AWR-2013.06.30-10Q
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 2013
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                    to                   
 
Commission file number   001-14431 
American States Water Company
(Exact Name of Registrant as Specified in Its Charter)
 
California
 
95-4676679
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Commission file number   001-12008 
Golden State Water Company
(Exact Name of Registrant as Specified in Its Charter)
California
 
95-1243678
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American States Water Company
 
Yes x No ¨
Golden State Water Company
 
Yes x No ¨
 
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required 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 shorter period that the Registrant was required to submit and post such files).


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American States Water Company
 
Yes x No ¨
Golden State Water Company
 
Yes x No ¨

 Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
American States Water Company
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Golden State Water Company
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨

 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
American States Water Company
 
Yes ¨ Nox
Golden State Water Company
 
Yes ¨ Nox
As of August 6, 2013, the number of Common Shares outstanding, of American States Water Company was 19,344,402 shares. As of August 6, 2013, all of the 146 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.
Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.
 



AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
FORM 10-Q
 
INDEX


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I
 Item 1. Financial Statements
 
General
 
The basic financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
 
Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consisting of normal recurring items and estimates necessary for a fair statement of results for the interim period have been made.
 
It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the latest Annual Report on Form 10-K of American States Water Company and its wholly owned subsidiary, Golden State Water Company.
 
Filing Format
 
American States Water Company (hereinafter “AWR”) is the parent company of Golden State Water Company (hereinafter “GSWC”) and American States Utility Services, Inc. (hereinafter “ASUS”) and its subsidiaries.
 
This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: AWR and GSWC. For more information, please see Note 1 of the Notes to Consolidated Financial Statements and the heading entitled General in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than GSWC.
 
Forward-Looking Information
 
This Form 10-Q and the documents incorporated herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.  For example, when we use words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements.  We are not able to predict all the factors that may affect future results.  We caution you that any forward-looking statements made by us are not guarantees of future performance and those actual results may differ materially from those in our forward-looking statements.  Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements, or from historical results, include, but are not limited to: 
The outcome of regulatory, legislative or other proceedings, investigations or audits, including decisions in our general rate cases and the results of independent audits of our construction contracting procurement practices or other independent audits of our costs
Changes in the policies and procedures of the California Public Utilities Commission (“CPUC”)
Timeliness of CPUC action on rates
Our ability to efficiently manage capital expenditures and operating and maintenance expenses within CPUC authorized levels and timely recovery of our costs through rates
The impact of increasing opposition to GSWC rate increases on our ability to recover our costs through rates and on the size of our customer base
Our ability to forecast the costs of maintaining GSWC’s aging water and electric infrastructure
Our ability to recover increases in permitting costs and in costs associated with negotiating and complying with the terms of our franchise agreements with cities and counties and other demands made upon us by the cities and counties in which GSWC operates

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Changes in accounting valuations and estimates, including those resulting from changes in our assessment of anticipated recovery of regulatory assets, liabilities and revenues subject to refund or regulatory disallowances
Changes in environmental laws and water and wastewater quality requirements and increases in costs associated with complying with these laws and requirements
Availability of water supplies, which may be adversely affected by changes in weather patterns, contamination and court decisions or other governmental actions restricting use of water from the Colorado River, transportation of water to GSWC’s service areas through the California State Water Project or pumping of groundwater
Our ability to obtain adequate, reliable and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our water and wastewater operations
Our ability to recover the costs associated with the contamination of GSWC’s groundwater supplies from parties responsible for the contamination or through the ratemaking process and the time and expense incurred by us in obtaining recovery of such costs
Adequacy of our power supplies for GSWC’s Bear Valley Electric Service division and the extent to which we can manage and respond to the volatility of electric and natural gas prices
Our ability to comply with the CPUC’s renewable energy procurement requirements
Changes in GSWC customer demand due to unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions, cost increases and conservation
Changes in accounting treatment for regulated utilities
Changes in estimates used in ASUS’s revenue recognition under the percentage of completion method of accounting for our construction activities at our contracted services business
Termination, in whole or in part, of our contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default
Delays in filing for or obtaining redetermination of prices or equitable adjustments to our prices on our contracts to provide water and/or wastewater services at military bases
Disallowance of costs on our contracts to provide water and/or wastewater services at military bases as a result of audits, cost review or investigations by contracting agencies
Inaccurate assumptions used in preparing bids in our contracted services business
Failure of the collection or sewage systems that we operate on military bases resulting in untreated wastewater or contaminants spilling into nearby properties, streams or rivers
Failure to comply with the terms of our military privatization contracts
Failure of any of our subcontractors to perform services for us in accordance with the terms of our military privatization contracts
Implementation, maintenance and upgrading of our information technology systems
General economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers
Explosions, fires, accidents, mechanical breakdowns, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions
The impact of storms, earthquakes, floods, mudslides, drought, wildfires, disease and similar natural disasters, or acts of terrorism or vandalism, that affect customer demand or that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely

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Potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber attack or other cyber incident
Restrictive covenants in our debt instruments or changes to our credit ratings on current or future debt that may increase our financing costs or affect our ability to borrow or make payments on our debt
Our ability to access capital markets and other sources of credit in a timely manner on acceptable terms
 
Please consider our forward-looking statements in light of these risks (which are more fully disclosed in our 2012 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all of our forward-looking statements by these cautionary statements.

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AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)



(in thousands)
 
June 30, 2013
 
December 31, 2012
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,393,711

 
$
1,351,086

Non utility property, at cost
 
9,121

 
9,021

Total
 
1,402,832

 
1,360,107

Less - Accumulated depreciation
 
(456,092
)
 
(442,316
)
Net property, plant and equipment
 
946,740

 
917,791

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
14,005

 
13,755

Total other property and investments
 
15,121

 
14,871

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
8,525

 
23,486

Accounts receivable — customers (less allowance for doubtful accounts of $742 in 2013 and $797 in 2012)
 
27,401

 
19,491

Unbilled revenue
 
20,131

 
16,147

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and $8 in 2012)
 
7,369

 
12,905

Other accounts receivable (less allowance for doubtful accounts of $372 in 2013 and $423 in 2012)
 
7,275

 
7,062

Income taxes receivable
 
2,001

 
16,547

Materials and supplies, at average cost
 
6,120

 
5,348

Regulatory assets — current
 
35,364

 
32,336

Prepayments and other current assets
 
4,189

 
4,391

Costs and estimated earnings in excess of billings on uncompleted contracts
 
52,843

 
37,703

Deferred income taxes — current
 
9,902

 
8,617

Total current assets
 
181,120

 
184,033

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
149,529

 
143,679

Costs and estimated earnings in excess of billings on uncompleted contracts
 
2,151

 
436

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and 2012)
 
2,827

 
4,535

Deferred income taxes
 
11

 
11

Other
 
15,487

 
15,587

Total regulatory and other assets
 
170,005

 
164,248

 
 
 
 
 
Total Assets
 
$
1,312,986

 
$
1,280,943

 
The accompanying notes are an integral part of these consolidated financial statements





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AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited)

(in thousands)
 
June 30, 2013
 
December 31, 2012
Capitalization
 
 

 
 

Common shares, no par value
 
$
251,627

 
$
249,322

Earnings reinvested in the business
 
213,758

 
205,257

Total common shareholders’ equity
 
465,385

 
454,579

Long-term debt
 
332,359

 
332,463

Total capitalization
 
797,744

 
787,042

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
3,383

 
3,328

Accounts payable
 
55,216

 
40,569

Income taxes payable
 
437

 
511

Accrued other taxes
 
6,599

 
8,167

Accrued employee expenses
 
9,202

 
9,919

Accrued interest
 
3,916

 
3,909

Unrealized loss on purchased power contracts
 
1,147

 
3,060

Billings in excess of costs and estimated earnings on uncompleted contracts
 
2,299

 
12,572

Dividends payable
 
7,811

 

Other
 
12,438

 
11,662

Total current liabilities
 
102,448

 
93,697

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,831

 
70,781

Contributions in aid of construction - net
 
113,187

 
106,450

Deferred income taxes
 
148,641

 
142,597

Unamortized investment tax credits
 
1,836

 
1,881

Accrued pension and other postretirement benefits
 
73,493

 
71,618

Other
 
6,806

 
6,877

Total other credits
 
412,794

 
400,204

 
 
 
 
 
Commitments and Contingencies (Note 8)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,312,986

 
$
1,280,943

 
The accompanying notes are an integral part of these consolidated financial statements

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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
Three Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
84,069

 
$
81,157

Electric
 
8,397

 
8,373

Contracted services
 
28,229

 
25,052

Total operating revenues
 
120,695

 
114,582

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
16,670

 
13,831

Power purchased for pumping
 
2,332

 
2,019

Groundwater production assessment
 
3,823

 
3,982

Power purchased for resale
 
2,828

 
2,680

Supply cost balancing accounts
 
(377
)
 
4,163

Other operation expenses
 
6,519

 
6,851

Administrative and general expenses
 
18,113

 
18,063

Depreciation and amortization
 
9,768

 
10,407

Maintenance
 
4,913

 
3,852

Property and other taxes
 
3,748

 
3,716

ASUS construction expenses
 
19,064

 
14,896

Net gain on sale of property
 

 
(3
)
Total operating expenses
 
87,401

 
84,457

 
 
 
 
 
Operating Income
 
33,294

 
30,125

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,768
)
 
(5,720
)
Interest income
 
140

 
495

Other, net
 
84

 
(13
)
Total other income and expenses
 
(5,544
)
 
(5,238
)
 
 
 
 
 
Income from operations before income tax expense
 
27,750

 
24,887

 
 
 
 
 
Income tax expense
 
11,148

 
9,809

 
 
 
 
 
Net Income
 
$
16,602

 
$
15,078

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
19,306

 
18,882

Basic Earnings Per Common Share
 
$
0.85

 
$
0.79

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
19,346

 
18,945

Fully Diluted Earnings Per Common Share
 
$
0.85

 
$
0.79

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.355

 
$
0.280


The accompanying notes are an integral part of these consolidated financial statements



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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
153,302

 
$
147,358

Electric
 
19,131

 
19,186

Contracted services
 
58,814

 
54,930

Total operating revenues
 
231,247

 
221,474

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
27,402

 
23,383

Power purchased for pumping
 
3,971

 
3,575

Groundwater production assessment
 
7,010

 
7,305

Power purchased for resale
 
6,508

 
5,871

Supply cost balancing accounts
 
994

 
7,600

Other operation expenses
 
11,973

 
14,277

Administrative and general expenses
 
36,020

 
34,892

Depreciation and amortization
 
19,584

 
20,897

Maintenance
 
8,847

 
7,183

Property and other taxes
 
7,896

 
7,821

ASUS construction expenses
 
39,797

 
35,181

Net gain on sale of property
 
(12
)
 
(3
)
Total operating expenses
 
169,990

 
167,982

 
 
 
 
 
Operating Income
 
61,257

 
53,492

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,546
)
 
(11,790
)
Interest income
 
327

 
710

Other, net
 
426

 
216

Total other income and expenses
 
(10,793
)
 
(10,864
)
 
 
 
 
 
Income from operations before income tax expense
 
50,464

 
42,628

 
 
 
 
 
Income tax expense
 
20,397

 
17,435

 
 
 
 
 
Net Income
 
$
30,067

 
$
25,193

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
19,285

 
18,857

Basic Earnings Per Common Share
 
$
1.54

 
$
1.33

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
19,324

 
18,988

Fully Diluted Earnings Per Common Share
 
$
1.54

 
$
1.32

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.71

 
$
0.56


The accompanying notes are an integral part of these consolidated financial statements



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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2013
 
2012
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
30,067

 
$
25,193

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
20,052

 
22,046

Provision for doubtful accounts
 
437

 
959

Deferred income taxes and investment tax credits
 
5,789

 
2,361

Stock-based compensation expense
 
1,135

 
1,170

Other — net
 
(159
)
 
(260
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(8,339
)
 
(2,978
)
Unbilled revenue
 
(3,984
)
 
(9,527
)
Other accounts receivable
 
(221
)
 
4,306

Receivable from the U.S. government
 
7,244

 
(346
)
Materials and supplies
 
(772
)
 
(1,888
)
Prepayments and other current assets
 
202

 
(1,863
)
Regulatory assets — supply cost balancing accounts
 
994

 
7,600

Costs and estimated earnings in excess of billings on uncompleted contracts
 
(16,855
)
 
9,732

Other assets (including other regulatory assets)
 
(14,307
)
 
(9,620
)
Accounts payable
 
5,979

 
4,428

Income taxes receivable/payable
 
14,472

 
13,677

Billings in excess of costs and estimated earnings on uncompleted contracts
 
(10,273
)
 
(4,358
)
Accrued pension and other postretirement benefits
 
3,733

 
4,379

Other liabilities
 
(1,574
)
 
(1,074
)
Net cash provided
 
33,620

 
63,937

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(41,189
)
 
(29,447
)
Other investments
 
(200
)
 

Proceed from sale of property
 
12

 
4

Net cash used
 
(41,377
)
 
(29,443
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from issuance of common shares and stock option exercises
 
1,832

 
2,748

Receipt of advances for and contributions in aid of construction
 
8,283

 
2,049

Refunds on advances for construction
 
(2,712
)
 
(2,684
)
Repayments of long-term debt
 
(109
)
 
(234
)
Proceeds from issuance of long-term debt
 
60

 
1,266

Net change in notes payable to banks
 

 
(2,000
)
Dividends paid
 
(13,684
)
 
(10,559
)
Other — net
 
(874
)
 
(480
)
Net cash used
 
(7,204
)
 
(9,894
)
Net (decrease) increase in cash and cash equivalents
 
(14,961
)
 
24,600

Cash and cash equivalents, beginning of period
 
23,486

 
1,315

Cash and cash equivalents, end of period
 
$
8,525

 
$
25,915



The accompanying notes are an integral part of these consolidated financial statements

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GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)


(in thousands)
 
June 30, 2013
 
December 31, 2012
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,393,711

 
$
1,351,086

Less - Accumulated depreciation
 
(451,213
)
 
(437,949
)
Net utility plant
 
942,498

 
913,137

 
 
 
 
 
Other Property and Investments
 
11,846

 
11,590

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
7,989

 
22,578

Accounts receivable-customers (less allowance for doubtful accounts of $742 in 2013 and $797 in 2012)
 
27,401

 
19,491

Unbilled revenue
 
20,131

 
16,147

Inter-company receivable
 
5,145

 
2,508

Other accounts receivable (less allowance for doubtful accounts of $362 in 2013 and $380 in 2012)
 
5,209

 
6,377

Income taxes receivable from Parent
 
3,947

 
16,442

Note receivable from Parent
 
9,200

 

Materials and supplies, at average cost
 
2,277

 
2,244

Regulatory assets — current
 
35,364

 
32,336

Prepayments and other current assets
 
3,595

 
4,162

Deferred income taxes — current
 
8,856

 
7,577

Total current assets
 
129,114

 
129,862

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
149,529

 
143,679

Other accounts receivable
 
1,445

 
1,445

Other
 
14,057

 
14,339

Total regulatory and other assets
 
165,031

 
159,463

 
 
 
 
 
Total Assets
 
$
1,248,489

 
$
1,214,052

 
The accompanying notes are an integral part of these financial statements

 

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GOLDEN STATE WATER COMPANY
BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited)

(in thousands)
 
June 30, 2013
 
December 31, 2012
Capitalization
 
 

 
 

Common shares, no par value
 
$
231,814

 
$
231,480

Earnings reinvested in the business
 
195,631

 
184,777

Total common shareholder’s equity
 
427,445

 
416,257

Long-term debt
 
332,359

 
332,463

Total capitalization
 
759,804

 
748,720

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
3,383

 
3,328

Accounts payable
 
41,126

 
27,292

Accrued other taxes
 
6,276

 
7,720

Accrued employee expenses
 
8,175

 
8,786

Accrued interest
 
3,916

 
3,909

Unrealized loss on purchased power contracts
 
1,147

 
3,060

Other
 
12,371

 
11,606

Total current liabilities
 
76,394

 
65,701

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,831

 
70,781

Contributions in aid of construction — net
 
113,187

 
106,450

Deferred income taxes
 
148,200

 
142,082

Unamortized investment tax credits
 
1,836

 
1,881

Accrued pension and other postretirement benefits
 
73,493

 
71,618

Other
 
6,744

 
6,819

Total other credits
 
412,291

 
399,631

 
 
 
 
 
Commitments and Contingencies (Note 8)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,248,489

 
$
1,214,052

 
The accompanying notes are an integral part of these financial statements

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GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2013 AND 2012
(Unaudited)


 
 
Three Months Ended 
 June 30,
(in thousands)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
84,069

 
$
81,157

Electric
 
8,397

 
8,373

Total operating revenues
 
92,466

 
89,530

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
16,670

 
13,831

Power purchased for pumping
 
2,332

 
2,019

Groundwater production assessment
 
3,823

 
3,982

Power purchased for resale
 
2,828

 
2,680

Supply cost balancing accounts
 
(377
)
 
4,163

Other operation expenses
 
5,842

 
6,202

Administrative and general expenses
 
15,166

 
15,670

Depreciation and amortization
 
9,484

 
10,122

Maintenance
 
4,365

 
3,357

Property and other taxes
 
3,375

 
3,354

Total operating expenses
 
63,508

 
65,380

 
 
 
 
 
Operating Income
 
28,958

 
24,150

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,726
)
 
(5,680
)
Interest income
 
140

 
469

Other, net
 
85

 
(14
)
Total other income and expenses
 
(5,501
)
 
(5,225
)
 
 
 
 
 
Income from operations before income tax expense
 
23,457

 
18,925

 
 
 
 
 
Income tax expense
 
9,643

 
7,567

 
 
 
 
 
Net Income
 
$
13,814

 
$
11,358

 
The accompanying notes are an integral part of these financial statements





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Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
153,302

 
$
147,358

Electric
 
19,131

 
19,186

Total operating revenues
 
172,433

 
166,544

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
27,402

 
23,383

Power purchased for pumping
 
3,971

 
3,575

Groundwater production assessment
 
7,010

 
7,305

Power purchased for resale
 
6,508

 
5,871

Supply cost balancing accounts
 
994

 
7,600

Other operation expenses
 
10,639

 
12,851

Administrative and general expenses
 
29,400

 
29,366

Depreciation and amortization
 
19,006

 
20,342

Maintenance
 
7,858

 
6,297

Property and other taxes
 
7,091

 
7,097

Total operating expenses
 
119,879

 
123,687

 
 
 
 
 
Operating Income
 
52,554

 
42,857

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,474
)
 
(11,689
)
Interest income
 
318

 
679

Other, net
 
427

 
215

Total other income and expenses
 
(10,729
)
 
(10,795
)
 
 
 
 
 
Income from operations before income tax expense
 
41,825

 
32,062

 
 
 
 
 
Income tax expense
 
17,306

 
13,322

 
 
 
 
 
Net Income
 
$
24,519

 
$
18,740


The accompanying notes are an integral part of these financial statements


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GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2013 AND 2012
(Unaudited)

 
 
 
Six Months Ended 
 June 30,
(in thousands)
 
2013
 
2012
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
24,519

 
$
18,740

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
19,474

 
21,491

Provision for doubtful accounts
 
411

 
925

Deferred income taxes and investment tax credits
 
5,868

 
2,351

Stock-based compensation expense
 
835

 
961

Other — net
 
(17
)
 
(323
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(8,339
)
 
(2,978
)
Unbilled revenue
 
(3,984
)
 
(9,527
)
Other accounts receivable
 
1,186

 
1,075

Materials and supplies
 
(33
)
 
(179
)
Prepayments and other current assets
 
567

 
(1,764
)
Regulatory assets — supply cost balancing accounts
 
994

 
7,600

Other assets (including other regulatory assets)
 
(14,262
)
 
(9,532
)
Accounts payable
 
5,166

 
(25
)
Inter-company receivable/payable
 
(2,637
)
 
(352
)
Income taxes receivable/payable from/to Parent
 
12,495

 
13,599

Accrued pension and other postretirement benefits
 
3,733

 
4,379

Other liabilities
 
(1,358
)
 
(722
)
Net cash provided
 
44,618

 
45,719

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(41,021
)
 
(28,728
)
Note receivable from AWR parent
 
(9,200
)
 

Other investments
 
(200
)
 

Net cash used
 
(50,421
)
 
(28,728
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
8,283

 
2,049

Refunds on advances for construction
 
(2,712
)
 
(2,684
)
Proceeds from the issuance of long-term debt
 
60

 
1,266

Repayments of long-term debt
 
(109
)
 
(234
)
Dividends paid
 
(13,600
)
 
(10,200
)
Other — net
 
(708
)
 
(389
)
Net cash used
 
(8,786
)
 
(10,192
)
 
 
 
 
 
Net (decrease) increase in cash and cash equivalents
 
(14,589
)
 
6,799

Cash and cash equivalents, beginning of period
 
22,578

 

Cash and cash equivalents, end of period
 
$
7,989

 
$
6,799

 
The accompanying notes are an integral part of these financial statements

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AMERICAN STATES WATER COMPANY AND SUBSIDIARIES
AND
GOLDEN STATE WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1 — Summary of Significant Accounting Policies:
 
Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”)).  The subsidiaries of ASUS may be collectively referred to herein as the “Military Utility Privatization Subsidiaries.”
 
GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 256,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 23,000 customers through its Bear Valley Electric Service (“BVES”) division. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, including properties, rates, services, facilities and other matters, and transactions by GSWC with its affiliates.  AWR’s assets and operating income are primarily those of GSWC.
 
ASUS performs water and wastewater services, including the operation, maintenance, renewal and replacement of water and/or wastewater systems on a contract basis. Through its wholly owned subsidiaries, ASUS operates and maintains the water and/or wastewater systems at various military bases pursuant to 50-year firm, fixed-price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances, and changes in laws and regulations. There is no direct regulatory oversight by the CPUC over AWR or the operation, rates or services provided by ASUS or any of its wholly owned subsidiaries.
 
Basis of Presentation: The consolidated financial statements and notes thereto are being presented in a combined report being filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified.  Certain prior period amounts have been reclassified to conform to the 2013 financial statement 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.
 
On May 20, 2013, AWR's Board of Directors also approved a two-for-one stock split of the Company's common shares.   On or about September 3, 2013, shareholders of record will receive one additional share for each AWR common share they own. Pro forma per share data on a post-split basis are presented in Note 3 Earnings Per Share/Capital Stock.

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”).  The December 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 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 the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2012 filed with the SEC.
 
GSWC's Related Party Transactions: In May 2013, AWR issued an interest bearing promissory note (the "Note") to GSWC for $20.0 million which expires on May 23, 2018. Under the terms of the Note, AWR may borrow from GSWC amounts up to $20.0 million for working capital purposes. AWR agrees to pay any unpaid principal amounts outstanding under the Note, plus accrued interest. As of June 30, 2013, AWR has borrowed $9.2 million from GSWC under this Note, which GSWC has reflected as a current note receivable on its June 30, 2013 balance sheet. This Note is expected to be repaid by AWR within one year.


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Table of Contents

GSWC and ASUS provide and receive various services to and from their parent, AWR, and among themselves. In addition, AWR has a $100.0 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations.  The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliate, ASUS, using allocation factors approved by the CPUC.  Amounts owed to GSWC by its parent, AWR, or for allocated expenses are included in inter-company receivables as of June 30, 2013 and December 31, 2012.
 
Notes Payable to Banks: On May 23, 2013, AWR entered into a fourth amendment to its revolving credit agreement to, among other things, extend the expiration date of the syndicated credit facility to May 23, 2018, reduce the amount of interest and fees paid by the Company, and update certain representations and covenants in the credit agreement.  The aggregate amount that may be borrowed under this facility is unchanged at $100.0 million.  The Company may, under the terms of the fourth amendment, elect to increase the aggregate commitment by up to an additional $50.0 million. As of June 30, 2013, there are no outstanding borrowings under this credit facility.
Sales and Use Taxes:  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to use public right of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $947,000 and $850,000 for the three months ended June 30, 2013 and 2012, respectively, and $1.8 million and $1.6 million for the six months ended June 30, 2013 and 2012, respectively. When GSWC acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis.
 
Depending on the state in which the operations are conducted, ASUS and its subsidiaries are also subject to certain state non-income tax assessments generally computed on a “gross receipts” or “gross revenues” basis.  These non-income tax assessments are required to be paid regardless of whether the subsidiary is reimbursed by the U.S. government for these assessments under its 50-year contracts with the U.S. government.  The non-income tax assessments are accounted for on a gross basis and totaled $169,000 and $186,000 during the three months ended June 30, 2013 and 2012, respectively, and $331,000 and $341,000 for the six months ended June 30, 2013 and 2012, respectively.
 
Accounting standards that have been issued by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on Registrant’s consolidated financial statements upon adoption.
 
Note 2 — Regulatory Matters:
 
In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At June 30, 2013, Registrant had approximately $74.3 million of regulatory assets, net of regulatory liabilities not accruing carrying costs. Of this amount, $50.7 million relates to the underfunding of pension and other post-retirement obligations, $15.3 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense, and $1.1 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchase power contract over the life of the contract. The remainder relates to other items that do not provide for or incur carrying costs.
 
Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determined that a portion of GSWC’s assets were not recoverable in customer rates, GSWC would be required to determine if it had suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:
 

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(dollars in thousands)
 
June 30,
2013
 
December 31,
2012
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
38,003

 
$
42,574

Base Revenue Requirement Adjustment Mechanism
 
8,265

 
6,833

Costs deferred for future recovery on Aerojet case
 
15,577

 
16,030

Pensions and other post-retirement obligations (Note 7)
 
55,836

 
56,894

Flow-through taxes, net (Note 6)
 
15,340

 
16,415

General rate case memorandum accounts
 
17,239

 
4,495

Other regulatory assets
 
40,393

 
40,332

Various refunds to customers
 
(5,760
)
 
(7,558
)
Total
 
$
184,893

 
$
176,015

 
Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2012 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2012.
 
Alternative-Revenue Programs:
 
GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC.  GSWC has implemented surcharges to recover all of its WRAM balances, net of the MCBA.  The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90-day commercial paper rate.  For the three months ended June 30, 2013 and 2012, surcharges of $7.1 million and $4.2 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts, and $10.6 million and $7.6 million were billed to customers during the six months ended June 30, 2013 and 2012, respectively.  For the three and six months ended June 30, 2013, the WRAM and MCBA accounts also reflect the effects of the authorized 2013 adopted revenue and supply cost amounts approved in the CPUC’s final decision issued in May 2013 on GSWC’s water general rate case, discussed later under General Rate Case Memorandum Accounts.  In March 2013, the CPUC approved recovery of GSWC's 2012 WRAM under-collection of $23.8 million, to be collected over 12 to 18 months. As of June 30, 2013, GSWC has a net aggregated regulatory asset of $38.0 million which is comprised of a $51.1 million under-collection in the WRAM accounts and $13.1 million over-collection in the MCBA accounts.
 
Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months.  In April 2012, the CPUC issued a final decision which, among other things, set the recovery periods for under-collection balances that are up to 15% of adopted annual revenues at 18 months or less.  In addition to adopting a new amortization schedule, the final decision sets a cap on total net WRAM/MCBA surcharges in any given calendar year of 10% of the last authorized revenue requirement. The cap is effective following the first test year of each applicant’s pending or next general rate case.  For GSWC, the cap will be applied to its 2013 WRAM balances to be filed in early 2014.  The cap requirement set forth in the final decision does not impact GSWC’s 2012 and prior year WRAM/MCBA balances.
 
For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”), which adjusts certain revenues to adopted levels.  In May 2013, the CPUC approved surcharges for recovery of BVES’ 2012 BRRAM balance. The CPUC approved a 36-month surcharge, with the amounts collected through December 2014 to be applied to the 2012 BRRAM under-collection of $2.3 million.  Surcharges collected during the remainder of the 36-month period will recover a $1.8 million increase in the BVES revenue requirement representing the difference between the allocated general office costs authorized by the CPUC in November 2010, and what was then in BVES’ rates for allocated general office costs.  As authorized by the CPUC, the $1.8 million was combined in the BRRAM for recovery through the surcharge; however, these costs are not considered an alternative revenue program.
 
General Rate Case Memorandum Accounts:
 
The balance in the general rate case memorandum accounts represents the revenue differences between interim rates and final rates authorized by the CPUC due to delays in receiving decisions on various general rate case applications. As of June 30, 2013, there is an aggregate $17.2 million in the general rate case memorandum accounts, the majority of which is for retroactive rate increases effective January 1, 2013, as a result of the final decision issued by the CPUC in May 2013 on GSWC’s water general rate case.
 

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On May 9, 2013, the CPUC issued a final decision on GSWC’s water general rate case approving new rates for 2013 through 2015 at GSWC’s three water regions, which include recovery for costs incurred at the general office. The new rates were retroactive to January 1, 2013 and were implemented on May 22, 2013.  Accordingly, as of June 30, 2013, GSWC has a $13.1 million regulatory asset representing the difference between interim rates and the final rates authorized by the CPUC for the period January 1, 2013 through May 22, 2013. A surcharge to recover this difference is expected to be filed with the CPUC during the third quarter of 2013.
 
Other Regulatory Assets:
 
Among other things, the final CPUC decision issued in May 2013 approved the recovery of various memorandum accounts which tracked certain previously incurred costs.  As a result, during the first quarter of 2013 , GSWC recorded $3.2 million in other regulatory assets, the majority of which was reflected as a decrease in certain operating expenses related to the approval of these memorandum accounts in the final decision.
 
Other Regulatory Matters:
 
CPUC Rehearing Matter
 
In July 2011, the CPUC issued an order granting the rehearing of certain issues from the Region II, Region III and general office rate case approved in November 2010.  Among the issues in the rehearing was the La Serena plant improvement project included in rate base totaling approximately $3.5 million.  As a result of the CPUC’s decision in November 2010, GSWC had recorded a pretax charge of $2.2 million during 2010, which included the disallowance of a portion of the La Serena capital costs and the related revenues earned on those capital costs to be refunded to customers.  In March 2013, GSWC and the Division of Ratepayer Advocates ("DRA") reached a settlement agreement, subject to CPUC approval, to resolve all the issues in the rehearing.  In March 2013, GSWC filed for CPUC approval of the settlement agreement. In anticipation of this settlement, GSWC recorded an additional pretax charge of $416,000 in 2012, representing disallowed plant improvement project costs and related revenues earned on those costs that it expects will be refunded to customers based upon the terms of the settlement being discussed. The settlement agreement, if approved, would resolve all issues arising from the rehearing.
 
BVES General Rate Case
 
In February 2012, BVES filed its general rate case (“GRC”) for new rates in years 2013 through 2016.  In August 2012, DRA issued its report on the GRC.  Included in DRA’s recommendations was a $2.0 million retroactive ratemaking proposal to increase BVES’ accumulated depreciation balance to reflect adopted depreciation expense for the years 2009 through 2012 rather than actual depreciation expense as recorded in accordance with Generally Accepted Accounting Principles.  DRA also recommended that one-half of deferred rate case costs be borne by shareholders, rather than entirely by customers, as has been authorized by the CPUC in prior rate cases.  As of June 30, 2013, GSWC has a $2.0 million regulatory asset representing deferred rate case costs for the current BVES general rate case, which the CPUC has historically allowed utilities to recover. If DRA prevails, GSWC may be required to record a charge to adjust accumulated depreciation and to write off half of its deferred rate case costs. GSWC believes DRA’s recommendations are without merit and intends to vigorously defend its positions.  At this time, GSWC does not believe a potential loss is probable, but is unable to predict the final outcome of these matters in the pending rate case.
 
Hearings on BVES’ GRC, including the matters discussed above, were held in September 2012.  In November 2012, GSWC filed a motion to introduce new information regarding the results of a study on mandatory testing of BVES’s transmission and distribution poles to help support BVES' request for approval of additional capital expenditures. The administrative law judge assigned to this GRC re-opened the record to receive additional testimony based on this study, and to conduct additional evidentiary hearings.  DRA has challenged the results of the study, and requested that BVES provide additional information.  Alternative dispute resolution meetings for the GRC are scheduled to be held in September 2013. A proposed decision for this GRC is expected later in 2013.
 
Renewables Portfolio Standard
 
In December 2011, a new renewables portfolio standard (“RPS”) law went into effect which changed, among other things, annual procurement targets to multi-year procurement targets.  Under the RPS, BVES must procure sufficient RPS-eligible resources to meet: (i) any RPS procurement requirement deficit for any year prior to 2011, and (ii) RPS procurement requirements for the 2011 through 2013 compliance period by no later than December 31, 2013.  BVES’ latest RPS reports under the new standards were submitted to the CPUC in December 2012, and did not reflect any RPS procurement deficiencies nor any potential or actual penalties.  Accordingly, no provision for loss has been recorded in the financial statements as of June 30, 2013.
 

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Table of Contents

In December 2012, GSWC entered into a ten-year agreement with a third party to purchase renewable energy credits (“RECs”). Under the terms of the agreement, GSWC would purchase approximately 582,000 RECs over a ten-year period which would be used towards meeting the CPUC’s RPS procurement requirements.  In July 2013, the CPUC approved the agreement.
 
In July 2012, the CPUC also approved the purchase of REC's from the Los Angeles County Sanitation District.  BVES intends to apply these RECS towards either its pre-2011 RPS requirements or its 2011 through 2013 requirements.  The RECs will be included as part of the electric supply cost balancing account when the RECs are applied towards the RPS requirements during the fourth quarter of 2013.

In March 2013, BVES filed an application with the CPUC to recover $835,000 (including interest) in additional costs incurred from April 1, 2011 through December 31, 2012 in connection with its efforts to procure renewable energy resources.  In May 2013, the CPUC approved these costs and accordingly, BVES recorded a regulatory asset and a corresponding decrease to legal and outside services costs during the second quarter of 2013. The amount will be recovered through a 12-month surcharge. In March 2012, BVES had also received approval for recovery of $1.2 million of costs in its efforts to procure renewable energy resources incurred during the period September 1, 2007 through March 31, 2011.
 
Note 3 — Earnings per Share/Capital Stock:
 
In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to its stock-based awards that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”).  In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities.

The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating basic net income per share:
Basic:
 
 For The Three Months Ended 
 June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
16,602

 
15,078

 
30,067

 
25,193

Less: (a)
 
Distributed earnings to common shareholders
 
6,854

 
5,287

 
13,693

 
10,560

 
 
Distributed earnings to participating securities
 
95

 
38

 
181

 
68

Undistributed earnings
 
9,653

 
9,753

 
16,193

 
14,565

 
 
 
 
 
 
 
 
 
 
 
(b)
 
Undistributed earnings allocated to common shareholders
 
9,522

 
9,683

 
15,982

 
14,472

 
 
Undistributed earnings allocated to participating securities
 
131

 
70

 
211

 
93

 
 
 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
16,376

 
$
14,970

 
$
29,675

 
$
25,032

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
19,306

 
18,882

 
19,285

 
18,857

Basic earnings per Common Share
 
$
0.85

 
$
0.79

 
$
1.54

 
$
1.33

 
Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options granted under Registrant’s 2000 and 2008 Employee Plans, and the 2003 Directors Plan, and net income. At June 30, 2013 and 2012, there were 140,834 and 519,273 options outstanding, respectively, under these Plans. At June 30, 2013 and 2012, there were also 130,453 and 147,109 restricted stock units outstanding, respectively.
 

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The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted:
 
 For The Three Months Ended 
 June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2013
 
2012
 
2013
 
2012
Common shareholders earnings, basic
 
$
16,376

 
$
14,970

 
$
29,675

 
$
25,032

Undistributed earnings for dilutive stock options
 

 

 

 
93

Total common shareholders earnings, diluted
 
$
16,376

 
$
14,970

 
$
29,675

 
$
25,125

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
19,306

 
18,882

 
19,285

 
18,857

Stock-based compensation (1)
 
40

 
63

 
39

 
131

Weighted average common shares outstanding, diluted
 
19,346

 
18,945

 
19,324

 
18,988

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.85

 
$
0.79

 
$
1.54

 
$
1.32

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 140,834 and 410,760 stock options at June 30, 2013 and 2012, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 130,453 and 147,109 restricted stock units at June 30, 2013 and 2012, respectively, were included in the calculation of diluted EPS for the six months ended June 30, 2013 and 2012.
 
No stock options outstanding as of June 30, 2013 had an exercise price greater than the average market price of AWR’s Common Shares for the six months ended June 30, 2013. As of June 30, 2012, 108,013 stock options were outstanding but not included in the computation of diluted EPS because the related option exercise price was greater than the average market price of AWR’s Common Shares for the three months ended June 30, 2012.  There were 500 stock options outstanding at June 30, 2012, but not included in the computation of diluted EPS because they were anti-dilutive. There were no stock options outstanding at June 30, 2013 that were anti-dilutive.
 
During the six months ended June 30, 2013 and 2012, Registrant issued 104,493 and 131,581 Common Shares, for approximately $1,832,000 and $2,748,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 401(k) Plan, the 2000 and 2008 Employee Plans, and the 2003 Directors Plan. In addition, Registrant purchased 240,612 and 408,962 Common Shares on the open market during the six months ended June 30, 2013 and 2012, respectively, under Registrant’s 401(k) Plan and the DRP. The Common Shares purchased by Registrant were used to satisfy the requirements of these plans.
 
During the three months ended June 30, 2013 and 2012, AWR paid quarterly dividends of approximately $6.8 million, or $0.355 per share, and $5.3 million, or $0.28 per share, respectively. During the six months ended June 30, 2013 and 2012, AWR paid quarterly dividends to shareholders of approximately $13.7 million, or $0.71 per share, and $10.6 million, or $0.56 per share, respectively.

On May 20, 2013, AWR's Board of Directors approved its third quarter cash dividend of $0.405 per share on the common shares of the Company. Dividends on the common shares will be payable on September 3, 2013 to shareholders of record at the close of business on August 15, 2013. The September 3, 2013 dividend will be applied to the shares prior to the stock split discussed below.

On May 20, 2013, AWR's Board of Directors also approved a two-for-one stock split of the Company's common shares.  On or about September 3, 2013, shareholders will receive one additional share for each AWR common share they own. Common shares issued and outstanding at June 30, 2013 and December 31, 2012 were 19.3 million and 19.2 million, respectively. Given retroactive effect to the stock split, common shares issued and outstanding at June 30, 2013 and December 31, 2012, would have been approximately 38.7 million and 38.5 million, respectively. Pro forma per share data for the three and six months ended June 30, 2013 on a post-split basis are presented below:

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Earnings per share
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2013
 
2012
 
2013
 
2012
As reported:
 
 
 
 
 
 
 
Basic weighted average shares outstanding (in 000's)
19,306

 
18,882

 
19,285

 
18,857

Basic earnings per share
$
0.85

 
$
0.79

 
$
1.54

 
$
1.33

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding (in 000's)
19,346

 
18,945

 
19,324

 
18,988

Diluted earnings per share
$
0.85

 
$
0.79

 
$
1.54

 
$
1.32

 
 
 
 
 
 
 
 
Pro forma two-for-one split adjusted:
 
 
 
 
 
 
 
Basic weighted average shares outstanding (in 000's)
38,612

 
37,764

 
38,570

 
37,714

Basic earnings per share
$
0.425

 
$
0.395

 
$
0.770

 
$
0.665

 
 
 
 
 
 
 
 
Diluted weighted average shares outstanding (in 000's)
38,692

 
37,890

 
38,648

 
37,976

Diluted earnings per share
$
0.425

 
$
0.395

 
$
0.770

 
$
0.660



Note 4 — Derivative Instruments:
 
GSWC purchases certain power at a fixed cost depending on the amount of power and the period during which the power is purchased under a purchased power contract.  The contract is subject to the accounting guidance for derivatives and requires mark-to-market derivative accounting.   The CPUC has authorized GSWC to establish a regulatory asset and liability memorandum account to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the purchased power contract are deferred on a monthly basis into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivative throughout the term of the contract, having no impact on GSWC’s earnings. Upon expiration of the purchased power contract, the balance in this regulatory memorandum account will be zero.  As of June 30, 2013 there was a $1.1 million cumulative unrealized loss which has been included in the memorandum account.
 
GSWC executed a new purchased power master agreement which is subject to CPUC approval. If approved, GSWC will be able to purchase 12 megawatts (“MWs”) of base load energy at a fixed price to be negotiated upon CPUC approval of the agreement. In June 2013, GSWC filed for approval of the agreement with the CPUC.  GSWC also intends to request CPUC approval of a regulatory asset and liability memorandum account for the new contract to offset the entries required by the accounting guidance on derivatives.
 
The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Under the accounting guidance, GSWC makes fair value measurements that are classified and disclosed in one of the following three categories:
 
Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 
Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability, or
 
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
 
Registrant’s valuation model utilizes various inputs that include quoted market prices for energy over the duration of the contract. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market.  Registrant receives one broker quote to determine the fair value of its derivative instrument.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Accordingly, the valuation of the derivative on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.
 

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Table of Contents

The following table presents changes in the fair value of the derivative for the three and six months ended June 30, 2013 and 2012.
 
 
 
 For The Three Months Ended 
 June 30,
 
 For The Six Months Ended 
 June 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Balance, at beginning of the period
 
$
(1,540
)
 
$
(7,506
)
 
$
(3,060
)
 
$
(7,611
)
Unrealized gain on purchased power contracts
 
393

 
2,330

 
1,913

 
2,435

Balance, at end of the period
 
$
(1,147
)
 
$
(5,176
)
 
$
(1,147
)
 
$
(5,176
)
 
Note 5 — Fair Value of Financial Instruments:
 
For cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amount is assumed to approximate fair value due to the short-term nature of the amounts. Investments held in a Rabbi Trust for the supplemental executive retirement plan are measured at fair value and totaled $5.0 million as of June 30, 2013. All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The investments held in the Rabbi trust are included in Other Property and Investments on Registrant's balance sheets.

The table below estimates the fair value of long-term debt held by GSWC. Rates available to GSWC at June 30, 2013 and December 31, 2012 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. The interest rates used for the June 30, 2013 valuation increased as compared to December 31, 2012, decreasing the fair value of long-term debt as of June 30, 2013. Changes in the assumptions will produce differing results.
 
 
June 30, 2013
 
December 31, 2012
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC
 
$
335,742

 
$
411,505

 
$
335,791

 
$
456,792


As previously discussed in Note 4, the accounting guidance for fair value measurements establishes a framework for measuring fair value and requires fair value measurements to be classified and disclosed in one of three levels. The following tables set forth by level, within the fair value hierarchy, GSWC’s long-term debt measured at fair value as of June 30, 2013:
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt—GSWC
 

 
$
411,505

 

 
$
411,505

 
Note 6 — Income Taxes:
 
As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal income tax rate in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise.  The GSWC ETRs deviated from the statutory rate primarily due to state taxes and differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally plant-, rate-case- and compensation-related items), as well as permanent items.
 
Changes in Tax Law:
 
In January 2013, the American Taxpayer Relief Act of 2012 extended 50% bonus depreciation for qualifying property through 2013.  Although this change in law reduces AWR’s current taxes payable, it does not reduce its total income tax expense or ETR.
 

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Table of Contents

Note 7 — Employee Benefit Plans:
 
The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and six months ended June 30, 2013 and 2012 are as follows:
 
 
For The Three Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,620

 
$
1,618

 
$
106

 
$
112

 
$
201

 
$
183

Interest cost
 
1,723

 
1,653

 
113

 
136

 
129

 
122

Expected return on plan assets
 
(1,895
)
 
(1,635
)
 
(95
)
 
(90
)
 

 

Amortization of transition
 

 

 
105

 
105

 

 

Amortization of prior service cost (benefit)
 
30

 
29

 
(50
)
 
(50
)
 
40

 
40

Amortization of actuarial loss
 
729

 
740

 

 

 
85

 
77

Net periodic pension cost under accounting standards
 
2,207

 
2,405

 
179

 
213

 
455

 
422

Regulatory adjustment — deferred
 
(409
)
 
(632
)
 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,798

 
$
1,773

 
$
179

 
$
213

 
$
455

 
$
422


 
 
For The Six Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
3,484

 
$
3,337

 
$
212

 
$
224

 
$
402

 
$
366

Interest cost
 
3,454

 
3,329

 
226

 
272

 
258

 
244

Expected return on plan assets
 
(3,788
)
 
(3,271
)
 
(190
)
 
(180
)
 

 

Amortization of transition
 

 

 
210

 
210

 

 

Amortization of prior service cost (benefit)
 
60

 
59

 
(100
)
 
(100
)
 
80

 
80

Amortization of actuarial loss
 
1,440

 
1,518

 

 

 
170

 
154

Net periodic pension cost under accounting standards
 
4,650

 
4,972

 
358

 
426

 
910

 
844

Regulatory adjustment — deferred
 
(919
)
 
(1,198
)