AWR-2015.03.31-10Q
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 March 31, 2015
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 May 1, 2015, the number of Common Shares outstanding, of American States Water Company was 37,779,984 shares. As of May 1, 2015, 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

The impact of condemnation actions on the size of our customer base

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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 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 mandatory restrictions on water use, 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

Termination of contracts and suspension or debarment for a period of time from contracting with the government due to violations of federal law or regulations in connection with military utility privatization activities

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 wastewater 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

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Issues with the implementation, maintenance and/or 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
 
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 2014 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)
 
March 31,
2015
 
December 31, 2014
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,506,244

 
$
1,492,880

Non-utility property, at cost
 
10,903

 
10,879

Total
 
1,517,147

 
1,503,759

Less - Accumulated depreciation
 
(509,584
)
 
(500,239
)
Net property, plant and equipment
 
1,007,563

 
1,003,520

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
17,505

 
17,536

Total other property and investments
 
18,621

 
18,652

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
74,675

 
75,988

Accounts receivable — customers (less allowance for doubtful accounts of $717 in 2015 and $803 in 2014)
 
16,773

 
18,814

Unbilled receivable
 
16,925

 
21,422

Receivable from the U.S. government
 
7,944

 
6,709

Other accounts receivable (less allowance for doubtful accounts of $112 in 2015 and $89 in 2014)
 
3,307

 
4,843

Income taxes receivable
 
14,565

 
20,993

Materials and supplies, at average cost
 
3,904

 
3,588

Regulatory assets — current
 
12,918

 
12,379

Prepayments and other current assets
 
5,853

 
2,745

Costs and estimated earnings in excess of billings on uncompleted contracts
 
25,706

 
34,535

Deferred income taxes — current
 
6,827

 
7,435

Total current assets
 
189,397

 
209,451

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
123,265

 
118,829

Costs and estimated earnings in excess of billings on uncompleted contracts
 
12,141

 
12,228

Unbilled receivable
 
4,374

 
3,513

Other
 
12,059

 
12,105

Total regulatory and other assets
 
151,839

 
146,675

 
 
 
 
 
Total Assets
 
$
1,367,420

 
$
1,378,298

 
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)
 
March 31,
2015
 
December 31,
2014
Capitalization
 
 

 
 

Common shares, no par value
 
$
251,343

 
$
253,199

Earnings reinvested in the business
 
246,022

 
253,602

Total common shareholders’ equity
 
497,365

 
506,801

Long-term debt
 
325,722

 
325,798

Total capitalization
 
823,087

 
832,599

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
299

 
292

Accounts payable
 
36,952

 
41,855

Income taxes payable
 
799

 
638

Accrued other taxes
 
4,675

 
8,602

Accrued employee expenses
 
12,480

 
10,519

Accrued interest
 
6,292

 
3,549

Unrealized loss on purchased power contracts
 
6,176

 
3,339

Billings in excess of costs and estimated earnings on uncompleted contracts
 
11,350

 
11,736

Other
 
17,711

 
18,760

Total current liabilities
 
96,734

 
99,290

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,298

 
68,328

Contributions in aid of construction - net
 
116,190

 
116,629

Deferred income taxes
 
191,358

 
191,209

Unamortized investment tax credits
 
1,677

 
1,699

Accrued pension and other postretirement benefits
 
63,339

 
61,773

Other
 
6,737

 
6,771

Total other credits
 
447,599

 
446,409

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,367,420

 
$
1,378,298

 
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 MARCH 31, 2015 AND 2014
(Unaudited)


 
 
Three Months Ended March 31,
(in thousands, except per share amounts)
 
2015
 
2014
Operating Revenues
 
 

 
 

Water
 
$
71,504

 
$
70,757

Electric
 
10,969

 
10,456

Contracted services
 
18,460

 
20,732

Total operating revenues
 
100,933

 
101,945

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
12,291

 
11,224

Power purchased for pumping
 
2,017

 
1,964

Groundwater production assessment
 
3,389

 
3,540

Power purchased for resale
 
2,499

 
2,699

Supply cost balancing accounts
 
1,813

 
818

Other operation
 
6,160

 
6,947

Administrative and general
 
19,527

 
20,184

Depreciation and amortization
 
10,548

 
10,530

Maintenance
 
3,477

 
3,489

Property and other taxes
 
4,276

 
4,325

ASUS construction
 
10,046

 
13,457

Total operating expenses
 
76,043

 
79,177

 
 
 
 
 
Operating Income
 
24,890

 
22,768

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,228
)
 
(5,627
)
Interest income
 
112

 
112

Other, net
 
273

 
125

Total other income and expenses
 
(4,843
)
 
(5,390
)
 
 
 
 
 
Income from operations before income tax expense
 
20,047

 
17,378

 
 
 
 
 
Income tax expense
 
7,898

 
6,357

 
 
 
 
 
Net Income
 
$
12,149

 
$
11,021

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
38,205

 
38,747

Basic Earnings Per Common Share
 
$
0.32

 
$
0.28

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
38,408

 
38,944

Fully Diluted Earnings Per Common Share
 
$
0.32

 
$
0.28

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.2130

 
$
0.2025

 
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 THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)

 
 
Three Months Ended 
 March 31,
(in thousands)
 
2015
 
2014
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
12,149

 
$
11,021

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

 
 

Depreciation and amortization
 
10,771

 
10,802

Provision for doubtful accounts
 
112

 
326

Deferred income taxes and investment tax credits
 
1,255

 
(415
)
Stock-based compensation expense
 
853

 
805

Other — net
 
339

 
165

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
1,958

 
3,628

Unbilled receivable
 
3,636

 
2,662

Other accounts receivable
 
1,507

 
2,735

Receivables from the U.S. government
 
(1,235
)
 
(611
)
Materials and supplies
 
(316
)
 
239

Prepayments and other assets
 
(3,310
)
 
(2,202
)
Costs and estimated earnings in excess of billings on uncompleted contracts
 
8,916

 
358

Regulatory assets
 
(4,612
)
 
3,497

Accounts payable
 
(2,765
)
 
(630
)
Income taxes receivable/payable
 
6,589

 
5,644

Billings in excess of costs and estimated earnings on uncompleted contracts
 
(386
)
 
(356
)
Accrued pension and other post-retirement benefits
 
2,099

 
1,692

Other liabilities
 
935

 
1,572

Net cash provided
 
38,495

 
40,932

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(17,390
)
 
(20,531
)
Other investing activities
 
(71
)
 
(116
)
Net cash used
 
(17,461
)
 
(20,647
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
292

 
201

Repurchase of Common Shares
 
(13,891
)
 

Receipt of advances for and contributions in aid of construction
 
714

 
1,516

Refunds on advances for construction
 
(429
)
 
(452
)
Retirement or repayments of long-term debt
 
(69
)
 
(76
)
Proceeds from notes payable to banks
 

 
24,000

Dividends paid
 
(8,155
)
 
(7,846
)
Other
 
(809
)
 
(918
)
Net cash (used) provided
 
(22,347
)
 
16,425

Net change in cash and cash equivalents
 
(1,313
)
 
36,710

Cash and cash equivalents, beginning of period
 
75,988

 
38,226

Cash and cash equivalents, end of period
 
$
74,675

 
$
74,936

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
11,003

 
$
12,952

Property installed by developers and conveyed
 
$
289

 
$
167



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)
 
March 31,
2015
 
December 31,
2014
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,506,244

 
$
1,492,880

Less - Accumulated depreciation
 
(503,103
)
 
(494,000
)
Net utility plant
 
1,003,141

 
998,880

 
 
 
 
 
Other Property and Investments
 
15,367

 
15,395

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
41,973

 
44,005

Accounts receivable-customers (less allowance for doubtful accounts of $717 in 2015 and $803 in 2014)
 
16,773

 
18,814

Unbilled receivable
 
16,637

 
17,733

Inter-company receivable
 
311

 
499

Other accounts receivable (less allowance for doubtful accounts of $112 in 2015 and $89 in 2014)
 
2,777

 
3,795

Income taxes receivable from Parent
 
23,682

 
29,580

Materials and supplies, at average cost
 
3,224

 
2,791

Regulatory assets — current
 
12,918

 
12,379

Prepayments and other current assets
 
4,864

 
2,507

Deferred income taxes — current
 
5,876

 
6,500

Total current assets
 
129,035

 
138,603

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
123,265

 
118,829

Other
 
10,637

 
10,667

Total regulatory and other assets
 
133,902

 
129,496

 
 
 
 
 
Total Assets
 
$
1,281,445

 
$
1,282,374

 
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)
 
March 31,
2015
 
December 31, 2014
Capitalization
 
 

 
 

Common shares, no par value
 
$
235,714

 
$
235,607

Earnings reinvested in the business
 
196,923

 
199,583

Total common shareholder’s equity
 
432,637

 
435,190

Long-term debt
 
325,722

 
325,798

Total capitalization
 
758,359

 
760,988

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
299

 
292

Accounts payable
 
28,025

 
29,619

Accrued other taxes
 
4,482

 
8,442

Accrued employee expenses
 
11,210

 
9,591

Accrued interest
 
6,336

 
3,593

Unrealized loss on purchased power contracts
 
6,176

 
3,339

Other
 
17,420

 
18,659

Total current liabilities
 
73,948

 
73,535

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,298

 
68,328

Contributions in aid of construction — net
 
116,190

 
116,629

Deferred income taxes
 
193,026

 
192,787

Unamortized investment tax credits
 
1,677

 
1,699

Accrued pension and other postretirement benefits
 
63,339

 
61,773

Other
 
6,608

 
6,635

Total other credits
 
449,138

 
447,851

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,281,445

 
$
1,282,374

 
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 MARCH 31, 2015 AND 2014
(Unaudited)


 
 
Three Months Ended March 31,
(in thousands)
 
2015
 
2014
Operating Revenues
 
 
 
 
Water
 
$
71,504

 
$
70,757

Electric
 
10,969

 
10,456

Total operating revenues
 
82,473

 
81,213

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
12,291

 
11,224

Power purchased for pumping
 
2,017

 
1,964

Groundwater production assessment
 
3,389

 
3,540

Power purchased for resale
 
2,499

 
2,699

Supply cost balancing accounts
 
1,813

 
818

Other operation
 
5,458

 
6,356

Administrative and general
 
15,557

 
16,985

Depreciation and amortization
 
10,241

 
10,240

Maintenance
 
2,817

 
3,061

Property and other taxes
 
3,918

 
3,896

Total operating expenses
 
60,000

 
60,783

 
 
 
 
 
Operating Income
 
22,473

 
20,430

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,218
)
 
(5,611
)
Interest income
 
104

 
109

Other, net
 
273

 
124

Total other income and expenses
 
(4,841
)
 
(5,378
)
 
 
 
 
 
Income from operations before income tax expense
 
17,632

 
15,052

 
 
 
 
 
Income tax expense
 
7,247

 
5,705

 
 
 
 
 
Net Income
 
$
10,385

 
$
9,347

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


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GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2015 AND 2014
(Unaudited)

 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2015
 
2014
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
10,385

 
$
9,347

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

 
 

Depreciation and amortization
 
10,464

 
10,512

Provision for doubtful accounts
 
112

 
326

Deferred income taxes and investment tax credits
 
1,361

 
(361
)
Stock-based compensation expense
 
627

 
564

Other — net
 
329

 
150

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
1,958

 
3,628

Unbilled receivable
 
1,096

 
2,514

Other accounts receivable
 
989

 
2,061

Materials and supplies
 
(433
)
 
(369
)
Prepayments and other assets
 
(2,558
)
 
(1,555
)
Regulatory assets
 
(4,612
)
 
3,497

Accounts payable
 
558

 
(370
)
Inter-company receivable/payable
 
188

 
187

Income taxes receivable/payable from/to Parent
 
5,898

 
5,004

Accrued pension and other post-retirement benefits
 
2,099

 
1,692

Other liabilities
 
377

 
1,040

Net cash provided
 
28,838

 
37,867

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(17,318
)
 
(19,796
)
Note receivable from AWR parent
 

 
(8,300
)
Receipt of payment of note receivable from AWR parent
 

 
8,800

Other investing activities
 
(79
)
 
(116
)
Net cash used
 
(17,397
)
 
(19,412
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
714

 
1,516

Refunds on advances for construction
 
(429
)
 
(452
)
Retirement or repayments of long-term debt
 
(69
)
 
(76
)
Dividends paid
 
(13,000
)
 
(13,000
)
Other
 
(689
)
 
(751
)
Net cash used
 
(13,473
)
 
(12,763
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(2,032
)
 
5,692

Cash and cash equivalents, beginning of period
 
44,005

 
37,875

Cash and cash equivalents, end of period
 
$
41,973

 
$
43,567

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
10,989

 
$
12,952

Property installed by developers and conveyed
 
$
289

 
$
167

 
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 258,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 24,000 electric 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 months ended March 31, 2015 and 2014. 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 operations, 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 in the consolidated and GSWC Statements of Cash Flow have been reclassified to conform to the 2015 presentation of "Regulatory assets" as a separate line item. There were also reclassifications of certain prior period amounts in the consolidated Statements of Cash Flow to conform to the 2015 presentation of certain changes as "Unbilled receivable" rather than as "Receivables from the U.S. government."
 
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.
 
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, 2014 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, 2014 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 agreed to pay any unpaid principal amounts outstanding under the Note, plus accrued interest. As of March 31, 2015, AWR had no amounts outstanding to GSWC under this Note.


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GSWC and ASUS provide and receive various support services to and from their parent, AWR, and among themselves. GSWC also allocates certain corporate office administrative and general costs to its affiliate, ASUS, using allocation factors approved by the CPUC. During the three months ended March 31, 2015 and 2014, GSWC allocated to ASUS approximately $707,000 and $696,000, respectively, of corporate office administrative and general costs. 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. Amounts owed to GSWC by its parent, AWR, or for allocated expenses are included in GSWC's inter-company receivables as of March 31, 2015 and December 31, 2014.
 
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 for each rate-making area as applicable. 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 $871,000 and $845,000 for the three months ended March 31, 2015 and 2014, 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.  The non-income tax assessments are accounted for on a gross basis and totaled $32,000 and $149,000 during the three months ended March 31, 2015 and 2014, respectively.
 
Recently Issued Accounting Pronouncements: In January 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 2014-05, Service Concession Arrangements, which specifies that an operating entity should not account for a service concession arrangement as a lease in accordance with Topic 840, Leases. The update also specifies that the infrastructure used in a service concession arrangement should not be recognized as property, plant, and equipment of the operating entity. The updated guidance is effective for reporting periods beginning after December 15, 2014. The adoption of the guidance did not, and is not expected to, have a material impact on the Company's consolidated results of operations or consolidated balance sheet.

In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, rather than as an asset. The standard does not affect the recognition and measurement of debt issuance costs. This guidance is effective January 1, 2016. As of March 31, 2015, Registrant had $5.1 million in debt issuance costs reflected under "Other Noncurrent Assets."
 
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 March 31, 2015, Registrant had approximately $68.6 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $40.2 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $6.2 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC's purchase power contracts over the term of the contracts, and $17.1 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.
 

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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 are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next 12-months have been classified as current assets and current liabilities by rate-making area. As of March 31, 2015, GSWC has a total of $131.9 million in net regulatory assets, of which $4.3 million of regulatory liabilities have been included in “Other Current Liabilities”. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows: 
(dollars in thousands)
 
March 31,
2015
 
December 31,
2014
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
17,948

 
$
9,369

Base Revenue Requirement Adjustment Mechanism
 
6,452

 
7,761

Costs deferred for future recovery on Aerojet case
 
13,457

 
13,629

Pensions and other post-retirement obligations (Note 7)
 
42,884

 
43,426

Derivative unrealized loss (Note 4)
 
6,176

 
3,339

Flow-through taxes, net (Note 6)
 
17,092

 
17,612

Low income rate assistance balancing accounts
 
9,215

 
9,109

General rate case memorandum accounts
 
4,651

 
4,731

Other regulatory assets
 
14,686

 
17,487

Various refunds to customers
 
(640
)
 
(759
)
Total
 
$
131,921

 
$
125,704

 
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, 2014 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2014.
 
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, 2014.  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 March 31, 2015 and 2014, surcharges (net of surcredits) of approximately $600,000 and $1.8 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts.  During the three months ended March 31, 2015 and 2014, GSWC recorded under-collections of $8.0 million and $3.6 million, respectively, in the WRAM, net of the MCBA accounts. As of March 31, 2015, GSWC has a net aggregated regulatory asset of $17.9 million which is comprised of a $13.7 million under-collection in the WRAM accounts and $4.2 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.  In November 2014, the CPUC issued a final decision on BVES' general rate case, setting rates and adopted revenues for years 2013 through 2016. In March 2015, surcharges were implemented to collect the 2014 BRRAM under-collection of $3.1 million over 24 months. As of March 31, 2015, GSWC had a regulatory asset of $6.5 million under-collection in the BRRAM.
 
Other Regulatory Matters:
 
Procurement Audits:
In December 2011, the CPUC issued a final decision adopting a settlement between GSWC and the CPUC on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects primarily in one of GSWC's three main geographic water regions. As part of the settlement reached with the CPUC on this matter, 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 cover GSWC’s procurement practices for contracts with

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other contractors from 1994 forward. The first audit started in 2014 and covers almost a 20-year period from January 1, 1994 through September 30, 2013.
In December 2014, the accounting firm engaged by the CPUC to conduct the first audit provided its draft report to GSWC for comments. The report asserted that GSWC had not complied, in all material respects, with the CPUC’s requirements and GSWC's procurement policies during the period from 1994 to 2006. Subsequent to 2006, except for specific instances of alleged noncompliance, GSWC was found to be in compliance, in all material respects, with the CPUC’s requirements and GSWC’s procurement policies. The findings and corresponding recommendations in the draft report included, among other things, instances of inadequate documentation to support competitive bidding procedures, change orders, and sole source justifications.
In February 2015, management provided to the auditors its responses to the draft report and each of the findings noted by the auditors. GSWC informed the auditors of certain inaccuracies in their report, asserted that GSWC complied, in all material respects, with the CPUC’s requirements throughout the entire audit period and, has been in material compliance with its own procurement policies throughout the audit period. In March 2015, the accounting firm issued its final report to the CPUC. The final report includes GSWC's responses to the accounting firm’s findings, as well as the firm’s responses to GSWC's comments. Based upon discussions with the CPUC's Division of Water and Audits ("DWA"), DWA does not intend to pursue further investigation, refunds, or penalties in respect of past procurement activities as a result of the final report. However, the CPUC's Office of Ratepayer Advocates ("ORA") has requested that the CPUC convene a separate phase of GSWC's current general rate case to consider the findings and recommendations in the final report. ORA may separately pursue disallowances and/or penalties from GSWC in that pending rate case proceeding. At this time management cannot predict the final outcome of this first audit and cannot determine a possible loss or range of loss, if any, associated with any disallowances and/or penalties that may be pursued against GSWC.

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 restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares that have been issued under AWR's 2000 and 2008 employee plans and the 2003 and 2013 directors plan.  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 March 31,
(in thousands, except per share amounts)
 
2015
 
2014
Net income
 
$
12,149

 
$
11,021

Less: (a) Distributed earnings to common shareholders
 
8,138

 
7,846

Distributed earnings to participating securities
 
45

 
43

Undistributed earnings
 
3,966

 
3,132

 
 
 
 
 
(b) Undistributed earnings allocated to common shareholders
 
3,945

 
3,114

Undistributed earnings allocated to participating securities
 
21

 
18

 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
12,083

 
$
10,960

 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
38,205

 
38,747

 
 
 
 
 
Basic earnings per Common Share
 
$
0.32

 
$
0.28

 
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 and restricted stock units granted under AWR’s 2000 and 2008 employee plans, and the 2003 and 2013 directors plans, and net income. At March 31, 2015 and 2014, there were 198,764 and 247,064 options outstanding, respectively, under these Plans. At March 31, 2015 and 2014, there were also 226,319 and 237,174 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.

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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 March 31,
(in thousands, except per share amounts)
 
2015
 
2014
Common shareholders earnings, basic
 
$
12,083

 
$
10,960

Undistributed earnings for dilutive stock-based awards
 
21

 
18

Total common shareholders earnings, diluted
 
$
12,104

 
$
10,978

 
 
 
 
 
Weighted average common shares outstanding, basic
 
38,205

 
38,747

Stock-based compensation (1)
 
203

 
197

Weighted average common shares outstanding, diluted
 
38,408

 
38,944

 
 
 
 
 
Diluted earnings per Common Share
 
$
0.32

 
$
0.28

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 198,764 and 247,064 stock options at March 31, 2015 and 2014, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 226,319 and 237,174 restricted stock units at March 31, 2015 and 2014, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2015 and 2014.
 
No stock options outstanding at March 31, 2015 had an exercise price greater than the average market price of AWR’s Common Shares for the three months ended March 31, 2015. There were no stock options outstanding at March 31, 2015 or 2014 that were anti-dilutive.
 
During the three months ended March 31, 2015 and 2014, AWR issued 47,422 and 57,249 common shares, for approximately $292,000 and $201,000, 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.

On March 27, 2014, AWR's Board of Directors approved a stock repurchase program, authorizing AWR to repurchase up to 1.25 million shares of its Common Shares from time to time through June 30, 2016. Pursuant to this program, Registrant repurchased 356,769 Common Shares on the open market during the three months ended March 31, 2015. The repurchase of Common Shares is restricted by California law under the same standards which apply to dividend distributions.
 
During the three months ended March 31, 2015 and 2014, AWR paid quarterly dividends of approximately $8.2 million, or $0.213 per share, and $7.8 million, or $0.2025 per share, respectively.



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Note 4 — Derivative Instruments:

Derivative financial instruments are used to manage exposure to commodity price risk. Commodity price risk represents the potential impact that can be caused by a change in the market value of a particular commodity. GSWC’s electric division, BVES, purchases power under long-term contracts at a fixed cost depending on the amount of power and the period during which the power is purchased under such contracts.  These contracts are generally subject to the accounting guidance for derivatives and require mark-to-market derivative accounting.  In December 2014, the CPUC approved an application that allowed GSWC to immediately execute new long-term purchased power contracts with energy providers on December 9, 2014. GSWC began taking power under these long-term contracts effective January 1, 2015 at a fixed cost over three and five year terms depending on the amount of power and period during which the power is purchased under the contracts.
The new long-term contracts executed in December 2014 are subject to the accounting guidance for derivatives and require mark-to-market derivative accounting. Among other things, the CPUC approval in December 2014 also authorized GSWC to establish a regulatory asset and liability memorandum account to offset the mark-to-market entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the new purchased power contracts executed in December 2014 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. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of March 31, 2015, there was a $6.2 million unrealized loss in the memorandum account for the new purchased power contracts as a result of the recent drop in energy prices. There were no derivatives as of March 31, 2014.  The notional volume of derivatives remaining under these long-term contracts as of March 31, 2015 was approximately 554,000 megawatt hours.
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).

To value the contract, Registrant applies the Black-76 model, utilizing 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 received 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 as Level 3. Accordingly, the valuation of the derivative on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.
 The following table presents changes in the fair value of GSWC’s Level 3 derivatives for the three months ended March 31, 2015 and 2014:
(dollars in thousands)
 
2015
 
2014
Fair value at beginning of the period
 
$
(3,339
)
 
$

Unrealized loss on purchased power contracts
 
(2,837
)
 

Fair value at end of the period
 
$
(6,176
)
 
$


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 $8.9 million as of March 31, 2015. 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. The fair values as of March 31, 2015 and December 31, 2014 have been determined using rates for similar financial instruments of the same duration utilizing Level 2

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methods and assumptions. The interest rates used for the March 31, 2015 valuation increased as compared to December 31, 2014, decreasing the fair value of long-term debt as of March 31, 2015. Changes in the assumptions will produce differing results.
 
 
March 31, 2015
 
December 31, 2014
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC
 
$
326,021

 
$
382,941

 
$
326,090

 
$
417,057


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 ETR was 41.1% and 37.9% for the three months ended March 31, 2015 and 2014, 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. The ETR at the AWR consolidated level also fluctuates as a result of ASUS's state income taxes, which vary among the jurisdictions in which it operates, and certain permanent differences.
 Changes in Tax Law:
During the fourth quarter of 2014, the Company reflected a change in its tax method of accounting for certain repair and maintenance expenditures pursuant to regulations issued by the U.S. Treasury Department in September 2013.  In connection with filing the 2014 tax returns on or before September 15, 2015, the Company will file an application for an automatic change in tax accounting method with the Internal Revenue Service ("IRS") for the 2014 tax year to implement the new method effective January 1, 2014. The tax accounting method change will also include a cumulative adjustment for 2013 and prior years, and will permit the expensing of certain utility asset replacement costs that were previously being capitalized and depreciated for book and tax purposes. As a result of the change, the Company will deduct a significant amount of asset costs, which consist primarily of water mains and connections.

During the fourth quarter of 2014, GSWC recorded a cumulative adjustment for 2013 and prior years as well as the 2014 estimated deduction, and recognized a total deferred income tax liability of $30.8 million for federal and state repair-and-maintenance deductions as of December 31, 2014. Although this change reduces AWR’s current taxes payable, it did not reduce total income tax expense or ETR.


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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 months ended March 31, 2015 and 2014 are as follows:
 
 
For The Three Months Ended March 31,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,686

 
$
1,487

 
$
95

 
$
99

 
$
204

 
$
192

Interest cost
 
1,939

 
1,915

 
114

 
130

 
163

 
154

Expected return on plan assets
 
(2,446
)
 
(2,215
)
 
(123
)
 
(113
)
 

 

Amortization of transition
 

 

 

 
104

 

 

Amortization of prior service cost (benefit)
 
30

 
30

 
(50
)
 
(50
)
 
29

 
40

Amortization of actuarial (gain) loss
 
469

 
7

 
(53
)
 
(66
)
 
108

 
35

Net periodic pension cost under accounting standards
 
1,678

 
1,224

 
(17
)
 
104

 
504

 
421

Regulatory adjustment — deferred
 
11

 
300

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,689

 
$
1,524

 
$
(17
)
 
$
104

 
$
504

 
$
421

In April 2015, Registrant contributed $919,000 to the pension plan. In total, Registrant expects to contribute $6.7 million to the pension plan during 2015.
Regulatory Adjustment:
As authorized by the CPUC in the most recent water and electric general rate case decisions, GSWC utilizes two-way balancing accounts for its water and electric 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 March 31, 2015, GSWC has a total $2.7 million net under-collection in the two-way pension balancing accounts included as part of the pension regulatory asset (Note 2).

Note 8 — 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:
On November 4, 2014, voters in the City of Claremont ("Claremont" or "the City") approved a measure authorizing the issuance of $135 million in water revenue bonds by the City to finance the acquisition of the Claremont water system. On December 9, 2014, the City filed an eminent domain lawsuit against GSWC. GSWC has the ability to legally challenge the government's right to take its property. GSWC does not believe the seizure is necessary and intends to vigorously defend against the potential condemnation. In January 2015, GSWC filed a motion on the grounds that Claremont failed to follow proper procedures when it filed its eminent domain lawsuit, among other things. On April 30, 2015, the Los Angeles Superior Court granted GSWC's motion. The City has the right to file an amended complaint. At this time, management cannot predict the outcome of the eminent domain proceeding. The Claremont water system has a net book value of approximately $47.4 million. GSWC serves approximately 11,000 customers in Claremont. 

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Ojai System:
In March 2013, Casitas Municipal Water District ("CMWD") passed resolutions under the Mello-Roos Community Facilities District Act of 1982 ("Mello-Roos Act") authorizing the establishment of a Community Facilities District, and the issuance of bonds to finance the potential acquisition of GSWC’s Ojai system by eminent domain. GSWC filed a petition in the Superior Court and eventually the Court of Appeals in 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. On April 14, 2015, the California Court of Appeals affirmed a prior court's ruling allowing the use of Mello-Roos funding. On April 29, 2015, GSWC file a petition for rehearing at the Appellate Court level in Ojai. Ojai FLOW ("Friends of Locally Owned Water") members were also granted class status by the Superior Court to later file action against GSWC should they be able to prove GSWC’s motions delayed condemnation action and resulted in higher costs for Ojai residents should the system be ultimately taken. GSWC serves approximately 3,000 customers in Ojai.
 
Apple Valley System:
The Town of Apple Valley has indicated they plan to commence a condemnation action against Park Water Company who serves most of the Town, but has not made a similar indication against GSWC. GSWC serves approximately 2,900 customers in the Town of Apple Valley.

Artesia System:
On October 13, 2014, the City of Artesia's City Council approved a request for a feasibility study on the potential acquisition of GSWC's water system in Artesia. GSWC serves approximately 3,300 customers in Artesia.

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.  Analysis indicates that offsite monitoring wells may also be necessary to document effectiveness of remediation.
  As of March 31, 2015, the total spent to clean-up and remediate GSWC’s plant facility was approximately $4.6 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 March 31, 2015, 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 continued 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.
 
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.


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Table of Contents

Note 9 — Business Segments:
 
AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. On a stand-alone basis, AWR has no material assets other than cash and its investments in its subsidiaries. 
 
All activities of GSWC, a rate-regulated utility, 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’s 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 government-funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.
 
 
As Of And For The Three Months Ended March 31, 2015
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
71,504

 
$
10,969

 
$
18,460

 
$

 
$
100,933

Operating income (loss)
 
19,741

 
2,732

 
2,420

 
(3
)
 
24,890

Interest expense, net
 
4,801

 
313

 
8

 
(6
)
 
5,116

Utility plant
 
958,270

 
44,871

 
4,422

 

 
1,007,563

Depreciation and amortization expense (1)
 
9,941

 
300

 
307

 

 
10,548

Income tax expense (benefit)
 
6,144

 
1,103

 
871

 
(220
)
 
7,898

Capital additions
 
16,244

 
1,074

 
72

 

 
17,390


 
 
As Of And For The Three Months Ended March 31, 2014
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
70,757

 
$
10,456

 
$
20,732

 
$

 
$
101,945

Operating income (loss)
 
18,395

 
2,035

 
2,384

 
(46
)
 
22,768

Interest expense, net
 
5,168

 
334

 
67

 
(54
)
 
5,515

Utility plant
 
938,744

 
40,553

 
4,632

 

 
983,929

Depreciation and amortization expense (1)
 
9,563

 
677

 
290

 

 
10,530

Income tax expense (benefit)
 
4,958

 
747

 
823

 
(171
)
 
6,357

Capital additions
 
19,324

 
472

 
735

 

 
20,531

 
(1)         Depreciation expense computed on GSWC’s transportation equipment of $223,000 and $272,000 for the three months ended March 31, 2015 and 2014, respectively, is recorded in administrative and general expenses.

The following table reconciles total utility plant (a key figure for rate-making) to total consolidated assets (in thousands):
 
 
March 31,
 
 
2015
 
2014
Total utility plant
 
$
1,007,563

 
$
983,929

Other assets
 
359,857

 
349,842

Total consolidated assets
 
$
1,367,420

 
$
1,333,771


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Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The following discussion and analysis provides information on AWR’s consolidated operations and assets and where necessary, includes specific references to AWR’s individual segments and/or other subsidiaries: GSWC and ASUS and its subsidiaries.  Included in the following analysis is a discussion of water and electric gross margins.  Water and electric gross margins are computed by taking total revenues, less total supply costs.  Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results.  Registrant believes these measures are useful internal benchmarks in evaluating the performance of GSWC.
 
The discussions and tables included in the following analysis also present Registrant’s operations in terms of earnings per share by business segment.  Registrant believes that the disclosure of earnings per share by business segment provides investors with clarity surrounding the performance of our differing services.  Registrant reviews these measurements regularly and compares them to historical periods and to our operating budget. However, these measures, which are not presented in accordance with generally accepted accounting principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income or earnings per share, which are determined in accordance with GAAP. A reconciliation of water and electric gross margins to the most directly comparable GAAP measures are included in the table under the section titled “Operating Expenses: Supply Costs.”  Reconciliations to AWR’s diluted earnings per share are included in the discussions under the section titled “Summary of First Quarter Results by Segment.

Overview
 
GSWC's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California and the delivery of electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC customers are determined by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital.  Factors affecting the financial performance of GSWC are described under Forward-Looking Information and include: the process and timing of setting rates charged to customers; the ability to recover, and the process for recovering in rates, the costs of distributing water and electricity and overhead costs; pressures on water supply caused by the drought in California, changing weather patterns in the West, population growth, more stringent water quality standards and deterioration in water quality and water supply from a variety of causes; fines, penalties and disallowances by the CPUC arising from failures to comply with regulatory requirements; the impact of increased water quality standards and environmental regulations on the cost of operations and capital expenditures; changes in long-term customer demand due to changes in usage patterns as a result of conservation efforts, mandatory regulatory changes impacting the use of water, such as mandatory restrictions on water use, new landscaping or irrigation requirements, recycling of water by the customer and purchases of recycled water by customers from other third parties; capital expenditures needed to upgrade water systems and increased costs and risks associated with litigation relating to water quality and water supply, including suits initiated by GSWC to protect its water supply and condemnation actions initiated by municipalities. GSWC plans to continue to seek additional rate increases in future years from the CPUC to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC are expected to remain at higher levels than depreciation expense. When necessary, GSWC obtains funds from external sources in the capital markets and through bank borrowings.

ASUS's revenues, operating income and cash flows are earned by providing water and/or wastewater services, including the operation, maintenance, renewal and replacement of the water and/or wastewater systems at various military installations pursuant to 50-year firm, fixed-price contracts. The contract price for each of these contracts is subject to prospective price redeterminations. Additional revenues generated by contract operations are primarily dependent on new construction activities under contract modifications with the U.S. government or agreements with other third party prime contractors. As a result, ASUS is subject to risks that are different than those of GSWC. Factors affecting the financial performance of our Military Utility Privatization Subsidiaries are described under Forward-Looking Information and include delays in receiving payments from and the redetermination and equitable adjustment of prices under contracts with the U.S. government; fines, penalties or disallowance of costs by the U.S. government; and termination of contracts and suspension or debarment for a period of time from contracting with the government due to violations of federal law and regulations in connection with military utility privatization activities.  ASUS's financial performance is also dependent upon its ability to accurately estimate costs in bidding on firm fixed-price construction contracts and the costs of seeking new contracts for the operation and maintenance and renewal and replacement of water and/or wastewater services at military bases and for additional construction work at existing bases.  ASUS is actively pursuing utility privatization contracts of other military bases to expand the contracted services segment.


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Table of Contents

Summary of First Quarter Results by Segment
 
The table below sets forth the first quarter diluted earnings per share by business segment:
 
 
Diluted Earnings per Share
 
 
Three Months Ended
 
 
 
 
3/31/2015
 
3/31/2014
 
CHANGE
Water
 
$
0.24

 
$
0.22

 
$
0.02

Electric
 
0.03

 
0.02

 
0.01

Contracted services
 
0.04

 
0.04

 

AWR (parent)
 
0.01

 

 
0.01

Consolidated diluted earnings per share, as reported
 
$
0.32

 
$
0.28

 
$
0.04

 
For the three months ended March 31, 2015, diluted earnings from the water segment increased by $0.02 to $0.24 per share as compared to the same period in 2014 due primarily to lower expenses. Excluding supply costs and surcharges which have no impact on operating income, there were decreases in certain expenses of $0.03 per share primarily due to a decrease in: (i) other operation expenses resulting from lower water treatment costs, materials and supplies costs, and bad debt expense; (ii) administrative and general expenses due to a reduction in legal expenses, and (iii) interest expense. These decreases in expenses were partially offset by a higher effective income tax rate ("ETR") for the water segment during the first quarter of 2015 as compared to the same period in 2014, decreasing earnings by $0.01 per share. The increase in the ETR was due primarily to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. 
For the three months ended March 31, 2015, diluted earnings from the electric segment increased by $0.01 to $0.03 per share as compared to the same period in 2014 due primarily to an increase in the electric gross margin and an overall decrease in operating expenses. The electric gross margin increased due, in large part, to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on BVES's general rate case. Differences in the 2015 versus 2014 monthly revenue spread will reverse during the year. Depreciation expense decreased due to lower depreciation composite rates approved by the CPUC in the electric general rate case in November 2014; however, most of this decrease was also reflected in a lower revenue requirement resulting in no impact on operating income. There was also a decrease in legal and maintenance expenses.
  
Diluted earnings from contracted services were $0.04 per share during the first quarter of 2015 and 2014. Overall increases in operating expenses were mostly offset by favorable changes in cost estimates for certain capital work in progress. These projects and cost estimates are continuously evaluated and revised accordingly. Revenues for these projects are recognized based on the percentage-of-completion method of accounting.

Diluted earnings from AWR (parent) increased by $0.01 per share during the first quarter of 2015 as compared to the same period in 2014 due primarily to lower state income taxes.

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Table of Contents

Consolidated Results of Operations — Three Months Ended March 31, 2015 and 2014 (amounts in thousands, except per share amounts):
 
 
Three Months Ended 
 March 31, 2015
 
Three Months Ended 
 March 31, 2014
 
$
CHANGE
 
%
CHANGE
OPERATING REVENUES
 
 

 
 

 
 

 
 

Water
 
$
71,504

 
$
70,757

 
$
747

 
1.1
 %
Electric
 
10,969

 
10,456

 
513

 
4.9
 %
Contracted services
 
18,460

 
20,732

 
(2,272
)
 
(11.0
)%
Total operating revenues
 
100,933

 
101,945

 
(1,012
)
 
(1.0
)%
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 

 
 

 
 

 
 

Water purchased
 
12,291

 
11,224

 
1,067

 
9.5
 %
Power purchased for pumping
 
2,017

 
1,964

 
53

 
2.7
 %
Groundwater production assessment
 
3,389

 
3,540

 
(151
)
 
(4.3
)%
Power purchased for resale
 
2,499

 
2,699

 
(200
)
 
(7.4
)%
Supply cost balancing accounts
 
1,813

 
818

 
995

 
121.6
 %
Other operation
 
6,160

 
6,947

 
(787
)
 
(11.3
)%
Administrative and general
 
19,527

 
20,184

 
(657
)
 
(3.3
)%
Depreciation and amortization
 
10,548

 
10,530

 
18

 
0.2
 %
Maintenance
 
3,477

 
3,489

 
(12
)
 
(0.3
)%
Property and other taxes
 
4,276

 
4,325

 
(49
)
 
(1.1
)%
ASUS construction
 
10,046

 
13,457

 
(3,411
)
 
(25.3
)%
Total operating expenses
 
76,043

 
79,177

 
(3,134
)
 
(4.0
)%
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
24,890

 
22,768

 
2,122

 
9.3
 %
 
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 
 

 
 

 
 

 
 

Interest expense
 
(5,228
)
 
(5,627
)
 
399

 
(7.1
)%
Interest income
 
112

 
112

 

 
 %
Other, net
 
273

 
125

 
148

 
118.4
 %
 
 
(4,843
)
 
(5,390
)
 
547

 
(10.1
)%
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
 
20,047

 
17,378

 
2,669

 
15.4
 %
Income tax expense
 
7,898

 
6,357

 
1,541

 
24.2
 %
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
12,149

 
$
11,021

 
$
1,128

 
10.2
 %
 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.32

 
$
0.28

 
$
0.04

 
14.3
 %
 
 
 
 
 
 
 
 
 
Fully diluted earnings per Common Share
 
$
0.32

 
$
0.28

 
$
0.04

 
14.3
 %


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Table of Contents

Operating Revenues:
 
General
 
Registrant relies upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant for GSWC. Registrant relies on price redeterminations and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS.  If adequate rate relief or price redeterminations are not granted in a timely manner, current operating revenues and earnings can be negatively impacted.  ASUS’s earnings are also impacted by the level of additional construction projects at the Military Utility Privatization Subsidiaries, which may or may not continue at current levels in future periods.
 
Water
 
For the three months ended March 31, 2015, revenues from water operations increased $747,000 to $71.5 million as compared to the same period in 2014. The increase in water revenues is primarily due to third-year rate increases, effective January 1, 2015 for certain rate-making areas, and increases generated from advice letter filings approved by the CPUC. These increases were partially offset by an $880,000 decrease in surcharges during the three months ended March 31, 2015 to recover previously incurred costs approved by the CPUC. The decrease in revenues from these surcharges is offset by a corresponding decrease in operating expenses (primarily administrative and general) resulting in no impact to pretax operating income.
 
Billed water consumption for the first quarter of 2015 decreased by approximately 13% as compared to the same period in 2014 due to conservation efforts. A change in consumption does not have a significant impact on revenues due to the CPUC-approved Water Revenue Adjustment Mechanism ("WRAM") account in place in all three water regions. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
 
Electric
 
For the three months ended March 31, 2015, revenues from electric operations were $11.0 million as compared to $10.5 million for the same period in 2014.  The increase in revenue is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on BVES's GRC. Differences in the 2015 versus 2014 monthly revenue spread will reverse during the year.
 
Billed electric usage increased by approximately 11% during the three months ended March 31, 2015 as compared to the three months ended March 31, 2014.  The winter experienced in California during the first quarter of 2014 was too warm for snowmaking, resulting in less electric usage in the Big Bear area than in 2015. Due to the CPUC approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.
 
Contracted Services
 
Revenues from contracted services are composed of construction revenues (including renewals and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the three months ended March 31, 2015, revenues from contracted services were $18.5 million as compared to $20.7 million for the same period in 2014. This decrease was due to a reduction in initial capital upgrade ("ICU") work, primarily at Fort Bragg (ONUS), coupled with lower levels of new capital upgrade ("NCU") work, primarily at the military bases in Virginia (ODUS) and Fort Bliss (FBWS). These decreases were partially offset by higher renewal and replacement ("R&R") capital work, primarily at Fort Bliss and Fort Jackson. R&R construction activity will continue to vary from year-to-year over the remaining term of the 50-year contracts with the U.S. government. In addition, there was an increase in revenues during the three months ended March 31, 2015 compared to the same period in 2014 resulting from favorable changes in cost estimates for certain capital work in progress. These projects and cost estimates are continuously evaluated and revised accordingly. Revenues for these projects are recognized based on the percentage-of-completion method of accounting.

ASUS subsidiaries continue to enter into U.S. government awarded contract modifications and agreements with third-party prime contractors for new construction projects at the Military Utility Privatization Subsidiaries. Earnings and cash flows from modifications to the original 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.


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Table of Contents

 
Operating Expenses:
 
Supply Costs
 
Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and water supply cost balancing accounts. Supply costs for the electric segment consist of purchased power for resale, the cost of natural gas used by BVES’s generating unit, the cost of renewable energy credits and the electric supply cost balancing account. Water and electric gross margins are computed by taking total revenues, less total supply costs. Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results. Registrant believes these measures are useful internal benchmarks in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with GAAP, may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income, which is determined in accordance with GAAP.
 
Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for approximately 28.9% and 25.6% of total operating expenses for the three months ended March 31, 2015 and 2014, respectively.
 
The table below provides the amount of increases (decreases) and percent changes in water and electric revenues, supply costs and gross margin during the three months ended March 31, 2015 and 2014 (dollar amounts in thousands):
 
 
Three Months Ended 
 March 31, 2015
 
Three Months Ended 
 March 31, 2014
 
$
CHANGE
 
%
CHANGE
WATER OPERATING REVENUES (1)
 
$
71,504

 
$
70,757

 
$
747

 
1.1
 %
WATER SUPPLY COSTS:
 
 

 
 

 
 

 
 

Water purchased (1)
 
$
12,291

 
$
11,224

 
$
1,067

 
9.5
 %
Power purchased for pumping (1)
 
2,017

 
1,964

 
53

 
2.7
 %
Groundwater production assessment (1)
 
3,389

 
3,540