**Table of Contents**

** **

 

** **

**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C. 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

 

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

** **

**forthe transition period from                    to               **

** **

**Commissionfile number   001-14431**

** **

**AmericanStates Water Company**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

** **

**(909) 394-3600**

(Registrant’s TelephoneNumber, Including Area Code)

** **

**Not Applicable**

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

 

**Commission file number   001-12008**

 

**GoldenState Water Company**

(Exact Name of Registrant as Specified in ItsCharter)

 

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

** **

**(909) 394-3600**

(Registrant’sTelephone Number, Including Area Code)

** **

**Not Applicable**

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

 

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

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

 

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

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

 

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

 

**American States Water Company**

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

 

**Golden State Water Company**

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

 

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

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

 

Asof November 3, 2009, the number of Common Shares outstanding, of AmericanStates Water Company was 18,512,032 shares. As of November 3, 2009, all of the134 outstanding Common Shares of Golden State Water Company were owned byAmerican States Water Company.

 

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

 

 

 

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Table of Contents

** **

**AMERICAN STATES WATER COMPANY**

**and**

**GOLDEN STATE WATER COMPANY**

**FORM 10-Q**

 

### **INDEX**

 
| **Part I**  | **Financial  Information**                                                                                                         | ** ** |
|------------------|------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **       | ** **                                                                                                                         | ** ** |
| Item 1:          | Financial Statements                                                                                                               | 1          |
|             |                                                                                                                               |       |
|             | Consolidated  Balance Sheets of American States Water Company as of September 30, 2009 and December 31, 2008             | 2          |
|             |                                                                                                                               |       |
|             | Consolidated  Statements of Income of American States Water Company for the Three Months Ended  September 30, 2009 and 2008   | 4          |
|             |                                                                                                                               |       |
|             | Consolidated Statements of Income of American States  Water Company for the Nine  Months Ended September 30, 2009 and 2008    | 5          |
|             |                                                                                                                               |       |
|             | Consolidated Statements of Cash Flow of American  States Water Company for the Nine  Months Ended September 30, 2009 and 2008 | 6          |
|             |                                                                                                                               |       |
|             | Balance Sheets of Golden State Water Company as of  September 30, 2009 and December 31, 2008                             | 7          |
|             |                                                                                                                               |       |
|             | Statements of Income of Golden State Water Company for  the Three Months Ended September 30,  2009 and 2008                   | 9          |
|             |                                                                                                                               |       |
|             | Statements of Income of Golden State Water Company for  the Nine Months Ended September 30,  2009 and 2008                    | 10         |
|             |                                                                                                                               |       |
|             | Statements of Cash Flow of Golden State Water Company  for the Nine Months Ended September 30,  2009 and 2008                 | 11         |
|             |                                                                                                                               |       |
|             | Notes to Consolidated Financial Statements                                                                                         | 12         |
|             |                                                                                                                               |       |
| Item 2:          | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                        | 30         |
|             |                                                                                                                               |       |
| Item 3:          | Quantitative  and Qualitative Disclosures About Market Risk                                                                        | 66         |
|             |                                                                                                                               |       |
| Item 4:          | Controls and  Procedures                                                                                                           | 67         |
|             |                                                                                                                               |       |
| Item 4T:         | Controls and  Procedures                                                                                                           | 67         |
|             |                                                                                                                               |       |
| **Part II** | **Other Information**                                                                                                              | ** ** |
| ** **       | ** **                                                                                                                         | ** ** |
| Item 1:          | Legal Proceedings                                                                                                                  | 68         |
|             |                                                                                                                               |       |
| Item 1A:         | Risk Factors                                                                                                                       | 68         |
|             |                                                                                                                               |       |
| Item 2:          | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                       | 68         |
|             |                                                                                                                               |       |
| Item 3:          | Defaults  Upon Senior Securities                                                                                                   | 68         |
|             |                                                                                                                               |       |
| Item 4:          | Submission  of Matters to a Vote of Security Holders                                                                               | 68         |
|             |                                                                                                                               |       |
| Item 5:          | Other Information                                                                                                                  | 68         |
|             |                                                                                                                               |       |
| Item 6:          | Exhibits                                                                                                                           | 69         |
|             |                                                                                                                               |       |
|             | Signatures                                                                                                                         | 70         |

 

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#### Table of Contents

 

#### **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.

 

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

 

It issuggested that these financial statements be read in conjunction with thefinancial statements and notes thereto in the latest Annual Report on Form 10-Kof American States Water Company and its wholly-owned subsidiary, Golden StateWater Company.

 

FilingFormat

 

AmericanStates Water Company (hereinafter “AWR”) is the parent company of Golden StateWater Company (hereinafter “GSWC”), Chaparral City Water Company (hereinafter “CCWC”)and American States Utility Services, Inc. (hereinafter “ASUS”) and itssubsidiaries.

 

Thisquarterly report on Form 10-Q is a combined report being filed by twoseparate Registrants: AWR and GSWC. For more information, please see Note 1 tothe Notes to Consolidated Financial Statements and the heading entitled Generalin Item 2 - Management’s Discussion and Analysis of Financial Condition andResults of Operations. References in this report to “Registrant” are to AWR andGSWC collectively, unless otherwise specified. GSWC makes no representations asto the information contained in this report relating to AWR and itssubsidiaries, other than GSWC.

 

**Forward-LookingInformation**

 

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

 

1

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS**

**ASSETS**

**(Unaudited)**

 
| **(in thousands)**                                                                                        | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Utility  Plant**                                                                                             | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Utility plant,  at cost                                                                                        |       | $                            | 1,223,922  |                        | $          | 1,171,284 |   |
| Less -  Accumulated depreciation                                                                               |       | (367,628                     | )          | (346,022                    | )          |
| Net utility  plant                                                                                             |       | 856,294                      |       | 825,262                     |       |
|                                                                                                           |       |                         |       |                        |       |
| **Other  Property and Investments**                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Goodwill                                                                                                       |       | 4,610                        |       | 4,610                       |       |
| Other property  and investments                                                                                |       | 11,526                       |       | 10,689                      |       |
| Total other  property and investments                                                                          |       | 16,136                       |       | 15,299                      |       |
|                                                                                                           |       |                         |       |                        |       |
| **Current  Assets**                                                                                            | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash  equivalents                                                                                     |       | 7,357                        |       | 7,283                       |       |
| Accounts  receivable — customers (less allowance for doubtful accounts of $674 in 2009  and $656 in 2008) |       | 18,811                       |       | 14,315                      |       |
| Unbilled revenue                                                                                               |       | 23,807                       |       | 17,958                      |       |
| Receivable from  the U.S. government (less allowance for doubtful accounts of $67 in 2009 and  $121 in 2008)   |       | 10,281                       |       | 8,094                       |       |
| Other accounts  receivable (less allowance for doubtful accounts of $456 in 2009 and $474 in  2008)            |       | 4,137                        |       | 6,341                       |       |
| Income taxes  receivable                                                                                       |       | 1,798                        |       | 1,526                       |       |
| Materials and  supplies, at average cost                                                                       |       | 1,912                        |       | 2,109                       |       |
| Regulatory  assets — current                                                                              |       | 8,693                        |       | 16,071                      |       |
| Prepayments and  other current assets                                                                          |       | 1,986                        |       | 2,950                       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                                   |       | 17,275                       |       | 11,836                      |       |
| Deferred income  taxes — current                                                                          |       | 3,607                        |       | 2,131                       |       |
| Total current  assets                                                                                          |       | 99,664                       |       | 90,614                      |       |
|                                                                                                           |       |                         |       |                        |       |
| **Regulatory  and Other Assets**                                                                               | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Regulatory  assets                                                                                             |       | 118,893                      |       | 104,521                     |       |
| Other accounts  receivable                                                                                     |       | 8,471                        |       | 8,167                       |       |
| Costs and  estimated earnings in excess of billings on uncompleted contracts                                   |       | 6,775                        |       | 6,897                       |       |
| Deferred income  taxes                                                                                         |       | 313                          |       | 254                         |       |
| Other                                                                                                          |       | 10,157                       |       | 10,273                      |       |
| Total regulatory  and other assets                                                                             |       | 144,609                      |       | 130,112                     |       |
|                                                                                                           |       |                         |       |                        |       |
| **Total  Assets**                                                                                              |       | $                            | 1,116,703  |                        | $          | 1,061,287 |   |

 

*The accompanying notes are anintegral part of these consolidated financial statements*

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDBALANCE SHEETS****CAPITALIZATION AND LIABILITIES****(Unaudited)**

 
| **(in thousands)**                                                      | ** ** | **September 30,  2009** | ** **      | **December 31,  2008** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------|-----------------|-----------------------------|------------|
| **Capitalization**                                                           | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| Common shares,  no par value, no stated value                                |       | $                            |  221,953   |                        | $          |  185,499 |   |
| Earnings  reinvested in the business                                         |       | 137,794                      |            | 125,004                     |       |
| Total common  shareholders’ equity                                      |       | 359,747                      |            | 310,503                     |       |
| Long-term debt                                                               |       | 306,298                      |            | 266,536                     |       |
| Total  capitalization                                                        |       | 666,045                      |            | 577,039                     |       |
|                                                                         |       |                         |            |                        |       |
| **Current  Liabilities**                                                     | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| Notes payable to  banks                                                      |       | 20,550                       |            | 74,700                      |       |
| Long-term debt —  current                                               |       | 648                          |            | 636                         |       |
| Accounts payable                                                             |       | 37,361                       |            | 36,582                      |       |
| Income taxes  payable                                                        |       | 21                           |            | 974                         |       |
| Accrued employee  expenses                                                   |       | 7,014                        |            | 5,625                       |       |
| Accrued interest                                                             |       | 5,357                        |            | 2,463                       |       |
| Unrealized loss  on purchased power contracts                                |       | 7,026                        |            | —                      |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 5,479                        |            | 2,094                       |       |
| Other                                                                        |       | 15,544                       |            | 14,323                      |       |
| Total current  liabilities                                                   |       | 99,000                       |            | 137,397                     |       |
|                                                                         |       |                         |            |                        |       |
| **Other  Credits**                                                           | ** ** | ** **                   | ** **      | ** **                  | ** ** |
| Advances for  construction                                                   |       | 84,619                       |            | 86,816                      |       |
| Contributions in  aid of construction — net                             |       | 103,512                      |            | 101,593                     |       |
| Deferred income  taxes                                                       |       | 91,208                       |            | 84,750                      |       |
| Unamortized  investment tax credits                                          |       | 2,177                        |            | 2,245                       |       |
| Accrued pension  and other postretirement benefits                           |       | 49,220                       |            | 52,235                      |       |
| Regulatory  liabilities                                                      |       | 1,182                        |            | 425                         |       |
| Billings in  excess of costs and estimated earnings on uncompleted contracts |       | 10,856                       |            | 9,866                       |       |
| Other                                                                        |       | 8,884                        |            | 8,921                       |       |
| Total other  credits                                                         |       | 351,658                      |            | 346,851                     |       |
|                                                                         |       |                         |            |                        |       |
| **Commitments  and Contingencies (Note 8)**                                  |       | —                       |            | —                      |       |
|                                                                         |       |                         |            |                        |       |
| **Total  Capitalization and Liabilities**                                    |       | $                            |  1,116,703 |                        | $          |  1,061,287 |   |

 

*The accompanying notes are an integralpart of these consolidated financial statements*

 

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**AMERICANSTATES WATER COMPANY**

**CONSOLIDATEDSTATEMENTS OF INCOME**

**FOR THETHREE MONTHS****ENDED SEPTEMBER 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                            | ** ** | **Three Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                             | ** ** | **2008** | ** ** |
| **Operating  Revenues**                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                                    | 78,297     |   | $ | 69,365 |   |
| Electric                                                              |       | 6,563                                                |       | 6,743 |   |
| Contracted  services                                                  |       | 16,641                                               |       | 9,153 |   |
| Total operating  revenues                                             |       | 101,501                                              |       | 85,261 |   |
|                                                                  |       |                                                 |       |   |   |
| **Operating  Expenses**                                               | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Water purchased                                                       |       | 14,151                                               |       | 15,087 |   |
| Power purchased  for pumping                                          |       | 3,335                                                |       | 3,484 |   |
| Groundwater  production assessment                                    |       | 3,247                                                |       | 2,791 |   |
| Power purchased  for resale                                           |       | 2,793                                                |       | 3,345 |   |
| Unrealized loss  on purchased power contracts                         |       | —                                               |       | 3,741 |   |
| Supply cost  balancing accounts                                       |       | 4,806                                                |       | (490 | ) |
| Other operation  expenses                                             |       | 7,663                                                |       | 7,366 |   |
| Administrative  and general expenses                                  |       | 17,018                                               |       | 16,307 |   |
| Depreciation and  amortization                                        |       | 8,400                                                |       | 7,882 |   |
| Maintenance                                                           |       | 4,052                                                |       | 4,027 |   |
| Property and  other taxes                                             |       | 3,555                                                |       | 3,461 |   |
| ASUS  construction expenses                                           |       | 9,266                                                |       | 5,117 |   |
| Loss on  settlement for removal of wells                              |       | 760                                                  |       | — |   |
|                                                                  |       |                                                 |       |   |   |
| Total operating  expenses                                             |       | 79,046                                               |       | 72,118 |   |
|                                                                  |       |                                                 |       |   |   |
| **Operating  Income**                                                 |       | 22,455                                               |       | 13,143 |   |
|                                                                  |       |                                                 |       |   |   |
| **Other  Income and Expenses**                                        | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Interest expense                                                      |       | (5,861                                               | )          | (5,428 | ) |
| Interest income                                                       |       | 173                                                  |       | 293 |   |
| Other                                                                 |       | 38                                                   |       | (30 | ) |
| Total other  income and expenses                                      |       | (5,650                                               | )          | (5,165 | ) |
|                                                                  |       |                                                 |       |   |   |
| **Income  from operations before income tax expense**                 |       | 16,805                                               |       | 7,978 |   |
|                                                                  |       |                                                 |       |   |   |
| Income tax  expense                                                   |       | 7,107                                                |       | 3,426 |   |
|                                                                  |       |                                                 |       |   |   |
| **Net  Income**                                                       |       | $                                                    | 9,698      |   | $ | 4,552 |   |
|                                                                  |       |                                                 |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                    |       | 18,502                                               |       | 17,268 |   |
| **Basic  Earnings Per Common Share**                                  |       | $                                                    | 0.52       |   | $ | 0.26 |   |
|                                                                  |       |                                                 |       |   |   |
| **Weighted  Average Number of Diluted Shares**                        |       | 18,645                                               |       | 17,404 |   |
| **Fully  Diluted Earnings Per Share**                                 |       | $                                                    | 0.52       |   | $ | 0.26 |   |
|                                                                  |       |                                                 |       |   |   |
| **Dividends  Declared Per Common Share**                              |       | $                                                    | 0.25       |   | $ | 0.25 |   |

 

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

 

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**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF INCOME**

**FOR THE NINE MONTHS****ENDED SEPTEMBER 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| **Operating  Revenues**                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Water                                                                 |       | $                                                   | 209,248    |   | $ | 186,824 |   |
| Electric                                                              |       | 21,083                                              |       | 21,754 |   |
| Contracted  services                                                  |       | 44,332                                              |       | 25,938 |   |
| Total  operating revenues                                             |       | 274,663                                             |       | 234,516 |   |
|                                                                  |       |                                                |       |   |   |
| **Operating  Expenses**                                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Water  purchased                                                      |       | 34,622                                              |       | 36,119 |   |
| Power  purchased for pumping                                          |       | 7,711                                               |       | 7,819 |   |
| Groundwater  production assessment                                    |       | 8,621                                               |       | 8,056 |   |
| Power  purchased for resale                                           |       | 9,158                                               |       | 10,179 |   |
| Unrealized  gain on purchased power contracts                         |       | —                                              |       | (766 | ) |
| Supply  cost balancing accounts                                       |       | 11,666                                              |       | (1,269 | ) |
| Other  operation expenses                                             |       | 21,981                                              |       | 22,415 |   |
| Administrative  and general expenses                                  |       | 49,405                                              |       | 46,077 |   |
| Depreciation  and amortization                                        |       | 25,148                                              |       | 23,485 |   |
| Maintenance                                                           |       | 12,012                                              |       | 12,569 |   |
| Property  and other taxes                                             |       | 9,667                                               |       | 9,220 |   |
| ASUS  construction expenses                                           |       | 25,540                                              |       | 13,426 |   |
| Net  gain on sale of property                                         |       | (15                                                 | )          | — |   |
| Loss  on settlement for removal of wells                              |       | 760                                                 |       | — |   |
|                                                                  |       |                                                |       |   |   |
| Total  operating expenses                                             |       | 216,276                                             |       | 187,330 |   |
|                                                                  |       |                                                |       |   |   |
| **Operating  Income**                                                 |       | 58,387                                              |       | 47,186 |   |
|                                                                  |       |                                                |       |   |   |
| **Other  Income and Expenses**                                        | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Interest  expense                                                     |       | (16,814                                             | )          | (16,100 | ) |
| Interest  income                                                      |       | 671                                                 |       | 1,429 |   |
| Other                                                                 |       | 90                                                  |       | 91 |   |
| Total  other income and expenses                                      |       | (16,053                                             | )          | (14,580 | ) |
|                                                                  |       |                                                |       |   |   |
| **Income  from operations before income tax expense**                 |       | 42,334                                              |       | 32,606 |   |
|                                                                  |       |                                                |       |   |   |
| Income  tax expense                                                   |       | 16,205                                              |       | 13,467 |   |
|                                                                  |       |                                                |       |   |   |
| **Net  Income**                                                       |       | $                                                   | 26,129     |   | $ | 19,139 |   |
|                                                                  |       |                                                |       |   |   |
| **Weighted  Average Number of Shares Outstanding**                    |       | 17,896                                              |       | 17,252 |   |
| **Basic  Earnings Per Common Share**                                  |       | $                                                   | 1.45       |   | $ | 1.10 |   |
|                                                                  |       |                                                |       |   |   |
| **Weighted  Average Number of Diluted Shares**                        |       | 18,029                                              |       | 17,378 |   |
| **Fully  Diluted Earnings Per Share**                                 |       | $                                                   | 1.45       |   | $ | 1.10 |   |
|                                                                  |       |                                                |       |   |   |
| **Dividends  Declared Per Common Share**                              |       | $                                                   | 0.75       |   | $ | 0.75 |   |

 

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

 

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** **

**AMERICAN STATES WATER COMPANY****CONSOLIDATED STATEMENTS OF CASH FLOW**

**FOR THENINE MONTHS ENDED SEPTEMBER 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                                                   | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                                      | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                                    | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                                   |       | $                                                   | 26,129     |   | $ | 19,139 |   |
| Adjustments for non-cash items:                                              |       |                                                |       |   |   |
| Depreciation and amortization                                                |       | 25,148                                              |       | 23,485 |   |
| Provision for doubtful accounts                                              |       | 774                                                 |       | 661 |   |
| Deferred income taxes and investment tax credits                             |       | 5,134                                               |       | 4,276 |   |
| Unrealized gain on purchased power contracts                                 |       | —                                              |       | (766 | ) |
| Stock-based compensation expense                                             |       | 1,042                                               |       | 1,097 |   |
| Loss on settlement for removal of wells                                      |       | 760                                                 |       | — |   |
| Other — net                                                             |       | 1,123                                               |       | 401 |   |
| Changes in assets and liabilities:                                           |       |                                                |       |   |   |
| Accounts receivable — customers                                         |       | (5,270                                              | )          | (3,902 | ) |
| Unbilled revenue                                                             |       | (5,849                                              | )          | (3,742 | ) |
| Other accounts receivable                                                    |       | 1,900                                               |       | 855 |   |
| Receivable from the U.S. government                                          |       | (2,187                                              | )          | (423 | ) |
| Materials and supplies                                                       |       | 197                                                 |       | (241 | ) |
| Prepayments and other current assets                                         |       | 964                                                 |       | 822 |   |
| Regulatory assets — supply cost balancing accounts                      |       | 11,666                                              |       | (1,269 | ) |
| Costs and estimated earnings in excess of billings  on uncompleted contracts |       | (5,317                                              | )          | (6,510 | ) |
| Other assets (including other regulatory assets)                             |       | (13,033                                             | )          | (1,719 | ) |
| Accounts payable                                                             |       | 382                                                 |       | 6,168 |   |
| Income taxes receivable/payable                                              |       | (1,225                                              | )          | (2,866 | ) |
| Billings in excess of costs and estimated earnings  on uncompleted contracts |       | 4,375                                               |       | 4,791 |   |
| Accrued pension and other postretirement benefits                            |       | (3,015                                              | )          | (77 | ) |
| Other liabilities                                                            |       | 6,716                                               |       | 3,162 |   |
| Net cash provided                                                            |       | 50,414                                              |       | 43,342 |   |
|                                                                         |       |                                                |       |   |   |
| **Cash Flows From Investing Activities:**                                    | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Construction expenditures                                                    |       | (55,633                                             | )          | (58,987 | ) |
| Business acquisition                                                         |       | —                                              |       | (2,298 | ) |
| Net cash used                                                                |       | (55,633                                             | )          | (61,285 | ) |
|                                                                         |       |                                                |       |   |   |
| **Cash Flows From Financing Activities:**                                    | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Proceeds from issuance of Common Shares, net of  issuance costs              |       | 35,354                                              |       | 708 |   |
| Proceeds from stock option exercises                                         |       | 67                                                  |       | 666 |   |
| Receipt of advances for and contributions in aid of  construction            |       | 1,065                                               |       | 4,339 |   |
| Refunds on advances for construction                                         |       | (3,033                                              | )          | (3,339 | ) |
| Repayments of long-term debt                                                 |       | (226                                                | )          | (272 | ) |
| Proceeds from issuance of long-term debt, net of  issuance costs             |       | 39,750                                              |       | — |   |
| Net change in notes payable to banks                                         |       | (54,150                                             | )          | 28,300 |   |
| Dividends paid                                                               |       | (13,285                                             | )          | (12,934 | ) |
| Other — net                                                             |       | (249                                                | )          | 18 |   |
| Net cash provided                                                            |       | 5,293                                               |       | 17,486 |   |
| **Net increase (decrease) in cash and cash  equivalents**                    |       | 74                                                  |       | (457 | ) |
| **Cash and cash equivalents, beginning of period**                           |       | 7,283                                               |       | 1,698 |   |
| **Cash and cash equivalents, end of period**                                 |       | $                                                   | 7,357      |   | $ | 1,241 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY****BALANCE SHEETS**

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

 
| **(in thousands)**                                                                                | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Utility Plant**                                                                                      | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Utility plant, at cost                                                                                 |       | $                            | 1,153,886  |                        | $          | 1,103,932 |   |
| Less - Accumulated depreciation                                                                        |       | (345,466                     | )          | (326,089                    | )          |
| Net utility plant                                                                                      |       | 808,420                      |       | 777,843                     |       |
|                                                                                                   |       |                         |       |                        |       |
| **Other Property and Investments**                                                                     | ** ** | 8,545                        |       | 7,719                       | ** ** |
|                                                                                                   |       |                         |       |                        |       |
| **Current Assets**                                                                                     | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Cash and cash equivalents                                                                              |       | 4,865                        |       | 3,812                       |       |
| Accounts receivable-customers (less allowance for doubtful  accounts of $634 in 2009 and $632 in 2008) |       | 18,371                       |       | 13,969                      |       |
| Unbilled revenue                                                                                       |       | 23,425                       |       | 17,641                      |       |
| Inter-company receivable                                                                               |       | 214                          |       | 309                         |       |
| Other accounts receivable (less allowance for doubtful  accounts of $443 in 2009 and 2008)             |       | 3,779                        |       | 4,348                       |       |
| Materials and supplies, at average cost                                                                |       | 1,796                        |       | 1,543                       |       |
| Regulatory assets — current                                                                       |       | 8,693                        |       | 16,018                      |       |
| Prepayments and other current assets                                                                   |       | 1,715                        |       | 2,714                       |       |
| Deferred income taxes — current                                                                   |       | 3,662                        |       | 2,144                       |       |
| Total current assets                                                                                   |       | 66,520                       |       | 62,498                      |       |
|                                                                                                   |       |                         |       |                        |       |
| **Regulatory and Other Assets**                                                                        | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Regulatory assets                                                                                      |       | 118,893                      |       | 104,521                     |       |
| Other accounts receivable                                                                              |       | 8,471                        |       | 8,167                       |       |
| Other                                                                                                  |       | 9,495                        |       | 9,402                       |       |
| Total regulatory and other assets                                                                      |       | 136,859                      |       | 122,090                     |       |
|                                                                                                   |       |                         |       |                        |       |
| **Total Assets**                                                                                       |       | $                            | 1,020,344  |                        | $          | 970,150 |   |

 

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

 

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** **

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

 
| **(in thousands)**                            | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|----------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **Capitalization**                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Common  shares, no par value, no stated value      |       | $                            | 195,526    |                        | $          | 194,728 |   |
| Earnings  reinvested in the business               |       | 133,501                      |       | 129,805                     |       |
| Total  common shareholder’s equity            |       | 329,027                      |       | 324,533                     |       |
| Long-term  debt                                    |       | 300,323                      |       | 260,561                     |       |
| Total  capitalization                              |       | 629,350                      |       | 585,094                     |       |
|                                               |       |                         |       |                        |       |
| **Current  Liabilities**                           | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Long-term  debt — current                     |       | 338                          |       | 326                         |       |
| Accounts  payable                                  |       | 29,329                       |       | 25,897                      |       |
| Inter-company  payable                             |       | 7,047                        |       | 18,392                      |       |
| Income  taxes payable to Parent                    |       | 1,091                        |       | 2,794                       |       |
| Accrued  employee expenses                         |       | 6,130                        |       | 4,940                       |       |
| Accrued  interest                                  |       | 5,241                        |       | 2,391                       |       |
| Deferred  income taxes — current              |       | —                       |       | 39                          |       |
| Unrealized  loss on purchased power contracts      |       | 7,026                        |       | —                      |       |
| Other                                              |       | 14,379                       |       | 13,245                      |       |
| Total  current liabilities                         |       | 70,581                       |       | 68,024                      |       |
|                                               |       |                         |       |                        |       |
| **Other  Credits**                                 | ** ** | ** **                   | ** ** | ** **                  | ** ** |
| Advances  for construction                         |       | 79,402                       |       | 80,977                      |       |
| Contributions  in aid of construction - net        |       | 90,594                       |       | 89,519                      |       |
| Deferred  income taxes                             |       | 90,787                       |       | 83,765                      |       |
| Unamortized  investment tax credits                |       | 2,177                        |       | 2,245                       |       |
| Accrued  pension and other postretirement benefits |       | 49,220                       |       | 52,235                      |       |
| Other                                              |       | 8,233                        |       | 8,291                       |       |
| Total  other credits                               |       | 320,413                      |       | 317,032                     |       |
|                                               |       |                         |       |                        |       |
| **Commitments  and Contingencies (Note 8)**        |       | —                       |       | —                      |       |
|                                               |       |                         |       |                        |       |
| **Total Capitalization and Liabilities**           |       | $                            | 1,020,344  |                        | $          | 970,150 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME**

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

 
| ** **                                            | ** ** | **Three Months Ended  September 30, 2009** |         |
|-------------------------------------------------------|------------|-----------------------------------------------------------|--------------|
| **(in thousands)**                               | ** ** | **2009**                                                  | ** **   | **2008** | ** ** |
| **Operating  Revenues**                               | ** ** | ** **                                                | ** **   | ** ** | ** ** |
| Water                                                 |       | $                                                         | 76,121       |   | $ | 67,316 |   |
| Electric                                              |       | 6,563                                                     |         | 6,743 |   |
| Total  operating revenues                             |       | 82,684                                                    |         | 74,059 |   |
|                                                  |       |                                                      |         |   |   |
| **Operating  Expenses**                               | ** ** | ** **                                                | ** **   | ** ** | ** ** |
| Water  purchased                                      |       | 13,822                                                    |         | 14,889 |   |
| Power  purchased for pumping                          |       | 3,131                                                     |         | 3,293 |   |
| Groundwater  production assessment                    |       | 3,247                                                     |         | 2,791 |   |
| Power  purchased for resale                           |       | 2,793                                                     |         | 3,345 |   |
| Unrealized  loss on purchased power contracts         |       | —                                                    |         | 3,741 |   |
| Supply  cost balancing accounts                       |       | 4,806                                                     |         | (490 | ) |
| Other  operation expenses                             |       | 6,557                                                     |         | 6,055 |   |
| Administrative  and general expenses                  |       | 13,711                                                    |         | 13,054 |   |
| Depreciation  and amortization                        |       | 7,716                                                     |         | 7,252 |   |
| Maintenance                                           |       | 3,303                                                     |         | 3,289 |   |
| Property  and other taxes                             |       | 3,145                                                     |         | 2,791 |   |
| Total  operating expenses                             |       | 62,231                                                    |         | 60,010 |   |
|                                                  |       |                                                      |         |   |   |
| **Operating  Income**                                 |       | 20,453                                                    |         | 14,049 |   |
|                                                  |       |                                                      |         |   |   |
| **Other  Income and Expenses**                        |       |                                                      |         |   |   |
| Interest  expense                                     |       | (5,693                                                    | )            | (5,018 | ) |
| Interest  income                                      |       | 170                                                       |         | 284 |   |
| Other                                                 |       | 30                                                        |         | (22 | ) |
| Total  other income and expenses                      |       | (5,493                                                    | )            | (4,756 | ) |
|                                                  |       |                                                      |         |   |   |
| **Income  from operations before income tax expense** |       | 14,960                                                    |         | 9,293 |   |
|                                                  |       |                                                      |         |   |   |
| Income  tax expense                                   |       | 6,418                                                     |         | 3,945 |   |
|                                                  |       |                                                      |         |   |   |
| **Net  Income**                                       |       | $                                                         |   8,542 |   | $ | 5,348 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF INCOME**

**FOR THE NINE MONTHS****ENDED SEPTEMBER 30, 2009 AND 2008****(Unaudited)**

 
| ** **                                            | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                               | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| **Operating  Revenues**                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Water                                                 |       | $                                                   | 203,594    |   | $ | 181,235 |   |
| Electric                                              |       | 21,083                                              |       | 21,754 |   |
| Total  operating revenues                             |       | 224,677                                             |       | 202,989 |   |
|                                                  |       |                                                |       |   |   |
| **Operating  Expenses**                               | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Water  purchased                                      |       | 33,764                                              |       | 35,572 |   |
| Power  purchased for pumping                          |       | 7,233                                               |       | 7,365 |   |
| Groundwater  production assessment                    |       | 8,621                                               |       | 8,056 |   |
| Power  purchased for resale                           |       | 9,158                                               |       | 10,179 |   |
| Unrealized  gain on purchased power contracts         |       | —                                              |       | (766 | ) |
| Supply  cost balancing accounts                       |       | 11,666                                              |       | (1,269 | ) |
| Other  operation expenses                             |       | 18,841                                              |       | 17,799 |   |
| Administrative  and general expenses                  |       | 39,809                                              |       | 36,655 |   |
| Depreciation  and amortization                        |       | 23,150                                              |       | 21,746 |   |
| Maintenance                                           |       | 9,340                                               |       | 10,408 |   |
| Property  and other taxes                             |       | 8,511                                               |       | 8,200 |   |
| Net  gain on sale of property                         |       | (15                                                 | )          | — |   |
| Total  operating expenses                             |       | 170,078                                             |       | 153,945 |   |
|                                                  |       |                                                |       |   |   |
| **Operating  Income**                                 |       | 54,599                                              |       | 49,044 |   |
|                                                  |       |                                                |       |   |   |
| **Other  Income and Expenses**                        |       |                                                |       |   |   |
| Interest  expense                                     |       | (16,112                                             | )          | (15,035 | ) |
| Interest  income                                      |       | 665                                                 |       | 1,370 |   |
| Other                                                 |       | 71                                                  |       | 69 |   |
| Total  other income and expenses                      |       | (15,376                                             | )          | (13,596 | ) |
|                                                  |       |                                                |       |   |   |
| **Income  from operations before income tax expense** |       | 39,223                                              |       | 35,448 |   |
|                                                  |       |                                                |       |   |   |
| Income  tax expense                                   |       | 16,074                                              |       | 14,576 |   |
|                                                  |       |                                                |       |   |   |
| **Net  Income**                                       |       | $                                                   | 23,149     |   | $ | 20,872 |   |

 

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

 

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**GOLDEN STATE WATER COMPANY****STATEMENTS OF CASH FLOW**

**FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND2008****(Unaudited)**

 
| ** **                                                           | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| **(in thousands)**                                              | ** ** | **2009**                                            | ** ** | **2008** | ** ** |
| **Cash Flows From Operating Activities:**                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income                                                           |       | $                                                   | 23,149     |   | $ | 20,872 |   |
| Adjustments for non-cash items:                                      |       |                                                |       |   |   |
| Depreciation and amortization                                        |       | 23,150                                              |       | 21,746 |   |
| Provision for doubtful accounts                                      |       | 736                                                 |       | 628 |   |
| Deferred income taxes and investment tax credits                     |       | 5,678                                               |       | 4,180 |   |
| Unrealized gain on purchased power contracts                         |       | —                                              |       | (766 | ) |
| Stock-based compensation expense                                     |       | 783                                                 |       | 940 |   |
| Other — net                                                     |       | 787                                                 |       | 377 |   |
| Changes in assets and liabilities:                                   |       |                                                |       |   |   |
| Accounts receivable — customers                                 |       | (5,138                                              | )          | (3,810 | ) |
| Unbilled revenue                                                     |       | (5,784                                              | )          | (3,702 | ) |
| Other accounts receivable                                            |       | 265                                                 |       | 783 |   |
| Materials and supplies                                               |       | (253                                                | )          | (152 | ) |
| Prepayments and other current assets                                 |       | 999                                                 |       | 849 |   |
| Regulatory assets — supply cost balancing accounts              |       | 11,666                                              |       | (1,269 | ) |
| Other assets (including other regulatory assets)                     |       | (13,078                                             | )          | (1,524 | ) |
| Accounts payable                                                     |       | 2,728                                               |       | 4,236 |   |
| Inter-company receivable/payable                                     |       | (50                                                 | )          | 338 |   |
| Income taxes receivable/payable from/to Parent                       |       | (1,703                                              | )          | (1,679 | ) |
| Accrued pension and other postretirement benefits                    |       | (3,015                                              | )          | (77 | ) |
| Other liabilities                                                    |       | 6,363                                               |       | 3,032 |   |
| Net cash provided                                                    |       | 47,283                                              |       | 45,002 |   |
|                                                                 |       |                                                |       |   |   |
| **Cash Flows From Investing Activities:**                            | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Construction expenditures                                            |       | (53,118                                             | )          | (55,455 | ) |
| Net cash used                                                        |       | (53,118                                             | )          | (55,455 | ) |
|                                                                 |       |                                                |       |   |   |
| **Cash Flows From Financing Activities:**                            | ** ** | ** **                                          | ** ** |   | ** ** |
| Proceeds from issuance of Common Shares to Parent                    |       | —                                              |       | 30,000 |   |
| Receipt of advances for and contributions in aid of  construction    |       | 1,015                                               |       | 4,197 |   |
| Refunds on advances for construction                                 |       | (2,827                                              | )          | (3,047 | ) |
| Proceeds from the issuance of long-term debt, net of  issuance costs |       | 39,750                                              |       | — |   |
| Repayments of long-term debt                                         |       | (226                                                | )          | (272 | ) |
| Net change in inter-company borrowings                               |       | (11,200                                             | )          | (12,510 | ) |
| Dividends paid                                                       |       | (19,400                                             | )          | (8,800 | ) |
| Other — net                                                     |       | (224                                                | )          | 28 |   |
| Net cash provided                                                    |       | 6,888                                               |       | 9,596 |   |
|                                                                 |       |                                                |       |   |   |
| **Net increase (decrease) in cash and cash  equivalents**            |       | 1,053                                               |       | (857 | ) |
| **Cash and cash equivalents, beginning of period**                   |       | 3,812                                               |       | 1,389 |   |
| **Cash and cash equivalents, end of period**                         |       | $                                                   | 4,865      |   | $ | 532 |   |

 

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

 

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** **

**AMERICANSTATES WATER COMPANY****AND****GOLDEN STATE WATER COMPANY****NOTES TO CONSOLIDATED FINANCIAL STATEMENTS**

**(Unaudited)**

 

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

 

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

 

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

 

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

 

GSWC’sRelated Party Transactions: GSWC and other subsidiaries provide and receivevarious services to and from their parent, AWR, and among themselves. Inaddition, AWR has a $115 million syndicated credit facility. AWR borrows underthis facility and provides funds to its subsidiaries, including GSWC, insupport of their operations.  GSWC isalso able to obtain letters of credit under this facility. Amounts owed to AWRfor borrowings under this facility are included in inter-company payables onGSWC’s balance sheets as of September 30, 2009 and December 31, 2008.The interest rate charged to GSWC and other affiliates is sufficient to coverAWR’s interest cost under the credit facility. GSWC also allocates certaincorporate office administrative and general costs to its affiliates usingallocation factors agreed upon by the CPUC.

 

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

 

Sales and Use Taxes: GSWC bills certain sales and use taxes levied by state or localgovernments to its customers. Included in these sales and use taxes arefranchise fees, which GSWC pays to various municipalities (based on ordinancesadopted by these municipalities) in order to use public right of way forutility purposes. GSWC bills these franchise fees to its customers based on aCPUC-authorized rate. These franchise fees, which are required to be paidregardless of GSWC’s ability to collect from the customer, are accounted for ona gross basis. GSWC’s franchise fees recorded were approximately $782,000 and$718,000 for the three months ended September 30, 2009 and 2008,respectively, and $2,116,000 and $2,052,000 for the nine months ended September 30,2009 and 2008, respectively. When GSWC acts as an agent, and the tax is notrequired to be remitted if it is not collected from the customer, the taxes areaccounted for on a net basis.

 

Depending on the state inwhich the operations are conducted, ASUS and its subsidiaries are also subjectto certain state non-income tax assessments generally computed on a “grossreceipts” or “gross revenues” basis. These non-income tax assessments are required to be paid regardless ofwhether the subsidiary is reimbursed by the U.S. government for theseassessments under its 50-year contracts with the U.S. government.  The non-income tax assessments are accountedfor on a gross basis and totaled $234,000 and $521,000 during the three monthsended September 30, 2009 and 2008, respectively, and $563,000 and $521,000for the nine months ended September 30, 2009 and 2008, respectively.

 

New Accounting Pronouncements:   In December 2007, the Financial Accounting Standards Board (“FASB”) issued  revised authoritative guidance on business combinations which establishes principles and requirements for how the acquirer in a business combination: (i) recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquire, (ii) recognizes and measures the goodwill acquired in the business combination, and (iii) determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance was effective for the Company beginning January 1, 2009.  Accordingly, any business combinations that Registrant may engage in subsequent to that date will be recorded and disclosed under the new guidance.

 

In December 2007,the FASB also amended authoritative guidance on noncontrolling interests inconsolidated financial statements.   Theobjective of this guidance is to improve the relevance, comparability, andtransparency of the financial information that a reporting entity provides inits consolidated financial statements by establishing accounting and reportingstandards for the noncontrolling interest in a subsidiary and for thedeconsolidation of a subsidiary.  Theamended guidance was effective for the Company beginning January 1, 2009 anddid not have any impact on Registrant’s consolidated financial position,results of operations or cash flows.

 

In March 2008, theFASB amended its guidance on disclosures about derivatives and hedgingactivities.  The amended guidancerequires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of gains andlosses on derivative instruments and disclosures about credit-risk-relatedcontingent features in derivative agreements.  This guidance was effectivefor the Company beginning January 1, 2009 and did not have any impact onRegistrant’s consolidated financial position, results of operations or cashflows.  The adoption of the new guidancedid result in enhanced qualitative disclosure of Registrant’s derivativeinstrument as discussed in Note 4.

 

In December 2008, the FASB amended its guidance on disclosures about postretirement benefit plans to require additional disclosures about plan assets held in an employer’s defined benefit pension or other postretirement plan, and to provide users of financial statements with an understanding of (i) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, (ii) the major categories of plan assets, (iii) the inputs and valuation techniques used to measure the fair value of plan assets including the level within the fair value hierarchy, using the guidance on fair value measurements,  and (iv) significant concentrations of risk within plan assets.  The amended guidance is effective for the Company beginning January 1, 2010.  Registrant is evaluating the potential impact of this new amended guidance.

 

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In April 2009, theFASB issued guidance requiring disclosures beginning in the second quarter of2009 about the fair value of all financial instruments, for which it ispracticable to estimate that fair value, for interim and annual reportingperiods. Since this new guidance impacts disclosure only, the adoption of thisposition will not have an impact on Registrant’s consolidated results ofoperations, financial position or cash flows. This enhanced disclosure is provided in Note 5.

 

In May 2009, theFASB issued guidance on subsequent events, establishing general standards ofaccounting for and disclosure of events that occur after the balance sheet datebut before the financial statements are issued or are available to be issued.The guidance requires disclosure of the date through which an entity hasevaluated subsequent events and the basis for that date, that is, whether thatdate represents the date the financial statements were issued or available tobe issued. This guidance was effective beginning in the second quarter of 2009and impacted disclosure only.  Registranthas performed an evaluation of subsequent events through November 5, 2009,which is the date the financial statements were issued.

 

In June 2009, theFASB issued revised guidance which enhances information reported to users offinancial statements by providing greater transparency about transfers offinancial assets and a company’s continuing involvement in transferred assets.It removes the concept of qualifying special purpose entity from US GAAP,changes the requirements for derecognizing financial assets and requiresadditional disclosures about a transferor’s continuing involvement intransferred financial assets. This revised guidance is effective for theCompany beginning January 1, 2010 and is not expected to have any impacton Registrant’s consolidated results of operations, financial position or cashflows.

 

In June 2009, theFASB amended the guidance on consolidation for variable interest entities. Thenew guidance requires a company to perform a qualitative analysis whendetermining whether it must consolidate a variable interest entity.  This guidance also amends  how to determine whether an entity is avariable interest entity. A company must now disclose how its involvement witha variable interest entity affects the company’s financial statements anddisclose any significant judgments and assumptions made in determining whetherit must consolidate a variable interest entity. This guidance is effective forthe Company beginning January 1, 2010. Registrant is currently evaluating the potential impact of this newguidance.

 

In June 2009, theFASB issued guidance on the codification of generally accepted accountingprinciples (“GAAP”). This guidance was effective for the Company beginning inthe third quarter of 2009.  The FASBAccounting Standards Codification became the source of authoritative GAAPrecognized by the FASB to be applied by nongovernmental entities. Rules andinterpretive releases of the Securities and Exchange Commission (“SEC”) underauthority of federal securities laws are also sources of authoritative GAAP forSEC registrants. On the effective date of this guidance, the Codificationsuperseded all then-existing accounting and reporting standards, other than rules andinterpretative releases issued by the SEC. The adoption of the new guidance didnot have any impact on the Company’s financial statements.

 

Other accounting guidancethat have been issued or proposed by the FASB or other standards-setting bodiesthat do not require adoption until a future date are not expected to have amaterial impact on Registrant’s consolidated financial statements uponadoption.

 

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**Note 2 —Regulatory Matters:**

 

In accordance with theaccounting guidance for rate-regulated enterprises, Registrant records regulatoryassets, which represent probable future revenue associated with certain coststhat will be recovered from customers through the ratemaking process, andregulatory liabilities, which represent probable future reductions in revenueassociated with amounts that are to be credited to customers through theratemaking process. At September 30, 2009, Registrant had approximately$19.4 million of regulatory assets not accruing carrying costs. Of this amount,$6.9 million relates to deferred income taxes representing accelerated taxbenefits flowed-through to ratepayers, which will be included in ratesconcurrently with recognition of the associated future tax expense, $7.0million relates to a memorandum account authorized by the CPUC to trackunrealized gains and losses on GSWC’s purchased power contracts, and $2.2million relates to general rate case memorandum accounts to be recovered within12 months.  The remainder relates toother expenses that do not provide for recovery of carrying costs that Registrantexpects to recover in rates over a short period.

 

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

 
| **(In thousands)**                                                           | ** ** | **September 30,********2009** | ** ** | **December 31,    2008** | ** ** |
|------------------------------------------------------------------------------|------------|------------------------------------|------------|-------------------------------|------------|
| **GSWC**                                                                     |       |                               |       |                          |       |
| Electric  supply cost balancing account                                      |       | $                                  | 13,307     |                          | $          | 16,077 |   |
| Water  supply cost balancing accounts                                        |       | 6,453                              |       | 11,807                        |       |
| Water  revenue adjustment mechanism, net of modified cost balancing accounts |       | 12,575                             |       | 825                           |       |
| Water  conservation memorandum accounts                                      |       | 2,292                              |       | —                        |       |
| Costs  deferred for future recovery on Aerojet case                          |       | 19,918                             |       | 20,613                        |       |
| Pensions  and other postretirement obligations                               |       | 38,850                             |       | 40,939                        |       |
| Flow-through  taxes, net                                                     |       | 6,853                              |       | 7,134                         |       |
| Electric  transmission line abandonment costs                                |       | 2,873                              |       | 3,001                         |       |
| Asset  retirement obligations                                                |       | 3,901                              |       | 3,646                         |       |
| Low  income rate assistance balancing accounts                               |       | 4,077                              |       | 4,758                         |       |
| General  rate case memorandum accounts                                       |       | 2,215                              |       | 4,922                         |       |
| Santa  Maria adjudication memorandum accounts                                |       | 3,943                              |       | 4,011                         |       |
| Derivative  losses (gains) memorandum account                                |       | 7,026                              |       | —                        |       |
| Refund  of water right lease revenues                                        |       | (1,948                             | )          | (2,360                        | )          |
| Other  regulatory assets, net                                                |       | 5,251                              |       | 5,166                         |       |
| Total  GSWC                                                                  |       | $                                  | 127,586    |                          | $          | 120,539 |   |
| **CCWC**                                                                     |       |                               |       |                          |       |
| Asset  retirement obligations                                                |       | $                                  | 58         |                          | $          | 55 |   |
| Other  regulatory liabilities, net                                           |       | (1,240                             | )          | (427                          | )          |
| Total  AWR                                                                   |       | $                                  | 126,404    |                          | $          | 120,167 |   |

 

Regulatory matters are discussed in detail inthe consolidated financial statements and the notes thereto included in the Form 10-Kfor the year ended December 31, 2008 filed with the SEC.  The discussion below focuses on significantmatters and changes since December 31, 2008.

 

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

 

***Electric Supply Cost Balancing Account***—Electric power costs incurred by GSWC’sBear Valley Electric Service (“BVES”) division continue to be charged to itselectric supply cost balancing account. The under-collection in the electricsupply cost balancing account is $13.3 million and $16.1 million at September 30,2009 and December 31, 2008, respectively, a reduction in theunder-collection of $2.8 million during the nine months ended September 30,2009.  As of September 30, 2009, theelectric supply cost balancing account consists of under-collections incurredduring the energy crisis in late 2000 and 2001, costs of abandonment of atransmission line upgrade and increases in purchased energy and power systemdelivery costs discussed below.

 

The CPUC has authorizedGSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hourthrough August 2011, to enable GSWC to recover an under-collection ofapproximately $23.1 million at the end of 2001 which had been incurredduring the energy crisis in late 2000 and 2001. GSWC sold 30,364,064 and 

 

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31,939,690 kilowatt hoursof electricity to its BVES customers for the three months ended September 30,2009 and 2008, respectively, and sold 100,800,183 and 105,354,442 kilowatthours of electricity to its customers for the nine months ended September 30,2009 and 2008, respectively.  As a resultof the surcharge, the supply cost balancing account was reduced byapproximately $675,000 and $720,000 for the three months ended September 30,2009 and 2008, respectively, and $2,240,000 and $2,361,000 for the nine monthsended September 30, 2009 and 2008, respectively.  Approximately $22.4 million of the $23.1million under-collection incurred during the energy crisis in late 2000 and2001 has been recovered through this surcharge. Therefore, as of September 30, 2009 approximately $728,000 relatedto the energy crisis remains to be recovered through this surcharge.   GSWC anticipates the surcharge, based onprojected electricity sales, to be sufficient for it to recover by August 2011the amount of the under-collected balance incurred during the energy crisis.However, in 2011, if GSWC has not fully recovered the amount of this undercollection, GSWC will seek additional recovery from the CPUC of any amounts notrecovered through this surcharge.

 

Changes in purchasedenergy and power system delivery costs as compared to CPUC authorized rateshave also impacted the electric supply cost balancing account by $8.9 millionunder-collection as of September 30, 2009. The purchased energy costs thatare recorded in the supply cost balancing account are subject to a price cap byterms of a 2001 settlement which was subsequently approved in a CPUC decision.The BVES division of GSWC is allowed to include its actual recorded purchasedenergy costs up to a weighted annual average cost of $77 per megawatt-hour (“MWh”)through August 2011 in its electric supply cost balancing account.  BVES began receiving power under a newpurchased power contract in January 1, 2009.   The main product under the new contractprovides for 13 MWs of electric energy at a fixed price of $63.75 per MWhduring 2009 as compared to $74.65 per MWh during 2008.  The reduction in the actual price ofpurchased power helps decrease the under-collection balance in the electricsupply cost balancing account.  To theextent that the actual weighted average annual cost for power purchased exceedsthe $77 per MWh amount, GSWC will not be able to include these amounts in itsbalancing account and such amounts will be expensed.  There were no amounts expensed over the $77per MWh cap during the three months and nine months ended September 30,2009 and 2008.

 

Charges to GSWC bySouthern California Edison (“Edison”) associated with the transportation ofenergy over Edison’s power system and the abandonment of a transmission lineupgrade have increased under Edison’s tariff to levels that exceed the amountsauthorized by the CPUC in BVES retail power rates to its customers. Theincremental cost increase to GSWC from the tariff for the abandonment of atransmission line upgrade, which is not currently included in rates, is $38,137per month.  The incremental costs of $3.7million at September 30, 2009 not included in rates have been included inthe balancing account at September 30, 2009 for subsequent recovery fromcustomers, subject to CPUC approval.

 

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

 

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

 

For the three monthsended September 30, 2009 and 2008, approximately $339,000 and $1.8 millionof under-collections (including interest), respectively, were recorded in thewater supply cost balancing accounts. For the nine months ended September 30, 2009 and 2008,approximately $1.1 million and $3.9 million of under-collections (includinginterest), respectively, were recorded in the water supply cost balancingaccounts. Amortization of surcharges that are in rates to recoverunder-collections from customers and surcredits that are in rates to refundover-collections to customers also increase or decrease the water supply costbalancing accounts, as applicable. During the three months ended September 30, 2009 and 2008,approximately $2.7 million and $860,000, respectively, of surcharges were billedto customers to decrease previously incurred under-collections in 

 

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the water supply costbalancing accounts.  During the ninemonths ended September 30, 2009 and 2008, approximately $6.5 million and$613,000 of surcharges were billed to customers to decrease previously incurredunder-collections in the water supply cost balancing accounts.

 

As of September 30, 2009,there is a net under-collection of approximately $6.5 million in the watersupply cost balancing accounts.  Of thisamount, approximately $3.5 million relates to GSWC’s Region III customerservice area.  The remaining $3.0 millionnet under-collections in the water supply cost balancing accounts relate toGSWC’s Region I net under-collection of $2.6 million and Region II’s netunder-collection of $0.4 million. Currently, there are surcharges in place at each of the three regions torecover these under-collections over a period ranging from 12 to 24months.  When these surcharges expire,any unrecovered balances will be included for recovery in a future filing.

 

On August 21, 2008,the CPUC issued a final decision which approved a settlement agreement betweenGSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”) regardingconservation rate design.  As a result ofthis decision, GSWC is permitted to establish a Modified Cost Balancing Account(“MCBA”) that will permit GSWC to recover supply costs related to changes inwater supply mix in addition to rate changes by GSWC’s suppliers. GSWCimplemented this MCBA in late November 2008 for Regions II and III and September 1,2009 for Region I.  This account replacesthe current water supply cost balancing account procedure for costs incurredafter the modified supply cost balancing account was implemented.

 

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

 

With the adoption of theWRAM and the MCBA effective November 25, 2008 for Regions II and III and September 1,2009 for Region I, GSWC began recording the difference between what is billedto its regulated customers and that authorized by the CPUC. Under the WRAM,GSWC records the adopted level of volumetric revenues as authorized by the CPUCfor metered accounts (adopted volumetric revenues).  While the WRAM tracks volumetric-basedrevenues, the revenue requirements approved by the CPUC include servicecharges, flat rate charges, and other items that are not subject to the WRAM.Approximately 66% of GSWC’s total adopted revenues are volumetric-based.  The adopted volumetric revenues considers theseasonality of consumption of water based upon historical averages. Thevariance between adopted volumetric revenues and actual billed volumetricrevenues for metered accounts is recorded as a component of revenue with anoffsetting entry to a regulatory asset or liability balancing account.  The variance amount may be positive(under-collection) or negative (over-collection) and represents amounts thatwill be billed or refunded to customers in the future.

 

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

 

The balances in the WRAMand MCBA assets and liabilities accounts will fluctuate on a monthly basisdepending upon the variance between adopted and actual results. The recovery orrefund of the WRAM is netted against the MCBA over-or under-collection for thecorresponding Region.  The over-or-undercollections bear interest at the current 90 day commercial paper rate. GSWCintends to seek approval from the CPUC to refund or collect the balance in theaccounts when the amount for WRAM net of MCBA achieves a pre-determined level(i.e., at least 2.5 percent over-or under-recovery of the approved revenuerequirement). Account balances less than those levels may be refunded orcollected in GSWC’s general rate case proceedings or aggregated with futurecalendar year balances for comparison with the pre-determined recovery level of2.5 percent of adopted revenues. As of September 30, 2009, GSWC has a netaggregated regulatory asset of $12.6 million which is comprised of a $16.5million under-collection in the WRAM accounts and $3.9 million over-collectionin the MCBA accounts.  The revenue requirementand volumetric revenues are adopted as part of a General Rate Case (“GRC”)every three years. Region I will file its next GRC in January 2010 withnew rates effective for 2011 and 2012. All water regions will  file one GRC in July of 2011 with rateseffective January 2013.  As part of future GRCs, the CPUC is expectedto adopt new volumetric revenues based on historical usage patterns and therevenue requirement adopted in these GRCs.

 

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

 

The CPUC also approved anadvice letter filing in a separate proceeding to allow GSWC to create andimplement a Water Conservation Memorandum Account (“WCMA”) to track theextraordinary expenses and revenue shortfall associated with conservationmeasures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008and was used to track on-going extraordinary expenses, and the revenueshortfall until the WRAM was implemented on November 25, 2008 for RegionsII and III and September 1, 2009 for Region I.  On November 24, 2008, approximately $2.0million of net under-collections were included in the WCMA for Regions II andIII prior to the implementation of the WRAM. On April 16, 2009, the CPUC approved the advice letter filed byGSWC to recover the $2.0 million  througha 12-month surcharge to customers’ bills. The surcharge went into effect on April 21,2009.  Accordingly, GSWC established a$2.0 million regulatory asset for Regions II and III during the second quarterof 2009.  At September 30, 2009, thebalance for Regions II and III is $1.2 million, net of amounts collected fromcustomers through the 12-month surcharge. In addition, GSWC established an$852,000 regulatory asset in the second quarter of 2009 for the activity inRegions I’s WCMA through June 30, 2009 and an additional $297,000 duringthe third quarter of 2009 for a total balance at September 30, 2009 of$1.1 million.  The regulatory asset forRegion I’s WCMA balance was incurred during the period of August 18, 2008through August 31, 2009.  Management believes that these amounts are also probable ofrecovery.  In October 2009, GSWCfiled an advice letter for recovery of Region I’s WCMA, through a 12-monthsurcharge for amounts incurred during the period of August 18, 2008through August 31, 2009.

 

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

 

In1999, GSWC sued Aerojet-General Corporation (“Aerojet”) for contaminating theSacramento County Groundwater Basin, which affected certain GSWC wells. On arelated matter, 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.  On July 21, 2005, the CPUC authorizedGSWC to collect approximately $21.3 million of the Aerojet litigationmemorandum account, through a rate surcharge, which will continue for no longerthan 20 years. Beginning in October 2005, new rates went into effect tobegin amortizing the memorandum account over a 20-year period.  A rate surcharge generating approximately$277,000 and $299,000 was billed to customers during the three months ended September 30,2009 and 2008, respectively, and $740,000 and $789,000 during the nine monthsended September 30, 2009 and 2008, respectively.  GSWC will keep the Aerojet memorandum accountopen until the earlier of full amortization of the balance or20 years.  However, no costs will beadded to the memorandum account, other than on-going interest charges approvedby the CPUC decision. Pursuant to the decision, additional interest ofapproximately $12,000 and $111,000 was added to the Aerojet litigationmemorandum account during the three months ended September 30, 2009 and2008, respectively, and $45,000 and $367,000 was added to the Aerojetmemorandum account during the nine months ended September 30, 2009 and 2008,respectively.

 

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

 

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

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs during 2009.   The amount included in rates for recovery ofpension costs in 2009 were previously established in that last GRC and did notinclude this higher level of costs.   InMarch 2009, GSWC filed an advice letter with the CPUC requestingauthorization to establish a Pension Costs Memorandum Account to track thedifference between the pension costs authorized by the CPUC and included incustomer rates, and actual pension costs in 2009.    The CPUC denied this request indicating thatamounts established in the previous GRC will remain in effect.  GSWC also amended its current rate caseapplication to request a two-way balancing account to track fluctuations in theforecasted annual pension expense adopted in rates and the actual annualexpense to be recorded by GSWC in 2010, 2011 and 2012 in accordance with theaccounting guidance for pension costs. If approved as filed, GSWC will establish a regulatory asset or liabilityin those years, for any shortfalls or excesses in this account.

 

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

 

As described in Note 4,in October 2008 GSWC executed a new purchased power contract.  GSWC began receiving power under thiscontract on January 1, 2009 at a fixed cost over three and five year termsdepending on the amount of power and period during which the power will bepurchased under the contract.  The newcontract is also subject to the accounting guidance on derivatives, andrequires mark-to-market derivative accounting. In May 2009, the CPUC issued a final decision approving the newpurchased power contract.  In thedecision, the CPUC also authorized the establishment of a regulatory asset andliability memorandum account to offset the entries required by the accountingguidance on derivatives.  Accordingly,all unrealized gains and losses generated from the new purchased power contractwill be deferred on a monthly basis into a non-interest bearing regulatorymemorandum account that will track the changes in fair value of the derivativethroughout the term of the contract.  Asof September 30, 2009, $7.0 million of cumulative unrealized losses havebeen included in this memorandum account, therefore not impacting earnings.

 

***DeferredRate Case Costs:***

 

Included in GSWC’s otherregulatory assets are deferred rate case costs totaling $3.7 million. These aredirect costs consisting primarily of outside consulting services, which havebeen incurred in connection with the preparation and processing of a GRC. Historically, GSWC has deferred these costs as a regulatory asset which arethen recovered in rates and amortized over the term of a rate case cycle oncethe new rates go into effect.  In the current GRC for Regions II and IIIand the general office, the CPUC’s Division of Ratepayer Advocates (“DRA”) ischallenging GSWC’s historical practice of deferring these costs with subsequentrecovery upon the effective date of the new rates.  Instead, DRA believesthat rate case costs should be projected for future periods and recoveredprospectively.   Management believes that DRA’s rationale andrecommendations are inconsistent with GSWC’s historical practice of deferringand recovering rate case expenses associated with the current GRC.  This practice has not been challenged by theCPUC in prior rate cases.  GSWC will vigorously defend its position. However, if DRA prevails, GSWC may be required to write-off approximately $2.3million as of September 30, 2009 related to the current water ratecase.  At this time, GSWC is unable to predict the outcome of this matter.

 

***BVES:***

 

GSWC’s BVES division hasbeen regularly filing compliance reports with the CPUC regarding its purchasesof energy from renewable energy resources. The filings indicated that BVES hasnot achieved interim target purchase levels of renewable energy resources andthus, on its face, might have a potential penalty. The CPUC considered thefuture timing and applicability of renewable energy resource requirements asthey apply to smaller energy utilities like BVES.  On May 30, 2008, the CPUC issued itsfinal decision regarding the renewable responsibilities of small utilities(including BVES).  The final decisionaffirmed the renewable obligation targets for small utilities but also allowedsmall utilities to defer compliance under the CPUC’s flexible compliancerules.  BVES is required to describe indetail the problems that warrant further deferral annually in accordance withthe CPUC’s flexible compliance rules. Because the final decision deferred BVES’ interim target purchase levelsfor the years 2004 through 2007, management believes that the CPUC’s decisioneffectively forecloses any exposure to financial penalties for the year 2007and earlier.  For the 2008 year, BVES didnot meet the interim targets and expects that the CPUC will waive any potentialfines in accordance with the flexible compliance rules.  Accordingly, no provision for loss has beenrecorded in the financial statements as of September 30, 2009.  At this time, management has determined thatinterim targets for the 2009 year will not be met but expects the CPUC to waiveany potential fines in accordance with the flexible compliance rules.

 

BVES is in negotiationswith two parties with respect to the purchase of biogas that would be used inBVES’ generator plant and the purchase of electricity generated at a landfillsite.  BVES intends to seek regulatoryapproval of the contracts, if negotiations are successful.  If approved by the CPUC, GSWC anticipatesthat BVES will be able to meet its 20% renewable requirement in 2010.

 

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***CCWC Other Regulatory Assets/Liabilities******:***

 

Fountain Hills SanitaryDistrict (“FHSD”) is a political subdivision of the State of Arizona thatprovides sanitary sewer service to customers residing within CCWC’s waterservice area. In connection with its sanitary system, FHSD constructed arecharge system whereby it recharges treated effluent through multipleinjection wells. In order for FHSD to secure an Aquifer Protection Permit forits recharge system, FHSD requested CCWC to permanently cease using one of itswells. As a possible replacement for this well, FHSD constructed a new welladjacent to the community center (“Community Center Well”). However, this wellwas not able to produce an amount of water equivalent to the amount produced byCCWC’s well that was taken out 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 agreed to: (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 wells from service did not have a significantimpact on CCWC’s water supply.

 

In 2005, CCWC recognizeda net gain of $760,000 related to this settlement agreement and established aregulatory liability for the remaining $760,000 that remained as of December 31,2008 pending ACC review of this matter. On October 8, 2009, the ACC made a final ruling ordering CCWC totreat the entire gain of $1,520,000 from the settlement agreement with FHSD asa reduction to rate base. As a result, CCWC has recorded a loss of $760,000during the third quarter of 2009.  Thiseffectively reverses the original gain recorded in 2005.

 

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

 

On February 15,2007, the CPUC issued a subpoena to GSWC in connection with an investigation ofcertain work orders and charges paid to a specific contractor used by GSWC fornumerous construction projects totaling approximately $24.0 million. The CPUC’sinvestigation focuses on whether GSWC was overcharged for these constructionprojects and whether these overcharges were approved in customer rates.  The construction projects completed by thisspecific contractor related primarily to work on water treatment and pumpingplants which have been placed in service and are used and useful.  In September 2007, GSWC receivednotification from the CPUC that it was instituting an audit. The purpose of theaudit was to examine for the period 1994 to the present, GSWC’s policies,procedures, and practices throughout all of its Regions regarding the grantingor awarding of construction contracts or jobs. GSWC is currently responding to data requests submitted by the CPUCincluding recent data requests which asked for information prior to 1994.  Management cannot predict the outcome of theinvestigation or audit at this time.

 

In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with theACC staff and has provided responsive materials that are relevant to CCWC.  Management cannot predict the outcome of theACC’s request.  Although the ACC hasissued a decision in the CCWC general rate case, they have held the proceedingopen pending resolution of the staff review of the CPUC subpoena documents.

 

In June 2009, GSWC implemented water conservation and rationing in its Bay Point customerservice area.  GSWC has also filed adviceletters with the CPUC and implemented mandatory conservation and rationing inits Simi Valley, Orange County, Metropolitan, Claremont, San Dimas and SanGabriel Valley customer service areas. Reduction goals range from 6% to 15% depending on the area.  GSWC will consider taking similar actions inother customer service areas as needed.

 

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** **

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

 

Registrantcomputes earnings per share (“EPS”) in accordance with the accounting guidancefor the effect of participating securities on EPS calculations and the use ofthe “two-class” method. The guidance requires the use of the “two-class” methodof computing EPS for companies with participating securities. The “two-class”method is an earnings allocations formula that determines EPS for eachclass of common stock and participating security.  AWR has participating securities related tostock options that earn dividend equivalents on an equal basis with CommonShares that have been issued under AWR’s 2003 Non-Employee Directors StockPlan,  and the restricted stock unitsunder AWR’s 2000 Stock Incentive Plan and 2008 Stock Incentive Plan.  In applying the “two-class” method,undistributed earnings are allocated to both Common Shares and participatingsecurities. The following is a reconciliation of Registrant’s net income andweighted average Common Shares outstanding for calculating basic net income pershare:

 
| **Basic**                                                             | ** **                                                    | **For The Three Months********Ended September 30,** | ** **  | **For The Nine Months********Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|---------------------------------------------------------------|------------------------------------------------------------------------------|-------------|---------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** **                                                    | **2009**                                                                     | ** **  | **2008**                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Net  income                                                           |                                                          | $                                                                            |  9,698 |                                                    | $          |  4,552 |   | $ |  26,129 |   | $ |  19,139 |   |
| Less:  (a)                                                       | Distributed  earnings to common shareholders                  |                                                                         | 4,625       |                                                    | 4,317      |   | 13,422 |   | 12,939 |   |
|                                                                  | Distributed  earnings to participating securities             |                                                                         | 22          |                                                    | 24         |   | 62 |   | 67 |   |
| Undistributed  earnings                                               |                                                          | 5,051                                                                        |        | 211                                                     |       | 12,645 |   | 6,133 |   |
|                                                                  |                                                          |                                                                         |        |                                                    |       |   |   |   |   |
| (b)                                                              | Undistributed  earnings allocated to common shareholders      |                                                                         | 5,026       |                                                    | 210        |   | 12,587 |   | 6,102 |   |
|                                                                  | Undistributed  earnings allocated to participating securities |                                                                         | 25          |                                                    | 1          |   | 58 |   | 31 |   |
|                                                                  |                                                          |                                                                         |        |                                                    |       |   |   |   |   |
| Total  income available to common shareholders, basic (a)+(b)         |                                                          | $                                                                            | 9,651       |                                                    | $          | 4,527 |   | $ | 26,009 |   | $ | 19,041 |   |
|                                                                  |                                                          |                                                                         |        |                                                    |       |   |   |   |   |
| Weighted  average Common Shares outstanding, basic                    |                                                          | 18,502                                                                       |        | 17,268                                                  |       | 17,896 |   | 17,252 |   |
| **Basic  earnings per Common Share**                                  |                                                          | $                                                                            | 0.52        |                                                    | $          | 0.26 |   | $ | 1.45 |   | $ | 1.10 |   |
|                                                                       |                                                               |                                                                              |             |                                                         |            |  |  |  |  |  |  |  |  |  |  |

 

DilutedEPS is based upon the weighted average number of Common Shares, including bothoutstanding shares and shares potentially issuable in connection with stockoptions and restricted stock units granted under the Registrant’s 2000 and 2008Stock Incentive Plans, and the 2003 Non-Employee Directors Stock Plan, and netincome. At September 30, 2009 and 2008 there were 679,258 and 544,778options outstanding, respectively, under these Plans. At September 30,2009 and 2008, there were also 86,947 and 76,809 restricted stock unitsoutstanding, respectively, under these Plans.

 

Thefollowing is a reconciliation of Registrant’s net income and weighted averageCommon Shares outstanding for calculating diluted net income per share:

 
| **Diluted**                                                           | ** ** | **For The Three Months********Ended September 30,** | ** ** | **For The Nine Months********Ended September 30,** | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(in thousands, except per share amounts)** | ** ** | **2009**                                                                     | ** ** | **2008**                                                | ** ** | **2009** | ** ** | **2008** | ** ** |
| Common  shareholders earnings, basic                                  |       | $                                                                            | 9,651      |                                                    | $          | 4,527 |   | $ | 26,009 |   | $ | 19,041 |   |
| Undistributed  earnings for dilutive stock options                    |       | 25                                                                           |       | 1                                                       |       | 58 |   | 31 |   |
| Total  common shareholders earnings, diluted                          |       | $                                                                            | 9,676      |                                                    | $          | 4,528 |   | $ | 26,067 |   | $ | 19,072 |   |
|                                                                  |       |                                                                         |       |                                                    |       |   |   |   |   |
| Weighted  average common shares outstanding, basic                    |       | 18,502                                                                       |       | 17,268                                                  |       | 17,896 |   | 17,252 |   |
| Stock-based  compensation (1)                                         |       | 143                                                                          |       | 136                                                     |       | 133 |   | 126 |   |
| Weighted  average common shares outstanding, diluted                  |       | 18,645                                                                       |       | 17,404                                                  |       | 18,029 |   | 17,378 |   |
| **Diluted  earnings per Common Share**                                |       | $                                                                            | 0.52       |                                                    | $          | 0.26 |   | $ | 1.45 |   | $ | 1.10 |   |

 

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(1)      In applying the treasury stock method ofreflecting the dilutive effect of outstanding stock-based compensation in thecalculation of diluted EPS, 422,553 and 333,792 stock options at September 30,2009 and 2008, respectively, were deemed to be outstanding in accordance withthe accounting guidance on earnings per share. All of the 86,947 and 76,809 restricted stock units at September 30,2009 and 2008, respectively, were included in the calculation of diluted EPS forthe three and nine months ended September 30, 2009 and 2008.

 

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Stockoptions of 252,326 and 110,713 were outstanding at September 30, 2009 and2008, respectively, but not included in the computation of diluted EPS becausethe related option exercise price was greater than the average market price ofAWR’s Common Shares for the nine months ended September 30, 2009 and2008.  Stock options of 4,379 and 100,273were outstanding at September 30, 2009 and 2008, respectively, but notincluded in the computation of diluted EPS because they were antidilutive.

 

Duringthe nine months ended September 30, 2009 and 2008, Registrant issued54,971 and 27,382 Common Shares, for approximately $1.4 million and $708,000,respectively, under Registrant’s Common Share Purchase and DividendReinvestment Plan, the 401(k) Plan, and the stock incentive plans.

 

InMay 2009, AWR completed a public offering of 1,150,000 shares of itsCommon Shares, including 150,000 shares issued upon exercise of an optiongranted to the underwriters to cover over-allotments, at a price to the publicof $31 per share. The net proceeds from the offering were $34.0 million, afterdeductions of underwriting commissions and discounts, and direct legal andaccounting fees. The Company used the proceeds of the offering to repayshort-term debt.

 

Inaddition, Registrant purchased 13,772 Common Shares on the open market duringthe nine months ended September 30, 2009 under Registrant’s Common SharePurchase and Dividend Reinvestment Plan and 27,566 Common Shares during thenine months ended September 30, 2008, under Registrant’s Common SharePurchase and Dividend Reinvestment Plan and 401(k) Plan.  The Common Shares purchased by Registrantwere used to satisfy the requirements of these plans.

 

Duringeach of the three months ended September 30, 2009 and 2008, AWR paidquarterly dividends to shareholders of approximately $4.6 million and $4.3million, or $0.25 per share, respectively. During the nine months endedSeptember 30, 2009 and 2008, AWR paid quarterly dividends to shareholdersof approximately $13.3 million and $12.9 million, or $0.75 per share,respectively.

 

**Note4 — Derivative Instruments:**

 

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

 

Registrant had certainblock-forward purchased power contracts that were subject to the accountingguidance for derivatives.  During 2002,GSWC became a party to block-forward purchased power contracts that qualifiedas derivative instruments under the accounting guidance.  As a result, unrealized gains and losses wererecorded to earnings on a monthly basis to reflect the fair market value of thederivative at the end of each month. These contracts expired onDecember 31, 2008.  During the threeand nine months ended September 30, 2008, $3.7 million of unrealizedlosses and $766,000 of unrealized gains, respectively, on purchased powercontracts were recorded to GSWC’s earnings.

 

InOctober 2008, GSWC executed a new purchased power contract that permitsGSWC to purchase power at a fixed cost over three and five year terms dependingon the amount of power and period during which the power will be purchasedunder the contract.  The new contract isalso subject to the accounting guidance for derivatives and requiresmark-to-market derivative accounting.  GSWC began receiving power under this contract on January 1, 2009.In May 2009, the CPUC issued a final decision approving the contract andauthorized GSWC to establish a regulatory asset and liability memorandumaccount to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and lossesgenerated from the new purchased power contract will be deferred on a monthlybasis into the non-interest bearing regulatory memorandum account that willtrack the changes in fair value of the derivative throughout the term of thecontract.  As a result, unrealizedderivative gains and losses from the new contract will not affect GSWC’searnings, and will have no impact on power purchased for resale due toregulatory accounting treatment.

 

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On amonthly basis, the related asset or liability from the new purchased powercontract is adjusted to reflect the fair market value at the end of themonth.  Registrant adopted the accountingguidance on fair value measurements effective January 1, 2008 forfinancial assets and liabilities measured on a recurring basis.  The accounting guidance applies to allfinancial assets and financial liabilities that are being measured and reportedon a fair value basis. There was no impact in the adoption of the newaccounting guidance to the consolidated financial statements. However, theguidance requires disclosure that establishes a framework for measuring fairvalue and expands disclosure about fair value measurements. The statementrequires fair value measurements to be classified and disclosed in one of thefollowing three categories:

 

*Level1*: Unadjustedquoted prices in active markets that are accessible at the measurement date foridentical, unrestricted assets or liabilities;

 

*Level2*: Quoted pricesin markets that are not active, or inputs which are observable, either directlyor indirectly, for substantially the full term of the asset or liability, or

 

*Level3*: Prices orvaluation techniques that require inputs that are both significant to the fairvalue measurement and unobservable (i.e., supported by little or no marketactivity).

 

Registrant’svaluation model utilizes various inputs that include quoted market prices forenergy over the duration of the contracts. The market prices used to determinethe fair value for this derivative instrument were estimated based onindependent sources such as broker quotes and publications that are notobservable in or corroborated by the market. Registrant receives one broker quote to determine the fair value of itsderivative instrument.  When such inputshave a significant impact on the measurement of fair value, the instrument iscategorized in Level 3.  Accordingly, thevaluation of the derivative on Registrant’s new purchased power contract hasbeen classified as Level 3 for all periods presented.

 

Thefollowing tables present changes in the fair value of the derivative for thethree and nine months ended September 30, 2009 and 2008.

 
| ** **                                           | ** ** | **For The Three  Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|------------------------------------------------------------------------|------------|
| **(dollars  in thousands)**                     | ** ** | **2009**                                                               | ** ** | **2008** | ** ** |
| Balance, at  beginning of the period                 |       | $                                                                      | (8,547     | ) | $ | 2,953 |   |
| Unrealized  (loss) gain on purchased power contracts |       | 1,521                                                                  |       | (3,741 | ) |
| Balance, at end  of the period                       |       | $                                                                      | (7,026     | ) | $ | (788 | ) |

 
| ** **                                           | ** ** | **For The Nine Months Ended September 30,** | ** ** |
|------------------------------------------------------|------------|---------------------------------------------------------------------------|------------|
| **(dollars  in thousands)**                     | ** ** | **2009**                                                                  | ** ** | **2008** | ** ** |
| Balance, at  beginning of the period                 |       | $                                                                         | —     |   | $ | (1,554 | ) |
| Unrealized  (loss) gain on purchased power contracts |       | (7,026                                                                    | )          | 766 |   |
| Balance, at end  of the period                       |       | $                                                                         | (7,026     | ) | $ | (788 | ) |

 

Forthe three and nine months ended September 30, 2009, the unrealized gains(losses) were included in regulatory assets. For the three and nine months ended September 30, 2008, theunrealized (losses) and gains were included in operating expenses.

 

**Note5 — Fair Value of Financial Instruments:**

 

Forcash and cash equivalents, accounts receivable, accounts payable and short-termdebt, the carrying amount is assumed to approximate fair value due to theshort-term nature of the amounts. The table below estimates the fair value oflong-term debt held by the utility subsidiaries. Rates available to the utilitysubsidiaries at September 30, 2009 and December 31, 2008 for debtwith similar terms and remaining maturities were used to estimate fair valuefor long-term debt. Changes in the assumptions will produce differing results.

 
| ** **                           | ** ** | **September 30,  2009** | ** ** | **December 31,  2008** | ** ** |
|--------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| **(dollars in thousands)** | ** ** | **Carrying Amount**     | ** ** | **Fair Value**         | ** ** | **Carrying Amount** | ** ** | **Fair Value** | ** ** |
| Financial  liabilities:              |       |                         |       |                        |       |   |   |   |   |
| Long-term  debt—GSWC            |       | $                            | 300,661    |                        | $          | 332,518 |   | $ | 260,887 |   | $ | 304,069 |   |
| Long-term  debt—CCWC            |       | 6,285                        |       | 5,884                       |       | 6,285 |   | 6,123 |   |
| Total AWR                            |       | $                            | 306,946    |                        | $          | 338,402 |   | $ | 267,172 |   | $ | 310,192 |   |

 

InMarch 2009, GSWC issued a 6.7% Senior Note due March 10, 2019 with anaggregate principal amount of $40.0 million.

 

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**Note 6 — Income Taxes:**

 

As aregulated utility, GSWC treats certain temporary differences asflow-through adjustments in computing its income tax provisionconsistent with the income tax approach approved by the CPUC for ratemakingpurposes. Flow-through adjustments increase or decrease tax expensein one period, with an offsetting increase or decrease occurring inanother period. Giving effect to these temporary differences as flow-throughadjustments typically results in a greater variance between theeffective tax rate (“ETR”) and the statutory federal income tax rate in anygiven period than would otherwise exist if GSWC were not requiredto account for its income taxes as a regulated enterprise.

 

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

 

On February 20,2009, California’s governor signed two bills into law that amended and addedseveral new provisions to California’s Revenue and Taxation Code.  One of the provisions in these bills changedthe manner by which most taxpayers may compute the portion of their incomederived from multiple jurisdictions that is subject to Californiataxation.  During the first quarter of2009, AWR applied the change in tax law resulting from enactment of the billsbased on its understanding of the legislature’s intent, which is to permittaxpayers to apply an alternative apportionment method commencing with the 2011tax year.  On October 11, 2009, California’sgovernor signed a bill into law that conformed the new provision’s language tothe legislature’s intent, consistent with AWR’s understanding of thatintent.  As a result of management’sintention to apply the alternative method, AWR adjusted its deferred taxbalances at March 31, 2009 to reflect the expected amount at which it willrealize its California deferred taxes consistent with the change in tax law, aswell as refining certain related estimates. This resulted in the recording of a benefit of approximately $918,000during the first quarter of 2009. While the effect of the tax law change willcontinue to affect AWR’s state taxes, the future effects may be beneficial ordetrimental depending on a combination of the profitability of AWR’snon-California activities as well as the relative proportion of thefactor(s) applied by its apportionment method.  Quarterly, management will assess itsintention to apply the alternative method and will adjust its deferred taxbalances accordingly.

 

GSWC continues to computeits state tax provision as if it were autonomous and not a member of AWR’sunitary group.  This approach isconsistent with the methodology used for ratemaking purposes.  Given that 100 percent of GSWC’s activitiesare conducted within California, GSWC’s state tax provision does not reflectapportionment of its income; consequently, the change in California law has hadno effect upon GSWC’s state taxes.

 

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**Note 7 — Employee Benefit Plans:**

 

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

 
| ** **                                     | ** ** | **For The  Three Months Ended September 30,** | ** ** |
|------------------------------------------------|------------|----------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                          | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2009**                                           | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                                               |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                                  | 1,082      |   | $ | 896 |   | $ | 86 |   | $ | 86 |   | $ | 87 |   | $ | 60 |   |
| Interest cost                                  |       | 1,435                                              |       | 1,350 |   | 160 |   | 161 |   | 83 |   | 63 |   |
| Expected return  on plan assets                |       | (972                                               | )          | (1,235 | ) | (52 | ) | (63 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                                             |       | — |   | 105 |   | 105 |   | — |   | — |   |
| Amortization of  prior service cost (benefit)  |       | 30                                                 |       | 30 |   | (50 | ) | (50 | ) | 40 |   | 230 |   |
| Amortization of  actuarial loss (gain)         |       | 572                                                |       | — |   | — |   | — |   | — |   | (14 | ) |
| Net periodic  pension cost                     |       | $                                                  | 2,147      |   | $ | 1,041 |   | $ | 249 |   | $ | 239 |   | $ | 210 |   | $ | 339 |   |

 
| ** **                                     | ** ** | **For The  Nine Months Ended September 30,** | ** ** |
|------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                                     | ** ** | **Pension Benefits**                         | ** ** | **Other  Postretirement  Benefits** | ** ** | **SERP** | ** ** |
| **(dollars in thousands)**           | ** ** | **2009**                                          | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Components  of Net Periodic Benefits Cost:** |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Service cost                                   |       | $                                                 | 3,246      |   | $ | 2,688 |   | $ | 258 |   | $ | 258 |   | $ | 261 |   | $ | 180 |   |
| Interest cost                                  |       | 4,305                                             |       | 4,050 |   | 480 |   | 483 |   | 249 |   | 189 |   |
| Expected return  on plan assets                |       | (2,916                                            | )          | (3,705 | ) | (156 | ) | (189 | ) | — |   | — |   |
| Amortization of  transition                    |       | —                                            |       | — |   | 315 |   | 315 |   | — |   | — |   |
| Amortization of  prior service cost (benefit)  |       | 90                                                |       | 90 |   | (150 | ) | (150 | ) | 120 |   | 690 |   |
| Amortization of  actuarial loss (gain)         |       | 1,716                                             |       | — |   | — |   | — |   | — |   | (42 | ) |
|                                           |       |                                              |       |   |   |   |   |   |   |   |   |   |   |
| Net periodic  pension cost                     |       | $                                                 | 6,441      |   | $ | 3,123 |   | $ | 747 |   | $ | 717 |   | $ | 630 |   | $ | 1,017 |   |

 

Registranthas contributed approximately $8.6 million to the pension plan and expects tocontribute $570,000 to the postretirement medical plan later in 2009.  During the three and nine months endedSeptember 30, 2009, $7.4 million and $8.6 million was contributed to thepension plan, respectively.  InMay 2009, the Board of Directors approved the establishment of a RabbiTrust created for the SERP plan. An amount of $842,000 was deposited in thetrust on June 15, 2009.

 

There was a significantincrease in the underfunded status of the pension plan during 2008.  This was primarily due to a significantdecrease in the fair value of plan assets due to market conditions during2008.  The increase in the underfundedstatus of the pension plan resulted in higher pension costs during the threeand nine months ended September 30, 2009 compared to the same period in2008.  However, during the nine monthsended September 30, 2009, the fair value of the pension plan assetsincreased by approximately 21.5% since December 31, 2008.

 

**Note 8 —Contingencies:**

 

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

 

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

 

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GSWC has, pursuant topermission of the court, amended its suit to claim certain affirmative defensesas an “innocent” party under CERCLA. Registrant is presently unable to predictthe outcome of this ruling on its ability to fully recover from the PRP’sfuture costs associated with the treatment of these wells. In this same suit,the PRP’s have filed cross-complaints against the Water Entities, theMetropolitan Water District, the Main San Gabriel Basin Watermaster and otherson the theory that they arranged for and did transport contaminated water intothe Main San Gabriel Basin for use by GSWC and the other two affected waterpurveyors and for other related claims.

 

On August 29, 2003,the US Environmental Protection Agency (“EPA”) issued Unilateral AdministrativeOrders (“UAO”) against 41 parties deemed responsible for polluting thegroundwater in that portion of the San Gabriel Valley from which the twoimpacted GSWC wells draw water. GSWC was not named as a party to the UAO. TheUAO requires that these parties remediate the contamination. The judge in thelawsuit has appointed a special master to oversee mandatory settlementdiscussions between the PRP’s and the Water Entities. EPA is also conductingsettlement discussions with several PRP’s regarding the UAO. The Water Entitiesand EPA are working to coordinate their settlement discussions under thespecial master in order to arrive at a complete resolution of all issuesaffecting the lawsuit and the UAO. Settlements with a number of the PRP’s arebeing finalized; however, Registrant is presently unable to predict theultimate outcome of these settlement discussions.

 

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

 

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

 

Although the City ofClaremont, California (the “City”) located in GSWC’s Region III, has notinitiated the formal condemnation process pursuant to California law, the Cityhas expressed various concerns to GSWC about the rates charged by GSWC and theeffectiveness of the CPUC’s rate-setting procedures. As of September 30,2009, management believes that the fair market value of the Claremont watersystem exceeds its $42.4 million recorded net book value. The Claremont Citycouncil members agreed that the acquisition of GSWC’s water system was toremain a priority and authorized staff to obtain updated appraisals for thevalue of the water systems.  In meetingsheld in 2008 and 2009, the Claremont City Council stated that they had decidedto authorize additional studies of the acquisition of GSWC’s water system andplanned to move forward on this matter.

 

The Town of Apple Valley(the “Town”) abandoned its activities related to a potential condemnation ofGSWC’s water system serving the Town in 2007. However, in April 2009, theTown announced that it will again consider a potential takeover of GSWC’s AppleValley water systems as well as those of another privately-owned utility.  The Town Council has directed staff toresearch the costs associated with updating the previously prepared financialfeasibility study for the acquisition of GSWC’s water system.

 

Except for the City ofClaremont and the Town of Apple Valley, Registrant has not been, within thelast three years, involved in activities related to the potential condemnationof any of its water customer service areas or in its BVES customer servicearea. No formal condemnation proceedings have been filed against any of theRegistrant’s service areas during the past three years.

 

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

 

In 1997, the Santa MariaValley Water Conservation District (“plaintiff”) filed a lawsuit againstmultiple defendants, including GSWC, the City of Santa Maria, and several otherpublic water purveyors. The plaintiff’s lawsuit sought an adjudication of theSanta Maria Groundwater Basin (the “Basin”). A stipulated settlement of thelawsuit has been reached, subject to CPUC approval.  The settlement, among other things, ifapproved by the CPUC, would preserve GSWC’s historical pumping rights andsecure supplemental water rights for use in case of drought or other reductionsin the natural yield of the Basin. GSWC, under the stipulation, has a right to10,000 acre-feet of groundwater replenishment provided by the TwitchellProject, a storage and flood control reservoir project operated by the SantaMaria Valley Conservation District.  A monitoring and annual reportingprogram has been established to allow the parties to responsibly manage theBasin and to respond to shortage conditions.  If severe water shortageconditions are found over a period of five years, the management areaengineer will make findings and recommendations to alleviate suchshortages.  If the Basin experiences severe shortage conditions,the court has the authority to limit GSWC’s groundwaterproduction to 10,248 acre-feet per year, based on developedwater in the Basin.

 

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On February 11,2008, the court issued its final judgment, which approves and incorporates thestipulation.  The judgment awards GSWC prescriptive rights to groundwateragainst the non-stipulating parties.  In addition, the judgment grantsGSWC the right to use the Basin for temporary storage and to recapture 45percent of the return flows that are generated from its importation ofState Water Project water.  Pursuant to this judgment, the court retainsjurisdiction over all of the parties to make supplemental orders or to amendthe judgment as necessary.  OnMarch 20, 2008, the non-stipulating parties filed notices of appeal.  Registrant is unable to predict the outcomeof the appeal.

 

***Aerojet Note Receivable:***

 

Pursuant to thesettlement agreement with Aerojet, GSWC has an $8.0 million notereceivable, plus $2.5 million of accrued interest, guaranteed by Aerojet.  This note, plus interest on the unpaidbalance, is scheduled to be paid by Aerojet in installments over five yearsbeginning in December 2009.  InJanuary 2009, Moody’s Investors Service downgraded the corporate familyratings of GenCorp Inc., Aerojet’s parent, further to B3 from B2 and itsprobability of default rating to Caa1 from B2. Obligations rated “B” are considered speculative by Moody’s and are, inMoody’s view, subject to high credit risk and have generally poor creditquality.  Obligations rated Caa1 arejudged by Moody’s to be of poor credit standing and are, in Moody’s view,subject to very high credit risk and have extremely poor credit quality.   On March 31, 2009, Standard &Poor’s Ratings Services, or S&P, lowered its ratings on GenCorp to CCC+from B+ with a developing outlook.  OnOctober 14, 2009, S&P revised its outlook to positive.  An S&P rating of “CCC” indicates acurrent identifiable vulnerability to default by S&P that is, in S&P’sview, dependent upon favorable business, financial and economic conditions tomeet timely payment of interest and repayment of principal.  At this time, management believes the notereceivable from Aerojet is still fully collectible and has not provided areserve for uncollectible amounts as of September 30, 2009.  GSWC will continue to assess recoverabilityof this note receivable.

 

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

 

In 1998, the South CoastAir Quality Management District (“AQMD”) issued a permit to GSWC for theinstallation and use of air stripping equipment at one of GSWC’s groundwatertreatment systems in its Region II service area. In 2005, the AQMD conducted aninspection of this facility (“Watson Well”) and issued a Notice of Violation(“NOV”) for exceeding the amount of groundwater permitted to be treated by thetreatment system during calendar year 2004. In 2007, GSWC reached a settlement of the NOV with the AQMD.  As part of the settlement, GSWC agreed toperform a Supplemental Environmental Program (“SEP”) that included installationand operation of granular activated carbon (“GAC”) filters at the facility.  The AQMD accepted this agreement and assesseda nominal penalty.  InFebruary 2009, GSWC began operating the permanent GAC treatment system atthe Watson Plant.   GSWC submitted afinal report to the AQMD indicating the completion of the SEP inApril 2009.  AQMD has acknowledgedthe completion of the SEP and therefore, management believes that GSWC hasfulfilled its obligations under the settlement with AQMD and no furtherpenalties are expected to be assessed. GSWC has spent approximately $895,000 as of September 30, 2009 onthe GAC treatment system. Management also believes it is probable that thecapital costs incurred on this project will be approved in rate-base by theCPUC.

 

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

 

Chadron Plant: GSWC has been involved in environmentalremediation and clean-up at a plant site (“Chadron Plant”) that contained anunderground storage tank which was used to store gasoline for its vehicles.This tank was removed from the ground in July 1990 along with thedispenser and ancillary piping. Since then, GSWC has been involved in variousremediation activities at this site.  GSWC is undertaking a multi-phase extraction cleanup program at thesite.  The second phase, which includes thecleanup of the groundwater, is expected to begin as soon as the extraction phaseis completed. GSWC expects remediation to take at least two more years,followed by two years of monitoring and reporting.

 

As of September 30,2009, the total spent to clean-up and remediate GSWC’s plant facility isapproximately $2.3 million, of which $1.5 million has been paid by theState of California Underground Storage Tank Fund and $800,000 has beenincluded in rate-base and approved by the CPUC for recovery. As ofSeptember 30, 2009, GSWC has an accrued liability for the estimatedadditional cost of $1.1 million to complete the clean-up at the site. Theultimate cost may vary as there are many unknowns in remediation of undergroundgasoline spills and this is an estimate based on currently availableinformation. Management also believes it is probable that the additional costsof remediation will be approved in rate-base by the CPUC.

 

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

 

***Mirant Settlement:***

 

GSWC had previously fileda complaint with the Federal Energy Regulatory Commission (“FERC”) seeking toreduce the $95 per MWh rate in a contract entered into in 2001 with MirantAmericas Energy Marketing (“Mirant Marketing”) to a just and reasonableprice.  In May 2009, GSWC reached asettlement agreement with Mirant Energy Trading, LLC, which acquired the powercontract from Mirant Marketing as a result of a bankruptcy reorganization. Pursuantto that settlement agreement, GSWC filed with the FERC a notice of thewithdrawal of its complaint. The settlement agreement required Mirant EnergyTrading to pay $1 million as a cash settlement to GSWC after the withdrawal ofthe complaint at the FERC became effective. On May 26, 2009, the $1 millioncash settlement was received and GSWC recorded a corresponding reduction topreviously incurred legal costs in the second quarter of 2009, which increasedpretax earnings during the nine months ended September 30, 2009.

 

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

 

Two former officers ofGSWC filed a lawsuit against both AWR and GSWC alleging among other things,wrongful termination and retaliation against the former officers. Managementbelieves that the allegations are without merit and intends to vigorouslydefend against them. The trial is set to commence on February 18, 2010.Based on management’s understanding of all the claims, management does notbelieve that the ultimate resolution of this matter will have a materialadverse effect on AWR’s and GSWC’s financial position, results of operations,or cash flows.

 

Registrant is alsosubject to other ordinary routine litigation incidental to its business.Management believes that rate recovery, proper insurance coverage and reservesare in place to insure against property, general liability and workers’compensation claims incurred in the ordinary course of business. Registrant isunable to predict an estimate of the loss, if any, resulting from any pendingsuits or administrative proceedings.

 

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** **

**Note 9 — Business Segments:**

 

AWR has three reportablesegments, water, electric and contracted services, whereas GSWC has twosegments, water and electric. Within the segments, AWR has three principalbusiness units: water and electric service utility operations conducted throughGSWC, a water-service utility operation conducted through CCWC, and acontracted services unit conducted through ASUS and its subsidiaries. Allactivities of GSWC are geographically located within California. All activitiesof CCWC are located in the state of Arizona. Activities of ASUS and itssubsidiaries are presently conducted in California, Maryland, New Mexico, NorthCarolina, South Carolina, Texas and Virginia. Both GSWC and CCWC are rate-regulated utilities.  ASUS’ wholly-owned subsidiaries are regulatedby the respective state in which the military base on which they operate isprimarily located.  On a stand-alonebasis, AWR has no material assets other than its investments in itssubsidiaries. The tables below set forth information relating to GSWC’soperating segments, CCWC, ASUS and its subsidiaries, and AWR Parent. Certainassets, revenues and expenses have been allocated in the amounts set forth. Theidentifiable assets are net of respective accumulated provisions fordepreciation. Capital additions reflect capital expenditures paid in cash andexclude property installed by developers and conveyed to GSWC or CCWC.

 
| ** **                             | ** ** | **As Of And For The Three Months Ended September 30, 2009** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                      | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                     | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                             | 76,121     |   | $ | 6,563 |   | $ | 2,176 |   | $ | 16,641 |   | $ | — |   | $ | 101,501 |   |
| Operating income  (loss)               |       | 21,122                                                                                                        |       | (669 | ) | (444 | ) | 2,456 |   | (10 | ) | 22,455 |   |
| Interest  expense, net                 |       | 4,964                                                                                                         |       | 559 |   | 102 |   | 86 |   | (23 | ) | 5,688 |   |
| Identifiable  assets                   |       | 771,578                                                                                                       |       | 36,842 |   | 44,802 |   | 3,072 |   | — |   | 856,294 |   |
| Depreciation and  amortization expense |       | 7,151                                                                                                         |       | 565 |   | 510 |   | 174 |   | — |   | 8,400 |   |
| Capital  additions                     |       | 16,812                                                                                                        |       | 340 |   | 370 |   | 1,171 |   | — |   | 18,693 |   |
|                                        |            |                                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Three Months Ended September 30, 2008** | ** ** |
|----------------------------------------|------------|---------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                      | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                     | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                             | 67,316     |   | $ | 6,743 |   | $ | 2,049 |   | $ | 9,153 |   | $ | — |   | $ | 85,261 |   |
| Operating income  (loss)               |       | 18,060                                                                                                        |       | (4,011 | )(1) | 524 |   | (1,418 | ) | (12 | ) | 13,143 |   |
| Interest  expense, net                 |       | 4,101                                                                                                         |       | 633 |   | 96 |   | 204 |   | 101 |   | 5,135 |   |
| Identifiable  assets                   |       | 730,849                                                                                                       |       | 37,803 |   | 44,468 |   | 2,339 |   | — |   | 815,459 |   |
| Depreciation and  amortization expense |       | 6,700                                                                                                         |       | 552 |   | 461 |   | 169 |   | — |   | 7,882 |   |
| Capital  additions                     |       | 19,279                                                                                                        |       | 172 |   | 904 |   | — |   | — |   | 20,355 |   |
|                                        |            |                                                                                                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(1)          Includes $3,741,000 unrealized loss onpurchased power contracts.

 
| ** **                             | ** ** | **As Of And For The Nine Months Ended September 30, 2009** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                     | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                    | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                            | 203,594    |   | $ | 21,083 |   | $ | 5,654 |   | $ | 44,332 |   | $ | — |   | $ | 274,663 |   |
| Operating income  (loss)               |       | 55,740                                                                                                       |       | (1,141 | ) | (680 | ) | 4,539 |   | (71 | ) | 58,387 |   |
| Interest  expense, net                 |       | 13,834                                                                                                       |       | 1,613 |   | 310 |   | 275 |   | 111 |   | 16,143 |   |
| Identifiable  assets                   |       | 771,578                                                                                                      |       | 36,842 |   | 44,802 |   | 3,072 |   | — |   | 856,294 |   |
| Depreciation and  amortization expense |       | 21,456                                                                                                       |       | 1,694 |   | 1,505 |   | 493 |   | — |   | 25,148 |   |
| Capital  additions                     |       | 52,189                                                                                                       |       | 929 |   | 1,194 |   | 1,321 |   | — |   | 55,633 |   |
|                                        |            |                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 
| ** **                             | ** ** | **As Of And For The Nine Months Ended September 30, 2008** | ** ** |
|----------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| ** **                             | ** ** | **GSWC**                                                                                                     | ** ** | **CCWC** | ** ** | **ASUS** | ** ** | **AWR** | ** ** | **Consolidated** | ** ** |
| **(dollars in thousands)**   | ** ** | **Water**                                                                                                    | ** ** | **Electric** | ** ** | **Water** | ** ** | **Contracts** | ** ** | **Parent** | ** ** | **AWR** | ** ** |
| Operating  revenues                    |       | $                                                                                                            | 181,235    |   | $ | 21,754 |   | $ | 5,589 |   | $ | 25,938 |   | $ | — |   | $ | 234,516 |   |
| Operating income  (loss)               |       | 47,971                                                                                                       |       | 1,073 | (2) | 837 |   | (2,567 | ) | (128 | ) | 47,186 |   |
| Interest  expense, net                 |       | 12,174                                                                                                       |       | 1,491 |   | 330 |   | 639 |   | 37 |   | 14,671 |   |
| Identifiable  assets                   |       | 730,849                                                                                                      |       | 37,803 |   | 44,468 |   | 2,339 |   | — |   | 815,459 |   |
| Depreciation and  amortization expense |       | 20,089                                                                                                       |       | 1,657 |   | 1,382 |   | 357 |   | — |   | 23,485 |   |
| Capital  additions                     |       | 54,734                                                                                                       |       | 721 |   | 2,322 |   | 1,210 |   | — |   | 58,987 |   |
|                                        |            |                                                                                                              |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

(2)          Includes $766,000 unrealized gain onpurchased power contracts.

 

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

 

**General**

 

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

 

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

 

GSWCserved 255,028 water customers and 23,055 electric customers atSeptember 30, 2009, or a total of 278,083 customers, compared with 254,689water customers and 23,091 electric customers, or a total of 277,780 customersat September 30, 2008. GSWC’s utility operations exhibit seasonal trends.Although GSWC’s water utility operations have a diversified customer base,residential and commercial customers account for the majority of GSWC’s watersales and revenues. Revenues derived from commercial and residential watercustomers accounted for approximately 91% of total water revenues for the threemonths ended September 30, 2009 and 2008 and approximately 88% for thenine months ended September 30, 2009 and 2008.

 

CCWCis an Arizona public utility company serving 13,397 customers atSeptember 30, 2009, compared with 13,437 customers at September 30,2008. Located in the town of Fountain Hills, Arizona and a portion of the Cityof Scottsdale, Arizona, the majority of CCWC’s customers are residential. TheArizona Corporation Commission (“ACC”) regulates CCWC.

 

ASUS,through its wholly-owned subsidiaries, has contracted with the U.S. governmentto provide water and/or wastewater services, including both the operation andmaintenance and the renewal and replacement of the water and/or wastewatersystems pursuant to 50-year fixed price contracts, which are subject toperiodic prospective price redeterminations and modifications for changes incircumstances.  All of the contracts withthe U.S. government may be terminated, in whole or in part, prior to the end ofthe 50-year term for convenience of the U.S. government or as a result ofdefault or nonperformance by the subsidiary performing the contract. In eitherevent, each Military Utility Privatization Subsidiary  is entitled to recover the remaining amountof its capital investment pursuant to the terms of a termination settlementwith the U.S. government at the time of termination as provided for in  the contract. The contract price for each ofthese contracts is subject to redetermination two years after commencement ofoperations and every three years thereafter under the terms of the contract.Prices are subject to equitable adjustment based upon changes in circumstances,changes in laws and/or regulations, and changes in wages and fringe benefits tothe extent provided in each of the contracts. AWR guarantees performance on all of ASUS’ military contracts.  Pursuant to the terms of these contracts, theMilitary Utility Privatization Subsidiaries operate, as of the effective dateof their respective contracts, the following water and wastewater systems:

 

·                  FBWS - water and wastewater systems atFort Bliss located near El Paso, Texas and extending into southeastern NewMexico effective October 1, 2004;

 

·                  TUS - water and wastewater systems atAndrews Air Force Base in Maryland effective February 1, 2006;

 

·                  ODUS - wastewater systems at Fort Lee inVirginia effective February 23, 2006 and the water and wastewater systemsat Fort Eustis, Fort Monroe and Fort Story in Virginia effective April 3,2006;

 

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·                  PSUS - water and wastewater systems atFort Jackson in South Carolina effective February 16, 2008; and

 

·                  ONUS - water and wastewater systems atFort Bragg, Pope Air Force Base and Camp MacKall, North Carolina effectiveMarch 1, 2008.

 

ASUS and GSWC have alsobeen pursuing opportunities to provide retail water services within the servicearea of the Natomas Central Mutual Water Company (“Natomas”).  Natomas isa California mutual water company which currently provides water service to itsshareholders, primarily for agricultural irrigation in portions of Sacramentoand Sutter counties in northern California. GSWC and Natomas have entered intovarious agreements for the purchase of certain water and water rights that mayallow GSWC the ability to serve portions of Sutter County in the future.

 

**Overview**

 

Registrant’s revenues,operating income and cash flows are earned primarily through delivering potablewater to homes and businesses through approximately 2,900 miles of water distributionpipelines and the delivery of electricity in the Big Bear area of SanBernardino County. Rates charged to customers of GSWC and CCWC are determinedby the CPUC and ACC, respectively. These rates are intended to allow recoveryof operating costs and a reasonable rate of return on capital.  Factors affecting financial performance ofour regulated utilities include the process and timing of setting rates chargedto customers; the ability to recover, and the process for recovering in rates,the costs of distributing water and electricity and our overhead costs;weather; the impact of increased water quality standards and environmentalregulations on the cost of operations and capital expenditures; pressures onwater supply caused by population growth, more stringent water qualitystandards, deterioration in water quality and a variety of other causes;capital expenditures needed to upgrade water systems; and risks associated withlitigation relating to water quality and water supply, including suits initiatedby Registrant to protect its water supply.

 

Operating revenues andincome from contracted services at ASUS and its subsidiaries are earnedprimarily from the operation and maintenance and renewal and replacement of thewater and/or wastewater systems for the U.S. government at various militarybases. All of the operations and maintenance and renewal and replacementcontracts with the U.S. government are 50-year firm, fixed-price contracts withprospective price redeterminations. ASUS also may generate revenues from theconstruction of infrastructure improvements at these bases pursuant to theterms of these 50-year contracts or pursuant to contract modifications.  Additional revenues generated by contractoperations are primarily dependent on these additional constructionactivities.  As a result, ASUS is subjectto risks that are different than those of Registrant’s regulated water andelectric utilities.  ASUS plans to continueseeking contracts for the operation and maintenance and renewal and replacementof water and/or wastewater services at military bases.  Factors affecting the financial performanceof our Military Utility Privatization Subsidiaries include delays in receivingpayments from the U.S. government and the timing of implementation by the U.S.government of redeterminations and/or equitable adjustments of prices undercontracts with the U.S. government.

 

Registrant plans tocontinue to seek additional rate increases in future years to recover operatingand supply costs and receive reasonable returns on invested capital. Capitalexpenditures in future years are expected to remain at much higher levels thandepreciation expense. Cash solely from operations is not expected to besufficient to fund Registrant’s needs for capital expenditures, investments inRegistrant’s contract business and other cash requirements. Registrant expectsto fund a portion of these needs through common stock offerings, as well asfrom long- and short- term borrowings. In May 2009, AWR completed a publicoffering of 1,150,000 shares of its Common Shares, including 150,000 sharesissued upon exercise of an option granted to the underwriters to coverover-allotments, at a price to the public of $31 per share. The net proceedsfrom the offering were $34.0 million, after deductions for underwritingcommissions and discounts, and direct legal and accounting fees. The Companyused the proceeds of the offering to repay short-term debt.  In addition, a senior note was issued by GSWCon March 10, 2009, to CoBank, ACB (“CoBank”). Under the terms of thissenior note, CoBank purchased a 6.7% Senior Note due March 10, 2019 in theaggregate principal amount of $40.0 million from GSWC. The proceeds from thesale of the note to CoBank have been used to pay down short-term borrowings,pending their use to fund capital expenditures.

 

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Net income for the threemonths ended September 30, 2009 was $9.7 million compared to $4.6 millionin the same period of 2008, an increase of 113.0%. Diluted earnings per sharefor the three months ended September 30, 2009 were $0.52 compared to $0.26in the same period of 2008, an increase of $0.26 per share.  Increasing diluted earnings per share werethe following items, all of which are more fully discussed later: (i) a$3.7 million pretax unrealized loss on purchased power contracts, or $0.13 pershare, for the three months ended September 30, 2008 with no correspondingloss in 2009; (ii) an increase in the dollar water margin of $4.7 million,or $0.15 per share; and (iii) the improved financial performance of theMilitary Utility Privatization Subsidiaries resulting in an increase in ASUS’pretax operating income of $3.9 million, or $0.12 per share (including a $1.1million contract modification approved in September 2009 in connectionwith a request for equitable adjustment filed by PSUS in 2008).   These increases to diluted earnings pershare were partially offset by: (i) an increase in operating expenses,other than supply costs, at the Company’s water and electric utilities of $2.2million, or $0.07 per share; (ii) an increase in interest expense, net ofinterest income of $553,000, or $0.02 per share; (iii) the recording of aloss on settlement for removal of wells at CCWC of $760,000, or $0.02 pershare; and (iv) a decrease of $0.03 per share due to an increase in theweighted average number of common shares outstanding resulting from theissuance of 1.1 million shares of AWR’s Common Shares in a public offeringcompleted in May 2009.

 

Net income for the ninemonths ended September 30, 2009 was $26.1 million compared to $19.1million in the same period of 2008, an increase of 36.5%.  Dilutedearnings per share for the nine months ended September 30, 2009 were $1.45compared to $1.10 in the same period of 2008, an increase of $0.35 per share.Increasing diluted earnings per share were the following items, all of whichare more fully discussed later: (i) an increase in the water dollar watermargin of $11.2 million, or $0.37 per share, during the nine months ended September 30,2009 compared to the same period of 2008; (ii) a settlement agreementreached with Mirant Energy Trading, LLC and the recording of the $1.0 millionproceeds received, or $0.03 per share, as a reduction in legal expenses; (iii) theimproved financial performance of the Military Utility PrivatizationSubsidiaries resulting in an increase in ASUS’s pretax operating income of $7.1million, or $0.23 per share (including the $1.1 million modification mentionedabove);  and (iv) a decrease in theeffective tax rate (“ETR”) and a tax benefit of $918,000 recorded in the firstquarter of 2009 resulting from new California apportionment laws as well asrefining certain related estimates, which favorably impacted earnings by $0.07per share.  These increases to dilutedearnings per share were partially offset by: (i) a $766,000 pretaxunrealized gain on purchased power contracts in 2008, or $0.03 per share, forthe nine months ended September 30, 2008 with no corresponding gain in2009; (ii) an increase in operating expenses, other than supply costs, atthe Company’s water and electric utilities of $6.3 million, or $0.21 per share(excluding the Mirant settlement discussed above), (iii) the recording ofa $760,000 loss on settlement for the removal of wells at CCWC, or $0.02 pershare; (iv) an increase in interest expenses net of interest income of$1.5 million, or $0.05 per share;  and (v) adecrease of $0.04 per share due to an increase in the weighted average numberof common shares outstanding resulting from the issuance of 1.1 million sharesof AWR’s Common Shares in a public offering completed in May 2009.

 

Unrealized gains andlosses on previous purchased power contracts impacted GSWC’s earnings since thecontracts qualified as derivative instruments under the accounting guidance forderivatives.  Historical purchased powercontracts that impacted earnings terminated at December 31, 2008. GSWC entered into a new purchased power contracteffective January 1, 2009 which is also subject to derivative accountingtreatment.  In May 2009, the CPUCissued a final decision approving the new purchased power contract andauthorizing GSWC to establish the memorandum account to track unrealized gainsand losses on the new contract throughout the term of the contract.   Accordingly, at September 30, 2009there was a $7.0 million cumulative unrealized loss which has been included inthe memorandum account, therefore not impacting GSWC’s earnings.  There were $3.7 million of pretax unrealized lossesand $766,000 of pretax unrealized gains on purchased power contracts includedin earnings for the three and nine months ended September 30, 2008,respectively.  Diluted earnings for thethree and nine months ended September 30, 2008 were $0.26 per share and$1.10 per share, respectively. Eliminating the effects of the unrealizedderivative loss and gains, adjusted diluted earnings per share for the threeand nine months ended September 30, 2008 would have increased by$0.13 and decreased by $0.03 per share, respectively, to $0.39 and $1.07 pershare, respectively.

 

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**SummaryResults by Segment**

 

AWR has three reportablesegments: water, electric and contracts operation. Within the segments, AWR hasthree principal business units: water and electric service utility operationsconducted through GSWC, a water-service utility operation conducted throughCCWC, and a contracted services unit through ASUS and its subsidiaries.

 

*Third Quarter Results*

 

The tables below setforth summaries of the results by segment (amounts in thousands):

 
| ** **             | ** ** | **Operating  Revenues** | ** ** | **Pretax  Operating Income** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **3  Months**           | ** ** | **3  Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**               | ** ** | **Ended**                    | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **9/30/2009**           | ** ** | **9/30/2008**                | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                       | 78,297     |                         | $          | 69,365 |   | $ | 8,932 |   | 12.9 | % | $ | 20,678 |   | $ | 18,584 |   | $ | 2,094 |   | 11.3 | % |
| Electric               |       | 6,563                   |       | 6,743                        |       | (180 | ) | -2.7 | % | (669 | ) | (4,011 | ) | 3,342 |   | -83.3 | % |
| Contracted services    |       | 16,641                  |       | 9,153                        |       | 7,488 |   | 81.8 | % | 2,456 |   | (1,418 | ) | 3,874 |   | -273.2 | % |
| AWR parent             |       | —                  |       | —                       |       | — |   | — |   | (10 | ) | (12 | ) | 2 |   | -16.7 | % |
| Totals from operations |       | $                       | 101,501    |                         | $          | 85,261 |   | $ | 16,240 |   | 19.0 | % | $ | 22,455 |   | $ | 13,143 |   | $ | 9,312 |   | 70.9 | % |

 

***Water-***For thethree months ended September 30, 2009, pretax operating income for waterincreased by $2.1 million, or 11.3%, primarily due to a $4.7 million increasein the water dollar margin as compared to the same period in 2008, partiallyoffset by an increase in operating expenses, including higher pensioncosts.  The dollar water margin increaseddue to higher water rates approved by the CPUC subsequent to September 30,2008.  These higher water rates increasedwater revenue by $2.9 million, partially offset by lower actualconsumption.  In addition, as a result ofimplementing the Water Revenue Adjustment Mechanism (“WRAM”) accounts inRegions II and III in late November 2008 and in Region I in September 2009,GSWC recorded $8.6 million of additional revenues for the three months ended September 30,2009.  The revenue requirement andvolumetric revenues are adopted as part of a General Rate Case (“GRC”) everythree years.  We expect to file Region I’s next GRC in January 2010,with rates effective January 2011 and 2012, and a GRC for all three waterregions in July of 2011 with rates effective January 2013.  Aspart of future GRCs, the CPUC is expected to adopt new volumetric revenuesbased on historical usage patterns and the revenue requirement adopted in theseGRCs.

 

Although the recording of the WRAM added $8.6 million ofwater revenues, this favorable impact to earnings was reduced by $1.6 millionof water supply over-collection costs tracked in the Modified Cost BalancingAccount (“MCBA”), also implemented in late November 2008 for Regions IIand III and in September 2009 for Region I.  The over-collection in the MCBA account isdue to: (i) lower consumption in the third quarter of 2009 as compared tothe consumption level adopted by the CPUC, and (ii) a lower percentage ofpurchased water in the supply mix during 2009 when compared to the supply mixincluded in customer rates, partially offset by increases in rates charged byGSWC’s suppliers. The implementation of the WRAM and MCBA help mitigatefluctuations in the Company’s earnings caused by changes in the volume of watersold and supply costs.

 

***Electric–***For thethree months ended September 30, 2009 as compared to the same period in2008, pretax operating income from electric operations increased by $3.3million due in large part to a $3.7 million pretax unrealized loss on purchasedpower contracts recorded in 2008.  Thisunrealized loss on purchased power contracts decreased operating income byapproximately $3.7 million during the third quarter of 2008, or $0.13 pershare, with no corresponding loss in 2009. As previously discussed, the purchased power contract that resulted inunrealized gains and losses to BVES’ earnings terminated at December 31,2008.  Excluding the effects of the unrealizedloss in 2008, BVES pretax operating loss increased by approximately $400,000from $270,000 for the three months ended September 30, 2008 to $669,000for the same period of 2009. This was primarily due to an increase in administrativeand general expenses resulting from higher outside legal and consulting costsassociated with the general rate case.

 

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***ContractedServices -***Forthe three months ended September 30, 2009, pretax operating income forcontracted services increased by $3.9 million, or $0.12 per share.  This was primarily due to an interim increasein operations and maintenance revenues at FBWS, an increase in constructionrevenues at FBWS and ODUS, and lower overall operating expenses. In addition,on September 30, 2009, the U.S. government approved $1.1 million inrevenues for a Request for Equitable Adjustment (“REA”)filed by PSUS for emergency construction costs mostly incurred in 2008.  As a result of the approved REA, ASUSrecorded $1.1 million in additional construction revenues and operating incomefor the three months ended September 30, 2009.  ONUS also had an increase of $273,000 in pretax operatingincome for the three months ended September 30, 2009 due to loweroperating expenses.

 

The timely receipt ofprice redeterminations continues to be critical in order for ASUS to recoverincreasing costs for operating and maintaining the water and wastewater systemsat the military bases.  In addition,higher allocations of expenses from the General Office and ASUS headquarters tothe Military Utility Privatization Subsidiaries were not contemplated at thetime the contracts with the U.S. government were negotiated and will beaddressed in future price redeterminations. Under the terms of these contracts, the contract price is subject toprice redetermination two years after commencement of operations and everythree years thereafter.

 

Redeterminations havebeen submitted and are under review by the U.S. government for operations ofODUS and TUS in Virginia and Maryland, respectively.  The price redeterminations for ODUS and TUSare expected to be completed in late 2009 and in 2010, respectively.  Pending redetermination of prices, ASUS hasreceived interim inflation adjustments during 2008 to the management fees foroperating and maintaining the water and wastewater systems for military basesin Virginia, and the wastewater system at Fort Lee also in Virginia effectiveon the second anniversary of the date when ASUS began operating these bases (February 23,2008 for Fort Lee and April 3, 2008 for the other three bases).

 

In March 2009,ONUS filed an REA related to a joint inventory report for Fort Bragg in NorthCarolina.  The report indicated thequantity of the ONUS infrastructure to be about 40% greater than what wasassumed under the original 50-year contract. The REA is expected to be resolved during the fourth quarter of2009.  First price redeterminationfilings for Fort Jackson and Fort Bragg are also expected to be filed by PSUSand ONUS, respectively, during the fourth quarter of 2009.

 

FBWShas experienced delays in the redetermination of prices at Fort Bliss followingcompletion of the first two years of operation in October 2006.  At Fort Bliss, management fees for operationand maintenance of the water and wastewater systems are based on cost levelsprevailing in 2003 when the contract with the U.S. government was bid.   Further, the contract pricing was also basedon assumptions about the size and age of the infrastructure to be operated andmaintained over the 50-year contract.  AnREA has been filed as a claim with the U.S. government to adequately reflectthe amount of assets included in the infrastructure at Fort Bliss, which issubstantially more than originally estimated by the U.S. government as part ofits solicitation for this contract.  In December 2008,the U.S. government approved an interim adjustment for FBWS which increased themonthly water and wastewater fees by 50% and 59%, respectively, related tooperating and maintaining the Fort Bliss systems. The increase was retroactiveto October 1, 2008 and expired on September 30, 2009.  FBWS is negotiating with the government to extendthe interim increases while continuing negotiations to finalize the adjustmentnecessary due to the increased infrastructure. FBWS also intends to file itsfirst price redetermination request for Fort Bliss during the fourth quarter of2009 followed by the second redetermination request shortly thereafter.

 

Theseprice redeterminations and equitable adjustments, which include adjustments toreflect changes in operating conditions and infrastructure levels from thatassumed at the time of the execution of the contracts, as well as inflation incosts, are expected to provide added revenues prospectively to help offsetincreased costs and provide Registrant the opportunity to generate positiveoperating income at its Military Utility Privatization Subsidiaries.  As of September 30, 2009, ASUS has $1.1million of goodwill, which may be at risk for potential impairment if requestedprice redeterminations and equitable adjustments that have not yet beenapproved, are not received.

 

In September 2009,the U.S. government issued contract modifications to subsidiaries of ASUS. Themodifications provided funding for $7.3 million in new construction projects atFBWS, ODUS, TUS and ONUS.  The majorityof this work will be performed during calendar year 2010.  Earnings and cash flows from amendments andmodifications for additional construction projects to the original 50-yearcontracts with the U.S. government may or may not continue in future periods.

 

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*Year-to-Date Results*

 

The tables below setforth summaries of the results by segment (amounts in thousands):

 
| ** **             | ** ** | **Operating  Revenues** | ** ** | **Pretax  Operating Income** | ** ** |
|------------------------|------------|-------------------------|------------|------------------------------|------------|
| ** **             | ** ** | **9  Months**           | ** ** | **9  Months**                | ** ** | ** ** | ** ** | ** ** | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **             | ** ** | **Ended**               | ** ** | **Ended**                    | ** ** | **$** | ** ** | **%** | ** ** | **Ended** | ** ** | **Ended** | ** ** | **$** | ** ** | **%** | ** ** |
| ** **             | ** ** | **9/30/2009**           | ** ** | **9/30/2008**                | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
|                   |       |                    |       |                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Water                  |       | $                       | 209,248    |                         | $          | 186,824 |   | $ | 22,424 |   | 12.0 | % | $ | 55,060 |   | $ | 48,808 |   | $ | 6,252 |   | 12.8 | % |
| Electric               |       | 21,083                  |       | 21,754                       |       | (671 | ) | -3.1 | % | (1,141 | ) | 1,073 |   | (2,214 | ) | -206.3 | % |
| Contracted services    |       | 44,332                  |       | 25,938                       |       | 18,394 |   | 70.9 | % | 4,539 |   | (2,567 | ) | 7,106 |   | -276.8 | % |
| AWR parent             |       | —                  |       | —                       |       | — |   | — |   | (71 | ) | (128 | ) | 57 |   | -44.5 | % |
| Totals from operations |       | $                       | 274,663    |                         | $          | 234,516 |   | $ | 40,147 |   | 17.1 | % | $ | 58,387 |   | $ | 47,186 |   | $ | 11,201 |   | 23.7 | % |

 

***Water-***Pretaxoperating income for water increased by $6.3 million, or 12.8%, primarily dueto an $11.2 million increase in the dollar water margin as compared to the sameperiod in 2008, partially offset by an increase in operating expenses includinghigher pension costs.  The dollar watermargin increased due to higher water rates approved by the CPUC subsequent to September 30,2008.  These higher water rates increasedwater revenue by approximately $6.9 million, partially offset by lower actualconsumption.  In addition, as a result ofimplementing the WRAM accounts in all its water regions, GSWC recorded $15.2million of additional revenues for the nine months ended September 30,2009.

 

Althoughthe recording of the WRAM added $15.2 million of water revenues, this favorableimpact to earnings was reduced by $3.4 million of water supply over-collectioncosts tracked in the MCBA account, also implemented in all of GSWC’s waterregions.  The over-collection in the MCBAaccount is due to: (i) lower consumption for the nine months ended September 30,2009 as compared to the consumption level approved by the CPUC, and (ii) alower percentage of purchased water in the supply mix during 2009 when comparedto the supply mix included in customer rates, partially offset by increases inrates charged by GSWC’s suppliers. The implementation of the WRAM and MCBA helpmitigate fluctuations in the Company’s earnings caused by changes in the volumeof water sold and supply costs.

 

In addition, during thenine months ended September 30, 2009, GSWC recorded $3.1 million ofadditional water revenues included in the Water Conservation Memorandum Account(“WCMA”) for all of its water regions. The CPUC had approved an advice letterfiling in a separate proceeding to allow GSWC to create and implement a WCMA totrack the extraordinary expenses and revenue shortfall associated withconservation measures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008and was used to track the revenue shortfall until the WRAM was implemented forRegions II and III on November 25, 2008 and for Region I on September 1,2009.  At November 24, 2008,approximately $2.0 million of net under-collections was included in the WCMAfor Regions II and III prior to the implementation of the WRAM. On April 16,2009, the CPUC approved the advice letter filed by GSWC to recover the $2.0million included in the WCMA for Regions II and III and authorized GSWC to establisha 12-month surcharge to customers’ bills. The surcharge went into effect on April 21,2009.  Accordingly, GSWC established a$2.0 million regulatory asset, which was recorded as additional water revenuesduring the second quarter of 2009. In addition, GSWC has established a $1.1million regulatory asset for Region I’s WCMA balance incurred during the periodof August 18, 2008 through August 31, 2009 which we believe is alsonow probable of recovery.  In October 2009,GSWC filed advice letters for recovery of Region I’s WCMA, through a 12-monthsurcharge, for amounts incurred during this period.

 

***Electric–***For thenine months ended September 30, 2009, pretax operating income fromelectric operations decreased by $2.2 million due in part to a decrease in thedollar electric margin of $307,000 as a result of lower usage as compared tothe same period last year.  There wasalso an increase in operating expenses including higher outsideconsulting and legal costs related to the general rate case and the purchasedpower contract, and higher franchise fees. However, these increases in operating costs were partially offset by therecording of the $1.0 million in proceeds received in the settlement agreement withMirant Energy Trading, LLC in May 2009, which reduced previously incurredlegal costs.  In addition, pretax operating income for the ninemonths ended September 30, 2008 included a $766,000 pretax unrealized gainon purchased power contracts with no corresponding gain in 2009.

 

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***ContractedServices -***Forthe nine months ended September 30, 2009, pretax operating income forcontracted services increased by $7.1 million, or $0.23 per share.  This was primarily due to an interim increasein operations and maintenance revenues at FBWS, an increase in new constructionprojects at FBWS and ODUS, and lower overall operating expenses.  In addition, on September 30, 2009, theU.S. government approved $1.1 million in revenues for an REAfiled by PSUS for emergency construction costs mostly incurred in 2008.  As a result of the approved REA, ASUSrecorded $1.1 million in additional construction revenues and operating incomefor the nine months ended September 30, 2009. During the nine months ended September 30, 2009,Fort Bragg continued to operate at a loss; however, the pretax operating lossfor the nine months ended September 30, 2009 decreased by $396,000 ascompared to the same period in 2008 due primarily to an increase inconstruction revenues.

 

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

 

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***ConsolidatedResults of Operations — Three Months Ended September 30, 2009 and 2008(amounts in thousands):***

 
| ** **                                       | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                       | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                               |       |          |       |          |       |       |       |       |       |
| Water                                            |       | $             | 78,297     |          | $          | 69,365     |       | $          | 8,932      |   | 12.9 | % |
| Electric                                         |       | 6,563         |       | 6,743         |       | (180       | )          | -2.7       | %          |
| Contracted services                              |       | 16,641        |       | 9,153         |       | 7,488      |       | 81.8       | %          |
| Total operating revenues                         |       | 101,501       |       | 85,261        |       | 16,240     |       | 19.0       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                               |       |          |       |          |       |       |       |       |       |
| Water purchased                                  |       | 14,151        |       | 15,087        |       | (936       | )          | -6.2       | %          |
| Power purchased for pumping                      |       | 3,335         |       | 3,484         |       | (149       | )          | -4.3       | %          |
| Groundwater production assessment                |       | 3,247         |       | 2,791         |       | 456        |       | 16.3       | %          |
| Power purchased for resale                       |       | 2,793         |       | 3,345         |       | (552       | )          | -16.5      | %          |
| Unrealized loss on purchased power contracts     |       | —        |       | 3,741         |       | (3,741     | )          | -100.0     | %          |
| Supply cost balancing accounts                   |       | 4,806         |       | (490          | )          | 5,296      |       | -1080.8    | %          |
| Other operation expenses                         |       | 7,663         |       | 7,366         |       | 297        |       | 4.0        | %          |
| Administrative and general expenses              |       | 17,018        |       | 16,307        |       | 711        |       | 4.4        | %          |
| Depreciation and amortization                    |       | 8,400         |       | 7,882         |       | 518        |       | 6.6        | %          |
| Maintenance                                      |       | 4,052         |       | 4,027         |       | 25         |       | 0.6        | %          |
| Property and other taxes                         |       | 3,555         |       | 3,461         |       | 94         |       | 2.7        | %          |
| ASUS construction expenses                       |       | 9,266         |       | 5,117         |       | 4,149      |       | 81.1       | %          |
| Loss on settlement for removal of wells          |       | 760           |       | —        |       | 760        |       | 100.0      | %          |
| Total operating expenses                         |       | 79,046        |       | 72,118        |       | 6,928      |       | 9.6        | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                 |       | 22,455        |       | 13,143        |       | 9,312      |       | 70.9       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                        |       |          |       |          |       |       |       |       |       |
| Interest expense                                 |       | (5,861        | )          | (5,428        | )          | (433       | )          | 8.0        | %          |
| Interest income                                  |       | 173           |       | 293           |       | (120       | )          | -41.0      | %          |
| Other                                            |       | 38            |       | (30           | )          | 68         |       | -226.7     | %          |
|                                             |       | (5,650        | )          | (5,165        | )          | (485       | )          | 9.4        | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE |       | 16,805        |       | 7,978         |       | 8,827      |       | 110.6      | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| Income tax expense                               |       | 7,107         |       | 3,426         |       | 3,681      |       | 107.4      | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| NET INCOME                                       |       | $             | 9,698      |          | $          | 4,552      |       | $          | 5,146      |   | 113.0 | % |

 

Net income for the threemonths ended September 30, 2009 was $9.7 million, equivalent to $0.52 percommon share on a basic and fully diluted basis, compared to $4.6 million or$0.26 per common share on a basic and fully diluted basis for the three monthsended September 30, 2008.

 

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Impacting thecomparability in the results of the two periods are the following items whichincreased diluted earnings per share by $0.26:

 

·                  An unrealized loss on purchased power contracts in2008 which decreased pretax income by $3.7 million, or $0.13 per share.  These purchased power contracts expired on December 31,2008 and GSWC began taking delivery of power under a new contract effective January 1,2009.  As previously discussed, the CPUCissued a decision approving the new contract and authorizing GSWC to establish a memorandum account to track unrealizedgains and losses on the new contract throughout the term of the contract.   Accordingly, during the three months ended September 30,2009, there was a $1.5 million unrealized gain which has been included in thememorandum account, therefore not impacting GSWC’s earnings.

 

·                  The dollar water margin increased by $4.7 million, or$0.15 per share, during the three months ended September 30, 2009 ascompared to the same period in 2008 due primarily to:  (i) higher water rates approved by theCPUC effective January 1, 2009; (ii)  the water margin impact ofrecording the WRAM and MCBA of approximately $7.0 million, or $0.22 per share;and (iii) the recording of  $297,000in Region I’s Water Conservation Memorandum Accounts. These increases werepartially offset by lower water consumption of approximately 9% when comparedto same period in 2008.

 

·                  Operating expenses, other than supplycosts, increased at the Company’s water and electric utilities by $2.2 million,or $0.07 per share, for the third quarter of 2009 due to: (i) an increaseof $829,000 in pension expenses resulting from an increase in the underfundedposition of the pension plan; (ii) an increase of $721,000 in watertreatment costs and; (iii) an increase of $514,000 in depreciation andamortization expense.

 

·                  Pretax operating income for contractedservices increased by $3.9 million, or $0.12 per share, during the three monthsended September 30, 2009 due primarily to an increase in specialconstruction projects at FBWS and ODUS, improved performance at PSUS and ONUSas compared to the prior year, and the receipt of an equitable adjustment of$1.1 million at PSUS for emergency construction costs previously incurred atFort Jackson, South Carolina.  Themajority of the costs on these projects at Fort Jackson had been previouslyrecognized by ASUS as construction expense in 2008.  The recognition of construction revenues waspending the approval of the request for equitable adjustment by the U.S.government.  As a result of thismodification, ASUS recognized construction revenues and operating income of$1.1 million during the third quarter of 2009.

 

·                  The recording of a loss at CCWC on thesettlement for removal of wells of $760,000, or $0.02 per share, resulting froma decision issued by the ACC on October 8, 2009.

 

·                  An increase in interest expense, net ofinterest income of $553,000, or $0.02 per share, due to an increase inlong-term debt resulting from the issuance of $40.0 million of notes in March 2009and the recording of $159,000 in the interest rate balancing account asapproved in July 2009 in the cost of capital proceeding.

 

·                  A decrease of $0.03 per share due to anincrease in the weighted average number of common shares outstanding resultingfrom the issuance of 1.1 million shares of AWR’s Common Shares in a publicoffering completed in May 2009.

 

***Operating Revenues***

 

*Water*

 

Forthe three months ended September 30, 2009, revenues from water operationsincreased by 12.9% to $78.3 million, compared to $69.4 million for the threemonths ended September 30, 2008. Contributing to this increase were rateincreases approved by the CPUC effective January 1, 2009, which addedapproximately $2.9 million to water revenues in the third quarter of 2009.  In addition, as a result of the implementation ofthe WRAM accounts for Regions II andIII in late November of 2008 and September 2009for Region I, GSWCrecorded $8.6 million of additional revenues to adjust the 2009 third quarterrevenues to the consumption levels adopted by the CPUC. Furthermore, GSWCrecorded $297,000 of additional revenues included in the WCMA conservationmemorandum accounts for Region I. Finally, there was an increase in water revenues of $1.8 million due tosurcharges approved by the CPUC in effect to recover under-collections insupply costs. These increases were 

 

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partially offset by $4.4 millionresulting from a decrease in actual consumption of approximately 9% when compared to the third quarter of 2008.

 

The revenue requirementand volumetric revenues will be adopted as part of a GRC every three years.Region I will file its next GRC in January 2010 for new rates in 2011 and2012. A GRC for all three water regions will be filed in July of 2011 withrates effective January 2013.  As part of future GRCs, the CPUC isexpected to adopt new volumetric revenues based on historical usage patternsand the revenue requirement adopted in these GRCs.

 

*Electric*

 

For the three monthsended September 30, 2009, revenues from electric operations decreased by2.7% to $6.6 million compared to $6.7 million for the three months ended September 30,2008 due primarily to a decrease in electric usage.

 

*ContractedServices*

 

Revenuesfrom contracted services are comprised of construction revenues (includingrenewals and replacements) and management fees for operating and maintainingthe water and/or wastewater systems at military bases.  For the three months ended September 30,2009, revenues from contracted services increased by $7.5 million, or 81.8%, to$16.6 million compared to $9.2 million for the three months ended September 30,2008 primarily due to higher construction revenues.  Construction revenues increased by $7.3million primarily related to special projects at FBWS and ODUS.  Construction revenues at bases served bythese subsidiaries increased collectively by $6.1 million (including theconstruction revenues from special projects) as compared to the third quarterof 2008.   Earnings and cash flows fromamendments and modifications to the original 50-year contracts with the U.S.government may or may not continue in future periods.  In addition, an REA for $1.1 million wasapproved by the U.S. government and recorded as construction revenue during thethird quarter of 2009 for emergency costs incurred and expensed largely in 2008at PSUS.

 

Forthe three months ended September 30, 2009, management fees for operatingand maintaining the various systems totaled $3.4 million as compared to $3.1million for the three months ended September 30, 2008.  In December 2008, the U.S. governmentauthorized an interim adjustment for FBWS which increased the monthly water andwastewater fees by 50% and 59%, respectively, pending resolution of FBWS’ REAfiled as a claim, due to inventory adjustments. This resulted in an increase of approximately $289,000 to FBWS’management fees for operating and maintaining the system for the third quarterof 2009 as compared to the third quarter of 2008.

 

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

 

***Operating Expenses:***

 

***Supply Costs***

 

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

 

Total supply costscomprise the largest segment of total operating expenses. Supply costsaccounted for approximately 35.8% and 33.6% of total operating expenses for thethree months ended September 30, 2009 and 2008, respectively.

 

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

 
| ** **                                          | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                    |       | $             | 78,297     |          | $          | 69,365     |       | $          | 8,932      |   | 12.9 | % |
| WATER SUPPLY COSTS:                                 |       |          |       |          |       |       |       |       |       |
| Water purchased **(****1)**                         |       | $             | 14,151     |          | $          | 15,087     |       | $          | (936       | ) | -6.2 | % |
| Power purchased for pumping **(****1)**             |       | 3,335         |       | 3,484         |       | (149       | )          | -4.3       | %          |
| Groundwater production assessment **(****1)**       |       | 3,247         |       | 2,791         |       | 456        |       | 16.3       | %          |
| Water supply cost balancing accounts **(****1)**    |       | 3,970         |       | (907          | )          | 4,877      |       | -537.7     | %          |
| TOTAL WATER SUPPLY COSTS                            |       | $             | 24,703     |          | $          | 20,455     |       | $          | 4,248      |   | 20.8 | % |
| WATER MARGIN**(****2)**                             |       | $             | 53,594     |          | $          | 48,910     |       | $          | 4,684      |   | 9.6 | % |
| PERCENT MARGIN - WATER                              |       | 68.4          | %          | 70.5          | %          |       |       |       |       |
|                                                |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**                 |       | $             | 6,563      |          | $          | 6,743      |       | $          | (180       | ) | -2.7 | % |
| ELECTRIC SUPPLY COSTS:                              |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(****1)**              |       | $             | 2,793      |          | $          | 3,345      |       | $          | (552       | ) | -16.5 | % |
| Electric supply cost balancing accounts **(****1)** |       | 836           |       | 417           |       | 419        |       | 100.5      | %          |
| TOTAL ELECTRIC SUPPLY COSTS                         |       | $             | 3,629      |          | $          | 3,762      |       | $          | (133       | ) | -3.5 | % |
| ELECTRIC MARGIN **(****2)**                         |       | $             | 2,934      |          | $          | 2,981      |       | $          | (47        | ) | -1.6 | % |
| PERCENT MARGIN - ELECTRIC                           |       | 44.7          | %          | 44.2          | %          |       |       |       |       |

 

----

(1)                                 As reported on AWR’s ConsolidatedStatements of Income, except for supply cost balancing accounts. The sum ofwater and electric supply cost balancing accounts in the table above are shownon AWR’s Consolidated Statements of Income and totaled $4,806,000 and($490,000) for the three months ended September 30, 2009 and 2008,respectively.

 

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

 

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

 

Prior to November 2008,changes in the water resource mix between water supplied from purchased sourcesand that supplied from Registrant’s wells would increase/decrease actualsupply-related costs relative to the mix approved for recovery through rates,thereby impacting earnings either negatively or positively.   On August 21, 2008, the CPUCissued a final decision which approved the establishment of a modified costbalancing account that allows recovery of supply costs for changes in watersupply mix.  GSWC implemented the MCBA inlate November 2008 for Regions II and III and in September 2009 forRegion I prospectively in connection with the new conservation rate design andthe implementation of a WRAM.  Under theMCBA, GSWC began tracking 

 

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adopted expense levelsfor purchased water, purchased power and pump taxes, as established by theCPUC. Variances (which include the effects of changes in both rate and volume)between adopted and actual purchased water, purchased power, and pump taxexpenses are recorded as a component of the supply cost balancing accountprovision.  The amount of such varianceswill be recovered from or refunded to GSWC’s customers at a later date. This isreflected with an offsetting entry to a regulatory asset or liability balancingaccount (tracked individually for each region).

 

For the three monthsended September 30, 2009, 40.4% of the Company’s water supply mix waspurchased as compared to 44.3% purchased for the three months ended September 30,2008.  However, as noted above, GSWCimplemented the MCBA for Regions II and III in November 2008 and forRegion I in September 2009, which prospectively eliminates the effects onearnings of changes in the water supply mix. The adopted percentage of purchased water for the three months ended September 30, 2009at Regions I, II and III was 23.7%, 65.0% and 48.8%, respectively, ascompared to actual purchased water of 23.3%, 42.6% and 45.9%, respectively, forthe third quarter of 2009.  Region I’s  supply mix consists primarily of pumpedwater.  The significant variance inRegion II’s actual mix compared to the mix approved by the CPUC resulted in anover-collection in the MCBA account. This contributed to the overall decreasein the water margin percent to 68.4% in the third quarter of 2009 compared to70.5% in the same period of 2008 since GSWC no longer receives any benefit froma more favorable supply mix than that approved by the CPUC.

 

Purchased water costs forthe three months ended September 30, 2009 decreased by 6.2% to $14.2million as compared to $15.1 million in the same period of 2008.  The decrease in purchased water costs was dueto lower customer usage, partially offset by higher water rates charged fromwholesale suppliers.

 

For the three monthsended September 30, 2009, power purchased for pumping decreased to $3.3million compared to $3.5 million for the same period of 2008.  Lower customer demand was partially offset byincreases in supplier rates and changes in the actual supply mix, as discussedabove.  Groundwater production assessmentsincreased by 16.3% due primarily to increases in assessment rates (pump taxrates) levied against groundwater production, effective July 2009.  In particular, Region II’s average pump taxrates increased by approximately 19% or $336,000, between the two periods.  The MCBA tracks the increases in pump taxrates for future recovery in water rates. These increases in groundwater production assessments were partiallyoffset by lower customer demand.

 

An increase of $4.9million in the water supply cost balancing account provision during the threemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily caused by: (i) a $1.8 million increase in the amortization ofthe water supply cost balancing accounts for surcharges currently in effect; (ii) therecording of $1.6 million in the MCBA accounts; and (iii) a net decreaseof $1.5 million of under-collections in 2009 (related to Region I in July andAugust 2009) compared to the same period in 2008.

 

For the three monthsended September 30, 2009, the cost of power purchased for resale tocustomers in GSWC’s BVES division decreased by 16.5% to $2.8 million comparedto $3.3 million for the three months ended September 30, 2008 reflectinglower customer demand.  In addition, GSWC began receiving powerunder a new purchased power contract in January 1, 2009.   Themain product under the new contract provides for 13 MWs of electric energy at afixed price of $63.75 per MWh during 2009 as compared to $74.65 during2008.  The decrease in the price ofpurchased power is reflected in the electric supply cost balancing accountresulting in no change to the dollar margin forelectric services.

 

***Unrealized Loss on Purchased Power Contracts***

 

Pursuant to theaccounting guidance for derivatives, the unrealized loss on purchased powercontracts during 2008 represented losses recorded for GSWC’s purchased poweragreements with Morgan Stanley Capital Group, Inc. There was a $3.7million pretax unrealized loss on purchased power contracts for the threemonths ended September 30, 2008. These contracts terminated at December 31,2008. GSWC began receiving power under the new purchasedpower contract in January 1, 2009. In May 2009, the CPUC issued a final decision approving thecontract and authorizing the memorandum account to track unrealized gains andlosses.  Accordingly, a cumulativeunrealized loss of $7.0 million as of September 30, 2009 has been includedin the memorandum account and did not impact GSWC’s earnings.

 

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*** ***

***Other Operation Expenses***

 

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

 
| ** **                     | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 6,206      |          | $          | 5,656      |       | $          | 550        |   | 9.7 | % |
| Electric Services              |       | 549           |       | 580           |       | (31        | )          | -5.3       | %          |
| Contracted Services            |       | 908           |       | 1,130         |       | (222       | )          | -19.6      | %          |
| Total other operation expenses |       | $             | 7,663      |          | $          | 7,366      |       | $          | 297        |   | 4.0 | % |

 

For the three months ended September 30, 2009,other operation expenses for water services increased by 9.7% due primarilyto:  (i) higher chemical and watertreatment costs, including supplies and materials, as a result of an increasein well production primarily at GSWC’s Region II, and (ii) an increase of$239,000 in operation labor costs and other related miscellaneous employeebenefits. These increases were partially offset by a decrease in equipmentrental and postage costs of $139,000.

 

There was a decrease of $31,000 in other operationexpenses for electric services due primarily to a decrease of $19,000 in baddebt expense.  Other miscellaneousexpenses decreased by $12,000.

 

Contractedservices experienced decreases in other operation expenses of $222,000 mainlydue to a decrease in outside services of $173,000, primarily related to PSUSand TUS.  In addition, transition costsof $110,000 were incurred in the third quarter of 2008 due to the commencementof the operation of water and wastewater systems at military bases in NorthCarolina and South Carolina, which are non-recurring. This was partially offsetby an increase in supplies and materials expense of $63,000.

 

***Administrative and General Expenses***

 

Administrative andgeneral expenses include payroll related to administrative and generalfunctions, the related employee benefits charged to expense accounts, insuranceexpenses, outside legal and consulting fees, regulatory utility commissionexpenses, expenses associated with being a public company, and generalcorporate expenses. For the three months ended September 30, 2009 and2008, administrative and general expenses by segment, including AWR (parent),consisted of the following (amounts in thousands):

 
| ** **                                | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 12,064     |          | $          | 11,771     |       | $          | 293        |   | 2.5 | % |
| Electric Services                         |       | 2,061         |       | 1,674         |       | 387        |       | 23.1       | %          |
| Contracted Services                       |       | 2,883         |       | 2,850         |       | 33         |       | 1.2        | %          |
| AWR (parent)                              |       | 10            |       | 12            |       | (2         | )          | -16.7      | %          |
| Total administrative and general expenses |       | $             | 17,018     |          | $          | 16,307     |       | $          | 711        |   | 4.4 | % |

 

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For the three months ended September 30,2009, administrative and general expenses increased by $293,000 in waterservices compared to the three months ended September 30, 2008 dueprimarily to an increase of $812,000 in pension expenses resulting from a reduction in the fairvalue of plan assets in 2008 caused by market conditions at the time.  There was also an increase in labor costs andother employee benefits of $173,000 due tohigher wages largely related to Registrant’s annual performance-based salaryreview program.  These increases werepartially offset by $585,000 of additional compensation expense incurred in2008 relating to the resignation of a GSWC officer effective September 26,2008 in connection with a Resignation Agreement and General Release of Claims.This expense did not recur in 2009. In addition, outside services and othermiscellaneous expenses decreased by $107,000. However, outside legal costs at GSWC may increasein the fourth quarter of 2009 and into 2010 as a result of ongoing legalproceedings.

 

For the three monthsended September 30, 2009, administrative and general expenses increased by$387,000 in electric services compared to the three months ended September 30,2009 primarily due to higher rate case costs of $241,000 associated with thecurrent rate case. There was also a $73,000 increase in wages and relatedbenefits, a $62,000 increase in allocation of costs from corporate headquartersto BVES, and $11,000 in other miscellaneous expenses.

 

For thethree months ended September 30, 2009 administrative and general expensesincreased by $33,000 for contracted services compared to the three months endedSeptember 30, 2008 due primarily to: (i) an increase in labor costsand other benefits of $249,000 due to higher wages and an increase in thenumber of employees and, (ii) an increase of $68,000 in pensionexpense.  These increases were partiallyoffset by decreases in outside services and legal costs of $286,000.

 

***Depreciation and Amortization***

 

For the three monthsended September 30, 2009 and 2008, depreciation and amortization bysegment consisted of the following (amounts in thousands):

 
| ** **                          | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 7,661      |          | $          | 7,161      |       | $          | 500        |   | 7.0 | % |
| Electric Services                   |       | 565           |       | 552           |       | 13         |       | 2.4        | %          |
| Contracted Services                 |       | 174           |       | 169           |       | 5          |       | 3.0        | %          |
| Total depreciation and amortization |       | $             | 8,400      |          | $          | 7,882      |       | $          | 518        |   | 6.6 | % |

 

For the three monthsended September 30, 2009, depreciation and amortization expense for waterand electric services increased by $513,000 to $8.2 million compared to $7.7million for the three months ended September 30, 2008 reflecting, amongother things, approximately $73.6 million of additions to utility plant during2008, depreciation on which began in January 2009.  Registrant anticipates that depreciationexpense will continue to increase due to ongoing construction at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

 

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***Maintenance***

 

For the three monthsended September 30, 2009 and 2008, maintenance expense by segmentconsisted of the following (amounts in thousands):

 
| ** **          | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 3,214      |          | $          | 3,096      |       | $          | 118        |   | 3.8 | % |
| Electric Services   |       | 249           |       | 261           |       | (12        | )          | -4.6       | %          |
| Contracted Services |       | 589           |       | 670           |       | (81        | )          | -12.1      | %          |
| Total maintenance   |       | $             | 4,052      |          | $          | 4,027      |       | $          | 25         |   | 0.6 | % |

 

For the three months ended September 30, 2009,maintenance expense for water and electric services increased by $106,000 to$3.5 million compared to $3.4 million for the three months ended September 30,2008 due principally to an increase of $91,000 in maintenance expense atCCWC.  In addition, GSWC’s maintenanceexpense at its three water regions increased slightly by $27,000 during thethree months ended September 30, 2009 compared to the same period in 2008.

 

There was a decrease of$81,000 in contracted services maintenance expense. Maintenance expense at ONUSdecreased by $166,000 during the three months ended September 30, 2009 ascompared to the same period in 2008. This decrease was partially offset by anincrease of $85,000 in maintenance expense at other military base operations.

 

***Property and Other Taxes***

 

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

 
| ** **                     | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 3,011      |          | $          | 2,635      |       | $          | 376        |   | 14.3 | % |
| Electric Services              |       | 179           |       | 183           |       | (4         | )          | -2.2       | %          |
| Contracted Services            |       | 365           |       | 643           |       | (278       | )          | -43.2      | %          |
| Total property and other taxes |       | $             | 3,555      |          | $          | 3,461      |       | $          | 94         |   | 2.7 | % |

 

For the three monthsended September 30, 2009, property and other taxes for water and electricservices increased by $372,000 resulting from increased assessed propertyvalues, higher payroll taxes based on increased labor costs and higherfranchise fees based on increased sales volume.

 

Property and other taxeswere lower in contracted services due to lower gross receipts taxes of $286,000at ODUS. In the third quarter of 2008, such taxes were determined to be owedand amounts related to activity going back to contract inception, making up themajority of this difference, were recorded. This was partially offset by anincrease in payroll taxes of $12,000 due to higher labor costs.

 

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***ASUS Construction Expenses***

 

For the three monthsended September 30, 2009, ASUS construction expenses were $9.3 million,increasing $4.2 million compared to the same period in 2008 due primarily tonew construction projects at FBWS and ODUS, which had increases of $1.5 millionand $3.4 million, respectively, over the same period in 2008.  These increases were partially offset by a$792,000 decrease in construction expense at other military bases.  For the three months ended September 30,2008, PSUS incurred expenses of $411,000 for emergency construction andanticipated losses associated with certain construction projects at FortJackson.  Such costs did not recur in thethree months ended September 30, 2009.

 

***Loss on Settlement for Removal of Wells***

 

Despite its previousrulings, on October 8, 2009, the ACC ordered CCWC to treat the entire gainof $1,520,000 from a settlement agreement with the Fountain Hills SanitaryDistrict (“FHSD”) as a reduction to rate base.  In 2005, in an agreement with the FHSD, CCWC agreed to permanently ceaseusing one of its wells in order for FHSD to secure an Aquifer Protection Permitfor its recharge system.  Based onprevious decisions ruled by the ACC on similar gains, CCWC recognized a netgain of $760,000 (50% of the proceeds) in 2005 related to the settlementagreement and established a regulatory liability for the remaining $760,000pending the ACC’s review of this matter. However, the decision issued on October 8, 2009 ordered CCWC totreat the entire settlement proceeds of $1,520,000 as a reduction to ratebase.  As a result, CCWC recognized aloss of $760,000 during the third quarter of 2009.  This effectively reverses the original gainrecorded in 2005.

 

***Interest Expense***

 

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

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 5,795      |          | $          | 5,116      |       | $          | 679        |   | 13.3 | % |
| Contracted Services         |       | 89            |       | 205           |       | (116       | )          | -56.6      | %          |
| AWR (parent)                |       | (23           | )          | 107           |       | (130       | )          | -121.5     | %          |
| Total interest expense      |       | $             | 5,861      |          | $          | 5,428      |       | $          | 433        |   | 8.0 | % |

 

Overall,interest expense increased in 2009 reflecting an increase in long-term debt,partially offset by lower interest rates and a decrease in short-termborrowings. On March 10, 2009, GSWC issued a senior note in the amount of$40.0 million toCoBank due March 10, 2019 with an interest rate of 6.7%.   Inaddition, a decision issued in July 2009in the GSWC cost of capital proceeding authorized an interest rate balancingaccount to track interest costs of new debt issued after January 1,2009.  This balancing account tracks anydifference between the incremental cost of debt included in the cost of capitaladopted and the actual cost of debt for any long-term debt issued by GSWC fromthe effective date of the final decision. This difference totaled $159,000 forthe three months ended September 30, 2009 and was included in thebalancing account, increasing interest expense. These increases were partiallyoffset by a decrease in short-term cash borrowings. Average bank loan balancesoutstanding under the AWR credit facility for the three months ended September 30,2009 were approximately $12.9 million, as compared to an average of $61.3million during the same period of 2008. The average interest rate on short-term borrowings for the three monthsended September 30, 2009 was 0.9% as compared to an average of 3.2% duringthe same period of 2008.

 

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***Interest Income***

 

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

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 170        |          | $          | 286        |       | $          | (116       | ) | -40.6 | % |
| Contracted Services         |       | 3             |       | 1             |       | 2          |       | 200.0      | %          |
| AWR (parent)                |       | —        |       | 6             |       | (6         | )          | -100.0     | %          |
| Total interest income       |       | $             | 173        |          | $          | 293        |       | $          | (120       | ) | -41.0 | % |

 

Interest income decreasedby $120,000 for the three months ended September 30, 2009 primarily due tothe lower interest rates earned on the uncollected balance of the Aerojetlitigation memorandum account.

 

***Other***

 

For the three months ended September 30, 2009 and2008, Registrant recorded other income of $38,000 and a loss of $30,000,respectively, as a result of Registrant’s equity interest in an investment.

 

***Income Tax Expense***

 

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

 
| ** **                  | ** ** | **3  Months** | ** ** | **3  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 6,202      |          | $          | 4,110      |       | $          | 2,092      |   | 50.9 | % |
| Contracted Services         |       | 881           |       | (636          | )          | 1,517      |       | -238.5     | %          |
| AWR (parent)                |       | 24            |       | (48           | )          | 72         |       | -150.0     | %          |
| Total income tax expense    |       | $             | 7,107      |          | $          | 3,426      |       | $          | 3,681      |   | 107.4 | % |

 

For the three monthsended September 30, 2009, income tax expense for water and electricincreased by 50.9% to $6.2 million compared to $4.1 million for the threemonths ended September 30, 2008 due primarily to an increase in pretaxincome. The effective tax rate (“ETR”) for the three months ended September 30,2009 was 43.0% as compared to a 42.3% ETR applicable to the three months ended September 30,2008.  The ETR deviates from the federalstatutory rate primarily due to state taxes and changes between book andtaxable income that are treated as flow-through adjustments in accordance withregulatory requirements (principally plant-, rate-case- andcompensation-related items). Flow-through adjustments increase or decrease tax expense in one period,with an offsetting increase or decrease occurring in another period.

 

Income tax expense forcontracted services increased to $881,000 compared to a tax benefit of $636,000for the three months ended September 30, 2008 due primarily to an increasein pretax income.  The ETR for contractedservices for the three months ended September 30, 2009 was 37.2% ascompared to a 39.2% ETR applicable to the three months ended September 30,2008.

 

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***ConsolidatedResults of Operations — Nine Months Ended September 30, 2009 and 2008(amounts in thousands):***

 
| ** **                                       | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                       | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                       | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| OPERATING REVENUES                               |       |          |       |          |       |       |       |       |       |
| Water                                            |       | $             | 209,248    |          | $          | 186,824    |       | $          | 22,424     |   | 12.0 | % |
| Electric                                         |       | 21,083        |       | 21,754        |       | (671       | )          | -3.1       | %          |
| Contracted services                              |       | 44,332        |       | 25,938        |       | 18,394     |       | 70.9       | %          |
| Total operating revenues                         |       | 274,663       |       | 234,516       |       | 40,147     |       | 17.1       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING EXPENSES                               |       |          |       |          |       |       |       |       |       |
| Water purchased                                  |       | 34,622        |       | 36,119        |       | (1,497     | )          | -4.1       | %          |
| Power purchased for pumping                      |       | 7,711         |       | 7,819         |       | (108       | )          | -1.4       | %          |
| Groundwater production assessment                |       | 8,621         |       | 8,056         |       | 565        |       | 7.0        | %          |
| Power purchased for resale                       |       | 9,158         |       | 10,179        |       | (1,021     | )          | -10.0      | %          |
| Unrealized gain on purchased power contracts     |       | —        |       | (766          | )          | 766        |       | -100.0     | %          |
| Supply cost balancing accounts                   |       | 11,666        |       | (1,269        | )          | 12,935     |       | -1019.3    | %          |
| Other operation expenses                         |       | 21,981        |       | 22,415        |       | (434       | )          | -1.9       | %          |
| Administrative and general expenses              |       | 49,405        |       | 46,077        |       | 3,328      |       | 7.2        | %          |
| Depreciation and amortization                    |       | 25,148        |       | 23,485        |       | 1,663      |       | 7.1        | %          |
| Maintenance                                      |       | 12,012        |       | 12,569        |       | (557       | )          | -4.4       | %          |
| Property and other taxes                         |       | 9,667         |       | 9,220         |       | 447        |       | 4.8        | %          |
| ASUS construction expenses                       |       | 25,540        |       | 13,426        |       | 12,114     |       | 90.2       | %          |
| Net gain on sale of property                     |       | (15           | )          | —        |       | (15        | )          | 100.0      | %          |
| Loss on settlement for removal of wells          |       | 760           |       | —        |       | 760        |       | 100.0      | %          |
| Total operating expenses                         |       | 216,276       |       | 187,330       |       | 28,946     |       | 15.5       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OPERATING INCOME                                 |       | 58,387        |       | 47,186        |       | 11,201     |       | 23.7       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| OTHER INCOME AND EXPENSES                        |       |          |       |          |       |       |       |       |       |
| Interest expense                                 |       | (16,814       | )          | (16,100       | )          | (714       | )          | 4.4        | %          |
| Interest income                                  |       | 671           |       | 1,429         |       | (758       | )          | -53.0      | %          |
| Other                                            |       | 90            |       | 91            |       | (1         | )          | -1.1       | %          |
|                                             |       | (16,053       | )          | (14,580       | )          | (1,473     | )          | 10.1       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE |       | 42,334        |       | 32,606        |       | 9,728      |       | 29.8       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| Income tax expense                               |       | 16,205        |       | 13,467        |       | 2,738      |       | 20.3       | %          |
|                                             |       |          |       |          |       |       |       |       |       |
| NET INCOME                                       |       | $             | 26,129     |          | $          | 19,139     |       | $          | 6,990      |   | 36.5 | % |

 

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Netincome for the nine months ended September 30, 2009 was $26.1 million,equivalent to $1.45 per common share on a basic and fully diluted basis,compared to $19.1 million or $1.10 per common share on a basic and fullydiluted basis for the nine months ended September 30, 2008, an increase innet income of 36.5%.

 

Impactingthe comparability in the results of the two periods are the following itemswhich increased diluted earnings per share by $0.35:

 

·                  An unrealized gain on purchased power contracts in2008 which increased pretax income by $766,000, or $0.03 per share.  As previously mentioned, these purchasedpower contracts that impacted GSWC’s earnings expired on December 31,2008. GSWC began taking delivery of power under a new contract effective January 1,2009.  Unrealized gains and losses onthis contract do not impact earnings.  Accordingly, during the nine months ended September 30,2009, there were $7.0 million of unrealized losses which have been included inthe memorandum account, therefore not impacting GSWC’s earnings.

 

·                  The water margin increased by $11.2 million, or $0.37per share, during the nine months ended September 30, 2009 compared to thesame period of 2008 due primarily to:  (i) higherwater rates approved by the CPUC effective January 1, 2009; (ii)  thewater margin impact of recording the WRAM and MCBA of approximately $11.8million, or $0.39 per share; and (iii) the recording of $3.1 million ofadditional revenues due to the CPUC’s approval in April 2009 of the Water ConservationMemorandum Accounts. These increases were partially offset by lower waterconsumption of approximately 8% when compared to the same period in 2008.

 

·                  GSWC reached a settlement agreement withMirant Energy Trading, LLC and recorded the proceeds of $1.0 million, or $0.03per share, as a reduction to legal costs during the second quarter of 2009.There was no similar gain in the same period of 2008.

 

·                  Excluding the gain from the settlementagreement with Mirant Energy Trading, LLC, operating expenses, other thansupply costs, increased by $6.3 million at the Company’s water and electricutility businesses, or $0.21 per share, for the first nine months of 2009 dueto an increase in pension expenses, labor and other related benefits, anincrease in outside services costs, and higher depreciation and amortizationexpense.

 

·                  Pretax operating income for contractedservices increased by $7.1 million, or $0.23 per share, during the nine monthsended 2009 due primarily to an increase in special construction projects atFBWS and ODUS, and improved performance at PSUS and ONUS as compared to theprior year. In addition, PSUS recorded additional construction revenues in thethird quarter of 2009 as a result of the approval by the U.S. government of arequest for an equitable adjustment of $1.1 million relating to previouslyincurred emergency construction costs.

 

·                  The recording of a loss by CCWC on thesettlement for removal of wells of $760,000, or $0.02 per share, as a result ofa decision issued by the ACC on October 8, 2009.

 

·                  An increase in interest expense net of interest income of $1.5 million,or $0.05 per share, due primarily to: (i) an increase in long-term debtfrom the issuance of $40.0 million of notes in March 2009; (ii) GSWC’srecording of $480,000 interest income, during the second quarter of 2008 inconnection with revisions to AWR’s 2002 income tax return, with no similar gainin 2009; (iii) the recording of $253,000 of interest expense in theinterest rate balancing account approved by the CPUC in July 2009 in thecost of capital proceeding; and (iv) lower interest income in 2009 of$322,000 accrued in the Aerojet litigation memorandum account balance.

 

·                  A decrease of $0.04 per share due to an increase in the weightedaverage number of common shares outstanding resulting from the issuance of 1.1million shares of AWR’s Common Shares in a public offering completed in May 2009.

 

·                  A tax benefit of $918,000 recorded in thefirst quarter of 2009 resulting from new California apportionment laws as wellas refining certain related estimates, favorably impacted earnings by $0.05 pershare.  In addition, a decrease in theETR during the nine months ended September 30, 2009 as compared to thesame period in 2008, favorably impacted earnings by $0.02 per share, dueprimarily to changes between book and taxable income that are treated asflow-through adjustments in accordance with regulatory requirements.

 

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***Operating Revenues***

 

*Water*

 

Forthe nine months ended September 30, 2009, revenues from water operationsincreased by 12.0% to $209.2 million, compared to $186.8 million for thenine months ended September 30, 2008. Contributing to this increase wererate increases approved by the CPUC effective January 1, 2009, which addedapproximately $6.9 million to water revenues in the first nine months of2009.  In addition, as a result of the implementation ofthe WRAM accounts for Regions II andIII in late November of 2008 and in RegionI in September 2009, GSWC recorded $15.2 million of additional revenues toadjust the 2009 revenues to the consumption levels approved by the CPUC.  Furthermore, GSWC recorded $3.1 millionincluded in the WCMA accounts at each of GSWC’s water regions.  Finally, there was an increase in water revenuesof $5.9 million due to surcharges approved by the CPUC in effect to recoverunder-collections in supply costs. These increases were partially offset by $9.2 millionresulting from a decrease in actual consumption of approximately 8% when compared to the first ninemonths of 2008.  Although precipitation was overall lowerduring the first nine months of 2009 compared to the same period in 2008, waterconsumption was down due to the continued effects of state-wide customerconservation efforts.

 

*Electric*

 

Forthe nine months ended September 30, 2009, revenues from electricoperations decreased by 3.1% to $21.1 million compared to $21.8 million for thenine months ended September 30, 2008 due primarily to a decrease inelectric usage.

 

*ContractedServices*

 

Forthe nine months ended September 30, 2009, revenues from contractedservices increased by $18.4 million, or 70.9%, to $44.3 million compared to$25.9 million for the nine months ended September 30, 2008 primarily dueto higher construction revenues.  Construction revenues increased by $16.5million primarily related to special projects at FBWS and ODUS, which increasedconstruction revenues by $7.5 million and $10.2 million, respectively.  Construction revenues for the nine monthsended September 30, 2009 at PSUS and ONUS increased $1.4 million.  Construction revenues at these bases werepartially offset by lower construction revenues of $2.6 million at TUS.  Earnings and cash flows from amendments andmodifications to the original 50-year contracts with the U.S. government may ormay not continue in future periods.  Inaddition, a request for equitable adjustment for PSUS was approved for $1.1million and recorded in the third quarter of 2009 as previously discussed.

 

Forthe nine months ended September 30, 2009, management fees for operatingand maintaining the various systems totaled $10.1 million as compared to $8.2million for the nine months ended September 30, 2008.  In December 2008, the U.S. governmentauthorized an interim adjustment at FBWS, which increased the monthly water andwastewater fees by 50% and 59%, respectively, pending resolution of FBWS’srequest for an equitable adjustment due to higher inventory at FBWS thandescribed in the request for proposal. This resulted in an increase of approximately $877,000 to FBWS’management fees for operating and maintaining the water and wastewater systemsfor the first nine months of 2009 as compared to the same period of 2008.  An additional $933,000 in revenue wasgenerated from management fees for operating and maintaining the water andwastewater systems under the contracts in North Carolina and South Carolinawhich commenced during the first quarter of 2008, as a result of a full ninemonths of operations in 2009.

 

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

 

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***Operating Expenses:***

 

***Supply Costs***

 

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

 

Total supply costscomprise the largest segment of total operating expenses. Supply costsaccounted for approximately 33.2%  and32.5% of total operating expenses for the nine months ended September 30,2009 and 2008, respectively.

 

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

 
| ** **                                      | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                      | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                      | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| WATER OPERATING REVENUES **(1)**                |       | $             | 209,248    |          | $          | 186,824    |       | $          | 22,424     |   | 12.0 | % |
| WATER SUPPLY COSTS:                             |       |          |       |          |       |       |       |       |       |
| Water purchased **(1)**                         |       | $             | 34,622     |          | $          | 36,119     |       | $          | (1,497     | ) | -4.1 | % |
| Power purchased for pumping **(1)**             |       | 7,711         |       | 7,819         |       | (108       | )          | -1.4       | %          |
| Groundwater production assessment **(1)**       |       | 8,621         |       | 8,056         |       | 565        |       | 7.0        | %          |
| Water supply cost balancing accounts **(1)**    |       | 8,768         |       | (3,510        | )          | 12,278     |       | -349.8     | %          |
| TOTAL WATER SUPPLY COSTS                        |       | $             | 59,722     |          | $          | 48,484     |       | $          | 11,238     |   | 23.2 | % |
| WATER MARGIN**(2)**                             |       | $             | 149,526    |          | $          | 138,340    |       | $          | 11,186     |   | 8.1 | % |
| PERCENT MARGIN - WATER                          |       | 71.5          | %          | 74.0          | %          |       |       |       |       |
|                                            |       |          |       |          |       |       |       |       |       |
| ELECTRIC OPERATING REVENUES **(1)**             |       | $             | 21,083     |          | $          | 21,754     |       | $          | (671       | ) | -3.1 | % |
| ELECTRIC SUPPLY COSTS:                          |       |          |       |          |       |       |       |       |       |
| Power purchased for resale **(1)**              |       | $             | 9,158      |          | $          | 10,179     |       | $          | (1,021     | ) | -10.0 | % |
| Electric supply cost balancing accounts **(1)** |       | 2,898         |       | 2,241         |       | 657        |       | 29.3       | %          |
| TOTAL ELECTRIC SUPPLY COSTS                     |       | $             | 12,056     |          | $          | 12,420     |       | $          | (364       | ) | -2.9 | % |
| ELECTRIC MARGIN **(2)**                         |       | $             | 9,027      |          | $          | 9,334      |       | $          | (307       | ) | -3.3 | % |
| PERCENT MARGIN - ELECTRIC                       |       | 42.8          | %          | 42.9          | %          |       |       |       |       |

 

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(1)                                 As reported on AWR’s ConsolidatedStatements of Income, except for supply cost balancing accounts. The sum ofwater and electric supply cost balancing accounts in the table above are shownon AWR’s Consolidated Statements of Income and totaled $11,666,000 and($1,269,000) for the nine months ended September 30, 2009 and 2008,respectively.

 

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

 

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For the nine months endedSeptember 30, 2009, 39.2% of the Company’s water supply mix was purchasedas compared to 42.0% purchased for the nine months ended September 30,2008.  However, as noted previously, GSWCimplemented the MCBA for Regions II and III in late November 2008 and inRegion I in September 2009, which eliminates the effects on earnings ofchanges in the water supply mix prospectively. The adopted percentages of purchased water for the nine months ended September 30, 2009at Regions I, II and III were 24.3%, 61.9% and 43.8%, respectively, ascompared to actual purchased water of 23.9%, 41.8% and 42.2%, respectively, forthe nine months of 2009.  Region I’ssupply mix consists primarily of pumped water. The variance in Regions II and III’s actual mix compared to the mixapproved by the CPUC resulted in an over-collection in the MCBA account. Thiscaused an overall decrease in the water margin percentage to 71.5% for thefirst nine months of 2009 compared to 74.0% in the same period of 2008 sinceGSWC no longer receives any benefit from a more favorable supply mix than thatapproved by the CPUC.

 

Purchased water costs forthe nine months ended September 30, 2009 decreased by 4.1% to $34.6million as compared to $36.1 million in the same period of 2008.  The decrease in purchased water costs was dueto lower customer usage, partially offset by higher water rates charged fromwholesale suppliers.

 

For the nine months endedSeptember 30, 2009, power purchased for pumping decreased slightly to $7.7million, compared to $7.8 million for the same period of 2008.  Lower customer demand was offset by increasesin supplier rates.  There were alsochanges in the actual supply mix, as discussed above.  Groundwater production assessments werehigher by 7.0% due primarily to increases in assessment rates (pump tax rates)levied against groundwater production, effective July 2009.  In particular, Region II’s average pump taxrates increased by approximately 19% or $636,000 between the two periods.  These increases in groundwater productionassessments were partially offset by lower customer demand.   The MCBA tracks the increases in pump taxrates for future recovery in water rates.

 

An increase of $12.3million in the water supply cost balancing account provision during the ninemonths ended September 30, 2009 as compared to the same period in 2008 wasprimarily caused by: (i) a $5.9 million increase in the amortization ofthe water supply cost balancing accounts for surcharges currently in effect; (ii) therecording of $3.4 million in the MCBA accounts; (iii) a net decrease of$2.8 million of under-collections in 2009 (only related to Region I prior toits implementation of MCBA on September 1, 2009) compared to the sameperiod in 2008, and (iv) the recording of a $181,000 net under-collectionadjustment relating to Region III’s pre-2001 supply costs which were approvedby the CPUC in May of 2008. Upon approval by the CPUC, a regulatory assetwas established for these previously incurred supply costs.

 

For the nine months endedSeptember 30, 2009, the cost of power purchased for resale to customers inGSWC’s BVES division decreased by 10.0% to $9.2 million compared to $10.2million for the nine months ended September 30, 2008 reflectinglower customer demand.  In addition, GSWC began receiving powerunder a new purchased power contract on January 1, 2009.   The main product under the new contract providesfor 13 MWs of electric energy at a fixed price of $63.75 per MWh during 2009 ascompared to $74.65 during 2008.  Thedecrease in the price of purchased power is reflected in the electric supplycost balancing account resulting in no change to the dollarmargin for electric services.

 

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

 

Pursuant to theaccounting guidance for derivatives, the unrealized gain on purchased powercontracts during 2008 represented gains recorded for GSWC’s purchased poweragreements with Morgan Stanley Capital Group, Inc. There was a $766,000pretax unrealized gain on purchased power contracts for the nine months ended September 30,2008. These contracts terminated on December 31, 2008. GSWC  began takingdelivery under a new purchased power contract in January 2009.  In May 2009, the CPUC issued a finaldecision approving the contract and authorizing the memorandum account to trackunrealized gains and losses. Accordingly, a cumulative unrealized loss of $7.0 million as of September 30,2009 has been included in the memorandum account and did not impact earnings.

 

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*** ***

***Other Operation Expenses***

 

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

 
| ** **                     | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 17,735     |          | $          | 16,652     |       | $          | 1,083      |   | 6.5 | % |
| Electric Services              |       | 1,740         |       | 1,666         |       | 74         |       | 4.4        | %          |
| Contracted Services            |       | 2,506         |       | 4,097         |       | (1,591     | )          | -38.8      | %          |
| Total other operation expenses |       | $             | 21,981     |          | $          | 22,415     |       | $          | (434       | ) | -1.9 | % |

 

For the nine months endedSeptember 30, 2009, other operation expenses for water and electricservices increased by $1.2 million, or 6.3%, primarily due to: (i) an increasein operation labor and related benefits of $432,000; (ii) an increase of$678,000 for chemical and water treatment costs as a result of an increase inwell production primarily at GSWC’s Region II; and (iii) an increase in bad debtexpense of $128,000. These increases were partially offset by a decrease of$81,000 in other operation expenses.

 

Contracted services experienced decreases in otheroperation expenses of $1.6 million primarily due to transition costs (some ofwhich exceeded transition revenues recovered, pursuant to the terms ofcontracts executed by ASUS and all of which is non-recurring) of $1.0 millionincurred during the nine months ending September 30, 2008 due to thecommencement of the operation of water and wastewater systems at military basesin North Carolina and South Carolina. There was also a decrease of approximately $739,000 in outside servicescosts partly attributable to payments to a subcontractor that provided wastewater services tocertain of ASUS’ subsidiaries in 2008. On January 31, 2008, ASUS and itssubsidiaries agreed to buy out all current and future rights which thissubcontractor had to provide wastewater services at any bases operated by ASUSand any of its present and/or future subsidiaries.  For the nine monthsended September 30, 2009, many of these services were performedinternally, some of which are recorded in labor costs within maintenanceexpense.  There were increased costs of$191,000 relating to operation labor and benefits, partially offset by adecrease of $43,000 in other miscellaneous operation expenses.

 

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***Administrative and General Expenses***

 

Administrative andgeneral expenses include payroll related to administrative and generalfunctions, the related employee benefits charged to expense accounts, insuranceexpenses, outside legal and consulting fees, regulatory utility commissionexpenses, expenses associated with being a public company, and generalcorporate expenses. For the nine months ended September 30, 2009 and 2008,administrative and general expenses by segment, including AWR (parent),consisted of the following (amounts in thousands):

 
| ** **                                | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                                | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                                | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                            |       | $             | 35,710     |          | $          | 33,356     |       | $          | 2,354      |   | 7.1 | % |
| Electric Services                         |       | 5,573         |       | 4,753         |       | 820        |       | 17.3       | %          |
| Contracted Services                       |       | 8,052         |       | 7,840         |       | 212        |       | 2.7        | %          |
| AWR (parent)                              |       | 70            |       | 128           |       | (58        | )          | -45.3      | %          |
| Total administrative and general expenses |       | $             | 49,405     |          | $          | 46,077     |       | $          | 3,328      |   | 7.2 | % |

 

For the nine months ended September 30,2009, administrative and general expenses increased by $2.4 million in water servicescompared to the nine months ended September 30, 2008 due primarily to: (i) anincrease of $2.3 million in pension expenses resulting from a reduction in the fair value of planassets in 2008 caused by market conditions at the time; (ii) an increase of$493,000 in labor costs and other employee benefits; and (iii) an increasein data-transmission-related costs of $261,000. These increases were partially offset by $585,000 ofadditional compensation expense incurred in 2008 relating to a Resignation Agreementand General Release of Claims  executedby the Company with respect to the resignation of a GSWC officer effective September 26,2008. This expense did not recur in 2009. There was also a decrease of $115,000in miscellaneous administrative and general expenses.  However, outside legal costs at GSWC may increase in the fourthquarter of 2009 and into 2010 as a result of ongoing legal proceedings.

 

For the nine months ended September 30, 2009,administrative and general expenses increased by $820,000 in electric servicescompared to the nine months ended September 30, 2008 due primarily to: (i) an$880,000 increase in outside consulting, legal and other services resultingfrom the current general rate case and the new purchased power contract; (ii) a$335,000 increase in labor costs and employee related benefits; (iii) anincrease of $376,000 in regulatory commission expenses; (iv) an increaseof $189,000 in allocation of costs from the corporate headquarters to BVES; and(v) an increase of $40,000 in other administrative expenses.  These increases were partially offset by therecording of $1.0 million as a reduction to previously incurred legal costs inconnection with a settlement agreement reached with Mirant Energy Trading, LLC, previously discussed.

 

There was an increase of$212,000 in administrative and general expenses for contracted services dueprimarily to an increase of $1.0 million in labor costs and related employeebenefits due to higher wages and an increase in the number of employees. Thisincrease was partially offset by a decrease in legal and consulting services of$730,000 resulting from reduced need for such services relating to filings withthe U.S. government and in dealing with other prime contractors, primarily atTUS, and a decrease of $106,000 in other miscellaneous expenses.

 

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***Depreciation and Amortization***

 

For the nine months endedSeptember 30, 2009 and 2008, depreciation and amortization by segmentconsisted of the following (amounts in thousands):

 
| ** **                          | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-------------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                      |       | $             | 22,961     |          | $          | 21,471     |       | $          | 1,490      |   | 6.9 | % |
| Electric Services                   |       | 1,694         |       | 1,657         |       | 37         |       | 2.2        | %          |
| Contracted Services                 |       | 493           |       | 357           |       | 136        |       | 38.1       | %          |
| Total depreciation and amortization |       | $             | 25,148     |          | $          | 23,485     |       | $          | 1,663      |   | 7.1 | % |

 

For the nine months endedSeptember 30, 2009, depreciation and amortization expense for water andelectric services increased by $1.5 million to $24.7 million compared to $23.1million for the nine months ended September 30, 2008 reflecting,among other things, the approximately $73.6 million of additions to utilityplant during 2008, depreciation on which began in January 2009.  Registrant anticipates that depreciationexpense will continue to increase due to ongoing construction at its regulatedsubsidiaries. Registrant believes that depreciation expense related to propertyadditions approved by the appropriate regulatory agency will be recoveredthrough water and electric rates.

 

There was also anincrease in depreciation and amortization expense for contracted services dueprimarily to the addition of fixed assets associated with taking over theassets of ASUS’ former subcontractor for wastewater services at FBWS, ODUS, andTUS and the purchase of wastewater cleaning vehicles at four of ASUS’ militarybase operations.

 

***Maintenance***

 

For the nine months endedSeptember 30, 2009 and 2008, maintenance expense by segment consisted ofthe following (amounts in thousands):

 
| ** **          | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|---------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **          | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **          | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services      |       | $             | 9,168      |          | $          | 10,031     |       | $          | (863       | ) | -8.6 | % |
| Electric Services   |       | 613           |       | 590           |       | 23         |       | 3.9        | %          |
| Contracted Services |       | 2,231         |       | 1,948         |       | 283        |       | 14.5       | %          |
| Total maintenance   |       | $             | 12,012     |          | $          | 12,569     |       | $          | (557       | ) | -4.4 | % |

 

For the nine months ended September 30, 2009,maintenance expense for water services decreased by $863,000 to $9.2 millioncompared to $10.0 million for the nine months ended September 30, 2008 dueprincipally to a decrease in unplanned and emergency maintenance on GSWC’swells, water supply and distribution facilities.  In addition, certain planned maintenance hasbeen deferred to later in the 2009 year, which we anticipate will increasemaintenance expense during the fourth quarter of 2009.  GSWC’s maintenance expense at its three waterregions decreased by $1.1 million during the nine months ended September 30,2009 compared to the same period in 2008. This decrease was partially offset byan increase of $227,000 in maintenance expense at CCWC.

 

There was an increase of $23,000 in maintenanceexpenses for electric services related to the 8.4 MW natural gas-fueledgeneration plant.

 

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An increase of $283,000in contracted services maintenance expense was due primarily to thecommencement of the operation of water andwastewater systems at military bases in North Carolina and South Carolina thatbegan during the first quarter of 2008, which added $163,000 in maintenanceexpense for the nine months ended September 30, 2009 compared to the sameperiod in 2008.  The level of maintenancecosts at these bases also reflects the size, age and condition of theinfrastructure at these bases.  There wasalso increased maintenance expense of $147,000 at FBWS due primarily to higherinternal labor costs associated with wastewater services performed by employeesthat were provided by a subcontractor prior to February 2008.

 

***Property and Other Taxes***

 

For the nine months endedSeptember 30, 2009 and 2008, property and other taxes by segment consistedof the following (amounts in thousands):

 
| ** **                     | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|--------------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                     | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                     | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water Services                 |       | $             | 8,148      |          | $          | 8,021      |       | $          | 127        |   | 1.6 | % |
| Electric Services              |       | 548           |       | 361           |       | 187        |       | 51.8       | %          |
| Contracted Services            |       | 971           |       | 838           |       | 133        |       | 15.9       | %          |
| Total property and other taxes |       | $             | 9,667      |          | $          | 9,220      |       | $          | 447        |   | 4.8 | % |

 

For the nine months endedSeptember 30, 2009, property and other taxes for water and electricservices  increased by $314,000. Currentyear tax assessments on property values have increased, offset by a tax refundof $488,000 resulting from lower reassessed property values.  There have also been increases in payrolltaxes and franchise fees as noted in the quarterly results.

 

Property and other taxeswere higher in contracted services due to thecommencement of the operation of water and wastewater systems at military basesin North Carolina and South Carolina that began during the first quarter of2008.  As a result of these new bases,property and other taxes increased by $84,000 during the nine months ended September 30,2009 as compared to the same period in 2008. There was also an increase of$49,000 at the other bases primarily from higher payroll and gross receipttaxes.

 

***ASUS Construction Expenses***

 

For the nine months endedSeptember 30, 2009 ASUS’ construction expenses were $25.5 million,increasing $12.1 million compared to the same period in 2008 due primarily tonew construction projects at FBWS and ODUS, which had increases of $6.4 millionand $7.6 million, respectively, over the same period in 2008.  These increases were partially offset by a$2.1 million decrease in construction expense at TUS.  For the nine months ended September 30,2008, PSUS incurred expenses of $782,000 in emergency construction andanticipated losses associated with certain construction projects at FortJackson.  Such costs did not recur in thenine months ended September 30, 2009. Construction costs at ONUS increased by $617,000 as compared to the sameperiod in 2008.

 

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

 

For the nine months ended September 30, 2009,Registrant recorded a pre-tax gain of $15,000 on the sale of property in thewater services segment.  There was nosimilar gain in the same period of 2008.

 

***Loss on Settlement for Removal of Wells***

 

In 2005, in an agreementwith the FHSD, CCWC agreed to permanently cease using one of its wells in orderfor FHSD to secure an Aquifer Protection Permit for its recharge system.  Based on previous ACC decisions, CCWCrecognized a net gain of $760,000 (50% of the proceeds) in 2005 related to thesettlement agreement and established a regulatory liability for the remaining$760,000 pending the ACC’s review of this matter.  On October 8, 2009, the ACC ordered CCWCto treat the entire settlement proceeds of $1,520,000 as a reduction to ratebase.  As a result, CCWC recognized aloss of $760,000 during the third quarter of 2009, reversing the original gainrecorded in 2005.

 

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***Interest Expense***

 

For the nine months endedSeptember 30, 2009 and 2008, interest expense by segment, including AWR(parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 16,418     |          | $          | 15,369     |       | $          | 1,049      |   | 6.8 | % |
| Contracted Services         |       | 281           |       | 644           |       | (363       | )          | -56.4      | %          |
| AWR (parent)                |       | 115           |       | 87            |       | 28         |       | 32.2       | %          |
| Total interest expense      |       | $             | 16,814     |          | $          | 16,100     |       | $          | 714        |   | 4.4 | % |

 

Overall, interest expense increasedin 2009 reflecting an increase in long-term debt, partially offset by lowerinterest rates and lower short-term borrowings. On March 10, 2009, GSWCissued a senior note in the amount of $40.0 million to CoBank due March 10,2019 with an interest rate of 6.7%.  In addition, a decisionissued in July 2009 in the GSWC cost of capital proceeding authorized aninterest rate balancing account to track interest costs of new debt.  This balancing account tracks any differencebetween the incremental cost of debt included in the cost of capital decisionand the actual cost of debt for any long-term debt issued by GSWC from theeffective date of the final decision. This difference totaled $253,000 for thenine months ended September 30, 2009 and was included in the balancingaccount, increasing interest expense. These increases were partially offset bya decrease in short-term cash borrowings. Average bank loan balancesoutstanding under the AWR credit facility for the nine months ended September 30,2009 were approximately $38.8 million, as compared to an average of $52.9million during the same period of 2008. The average interest rate on short-term borrowings for the nine monthsended September 30, 2009 was 1.2% as compared to an average of 3.4% duringthe same period of 2008.

 

***Interest Income***

 

For the nine months endedSeptember 30, 2009 and 2008, interest income by segment, including AWR(parent) consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 661        |          | $          | 1,374      |       | $          | (713       | ) | -51.9 | % |
| Contracted Services         |       | 6             |       | 5             |       | 1          |       | 20.0       | %          |
| AWR (parent)                |       | 4             |       | 50            |       | (46        | )          | -92.0      | %          |
| Total interest income       |       | $             | 671        |          | $          | 1,429      |       | $          | (758       | ) | -53.0 | % |

 

Interest income decreasedby $758,000 for the nine months ended September 30, 2009 due primarily tothe recording in 2008 of $480,000 in interest income in connection with the IRS’sexamination of the 2002 income tax return, with no similar income in the sameperiod of 2009. Also, there was a decrease of $322,000 in interest accrued onthe uncollected balance of the Aerojet litigation memorandum account authorizedby the CPUC due to lower interest rates.

 

***Other***

 

For the nine months ended September 30, 2009 and 2008,Registrant recorded other income of $90,000 and $91,000, respectively, as aresult of Registrant’s equity interest in an investment.

 

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***Income Tax Expense***

 

For the nine months endedSeptember 30, 2009 and 2008, income tax expense by segment, including AWR(parent), consisted of the following (amounts in thousands):

 
| ** **                  | ** ** | **9  Months** | ** ** | **9  Months** | ** ** | ** ** | ** ** | ** ** | ** ** |
|-----------------------------|------------|---------------|------------|---------------|------------|------------|------------|------------|------------|
| ** **                  | ** ** | **Ended**     | ** ** | **Ended**     | ** ** | **$**      | ** ** | **%**      | ** ** |
| ** **                  | ** ** | **9/30/2009** | ** ** | **9/30/2008** | ** ** | **CHANGE** | ** ** | **CHANGE** | ** ** |
| Water and Electric Services |       | $             | 15,683     |          | $          | 14,771     |       | $          | 912        |   | 6.2 | % |
| Contracted Services         |       | 1,568         |       | (1,247        | )          | 2,815      |       | -225.7     | %          |
| AWR (parent)                |       | (1,046        | )          | (57           | )          | (989       | )          | 1735.1     | %          |
| Total income tax expense    |       | $             | 16,205     |          | $          | 13,467     |       | $          | 2,738      |   | 20.3 | % |

 

For the nine months endedSeptember 30, 2009, income tax expense for water and electric servicesincreased by 6.2% to $15.7 million compared to $14.8 million for the ninemonths ended September 30, 2008 due primarily to an increase in pretaxincome.  The ETR for water and electricservices for the nine months ended September 30, 2009 remained consistentat approximately 41%.  The ETR deviatesfrom the federal statutory rate primarily due to state taxes and changesbetween book and taxable income that are treated as flow-through adjustments inaccordance with regulatory requirements (principally plant-, rate-case- andcompensation-related items). Flow-through adjustments increase or decrease tax expense in one period,with an offsetting increase or decrease occurring in another period.

 

Income tax expense forcontracted services increased to $1.6 million compared to a tax benefit of $1.2million for the nine months ended September 30, 2008 due primarily to anincrease in pretax income.  The ETR forcontracted services for the nine months ended September 30, 2009 was 36.8%as compared to a 38.9% ETR applicable to the nine months ended September 30,2008.

 

AWR (parent) receives atax benefit for expenses incurred at the parent-company level.  For the nine months ended September 30,2009, the taxes recorded at AWR (parent) also include the effect of a change inCalifornia law during the first quarter of 2009.  On February 20, 2009, California’sgovernor signed two bills into law that amended and added several new provisionsto California’s Revenue and Taxation Code. One of the provisions in these bills changed the manner by which mosttaxpayers may compute the portion of their income derived from multiplejurisdictions that is subject to California taxation.  During the first quarter of 2009, AWR appliedthe change in tax law resulting from enactment of the bills based on itsunderstanding of the legislature’s intent, which is to permit taxpayers toapply an alternative apportionment method commencing with the 2011 taxyear.   On October 11, 2009,California’s governor signed a bill into law that conformed the new provision’slanguage to the legislature’s intent, consistent with AWR’s understanding ofthat intent.  As a result of management’sintention to apply the alternative method, AWR adjusted its deferred taxbalances in the first quarter of 2009 to reflect the expected amount at whichit will realize its California deferred taxes consistent with the change in taxlaw, as well as refining certain related estimates.  This resulted in the recording of a benefitof approximately $918,000, or $0.05 per share, during the nine months ended September 30,2009. While the effect of the tax law change will continue to affect AWR’sstate taxes, the future effects may be beneficial or detrimental depending on acombination of the profitability of AWR’s non-California activities as well asthe relative proportion of the factor(s) applied by its apportionmentmethod.  On a quarterly basis, managementwill assess its intention to apply the alternative method and will adjust itsdeferred tax balances accordingly. Absent this tax benefit, the consolidated ETR for the nine months ended September 30,2009 would have been 40.4%.

 

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**CriticalAccounting Policies and Estimates**

 

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

 

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

 

**Liquidityand Capital Resources**

 

***AWR***

 

Registrant’s regulated business (primarily that ofGSWC), is capital intensive and requires considerable capital resources. Aportion of these capital resources are provided by internally generated cashflows from operations. When necessary, Registrant obtains funds from externalsources in the capital markets and through bank borrowings. Access to externalfinancing on reasonable terms depends on Registrant’s credit ratings andcurrent business conditions, including that of the water utility industry ingeneral as well as conditions in the debt or equity capital markets. If thesebusiness and market conditions deteriorate to the extent that AWR no longer hasaccess to the capital markets at reasonable terms, Registrant has access to a$115 million revolving credit facility that is currently utilized to supportoperations.  Up to$20 million of this facility may be used for letters of credit. As of September 30,2009, an aggregate of $20.6 million in cash borrowings were included in currentliabilities and approximately $11.3 million of letters of credit wereoutstanding under this facility.  As of September 30, 2009,AWR had approximately $83.1 million available to borrow under the creditfacility.

 

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

 

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

 

AWR filed a newRegistration Statement on August 10, 2009 with the Securities and ExchangeCommission (“SEC”) for the sale from time to time of debt and equitysecurities. As of September 30, 2009, $115.0 million was available forissuance under this Registration Statement.

 

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

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs and cash contributions during 2009.  However, during the nine months ended September 30,2009, the fair value of the pension plan assets have increased by approximately21.5% since December 31, 2008. Higher plan asset values may result in adecrease to pension costs and required cash contributions in 2010, and insubsequent years, to the extent the effects are not offset by the effects of achange in the discount rate.

 

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*CashFlows from Operating Activities*:

 

Net cash provided byoperating activities was $50.4 million for the nine months ended September 30,2009 as compared to $43.3 million for the same period ended September 30,2008. The overall increase of $7.1 million was primarily attributable to anincrease in operating income at GSWC due to higher water rates charged tocustomers that were approved by the CPUC, and an increase in constructionactivities at ASUS primarily for new projects at FBWS and ODUS. The timing ofcash receipts and disbursements related to working capital items, includingrate recovery from customers of regulatory assets and changes in days salesoutstanding, also affected the changes in net cash provided by operatingactivities.  Changes in cash flows fromoperating activities were generally consistent with changes in the results ofoperations as adjusted by changes in working capital in the normal course ofbusiness.

 

*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities, which consists primarily of capital expenditures at GSWC,decreased to $55.6 million for the nine months ended September 30, 2009 ascompared to $61.3 million for the same period in 2008.  The decrease was due in part to a businessacquisition in 2008.  In the firstquarter of 2008, ASUS completed the acquisition of contracts with asubcontractor and substantially all assets of the subcontractor used to providewastewater services for certain of the Military Utility PrivatizationSubsidiaries for an aggregate purchase price of $2.3 million. Capitalexpenditures were lower by $3.4 million as compared to 2008 but are consistentwith Registrant’s capital investment plan for 2009.

 

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

 

*CashFlows from Financing Activities*:

 

Net cash provided byfinancing activities was $5.3 million for the nine months ended September 30,2009 as compared to $17.5 million for the same period in 2008. The decrease of$12.2 million in net cash provided by financing activities was primarily due tothe decrease of $82.5 million in notes payable to banks and $3.3 million inadvances for and contributions in aid of construction, partially offset by theissuance of $39.8 million in long-term debt, net of issuance costs, and anincrease in net proceeds of $34.6 million from the issuance of Common Shares.

 

***GSWC***

 

GSWC funds the majorityof its operating expenses, payments on its debt, and dividends on itsoutstanding common shares and a portion of its construction expendituresthrough internal sources and short-term and long-term borrowings. Internalsources of cash flow are provided primarily by retention of a portion ofearnings from operating activities. Internal cash generation is influenced byfactors such as weather patterns, environmental regulation, litigation, changesin supply costs and regulatory decisions affecting GSWC’s ability to recoverthese supply costs, timing of rate relief, increases in operation, maintenance,administrative and general expenses, and capital expenditures.  Outside legal costs at GSWC may increase inthe fourth quarter of 2009 and into 2010 as a result of ongoing legalproceedings.  GSWC has $60 millionavailable for issuance of debt or equity securities under a RegistrationStatement filed with the SEC as of September 30, 2009.

 

*CashFlows from Operating Activities*:

 

Net cash provided byoperating activities was $47.3 million for the nine months ended September 30,2009 as compared to $45.0 million for the same period in 2008. The increase of$2.3 million is primarily attributable to increased operating income resultingfrom higher water rates charged to customers that were approved by the CPUC,and the timing of cash receipts and disbursements related to working capitalitems affecting the changes in net cash provided by operating activities,including rate recovery from customers of GSWC’s regulatory assets and changesto the days sales outstanding.  Changesin cash flows from operating activities were generally consistent with changesin the results of operations in the normal course of business.

 

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*CashFlows from Investing Activities*:

 

Net cash used ininvesting activities, which consists primarily of capital expenditures,decreased to $53.1 million for the nine months ended September 30, 2009 ascompared to $55.5 million for the same period in 2008.  Capital expenditures are consistent with GSWC’scapital improvement plan for 2009.  Inaddition, GSWC is expected to incur capital expenditures in 2010 of approximately$85 - $90 million primarily for upgrades to its water supply and distributionfacilities.

 

*CashFlows from Financing Activities*:

 

Net cash provided byfinancing activities was $6.9 million for the nine months ended September 30,2009 as compared to $9.6 million for the same period in 2008. The decrease of$2.7 million in net cash provided by financing activities was primarily due to$30.0 million in proceeds from the issuance of Common Shares to AWR in 2008which did not recur in 2009, $3.2 million in advances for and contributions inaid of construction, and an increase of $10.6 million in dividends paid,partially offset by the issuance of $39.8 million in long-term debt, net ofissuance costs.

 

***CCWC and ASUS***

 

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

 

**Contractual Obligations and OtherCommitments**

 

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

 

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

 

In May 2009, GSWC entered into contracts topurchase software and receive implementation services for a new CustomerInformation/Customer Relationship Management System (CIS/CRM). The estimatedcosts under these contracts is $9.3 million over a period of 22 months.  As of September 30, 2009, approximately$5.1 million remains outstanding under these contracts.

 

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

 

**RegulatoryMatters**

 

***Recent Changes in Rates***

 

*Rate increases in 2009:*

 

In January 2009, the CPUC approvedescalation/attrition year rate increases for all three GSWC water ratemakingareas effective January 1, 2009. The authorized rate increases are expected to provide GSWC withadditional annual revenues of approximately $256,000 for Region I,approximately $5.1 million for Region II, representing the third year of athree-year rate case increase approved by the CPUC in 2007, and approximately$4.0 million for Region III in 2009. These estimates of additional revenues arebased upon normalized sales levels approved by the CPUC, effective January 1,2009.

 

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The CPUC also issued its final decision in the cost ofcapital proceeding in June 2009.  Inthat decision, the CPUC authorized a 10.2% Return on Equity (“ROE”), and acorresponding Return on Rate Base (“RORB”) of 8.90% to be implemented intorates for all GSWC water ratemaking areas. Implementation of the cost of capital decision is expected to result ina net annual increase in revenues of approximately $670,000.

 

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

 

In June 2008, GSWC’sBVES division filed its general rate case with the CPUC’s electric division.The filing was the first full general rate case for BVES since 1996. Costsincurred in connection with the construction of BVES’ 8.4 megawatt generatingfacility were reviewed by the CPUC as part of the 2008 general rate case. On October 15,2009, the CPUC issued a final decision regarding the BVES general ratecase.  The decision authorizes an ROE of10.5% with a corresponding RORB of 9.15%. The annual rate increases approved in the decision are $4.8 million for2009, $1.2 million for 2010, $0.2 million for 2011 and $0.2 million in2012.  All increases areprospective.  Based on the decision, BVESis also allowed to establish a Base Revenue Requirement Adjustment Mechanism todecouple usage from revenue.

 

Among otherthings, the decision allows for an update to BVES’ rates in 2010 for thecorporate headquarters’ costs based on the CPUC’s adoption by the end of 2009of new rates for GSWC’s current general rate case including the recovery ofexpenses associated with its corporate headquarters. However, in June 2009,the CPUC had authorized BVES to track the difference between the 2007 adoptedgeneral office cost allocation to BVES and the 1996 adopted general office costallocation to BVES, effective and retroactive to June 4, 2009.  The amount in this memorandum account totalsapproximately $761,000 as of September 30, 2009. However, the decisionissued on October 15, 2009 did not address the disposition of thismemorandum account.   GSWC intends toseek clarification from the CPUC on the treatment and recovery of thismemorandum account.   If approved forrecovery, GSWC will record a regulatory asset and a corresponding increase toearnings for amounts included in this memorandum account.

 

*CCWC*

 

CCWC filed a rate casewith the ACC in August 2004 for its water system in Fountain Hills,Arizona. In September 2005, the ACC approved a rate increase for CCWC. Therate increase was effective on October 1, 2005 and was expected togenerate additional annual revenues of approximately $1.1 million, an 18%increase over 2004 revenues. During this GRC, CCWC sought to have its ratesdetermined using a fair value rate base. The ACC elected not to use fair valuein setting the rates. CCWC appealed the ACC’s use of only original cost lessdepreciation rate base to determine the revenue requirement with the ArizonaCourt of Appeals. Because CCWC’s fair value rate base was higher, the use oforiginal cost exclusively to determine the revenue requirement deprived CCWC ofa substantial amount of operating income.

 

On February 13,2007, the Arizona Court of Appeals upheld CCWC’s challenge to the ACC’s failureto use fair value rate base in the determination of operating income. Theprocess the ACC utilized was found to be in violation of the ArizonaConstitution. However, the Court also held that the ACC’s determination of thereturn on equity, while not well-explained, was made based on the evidence, wasa matter within the agency’s substantial discretion and was lawful.  The ACC decided not to seek review, and thematter was returned to the ACC on remand for modification of the original ACCdecision consistent with the decision of the Court of Appeals. Testimony wasfiled by ACC staff and the Residential Utility Consumer Office.

 

The ACC conductedevidentiary hearings on the remanded case in January 2008.  The ACC rendered its final decision on July 17,2008.  The decision reduced the ROE fromthe 9.3% in the original decision by 200 basis points resulting in a return onfair value rate base of only 6.4%. Under this decision, CCWC’s annual revenueswould only be expected to increase by $12,000. CCWC has filed an appeal of this decision.  In October 2009, the Arizona Court ofAppeals notified CCWC that it would hear oral arguments on the CCWCAppeal.  CCWC expects that oral argumentswill be sometime in December 2009 or January 2010.

 

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CCWC filed a rate caseduring the fourth quarter of 2007, requesting rate increases of approximately$2.9 million.  On October 8,2009, the ACC issued a final decision approving a rate increase for CCWC, whichwas effective on October 15, 2009 and is expected to generate additionalannual revenues of approximately $1.7 million, a 23% increase over currentrevenues.  In addition, despite itsprevious rulings, the ACC also ordered CCWC to treat the entire gain of$1,520,000 from a settlement agreement with the Fountain Hills SanitaryDistrict (“FHSD”) as a reduction to rate base.  In 2005, in an agreement with the FHSD, CCWC agreed to permanently ceaseusing one of its wells in order for the FHSD to secure an Aquifer ProtectionPermit for its recharge system.  Based onprevious decisions ruled by the ACC on similar gains, CCWC recognized a netgain of $760,000 (50% of the proceeds) in 2005 related to the settlementagreement and established a regulatory liability for the remaining $760,000pending the ACC’s review of this matter. However, the final decision issued on October 8, 2009, ordered CCWCto treat the entire settlement proceeds of $1,520,000 as a reduction to rate base.  As a result, CCWC recognized a loss of$760,000, or $0.02 per share, during the third quarter of 2009.   This effectively reverses the original gainrecorded in 2005.

 

As of September 30,2009, CCWC has $3.5 million of goodwill which may be at risk for potentialimpairment if future requested rate increases are not granted or furtherdelayed by the ACC.

 

*Rate increases in 2008:*

 

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

 

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

 

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

 

***PendingRate Requests***

 

*GSWC*

 

GSWC filed its generalrate case for Regions II and III plus the general office on July 1,2008.  The new rates are to be effective for 2010, 2011 and 2012. In thefiling, GSWC requested rate increases that would be expected to generateapproximately $20.3 million in annual revenues starting in 2010, $2.6 millionin 2011 and $4.2 million in 2012 for Region II, and increases of $30.0 millionstarting in 2010, $1.7 million in 2011 and $3.7 million in 2012 for Region III,if approved as filed, based upon normalized sales levels approved by theCPUC.  During the course of the proceeding, GSWC has agreed to reduce oreliminate certain requests.  As a result, the revised requested increasethat was submitted to the CPUC would result in increased annual revenues of$17.6 million in 2010, $2.3 million in 2011 and $3.2 million in 2012 for RegionII, and increases of $24.6 million in 2010, $1.2 million in 2011 and $2.6million in 2012 for Region III if approved by the CPUC, based upon normalizedsales levels approved by the CPUC.  At the time that the CPUC issues itsfinal decision, certain cost increase projections will be updated to reflectmore current inflation rates and the most current purveyor rates for purchasedpower, purchased water and pump taxes.   These updates could have apositive or negative impact on the final increases approved by the CPUC.

 

***Other Regulatory Matters***

 

See *“Management’s Discussion and Analysis of Financial Condition andResults of Operation—Regulatory Matters”*section of the Registrant’sForm 10-K for the year-ended December 31, 2008 for a detaileddiscussion of other regulatory matters. The discussion below focuses onsignificant matters and changes since December 31, 2008.

 

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**Cost of Capital**

 

Under the new rate caseplan adopted by the CPUC in May 2007, GSWC is required to file a separateapplication to review the rate of return authorized by the CPUC every threeyears.  In prior years, the rate ofreturn was determined as part of the general rate case process along with allother operating costs.  This new procedureto separate the rate of return from the general rate case is the same processthat the CPUC utilizes to determine the rate of return for energy companiesunder CPUC jurisdiction.

 

GSWC filed its first costof capital application under the new rate case plan on May 1, 2008.  The application requested the CPUC to adoptan ROE of 12.1%.  The scoping memo forthis proceeding bifurcated the proceeding into two phases.  In May 2009, the CPUC issued a finaldecision in the Phase I cost of capital proceeding.  The final decision authorized an ROE of10.2%.  In January 2009, the CPUC issueda revised scoping memo for Phase II of the proceeding which directed theparties to submit testimony addressing the effect of the current financialmarket crisis on the utilities’ ability to attract and retain capital.  On July 30, 2009, the CPUC approvedPhase II of the cost of capital application which adopts an automaticadjustment mechanism to adjust ROE and RORB between the three year cost ofcapital proceedings.

 

**ConservationRate Design and Revenue Adjustment Mechanisms**

 

On August 21, 2008,the CPUC issued a final decision which authorized GSWC to implement anincreasing block rate design in GSWC’s Regions II and III as a means toencourage water conservation.  It alsodirected GSWC to file a tiered rate design for Region I, which has been filed byGSWC.  In addition, GSWC was authorizedto establish a WRAM to track revenue shortfalls for subsequent recovery fromcustomers, and an MCBA that would include recovery for changes in the watersupply mix.

 

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

 

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

 

The CPUC also approved anadvice letter filing in a separate proceeding to allow GSWC to create andimplement a WCMA to track the extraordinary expenses and revenue shortfallassociated with the conservation measures in conjunction with the declareddrought in California.  The WCMA was effectiveAugust 18, 2008 and was used to track the revenue shortfall until the WRAMwas implemented on November 25, 2008. At November 24, 2008, approximately $2.0 million of netunder-collection had been included in the WCMA for Regions II and III prior tothe implementation of the WRAM. On April 16, 2009, the CPUC approved theWCMA and authorized GSWC to establish a 12-month surcharge to customers’ bills.The surcharge went into effect on April 21, 2009.  Accordingly, GSWC established a $2.0 millionregulatory asset with a corresponding increase to income during the secondquarter of 2009.

 

On May 7, 2009, theCPUC approved three-tiered rates for Region I and the establishment of a WRAMand MCBA which went into effect on September 1, 2009.  As of September, 2009, GSWC has a $1.1million regulatory asset for Region I’s WCMA balance incurred during the periodof August 18, 2008 through August 31, 2009.  In October 2009, GSWC filed for recoveryof the Region I WCMA balance.  Managementbelieves that this amount is probable of recovery.

 

**DeferredRate Case Costs:**

 

Included in GSWC’s otherregulatory assets are deferred rate case costs totaling $3.7 million. These aredirect costs consisting primarily of outside consulting services, which areincurred in connection with the preparation and processing of a GRC. Historically, GSWC has deferred these costs as a regulatory asset which arethen recovered in rates and amortized over the term of a rate case cycle oncethe new rates go into effect.  In the current GRC for Regions II and IIIand the general office, the CPUC’s Division of Ratepayer Advocates (“DRA”) haschallenged GSWC’s historical practice of deferring these costs with subsequentrecovery upon the effective date of the new rates.  Instead, DRA believesthat rate case costs should be projected for future periods and recoveredprospectively.   Management believes that DRA’s rationale andrecommendations are inconsistent with GSWC’s 

 

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historical practice ofdeferring and recovering rate case expenses associated with the currentGRC.  These practices  have not been challenged by the CPUC in priorrate cases.  GSWC will vigorously defend its position.  However, ifDRA prevails, GSWC may be required to write-off approximately $2.3 million asof September 30, 2009 related to the current water rate case.  Atthis time, GSWC is unable to predict the outcome of this matter.

 

**CPUCSubpoena**

 

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

 

In January 2009, theACC staff requested information regarding the CPUC subpoena and on-goingaudit.  GSWC has been working with theACC staff and has provided responsive materials that are relevant to CCWC.  Management cannot predict the outcome of theACC’s request.  Although the ACC hasissued a decision in the CCWC general rate case, they have held the proceedingopen pending resolution of the staff review of the CPUC subpoena documents.

 

**PensionCosts Memorandum Account**

 

There was an increase inthe underfunded status of the pension plan during 2008 which has resulted inhigher pension costs during 2009.  Theamount included in rates for recovery of pension costs for 2009 were previouslyestablished in the last GRC and did not include this higher level ofcosts.  In March 2009,GSWC filed an advice letter with the CPUC requesting authorization to establisha Pension Costs Memorandum Account to track the difference between the pensioncosts authorized by the CPUC and included in customer rates, and actual pensioncosts in 2009. The CPUC has rejected this request indicating that amountsestablished in the previous GRC will remain in effect.

 

GSWC also amended its current rate case application torequest a two-way balancing account to track fluctuations in the forecastedannual pension expense adopted in rates and the actual annual expense to berecorded by GSWC in 2010, 2011 and 2012 in accordance with the accountingguidance on pension costs.  If approvedas filed, GSWC will establish a regulatory asset or liability those years, forany shortfalls or excesses in this account.

 

**Mandatory Conservation and RationingImplementation Memorandum Account**

 

GSWC serves approximately 4,800 customers in the City ofBay Point in Region I.  The majority ofthe water supply for the Bay Point customer service area is obtained from theContra Costa Water District (“CCWD”).  On March 4, 2009, CCWD made a findingthat a water supply shortage existed within CCWD service territories anddetailed a plan for significant conservation efforts.  Accordingly,GSWC filed an advice letter with the CPUC seeking authority to implement CPUC’sRule No. 14.1, which details water conservation and rationing in itsBay Point customer service area.  GSWCwill implement waterrationing, restrictions, and excess usage charges to its customers, asneeded.  GSWC alsofiled a separate advice letter seeking authorization to establish a MandatoryConservation and Rationing Implementation Memorandum Account (“MCRIMA”) totrack the additional administrative costs, operating costs, and revenueshortfall not otherwise recoverable through any other mechanism recognized bythe CPUC.

 

In June 2009, bothadvice letters were approved by the CPUC and GSWC has implemented waterrationing, restrictions, and excess usage charges to its customers, in the BayPoint service area.  Furthermore, in June 2009,GSWC also filed advice letters with the CPUC which were approved in October 2009and has implemented similar mandatory water conservation and rationingschedules, as well as a MCRIMA, in its Simi Valley, Claremont, San Dimas, SanGabriel, Orange County and Metropolitan customer service areas.

 

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**Bear Valley Electric**

 

GSWChad previously filed a complaint with the FERC seeking to reduce the $95 perMWh rate in a contract entered into with Mirant Americas Energy Marketing (“MirantMarketing”) to a just and reasonable price. In May 2009, GSWC reached asettlement agreement with Mirant Energy Trading, LLC, which acquired the powercontract from Mirant Marketing as a result of bankruptcy reorganization.Pursuant to that settlement agreement, GSWC filed with the FERC a notice of thewithdrawal of its complaint. The settlement agreement required Mirant EnergyTrading to pay $1.0 million as a cash settlement to GSWC after the withdrawalof the complaint at the FERC becomes effective. On May 26, 2009, GSWC received the $1.0 million settlement paymentfrom Mirant and GSWC recorded a corresponding reduction to previously incurredlegal costs, which increased pretax earnings during the nine months ended September 30,2009.

 

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

 

*OIR on Affiliate Transactions**:*

 

In April 2009, the CPUC issued an OIR on the CPUC’sown motion to develop standard rules and procedures for regulated waterand sewer utilities governing affiliate transactions and the use of regulatedassets for non-tariffed utility services (formerly called excesscapacity).  This OIR is designed to create generic rules forall water and sewer companies with regard to transactions with a parent companyand/or affiliates and with regard to the use of regulated assets and personnelfor non-tariffed utility products and services.

 

*OIR on Contamination Proceeds:*

 

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

 

**Environmental Matters**

 

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

 

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

 

**WaterSupply**

 

***State Water Project***

 

GSWCmanages a portfolio of water supplies, including groundwater, surface water andwater purchased from wholesalers.  Forexample, GSWC has contracts with various governmental entities,principally Metropolitan Water District’s member agencies (“MWD”), and otherparties to purchase water for distribution to customers.  The MWD is a public agency organized and managed toprovide a supplemental, imported supply of water to its member publicagencies.  GSWC has 46 connections to MWD’swater distribution facilities and those of member agencies.  The Company purchases MWD water through sixmember agencies aggregating more than 62,000 acre-feet annually. MWD’sprincipal sources of water are the Colorado River via the Colorado RiverAqueduct and northern California supplies via the State Water Project (“SWP”).

 

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

 

A keylink in the SWP is the Sacramento/San Joaquin River Delta adjacent to the SanFrancisco Bay (“Delta”).  Theenvironmental health of the Delta has been called into question, citing amongother things declining levels of particular fish species.  The SWP is subject to a variety of operatinglimitations and permitting processes designed, collectively, to balance theneed for water exports with the need to restore and protect the Delta 

 

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environment.  Inlate 2007, a Federal judge issued a decision in the case *Natural Resources Defense Council v. Kempthorne*,Case No. 05-CV-1207 (U.S. Dist. Ct., E.D.) finding, among other things,that the Biological Opinion (“BiOp”) issued by the U.S. Fish and WildlifeService was legally insufficient and failed to consider recent declines indelta smelt fish populations.  A new BiOp, responsive to recent scientificfindings and to the judge’s order, was filed December 15, 2008.  The BiOp, which sets the parameters for a newoperating procedure for the SWP, could result in permanent restrictions onwater deliveries through the Delta, reducing deliveries in some years by up to50%.

 

On September 4,2009, the National Marine Fisheries Service issued a new BiOp to protect salmonin the delta under the Endangered Species Act. This was followed by the September 25, 2009 listing of the long finsmelt by the California Fish and Game Commission as a threatened species.  The listing of the long fin smelt and the newBiOp for salmon could potentially impact SWP deliveries further.

 

At the start of eachyear, the Department of Water Resources (“DWR”) issues a conservative initialallocation estimate that is typically increased as the water year progresses.Due to declining storage levels in the State’s reservoirs and the need to meetcertain operational conditions, DWR has established a 40% delivery levelthrough the SWP for 2009.

 

In response to thereduced SWP deliveries and reduced local storage levels, MWD implemented itsWater Supply Allocation Plan to effectively reduce water deliveries across theregion by 10% beginning July 1, 2009. MWD plans to achieve the reduction by imposing significant penaltycharges to its member agencies who do not achieve stated reductions.  GSWC purchases MWD water through these memberagencies, and the member agencies have implemented similar penalty structuresto its customers, including GSWC, to ensure commensurate conservationlevels.  GSWC has implemented mandatorywater conservation and allocations in certain service areas in accordance withthe stated reductions.  MWD has alsoannounced an 8.8% basic rate increase as well as a $69 per-acre-foot Deltasurcharge.  These two elements result ina combined average increase of 19.7% effective September 1, 2009.

 

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

 

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

 

**New AccountingPronouncements**

 

Registrantis subject to newly issued requirements as well as changes in existingrequirements issued by the Financial Accounting Standards Board. Differences infinancial reporting between periods could occur unless and until the CPUC andthe ACC approve such changes for conformity through regulatory proceedings. See*Note 1**of UnauditedNotes to Consolidated Financial Statements.*

 

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

 

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

 

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

 

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**Item 4. Controls and Procedures**

 

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

 

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

 

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

 

Therehas been no change in our internal control over financial reporting during thequarter ended September 30, 2009, that has materially affected or isreasonably likely to materially affect our internal control over financialreporting.

 

**Item 4T. Controls and Procedures**

 

Notapplicable.

 

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**PART II**

 

**Item 1. Legal Proceedings**

 

There have been no materialdevelopments in any of the legal proceedings described in our 2008 AnnualReport on Form 10-K.  However, outside legal costs at GSWC may increasein the fourth quarter of 2009 and into 2010 as a result of ongoing legalproceedings.

 

Registrant is subject to ordinaryroutine litigation incidental to its business. Other than those disclosed inRegistrant’s Form 10-K for the year ended December 31, 2008, no otherlegal proceedings are pending, which are believed to be material. Management believes that rate recovery,proper insurance coverage and reserves are in place to insure against property,general liability and workers’ compensation claims incurred in the ordinarycourse of business.

 

**Item 1A. Risk Factors**

 

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

 

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

 

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

 
| **Period**                       | ** ** | **Total Number of  Shares  Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of  Shares Purchased as  Part of Publicly  Announced Plans or  Programs (1)** | ** ** | **Maximum Number  of Shares That May  Yet Be Purchased  under the Plans or  Programs** | ** ** |
|----------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------|------------|
| July 1-31, 2009             |       | 55                                               | (2)        | $                                                | 34.48      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| August 1-31, 2009           |       | 110                                              |       | $                                                | 33.15      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| September 1 – 30, 2009 |       | 14                                               |       | $                                                | 35.00      |                                                                                                                                 | —     |                                                                                                                                | NA         |   |
| Total                            |       | 179                                              | (2)        | $                                                | 33.70      |                                                                                                                                 | —     |                                                                                                                                | NA         | (3) |

 

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

 

(2)         Of the amounts presented, 4 Common Shareswere acquired on the open market for employees pursuant to the Company’s 401 (k) plan.The remainder of the Common Shares was acquired on the open market for newparticipants in the Company’s Common Share Purchase and Dividend ReinvestmentPlan.

 

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

 

**Item 3. Defaults Upon Senior Securities**

 

None

 

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

 

Noitems were submitted during the third quarter of the fiscal year covered bythis report to a vote of security holders through the solicitation of proxiesor otherwise.

 

**Item 5. Other Information**

 

(a)          OnOctober 27, 2009, the Board of Directors of AWR declared a regularquarterly dividend of $0.260 per common share. The dividend will be paid on December 1,2009 to shareholders of record as of the close of business on November 12,2009.

 

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

 

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## **Item6. Exhibits**

##  

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

 
| 31.1   | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
|--------|-----------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                  |
| 31.1.1 | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
|   |                                                                                                                  |
| 31.2   | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)  |
|   |                                                                                                                  |
| 31.2.1 | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1) |
|   |                                                                                                                  |
| 32.1   | Certification of Chief Executive Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |
|   |                                                                                                                  |
| 32.2   | Certification of Chief Financial Officer pursuant to  Section 906 of the Sarbanes-Oxley Act of 2002 (2)          |

 

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(1)         Filed concurrently herewith

 

(2)         Furnished concurrently herewith

 

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#### **SIGNATURE**

####  

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

 
|   |            | AMERICAN STATES WATER COMPANY (“AWR”): |
|--------|-----------------|--------------------------------------------------|
|   |            |                                             |
|   |   By: | /s/ EVA G. TANG                                  |
|   |            | Senior Vice President-Finance, Chief Financial   |
|   |            | Officer, Corporate Secretary and Treasurer       |
|   |            |                                             |
|   |            | GOLDEN STATE WATER COMPANY (“GSWC”):   |
|   |            |                                             |
|   |   By: | /s/ EVA G. TANG                                  |
|   |            | Senior Vice President-Finance, Chief Financial   |
|   |            | Officer and Secretary                            |
|   |            |                                             |
|   | Date:           | November 5, 2009                            |

 

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