AWR-2014.06.30-10Q
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, 2014
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).


Table of Contents

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 4, 2014, the number of Common Shares outstanding, of American States Water Company was 38,709,657 shares. As of August 4, 2014, 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


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

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 pending and future 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

Availability of water supplies, which may be adversely affected by the California drought, changes in weather patterns in the West, contamination and court decisions or other governmental actions restricting the use of water from the Colorado River, the California State Water Project, and/or pumping of groundwater

Our ability to efficiently manage GSWC 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 the threat of condemnation of our service territories on the size of our customer base


1

Table of Contents

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

Changes in accounting valuations and estimates, including changes 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

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 electric division's power supplies and the extent to which we can manage and respond to the volatility of electric and natural gas prices
 
Our electric operation's ability to comply with the CPUC’s renewable energy procurement requirements
 
Changes in GSWC long-term customer demand due to changes in customer usage patterns as a result of conservation efforts, regulatory changes affecting demand such as new landscaping or irrigation requirements, recycling of water by the customer or purchase of recycled water supplied by other parties, unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions and cost increases
 
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 construction activities at our contracted services business
 
Termination, in whole or in part, of one or more of our Military Utility Privatization Subsidiaries' contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default

Failure of the U.S. government to make timely payments to ASUS for water and/or wastewater services at military bases as a result of fiscal uncertainties over the funding of the U.S. government
 
Delays in obtaining redetermination of prices or equitable adjustments to our prices on one or more of our contracts to provide water and/or wastewater services at military bases

Disallowance of costs on any of our contracts to provide water and/or wastewater services at military bases as a result of audits, cost reviews 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

2

Table of Contents

 
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
 
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 2013 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.

3

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)



(in thousands)
 
June 30,
2014
 
December 31, 2013
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,463,130

 
$
1,443,623

Non-utility property, at cost
 
10,895

 
9,519

Total
 
1,474,025

 
1,453,142

Less - Accumulated depreciation
 
(485,357
)
 
(471,665
)
Net property, plant and equipment
 
988,668

 
981,477

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
16,118

 
15,806

Total other property and investments
 
17,234

 
16,922

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
77,849

 
38,226

Accounts receivable — customers (less allowance for doubtful accounts of $786 in 2014 and $755 in 2013)
 
25,181

 
23,829

Unbilled revenue
 
20,151

 
18,552

Receivable from the U.S. government
 
3,615

 
7,106

Other accounts receivable (less allowance for doubtful accounts of $363 in 2014 and $432 in 2013)
 
4,235

 
4,914

Income taxes receivable
 
521

 
9,214

Materials and supplies, at average cost
 
3,671

 
4,558

Regulatory assets — current
 
13,607

 
27,676

Prepayments and other current assets
 
4,542

 
2,481

Costs and estimated earnings in excess of billings on uncompleted contracts
 
33,678

 
45,508

Deferred income taxes — current
 
10,800

 
9,553

Total current assets
 
197,850

 
191,617

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
99,698

 
95,005

Costs and estimated earnings in excess of billings on uncompleted contracts
 
7,344

 
7,823

Receivable from the U.S. government
 
2,976

 
3,104

Other
 
13,322

 
14,235

Total regulatory and other assets
 
123,340

 
120,167

 
 
 
 
 
Total Assets
 
$
1,327,092

 
$
1,310,183

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





4

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

(in thousands)
 
June 30,
2014
 
December 31,
2013
Capitalization
 
 

 
 

Common shares, no par value
 
$
254,610

 
$
253,961

Earnings reinvested in the business
 
240,571

 
238,443

Total common shareholders’ equity
 
495,181

 
492,404

Long-term debt
 
310,912

 
326,079

Total capitalization
 
806,093

 
818,483

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
21,291

 
6,298

Accounts payable
 
45,417

 
49,787

Income taxes payable
 
2,808

 
507

Accrued other taxes
 
7,978

 
9,802

Accrued employee expenses
 
9,969

 
10,801

Accrued interest
 
3,894

 
3,897

Billings in excess of costs and estimated earnings on uncompleted contracts
 
14,553

 
6,852

Dividends payable
 
8,260

 

Other
 
13,331

 
12,962

Total current liabilities
 
127,501

 
100,906

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,394

 
69,332

Contributions in aid of construction - net
 
115,660

 
114,916

Deferred income taxes
 
159,149

 
159,506

Unamortized investment tax credits
 
1,745

 
1,790

Accrued pension and other postretirement benefits
 
41,664

 
38,726

Other
 
6,886

 
6,524

Total other credits
 
393,498

 
390,794

 
 
 
 
 
Commitments and Contingencies (Note 7)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,327,092

 
$
1,310,183

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

5

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2014 AND 2013
(Unaudited)


 
 
Three Months Ended June 30,
(in thousands, except per share amounts)
 
2014
 
2013
Operating Revenues
 
 

 
 

Water
 
$
86,232

 
$
84,069

Electric
 
8,328

 
8,397

Contracted services
 
21,081

 
28,229

Total operating revenues
 
115,641

 
120,695

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
16,263

 
16,670

Power purchased for pumping
 
2,570

 
2,332

Groundwater production assessment
 
4,853

 
3,823

Power purchased for resale
 
1,988

 
2,828

Supply cost balancing accounts
 
(106
)
 
(377
)
Other operation
 
7,085

 
6,519

Administrative and general
 
19,407

 
18,113

Depreciation and amortization
 
10,525

 
9,768

Maintenance
 
4,327

 
4,913

Property and other taxes
 
3,965

 
3,748

ASUS construction
 
13,764

 
19,064

Total operating expenses
 
84,641

 
87,401

 
 
 
 
 
Operating Income
 
31,000

 
33,294

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,778
)
 
(5,768
)
Interest income
 
123

 
140

Other, net
 
271

 
84

Total other income and expenses
 
(5,384
)
 
(5,544
)
 
 
 
 
 
Income from operations before income tax expense
 
25,616

 
27,750

 
 
 
 
 
Income tax expense
 
10,262

 
11,148

 
 
 
 
 
Net Income
 
$
15,354

 
$
16,602

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
38,781

 
38,612

Basic Earnings Per Common Share
 
$
0.39

 
$
0.43

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
39,001

 
38,692

Fully Diluted Earnings Per Common Share
 
$
0.39

 
$
0.43

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.2025

 
$
0.1775

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

6

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2014 AND 2013
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2014
 
2013
Operating Revenues
 
 

 
 

Water
 
$
156,989

 
$
153,302

Electric
 
18,784

 
19,131

Contracted services
 
41,813

 
58,814

Total operating revenues
 
217,586

 
231,247

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
27,487

 
27,402

Power purchased for pumping
 
4,534

 
3,971

Groundwater production assessment
 
8,393

 
7,010

Power purchased for resale
 
4,687

 
6,508

Supply cost balancing accounts
 
712

 
994

Other operation
 
14,032

 
11,973

Administrative and general
 
39,591

 
36,020

Depreciation and amortization
 
21,055

 
19,584

Maintenance
 
7,816

 
8,847

Property and other taxes
 
8,290

 
7,896

ASUS construction
 
27,221

 
39,797

Net gain on sale of property
 

 
(12
)
Total operating expenses
 
163,818

 
169,990

 
 
 
 
 
Operating Income
 
53,768

 
61,257

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,405
)
 
(11,546
)
Interest income
 
235

 
327

Other, net
 
396

 
426

Total other income and expenses
 
(10,774
)
 
(10,793
)
 
 
 
 
 
Income from operations before income tax expense
 
42,994

 
50,464

 
 
 
 
 
Income tax expense
 
16,619

 
20,397

 
 
 
 
 
Net Income
 
$
26,375

 
$
30,067

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
38,764

 
38,570

Basic Earnings Per Common Share
 
$
0.68

 
$
0.77

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
38,974

 
38,648

Fully Diluted Earnings Per Common Share
 
$
0.67

 
$
0.77

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.405

 
$
0.355


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



7

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2014
 
2013
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
26,375

 
$
30,067

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

 
 

Depreciation and amortization
 
21,552

 
20,052

Provision for doubtful accounts
 
604

 
437

Deferred income taxes and investment tax credits
 
(1,653
)
 
5,789

Stock-based compensation expense
 
1,399

 
1,135

Other — net
 
69

 
(159
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(1,907
)
 
(8,339
)
Unbilled revenue
 
(1,599
)
 
(3,984
)
Other accounts receivable
 
1,543

 
(221
)
Receivable from the U.S. government
 
3,619

 
7,244

Materials and supplies
 
887

 
(772
)
Prepayments and other current assets
 
(2,061
)
 
202

Regulatory assets — supply cost balancing accounts
 
712

 
994

Costs and estimated earnings in excess of billings on uncompleted contracts
 
12,309

 
(16,855
)
Other assets (including other regulatory assets)
 
8,120

 
(14,307
)
Accounts payable
 
1,019

 
5,979

Income taxes receivable/payable
 
10,994

 
14,472

Billings in excess of costs and estimated earnings on uncompleted contracts
 
7,701

 
(10,273
)
Accrued pension and other postretirement benefits
 
3,125

 
3,733

Other liabilities
 
(1,928
)
 
(1,574
)
Net cash provided
 
90,880

 
33,620

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(35,620
)
 
(41,189
)
Other investments
 
(195
)
 
(200
)
Proceed from sale of property
 

 
12

Net cash used
 
(35,815
)
 
(41,377
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from issuance of common shares and stock option exercises
 
219

 
1,832

Repurchase of common shares
 
(306
)
 

Receipt of advances for and contributions in aid of construction
 
4,174

 
8,283

Refunds on advances for construction
 
(2,518
)
 
(2,712
)
Repayments of long-term debt
 
(174
)
 
(109
)
Proceeds from issuance of long-term debt
 

 
60

Dividends paid
 
(15,699
)
 
(13,684
)
Other — net
 
(1,138
)
 
(874
)
Net cash used
 
(15,442
)
 
(7,204
)
Net change in cash and cash equivalents
 
39,623

 
(14,961
)
Cash and cash equivalents, beginning of period
 
38,226

 
23,486

Cash and cash equivalents, end of period
 
$
77,849

 
$
8,525



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

8

Table of Contents
GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)


(in thousands)
 
June 30,
2014
 
December 31,
2013
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,463,130

 
$
1,443,623

Less - Accumulated depreciation
 
(479,444
)
 
(466,329
)
Net utility plant
 
983,686

 
977,294

 
 
 
 
 
Other Property and Investments
 
13,971

 
13,653

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
43,239

 
37,875

Accounts receivable-customers (less allowance for doubtful accounts of $786 in 2014 and $755 in 2013)
 
25,181

 
23,829

Unbilled revenue
 
20,151

 
18,552

Inter-company receivable
 
382

 
718

Other accounts receivable (less allowance for doubtful accounts of $354 in 2014 and $359 in 2013)
 
2,226

 
3,570

Income taxes receivable from Parent
 

 
9,704

Note receivable from Parent
 

 
500

Materials and supplies, at average cost
 
2,472

 
1,859

Regulatory assets — current
 
13,607

 
27,676

Prepayments and other current assets
 
3,733

 
2,218

Deferred income taxes — current
 
9,618

 
8,573

Total current assets
 
120,609

 
135,074

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
99,698

 
95,005

Other accounts receivable
 

 
913

Other
 
11,483

 
11,442

Total regulatory and other assets
 
111,181

 
107,360

 
 
 
 
 
Total Assets
 
$
1,229,447

 
$
1,233,381

 
The accompanying notes are an integral part of these financial statements

 

9

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

(in thousands)
 
June 30,
2014
 
December 31, 2013
Capitalization
 
 

 
 

Common shares, no par value
 
$
233,986

 
$
233,721

Earnings reinvested in the business
 
200,635

 
203,892

Total common shareholder’s equity
 
434,621

 
437,613

Long-term debt
 
310,912

 
326,079

Total capitalization
 
745,533

 
763,692

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
21,291

 
6,298

Accounts payable
 
35,103

 
37,611

Income taxes payable to Parent
 
913

 

Accrued other taxes
 
7,698

 
9,299

Accrued employee expenses
 
8,712

 
9,536

Accrued interest
 
3,894

 
3,897

Other
 
13,220

 
12,880

Total current liabilities
 
90,831

 
79,521

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,394

 
69,332

Contributions in aid of construction — net
 
115,660

 
114,916

Deferred income taxes
 
158,877

 
158,994

Unamortized investment tax credits
 
1,745

 
1,790

Accrued pension and other postretirement benefits
 
41,664

 
38,726

Other
 
6,743

 
6,410

Total other credits
 
393,083

 
390,168

 
 
 
 
 
Commitments and Contingencies (Note 7)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,229,447

 
$
1,233,381

 
The accompanying notes are an integral part of these financial statements

10

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2014 AND 2013
(Unaudited)


 
 
Three Months Ended 
 June 30, 2014
(in thousands)
 
2014
 
2013
Operating Revenues
 
 
 
 
Water
 
$
86,232

 
$
84,069

Electric
 
8,328

 
8,397

Total operating revenues
 
94,560

 
92,466

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
16,263

 
16,670

Power purchased for pumping
 
2,570

 
2,332

Groundwater production assessment
 
4,853

 
3,823

Power purchased for resale
 
1,988

 
2,828

Supply cost balancing accounts
 
(106
)
 
(377
)
Other operation
 
6,448

 
5,842

Administrative and general
 
16,424

 
15,166

Depreciation and amortization
 
10,232

 
9,484

Maintenance
 
3,783

 
4,365

Property and other taxes
 
3,530

 
3,375

Total operating expenses
 
65,985

 
63,508

 
 
 
 
 
Operating Income
 
28,575

 
28,958

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,721
)
 
(5,726
)
Interest income
 
113

 
140

Other, net
 
272

 
85

Total other income and expenses
 
(5,336
)
 
(5,501
)
 
 
 
 
 
Income from operations before income tax expense
 
23,239

 
23,457

 
 
 
 
 
Income tax expense
 
9,783

 
9,643

 
 
 
 
 
Net Income
 
$
13,456

 
$
13,814

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


11

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2014 AND 2013
(Unaudited)


 
 
Six Months Ended 
 June 30,
(in thousands)
 
2014
 
2013
Operating Revenues
 
 

 
 

Water
 
$
156,989

 
$
153,302

Electric
 
18,784

 
19,131

Total operating revenues
 
175,773

 
172,433

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
27,487

 
27,402

Power purchased for pumping
 
4,534

 
3,971

Groundwater production assessment
 
8,393

 
7,010

Power purchased for resale
 
4,687

 
6,508

Supply cost balancing accounts
 
712

 
994

Other operation
 
12,804

 
10,639

Administrative and general
 
33,409

 
29,400

Depreciation and amortization
 
20,472

 
19,006

Maintenance
 
6,844

 
7,858

Property and other taxes
 
7,426

 
7,091

Total operating expenses
 
126,768

 
119,879

 
 
 
 
 
Operating Income
 
49,005

 
52,554

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,332
)
 
(11,474
)
Interest income
 
222

 
318

Other, net
 
396

 
427

Total other income and expenses
 
(10,714
)
 
(10,729
)
 
 
 
 
 
Income from operations before income tax expense
 
38,291

 
41,825

 
 
 
 
 
Income tax expense
 
15,488

 
17,306

 
 
 
 
 
Net Income
 
$
22,803

 
$
24,519

 
The accompanying notes are an integral part of these financial statements





12

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2014 AND 2013
(Unaudited)

 
 
 
Six Months Ended 
 June 30,
(in thousands)
 
2014
 
2013
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
22,803

 
$
24,519

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

 
 

Depreciation and amortization
 
20,969

 
19,474

Provision for doubtful accounts
 
667

 
411

Deferred income taxes and investment tax credits
 
(1,219
)
 
5,868

Stock-based compensation expense
 
973

 
835

Other — net
 
34

 
(17
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(1,907
)
 
(8,339
)
Unbilled revenue
 
(1,599
)
 
(3,984
)
Other accounts receivable
 
2,145

 
1,186

Materials and supplies
 
(613
)
 
(33
)
Prepayments and other current assets
 
(1,515
)
 
567

Regulatory assets — supply cost balancing accounts
 
712

 
994

Other assets (including other regulatory assets)
 
8,124

 
(14,262
)
Accounts payable
 
2,968

 
5,166

Inter-company receivable/payable
 
336

 
(2,637
)
Income taxes receivable/payable from/to Parent
 
10,617

 
12,495

Accrued pension and other postretirement benefits
 
3,125

 
3,733

Other liabilities
 
(1,756
)
 
(1,358
)
Net cash provided
 
64,864

 
44,618

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(34,331
)
 
(41,021
)
Note receivable from AWR parent
 
(8,300
)
 
(9,200
)
Receipt of payment of note receivable from AWR parent
 
8,800

 

Other investments
 
(195
)
 
(200
)
Net cash used
 
(34,026
)
 
(50,421
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
4,174

 
8,283

Refunds on advances for construction
 
(2,518
)
 
(2,712
)
Proceeds from the issuance of long-term debt
 

 
60

Repayments of long-term debt
 
(174
)
 
(109
)
Dividends paid
 
(26,000
)
 
(13,600
)
Other — net
 
(956
)
 
(708
)
Net cash used
 
(25,474
)
 
(8,786
)
 
 
 
 
 
Net change in cash and cash equivalents
 
5,364

 
(14,589
)
Cash and cash equivalents, beginning of period
 
37,875

 
22,578

Cash and cash equivalents, end of period
 
$
43,239

 
$
7,989

 
The accompanying notes are an integral part of these financial statements

13

Table of Contents
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 257,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 24,000 customers through its Bear Valley Electric Service (“BVES”) division. Although Registrant has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 90% of total water revenues during the three and six months ended June 30, 2014 and 2013. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, in matters 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, through its wholly-owned subsidiaries, operates, maintains and performs construction activities (including renewal and replacement capital work) on water and/or wastewater systems at various United States military bases pursuant to 50-year firm fixed-price contracts. These contracts 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.
 
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 approved a two-for-one stock split of the Company's common shares.  In September 2013, shareholders of record received one additional share for each AWR common share they owned.  This two-for-one stock split has been retroactively applied to these financial statements, resulting in an increase in the number of shares outstanding for all periods presented.

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, 2013 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("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, 2013 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, 2014, AWR had no amounts outstanding to GSWC under this Note.


14

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, 2014 and December 31, 2013.
 
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, 2014, there were no borrowings outstanding under this credit facility.
Long-term debt: In June 2014, GSWC issued a notice of redemption of its $5,000,000, 6.87% Medium-Term Notes Series A due 2023, and $10,000,000, 7.00% Medium-Term Notes Series A also due 2023. On July 15, 2014, these notes were redeemed and; accordingly, are included on the balance sheet as of June 30, 2014 in the current portion of long-term debt. The notes were redeemed at a price of 100% of the outstanding principal amount of the Notes, plus interest.
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 $975,000 and $947,000 for the three months ended June 30, 2014 and 2013, respectively, and $1.8 million million for the six months ended June 30, 2014 and 2013. 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 $157,000 and $169,000 during the three months ended June 30, 2014 and 2013, respectively, and $306,000 and $331,000 for the six months ended June 30, 2014 and 2013, respectively.
 
Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board issued updated accounting guidance on revenue recognition. The updated guidance includes specific steps required to recognize revenue on contracts with customers. For Registrant, the updated guidance is effective for reporting periods beginning after December 15, 2016. Registrant is currently evaluating the impact of this guidance, but does not expect it to have a material impact on its consolidated financial statements.

In June 2014, the Financial Accounting Standards Board issued updated accounting guidance on share-based compensation.  The update includes explicit guidance on how to account for share-based payment awards whereby a performance target could be achieved after an employee completes the requisite service period.  For Registrant, the updated guidance is effective for reporting periods beginning after December 15, 2015.  Registrant is currently evaluating the impact of this guidance, but does not expect it to have a material impact on its consolidated financial statements.

 
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, 2014, Registrant had approximately $35.7 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $15.0 million relates to the underfunding of pension and other post-retirement obligations and $16.2 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. The remainder relates to other items that do not provide for or incur carrying costs.
 

15

Table of Contents

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 determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has 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:
 
(dollars in thousands)
 
June 30,
2014
 
December 31,
2013
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
17,543

 
$
16,345

Base Revenue Requirement Adjustment Mechanism
 
9,966

 
8,725

Costs deferred for future recovery on Aerojet case
 
14,302

 
14,763

Pensions and other post-retirement obligations (Note 6)
 
18,568

 
20,241

Flow-through taxes, net (Note 5)
 
16,201

 
16,189

Low income rate assistance balancing accounts
 
9,747

 
9,979

General rate case memorandum accounts
 
9,868

 
15,645

Other regulatory assets
 
20,066

 
25,086

Various refunds to customers
 
(2,956
)
 
(4,292
)
Total
 
$
113,305

 
$
122,681

 
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, 2013 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2013.
 
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, net of the MCBA balances, as of December 31, 2013.  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.  Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months.  For the three months ended June 30, 2014 and 2013, surcharges of approximately $4.5 million and $7.1 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts, and surcharges (net of surcredits) of approximately $6.4 million and $10.6 million were billed to customers during the six months ended June 30, 2014 and 2013, respectively.  As of June 30, 2014, GSWC has a net aggregated regulatory asset of $17.5 million which is comprised of a $15.8 million under-collection in the WRAM accounts and $1.7 million under-collection in the MCBA accounts.
 
For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which adjusts certain revenues to adopted levels.  Pending a final decision on the BVES general rate case, the 2013 and 2014 BRRAM balances have been recorded using 2012 adopted levels authorized by the CPUC. As of June 30, 2014, GSWC had a regulatory asset of $10.0 million under-collection in the BRRAM.
 
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, 2014, there is an aggregate $9.9 million in the general rate case memorandum accounts, $5.8 million 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. Surcharges ranging from 12 to 24 months, with the majority being 12 months, were implemented during the third quarter of 2013 to recover the retroactive adopted revenues related to the May 2013 CPUC decision.
 



16

Table of Contents

Other Regulatory Matters:
 
CPUC Approval to Serve New Area:
On June 26, 2014, the CPUC approved a Certificate of Public Convenience and Necessity application granting GSWC approval to provide water utility services to an area to be developed near Sacramento, in Sutter County, California, called Sutter Pointe. The CPUC's decision approved a settlement that was jointly filed by GSWC, Sutter County, the Sutter Pointe Developers, and a coalition of Sutter County residents. With the CPUC's approval, GSWC will create a water service district to supply the Sutter Pointe development with groundwater and surface water from the Sacramento River. The project will involve the construction of underground infrastructure, groundwater wells, a water treatment plant and storage facilities to serve retail, industrial and approximately 17,000 residential customers at final build out. As part of the agreement, GSWC will also request approval from the CPUC to acquire the water system that currently serves the community of Robbins in Sutter County.
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 November 2010 decision, GSWC recorded a $2.2 million pretax charge during 2010, which included a 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 Office of Ratepayer Advocates ("ORA") reached a settlement agreement.  In March 2013, GSWC filed for CPUC approval of the settlement agreement. The settlement agreement, if approved, will resolve all issues arising from the rehearing. As a result of the settlement agreement reached in March 2013, GSWC recorded a pretax charge during 2012 totaling $416,000 for an additional disallowance of the La Serena capital costs and the related revenues earned on those capital costs to be refunded to customers.
Procurement Audits:
In December 2011, the CPUC issued a final decision on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects. As part of the CPUC decision, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of ten years from the date the settlement was approved by the CPUC.  The audits will cover GSWC’s procurement practices related to contracts with other contractors from 1994 forward and could result in disallowances of costs. The cost of the audits will be borne by shareholders and may not be recovered by GSWC in rates to customers. The first audit is currently underway. At this time, management cannot predict the outcome of these audits or determine an estimated loss or range of loss, if any, resulting from these audits.
 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, ORA issued its report on the GRC, which included recommendations for BVES to record a retroactively ratemaking increase to its accumulated depreciation balance, and to write-off one-half of its deferred rate case costs. On May 7, 2014, GSWC filed a settlement agreement with the CPUC that has been reached with all parties involved in the BVES general rate case. The settlement agreement, if approved, would resolve all matters in the pending electric rate case for rates in years 2013 through 2016. As a result of this settlement, GSWC does not believe any loss is probable with respect to ORA's recommendations; therefore, no provision for loss has been recorded in the financial statements as of June 30, 2014. A final decision from the CPUC is expected in late 2014. The settlement, once approved, will not have a significant impact on GSWC's financial statements. Pending a final decision on the BVES rate case, electric revenues have been recorded using 2012 adopted levels authorized by the CPUC.

17

Table of Contents


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 used 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)
 
2014
 
2013
 
2014
 
2013
Net income
 
$
15,354

 
$
16,602

 
$
26,375

 
$
30,067

Less: (a) Distributed earnings to common shareholders
 
7,853

 
6,854

 
15,699

 
13,693

Distributed earnings to participating securities
 
47

 
95

 
87

 
181

Undistributed earnings
 
7,454

 
9,653

 
10,589

 
16,193

 
 
 
 
 
 
 
 
 
(b) Undistributed earnings allocated to common shareholders
 
7,411

 
9,522

 
10,530

 
15,982

Undistributed earnings allocated to participating securities
 
43

 
131

 
59

 
211

 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
15,264

 
$
16,376

 
$
26,229

 
$
29,675

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
38,781

 
38,612

 
38,764

 
38,570

 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.39

 
$
0.43

 
$
0.68

 
$
0.77

 
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 Stock Incentive Plans, the 2003 Non-Employee Directors Plan, and net income. At June 30, 2014 and 2013, there were 245,784 and 281,668 options outstanding, respectively, under these Plans. At June 30, 2014 and 2013, there were also 239,226 and 260,906 restricted stock units outstanding, respectively, under these plans and the 2013 Non-Employee Directors Plan.

18

Table of Contents

 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)
 
2014
 
2013
 
2014
 
2013
Common shareholders earnings, basic
 
$
15,264

 
$
16,376

 
$
26,229

 
$
29,675

Undistributed earnings for dilutive stock options
 
43

 

 
59

 

Total common shareholders earnings, diluted
 
$
15,307

 
$
16,376

 
$
26,288

 
$
29,675

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
38,781

 
38,612

 
38,764

 
38,570

Stock-based compensation (1)
 
220

 
80

 
210

 
78

Weighted average common shares outstanding, diluted
 
39,001

 
38,692

 
38,974

 
38,648

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.39

 
$
0.43

 
$
0.67

 
$
0.77

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 245,784 and 281,668 stock options at June 30, 2014 and 2013, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 239,226 and 260,906 restricted stock units at June 30, 2014 and 2013, respectively, were included in the calculation of diluted EPS for the six months ended June 30, 2014 and 2013.
 
No stock options outstanding at June 30, 2014 had an exercise price greater than the average market price of AWR’s Common Shares for the six months ended June 30, 2014. There were no stock options outstanding at June 30, 2014 or 2013 that were anti-dilutive.
 
During the six months ended June 30, 2014 and 2013, Registrant issued 70,573 and 208,986 Common Shares, for approximately $219,000 and $1,832,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 401(k) Plan, the 2000 and 2008 Stock Incentive Plans, and the 2003 and 2013 Non-Employee Directors Stock Plans. In addition, Registrant purchased 192,188 and 481,224 common shares on the open market during the six months ended June 30, 2014 and 2013, respectively, under Registrant’s 401(k) Plan and the DRP. On March 27, 2014, AWR's Board of Directors approved a stock repurchase program, authorizing the Company to repurchase up to 1.25 million shares of the Company's common shares from time to time through June 30, 2016. Pursuant to this program, Registrant repurchased an additional 9,300 common shares on the open market in the second quarter of 2014.
 
During the three months ended June 30, 2014 and 2013, AWR paid quarterly dividends of approximately $7.9 million, or $0.2025 per share, and $6.8 million, or $0.1775 per share, respectively. During the six months ended June 30, 2014 and 2013 AWR paid quarterly dividends to shareholders of approximately $15.7 million, or $0.405 per share, and $13.7 million, or $0.355 per share, respectively.

On May 19, 2014, AWR's Board of Directors declared and approved a 5.2% increase in AWR's third quarter cash dividend from $0.2025 to $0.2130 per share on the common shares of the Company. Dividends on the common shares will be payable on September 2, 2014 to shareholders of record at the close of business on August 15, 2014.


Note 4 — 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 $7.2 million as of June 30, 2014. 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. As a result of the expiration in November 2013 of BVES's purchased power contracts, Registrant has no derivative instruments as of June 30, 2014 and December 31, 2013.

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:

19

Table of Contents

 
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).

The table below estimates the fair value of long-term debt held by GSWC. The fair values as of June 30, 2014 and December 31, 2013 have been determined using rates for similar financial instruments of the same duration utilizing level 2 methods and assumptions. The interest rates used for the June 30, 2014 valuation increased as compared to December 31, 2013, decreasing the fair value of long-term debt as of June 30, 2014. Changes in the assumptions will produce differing results.
 
 
June 30, 2014
 
December 31, 2013
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC
 
$
332,203

 
$
421,028

 
$
332,377

 
$
412,590


Note 5 — 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 ETR was 42.1% and 41.1% for the three months ended June 30, 2014 and 2013, respectively and 40.4% and 41.4% for the six months ended June 30, 2014 and 2013, respectively. 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 (primarily related to plant, rate-case and compensation items), as well as permanent items.
 Changes in Tax Law:
In September 2013, the U.S. Treasury Department issued final regulations related to the tax treatment of tangible property, including guidance on expensing certain repair and maintenance expenditures.  The regulations are effective for tax years beginning on or after January 1, 2014. Registrant’s current tax treatment of tangible property continues to be permitted; however, Registrant is evaluating its water-pipeline tax repair-cost method, as well as other tax-method changes pursuant to these regulations. If Registrant adopts new methods, the impact to total income tax expense and the effective tax rate is not expected to be significant.
In January 2013, the American Taxpayer Relief Act of 2012 extended 50% bonus depreciation for qualifying property through 2013.  Although this change in law reduced AWR’s current taxes payable, it did not reduce its total income tax expense or ETR.


20

Table of Contents

Note 6 — 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, 2014 and 2013 are as follows:
 
 
For The Three Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,335

 
$
1,620

 
$
99

 
$
106

 
$
192

 
$
201

Interest cost
 
1,845

 
1,723

 
130

 
113

 
154

 
129

Expected return on plan assets
 
(2,235
)
 
(1,895
)
 
(113
)
 
(95
)
 

 

Amortization of transition
 

 

 
104

 
105

 

 

Amortization of prior service cost (benefit)
 
29

 
30

 
(50
)
 
(50
)
 
40

 
40

Amortization of actuarial (gain) loss
 
(7
)
 
729

 
(66
)
 

 
35

 
85

Net periodic pension cost under accounting standards
 
967

 
2,207

 
104

 
179

 
421

 
455

Regulatory adjustment — deferred
 
449

 
(409
)
 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,416

 
$
1,798

 
$
104

 
$
179

 
$
421

 
$
455


 
 
For The Six Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
2,822

 
$
3,484

 
$
198

 
$
212

 
$
384

 
$
402

Interest cost
 
3,760

 
3,454

 
260

 
226

 
308

 
258

Expected return on plan assets
 
(4,450
)
 
(3,788
)
 
(226
)
 
(190
)
 

 

Amortization of transition
 

 

 
208

 
210

 

 

Amortization of prior service cost (benefit)
 
59

 
60

 
(100
)
 
(100
)
 
80

 
80

Amortization of actuarial (gain) loss
 

 
1,440

 
(132
)
 

 
70

 
170

Net periodic pension cost under accounting standards
 
2,191

 
4,650

 
208

 
358

 
842

 
910

Regulatory adjustment — deferred
 
749

 
(919
)
 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
2,940

 
$
3,731

 
$
208

 
$
358

 
$
842

 
$
910


Registrant expects to contribute approximately $8.2 million to the pension plan during 2014.
Regulatory Adjustment:
In May 2013, the CPUC issued a final decision that authorized GSWC to establish a two-way balancing account for its water regions and the general office to track differences between the forecasted annual pension expenses adopted in rates and the actual annual expense recorded by GSWC in accordance with the accounting guidance for pension costs.  As of June 30, 2014, GSWC has a $3.6 million under-collection in the two-way pension balancing account included as part of the pension regulatory asset (Note 2).

21

Table of Contents

Affordable Care Act:
In 2010, the Patient Protection and Affordable Care Act ("Affordable Care Act") was passed and was to become effective in 2014.  In July 2013, compliance with the employer mandate and certain reporting requirements under the Affordable Care Act were delayed until 2015. Registrant’s health care plan meets the current requirements of the Affordable Care Act for the majority of its employees. Registrant is evaluating alternatives to address those employees for which the plan may not currently meet the requirements. Registrant continues to assess the impact of the Affordable Care Act on its health care benefit costs, but does not expect it to have a material impact in the near future on Registrant's consolidated financial position, results of operations or cash flows.     

Note 7 — Contingencies:

Condemnation of Properties:
 
The laws of the State of California provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation, where doing so is necessary and in the public interest. In addition, these laws provide: (i) that the owner of utility property may contest whether the condemnation is actually necessary and in the public interest, and (ii) that the owner is entitled to receive the fair market value of its property if the property is ultimately taken.
Claremont System:
The City of Claremont ("Claremont" or "the City") located in GSWC’s Region III, has expressed various concerns to GSWC about rates charged by GSWC and the effectiveness of the CPUC’s rate-setting procedures. In November 2012 and again in September 2013, Claremont made an offer to acquire GSWC’s water system servicing Claremont. GSWC rejected both offers and informed the City that the system is not for sale.  Claremont continues to express a desire to potentially take the system by eminent domain.
On July 31, 2014, the City passed a resolution calling for a special election to be held November 4, 2014 for the purpose of authorizing the issuance of $135.0 million in water revenue bonds by the City to finance the acquisition of the system. GSWC serves approximately 11,000 customers in Claremont.
 
Ojai System:
In April 2011, an organization called Ojai FLOW ("Friends of Locally Owned Water") started a local campaign for the Casitas Municipal Water District ("CMWD") to purchase GSWC’s Ojai water system.  In March 2013, CMWD passed resolutions authorizing the establishment of a Community Facilities District, an entity authorized pursuant to the Mello-Roos Community Facilities District Act of 1982 ("Mello-Roos Act") and the issuance of bonds to finance the potential acquisition of GSWC’s Ojai system by eminent domain. In August 2013, Ojai residents approved the levying of a special tax to satisfy the planned bond obligations. GSWC filed a petition in the Superior Court, Ventura County, which, among other things, challenged the legality of CMWD’s effort to utilize the Mello-Roos Act to acquire property by eminent domain and to fund legal and expert costs of the planned condemnation. Ojai FLOW members filed a motion with the Superior Court asking that all residents of GSWC’s Ojai service area be certified as class defendants in GSWC's pending action. They contend that the class would later be entitled to sue GSWC for damages if GSWC's challenge is denied.  Without deciding whether such a lawsuit would be permitted, the Court granted the motion for class certification.  On March 13, 2014, the Court denied GSWC's petition. On April 9, 2014, GSWC filed a Notice of Appeal. GSWC is unable to predict the outcome of the appeal at this time. GSWC serves approximately 3,000 customers in Ojai.
  
Environmental Clean-Up and Remediation:
     GSWC has been involved in environmental remediation and clean-up at a plant site ("Chadron Plant") that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.  Recent analysis indicates that offsite monitoring wells may also be necessary to document effectiveness of remediation.
  As of June 30, 2014, the total spent to clean-up and remediate GSWC’s plant facility was approximately $4.1 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of June 30, 2014, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.4 million to complete the clean-up at the site. The estimate includes costs for two years of continuation of current activities of groundwater cleanup and monitoring, future soil treatment and site closure related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will be approved in rate base by the CPUC.

22

Table of Contents

 
Other Litigation:
 
Registrant is also subject to other ordinary routine litigation incidental to its business. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business. Registrant is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.


23

Table of Contents

Note 8 — Business Segments:
 
AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. AWR has no material assets other than cash and its investments in its subsidiaries on a stand-alone basis.  All activities of GSWC are geographically located within California.
 
Activities of ASUS and its subsidiaries are conducted in California, Georgia, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Each of ASUS’s wholly-owned subsidiaries is regulated by the state in which the subsidiary primarily conducts water and/or wastewater operations.  Fees charged for operations and maintenance and renewal and replacement services are based upon the terms of the contracts with the U.S. government which have been filed with the regulatory commissions in the states in which ASUS’ subsidiaries are incorporated.
 
The tables below set forth information relating to GSWC’s operating segments, ASUS and its subsidiaries and other matters. Total assets by segment are not presented below, as certain of Registrant’s assets are not tracked by segment.  The utility plant amounts are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property installed by developers and conveyed to GSWC.
 
 
As Of And For The Three Months Ended June 30, 2014
 
 
GSWC
 
ASUS
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
Contracts
 
Parent
 
AWR
Operating revenues
 
$
86,232

 
$
8,328

 
$
21,081

 
$

 
$
115,641

Operating income
 
27,182

 
1,393

 
2,425

 

 
31,000

Interest expense, net
 
5,271

 
337

 
55

 
(8
)
 
5,655

Utility plant
 
943,382

 
40,304

 
4,982

 

 
988,668

Depreciation and amortization expense (1)
 
9,634

 
598

 
293

 

 
10,525

Income tax expense (benefit)
 
9,374

 
409

 
923

 
(444
)
 
10,262

Capital additions
 
14,327

 
208

 
554

 

 
15,089


 
 
As Of And For The Three Months Ended June 30, 2013
 
 
GSWC
 
ASUS
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
Contracts
 
Parent
 
AWR
Operating revenues
 
$
84,069

 
$
8,397

 
$
28,229

 
$

 
$
120,695

Operating income (loss)
 
26,772

 
2,186