** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

**FORM 10-Q**

 

**(Mark One)**

 

**ý****                                ****Quarterly reportpursuant to Section 13 or 15(d) of the Securities Exchange Act of1934**

** **

**for the quarterly period ended September 30, 2005**

 

**or**

 

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

** **

**for thetransition period from                   to                       **

 

**Commissionfile number     001-14431**

 

**AmericanStates Water Company**

(Exact Name of Registrant as Specified in Its Charter)

 
| **California**                                                                      |   | **95-4676679**                     |
|-------------------------------------------------------------------------------------|--------|------------------------------------|
| (State  or Other Jurisdiction of Incorporation or Organization)                     |   | (IRS  Employer Identification No.) |
|                                                                                |   |                               |
| **630 East Foothill  Boulevard, San Dimas**                                         |   | **91773-1207**                     |
| (Address  of Principal Executive Offices)                                           |   | (Zip  Code)                        |
|                                                                                |   |                               |
| **(909) 394-3600**                                                                  |
| (Registrant’s  Telephone Number, Including Area Code)                          |
|                                                                                |   |                               |
| **Not Applicable**                                                                  |
| (Former  Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

 

**Commissionfile number     001-12008**

 

**Golden StateWater 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 East Foothill  Boulevard, San Dimas**                                         |   | **91773-1212**                     |
| (Address  of Principal Executive Offices)                                           |   | (Zip  Code)                        |
|                                                                                |   |                               |
| **(909) 394-3600**                                                                  |
| (Registrant’s  Telephone Number, Including Area Code)                          |
|                                                                                |   |                               |
| **Southern  California Water Company**                                              |
| (Former  Name, Former Address and Former Fiscal Year, if Changed Since Last Report) |

 

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

 

American States WaterCompany                                                               Yes ý No o

Golden State Water Company                                                                                  Yes ý No o

 

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

 

American States WaterCompany                                                               Yes ý No o

Golden State Water Company                                                                                  Yes o No ý

 

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

 

American States WaterCompany                                                               Yes o No ý

Golden State Water Company                                                                                  Yes o No ý

 

As of November 9,2005, the number of Common Shares outstanding, of American States Water Companywas 16,789,533 shares.

 

Asof November 9 2005, all of the 122 outstanding Common Shares of GoldenState Water Company were owned by American States Water Company.

 

 

----

 

**AMERICANSTATES WATER COMPANY**

**and**

 

**GOLDENSTATE WATER COMPANY**

**FORM 10-Q**

 

### **INDEX**

 
| ** **       | ** **                                                                                                                                         | **Page**   |
|------------------|----------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       |                                                                                                                                               | ** ** |
| **Part I**  | **Financial Information**                                                                                                                          | ** ** |
| ** **       | ** **                                                                                                                                         | ** ** |
| Item 1:          | Financial Statements                                                                                                                               | 2          |
|             |                                                                                                                                               |       |
|             | Consolidated Balance Sheets of American  States Water Company as of  September 30, 2005 and December 31, 2004                            | 3-4        |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Income of  American States Water Company for the  Three Months Ended September 30, 2005 and 2004                   | 5          |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Income of  American States Water Company for the  Nine Months Ended September 30, 2005 and 2004                    | 6          |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Cash Flow of  American States Water Company for the  Nine Months Ended September 30, 2005 and 2004                 | 7          |
|             |                                                                                                                                               |       |
|             | Consolidated Balance Sheets of Golden State  Water Company as of  September 30, 2005 and December 31, 2004                               | 8-9        |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Income of Golden  State Water Company for the  Three Months Ended September 30, 2005 and 2004                      | 10         |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Income of Golden  State Water Company for the  Nine Months Ended September 30, 2005 and September 30, 2004    | 11         |
|             |                                                                                                                                               |       |
|             | Consolidated Statements of Cash Flow of  Golden State Water Company for the  Nine Months Ended September 30, 2005 and September 30, 2004 | 12         |
|             |                                                                                                                                               |       |
|             | Notes to Consolidated Financial Statements                                                                                                         | 13-29      |
|             |                                                                                                                                               |       |
| Item 2:          | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                                        | 30-49      |
|             |                                                                                                                                               |       |
| Item 3:          | Quantitative and Qualitative Disclosures  About Market Risks                                                                                       | 49         |
|             |                                                                                                                                               |       |
| Item 4:          | Controls and Procedures                                                                                                                            | 49         |
|             |                                                                                                                                               |       |
| **Part II** | **Other Information**                                                                                                                              | ** ** |
| ** **       | ** **                                                                                                                                         | ** ** |
| Item 1:          | Legal Proceedings                                                                                                                                  | 50         |
|             |                                                                                                                                               |       |
| Item 2:          | Unregistered Sales of Equity Securities and  Use of Proceeds                                                                                       | 50         |
|             |                                                                                                                                               |       |
| Item 3:          | Defaults Upon Senior Securities                                                                                                                    | 50         |
|             |                                                                                                                                               |       |
| Item 4:          | Submission of Matters to a Vote of Security  Holders                                                                                               | 51         |
|             |                                                                                                                                               |       |
| Item 5:          | Other Information                                                                                                                                  | 51         |
|             |                                                                                                                                               |       |
| Item 6:          | Exhibits                                                                                                                                           | 51         |
|             |                                                                                                                                               |       |
|             | Signature                                                                                                                                          | 52         |

 

1

----

 

#### **PART I**

 

**Item 1. Financial Statements**

 

General

 

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

 

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

 

It is suggested that these financialstatements be read in conjunction with the financial statements and notesthereto in the latest Annual Report on Form 10-K of American States WaterCompany and its wholly owned subsidiary, Golden State Water Company.

 

Filing Format

 

This quarterly report on Form 10-Q is acombined report being filed by two separate Registrants: American States WaterCompany (hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”)(formerly known as Southern California Water Company). For more information,please see Note 1 to the  *Notes to Consolidated Financial Statements* and the headingentitled *General* in *Item 2 -Management’s Discussion and Analysis of Financial Condition and Results ofOperation.* References in this report to “Registrant” are to AWR and GSWCcollectively, unless otherwise specified. GSWC makes no representations as tothe information contained in this report relating to AWR and its subsidiaries,other than GSWC.

 

2

----

 

**AMERICANSTATES WATER COMPANY**

**CONSOLIDATED BALANCE SHEETS**

**ASSETS**

**(Unaudited)**

 
| ** **                                                                                              | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|---------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in  thousands)**                                                                                     | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                              | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Utility Plant, at cost**                                                                              |       |                   |       |                  |       |
| Water                                                                                                   |       | $                      | 806,873    |                  | $          | 778,238 |   |
| Electric                                                                                                |       | 58,670                 |       | 58,667                |       |
|                                                                                                    |       | 865,543                |       | 836,905               |       |
| Less - Accumulated depreciation                                                                         |       | (257,622               | )          | (241,717              | )          |
|                                                                                                    |       | 607,921                |       | 595,188               |       |
| Construction work in progress                                                                           |       | 90,309                 |       | 68,977                |       |
| Net utility plant                                                                                       |       | 698,230                |       | 664,165               |       |
|                                                                                                    |       |                   |       |                  |       |
| **Other Property and Investments**                                                                      |       |                   |       |                  |       |
| Goodwill                                                                                                |       | 11,862                 |       | 11,925                |       |
| Other property and investments                                                                          |       | 9,765                  |       | 9,792                 |       |
| Total other property and investments                                                                    |       | 21,627                 |       | 21,717                |       |
|                                                                                                    |       |                   |       |                  |       |
| **Current Assets**                                                                                      |       |                   |       |                  |       |
| Cash and cash equivalents                                                                               |       | 5,691                  |       | 4,303                 |       |
| Accounts receivable-customers (less  allowance for doubtful  accounts of $750 in 2005 and $782 in 2004) |       | 15,209                 |       | 10,970                |       |
| Unbilled revenue                                                                                        |       | 17,400                 |       | 13,743                |       |
| Other accounts receivable (less allowance  for doubtful  accounts of $234 in 2005 and $201 in 2004)     |       | 3,614                  |       | 3,384                 |       |
| Income taxes receivable                                                                                 |       | —                 |       | 5,833                 |       |
| Materials and supplies, at average cost                                                                 |       | 1,435                  |       | 1,496                 |       |
| Regulatory assets - current                                                                             |       | 4,569                  |       | 7,104                 |       |
| Prepayments and other current assets                                                                    |       | 7,047                  |       | 3,466                 |       |
| Deferred income taxes - current                                                                         |       | 1,490                  |       | 2,725                 |       |
| Total current assets                                                                                    |       | 56,455                 |       | 53,024                |       |
|                                                                                                    |       |                   |       |                  |       |
| **Regulatory  and Other Assets**                                                                        |       |                   |       |                  |       |
| Regulatory assets                                                                                       |       | 50,587                 |       | 54,404                |       |
| Other accounts receivable                                                                               |       | 8,713                  |       | 8,400                 |       |
| Other                                                                                                   |       | 8,745                  |       | 8,567                 |       |
| Total regulatory and other assets                                                                       |       | 68,045                 |       | 71,371                |       |
|                                                                                                    |       |                   |       |                  |       |
| **Total  Assets**                                                                                       |       | $                      | 844,357    |                  | $          | 810,277 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

3

----

 

**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**CAPITALIZATIONAND LIABILITIES**

**(Unaudited)**

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in  thousands)**                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                               |       |                   |       |                  |       |
| **Capitalization**                                 |       |                   |       |                  |       |
| Common shares, no par value, no stated  value      |       | $                      | 166,206    |                  | $          | 165,270 |   |
| Earnings reinvested in the business                |       | 99,866                 |       | 89,454                |       |
| Accumulated other comprehensive loss               |       | (3,259                 | )          | (3,259                | )          |
| Total common shareholders’ equity             |       | 262,813                |       | 251,465               |       |
| Long-term debt                                     |       | 228,685                |       | 228,902               |       |
| Total capitalization                               |       | 491,498                |       | 480,367               |       |
|                                               |       |                   |       |                  |       |
| **Current Liabilities**                            |       |                   |       |                  |       |
| Notes payable to banks                             |       | 55,000                 |       | 45,000                |       |
| Long-term debt - current                           |       | 658                    |       | 880                   |       |
| Accounts payable                                   |       | 18,471                 |       | 18,206                |       |
| Income taxes payable                               |       | 2,908                  |       | —                |       |
| Accrued employee expenses                          |       | 4,240                  |       | 4,260                 |       |
| Accrued interest                                   |       | 5,139                  |       | 1,670                 |       |
| Regulatory liabilities - current                   |       | 4,904                  |       | 3,441                 |       |
| Other                                              |       | 12,607                 |       | 12,879                |       |
| Total current liabilities                          |       | 103,927                |       | 86,336                |       |
|                                               |       |                   |       |                  |       |
| **Other Credits**                                  |       |                   |       |                  |       |
| Advances for construction                          |       | 83,522                 |       | 81,351                |       |
| Contributions in aid of construction - net         |       | 77,207                 |       | 73,100                |       |
| Deferred income taxes                              |       | 65,046                 |       | 59,839                |       |
| Unamortized investment tax credits                 |       | 2,541                  |       | 2,609                 |       |
| Accrued pension and other postretirement  benefits |       | 9,994                  |       | 8,793                 |       |
| Regulatory liabilities                             |       | 2,180                  |       | 9,731                 |       |
| Other                                              |       | 8,442                  |       | 8,151                 |       |
| Total other credits                                |       | 248,932                |       | 243,574               |       |
|                                               |       |                   |       |                  |       |
| **Commitments and Contingencies (Note 10)**        |       | —                 |       | —                |       |
|                                               |       |                   |       |                  |       |
| **Total  Capitalization and Liabilities**          |       | $                      | 844,357    |                  | $          | 810,277 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

4

----

 

**AMERICANSTATES WATER COMPANY**

**CONSOLIDATED STATEMENTS OF INCOME**

**FOR THETHREE MONTHS**

**ENDED SEPTEMBER 30,2005 AND 2004**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** |
| **(in  thousands, except per share amounts)**        | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                 |       |                   |       |   |   |
| **Operating Revenues**                               |       |                   |       |   |   |
| Water                                                |       | $                      | 60,539     |   | $ | 62,455 |   |
| Electric                                             |       | 6,544                  |       | 6,208 |   |
| Other                                                |       | 988                    |       | 298 |   |
|                                                 |       | 68,071                 |       | 68,961 |   |
| **Operating Expenses**                               |       |                   |       |   |   |
| Water purchased                                      |       | 15,779                 |       | 15,339 |   |
| Power purchased for pumping                          |       | 3,252                  |       | 2,971 |   |
| Power purchased for resale                           |       | 3,075                  |       | 3,107 |   |
| Unrealized (gain) loss on purchased power  contracts |       | (4,018                 | )          | 224 |   |
| Groundwater production assessment                    |       | 2,315                  |       | 2,120 |   |
| Supply cost balancing accounts                       |       | 514                    |       | 1,016 |   |
| Other operating expenses                             |       | 4,850                  |       | 4,818 |   |
| Administrative and general expenses                  |       | 10,074                 |       | 10,591 |   |
| Depreciation and amortization                        |       | 4,705                  |       | 5,589 |   |
| Maintenance                                          |       | 3,080                  |       | 2,593 |   |
| Taxes on income                                      |       | 10,558                 |       | 5,692 |   |
| Other taxes                                          |       | 2,548                  |       | 2,235 |   |
| Total operating expenses                             |       | 56,732                 |       | 56,295 |   |
|                                                 |       |                   |       |   |   |
| **Operating Income**                                 |       | 11,339                 |       | 12,666 |   |
|                                                 |       |                   |       |   |   |
| **Other Income (Loss)**                              |       |                   |       |   |   |
| Other income (loss), net                             |       | (148                   | )          | (160 | ) |
| Taxes on other income (loss)                         |       | 84                     |       | 76 |   |
| Total other income (loss), net                       |       | (64                    | )          | (84 | ) |
|                                                 |       |                   |       |   |   |
| **Interest Charges**                                 |       |                   |       |   |   |
| Interest on long-term debt                           |       | 4,092                  |       | 4,047 |   |
| Other interest and amortization of debt  expense     |       | (5,051                 | )          | 517 |   |
| Total interest charges, net                          |       | (959                   | )          | 4,564 |   |
|                                                 |       |                   |       |   |   |
| **Net Income**                                       |       | $                      | 12,234     |   | $ | 8,018 |   |
|                                                 |       |                   |       |   |   |
| **Weighted Average Number of Shares Outstanding**    |       | 16,782                 |       | 15,318 |   |
| **Basic Earnings Per Common Share**                  |       | $                      | 0.72       |   | $ | 0.52 |   |
|                                                 |       |                   |       |   |   |
| **Weighted Average Number of Diluted Shares**        |       | 16,887                 |       | 15,338 |   |
| **Fully Diluted Earnings Per Share**                 |       | $                      | 0.72       |   | $ | 0.52 |   |
|                                                 |       |                   |       |   |   |
| **Dividends Declared Per Common Share**              |       | $                      | 0.225      |   | $ | 0.221 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

5

----

 

**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THE NINE MONTHS ENDED**

**SEPTEMBER 30,2005 AND 2004**

**(Unaudited)**

 
| ** **                                        | ** ** | **Nine Months Ended**  | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **September 30,** | ** ** |
| **(in  thousands, except per share amounts)**     | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                              |       |                   |       |   |   |
| **Operating Revenues**                            |       |                   |       |   |   |
| Water                                             |       | $                      | 155,587    |   | $ | 154,773 |   |
| Electric                                          |       | 20,105                 |       | 19,284 |   |
| Other                                             |       | 2,669                  |       | 899 |   |
|                                              |       | 178,361                |       | 174,956 |   |
| **Operating Expenses**                            |       |                   |       |   |   |
| Water purchased                                   |       | 35,742                 |       | 37,022 |   |
| Power purchased for pumping                       |       | 6,923                  |       | 7,103 |   |
| Power purchased for resale                        |       | 9,922                  |       | 10,474 |   |
| Unrealized gain on purchased power  contracts     |       | (7,492                 | )          | (257 | ) |
| Gain on settlement for removal of wells           |       | (760                   | )          | — |   |
| Gain on sale of water rights                      |       | —                 |       | (5,675 | ) |
| Groundwater production assessment                 |       | 6,079                  |       | 5,280 |   |
| Supply cost balancing accounts                    |       | 1,042                  |       | 4,835 |   |
| Other operating expenses                          |       | 15,137                 |       | 14,538 |   |
| Administrative and general expenses               |       | 31,698                 |       | 31,166 |   |
| Depreciation and amortization                     |       | 16,036                 |       | 15,840 |   |
| Maintenance                                       |       | 8,068                  |       | 7,529 |   |
| Taxes on income                                   |       | 18,582                 |       | 11,720 |   |
| Other taxes                                       |       | 7,041                  |       | 6,566 |   |
| Total operating expenses                          |       | 148,018                |       | 146,141 |   |
|                                              |       |                   |       |   |   |
| **Operating Income**                              |       | 30,343                 |       | 28,815 |   |
|                                              |       |                   |       |   |   |
| **Other Income (Loss)**                           |       |                   |       |   |   |
| Other income (loss), net                          |       | (390                   | )          | 509 |   |
| Taxes on other income (loss)                      |       | 225                    |       | (138 | ) |
| Total other income (loss), net                    |       | (165                   | )          | 371 |   |
|                                              |       |                   |       |   |   |
| **Interest Charges**                              |       |                   |       |   |   |
| Interest on long-term debt                        |       | 12,198                 |       | 12,149 |   |
| Other interest and amortization of debt  expense  |       | (3,753                 | )          | 1,163 |   |
| Total interest charges                            |       | 8,445                  |       | 13,312 |   |
|                                              |       |                   |       |   |   |
| **Net Income**                                    |       | $                      | 21,733     |   | $ | 15,874 |   |
|                                              |       |                   |       |   |   |
| **Weighted Average Number of Shares Outstanding** |       | 16,773                 |       | 15,264 |   |
| **Basic Earnings Per Common Share**               |       | $                      | 1.29       |   | $ | 1.04 |   |
|                                              |       |                   |       |   |   |
| **Weighted Average Number of Diluted Shares**     |       | 16,845                 |       | 15,288 |   |
| **Fully Diluted Earnings Per Share**              |       | $                      | 1.29       |   | $ | 1.04 |   |
|                                              |       |                   |       |   |   |
| **Dividends Declared Per Common Share**           |       | $                      | 0.675      |   | $ | 0.663 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

6

----

 

**AMERICANSTATES WATER COMPANY**

**CONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2005 AND 2004**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **September 30,** | ** ** |
| **(in thousands)**                                                | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Operating Activities:**                        |       |                   |       |   |   |
| Net income                                                        |       | $                      | 21,733     |   | $ | 15,874 |   |
| Adjustments for non-cash items:                                   |       |                   |       |   |   |
| Depreciation and amortization                                     |       | 16,036                 |       | 15,840 |   |
| Provision for doubtful accounts                                   |       | 311                    |       | 495 |   |
| Deferred income taxes and investment tax  credits                 |       | 9,453                  |       | 608 |   |
| Unrealized gain on purchased power  contracts                     |       | (7,492                 | )          | (257 | ) |
| Impairment loss on assets removed from  rate-base                 |       | —                 |       | 482 |   |
| Non-cash compensation expense on stock  units issued              |       | 110                    |       | 794 |   |
| Other - net                                                       |       | 30                     |       | 1,175 |   |
| Changes in assets and liabilities:                                |       |                   |       |   |   |
| Accounts receivable - customers                                   |       | (4,517                 | )          | (3,243 | ) |
| Unbilled revenue                                                  |       | (3,657                 | )          | (3,761 | ) |
| Other accounts receivable                                         |       | (576                   | )          | 8,307 |   |
| Materials and supplies                                            |       | 61                     |       | (139 | ) |
| Prepayments and other current assets                              |       | 1,884                  |       | 2,009 |   |
| Regulatory assets - supply cost balancing  accounts               |       | 1,042                  |       | 4,835 |   |
| Other assets                                                      |       | (2,143                 | )          | (789 | ) |
| Accounts payable                                                  |       | 265                    |       | 191 |   |
| Income taxes receivable/payable                                   |       | 8,741                  |       | 5,693 |   |
| Other liabilities                                                 |       | 3,906                  |       | (63 | ) |
| Net cash provided                                                 |       | 45,187                 |       | 48,051 |   |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Investing Activities:**                        |       |                   |       |   |   |
| Construction expenditures                                         |       | (51,958                | )          | (57,531 | ) |
| Net cash used                                                     |       | (51,958                | )          | (57,531 | ) |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Financing Activities:**                        |       |                   |       |   |   |
| Proceeds from issuance of common shares,  net of issuance costs   |       | 830                    |       | 35,256 |   |
| Receipt of advances for and contributions  in aid of construction |       | 10,350                 |       | 8,308 |   |
| Refunds on advances for construction                              |       | (3,147                 | )          | (2,947 | ) |
| Repayments of long-term debt                                      |       | (560                   | )          | (541 | ) |
| Net change in notes payable to banks                              |       | 10,000                 |       | (28,000 | ) |
| Cash received on financing portion of  purchased power contracts  |       | 2,007                  |       | 1,339 |   |
| Dividends paid                                                    |       | (11,321                | )          | (10,108 | ) |
| Net cash provided                                                 |       | 8,159                  |       | 3,307 |   |
|                                                              |       |                   |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**         |       | 1,388                  |       | (6,173 | ) |
| **Cash and  cash equivalents, beginning of period**               |       | 4,303                  |       | 12,775 |   |
| **Cash and  cash equivalents, end of period**                     |       | $                      | 5,691      |   | $ | 6,602 |   |

 

*The accompanying notes are an integral partof these consolidated financial statements*

 

7

----

 

**GOLDEN STATE WATER COMPANY**

**BALANCESHEETS**

**ASSETS**

**(Unaudited)**

 
| ** **                                                                                             | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in  thousands)**                                                                                    | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| ** **                                                                                             | ** ** | ** **             | ** ** | ** **            | ** ** |
| **Utility Plant, at cost**                                                                             |       |                   |       |                  |       |
| Water                                                                                                  |       | $                      | 761,510    |                  | $          | 734,662 |   |
| Electric                                                                                               |       | 58,670                 |       | 58,667                |       |
|                                                                                                   |       | 820,180                |       | 793,329               |       |
| Less - Accumulated depreciation                                                                        |       | (244,746               | )          | (229,664              | )          |
|                                                                                                   |       | 575,434                |       | 563,665               |       |
| Construction work in progress                                                                          |       | 85,090                 |       | 65,136                |       |
| Net utility plant                                                                                      |       | 660,524                |       | 628,801               |       |
|                                                                                                   |       |                   |       |                  |       |
| **Other Property and Investments**                                                                     |       | 7,388                  |       | 7,419                 |       |
|                                                                                                   |       |                   |       |                  |       |
| **Current Assets**                                                                                     |       |                   |       |                  |       |
| Cash and cash equivalents                                                                              |       | 4,129                  |       | 2,702                 |       |
| Accounts receivable-customers (less  allowance for doubtful accounts of $703 in 2005 and $758 in 2004) |       | 14,968                 |       | 10,818                |       |
| Unbilled revenue                                                                                       |       | 17,066                 |       | 13,466                |       |
| Inter-company receivable                                                                               |       | 335                    |       | 1,126                 |       |
| Other accounts receivable (less allowance  for doubtful accounts of $234 in 2005 and $201 in 2004)     |       | 1,504                  |       | 2,465                 |       |
| Income taxes receivable from Parent                                                                    |       | —                 |       | 4,187                 |       |
| Materials and supplies, at average cost                                                                |       | 1,410                  |       | 1,473                 |       |
| Regulatory assets - current                                                                            |       | 4,496                  |       | 7,104                 |       |
| Prepayments and other current assets                                                                   |       | 6,943                  |       | 3,248                 |       |
| Deferred income taxes - current                                                                        |       | 1,511                  |       | 2,795                 |       |
| Total current assets                                                                                   |       | 52,362                 |       | 49,384                |       |
|                                                                                                   |       |                   |       |                  |       |
| **Regulatory and Other Assets**                                                                        |       |                   |       |                  |       |
| Regulatory assets                                                                                      |       | 50,330                 |       | 54,219                |       |
| Other accounts receivable                                                                              |       | 8,713                  |       | 8,400                 |       |
| Other                                                                                                  |       | 7,880                  |       | 8,053                 |       |
| Total regulatory and other assets                                                                      |       | 66,923                 |       | 70,672                |       |
|                                                                                                   |       |                   |       |                  |       |
| **Total  Assets**                                                                                      |       | $                      | 787,197    |                  | $          | 756,276 |   |

 

*The accompanying notes are an integral partof these financial statements*

 

8

----

 

**GOLDENSTATE WATER COMPANY**

**BALANCESHEETS**

### **CAPITALIZATION AND LIABILITIES**

**(Unaudited)**

 
| ** **                                         | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(in  thousands)**                                | ** ** | **2005**               | ** ** | **2004**              | ** ** |
|                                               |       |                   |       |                  |       |
| **Capitalization**                                 |       |                   |       |                  |       |
| Common shares, no par value                        |       | $                      | 159,396    |                  | $          | 159,290 |   |
| Earnings reinvested in the business                |       | 98,166                 |       | 87,817                |       |
| Accumulated other comprehensive loss               |       | (3,259                 | )          | (3,259                | )          |
| Total common shareholder’s equity             |       | 254,303                |       | 243,848               |       |
| Long-term debt                                     |       | 221,649                |       | 221,697               |       |
| Total capitalization                               |       | 475,952                |       | 465,545               |       |
|                                               |       |                   |       |                  |       |
| **Current Liabilities**                            |       |                   |       |                  |       |
| Long-term debt - current                           |       | 229                    |       | 282                   |       |
| Accounts payable                                   |       | 17,661                 |       | 17,196                |       |
| Inter-company payable                              |       | 33,616                 |       | 23,925                |       |
| Income taxes payable to Parent                     |       | 3,680                  |       | —                |       |
| Accrued employee expenses                          |       | 3,920                  |       | 3,951                 |       |
| Accrued interest                                   |       | 5,014                  |       | 1,636                 |       |
| Regulatory liabilities - current                   |       | 4,904                  |       | 3,441                 |       |
| Other                                              |       | 12,160                 |       | 12,601                |       |
| Total current liabilities                          |       | 81,184                 |       | 63,032                |       |
|                                               |       |                   |       |                  |       |
| **Other Credits**                                  |       |                   |       |                  |       |
| Advances for construction                          |       | 71,378                 |       | 70,206                |       |
| Contributions in aid of construction-net           |       | 76,351                 |       | 72,574                |       |
| Deferred income taxes                              |       | 61,136                 |       | 56,684                |       |
| Unamortized investment tax credits                 |       | 2,541                  |       | 2,609                 |       |
| Accrued pension and other postretirement  benefits |       | 9,994                  |       | 8,793                 |       |
| Regulatory liabilities                             |       | 1,419                  |       | 9,731                 |       |
| Other                                              |       | 7,242                  |       | 7,102                 |       |
| Total other credits                                |       | 230,061                |       | 227,699               |       |
|                                               |       |                   |       |                  |       |
| **Commitments and Contingencies (Note 10)**        |       | —                 |       | —                |       |
|                                               |       |                   |       |                  |       |
| **Total  Capitalization and Liabilities**          |       | $                      | 787,197    |                  | $          | 756,276 |   |

 

*The accompanying notes are an integral partof these financial statements*

 

9

----

 

**GOLDEN STATE WATER COMPANY**

**STATEMENTSOF INCOME**

**FOR THETHREE MONTHS**

**ENDED SEPTEMBER 30,2005 AND 2004**

**(Unaudited)**

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **September 30,** | ** ** |
| **(in  thousands)**                                  | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                 |       |                   |       |   |   |
| **Operating Revenues**                               |       |                   |       |   |   |
| Water                                                |       | $                      | 58,568     |   | $ | 60,506 |   |
| Electric                                             |       | 6,544                  |       | 6,208 |   |
|                                                 |       | 65,112                 |       | 66,714 |   |
| **Operating Expenses**                               |       |                   |       |   |   |
| Water purchased                                      |       | 15,446                 |       | 15,150 |   |
| Power purchased for pumping                          |       | 3,080                  |       | 2,806 |   |
| Power purchased for resale                           |       | 3,074                  |       | 3,107 |   |
| Unrealized (gain) loss on purchased power  contracts |       | (4,018                 | )          | 224 |   |
| Groundwater production assessment                    |       | 2,316                  |       | 2,120 |   |
| Supply cost balancing accounts                       |       | 514                    |       | 1,016 |   |
| Other operating expenses                             |       | 4,346                  |       | 4,467 |   |
| Administrative and general expenses                  |       | 8,749                  |       | 8,712 |   |
| Depreciation and amortization                        |       | 4,431                  |       | 5,346 |   |
| Maintenance                                          |       | 2,998                  |       | 2,472 |   |
| Taxes on income                                      |       | 10,561                 |       | 6,145 |   |
| Other taxes                                          |       | 2,457                  |       | 2,138 |   |
| Total operating expenses                             |       | 53,954                 |       | 53,703 |   |
|                                                 |       |                   |       |   |   |
| **Operating Income**                                 |       | 11,158                 |       | 13,011 |   |
|                                                 |       |                   |       |   |   |
| **Other Income (Loss)**                              |       |                   |       |   |   |
| Other income (loss), net                             |       | (157                   | )          | (161 | ) |
| Taxes on other income (loss)                         |       | 87                     |       | 84 |   |
| Total other income (loss), net                       |       | (70                    | )          | (77 | ) |
|                                                 |       |                   |       |   |   |
| **Interest Charges**                                 |       |                   |       |   |   |
| Interest on long-term debt                           |       | 3,991                  |       | 3,946 |   |
| Other interest and amortization of debt  expense     |       | (5,276                 | )          | 371 |   |
| Total interest charges                               |       | (1,285                 | )          | 4,317 |   |
|                                                 |       |                   |       |   |   |
| **Net Income**                                       |       | $                      | 12,373     |   | $ | 8,617 |   |

 

*The accompanying notes are an integral partof these financial statements*

 

10

----

 

**GOLDENSTATE WATER COMPANY**

**STATEMENTS OF INCOME**

**FOR THE NINEMONTHS ENDED**

**SEPTEMBER 30,2005 AND 2004**

**(Unaudited)**

 
| ** **                                       | ** ** | **Nine Months Ended**  | ** ** |
|--------------------------------------------------|------------|------------------------|------------|
| ** **                                       | ** ** | **September 30,** | ** ** |
| **(in  thousands)**                              | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                             |       |                   |       |   |   |
| **Operating Revenues**                           |       |                   |       |   |   |
| Water                                            |       | $                      | 150,519    |   | $ | 149,864 |   |
| Electric                                         |       | 20,105                 |       | 19,284 |   |
|                                             |       | 170,624                |       | 169,148 |   |
| **Operating Expenses**                           |       |                   |       |   |   |
| Water purchased                                  |       | 35,116                 |       | 36,479 |   |
| Power purchased for pumping                      |       | 6,537                  |       | 6,741 |   |
| Power purchased for resale                       |       | 9,921                  |       | 10,474 |   |
| Unrealized gain on purchased power  contracts    |       | (7,492                 | )          | (257 | ) |
| Gain on sale of water rights                     |       | —                 |       | (5,675 | ) |
| Groundwater production assessment                |       | 6,115                  |       | 5,280 |   |
| Supply cost balancing accounts                   |       | 1,042                  |       | 4,835 |   |
| Other operating expenses                         |       | 13,656                 |       | 13,474 |   |
| Administrative and general expenses              |       | 27,221                 |       | 25,866 |   |
| Depreciation and amortization                    |       | 15,203                 |       | 15,118 |   |
| Maintenance                                      |       | 7,611                  |       | 7,100 |   |
| Taxes on income                                  |       | 18,947                 |       | 13,505 |   |
| Other taxes                                      |       | 6,729                  |       | 6,278 |   |
| Total operating expenses                         |       | 140,606                |       | 139,218 |   |
|                                             |       |                   |       |   |   |
| **Operating Income**                             |       | 30,018                 |       | 29,930 |   |
|                                             |       |                   |       |   |   |
| **Other Income (Loss)**                          |       |                   |       |   |   |
| Other income (loss), net                         |       | (421                   | )          | 503 |   |
| Taxes on other income (loss)                     |       | 237                    |       | (137 | ) |
| Total other income (loss), net                   |       | (184                   | )          | 366 |   |
|                                             |       |                   |       |   |   |
| **Interest Charges**                             |       |                   |       |   |   |
| Interest on long-term debt                       |       | 11,894                 |       | 11,820 |   |
| Other interest and amortization of debt  expense |       | (4,409                 | )          | 821 |   |
| Total interest charges                           |       | 7,485                  |       | 12,641 |   |
|                                             |       |                   |       |   |   |
| **Net Income**                                   |       | $                      | 22,349     |   | $ | 17,655 |   |

 

*The accompanying notes are an integral partof these financial statements*

 

11

----

 

**GOLDENSTATE WATER COMPANY**

**CASH FLOW STATEMENTS**

**FOR THE NINEMONTHS ENDED SEPTEMBER 30, 2005 AND 2004**

**(Unaudited)**

 
| ** **                                                        | ** ** | **Nine Months Ended**  | ** ** |
|-------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                        | ** ** | **September 30,** | ** ** |
| **(in  thousands)**                                               | ** ** | **2005**               | ** ** | **2004** | ** ** |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Operating Activities:**                        |       |                   |       |   |   |
| Net income                                                        |       | $                      | 22,349     |   | $ | 17,655 |   |
| Adjustments for non-cash items:                                   |       |                   |       |   |   |
| Depreciation and amortization                                     |       | 15,203                 |       | 15,118 |   |
| Provision for doubtful accounts                                   |       | 280                    |       | 313 |   |
| Deferred income taxes and investment tax  credits                 |       | 8,684                  |       | 303 |   |
| Unrealized gain on purchased power  contracts                     |       | (7,492                 | )          | (257 | ) |
| Impairment loss on assets removed from  rate-base                 |       | —                 |       | 482 |   |
| Non-cash compensation expense on stock  units issued              |       | 110                    |       | 794 |   |
| Other - net                                                       |       | 249                    |       | 1,072 |   |
| Changes in assets and liabilities:                                |       |                   |       |   |   |
| Accounts receivable - customers                                   |       | (4,397                 | )          | (3,066 | ) |
| Unbilled revenue                                                  |       | (3,600                 | )          | (3,695 | ) |
| Other accounts receivable                                         |       | 615                    |       | 8,341 |   |
| Materials and supplies                                            |       | 63                     |       | (138 | ) |
| Prepayments and other current assets                              |       | 1,770                  |       | 2,004 |   |
| Regulatory assets - supply cost balancing  accounts               |       | 1,042                  |       | 4,835 |   |
| Other assets                                                      |       | (1,959                 | )          | (741 | ) |
| Accounts payable                                                  |       | 465                    |       | 534 |   |
| Inter-company receivable/payable                                  |       | 3,182                  |       | (358 | ) |
| Income taxes receivable/payable from/to  Parent                   |       | 7,867                  |       | 7,800 |   |
| Other liabilities                                                 |       | 2,723                  |       | (390 | ) |
| Net cash provided                                                 |       | 47,154                 |       | 50,606 |   |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Investing Activities:**                        |       |                   |       |   |   |
| Construction expenditures                                         |       | (48,756                | )          | (54,793 | ) |
| Net cash used                                                     |       | (48,756                | )          | (54,793 | ) |
|                                                              |       |                   |       |   |   |
| **Cash  Flows From Financing Activities:**                        |       |                   |       |   |   |
| Proceeds from issuance of common shares                           |       | —                 |       | 28,000 |   |
| Receipt of advances for and contributions  in aid of construction |       | 8,745                  |       | 7,922 |   |
| Refunds on advances for construction                              |       | (2,801                 | )          | (2,576 | ) |
| Repayments of long-term debt                                      |       | (222                   | )          | (226 | ) |
| Net change in intercompany borrowings                             |       | 7,300                  |       | (24,500 | ) |
| Cash received on financing portion of purchased  power contracts  |       | 2,007                  |       | 1,339 |   |
| Dividends paid                                                    |       | (12,000                | )          | (11,550 | ) |
| Net cash provided (used)                                          |       | 3,029                  |       | (1,591 | ) |
|                                                              |       |                   |       |   |   |
| **Net  increase (decrease) in cash and cash equivalents**         |       | 1,427                  |       | (5,778 | ) |
| **Cash and  cash equivalents, beginning of period**               |       | 2,702                  |       | 8,306 |   |
| **Cash and  cash equivalents, end of period**                     |       | $                      | 4,129      |   | $ | 2,528 |   |

 

*The accompanying notes are an integral partof these financial statements*

 

12

----

 

**AMERICANSTATES WATER COMPANY**

**AND**

**GOLDEN STATE WATER COMPANY**

**NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

**Note 1 – Summary of Significant Accounting Policies**

 

General: American States Water Company (“AWR”) is the parent company of GoldenState Water Company (“GSWC”), American States Utility Services, Inc. (“ASUS”)(and its subsidiary, Fort Bliss Water Services Company (“FBWS”)), and ChaparralCity Water Company (“CCWC”). Unless otherwise stated in this report, the termRegistrant applies to both AWR and GSWC, collectively. GSWC changed its name fromSouthern California Water Company to Golden State Water Company by amendment toits Restated Articles of Incorporation on September 30, 2005.

 

More than 90% of AWR’s assets consist of thecommon stock of GSWC. GSWC is a public utility engaged principally in the purchase,production, distribution and sale of water in three regions in California. GSWCalso distributes electricity in the Big Bear Lake area in California. TheCalifornia Public Utilities Commission (“CPUC”) regulates GSWC’s water andelectric businesses, including properties, rates, services, facilities andother matters. CCWC is a public utility regulated by the Arizona CorporationCommission (“ACC”). ASUS performs water related services and operations on acontract basis. On October 1, 2004, FBWS commenced operation of the waterand wastewater systems at Fort Bliss located near El Paso, Texas pursuant tothe terms of a 50-year contract with the U.S. Government.  FBWS holds a Certificate of Public Convenienceand Necessity from the Texas Commission on Environmental Quality (“TCEQ”).There is no direct regulatory oversight by either the CPUC or the ACC of theoperation or rates of ASUS’s contracted services or AWR.

 

Basis of Presentation:The consolidated financial statementsof AWR include the accounts of AWR and its wholly-owned subsidiaries GSWC, ASUS(and its wholly owned subsidiary, FBWS), and CCWC, and are prepared inconformity with accounting principles generally accepted in the United Statesof America. Intercompany transactions and balances have been eliminated in theAWR consolidated financial statements. The consolidated financial statementsincluded herein have been prepared by Registrant, without audit, pursuant tothe rules and regulations of the Securities and Exchange Commission (“SEC”).Certain information and footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America for annual financial statements have beencondensed or omitted pursuant to such rules and regulations. Thepreparation of the consolidated financial statements requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the date ofthe financial statements and the reported amounts of revenue and expensesduring the reporting period. Actual results could differ from those estimates.In the opinion of management, all adjustments, consisting of normal recurringitems and estimates necessary for a fair statement of the results for theinterim periods, have been made. It is suggested that these consolidatedfinancial statements be read in conjunction with the consolidated financialstatements and the notes thereto included in the Form 10-K for the yearended December 31, 2004 filed with the SEC. Certain prior year amountshave been reclassified to conform to current year presentation. None of thesereclassifications had an impact on Registrant’s Shareholders’ Equity or NetIncome.

 

13

----

 

GSWC’s Related-Party Transactions: GSWC and other subsidiaries provide andreceive various services to and from their parent, AWR, and among themselves.AWR provides funds to GSWC in support of its operations.  Amounts owed to AWR for borrowings representthe majority of GSWC’s intercompany payables on GSWC’s balance sheets as of September 30,2005 and December 31, 2004. Interest is charged to GSWC in an amount sufficient to cover AWR’s interestcost under AWR’s syndicated revolving credit facility.  GSWC also allocates certain corporate officeadministrative and general costs to its affiliates using CPUC approved and/or allocationfactors believed to be reasonable.

 

**Note 2 – Regulatory Matters**

 

In accordance with accounting principles forrate-regulated enterprises, Registrant records regulatory assets, whichrepresent probable future revenue associated with certain costs that will berecovered from customers through the rate-making process, and regulatoryliabilities, which represent probable future reductions in revenue associatedwith amounts that are to be credited to customers through the rate-makingprocess.  At September 30,2005, Registrant had $27.9 million of regulatory assets not accruing carryingcosts. Of this amount, $21.3 million relates to the regulatory asset for costsdeferred on the Aerojet matter disclosed below as a “non-yielding” regulatoryasset. In addition, other regulatory assets not accruing carrying costs includea deferred income tax balance of $4.7 million representing accelerated taxbenefits previously flowed-through to ratepayers, which will be included inrates concurrently with recognition of the associated tax expense. Finally,there are other expenses that Registrant recovers in rates over a short periodthat do not provide for recovery of carrying costs. At September 30, 2005,$1.9 million was recorded as other regulatory assets for such expenses to berecovered.

 

Regulatory assets, less regulatory liabilities,included in the consolidated balance sheets are as follows:

 
| ** **                                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| **(In  thousands)**                                  | ** ** | **2005**               | ** ** | **2004**              | ** ** |
| **GSWC**                                             |       |                   |       |                  |       |
| Supply cost balancing accounts                       |       | $                      | 17,277     |                  | $          | 23,537 |   |
| Costs deferred for future recovery on Aerojet case   |       | 21,254                 |       | 15,347                |       |
| Flow-through taxes, net                              |       | 4,717                  |       | 7,733                 |       |
| Electric transmission line abandonment costs         |       | 3,459                  |       | 3,546                 |       |
| Asset retirement obligations                         |       | 3,326                  |       | 3,038                 |       |
| Low income balancing accounts                        |       | 2,601                  |       | 2,134                 |       |
| General rate case memorandum accounts                |       | 923                    |       | 2,168                 |       |
| Refund of water right lease revenues                 |       | (6,323                 | )          | (5,889                | )          |
| Revenues subject to refund                           |       | —                 |       | (3,487                | )          |
| Supply cost memorandum accounts net over-collections |       | —                 |       | (1,818                | )          |
| Other regulatory assets                              |       | 1,269                  |       | 1,842                 |       |
| Total GSWC                                           |       | $                      | 48,503     |                  | $          | 48,151 |   |
| **CCWC**                                             |       |                   |       |                  |       |
| Asset retirement obligations                         |       | $                      | 43         |                  | $          | 41 |   |
| Other regulatory assets/liabilities, net             |       | (474                   | )          | 144                   |       |
| Total AWR                                            |       | $                      | 48,072     |                  | $          | 48,336 |   |

 

14

----

 

***Supply Cost BalancingAccounts:***

 

***Electric SupplyCost Balancing Account*** – Electricpower costs incurred by GSWC’s Bear Valley Electric division continue to becharged to its electric supply cost balancing account. The under-collection inthe electric supply cost balancing account is $21.3 million at September 30,2005. The CPUC has authorized GSWCto collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011,to enable GSWC to recover an under-collection of approximately $23.1 million atthe end of 2001 which had been incurred during the energy crisis in late 2000and 2001. GSWC sold 31,123,833 and 32,084,995 kilowatt hours of electricity toits Bear Valley Electric division customers for the three months ended September 30,2005 and 2004, respectively, and 101,438,647 and 102,040,970 kilowatt hours forthe nine months ended September 30, 2005 and 2004, respectively. As aresult, the supply cost balancing account was reduced by $664,000 and $685,000 forthe three month period ended September 30, 2005 and September 30,2004, respectively, and $2.1 million and $2.0 million for the nine month periodended September 30, 2005 and September 30, 2004, respectively. Approximately,$9.9 million of the under-collection incurred during the energy crisis in late2000 and 2001 has been recovered through this surcharge. GSWC anticipates thesurcharge based on electricity sales to be sufficient for it to recover theamount of the under-collected balance incurred during the energy crisis by August 2011.

 

GSWC records both purchased energy and power systemdelivery costs in the supply cost balancing account.  By terms of the settlement with the CPUC, thepurchased energy costs that are recorded in the supply cost balancing accountare subject to a price cap.  GSWC isallowed to include only up to a weighted annual energy purchase cost of $77 perMWh each year through August 2011 in its electric supply cost balancingaccount for purchased energy costs. To the extent that the actual weightedaverage annual cost for power purchased exceeds the $77 per MWh amount, GSWCwill not be able to include these amounts in its balancing account and suchamounts will be expensed. During the nine months ended September 30, 2005and 2004, GSWC expensed approximately $6,400 and $290,400,respectively, for costs over $77 per MWh. The incoming power system delivery costs are not subject to any pricecaps.

 

The ability of GSWC to deliver purchased power to customersin its Bear Valley Electric service area is limited by the ability of thetransmission facilities owned by Southern California Edison Company (“Edison”)to transmit this power. GSWC filed a lawsuit against Edison in 2000 for breachof contract as a result of delays in upgrading these transmission facilities aswell as for other reasons. In March 2004, GSWC and Edison agreed to settlethis suit. Under the terms of the settlement agreement, GSWC agreed to pay a $5million project abandonment fee to Edison. Edison filed an application to the FederalEnergy Regulatory Commission ("FERC") for approval to treat theentire $5 million settlement payment as an abandoned project cost to beincluded in Edison’s wholesale tariff charged to GSWC.

 

GSWC made an initial lump sum payment of $1.4 million toEdison during the first quarter of 2004 and agreed to pay Edison the remaining$3.6 million over a 15 year term through 180 equal monthly payments of $38,137to be included in Edison’s monthly tariff. The $1.4 million lump sum paymentwas recorded as a regulatory asset pending FERC approval of Edison’sapplication.  FERC approved Edison’sapplication in August 2004 and as a result, GSWC transferred the $1.4million lump sum payment to the electric supply cost balancing account. Inaddition, monthly payments of $38,137 per month, totaling $114,411 and $76,274 madeto Edison during the three months ended September 30, 2005 and 2004, respectively,and $343,233 and $76,274 made during the nine months ended September 30,2005 and 2004, respectively, have also been included in the electric supplycost balancing account. Management believes that it is probable that the CPUCwill permit GSWC to  recover therates  authorized by and on file withFERC in connection with the Edison settlement; however, management cannot giveassurance that the CPUC will ultimately allow recovery of all or any of the thesecosts that are included in the electric supply cost balancing account.

 

15

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***Water Memorandum Supply Cost Accounts -*** Ina CPUC decision issued on June 19, 2003 related to memorandum supply costaccounts, all water utilities regulated by the CPUC are required to seek reviewof under- and over- collections by filing an advice letter annually.  GSWC filed advice letters in 2004 and 2005 withrespect to its cumulative net over-collection for Regions I and II for theperiod from November 29, 2001 to December 31, 2004, which has beenrecorded as a regulatory liability.  In June 2005,the CPUC approved these advice letters, as filed, for the 2001, 2002 and 2003years and as a result a $1.4 million over-collection was transferred to thesupply cost balancing accounts*.*The adviceletters for the 2004 year totaling $4.2 million net over-collection wereapproved by the CPUC in August of 2005. The $4.2 million net over-collection includes approximately $3.5 millionof thenet proceeds received from potentially responsible parties in the Charnock Groundwater Basin, which was recorded as a regulatory liability(see “Revenues Subject to Refund” discussed below). The amount wastransferred to the supply cost balancing accounts in August 2005.  There was no impact to earnings as theseover-collections had been recorded as regulatory liabilities in prior years.

 

GSWC alsofiled advice letters with the CPUC for review of the activity in the Region IIImemorandum supply cost account for the period from November 29, 2001 to December 31,2004 totaling a cumulative $4.2 million under-collection. A regulatory assetwith respect to this under-collection was not recorded pending receipt of aCPUC decision authorizing the recovery of the under-collection.  In June 2005, the CPUC approved the transfer of an approximate$1.3 million under-collection in Region III’s 2004 memorandum supply costaccount into the water supply cost balancing account, income of which wasrecorded in the second quarter of 2005. The advice letters for the 2001-2003 years were approved in October 2005.  As a result, GSWC will be allowed to recoveran under-collection of $2.9 million recorded in the supply cost memorandumaccount between November 2001 and December 2003. This will result inan increase to pre-tax income of $2.9 million in the fourth quarter of 2005.

 

***Costs Deferred for Future Recover:***

 

GSWCsued Aerojet-General Corporation (“Aerojet”) for contaminating the SacramentoCounty Groundwater Basin, which affected certain GSWC wells. On a relatedmatter, GSWC also filed a lawsuit against the State of California (the “State”).The CPUC authorized memorandum accounts to allow for recovery, from customers,of costs incurred by GSWC in prosecuting the cases against Aerojet and theState, less any recovery from the defendants or others. OnOctober 30, 2003, GSWC, in its Region I abbreviated general rate case,filed for recovery of the cumulative balance of approximately $22 million inits memorandum account. This balance consisted primarily of deferred litigationcosts and carrying costs.  The filing withthe CPUC requested recovery of the balance over a 20-year amortization period.

 

OnJuly 21, 2005, the CPUC authorized GSWC to collect approximately $21.3million of the Aerojet litigation memorandum account, through a rate surcharge,which will continue for no longer than 20 years.  At the time of the decision, approximately$15.1 million had been recorded as a non-yielding regulatory asset representingprimarily the legal costs incurred to date in connection with prosecuting thecases. The difference between the amount filed with the CPUC for recovery inrates and those recorded primarily relate to previously incurred carrying costsfor certain capital investments required to restore the water supply.  As a result of this decision, GSWC reflectedan increase of approximately $6.2 million in its regulatory assets to includepreviously expensed carrying and other costs and recorded a correspondingpre-tax gain in its results of operations during the third quarter of 2005.  In addition, GSWC was ordered to restore to theappropriate plant accounts those amounts that have been reimbursed by Aerojetpursuant to the settlement. This resulted in GSWC recording an approximate $1.0million decrease to depreciation expense during the third quarter of 2005.

 

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Asa result of the favorable CPUC decision on the Aerojet matter, the following isa summary of the impact to the Statement of Income for the three months ended September 30,2005:

 
| ** **                                       | ** ** | **Amount**                | ** **    |
|--------------------------------------------------|------------|---------------------------|---------------|
| ** **                                       | ** ** | **Increase / (Decrease)** | ** **    |
| **Operating Expenses**                           | ** ** | ** **                | ** **    |
| Power purchased for resale                       |       | $                         |  (31,230 | ) |
| Other operating expenses                         |       | (459,415                  | )             |
| Administrative and general expenses              |       | (16,963                   | )             |
| Depreciation and amortization                    |       | (992,232                  | )             |
| Total pre-tax impact to operating expenses       |       | (1,499,840                | )             |
|                                             |       |                      |          |
| **Interest Charges**                             |       |                      |          |
| Other interest and amortization of debt  expense |       | (5,691,634                | )             |
|                                             |       |                      |          |
| Total pre-tax impact to results of operations    |       | $                         | 7,191,474     |   |
| Impact to taxes on income                        |       | 2,930,238                 |          |
| Total impact to net income                       |       | $                         | 4,261,236     |   |

 

GSWCwill keep the Aerojet memorandum account open until it is fully amortized. However,no costs will be added to the memorandum account, other than cumulativeinterest charges approved by the decision. It is management’s intention tooffset any settlement proceeds from Aerojet that may occur from these actionsagainst the balance in the memorandum account at the time of settlement. SeeNote 10 for further discussion of the Aerojet matter.

 

***Refund of Water Right Lease Revenues***

 

In 1994, GSWC enteredinto a contract to lease to the City of Folsom, 5,000 acre-feet per year ofwater rights from the American River. GSWC included all associated revenues ina non-operating income account. In a decision issued on March 16, 2004,the CPUC ordered GSWC to refund 70 percent of the total amount of leaserevenues received since 1994, plus interest, to customers. Pursuant to theorder, GSWC recorded a $6.2 million regulatory liability with a correspondingcharge against non-operating income, net of taxes, during the fourth quarter of2003. A final amount of the refund was approved by the CPUC in June 2004and GSWC adjusted its estimate to the approved refund amount of $5.2million.  Refunds of approximately$194,000 and $455,000 were provided to customers during the three and ninemonths ended September 30, 2005, respectively.  The refunds will be made over a 9-yearperiod.

 

Managementdisagreed with the CPUC’s decision and filed an application for rehearing ofthat decision.  The CPUC denied GSWC’sapplication for rehearing in 2004.  GSWCnext filed a petition for review with the California Supreme Court to hear thematter, which was denied in February of 2005.  Subsequently, GSWC filed a petition forreview with the Supreme Court of the United States, asking the Court to directthe California Supreme Court to accept GSWC’s petition for review and to orderthe CPUC to reverse the underlying decision. The US Supreme court denied the petition for review in October of2005.  With the denial of the petitionfor review, GSWC has exhausted its appellate process of the original CPUCdecision.  GSWC is now procedurallysituated to institute a new action against the CPUC in federal district courtconcerning the taking of water rights, which it plans to do in the near future.

 

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Pursuant to the order,the apportionment of any lease revenues that GSWC may collect commencing January 2004will be determined by a later decision. Hearings on this matter have concludedand a decision is expected in either late 2005 or early 2006.  Beginning in the first quarter of 2004, allamounts billed to the City of Folsom are included in a regulatory liabilityaccount and no amounts have been recognized as revenue for 2004 and 2005 untilall uncertainties about this matter are resolved with the CPUC. For the three andnine months ended September 30, 2005, GSWC recorded an additional $317,000and $889,000 in the regulatory liability account, respectively.

 

***Revenues Subject to Refund***

 

In March 2002, GSWCand the City of Santa Monica (“City”) reached a settlement agreement in which GSWCsold its water rights in the Charnock Groundwater Basin (“Basin”) to the Cityand assigned to the City its rights against all potentially responsible parties(“PRPs”) who stored, transported and dispensed gasoline containing methyltertiary butyl ether (“MTBE”) in underground storage tanks, pipelines or otherrelated infrastructure in the Basin. The City also indemnified GSWC fromrelated claims.

 

On July 8, 2004, theCPUC approved the settlement agreement and directed GSWC, among other things,to refund to ratepayers the net proceeds of $3.5 million received from PRPs,which was recorded as a regulatory liability in December 2003 on the basisof a proposed decision by the CPUC.  As aresult of the approval of the 2004 advice letters for Region’sII memorandum supply cost accounts in August of 2005, which included the$3.5 million received from the PRPs and to be refunded to customers, theregulatory liability was transferred to the supply cost balancingaccounts.  There was no impact toearnings as this refund had been recorded in prior years.

 

***CCWC Other RegulatoryAssets/Liabilities***

 

Fountain Hills Sanitary District (“FHSD”) is apolitical subdivision of the State of Arizona that provides sanitary sewerservice to customers residing within CCWC’s water service area.  In connection with its sanitary system, FHSDconstructed a recharge system whereby it recharges treated effluent throughmultiple aquifer storage and recovery wells. In order for FHSD to secure an Aquifer Protection Permit for itsrecharge system, FHSD requested CCWC to permanently cease using one of itswells.  As a possible replacement forthis well, FHSD constructed a new well adjacent to the community center (“CommunityCenter Well”).  However, this well wasnot able to produce an equivalent amount of water to CCWC’s well that was takenout of production.  Accordingly, in February 2005,CCWC entered into an agreement with FHSD whereby CCWC agreed to permanentlyremove from service this well and in return CCWC received a settlement fee of$1,520,000 from FHSD. Pursuant to the agreement, CCWC will: (i) permanentlyremove from service and cap this well, and cap another well which had neverbeen used as a potable source of supply; (ii) relinquish any legal claimor interest that CCWC may otherwise possess in the Community Center Well; and (iii) grantan option to FHSD to acquire one of the wells at a future date at fair marketvalue.  The removal of these two wellsfrom service did not have a significant impact on CCWC’s water supply.

 

For the nine monthsended September 30, 2005, CCWC has recognized a net gain of $760,000related to this settlement agreement and has established a regulatory liabilityfor the remaining $760,000 pending Arizona Corporation Commission’s (“ACC”)review of this matter.

 

Except as discussedabove, there were no other significant changes in regulatory assets and liabilitiesduring the three and nine months ended September 30, 2005.

 

18

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**Note 3 - Earnings Per Share / Capital Stock**

 

In March 2004, the Emerging Issues Task Force (“EITF”)issued EITF No. 03-06, *“Participating Securitiesand the Two-Class Method under FASB Statement No. 128”.* EITF No. 03-06 was effective in thesecond quarter of 2004 and provided new accounting guidance for the effect ofparticipating securities on earnings per share (“EPS”) calculations and the useof the “two-class” method.  The newguidance 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.  Registrant hasparticipating securities related to stock options that earn dividendequivalents on an equal basis with common shares.  Registrant determined that the effect on 2004,2003 and 2002 was immaterial.

 

Basic EPS is computed, utilizing the “two-class”method, by dividing net income available for common shareholders by theweighted-average number of common shares outstanding. Net income available forcommon shareholders, which exclude earnings available and allocated toparticipating securities, was $12.1 million and $8.0 million for the threemonths ended September 30, 2005 and 2004, respectively, and was $21.6million and $15.9 million for the nine months ended September 30, 2005 and2004, respectively.

 

Diluted EPS is based upon the weighted averagenumber of Common Shares including both outstanding shares and sharespotentially issuable in connection with stock options and stock units grantedunder Registrant’s 2000 Stock Incentive Plan and the 2003 Non-EmployeeDirectors Stock Plan, and net income. At September 30, 2005 and 2004 therewere 686,600 and 498,320 options outstanding, respectively, under thesePlans.  At September 30, 2005 and2004, there were also approximately 30,800 and 32,000 stock units outstanding,respectively, pursuant to the 2003 Non-Employee Directors Stock Plan.  Outstanding stock options and stock unitawards, including those issued for dividend equivalent rights, issued by theRegistrant represent the only dilutive effect reflected in diluted weightedaverage shares outstanding.

 

During the three months ended September 30,2005 and 2004, Registrant issued 9,468 and 20,725 common shares, which totaledapproximately $274,000 and $494,000, under the Registrant’s Common SharePurchase and Dividend Reinvestment Plan and 401(k) Plan, respectively.  Duringthe nine months ended September 30, 2005 and 2004, Registrant issued 30,153and 70,391 common shares, which totaled approximately $830,000 and $1,699,000, underthe Registrant’s Common Share Purchase and Dividend Reinvestment Plan and401(k) Plan, respectively.  In addition during the three and nine monthsended September 30, 2005, Registrant repurchased in the open market 26,009and 47,515 common shares, respectively, under the Registrant’s CommonShare Purchase and Dividend Reinvestment Plan, 401(k) Plan and anniversarystock grant program, which were used to satisfy the stock delivery requirementsof these plans.

 

On September 22, 2004, AWR also issued1,400,000 shares in a registered public offering and received proceeds of $33.6million, net of underwriter fees and other issuance costs of $1.8 million. Theproceeds recorded in common shares were reduced by direct issuance costs. On October 12,2004, the underwriters partially exercised an over-allotment option for anadditional 50,000 shares. The Company received proceeds of $1,212,500, whichwas net of underwriter fees and other issuance costs of $50,500, from theissuance of these shares.

 

In September 2004, the Board approved the issuanceof 10 additional GSWC common shares to AWR for $28.0 million. GSWC used theproceeds to pay down debt owed to AWR. In November 2004, the Boardapproved the issuance of 2 additional GSWC common shares to AWR for $7.1million.

 

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During the three months ended September 30, 2005and 2004, AWR paid quarterly dividends to the shareholders, totalingapproximately $3.8 million or $0.225 per share and $3.4 million or $0.221 pershare, respectively.  During the ninemonths ended September 30, 2005 and 2004, AWR paid quarterly dividends tothe shareholders, totaling approximately $11.3 million or $0.675 per share and$10.1 million or $0.663 per share, respectively.

 

**Note4 – Credit Facility**

 

InJune 2005, AWR amended and restated its credit agreement which increasedits borrowing limit under this facility to $85 million and extended thematurity date to June 2010.  Up to$20 million of this facility may be used for letters of credit. As of September 30,2005, an aggregate of $55 million in cash borrowings are included in currentliabilities and approximately $11.2 million of letters of credit wereoutstanding under this facility.

 

**Note5 – Derivative Instruments**

 

During2002, GSWC entered into block-forward power purchase contracts that qualifiedas derivative instruments under SFAS No. 133, *“Accountingfor Derivative Instruments and Hedging Activities”*, as amended bySFAS Nos. 138 and 139. Contracts with Pinnacle West Capital Corporation (“PWCC”)became effective in November 2002 and do not qualify for designation asnormal purchases and normal sales.  As aresult, GSWC has recognized these contracts at fair market value on its balancesheets resulting in a cumulative unrealized gain of $5.5 million as of September 30,2005. This also resulted in a pre-tax unrealized gain of $4,018,000 and apre-tax unrealized loss of $224,000 for the three months ended September 30,2005 and 2004, respectively, and a pre-tax unrealized gain of $7,492,000 and $257,000for the nine months ended September 30, 2005 and 2004, respectively, dueto increases in energy prices.  On amonthly basis, the related asset or liability is adjusted to reflect the fairmarket value at the end of the month. As this contract moves forward in timeand is settled, the realized gains or losses are recorded in power purchasedfor resale, and the unrealized gains or losses are reversed. The market prices used to determinethe fair value for this derivative instrument were estimated based onindependent sources such as broker quotes and publications. Settlement of thiscontract occurs on a cash or net basis through 2006 and by physical deliverythrough 2008. Registrant has no other derivativefinancial instruments.

 

20

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**Note 6 – Income Taxes**

 

As a regulated utility, GSWCtreats certain temporary differences as flow-through adjustments incomputing its income tax provision consistent with the income taxapproach approved by the CPUC for ratemaking purposes.  Flow-through adjustmentsincrease or decrease tax expense in one period, with anoffsetting increase or decrease occurring in another period.  Givingeffect to these temporary differences as flow-through adjustmentstypically results in a greater variance between the effectivetax rate (“ETR”) and the statutory federal income tax rate in any givenperiod than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.  During the second quarter of 2005, therecognition of the federal benefit of state taxes was adjusted to conform tothe flow-through method reflected in the tax calculation for ratemakingpurposes, which partially defers the recognition of the benefit to thesubsequent tax year.  This resulted in additional income taxes of $801,000and $1,190,000 for the three and nine months ended September 30, 2005,respectively.

 

In October 2004, the American Jobs Creation Actof 2004 (the “Act”) was signed into law and provides a new federal income taxdeduction from qualified U.S. production activities, which is being phased infrom 2005 through 2010.  Under the Act,qualified production activities include Registrant’s production of electricityand potable water.  In December 2004,the FASB issued FASB Staff Position No. 109-1 and proposed that thededuction should be accounted for as a “special deduction” in accordance withSFAS No. 109.  As such, the specialdeduction had no effect on deferred tax assets and liabilities existing at theenactment date. Rather, the impact of the deduction is to be reported in theperiod in which the deduction is claimed on Registrant’s tax return.  During the first quarter of fiscal 2005,Registrant completed its initial evaluation of the provisions of the Act.  The amount of the benefit for the three andnine months ended September 30, 2005 was not material.

 

**Note 7 – Stock Incentive Plans**

 

Registrant applies Accounting Principles BoardOpinion (“APB”) No. 25, *“Accounting for StockIssued to Employees”*, in accounting for its stock options under its2000 Stock Incentive Plan. Accordingly, no compensation cost for the Plan hasbeen recognized for options granted at fair value at the date of grant.Registrant has also adopted the disclosure only requirements of SFAS No. 123,*“Accounting for Stock-Based Compensation”.*

 

Atthe May 2004 Annual Meeting, the shareholders adopted the 2003Non-Employee Directors Stock Plan (“New Directors Plan”). The New DirectorsPlan provides the non-employee directors with supplemental stock-basedcompensation. Pursuant to the New Directors Plan, directors are entitled toreceive stock options and stock unit awards. As of September 30, 2005, anaggregate of 27,000 stock options have been granted to the directors under theNew Director’s Plan. Registrant also applies APB No. 25 in accounting forthe director’s stock options.  The director’sstock options were granted at fair value at the date of grant; therefore nocompensation cost has been recognized for these options. The stock units are anon-voting unit of measurement which is deemed for bookkeeping and paymentpurposes to represent outstanding AWR common shares.  Upon adoption of the New Directors Plan in May 2004,Registrant began recording compensation expense on the stock unit awards.  As of September 30, 2005, the directorshave been credited with approximately 30,800 stock units. Stock units will bepaid only in AWR common shares on the date that the participant terminatesservice as a director.

 

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If Registrant had elected to adopt the optionalrecognition provisions of SFAS No. 123 for its stock options and stockunits under the 2000 Stock Incentive Plan and the New Directors Plan, netincome and earnings per share would have been changed to the pro forma amountsindicated below:

 
| ** **                                                                                             | ** ** | **For The Three Months**     | ** ** | **For The Nine Months**      | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                                                             | ** ** | **Ended September 30,** | ** ** | **Ended September 30,** | ** ** |
| **(dollars  in thousands, except EPS)**                                                                | ** ** | **2005**                     | ** ** | **2004**                     | ** ** | **2005** | ** ** | **2004** | ** ** |
| Net income, as reported                                                                                |       | $                            | 12,234     |                         | $          | 8,018 |   | $ | 21,733 |   | $ | 15,874 |   |
| Add: Stock-based  compensation expense included in reported net income, net of tax                     |       | 7                            |       | 6                            |       | 64 |   | 474 |   |
| Less:  Stock-based compensation expense determined under the fair-value accounting  method, net of tax |       | (10                          | )          | (6                           | )          | (682 | ) | (928 | ) |
| Pro forma net income                                                                                   |       | $                            | 12,231     |                         | $          | 8,018 |   | $ | 21,115 |   | $ | 15,420 |   |
|                                                                                                   |       |                         |       |                         |       |   |   |   |   |
| **Basic  earnings per share:**                                                                         |       |                         |       |                         |       |   |   |   |   |
| As reported                                                                                            |       | $                            | 0.72       |                         | $          | 0.52 |   | $ | 1.29 |   | $ | 1.04 |   |
| Pro forma                                                                                              |       | $                            | 0.72       |                         | $          | 0.52 |   | $ | 1.25 |   | $ | 1.01 |   |
|                                                                                                   |       |                         |       |                         |       |   |   |   |   |
| **Diluted  earnings per share:**                                                                       |       |                         |       |                         |       |   |   |   |   |
| As reported                                                                                            |       | $                            | 0.72       |                         | $          | 0.52 |   | $ | 1.29 |   | $ | 1.04 |   |
| Pro forma                                                                                              |       | $                            | 0.72       |                         | $          | 0.52 |   | $ | 1.25 |   | $ | 1.01 |   |

 

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**Note 8 – Employee Benefit Plans**

 

The components of net periodic benefit costs, beforeallocation to the overhead pool, for Registrant’s pension plan, other postretirement(medical) plan, and Supplemental Executive Retirement Plan (“SERP”) for thethree and nine months ended September 30, 2005 and 2004 are as follows:

 
| ** **                                     | ** ** | **For The Three Months Ended September 30, 2005 and 2004** | ** ** |
|------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                                            | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**                     | ** ** | **2005**                                                        | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                                                            |       |   |   |   |   |   |   |   |   |   |   |
| Service Cost                                   |       | $                                                               | 933        |   | $ | 724 |   | $ | 109 |   | $ | 97 |   | $ | 32 |   | $ | 32 |   |
| Interest  Cost                                 |       | 1,088                                                           |       | 936 |   | 151 |   | 146 |   | 28 |   | 31 |   |
| Expected  Return on Plan Assets                |       | (922                                                            | )          | (834 | ) | (74 | ) | (63 | ) | — |   | — |   |
| Amortization  of Transition                    |       | —                                                          |       | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization  of Prior Service Cost            |       | 41                                                              |       | 41 |   | (50 | ) | (50 | ) | 38 |   | 37 |   |
| Amortization  of Actuarial (Gain) Loss         |       | 313                                                             |       | 129 |   | 41 |   | 32 |   | (10 | ) | — |   |
| Net Periodic Pension Cost                      |       | $                                                               | 1,453      |   | $ | 996 |   | $ | 282 |   | $ | 267 |   | $ | 88 |   | $ | 100 |   |

 
| ** **                                     | ** ** | **For The Nine Months Ended September 30, 2005 and 2004** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                                           | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**                     | ** ** | **2005**                                                       | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                                                           |       |   |   |   |   |   |   |   |   |   |   |
| Service Cost                                   |       | $                                                              | 2,799      |   | $ | 2,172 |   | $ | 327 |   | $ | 291 |   | $ | 96 |   | $ | 96 |   |
| Interest  Cost                                 |       | 3,264                                                          |       | 2,808 |   | 453 |   | 438 |   | 84 |   | 93 |   |
| Expected  Return on Plan Assets                |       | (2,766                                                         | )          | (2,502 | ) | (222 | ) | (189 | ) | — |   | — |   |
| Amortization  of Transition                    |       | —                                                         |       | — |   | 315 |   | 315 |   | — |   | — |   |
| Amortization  of Prior Service Cost            |       | 123                                                            |       | 123 |   | (150 | ) | (150 | ) | 114 |   | 111 |   |
| Amortization  of Actuarial (Gain) Loss         |       | 939                                                            |       | 387 |   | 123 |   | 96 |   | (30 | ) | — |   |
| Net Periodic Pension Cost                      |       | $                                                              | 4,359      |   | $ | 2,988 |   | $ | 846 |   | $ | 801 |   | $ | 264 |   | $ | 300 |   |

 

A decrease in thediscount rate from 6.25% to 5.75%, and the update of mortality rate tablesresulted in increases in pension and other postretirement benefits in 2005. Registrantcontributed $4,338,000 to the pension plan during the third quarter of2005.  Registrant expects to contribute $754,000to the postretirement benefit plan by the end of 2005.

 

**Note 9 - NewAccounting Pronouncements**

 

In March 2005, the FASB issued Interpretation No. 47, *“Accounting for Conditional Asset Retirement Obligations,”* which clarifies that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation if the fair value can be reasonably estimated even though uncertainty exists about the timing and (or) method of settlement.  Registrant is required to adopt Interpretation No. 47 by the end of 2006.  Registrant is currently evaluating the impact Interpretation No. 47 will have on its results of operations and financial condition. However, since Registrant follows accounting principles for rate-regulated enterprises and receives recovery of these costs through rates, implementation of this interpretation at GSWC is not expected to affect earnings.

 

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In December 2004, the FASB issued a revision toSFAS No. 123, *“Share-Based Payment,”*(“SFAS No. 123R”) which is a revision of SFAS No. 123, *“Accounting for Stock-Based Compensation,”* (“SFAS No. 123”).SFAS No. 123R requires all share-based payments to employees,including grants of employee stock options, to be recognized in the incomestatement based on fair values. The pro forma disclosures previously permittedunder SFAS No. 123 no longer will be an alternative to financialstatement recognition. In April 2005, the Securities and ExchangeCommission deferred the adoption date of SFAS No. 123R to the beginning ofthe fiscal year that begins after June 15, 2005, (January 1, 2006 forcalendar year companies) from a July 1, 2005 adoption date previously setby the FASB. Registrant expects to adopt this standard on January 1, 2006.Based on stock option grants made in 2005 and currently anticipated for 2006, Registrantestimates it will (assuming the modified prospective method is used) recognizeexpense for stock options for the year ending December 31, 2006 in an amountconsistent with that disclosed in Note 7 which summarizes the pro forma impactof recognizing stock expense under the fair value accounting method. Registrantassumes that stock options will be granted in 2006 upon similar terms tooptions granted in 2005, which provide for continued vesting of the optionsfollowing termination of employment, unless the grantee is terminated for cause.  If these assumptions change, the impact ofrecognizing stock expense under the fair value accounting method will differfrom amounts disclosed in Note 7.

 

In October 2004, the American Jobs Creation Actof 2004 (the “Act”) was signed into law and provides a new federal income taxdeduction from qualified U.S. production activities, which will be phased infrom 2005 through 2010.  During the firstquarter of fiscal 2005, Registrant completed its initial evaluation of theprovisions of the Act.  See Note 6 forfurther information.

 

**Note 10 – Contingencies**

 

**Water Quality-Related Litigation**

 

In 1997, GSWC wasnamed as a defendant in nineteen lawsuits that alleged that GSWC and otherwater utilities, delivered unsafe water to their customers in the San GabrielValley and Pomona Valley areas of Los Angeles County. Plaintiffs in theseactions sought damages, including general, special, and punitive damages, aswell as attorney’s fees on certain causes of action, costs of suit, and otherunspecified relief.

 

On August 4,2004, the Trial Judge dismissed GSWC from all nineteen Los Angeles County cases.The order was issued by the Trial Judge presiding over these matters, andfollowed a lengthy legal proceeding dating back to April 1997 when thefirst of the cases was filed by over 140 customers in the San Gabriel Valley,alleging their water had caused personal injuries of varying types and degrees.The Court found GSWC did not violate established water quality standards anddismissed the cases after allowing reasonable time and opportunity for the plaintiffsto prove otherwise. GSWC has long asserted that it meets or exceeds therequirements to provide water within the standards established by the healthauthorities. On September 21, 2004, GSWC received notice that severalplaintiffs filed an appeal to the trial court’s order to dismiss GSWC. Briefsand reply briefs on the appeal have been filed; however, no date for a hearingbefore the appeals court has been set yet. GSWC is unable to predict the outcome of this appeal.  GSWC was also dismissed from three similarlawsuits in Northern California in 2004; the plaintiffs in those cases have notfiled an appeal.

 

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GSWC issubject to self-insured retention (deductible) provisions in its applicableinsurance policies and has either expensed the self-insured amounts or hasreserved against payment of these amounts as appropriate. GSWC’s variousinsurance carriers have, to date, provided reimbursement for much of the costsincurred above the self-insured amounts for defense against these lawsuits,subject to a reservation of rights. In addition, the CPUC has issued certain decisions, whichauthorize GSWC to establish a memorandum account to accumulate costs for futurerecovery, to comply with certain contamination remediation requirements forfuture recovery.

 

**Aerojet**

 

On October 25, 1999, GSWC sued Aerojet for contaminating eastern portions of the Sacramento County groundwater basin. On October 12, 2004, Registrant reached a final settlement with Aerojet. Under the terms of the settlement, Aerojet paid GSWC $8.7 million in the first quarter of 2004. Aerojet has also agreed to pay GSWC an additional $8 million, plus interest accruing beginning January 1, 2004, over a five year period beginning in December 2009. The $8.7 million payment and the $8 million receivable have been applied directly to reduce GSWC’s costs of utility plant and purchased water by $16 million and $735,000, respectively. Prior to the settlement, Aerojet had reimbursed GSWC $4.3 million in capital costs and $171,000 for additional water supply costs.

 

Aerojet has also agreed to reimburse GSWC $17.5 million, plus interest accruing from January 1, 2004, for its past legal and expert costs. The recovery of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development.

 

Aerojet has transferredits remediated groundwater to the Sacramento County Water Agency, which willprovide treated water for distribution to GSWC and other water purveyorsaffected by the contamination. GSWC has entered into an agreement withSacramento County Water Agency to receive water. Aerojet has also paid for certaintransmission pipelines and upgrades to GSWC’s Coloma Treatment Plant as acontingency plan, should additional wells be impacted. The pipelines are now inservice and the upgraded treatment facilities are expected to be fullyoperational by the end of 2005.

 

**Other Water Quality Litigation**

 

Perchlorate and/or Volatile Organic Compounds (“VOC”)have been detected in five wells servicing GSWC’s San Gabriel System. GSWCfiled suit in federal court, along with two other affected water purveyors andthe San Gabriel Basin Water Quality Authority (“WQA”), against some of thoseresponsible for the contamination. Some of the other potential defendantssettled with GSWC, other water purveyors and the WQA (the “Water Entities”) onVOC related issues prior to the filing of the lawsuit. In response to thefiling of the Federal lawsuit, the Potentially Responsible Party (“PRP”) defendantsfiled motions to dismiss the suit or strike certain portions of the suit. Thejudge issued a ruling on April 1, 2003 granting in part and denying inpart the defendant’s motions. A key ruling of the court was that the waterpurveyors, including the Registrant, by virtue of their ownership of wellscontaminated with hazardous chemicals are themselves PRPs under theComprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

 

25

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Registrant has, pursuant to permission of the court,amended its suit to claim certain affirmative defenses as an “innocent” partyunder CERCLA. Registrant is presently unable to predict the outcome of thisruling on its ability to fully recover from the PRPs future costs associatedwith the treatment of these wells. In this same suit, the PRPs have filedcross-complaints against the Water Entities, the Metropolitan Water District,the Main San Gabriel Basin Watermaster and others on the theory that they arrangedfor and did transport contaminated water into the Basin for use by Registrantand the other 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 two of GSWC’s impacted wells draw water. GSWC was not named as a party tothe UAO. The UAO requires that these parties remediate the contamination. Thejudge in the Federal lawsuit has appointed a special master to overseemandatory settlement discussions between the PRPs and the Water Entities.  EPA is also conducting settlement discussionswith several PRPs regarding the UAO.  TheWater Entities and EPA are working to coordinate their settlement discussionsunder the special master in order to arrive at a complete resolution of allissues affecting the Federal lawsuits and the UAO.  Registrant is presently unable to predict theultimate outcome of these settlement discussions.

 

**Condemnation of Properties**

 

The laws of the State of California and the State ofArizona provide for the acquisition of public utility property by governmentalagencies through their power of eminent domain, also known as condemnation,where doing so is in the public interest. In addition, however, the laws of theState of California also provide: (1) that the owner of the utilityproperty may contest whether the condemnation is actually in the publicinterest; and (2) that the owner is entitled to receive the fair marketvalue of its property if the property is ultimately taken.

 

Although the City of Claremont, California locatedin GSWC’s Region III, has not initiated the formal condemnation processpursuant to California law, the City has expressed various concerns to GSWC aboutthe rates charged by GSWC and the effectiveness of the CPUC’s rate settingprocedures. The City hired a consultant to perform an appraisal of the value ofRegistrant’s water system serving the City. Such value was determined by the consultant at $40 - $45 million. GSWCdisagrees with the City’s valuation assessment. Under California law, the condemning City would be required to pay fairmarket value for the water system.  As ofSeptember 30, 2005, management believes that the fair market value of thesystem far exceeds the $33 million recorded net book value of the Claremontwater system.

 

Except for the City of Claremont, Registrant has notbeen, within the last three years, involved in activities related to thecondemnation of any of its water customer service areas or in its Bear ValleyElectric customer service area. However, on April 12, 2005, the TownCouncil of the Town of Apple Valley voted 5-0 to authorize Town staff toprepare a Request for Proposal for an evaluation of the feasibility and potentialcost of and a timeframe for the potential takeover of GSWC’s Apple Valley watersystems as well as the water systems of another utility serving the Town.  On August 23, 2005, the Town Councilauthorized staff to hire a firm to perform a feasibility study and financialanalysis regarding the potential takeover. It is presently unknown when the results of the study will be presentedto the Town.

 

26

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GSWC has not received any formal notice from theTown of its intention to condemn the Registrant’s Apple Valley watersystems.  Management is unable to predictwhat the results of the Town’s evaluation might be and what action, if any, theTown might take as a result of the evaluation. However, GSWC will vigorously defend itself should the Town determine toproceed towards condemning its Apple Valley water systems.  As of September 30, 2005, managementbelieves that the fair value market of the system far exceeds the recorded netbook value of the Apple Valley water systems.

 

**Santa Maria Groundwater BasinAdjudication**

 

In 1997, the Santa Maria Valley Water ConservationDistrict (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC,the City of Santa Maria, and several other public water purveyors. Theplaintiff’s lawsuit seeks an adjudication of the Santa MariaGroundwater Basin.

 

As of September 30, 2005, GSWC has incurredcosts in defending its rights in the Basin, including legal and expertwitness fees, which have been deferred in Utility Plant for rate recovery.  Management believes that the recovery ofthese costs through rates is probable. However, management cannot giveassurance that the CPUC will ultimately allow recovery of all or any of thecosts that have been incurred by GSWC in this lawsuit. A settlement has beenreached, subject to CPUC approval. The settlement, among other things, ifapproved, would preserve GSWC’s historical pumping rights and securesupplemental water rights for use in case of drought or other reductions in thenatural yield of the Basin. 

 

**Other Litigation**

 

Registrant is also subjectto ordinary routine litigation incidental to its business. Other than thosedisclosed above, no other legal proceedings are pending, which are believed tobe material. Management believes that rate recovery, proper insurance coverageand reserves are in place to insure against property, general liability andworkers’ compensation claims incurred in the ordinary course of business.

 

27

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**Note11 - Business Segments**

 

AWRhas three principal business units: water and electric distribution units,through its GSWC subsidiary, a water-service utility operation conductedthrough its CCWC unit, and a contracted services unit through the ASUSsubsidiary. All activities of GSWC are geographically located withinCalifornia. All activities of CCWC are located in the state of Arizona. Allactivities of ASUS have been conducted in California, Arizona and Texas for theperiods set forth below. Both GSWC and CCWC are regulated utilities. On astand-alone basis, AWR has no material assets other than its investments in itssubsidiaries. The tables below set forth information relating to GSWC’soperating segments, CCWC and other matters which includes ASUS and itssubsidiaries. Included in the amounts set forth, certain assets, revenues andexpenses have been allocated. The identifiable assets are net of respectiveaccumulated provisions for depreciation. Capital additions reflect capitalexpenditures paid in cash and exclude property installed by developers andconveyed to the Company.

 
| ** **                                  | ** ** | **As of and for the Three Months Ended September 30, 2005** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **GSWC**                                                         | ** ** | **CCWC**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Water**                                                        | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                         |       | $                                                                | 58,568     |         | $          | 6,544 |   | $ | 1,971 |   | $ | 988 |   |   |   | $ | 68,071 |   |
| Operating income (loss) before income taxes |       | 16,825                                                           |       | 4,894        | (1)        | 322 |   | (144 | ) |   |   | 21,897 |   |
| Interest  expense, net                      |       | (1,167                                                           | )          | (118         | )          | 122 |   | 204 |   |   |   | (959 | ) |
| Identifiable  assets                        |       | 620,844                                                          |       | 39,680       |       | 37,028 |   | 678 |   |   |   | 698,230 |   |
| Depreciation and amortization expense       |       | 3,919                                                            |       | 512          |       | 263 |   | 11 |   |   |   | 4,705 |   |
| Capital  additions                          |       | 15,031                                                           |       | 288          |       | 805 |   |   |   |   |   | 16,124 |   |
|                                             |            |                                                                  |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                  | ** ** | **As of and for the Three Months Ended September 30, 2004** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|------------------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **GSWC**                                                         | ** ** | **CCWC**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Water**                                                        | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                         |       | $                                                                | 60,506     |         | $          | 6,208 |   | $ | 1,973 |   | $ | 298 |   | $ | (24 | ) | $ | 68,961 |   |
| Operating income (loss) before income taxes |       | 18,472                                                           |       | 684          |       | 681 |   | (1,479 | ) |   |   | 18,358 |   |
| Interest  expense, net                      |       | 3,916                                                            |       | 401          |       | 108 |   | 139 |   |   |   | 4,564 |   |
| Identifiable  assets                        |       | 571,587                                                          |       | 37,963       |       | 33,619 |   | 318 |   |   |   | 643,487 |   |
| Depreciation and amortization expense       |       | 4,935                                                            |       | 411          |       | 236 |   | 7 |   |   |   | 5,589 |   |
| Capital  additions                          |       | 24,769                                                           |       | 757          |       | 1,259 |   | 153 |   |   |   | 26,938 |   |
|                                             |            |                                                                  |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                                  | ** ** | **As of and for the Nine Months Ended September 30, 2005** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **GSWC**                                                        | ** ** | **CCWC**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Water**                                                       | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                         |       | $                                                               | 150,519    |         | $          | 20,105 |   | $ | 5,068 |   | $ | 2,704 |   | $ | (35 | ) | $ | 178,361 |   |
| Operating income (loss) before income taxes |       | 39,729                                                          |       | 9,236        | (1)        | 1,588 |   | (1,628 | ) |   |   | 48,925 |   |
| Interest  expense, net                      |       | 6,789                                                           |       | 696          |       | 346 |   | 614 |   |   |   | 8,445 |   |
| Identifiable  assets                        |       | 620,844                                                         |       | 39,680       |       | 37,028 |   | 678 |   |   |   | 698,230 |   |
| Depreciation and amortization expense       |       | 13,684                                                          |       | 1,519        |       | 788 |   | 45 |   |   |   | 16,036 |   |
| Capital  additions                          |       | 47,108                                                          |       | 1,648        |       | 2,843 |   | 359 |   |   |   | 51,958 |   |
|                                             |            |                                                                 |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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(1)  Includes $4,018,000 and $7,492,000 unrealized gain onpurchased power contracts for the three and nine months endedSeptember 30, 2005, respectively.

 

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| ** **                                  | ** ** | **As of and for the Nine Months Ended September 30, 2004** | ** ** | ** **   | ** ** |
|---------------------------------------------|------------|-----------------------------------------------------------------|------------|--------------|------------|
| ** **                                  | ** ** | **GSWC**                                                        | ** ** | **CCWC**     | ** ** | ** ** | ** ** | ** ** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**                  | ** ** | **Water**                                                       | ** ** | **Electric** | ** ** | **Water** | ** ** | **Other*** | ** ** | **Eliminations** | ** ** | **AWR** | ** ** |
| Operating  revenues                         |       | $                                                               | 149,864    |         | $          | 19,284 |   | $ | 4,982 |   | $ | 899 |   | $ | (73 | ) | $ | 174,956 |   |
| Operating income (loss) before income taxes |       | 42,744                                                          |       | 691          |       | 915 |   | (3,815 | ) | — |   | 40,535 |   |
| Interest  expense, net                      |       | 11,468                                                          |       | 1,173        |       | 351 |   | 320 |   | — |   | 13,312 |   |
| Identifiable  assets                        |       | 571,587                                                         |       | 37,963       |       | 33,619 |   | 318 |   | — |   | 643,487 |   |
| Depreciation and amortization expense       |       | 13,990                                                          |       | 1,129        |       | 706 |   | 15 |   | — |   | 15,840 |   |
| Capital  additions                          |       | 51,698                                                          |       | 3,095        |       | 2,502 |   | 236 |   | — |   | 57,531 |   |
|                                             |            |                                                                 |            |              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

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****Includes amounts from AWR andASUS’s contracted services.  Beginning onOctober 1, 2004, it also includes ASUS’s wholly-owned subsidiary FBWS.*

 

**Note 12 - Subsequent Events**

 

As discussed in Note 2, on October 6, 2005, theCPUC approved an advice letter allowing GSWC to impose temporary surcharges inits Region III water service area to recover an under-collection of $2.9million recorded in the supply cost memorandum account between November 2001and December 2003. The surcharges went into effect on October 11,2005 and are expected to recover the $2.9 million over a twelve month period.This will result in an increase to pre-tax income of $2.9 million in the fourthquarter of 2005.

 

OnOctober 11, 2005, CoBank, ACB (“CoBank”), purchased a 5.87% Senior Notedue December 20, 2028 (the “Note”) in the aggregate principal amount of$40,000,000 from GSWC pursuant to the terms of a Note Purchase Agreement (the “Agreement”)dated as of October 11, 2005 between GSWC and CoBank. The Agreement contains customaryevents of default, including failure to pay any debt with an aggregateprincipal amount of more than $2.5 million for a period or more than 60 daysfrom the date due, whether at stated maturity or upon acceleration, and failureto pay a final judgment of more than $2.5 million within 60 days after entry,unless bonded, discharged or stayed pending appeal or payment over time ispermitted by the order of a governmental agency or by agreement of the parties.The proceeds were used to pay down GSWC’sintercompany short-term borrowings.

 

This Agreement contains restrictionson (i) incurring liens and entering into sale and leaseback transactions,with customary exceptions, (ii) dispositions of property with a book valueof more than 15% of total capitalization (as defined) in any fiscal year,unless the proceeds are used within one year to purchase public utilityproperty or redeem all or a portion of the amount borrowed from CoBank or otherdebt ranking pari passu with the debt owed to CoBank, (iii) merging orconsolidating with any other person, unless GSWC is the survivor or thesurvivor is principally engaged in the business of a water or wastewater publicutility and the financial covenants described below are satisfied on a pro formabasis at the end of the quarter immediately preceding the merger orconsolidation, after giving effect to the transaction, (iv) incurring anyindebtedness if, as a result an event of default would occur or the totalindebtedness to EBITDA ratio ( as defined) of GSWC at the end of the quarterpreceding the transaction would exceed 8 to 1 or the total indebtedness tocapitalization ratio (as defined) would exceed .6667 to 1, or (v) declaringor paying any dividends in cash or property if at the time of the distributionor payment, an event of default would occur or, if after giving effect to thedistribution, the total indebtedness to capital ratio (as defined) of GSWCwould be more than .6667 to 1.

 

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**Item 2. Management’s Discussion and Analysis of Financial Condition andResults of Operation**

 

**Forward-Looking Information**

 

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

 

The following discussion should be read inconjunction with the accompanying unaudited condensed consolidated financialstatements and related notes thereto and the consolidated financial statementsand the notes thereto contained in our 2004 Annual Report on Form 10-K.

 

# **General**

 

American States Water Company (“AWR”) is the parentcompany of Golden State Water Company (“GSWC”), American States UtilityServices, Inc. (“ASUS”) (and its subsidiary, Fort Bliss Water ServicesCompany (“FBWS”)), and Chaparral City Water Company (“CCWC”).  AWR was incorporated as a Californiacorporation in 1998 as a holding company for GSWC.

 

GSWC is a Californiapublic utility company engaged principally in the purchase, production anddistribution of water. GSWC also distributes electricity in one customerservice area. GSWC is regulated by the California Public Utilities Commission (“CPUC”)and was incorporated on December 31, 1929. GSWC served 252,802 water customersand 22,904 electric customers at September 30, 2005, or a total of 275,706customers, compared with 274,041 total customers at September 30, 2004. GSWC’sutility operations exhibit seasonal trends. Due to changes in weather, waterrevenues are higher during the summer months and lower during the cooler monthsof each year. Although GSWC’s water utility operations have a diversifiedcustomer base, residential and commercial customers account for the majority ofGSWC’s water sales and revenues. Revenues derived from commercial andresidential water customers accounted for approximately 90.2% and 88.8% of total water revenues forthe three and nine months ended September 30, 2005, respectively, as compared to 87.4% and 88.5% forthe three and nine months ended September 30, 2004, respectively.

 

CCWC is an Arizona public utility company serving12,959 customers as of September 30, 2005, compared with 12,485 customersat September 30, 2004.

 

ASUS contracts, either directly or throughwholly-owned subsidiaries, with various municipalities, the U.S. Government andprivate entities to provide water and wastewater services, including billingand meter reading, water marketing and the operation and maintenance of waterand wastewater systems. On October 1, 2004, ASUS commenced operation ofthe water and wastewater systems at Fort Bliss located near El Paso, Texas,through FBWS, pursuant to the terms of a 50-year contract with the U.S.Government.

 

30

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ASUS is also an active participant in biddingon other contracts for the privatization of military bases.  ASUS entered into agreements to operate and maintain the waterand wastewater systems at Andrews Air Force Base in Maryland, dated September 30,2005, and Fort Story, Fort Eustis, Fort Monroe and the wastewater system at FortLee, in Virginia, dated September 28, 2005.  Under the terms of these agreements, theaggregate amount of these contracts is estimated at more than $238 million overa 50-year period and is subject to periodic price re-determination adjustmentsand modifications for changes in circumstances. Terrapin Utility Services, Inc.(“TUS”) in Maryland and Old Dominion Utility Services, Inc. (“ODUS”) inVirginia, wholly-owned subsidiaries of ASUS, will furnish all necessary labor,management, supervision, permits, equipment, supplies, materials,transportation and any other incidentals for the complete operation,maintenance, repair, upgrades and improvements to the utility systems following  the expiration of a 90-day  transition period. TUS will also undertakecertain capital projects at Andrews Air Force Base during the 90-day transitionperiod. FBWS, TUS and ODUS are referred to herein as the “Military UtilityPrivatization Subsidiaries”.

 

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***Consolidated Results of Operations – Three MonthsEnded September 30, 2005 and 2004 (dollars in thousands)***

 
| ** **                                    | ** ** | **3 MOS**     | ** ** | **3 MOS**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **ENDED**     | ** ** | **ENDED**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                    | ** ** | **9/30/2005** | ** ** | **9/30/2004** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING  REVENUES                           |       |          |       |          |       |       |       |       |       |
| Water                                         |       | $             | 60,539     |          | $          | 62,455     |       | $          | (1,916     | ) | -3.1 | % |
| Electric                                      |       | 6,544         |       | 6,208         |       | 336        |       | 5.4        | %          |
| Other                                         |       | 988           |       | 298           |       | 690        |       | 231.5      | %          |
| Total operating revenues                      |       | 68,071        |       | 68,961        |       | (890       | )          | -1.3       | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| OPERATING  EXPENSES                           |       |          |       |          |       |       |       |       |       |
| Water purchased                               |       | 15,779        |       | 15,339        |       | 440        |       | 2.9        | %          |
| Power purchased for pumping                   |       | 3,252         |       | 2,971         |       | 281        |       | 9.5        | %          |
| Groundwater production assessment             |       | 2,315         |       | 2,120         |       | 195        |       | 9.2        | %          |
| Power purchased for resale                    |       | 3,075         |       | 3,107         |       | (32        | )          | -1.0       | %          |
| Unrealized gain on purchased power  contracts |       | (4,018        | )          | 224           |       | (4,242     | )          | -1893.8    | %          |
| Supply cost balancing accounts                |       | 514           |       | 1,016         |       | (502       | )          | -49.4      | %          |
| Other operating expenses                      |       | 4,850         |       | 4,818         |       | 32         |       | 0.7        | %          |
| Administrative and general expenses           |       | 10,074        |       | 10,591        |       | (517       | )          | -4.9       | %          |
| Depreciation and amortization                 |       | 4,705         |       | 5,589         |       | (884       | )          | -15.8      | %          |
| Maintenance                                   |       | 3,080         |       | 2,593         |       | 487        |       | 18.8       | %          |
| Taxes on income                               |       | 10,558        |       | 5,692         |       | 4,866      |       | 85.5       | %          |
| Other taxes                                   |       | 2,548         |       | 2,235         |       | 313        |       | 14.0       | %          |
| Total operating expenses                      |       | 56,732        |       | 56,295        |       | 437        |       | 0.8        | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| Operating income                              |       | 11,339        |       | 12,666        |       | (1,327     | )          | -10.5      | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| OTHER INCOME  (LOSS) - NET                    |       | (64           | )          | (84           | )          | 20         |       | -23.8      | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| INTEREST  CHARGES                             |       | (959          | )          | 4,564         |       | (5,523     | )          | -121.0     | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| NET INCOME                                    |       | $             | 12,234     |          | $          | 8,018      |       | $          | 4,216      |   | 52.6 | % |

 

Netincome for the three months ended September 30, 2005 increased by 52.6% to$12.2 million, equivalent to $0.72 per common share on a basic and fullydiluted basis, compared to $8.0 million or $0.52 per common share on a basicand fully diluted basis for the three months ended September 30, 2004. Impactingthe comparability in the results of the two periods are the followingsignificant items:

 

•                  A favorable decision issued by the CPUC on July 21,2005 regarding the Aerojet memorandum account which added about $4.3 million tonet income in July 2005 or approximately $0.25 per share. GSWC wasauthorized to collect the balance of the Aerojet litigation memorandum accountof approximately $21.3 million, through a rate surcharge, which will continuefor no longer than 20 years.  As a resultof this decision, in July 2005 GSWC recorded an increase of approximately$6.2 million to the Aerojet regulatory asset to include previously expensedcarrying and other costs, and recorded a corresponding pre-tax gain.  In addition, GSWC was ordered to restore tothe appropriate plant accounts, those amounts that have been reimbursed byAerojet pursuant to the settlement. This resulted in GSWC recording an approximate$1.0 million decrease to depreciation expense during the third quarter of 2005.  The following is a summary of the impact onthe results of operations for the three months ended September 30, 2005resulting from this decision:

 

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| ** **                                       | ** ** | **Amount**                | ** ** |
|--------------------------------------------------|------------|---------------------------|------------|
| ** **                                       | ** ** | **Increase / (Decrease)** | ** ** |
| **Operating  Expenses**                          |       |                      |       |
| Power purchased for resale                       |       | $                         | (31,230    | ) |
| Other operating expenses                         |       | (459,415                  | )          |
| Administrative and general expenses              |       | (16,963                   | )          |
| Depreciation and amortization                    |       | (992,232                  | )          |
| Total  pre-tax impact to operating expenses      |       | (1,499,840                | )          |
|                                             |       |                      |       |
| **Interest  Charges**                            |       |                      |       |
| Other interest and amortization of debt  expense |       | (5,691,634                | )          |
|                                             |       |                      |       |
| Total  pre-tax impact to results of operations   |       | $                         | 7,191,474  |   |
| Impact to taxes on income                        |       | 2,930,238                 |       |
| Total impact  to net income                      |       | $                         | 4,261,236  |   |
|                                             |       |                      |       |
| Impact to  Basic Earnings per Share              |       | $                         | 0.25       |   |
| Impact to  Diluted Earnings per Share            |       | $                         | 0.25       |   |

 

•                  A significant increase in the unrealized gainon purchased power contracts due to an increase in forward energy prices. Thisunrealized gain added approximately $0.14 per share to the three months ended September 30,2005, as compared to the unrealized loss of $0.01 per share for the same periodof 2004.

 

•                  The increases were partially offset byapproximately $0.08 per share due to retroactive revenues recorded in the thirdquarter of 2004 as discussed below. There were no retroactive revenues recorded in the same period of 2005.

 

•                  A 2.7% decrease in water consumption impactedrevenues negatively by approximately $1.1 million (or approximately $0.03 pershare impact) as discussed below.

 

•                  A higher effective tax rate reduced earningsby $0.07 per share resulting from differences between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements.

 

***Operating Revenues***

 

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

 

For thethree months ended September 30, 2005, revenues from water utility operationsdecreased by 3.1% to $60.5 million, compared to $62.5 million for the threemonths ended September 30, 2004. The decrease primarily reflects: (i) a favorable CPUC decisionresulting in the recording of approximately $2.0 million in August 2004related to additional revenues associated with the Region II rate increaseapproved by the CPUC in August 2004 that were retroactive to February 14,2004, pursuant to new legislation effective January 1, 2004; there were nocorresponding retroactive revenues recorded in 2005, and (ii) decreases inwater consumption of approximately 2.7% due to changes in weather conditions.These decreases were partially offset by increases in water rates coveringalmost all of GSWC’s water

 

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customers.Differences intemperature and rainfall in Registrant’s service areas impact sales of water tocustomers, causing fluctuations in Registrant’s revenues and earnings betweencomparable periods.

 

For the three months ended September 30, 2005,revenues from electric operations increased by 5.4% to $6.5 million compared to$6.2 million for the three months ended September 30, 2004. The increasereflects primarily a rate increase effective on April 15, 2005 related tothe 8.4 MW natural gas-fueled generation facility. This new rate is expected toincrease annual revenues by approximately $2.7 million. For the three monthsended September 30, 2005, the rate increase was partially offset by a 3% decreasein kilowatt-hour consumption.

 

For the three months ended September 30, 2005, otheroperating revenues increased by 231.5% to $988,000 compared to $298,000 for thethree months ended September 30, 2004 due primarily to approximately $543,000of additional revenues associated with the operationof the water and wastewater systems at Fort Bliss, located near El Paso, Texasthat commenced on October 1, 2004.

 

***Operating Expenses***

 

For thethree months ended September 30, 2005, purchased water costs increased by2.9% to $15.8 million compared to $15.3 million for the three months ended September 30,2004 due to supplier rate increases.  Inaddition, 49.8% of the Company’s supply mix was purchased water for the thirdquarter of 2005 as compared to 48.9% purchased water for the same period of2004.  These increases were partiallyoffset by a decline in customer demand resulting from lower consumption.

 

For the three months ended September 30, 2005, thecost of power purchased for pumping increased by 9.5% to $3.3 million comparedto $3.0 million for the three months ended September 30, 2004 due to rateincreases from suppliers, offset by a decrease in water consumption.

 

Forthe three months ended September 30, 2005, groundwater productionassessments increased by 9.2% as compared to the three months ended September 30,2004 due to increases in assessment rates levied against groundwaterproduction, effective July 2005. Average pump tax rates increased inRegions II and III by approximately 5% and 22%, respectively.  The increases were offset by a decrease inwell production due to decreased consumption.

 

Changes in the water resource mix between watersupplied from purchased sources and that supplied from Registrant’s own wellscan increase/decrease actual supply-related costs relative to that approved forrecovery through rates, thereby impacting earnings either negatively orpositively. Registrant has the opportunity to change the supply-related costsrecovered through rates by application to the appropriate regulatory body.Registrant believes that its applications for recovery of supply-related costsaccurately reflect the water supply situation as it is known at the time offiling of the applications. However, it is impossible to adequately protectearnings from adverse changes in supply costs related to unforeseencontamination or other loss of water supply.

 

For the three months ended September 30, 2005, cost ofpower purchased for resale to customers in GSWC’s Bear Valley Electric divisiondecreased by 1.0% as compared to the three months ended September 30, 2004due primarily to a decrease in kilowatt-hour usage.

 

Unrealizedgain and loss on purchased power contracts represents gains and losses recordedfor GSWC’s purchased power agreements with Pinnacle West Capital Corporation (“PWCC”), which qualify as derivativeinstruments under SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”*. The $4,018,000 pretaxunrealized gain on purchased power contracts for the three months ended September 30,2005 is due to an increase in current forward market prices since June 30,2005. As of September 30, 2005, GSWC has recorded a cumulative unrealizedgain of $5.5 million on its balance

 

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sheet. Unrealized gains and losses at the Bear Valley Electric division of GSWCwill continue to impact earnings during the life of the contract with PWCC,which terminates in 2008.

 

A decrease of $502,000 during the three months ended September 30,2005 in the provision for supply cost balancing accounts as compared to the threemonths ended September 30, 2004 primarily reflects: (i) adecrease of $375,000 in amortization primarily related to pre-November 2001water supply cost balancing accounts and the electric balancing account, and (ii) adecrease of $107,000 in the electric supply cost balancing account due to alower amount being written off over the $77 per MWh recovery cap authorized bythe CPUC.

 

For the three months ended September 30, 2005, otheroperating expenses increased slightly by 0.7% to $4.9 million compared to $4.8million for the three months ended September 30, 2004 due to: (i) higherlabor costs in 2005 which increased by approximately $113,000 at GSWC; (ii) higheroperating expenses of $143,000 at ASUS due to the commencement of operations ofthe water and wastewater system at Fort Bliss; (iii) higher chemical andwater treatment costs which increased by approximately $127,000, and (iv) anet increase of approximately $90,000 in various other operating expenses.  These increases were offset by a $459,000adjustment reflecting the approval from the CPUC ofrecovery of previously incurred operating expenses in the Aerojet memorandumaccount.

 

Forthe three months ended September 30, 2005, administrative and generalexpenses decreased by 4.9% to $10.1 million compared to $10.6 million for thethree months ended September 30, 2004. The decrease was due to: (i) lower outside services costs ofapproximately $646,000 in connection with new business development and other matters,and (ii) net decreases in various other miscellaneous expenses totaling $440,000.These decreases were offset by an approximate $300,000 increase in pensions andbenefits caused by actuarial assumption changes in the discount rate and mortalitytables, and increases of approximately $268,000 in various other benefit costs.Registrant believes thatprudent administrative expenses approved in advance by state regulators to beincurred in the operation and management of its regulated subsidiaries will berecovered through water and electric rates. Amounts included in each general rate case are estimated for futureyears.  Overages from those estimates arenot covered in rates.

 

Forthe three months ended September 30, 2005, depreciation and amortizationexpense decreased by 15.8% to $4.7 million compared to $5.6 million for thethree months ended September 30, 2004.  This decrease in depreciation expense resulted from the favorable CPUCdecision on the Aerojet matter, discussed previously, which ordered GSWC torestore approximately $1 million to the appropriate plant accounts and decreasedepreciation expense. In addition, Region II’s general rate case wasapproved in August 2004 by the CPUC, which increased the depreciationcomposite rates, retroactive to February 14, 2004 to match with the timingof revenue recovery. This resulted in an increase in depreciation expense ofapproximately $344,000 for the three months ended September 30, 2004.There was no corresponding increase in 2005. These decreases were partially offset by, amongother things, the effects of recording approximately $71 million in additionsto utility plant during 2004, depreciation on which began in January 2005.Registrant anticipates thatdepreciation expense will continue to increase due to Registrant’s on-goingconstruction program at its regulated subsidiaries. Registrant believes thatdepreciation expense related to property additions approved by the appropriateregulatory agency will be recovered through water and electric rates.

 

Forthe three months ended September 30, 2005, maintenance expenses increasedby 18.8% to $3.1 million compared to $2.6 million for the three months ended September 30,2004 due principally to increases in scheduled maintenance and emergencyrepairs at GSWC’s Regions II and III.  Maintenanceexpense increases for regulated activities are included in each general ratecase and are covered in rates, unless disallowed as not reasonable or prudent.  Each of the Military Utility PrivatizationSubsidiaries bears the risk of increases in maintenance and all other costsabove those authorized in the contract for operation of the water andwastewater systems for the U.S. Army or Air Force, unless it is entitled to anequitable adjustment for such matters as an increase in labor rates, changes incircumstances or differing site conditions from those anticipated at the timeof execution of the contract.

 

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For the three months ended September 30, 2005,taxes on operating income increased by 85.5% to $10.6 millioncompared to $5.7 million for the three months ended September 30, 2004due, in part, to an increase in pretax operating income of 65.7%.  Inaddition, the effective tax rate (“ETR”) applicable to the three monthsended September 30, 2005 increased to 46.2% as compared to a 41.3% ETRapplicable to the three months ended September 30, 2004.  Thevariance between the ETR and the statutory tax rate is primarily the result ofdifferences between book and taxable income that are treated as flow-throughadjustments in accordance with regulatory requirements. Flow-throughadjustments increase or decrease tax expense in one period, with an offsettingincrease or decrease occurring in another period.  During the second quarter of 2005, therecognition of the federal benefit of state taxes was adjusted to conform tothe flow-through method reflected in the tax calculation for ratemakingpurposes, which partially defers the recognition of the benefit to thesubsequent tax year.  This resulted inadditional income taxes of $801,000 for the three months ended September 30,2005.

 

For the three months ended September 30, 2005, othertaxes increased by 14.0% to $2.5 million compared to $2.2 million for the threemonths ended September 30, 2004 reflecting additional property taxes of$273,000 resulting from higher assessed values, and increases in payroll taxes ofapproximately $27,000 based on increased labor costs.

 

***Other Income (Loss)***

 

For the three months ended September 30,2005, other net income (loss) was a loss of $64,000 as compared to a loss of $84,000for the three months ended September 30, 2004. This was largely due to anincrease in charitable contributions of $29,000 in connection with the KatrinaRelief Fund, offset by increases in other investment income.

 

***Interest Charges***

 

For thethree months ended September 30, 2005, interest expense decreased by $5.5million reflecting theapproval from the CPUC of previously incurred and expensed interest coststotaling $5.7 million in the Aerojet memorandum account, discussed previously. Thiswas offset by increases in short-term borrowings and higher interestrates on short-term borrowings of approximately $232,000.

 

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***Consolidated Results of Operations – Nine MonthsEnded September 30, 2005 and 2004 (dollars in thousands)***

 
| ** **                                    | ** ** | **9 MOS**     | ** ** | **9 MOS**     | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                    | ** ** | **ENDED**     | ** ** | **ENDED**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                    | ** ** | **9/30/2005** | ** ** | **9/30/2004** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING  REVENUES                           |       |          |       |          |       |       |       |       |       |
| Water                                         |       | $             | 155,587    |          | $          | 154,773    |       | $          | 814        |   | 0.5 | % |
| Electric                                      |       | 20,105        |       | 19,284        |       | 821        |       | 4.3        | %          |
| Other                                         |       | 2,669         |       | 899           |       | 1,770      |       | 196.9      | %          |
| Total operating revenues                      |       | 178,361       |       | 174,956       |       | 3,405      |       | 1.9        | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| OPERATING  EXPENSES                           |       |          |       |          |       |       |       |       |       |
| Water purchased                               |       | 35,742        |       | 37,022        |       | (1,280     | )          | -3.5       | %          |
| Power purchased for pumping                   |       | 6,923         |       | 7,103         |       | (180       | )          | -2.5       | %          |
| Groundwater production assessment             |       | 6,079         |       | 5,280         |       | 799        |       | 15.1       | %          |
| Power purchased for resale                    |       | 9,922         |       | 10,474        |       | (552       | )          | -5.3       | %          |
| Unrealized gain on purchased power  contracts |       | (7,492        | )          | (257          | )          | (7,235     | )          | 2815.2     | %          |
| Gain on settlement for removal of wells       |       | (760          | )          | —        |       | (760       | )          | -100.0     | %          |
| Gain on sale of water rights                  |       | —        |       | (5,675        | )          | 5,675      |       | -100.0     | %          |
| Supply cost balancing accounts                |       | 1,042         |       | 4,835         |       | (3,793     | )          | -78.4      | %          |
| Other operating expenses                      |       | 15,137        |       | 14,538        |       | 599        |       | 4.1        | %          |
| Administrative and general expenses           |       | 31,698        |       | 31,166        |       | 532        |       | 1.7        | %          |
| Depreciation and amortization                 |       | 16,036        |       | 15,840        |       | 196        |       | 1.2        | %          |
| Maintenance                                   |       | 8,068         |       | 7,529         |       | 539        |       | 7.2        | %          |
| Taxes on income                               |       | 18,582        |       | 11,720        |       | 6,862      |       | 58.5       | %          |
| Other taxes                                   |       | 7,041         |       | 6,566         |       | 475        |       | 7.2        | %          |
| Total operating expenses                      |       | 148,018       |       | 146,141       |       | 1,877      |       | 1.3        | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| Operating income                              |       | 30,343        |       | 28,815        |       | 1,528      |       | 5.3        | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| OTHER INCOME  (LOSS) - NET                    |       | (165          | )          | 371           |       | (536       | )          | -144.5     | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| INTEREST  CHARGES                             |       | 8,445         |       | 13,312        |       | (4,867     | )          | -36.6      | %          |
|                                          |       |          |       |          |       |       |       |       |       |
| NET INCOME                                    |       | $             | 21,733     |          | $          | 15,874     |       | $          | 5,859      |   | 36.9 | % |

 

Netincome for the nine months ended September 30, 2005 increased 36.9% to $21.7million, equivalent to $1.29 per common share on a basic and fully dilutedbasis, compared to $15.9 million or $1.04 per share for the nine months ended September 30,2004. Impacting the comparability in the results of the two periods are thefollowing significant items:

 

•                  A favorable decision issued by the CPUC in2004 that resulted in a $5.7 million pre-tax gain on thesale of water rights during thesecond quarter of 2004 offset by an impairment loss of $482,000 associated withrelated assets removed from rate base pursuant to this decision.  This $5.2 million net gain addedapproximately $0.20 per share to the nine months ended September 30, 2004.

 

•                  A significant increase in the unrealized gainon purchased power contracts due to increasing energy prices.  This unrealized gain added approximately $7.5million to pretax income, or $0.26 per share, to the nine months ended September 30,2005, as compared to the unrealized gain of $0.3 million, or $0.01 per share,for the same period of 2004.

 

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•                  As discussed in the quarterly results, theincrease in the nine months recorded results reflects a favorable decision issued by the CPUC on July 21,2005 regarding the Aerojet memorandum account which added about $4.3 million tonet income in July or approximately $0.25 per share.  The impact to pre-tax income was to reduceinterest charges, depreciation expense and other operating expenses asdiscussed below.

 

•                  A significantdecrease in the provision for supply cost balancing account. In May 2004, GSWCrecorded a cumulative $2.7million regulatory liability with a corresponding charge booked to theprovision for supply cost balancing account as a result of the advice lettersfiled for the memorandum supply cost accounts for Regions I and II that had netover-collection balances covering 2001, 2002, 2003 and parts of 2004. During thenine months ended September 30, 2005, there was no similar charge forover-collection. In addition, an approximate $1.3 million under-collection inRegion III’s 2004 memorandum supply cost account which was approved by the CPUCin June of 2005 and was recorded during the nine months ended September 30,2005 as a reduction to the provision.

 

•                  Water rate increases contributedapproximately $6.1 million to revenues, almost all of which was offset by a 6.9%decrease in billed water consumption. The decrease in consumption negativelyimpacted earnings by approximately $0.15 per share.

 

•                  A higher effective tax rate reduced earningsby $0.07 per share resulting from differences between book and taxable incomethat are treated as flow-through adjustments in accordance with regulatoryrequirements.

 

***Operating Revenues***

 

For thenine months ended September 30, 2005, revenues from water operationsremained relatively flat compared to the nine months ended September 30,2004. Water revenues reflect rate increases in 2004 and 2005 covering almostall of GSWC’s water customers which contributed $6.1 million in increasedrevenues, offset by a decrease of 6.9% in billed water consumption resulting from changes in weather conditions.Differences in temperature and rainfall in Registrant’s service areas impactsales of water to customers, causing fluctuations in Registrant’s revenues andearnings between comparable periods.

 

For the nine months ended September 30, 2005, revenuesfrom electric operations increased by 4.3% to $20.1 million compared to $19.3 millionfor the nine months ended September 30, 2004. The increase reflects a rateincrease related to the commencement of operations of an 8.4 MW naturalgas-fueled generation facility.  The newrates went into effect on April 15, 2005. The rate increase for this facility is expected to generateapproximately $2.7 million in additional annual revenues and is subject torefund.  The increase was offset by aslight decrease in kilowatt-hour consumption.

 

For the nine months ended September 30, 2005, otheroperating revenues increased by 196.9% to $2.7 million compared to $899,000 forthe nine months ended September 30, 2004 due primarily to approximately $1.6million of additional revenues associated with the operationof the water and wastewater systems at Fort Bliss, located near El Paso, Texasthat commenced on October 1, 2004 pursuant to the terms of a 50-yearcontract between FBWS and the U.S. Government.

 

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***Operating Expenses***

 

For the ninemonths ended September 30, 2005 and 2004, 47.2% of the Company’s supplymix was purchased water. Purchased water costs decreased by 3.5% to $35.7million compared to $37.0 million for the nine months ended September 30,2004 due primarily to a decline in customer demand resulting from lowerconsumption. These decreases were offset by increases in supplier rates.

 

For the nine months ended September 30, 2005, the costof power purchased for pumping decreased by 2.5% to $6.9 million compared to $7.1million for the nine months ended September 30, 2004 due primarily to adecrease in kilowatt hour usage caused by lower customer demand.

 

Forthe nine months ended September 30, 2005, groundwater productionassessments increased by 15.1% as compared to the nine months ended September 30,2004 due primarily to increases in assessment rates levied against groundwaterproduction in Regions II and III, effective July 2004 and 2005. Average pumptax rates increased in Regions II and III in July 2004 by approximately11% and 15%, respectively, and increased by 5% and 22%, respectively, in July 2005.In addition, GSWC received $728,000 for leasing temporary surplus water rightsduring the nine months ended September 30, 2004 which was recorded as areduction to groundwater production assessments as compared to $221,000received for the nine months ended September 30, 2005. These increaseswere partially offset by a decrease in well production due to a decline in customerdemand.

 

For the nine months ended September 30, 2005, cost ofpower purchased for resale to customers in GSWC’s Bear Valley Electric divisiondecreased by 5.3% to $9.9 million compared to $10.5 million for the nine monthsended September 30, 2004. The decreasewas due primarily to two related events with Mirant Americas Energy Marketing (“MirantMarketing”). The first event was the recording of additional one time costs forthe nine months ended September 2004 that did not recur in the nine monthsended September 2005.  The additional one time costs booked in thefirst nine months of 2004 was due to a refund to Mirant Marketing of $644,000ordered by the Federal Energy Regulatory Commission (“FERC”) in March of2004 for the one-time sale of excess energy in the spot market. While thisincreased the cost of power purchased for resale, GSWC also booked the refundpayment to Mirant Marketing in its supply cost balancing account; therefore,there was no net impact on earnings in 2004. The second event was the result ofa FERC order in November of 2004 in which FERC ordered Mirant Marketing toreimburse $247,000 of the amount GSWC had refunded to Mirant Marketing. GSWCreceived the reimbursement of $247,000 from Mirant Marketing in May of2005. GSWC recorded the Mirant Marketing reimbursement in its supply costbalancing account which also resulted in no net impact on earnings in 2005. Thesedecreases were partially offset by: (i) an increase of approximately$193,000 in charges from Southern California Edison due to rate increases, and (ii) increasesin power costs paid to APX of approximately $65,000.

 

Unrealizedgain and loss on purchased power contracts represents gains and losses recordedfor GSWC’s purchased power agreements with PWCC, which qualify as derivative instrumentsunder SFAS No. 133, *“Accounting for DerivativeInstruments and Hedging Activities”*. The $7,492,000 pretaxunrealized gain on purchased power contracts for the nine months ended September 30,2005 is due to an increase in the current forward market prices since December 31,2004. As of September 30, 2005, GSWC has recorded a cumulative unrealizedgain of $5.5 million on its balance sheet. Unrealized gains and losses at Bear Valley Electric will continue toimpact earnings during the life of the contract with PWCC, which terminates in2008.

 

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For the nine months ended September 30, 2005, Registrantrecorded a net pre-tax gain of $760,000 on a settlement reached with theFountain Hills Sanitary District (“FHSD”) in February 2005 for the cappingof two CCWC wells in order to facilitate FHSD’s ability to secure certainpermits.  Pursuant to the settlementagreement, CCWC agreed to permanently remove from service and cap one of itswells, and cap another well which had never been used as a potable source ofsupply.

 

For the nine months ended September 30, 2004,Registrant recorded a $5.7 million pre-tax gain on the sale of water rightsreflecting a favorable CPUC decision in2004. The $5.7 million represented settlement proceeds received in May 2004from the City of Santa Monica relating to the sale and the assignment of rightsregarding the Charnock Groundwater Basin.

 

A decrease of $3.8 million during the nine months ended September 30,2005 in the provision for supply cost balancing accounts as compared to the ninemonths ended September 30, 2004 primarily reflects: (i) the recordingin May 2004 of a cumulative$2.7 million regulatory liability with a corresponding charge booked to theprovision for supply cost balancing account as a result of the advice lettersfiled for the memorandum supply cost accounts for Regions I and II that had netover-collection balances covering 2001, 2002, 2003 and parts of 2004; there wasno similar charge during the same period of 2005; (ii) approval by theCPUC in June 2005 to recover an approximate $1.3 million under-collectionin Region III’s 2004 memorandum supply cost account; (iii) a decrease of $883,000in amortization primarily related to pre-November 2001 water supply costbalancing accounts and the electric balancing account, and (iv) a decreaseof $283,000 in the electric supply cost amounts in excess of the $77 per MWhrecovery cap authorized by the CPUC. These decreases were offset by: (i) anet change in the current period of $622,000 in the over-collections of thememorandum supply cost accounts, and (ii) the net refunds to Mirant Marketingpreviously discussed in cost of power purchased for resale in GSWC’s BearValley Electric service area.

 

For the nine months ended September 30, 2005, otheroperating expenses increased by 4.1% to $15.1 million compared to $14.5 millionfor the nine months ended September 30, 2004 due primarily to: (i) higherlabor costs as a result of higher wages which increased by approximately $908,000at GSWC; (ii) higher operating expenses of $439,000 at ASUS due to thecommencement of operations of the water and wastewater system at Fort Bliss,and (iii) higher chemicals and water treatment costs of $152,000 at GSWC. Theseincreases were offset by: (i) an impairment loss of $482,000 that wasrecorded at the end of the second quarter of 2004 related to the CharnockGroundwater Basin assets being removed from rate-base pursuant to a CPUC order in2004, and (ii) by a $459,000 adjustment in the third quarter of 2005 reflectingthe approval from the CPUC of recovery of previously incurred operatingexpenses in the Aerojet memorandum account.

 

Forthe nine months ended September 30, 2005, administrative and generalexpenses increased by 1.7% to $31.7 million compared to $31.2 million for the ninemonths ended September 30, 2004 due to: (i) an approximate $900,000 increasein pensions and benefits due to changes in actuarial assumptions with respectto the discount rate and mortality tables, and increases of approximately $834,000in various other benefit costs, (ii) an approximate $347,000 increase in GSWC’sgeneral office labor costs due to higher wages, and (iii) an approximate$351,000 increase at FBWS due to the commencement of operations of the waterand wastewater system at Fort Bliss. These increases were partially offset by: (i) a$1.4 million decrease in outside services in connection with new businessdevelopment and other matters, and (ii) a net decrease of approximately$536,000 in various other miscellaneous expenses.

 

Forthe nine months ended September 30, 2005, depreciation and amortizationexpense increased by 1.2% to $16.0 million compared to $15.8 million for the ninemonths ended September 30, 2004 reflecting, among other things, theeffects of recording approximately $71 million in additions to utility plantduring 2004, depreciation on which began in January 2005. This increasewas offset by a decreasein depreciation expense resulting from the favorable CPUC decision on theAerojet matter, discussed previously, which ordered GSWC to restoreapproximately $1 million to the appropriate plant accounts

 

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anddecrease depreciation expense.  Registrantanticipates that depreciation expense will continue to increase due toRegistrant’s on-going construction program at its regulated subsidiaries.Registrant believes that depreciation expense related to property additionsapproved by the appropriate regulatory agency will be recovered through waterand electric rates.

 

Forthe nine months ended September 30, 2005, maintenance expense increased by7.2% to $8.1 million compared to $7.5 million for the nine months ended September 30,2004 due principally to increases in scheduled maintenance and emergencyrepairs at GSWC’s Region III and an increase of $169,000 in maintenanceexpenses for FBWS due to the Fort Bliss operations which began in October 2004.Each of the Military Utility Privatization Subsidiaries bears the risk ofincreases in maintenance and all other costs above those authorized in thecontract for operation of the water and wastewater systems for the U.S. Armyand Air Force, unless it is entitled to an equitable adjustment for suchmatters as an increase in labor rates, changes in circumstances or differingsite conditions from those anticipated at the time of execution of thecontract.

 

For the nine months ended September 30, 2005,taxes on operating income increased by 58.5% to $18.6 million compared to $11.7million for the nine months ended September 30, 2004 due, in part, to anincrease in pretax operating income of 48.7%. In addition, the ETRapplicable to the nine months ended September 30, 2005 increased to 45.9%as compared to a 43.1% ETR applicable to the nine months ended September 30,2004.  The variance between the ETR and the statutory tax rate isprimarily the result of differences between book and taxable income that aretreated as flow-through adjustments in accordance with regulatoryrequirements.  Flow-through adjustmentsincrease or decrease tax expense in one period, with an offsetting increase ordecrease occurring in another period. During the nine months ended September 30, 2005, the recognition ofthe federal benefit of state taxes was adjusted to conform to the flow-throughmethod reflected in the tax calculation for ratemaking purposes, whichpartially defers the recognition of the benefit to the subsequent taxyear.  This resulted in additional incometaxes of $1,190,000.

 

For the nine months ended September 30, 2005, othertaxes increased by 7.2% to $7.0 million compared to $6.6 million for the ninemonths ended September 30, 2004 reflecting an increase of approximately$351,000 in additional property taxes resulting from higher assessed values,and increases in payroll taxes of approximately $112,000 based on increasedlabor costs.

 

***Other Income (Loss)***

 

For the nine months ended September 30,2005, other net income (loss) was a loss of $165,000 as compared to income of $371,000for the nine months ended September 30, 2004. This was largely due to areduction in GSWC’s estimate of customer refunds associated with lease revenuesfrom the City of Folsom adjusted in September 2004.

 

***Interest Charges***

 

For the ninemonths ended September 30, 2005, interest charges decreased by 36.6% to $8.4million compared to $13.3 million for the nine months ended September 30,2004 reflecting theapproval from the CPUC of previously incurred and expensed carrying coststotaling $5.7 million in the Aerojet memorandum account, discussed previously. Thiswas offset by increases in short-term borrowings and higher interestrates on short-term borrowings of approximately $645,000. In addition, duringthe first quarter of 2004 GSWC recorded the recovery of carrying costs ofapproximately $168,000 with respect to the costs incurred in connection withthe CPUC’s investigation of water quality matters relating to public utilitiesregulated by the CPUC which was authorized by the CPUC in March 2004.There was no corresponding recovery in 2005.

 

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**Critical Accounting Policies**

 

Critical accounting policies are those that areimportant to the portrayal of AWR’s financial condition, results of operationsand cash flows, and require the most difficult, subjective or complex judgmentsof AWR’s management. The need to make estimates about the effect of items thatare uncertain is what makes these judgments difficult, subjective and/orcomplex. Management makes subjective judgments about the accounting andregulatory treatment of many items. These judgments are based on AWR’s historicalexperience, terms of existing contracts, AWR’s observance of trends in theindustry, information provided by customers and information available fromother outside sources, as appropriate. Actual results may differ from theseestimates under different assumptions or conditions.

 

The critical accounting policies used in the preparation of the Registrant’s financial statements that we believe affect the more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in *“Management’s Discussion and Analysis of Financial Condition and Results of Operation”* included in our Annual Report on Form 10-K for the year ended December 31, 2004. There have been no material changes to the critical accounting policies since December 31, 2004.

 

**Liquidity and Capital Resources**

 

***AWR***

 

AWR funds its operating expenses and pays dividendson its outstanding common shares primarily through dividends from itssubsidiaries, principally GSWC.

 

Net cash provided by operating activities was $45.2 millionfor the nine months ended September 30, 2005 as compared to $48.1 millionfor the nine months ended September 30, 2004. The decrease of $2.9 millionwas primarily attributable to the receipt in the first quarter of 2004 of $8.7million from Aerojet in connection with the settlement of the litigation whichaccounted for the change in other accounts receivable. This decrease was offsetprimarily by the receipt of $5.0 million in federal tax refunds during the ninemonths ended September 30, 2005 not received during the nine months ended September 30,2004. A change in cash provided by operating activities is also affected by thetiming of cash receipts and disbursements related to other working capitalitems.

 

Net cash used in investing activities was $52.0million for the nine months ended September 30, 2005 as compared to $57.5million for the nine months ended September 30, 2004 due to higher capitalexpenditures incurred during the third quarter of 2004.

 

Net cash provided by financing activities was$8.2 million for the nine months ended September 30, 2005 as compared to netcash provided by financing activities of $3.3 million for the nine months endedSeptember 30, 2004. The increase in net cash provided by financingactivities was due primarily to an increase in short-term borrowings againstthe revolving credit line and by a $2.0 million increase in receipt ofadvances for and contributions in aid of construction.  In addition, the change also reflects approximately$35 million of proceeds from the issuance of common shares which was then usedto pay down $28 million of short-term borrowings in September of 2004.

 

In June 2005, AWR amended and restatedits credit agreement which increased its borrowing limit under this facility to$85 million and extended the maturity date to June 2010. Up to $20 millionof this facility may be used for letters of credit. As of September 30,2005, an aggregate of $55 million in cash borrowing included in currentliabilities and approximately $11.2 million of letters of credit were outstandingunder this facility.

 

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Registrantanticipates that interest costs will increase in future periods due to the needfor additional external capital to fund its construction program, potentialgeneral market interest rate increases and the April, 2004 downgrade of AWR’scredit rating by Standard & Poor’s Ratings Service (S&P) from A+to A- with a negative outlook. S&P debt ratings range from AAA (highest rating possible) to D(obligation is in default). Securities ratings are not recommendations to buy,sell or hold a security and are subject to change or withdrawal at any time bythe rating agency. Registrant believes that costs associated with capital usedto fund construction at its regulated subsidiaries will continue to berecovered in water and electric rates charged to customers.

 

***GSWC***

 

Net cash provided byoperating activities was $47.2 million for the nine months ended September 30,2005 as compared to $50.6 million for the nine months ended September 30,2004.  The decrease of $3.4 million incash provided by operations was primarily attributable to the receipt in thefirst quarter of 2004 of $8.7 million from Aerojet in connection with a settlementagreement. This was offset by: (i) the payment of approximately $1.4million to Southern California Edison in March of 2004 pursuant to asettlement agreement, with no corresponding payment in 2005, and (ii) an approximately$3.5 million increase in intercompany receivable/payable.  There were also other changes in the timingof cash receipts from customer accounts receivable and disbursements related toother working capital items.

 

Net cash used in investing activities decreasedto $48.8 million for the nine months ended September 30, 2005 as comparedto $54.8 million for the same period of 2004 due to higher capital expendituresduring the third quarter of 2004.

 

Net cash provided by financing activities was$3.0 million for the nine months ended September 30, 2005 as compared to netcash used in financing activities of $1.6 million for the nine months ended September 30,2004, reflecting primarily an increase in intercompany borrowings.  There was also an $823,000 increase inreceipt of advances for and contributions in aid of construction in 2005.  In addition, the change reflects $28 millionreceived by GSWC from the issuance of common shares to AWR, offset by therepayment of $24.5 million of intercompany short-term borrowings in 2004.

 

GSWC funds the majority of its operatingexpenses, payments on its debt, and dividends on its outstanding common sharesthrough internal sources. Internal sources of cash flow are provided primarilyby retention of a portion of earnings from operating activities. Internal cashgeneration is influenced by factors such as weather patterns, environmentalregulation, litigation, changes in supply costs and regulatory decisionsaffecting GSWC’s ability to recover these supply costs, and timing of raterelief.

 

GSWC also relies on external sources, including equityinvestments and short-term borrowings from AWR, long-term debt,contributions-in-aid-of-construction, advances for construction andinstall-and-convey advances to fund the majority of its constructionexpenditures. GSWC has a Registration Statement on file with the SEC forissuance from time to time, of up to $100 million of debt securities. As of September 30,2005, $50 million remained for issuance under this Registration Statement.

 

OnOctober 11, 2005, CoBank purchased a 5.87% Senior Note due December 20,2028 (the “Note”) in the aggregate principal amount of $40,000,000 from GSWCpursuant to the terms of a Note Purchase Agreement dated as of October 11,2005 between GSWC and CoBank. The proceeds were used to pay down GSWC’sintercompany short-term borrowings.

 

In February 2005,Moody’s Investor Services (“Moody’s”) changed the rating outlook for $175million of senior unsecured debt at GSWC from A2 negative to A2 stable.  Moody’s debt ratings range from Aaa (bestquality) to C (lowest quality). GSWC currently has a debt rating of A- withnegative outlook by S&P.  Securitiesratings are not recommendations to buy, sell or hold a security and are subjectto change or withdrawal at any time by the rating agency.

 

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***CCWC***

 

CCWC funds the majority of its operating expenses, paymentson its debt and dividends, if any, through internal operating sources or short-termborrowings from AWR. CCWC also relies on external sources, including long-termdebt, contributions-in-aid-of-construction, advances for construction andinstall-and-convey advances, to fund the majority of its constructionexpenditures.

 

***ASUS***

 

ASUS funds its operatingexpenses primarily through management fees and investments by or loans fromAWR.  ASUS, in turn, provides funding tothe Military Utility Privatization Subsidiaries. 

 

**Contractual Obligationsand Other Commitments**

 

The following is an update to AWR’s contractualobligations and other commitments. See “Managements’ Discussion and Analysis ofFinancial Condition and Results of Operation—Contractual Obligations and OtherCommitments” section of the Registrant’s Form 10-K for the year-ended2004  for a detailed discussion ofcontractual obligations and other commitments.

 

In June 2005, AWRamended and restated its syndicated revolving credit agreement which increasedits borrowing limit under this agreement to $85 million and extended thematurity date to June 2010.  Up to$20 million of this facility may be used for letters of credit. As of September 30,2005, an aggregate of $55 million in cash borrowings are included in currentliabilities and approximately $11.2 million of letters of credit wereoutstanding under this facility. The syndicated revolving credit facilitycontains restrictions on prepayments, disposition of property, mergers, liens indebtednessand guaranty obligations and, transactions with affiliates and contains anegative pledge, minimum interest coveragerequirements, a maximum debt to capitalization ratio, and a minimum debt rating covenant. Pursuantto the Credit Agreement, AWR must maintain a minimum interest coverage ratio of3.25 times interest expense, a maximum total funded debt ratio of 0.65 to 1.00and a minimum debt rating of Baa3 or BBB-.

 

OnOctober 11, 2005, CoBank purchased a 5.87% Senior Note due December 20,2028 in the aggregate principal amount of $40,000,000 from GSWC pursuant to theterms of a Note Purchase Agreement dated as of October 11, 2005 between GSWCand CoBank. The proceeds were used to pay down GSWC’s intercompany short-termborrowings. ThisAgreement contains restrictions on (i) incurring liens and entering intosale and leaseback transactions, with customary exceptions, (ii) dispositionsof property with a book value of more than 15% of total capitalization (asdefined) in any fiscal year, unless the proceeds are used within one year topurchase public utility property or redeem all or a portion of the amountborrowed from CoBank or other debt ranking pari passu with the debt owed toCoBank, (iii) merging or consolidating with any other person, unless GSWCis the survivor or the survivor is principally engaged in the business of awater or wastewater public utility and the financial covenants described beloware satisfied on a pro forma basis at the end of the quarter immediatelypreceding the merger or consolidation, after giving effect to the transaction, (iv) incurringany indebtedness if, as a result an event of default would occur or the totalindebtedness to EBITDA ratio ( as defined) of GSWC at the end of the quarterpreceding the transaction would exceed 8 to 1 or the total indebtedness tocapitalization ratio (as defined) would exceed .6667 to 1, or (v) declaringor paying any dividends in cash or property if at the time of the distributionor payment, an event of default would occur or, if after giving effect to thedistribution, the total indebtedness to capital ratio (as defined) of GSWCwould be more than .6667 to 1.

 

Under the terms of its powerpurchase contracts, GSWC is required to post security, at the request of theseller, if GSWC is in default under the terms of the contract and the futurevalue of the contract is greater than the future value of contracts of asimilar term on the date of default. GSWC will be in default under the terms ofthese contracts if its debt is rated less than BBB- by S&P or Fitch, Inc.(“Fitch”) or less

 

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thanBaa3 by Moody’s. GSWC currently has a senior unsecured debt rating of A- with anegative outlook by S&P and A2 with a recent upgrade from negative to “stableoutlook” by Moody’s. Fitch does not rate GSWC.

 

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

 

**Construction Program**

 

GSWC maintains anongoing water distribution main replacement program throughout its customerservice areas based on the priority of leaks detected, fire protectionenhancement and an underlying replacement schedule. In addition, GSWC upgradesits electric and water supply facilities in accordance with industry standards,local requirements and CPUC requirements. As of September 30, 2005, GSWC has unconditional purchaseobligations for capital projects of approximately $36.5 million. During the ninemonths ended September 30, 2005, GSWC spent $48.8 million for thesepurposes.

 

During the nine monthsended September 30, 2005, CCWC spent $2,843,000 primarily related to a newwater treatment facility, the cost of which is included in rates authorized bythe ACC in October 2005.

 

AWR has no material capitalcommitments.  ASUS actively seeksopportunities to own, lease or operate water and wastewater systems forgovernmental entities, which may involve significant capital commitments.  Each of the Military Utility PrivatizationSubsidiaries has capital commitments that are to be funded by future revenuesunder the contracts with the U.S. Government.

 

**Regulatory Matters**

 

***Regulation***

 

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

 

***Changes in Rates***

 

The CPUC has approved GSWC’sadvice letter requesting rate increases in Region I. The new rates wereeffective June 8, 2005 and are expected to generate annual revenues of$2.3 million.

 

On November 2, 2004, GSWC filed advice letters with the CPUC forstep increases for Region II in an amount of approximately $2.8 million andattrition increases of approximately $2.4 million for Region III that wereapproved and became effective January 1, 2005.

 

On July 10, 2003, the CPUC approved the Certificate ofPublic Convenience and Necessity (“CPCN”) for construction of an 8.4 MW naturalgas-fueled generation facility on a portion of its property in the City of BigBear Lake. The capital cost of the generating facility was approximately $13million. GSWC filed for increased rates in the third quarter of 2004, using aspecial filing called a “Major Additions Adjustment Clause” or “MAAC” filing.This request was approved by the CPUC and the new rates became effective on April 15,2005, which should result in an estimated annual revenue increase of

 

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approximately $2.7 million.  The rate increase for the generation facilityis all subject to refund pending final cost review.

 

CCWC filed its rate case with the ACC in August 2004.In September 2005, the ACC approved a rate increase for CCWC. The rateincrease was effective on October 1, 2005 and is expected to generateadditional annual revenues of $1.1 million, an 18% increase over currentrevenues.

 

***Pending Rate Changes***

 

In February 2005,GSWC filed an application with the CPUC for rate increases in Region III. If approved as filed, the rate increases areexpected to generate approximately $15.6 million in annual revenues starting in2006.  In addition, rates are expected toincrease by approximately $1.0 million in 2007 and 2008, respectively.  A decision on this application is expected inthe fourth quarter of 2005; however, at this time management is unable topredict the ultimate outcome of this rate case.

 

***OtherRegulatory Matters***

 

In a CPUCdecision issued on June 19, 2003 related to memorandum supply costaccounts, all water utilities regulated by the CPUC are required to seek reviewof under- and over- collections by filing an advice letter annually.  GSWC filed advice letters in 2004 and 2005with respect to its cumulative net over-collection for Regions I and II for theperiod from November 29, 2001 to December 31, 2004, which has beenrecorded as a regulatory liability.  In June 2005,the CPUC approved these advice letters, as filed, for the 2001, 2002 and 2003years and as a result a $1.4 million over-collection was transferred to the supplycost balancing accounts*.*The adviceletters for 2004 totaling $4.2 million net over-collection were approved by theCPUC in August of 2005.  The $4.2million net over-collection includes approximately $3.5 million of the net proceedsreceived from potentially responsible parties in the Charnock Groundwater Basin,which was recorded as a regulatory liability. The amount wastransferred to the supply cost balancing accounts in August 2005. Therewas no impact to earnings as these over-collections had been recorded asregulatory liabilities in prior years.

 

GSWC alsofiled advice letters with the CPUC for review of the activity in the Region IIImemorandum supply cost account for the period from November 29, 2001 to December 31,2004 totaling a cumulative $4.2 million under-collection. A regulatory assetwith respect to this under-collection was not recorded pending receipt of aCPUC decision authorizing the recovery of the under-collection.  In June 2005, the CPUC approved the transfer of an approximate $1.3million under-collection in Region III’s 2004 memorandum supply cost accountinto the water supply cost balancing account, income of which was recorded inthe second quarter of 2005.  The adviceletters for the 2001-2003 years were approved in October 2005.  As a result, GSWC will be allowed to recoveran under-collection of $2.9 million recorded in the supply cost memorandumaccount between November 2001 and December 2003. This will result inan increase to pre-tax income of $2.9 million in the fourth quarter of 2005.

 

On July 21, 2005, theCPUC authorized GSWC to collect the balance of the Aerojet litigationmemorandum account of approximately $21.3 million, through a rate surcharge,which will continue for no longer than 20 years.  As a result of this decision, GSWC, amongother things, was ordered to: (i) impose a surcharge in the Arden-Cordovacustomer service area to amortize the balance totaling $21.3 million in thememorandum account and consequently, GSWC reflected an increase ofapproximately $6.2 million in its regulatory assets to include previouslyexpensed carrying costs and record a corresponding gain in its results ofoperations during the third quarter of 2005; (ii) restore the appropriateplant accounts by approximately $1.0 million with a corresponding decrease indepreciation expense during the third quarter of 2005, due to the fullreimbursement from Aerojet of capital expenditures, and (iii) keep thememorandum account open until it is fully amortized. However, no costs may beadded to the memorandum account, other than cumulative interest chargesapproved by the decision. Furthermore, it is management’s intention to offsetany settlement proceeds from Aerojet’s proposed land development,

 

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firstagainst an $8 million note from Aerojet and then against the balance in thememorandum account at the time of receipt of the settlement payments.

 

**Environmental Matters**

 

Our subsidiaries are subject to increasinglystringent environmental regulations including the 1996 amendments to FederalSafe Drinking Water Act; enhancedsurface water treatment rules; regulation of disinfectant/disinfection by-products;andthe long-term enhanced surface water treatment rules; ground water treatment rule;contaminant regulation of radon and arsenic; and unregulated contaminantsmonitoring rule.

 

Additional information on these requirements andother significant environmental matters are described in *“Management’sDiscussion and Analysis of**Financial Condition andResults of Operation”* included in our 2004 Annual Report on Form 10-Kfor the year ended December 31, 2004.  Construction activities at the new treatmentplant in the Calipatria-Niland customer service area were completed in thesecond quarter of 2005.  As a result, managementbelieves that all surface water plants in GSWC and CCWC are in compliance withthe Enhanced Surface Water Treatment Rule which becomes effective on June 1,2006. Except for this matter, there have been no other material changes in anyof the environmental matters discussed in the Form 10-K since December 31,2004.

 

Under the terms of contracts executedby the Military Utility Privatization Subsidiaries with the U.S.Army and U.S. Air Force, the U.S. Government continues to be responsiblefor environmental contamination caused by its fault or negligence and forenvironmental contamination that occurred prior to execution ofthe contract. In addition, each of the Military Utility PrivatizationSubsidiaries has the right to seek an equitable adjustment to its contract inthe event that there are changes in environmental laws, a change in thequality of water used in providing water service or wastewaterdischarged by the U.S. Government or contamination of the air or soilnot caused by the fault or negligence of the Military UtilityPrivatization Subsidiary. Following the end of a transition period, one ofthe Military Utility Privatization Subsidiaries will assume responsibility foroperation and maintenance of the water and wastewater systems at Fort Eustis,Virginia. The U.S. Government has entered into a consent order with theDepartment of Health of the Commonwealth of Virginia relating toexceedances of the non-acute primary maximum contaminant level for totalcoliform bacteria, which appears to be due to biological growth in thedistribution system. This Military UtilityPrivatization Subsidiary will be undertaking a number of improvements tothe water system at Fort Eustis to address this problem. Untilthese improvements are completed, there may be additional exceedances of thenon-acute primary maximum contaminant level for total coliform bacteria at FortEustis.

 

**Water Supply**

 

Theadequacy of our water supplies varies from year to year depending upon avariety of factors, including:

 

•                  Rainfall

•                  Availabilityof Colorado River water and imported water from northern California

•                  Theamount of water stored in reservoirs and groundwater basins

•                  Theamount of water used by our customers and others

•                  Waterquality

•                  Legallimitations on use

 

Population growth and increases in the amountof water used have increased limitations on use to prevent over-drafting ofgroundwater basins. The importation of water from the Colorado River, one of GSWC’simportant sources of supply, is expected to decrease in future years due to therequirements of the Central Arizona Project (“CAP”) and other limitations onthe amount of water that the Metropolitan

 

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Water District of SouthernCalifornia (“MWD”) is entitled to take from the Colorado River. MWD is expectedto increase its efforts to secure additional supplies from conservation,desalination and water exchanges with the agricultural water users.

 

CCWC obtains its water supply from operatingwells and from the Colorado River through the CAP. CCWC’s water supply may besubject to interruption or reduction if there is an interruption or reductionin CAP water. In addition, CCWC’s ability to provide water service to new realestate developments is dependent upon CCWC’s ability to meet the requirementsof the Arizona Department of Water Resources regarding its assured water supplyaccount.

 

The U.S. Government is responsible forsupplying water under the terms of the contracts with our Military Utility PrivatizationSubsidiaries.

 

Water shortages may affect us in a variety ofways:

 

•                  Theyadversely affect supply mix by causing us to rely on more expensive purchasedwater.

•                  Theyadversely affect operating costs.

•                  Theymay result in an increase in capital expenditures for building pipelines toconnect to alternative sources of supply, new wells to replace those that areno longer in service or are otherwise inadequate to meet the needs of customersand reservoirs and other facilities to conserve or reclaim water.

 

We may be able to recover increased operating andconstruction costs for our regulated systems through the ratemaking process. Wemay also be able to recover certain of these costs from third parties that maybe responsible, or potentially responsible, for groundwater contamination. Wemay be able to recover increased operating and construction costs for the watersystems operated by our Military Utility Privatization Subsidiaries throughequitable adjustments to our contracts with the U.S. Army and Air Force.

 

**Risk Factor Summary**

 

The following riskfactors, which are described more fully in our 2004 Annual Report on Form 10-K,represent risks and uncertainties that could cause our actual results to differmaterially from our historical experience and our present expectations orprojections.   There have been no significant changes in riskfactors since December 31, 2004.

 

•                  Ourbusiness is heavily regulated and, as a result, decisions by regulatoryagencies and changes in laws and regulations can significantly affect ourbusiness;

•                  Ourliquidity and earnings could be adversely affected by changes in water supplycosts;

•                  Ourbusiness entails a significant risk of litigation, brought on a variety oflegal theories, alleging that we have caused personal injury and propertydamage as a result of alleged delivery of contaminated water;

•                  Ouroperating costs have increased and are expected to continue to increase as aresult of groundwater contamination;

•                  Environmentalregulation has increased, and is expected to continue to increase our operatingcosts;

•                  Theadequacy of our water supplies depends upon a variety of factors beyond ourcontrol described more fully in the “Management’s Discussion and Analysis ofFinancial Condition and Results of Operation— Water Supply” section;

•                  Our earnings are greatly affected by weatherduring different seasons;

•                  Ourliquidity, and in certain circumstances, earnings, could be adversely affectedby increases in electricity and natural gas prices in California;

•                  Ourbusiness requires significant capital expenditures; and

 

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•                  Theexpansion of our contract operations exposes us to different risks than thoseassociated with our utility operations.

 

**New Accounting Pronouncements**

 

Registrantis subject to newly issued as well as changes in existing requirements issuedby the Financial Accounting Standard Board. Differences in financial reportingbetween periods could occur unless and until the CPUC and the ACC approve suchchanges for conformity through regulatory proceedings. See *Note 9*ofNotes to Consolidated Financial Statements.

 

**Item 3. Quantitative and Qualitative Disclosures About Market Risk**

 

Registrantis exposed to certain market risks, including fluctuations in interest rates,and commodity price risk primarily relating to changes in the market price ofelectricity. Market risk is the potential loss arising from adverse changes inprevailing market rates and prices.  There have been no material changesregarding Registrant’s market risk position from the information provided inits Annual Report on Form 10-K for the year ended December 31, 2004.The quantitative and qualitative disclosures about market risk are discussed in*Item 7A-Quantitative and Qualitative DisclosuresAbout Market Risk*, contained in Registrant’s 2004 Annual Report on Form 10-K.

 

**Item 4. Controls and Procedures**

 

**(a)  Evaluation of Disclosure Controls and Procedures**

 

As required by Rule 13a-15(b) under theSecurities and Exchange Act of 1934 (the “Exchange Act”), we have carried outan evaluation, under the supervision and with the participation of ourmanagement, including our Chief Executive Officer (“CEO”) and our ChiefFinancial Officer (“CFO”), of the effectiveness, as of the end of the fiscal quartercovered by this report, of the design and operation of our “disclosure controlsand procedures” as defined in Rule 13a-15(e) and 15d-15(e) promulgatedby the Securities and Exchange Commission (“SEC”) under the Exchange Act. Basedupon that evaluation, the CEO and the CFO concluded that disclosure controlsand procedures, as of the end of such fiscal quarter, were adequate andeffective to ensure that information required to be disclosed by us in thereports that we file or submit under the Exchange Act is recorded, processed,summarized and reported within the time periods specified in the SEC’s rules andforms and that such information is accumulated and communicated to ourmanagement, including our CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.

 

**(b)  Changes in Internal Controls over Financial Reporting**

 

There has been no change in our internal controlover financial reporting during the quarter ended September 30, 2005 thathas materially affected or is reasonably likely to materially affect ourinternal control over financial reporting.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

Registrantis subject to ordinary routine litigation incidental to its business. Other thanthose disclosed in Registrant’s Form 10-K for the year ended December 31,2004, no other legal proceedings are pending, which are believed to bematerial. There have been no material developments in any of these legalproceedings since the filing of this Form 10-K. 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 2. Unregistered Sales of Equity Securities and Use ofProceeds**

 

Theshareholders of AWR have approved the material features of all equitycompensation plans under which AWR directly issues equity securities. AWR didnot directly issue any unregistered equity securities during the third quarterof 2005.

 

Thefollowing table provides information about repurchases of common shares by AWRduring the three months ended September 30, 2005:

 
| **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** | ** ** |
|-----------------------------------|------------|-----------------------------------------|------------|-----------------------------------|------------|---------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| July 1 – 31,  2005      |       | 393                                     | (2)        | $                                 | 30.31      |                                                                                              | —     |                                                                                         | NA         | (3) |
| August 1 –  31, 2005    |       | 16,403                                  | (4)        | $                                 | 29.96      |                                                                                              | —     |                                                                                         | NA         | (3) |
| September 1 –  30, 2005 |       | 9,213                                   | (4)        | $                                 | 31.94      |                                                                                              | —     |                                                                                         | NA         | (3) |
| Total                             |       | 26,009                                  |       | $                                 | 30.66      |                                                                                              | —     |                                                                                         | NA         | (3) |

 

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(1) None of the common shares were purchased pursuant to any publicly announcedstock repurchase program.

 

(2) All of these Common Shares were acquired on the open market for newparticipants in the Company’s Common Share Purchase and Dividend ReinvestmentPlan.

 

(3) Noneof these plans contain a maximum number of common shares that may be purchasedin the open market under the plans.

 

(4) Of this amount, 15,500 and 8,500 Common Shares were acquired on the open marketin August and September, respectively, for employees pursuant to the Company’s401(k) plan. All of the Common Shares needed to meet the requirements of thisplan were purchased in the open market.  The remainder of the CommonShares was acquired on the open market for new participants in the Company’sCommon Share Purchase and Dividend Reinvestment Plan.

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

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

 

No items were submitted during the third quarter of the2005 fiscal year covered by this report to a vote of security holders throughthe solicitation of proxies or otherwise.

 

## **Item 5. Other Information**

 

(a)  On November 7, 2005, the Board of Directors ofRegistrant declared a regular quarterly dividend of $0.225 per common share.The dividend will be paid December 1, 2005 to shareholders of record as ofthe close of business on November 18, 2005. The Board also approved anamendment to the Company’s Supplemental Executive Retirement Plan to providethat annual bonus payments and dividend equivalent rights be included incompensation for purposes of determining the amount of payments under the Plan.In addition, the Board authorized the Company to make payments to Mr. Sprowlsin an amount equal to what Mr. Sprowls would be entitled to receive underthe Company’s Pension Plan and Supplemental Executive Retirement Plan if Mr. Sprowlsretires prior to becoming vested in these plans.

 

On November 7,2005, the Compensation Committee also approved a new form of Amended andRestated Change-in-Control Agreement for each of the executive officers ofRegistrant which will amend and restate the current change-in-controlagreements. The change in control agreements, as amended, provide each of theexecutive officers with certain benefits in the event of a change in control ofAWR if the executive officer’s employment is terminated other than for cause ordisability or the executive terminates employment for good reason. A change incontrol under these agreements will generally include (i) any sale, lease,exchange or other change in ownership (in one or a series of transactions) ofall or substantially all of the assets of AWR, unless its business is continuedby another entity in which holders of AWR’s voting securities immediatelybefore the event own, either directly or indirectly, more than 55% of thecontinuing entity’s voting securities after the event, (ii) a reorganization ormerger of AWR, unless the holders of AWR’s voting securities immediately beforethe event own, either directly or indirectly, more than 55% of the continuingentity’s voting securities and at least a majority of the members of the continuingentity’s board of directors were members of the incumbent Board of Directors atthe time that such incumbent Board of Directors took action on suchreorganization or merger, or (iii) an acquisition by any person or group actingin concert of more than 55% of the voting securities of AWR, unless the holdersof AWR’s voting securities immediately before the event own, either directly orindirectly, more than 55% of the acquirer’s voting securities immediately afterthe acquisition, (iv) the consummation of a tender offer or exchange offer byany person or group which results in that person or group owning beneficiallymore than 25% of the voting securities of AWR, unless the tender offer is madeby AWR or one of its subsidiaries or the tender offer is approved by a majorityof the members of the Board of Directors of AWR who were in office at thebeginning of the 12 month period preceding the tender offer, or (v) a change ofone-half or more of the members of the Board of Directors, unless the electionor nomination for election by shareholders of new directors within such periodconstituting a majority of the applicable Board was approved by a vote of atleast  2/3rds of the directors still inoffice who were in office at the beginning of the 12 month period. An executivemay terminate his or her employment for good reason if the executive isassigned duties inconsistent in any respect with the executive’s position, theexecutive is not reappointed to such position, except as a result of death,disability or termination for cause, or any other action which results in adiminution of such position following the change in control, the executive’scompensation is reduced or the executive is located at an office that increasesthe distance from the executive’s home by more than 35 miles.

 

Under thechange in control agreements, as amended, each executive will be entitled toreceive an amount equal to 2.99 times the sum of (i) his or her annual salaryat the highest rate in effect during the three calendar years preceding thetermination of employment, (ii) the average of the payments made to theexecutive during the preceding 5 calendar years under any cash compensationplan, and (iii) the average of the amount of cash received by the executiveduring the preceding 5 calendar years with respect to dividend equivalentscredited to the account of the executive. In addition, each executive officerwill be entitled to a cash lump sum payment equal to the excess of (i) thesingle sum actuarial equivalent of what the executive’s accrued benefits wouldbe under the terms of the Southern California Water Company Pension Plan, orany successor plan (the “Pension Plan”) at the time of the executive’stermination of employment, whether or not vested, if the executive were creditedwith 3 additional years of service and (ii) the single sum actuarial equivalentof the executive’s benefits under the Pension Plan at the time of terminationof employment.  Health and welfarebenefits will also be extended for an additional three years for the ChiefExecutive Officer and Chief Financial Officer and for an additional two yearsfor each of the other executive officers. The change in control agreements alsoprovide for a gross-up payment if any executive officer is required to pay anexcise tax under Section 4999 of the Internal Revenue Code.

 

(b)  There have been no material changes during the third quarterof 2005 to the procedures by which shareholders may nominate persons to theBoard of Directors of AWR.

 

## **Item 6. Exhibits**

 

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

 

3.1                                 Restated Articles of Incorporation of GoldenState Water Company, as amended (1)

 

10.1                           Supplemental Executive Retirement Plan, asamended (1)(2)

 

10.2                           Letter Agreement with Mr. Sprowlsregarding retirement benefits (1)(2)

 

10.3                           Form of Amended and Restated Change inControl Agreement (1)(2)

31.1                           Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)

 

31.1.1                  Certification of Chief Executive Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1)

 

31.2                           Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)

 

31.2.1                  Certification of Chief Financial Officerpursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1)

 

32.1                           Certification of Chief Executive Officerpursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (3)

 

32.2                           Certificationof Chief Financial Officer pursuant to Section 906 of the Sarbanes-OxleyAct of 2002 (3)

 

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(1)  Filedconcurrently herewith.

 

(2) Management contract or compensatory benefit plan.

 

(3)  Furnishedconcurrently herewith.

 

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#### **SIGNATURE**

 

 

Pursuant to the requirements of SecuritiesExchange Act of 1934, the Registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized and as its principalfinancial officer.

 

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

 

 

Dated: November 9, 2005

 

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