA for Regions II and III prior to the implementation of the WRAM. On April 16,2009, the CPUC approved the WCMA and authorized GSWC to establish a 12-monthsurcharge to customers’ bills. The surcharge went into effect on April 21,2009.  Accordingly, GSWC established a$2.0 million regulatory asset with a corresponding increase to income duringthe second quarter of 2009.  GSWCcontinues to track under-collections for Region I in the WCMA and will do sountil a WRAM is established in Region I. On May 7, 2009, the CPUC approved tiered rates for Region I and theestablishment of a WRAM and MCBA which will go into effect on or about September 1,2009.  During the second quarter of 2009,GSWC also established an $852,000 regulatory asset for Region I’s WCMA balanceincurred during the period of August 18, 2008 through June 30, 2009which management believes is also now probable of recovery.  GSWC will file an advice letter for recoveryof Region I’s WCMA, through a 12-month surcharge, once the WRAM and MCBA becomeeffective on or about September 1, 2009 for the period of August 18,2008 through August 31, 2009.

 

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**CPUCSubpoena**

 

On February 15,2007, the CPUC issued a subpoena to GSWC in connection with an investigation ofcertain work orders and charges paid to a specific contractor used by GSWC fornumerous construction projects totaling approximately $24.0 million. The CPUC’sinvestigation focuses on whether GSWC was overcharged for these constructionprojects and whether these overcharges were approved in customer rates.  The construction projects completed by thisspecific contractor related primarily to work on water treatment and pumpingplants which have been placed in service and are used and useful.  In June 2007, GSWC received notificationfrom the CPUC that it was instituting an audit. The purpose of the audit was toexamine for the period 1994 to the present, GSWC’s policies, procedures, andpractices throughout all of its Regions regarding the granting or awarding ofconstruction contracts or jobs.  GSWC iscurrently responding to data requests submitted by the CPUC including recentdata requests which asked for information prior to 1994. Management cannotpredict the outcome of the investigation or audit at this time.

 

In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with the ACCstaff and has provided responsive materials that are relevant to CCWC.  Management cannot predict the outcome of theACC’s request and whether it could affect the processing of CCWC’s GRC.

 

**PensionCosts Memorandum Account**

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs during 2009.  InMarch 2009, GSWC filed an advice letter with the CPUC requestingauthorization to establish a Pension Costs Memorandum Account.  If this account is approved, GSWC will trackthe difference between the pension costs authorized by the CPUC and included incustomer rates, and actual pension costs.  GSWC will not record theamounts in this account as a regulatory asset until they are reviewed andapproved by the CPUC.  If approved by the CPUC, GSWC will then establish aregulatory asset with a corresponding increase to earnings. Until then,Registrant expects that its earnings will be negatively affected by increasingpension costs.  In April 2009, the CPUC’sWater Division rejected our filing.  GSWChas filed an appeal.  At this time,management cannot predict the outcome of this matter as it relates to 2009.  GSWC also amended its current rate caseapplication to request a two-way balancing account to track fluctuations in theforecasted annual pension expense adopted in rates and the actual annualexpense to be recorded by GSWC in 2010, 2011 and 2012 in accordance with SFAS No. 87,*“Employers’Accounting for Pensions”*.  If approved as filed, GSWC will establish aregulatory asset with a corresponding increase to earnings in those years, forany shortfalls.

 

**Mandatory Conservation and RationingMemorandum Account**

 

GSWC serves approximately 4,800 customers in the City ofBay Point in Region I.  The majority ofthe water supply for the Bay Point customer service area is obtained from theContra Costa Water District (“CCWD”).  On March 4, 2009, CCWD made afinding that a water supply shortage existed within CCWD service territoriesand detailed a plan for significant conservation efforts.  Accordingly,GSWC filed an advice letter with the CPUC seeking authority to implement CPUC’sRule No. 14.1, which details water conservation and rationing in itsBay Point customer service area.  GSWCwill implement waterrationing, restrictions, and excess usage charges to its customers, asneeded.  GSWC alsofiled a separate advice letter seeking authorization to establish a MandatoryConservation and Rationing Memorandum Account (“MCRMA”) to track the additionaladministrative costs, operating costs, and revenue shortfall not otherwiserecoverable through any other mechanism recognized by the CPUC.  In June 2009, both advice letters were approvedby the CPUC and GSWC has implemented water rationing, restrictions, and excessusage charges to its customers, in this service area.  Furthermore, in June 2009, GSWC alsofiled advice letters with the CPUC seeking to implement similar mandatory waterconservation and rationing schedules, as well as a MCRMA, in its Simi Valley,Claremont, San Dimas, San Gabriel, Orange County and Metropolitancustomer serviceareas.  These filings have been protested by DRA and are still pending.

 

**Bear Valley Electric**

 

GSWChad previously filed a complaint with the Federal Energy Regulatory Commission(“FERC”) seeking to reduce the $95 per MWh rate in a contract entered into withMirant Americas Energy Marketing (“Mirant Marketing”) to a just and reasonableprice. In May 2009, GSWC reached a settlement agreement with Mirant EnergyTrading, LLC, which acquired the power contract from Mirant Marketing as aresult of bankruptcy reorganization. Pursuant to that settlement agreement,GSWC filed with the FERC a notice of the withdrawal of its complaint. Thesettlement agreement required Mirant Energy Trading to pay $1.0 million as acash settlement to 

 

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GSWCafter the withdrawal of the complaint at the FERC becomes effective.  On May 26, 2009, GSWC received the $1.0million settlement payment from Mirant and GSWC recorded a correspondingreduction to previously incurred legal costs, which increased pretax earningsduring the three and six months ended June 30, 2009.

 

**Order Instituting Rulemaking (“OIR”)**

 

*OIR on Affiliate Transactions**:*

 

In April 2009, the CPUC issued an OIR on the CPUC’sown motion to develop standard rules and procedures for regulated waterand sewer utilities governing affiliate transactions and the use of regulatedassets for non-tariffed utility services (formerly called excesscapacity).  In July 2009, partieswere requested to file a Prehearing Conference Statement that includesresponses to various questions and scenarios that are presented in the OIR.  Responses are scheduled to be filed on August 13,2009.  This OIR is designed to create generic rules for all water and sewercompanies with regard to transactions with a parent company and/or affiliatesand with regard to the use of regulated assets and personnel for non-tariffedutility products and services.

 

*OIR on Contamination Proceeds:*

 

In March, 2009 the CPUC issued an OIR on the CPUC’sown motion to develop rules and procedures to ensure that investor-ownedwater utilities do not earn an unreasonable return on investments financed bycontamination proceeds, including damage awards, and public loans received dueto water supply contamination. Opening comments were filed by the parties in June 2009with reply comments filed in July 2009.

 

**Environmental Matters**

 

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

 

There have been no material changes to AWR’s environmental matters since December 31, 2008. See *“Management’s Discussion and Analysis of Financial Condition and Results of Operation-Environmental Matters”*section of the Registrant’s Form 10-K for the year-ended December 31, 2008 for a detailed discussion of environmental matters.

 

**WaterSupply**

 

***State Water Project***

 

GSWCmanages a portfolio of water supplies, including groundwater production, use oftreated surface water and arrangements with water wholesalers to insure thereliability, quality and affordability of water.  For example, GSWC hascontracts with various governmental entities, principally Metropolitan WaterDistrict’s member agencies (“MWD”), and other parties to purchase water fordistribution to customers.  The MWD is a public agency organized andmanaged to provide a supplemental, imported supply of water to its memberpublic agencies.  GSWC has 46 connectionsto MWD’s water distribution facilities and those of member agencies.  The Company purchases MWD water through sixseparate member agencies aggregating more than 62,000 acre-feet annually. MWD’sprincipal sources of water are the Colorado River via the Colorado RiverAqueduct and northern California supplies via the State Water Project (“SWP”).

 

Water supplies availableto MWD through the SWP have historically varied from year to year based onweather.  However, MWD has generally beenable to provide sufficient quantities of water to satisfy the needs of itsconstituents.

 

A keylink in the SWP is the Sacramento/San Joaquin River Delta adjacent to the SanFrancisco Bay (“Delta”).  The fresh waterpathway through the Delta is supported by earthen levees, and the reliabilityof those levees has been called into question based on post hurricane Katrinaassessments by various federal, state and local agencies.  A significant failure of the Delta leveesystem would substantially interfere with water exports, thus potentiallydisrupting the water supply available to GSWC from northern California viaMWD.  In addition, the environmentalhealth of the Delta has been called into question, citing declining levels ofparticular fish species.  In light ofthese risks and environmental concerns, the state Department of Water Resources(“DWR”) and the Governor have convened a series of interdisciplinary taskforces to develop proposals to preserve the environmental 

 

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viability of the Deltaand safeguard the water supply.  GSWCcontinues to participate in and monitor developments related to the Delta andefforts to craft a workable solution to the risks presented by reliance on theDelta for water supplies in southern California.

 

TheSWP faces particular challenges to the operation of its pumping plant locatedat the southern end of the Delta which naturally drains to the Pacific Oceanthrough the San Francisco Bay. Because of its diversion of water for export tocentral, coastal and southern California through the pumping plant, the SWP issubject to a variety of operating limitations and permitting processesdesigned, collectively, to balance the need for water exports with the need torestore and protect the Delta environment.  In late 2007, a Federal judgeissued a decision in the case *NaturalResources Defense Council v. Kempthorne*, Case No. 05-CV-1207(U.S. Dist. Ct., E.D.) finding, among other things, that the Biological Opinion(“BiOp”) issued by the U.S. Fish and Wildlife Service (the “Service”) waslegally insufficient and failed to consider recent declines in delta smelt fishpopulations.  A new BiOp, responsive to recent scientific findings and tothe judge’s order, was filed December 15, 2008.  The BiOp, which sets the parameters for a newoperating procedure for the SWP, could result in permanent restrictions onwater deliveries through the Delta, reducing deliveries in some years by up to50%.  On June 4, 2009, the NationalMarine Fisheries Service issued a new biolological opinion to protect salmon inthe delta under the Endangered Species Act. This was followed by the June 25, 2009 listing of the long finsmelt by the California Fish and Game as a threatened species.  The listing of the long fin smelt and the newBiOp for salmon could potentially impact SWP deliveries further.

 

At the start of eachyear, DWR issues a conservative initial allocation estimate that is typicallyincreased as the water year progresses. Due to declining storage levels in theState’s reservoirs, DWR has established a 40% delivery level through the SWPfor 2009.  The board of MWD voted on April 14,2009 to implement its Water Supply Allocation Plan to effectively reduce waterdeliveries across the region by 10% beginning July 1, 2009.  MWD plans to achieve the reduction byimposing significant penalty charges to its member agencies who do not achievestated reductions.  GSWC purchases MWDwater through these member agencies, and the member agencies have implementedsimilar penalty structures to its customers, including GSWC, to ensurecommensurate conservation levels.  MWDhas also announced an 8.8% basic rate increase as well as a $69 per-acre-footDelta surcharge.  These two elementsresult in a combined average increase of 19.7% effective September 1,2009.

 

In June 2009, GSWCimplemented water conservation and rationing inits Bay Point customer service area. GSWC has filed advice letters with the CPUC to implement mandatoryconservation and rationing in its Simi Valley, Orange County, Metropolitan,Claremont, San Dimas and San Gabriel Valley customer service areas.  Reduction goals range from 6% to 15%depending on the area.  GSWC willconsider similar action in other customer service areas as needed.

 

Statewidewater conditions have improved in recent months but they remain below averagefor the third consecutive year.  Totalwater storage in the Colorado River basin is also slightly better than lastyear.  The percentage of normal yearColorado River runoff is at 85% as a result of a persistent drought in thebasin.  Lake Mead, which supplies SouthernCalifornia, is at 42% of its full capacity, although it may receive more waterfrom upstream Lake Powell as the season progresses.

 

GSWCis continually evaluating its water supply portfolio to meet the needs of itscustomers and changing supply conditions. In May 2009, GSWC signed a non-binding letter of intent toparticipate in the “Cadiz Water Conservation and Storage Project.” Cadiz ownsapproximately 70 square miles of property in eastern San Bernardino County,California with potentially significant groundwater resources that could beutilized by GSWC in its MWD service territory, if the project is implemented byCadiz, Inc., as currently envisioned.

 

Additionalinformation on water supply issues are described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in our 2008 Annual Report on Form 10-Kfor the year ended December 31, 2008.

 

**NewAccounting Pronouncements**

 

Registrantis subject to newly issued requirements as well as changes in existing requirementsissued by the Financial Accounting Standards Board. Differences in financialreporting between periods could occur unless and until the CPUC and the ACCapprove such changes for conformity through regulatory proceedings. See *Note 1**of Unaudited Notes toConsolidated Financial Statements.*

 

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

 

Registrantis exposed to certain market risks, including fluctuations in interest rates,commodity price risk primarily relating to changes in the market price ofelectricity and the impact of the current financial crisis. Market risk is thepotential loss arising from adverse changes in prevailing market rates andprices.

 

Therehave been no material changes regarding Registrant’s market risk position fromthe information provided in its Annual Report on Form 10-K for the yearended December 31, 2008. The quantitative and qualitative disclosuresabout market risk are discussed in *Item 7A-Quantitative andQualitative Disclosures About Market Risk*, contained in Registrant’sAnnual Report on Form 10-K.

 

**Item 4. Controls and Procedures**

 

**(a) Evaluationof Disclosure Controls and Procedures**

 

Asrequired by Rule 13a-15(b) under the Securities and Exchange Act of1934 (the “Exchange Act”), we have carried out an evaluation, under thesupervision and with the participation of our management, including our ChiefExecutive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of theeffectiveness, as of the end of the fiscal quarter covered by this report, ofthe design and operation of our “disclosure controls and procedures” as definedin Rule 13a-15(e) and 15d-15(e) promulgated by the Securitiesand Exchange Commission (“SEC”) under the Exchange Act. Based upon thatevaluation, the CEO and the CFO concluded that disclosure controls andprocedures, as of the end of such fiscal quarter, were adequate and effectiveto ensure that information required to be disclosed by us in the reports thatwe file or submit under the Exchange Act is recorded, processed, summarized andreported within the time periods specified in the SEC’s rules and formsand that such information is accumulated and communicated to our management,including our CEO and CFO, as appropriate to allow timely decisions regardingrequired disclosure.

 

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

 

Therehas been no change in our internal control over financial reporting during thequarter ended June 30, 2009, that has materially affected or is reasonablylikely to materially affect our internal control over financial reporting.

 

**Item 4T. Controls and Procedures**

 

Notapplicable.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

Therehavebeennomaterialdevelopmentsinanyofthelegalproceedingsdescribedinour2008AnnualReportonForm 10-K.

 

Registrant is subject to ordinaryroutine litigation incidental to its business. Other than those disclosed inRegistrant’s Form 10-K for the year ended December 31, 2008, no otherlegal 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 ordinarycourse of business.

 

**Item 1A. Risk Factors**

 

There have been no significant changes in the risk factorsdisclosed in our 2008 Annual Report on Form 10-K.

 

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

 

The shareholders of AWR have approved the material featuresof all equity compensation plans under which AWR directly issues equitysecurities. AWR did not directly issue any unregistered equity securitiesduring the second quarter of 2009.  Thefollowing table provides information about repurchases of Common Shares by AWRduring the second quarter of 2009:

 
| **Period**                   | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** **  | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs (1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|-------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| April 1 — 30, 2009 |       | 14                                               |       | $                                                |  34.09 |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| May 1 — 31, 2009   |       | 12,735                                           |       | $                                                |  32.05 |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| June 1 — 30, 2009  |       | 540                                              |       | $                                                |  33.06 |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| Total                        |       | 13,289                                           | (2)        | $                                                |  32.09 |                                                                                                                                 | —     |                                                                                                                                | NA         | (3) |

 

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

 

(2)          Of the amounts presented, 12,720 CommonShares were acquired on the open market for employees pursuant to the Company’s401 (k) plan. The remainder of the Common Shares was acquired on the openmarket for new participants in the Company’s Common Share Purchase and DividendReinvestment Plan.

 

(3)          None of these plans contain a maximumnumber of common shares that may be purchased in the open market under theplans.

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

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

 

The annual meeting of shareholderswas held on May 19, 2009. The following table presents the voting resultsof the election of Class I directors at this meeting:

 
| **Name**            | ** ** | **“Votes For”** | ** ** | **“Votes Withheld”** | ** ** |
|---------------------|------------|--------------------------------|------------|-------------------------------------|------------|
| James L. Anderson   |       | 13,888,002                     |       | 703,080                             |       |
| Diana M. Bontá |       | 13,987,249                     |       | 603,833                             |       |
| Anne M. Holloway    |       | 13,904,925                     |       | 686,157                             |       |
| Robert J. Sprowls   |       | 13,975,499                     |       | 615,583                             |       |

 

Registrant has oneother class of directors, which include N. P. Dodge, Jr., Robert F.Kathol, Gary F. King and Lloyd E. Ross, whose terms will expire at the annualmeeting in 2010.

 

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Registrant’sshareholders also ratified the appointment of PricewaterhouseCoopers LLP as ourindependent registered public accounting firm, with 14,349,659 voting in favorof the appointment, 110,257 opposing the appointment, and 131,165 abstainingfrom voting on the appointment.

 

Finally,Registrant’s shareholders approved a proposal to transact any other businesswhich may properly come before the meeting, or any adjournment thereof, with7,873,439 voting in favor, 6,322,385 against, and 395,255 abstaining.

 

Noother items were submitted during the second quarter of the fiscal year coveredby this report to a vote of security holders through the solicitation ofproxies or otherwise.

 

**Item 5. Other Information**

 

(a)          OnJuly 28, 2009, the Board of Directors of AWR declared a regular quarterlydividend of $0.250 per common share. The dividend will be paid on September 1,2009 to shareholders of record as of the close of business on August 11,2009.

 

(b)         Therehave been no material changes during the second quarter of 2009 to theprocedures by which shareholders may nominate persons to the Board ofDirectors of AWR.

##  

## **Item6. Exhibits**

##  

(a)          The following documents are filed asExhibits to this report:

 
| 4.1    |   | Indenture dated as of December 1, 1998 between  American States Water Company and The Bank of New York Mellon Trust Company,  N.A., as supplemented by the First Supplemental Indenture dated as of July 31,  2009 (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 GSWC (1)                                                                                                            |
|   |   |                                                                                                                                                                                                                             |
| 31.2   |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)                                                                                                             |
|   |   |                                                                                                                                                                                                                             |
| 31.2.1 |   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1)                                                                                                            |
|   |   |                                                                                                                                                                                                                             |
| 32.1   |   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)                                                                                                                     |
|   |   |                                                                                                                                                                                                                             |
| 32.2   |   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)                                                                                                                     |

 

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(1)          Filed concurrently herewith

 

(2)          Furnished concurrently herewith

 

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#### **SIGNATURE**

 

Pursuantto the requirements of Securities Exchange Act of 1934, the Registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized and as its principal financial officer.

 
|   |            | AMERICAN STATES WATER COMPANY (“AWR”): |
|--------|-----------------|--------------------------------------------------|
|   |            |                                             |
|   |   By: | /s/ EVA G. TANG                                  |
|   |            | Senior Vice President-Finance, Chief Financial   |
|   |            | Officer, Corporate Secretary and Treasurer       |
|   |            |                                             |
|   |            | GOLDEN STATE WATER COMPANY (“GSWC”):   |
|   |            |                                             |
|   |   By: | /s/ EVA G. TANG                                  |
|   |            | Senior Vice President-Finance, Chief Financial   |
|   |            | Officer and Secretary                            |
|   |            |                                             |
|   | Date:           | August 7, 2009                              |

 

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