10-Q
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, 2016
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, 2016, the number of Common Shares outstanding, of American States Water Company was 36,554,067 shares. As of May 1, 2016, 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 (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. and its subsidiaries ("ASUS").
 
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 other than with respect to itself.
 
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 the 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 outcomes of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in GSWC's general rate cases and the results of independent audits of GSWC's 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 recover our costs through rates;


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the impact of opposition to GSWC rate increases on our ability to recover our costs through rates, including costs associated with construction of pipelines to connect to alternative sources of water, new wells to replace wells that are no longer in service (or are otherwise inadequate to meet the needs of our customers), and other facilities to conserve or reclaim water;

the impact of opposition by GSWC customers to rate increases associated with the implementation of tiered rate structures and restrictions on water use mandated in California as a result of the California drought;

the impact of condemnation actions on future revenues and other aspects of our business if we do not receive adequate compensation for the assets acquired, or recovery of all charges associated with the condemnation of these assets, and the impact on future revenues if we are no longer entitled to any portion of the revenues generated from these assets;

liabilities associated with the inherent risks of damage to private property and injuries to employees and the general public if they should come into contact with electrical current or equipment, including through downed power lines or equipment malfunctions, or we fail to maintain safe construction and maintenance work sites;

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 GSWC's regulatory assets, liabilities and revenues subject to refund or regulatory disallowances and the timing of such recovery, and the amounts set aside for uncollectible accounts receivable, inventory obsolescence, pensions and post-retirement liabilities, taxes and uninsured losses and claims, including general liability and workers' compensation claims;

changes in environmental laws, health and safety laws and water and wastewater quality requirements and increases in costs associated with complying with these laws and requirements, including costs associated with upgrading and building new water treatment plants, disposing of residuals from our water treatment plants, handling and storing hazardous chemicals, compliance monitoring activities and securing alternative supplies of water when necessary;

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 attract, retain, train, motivate, develop and transition key employees;
 
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 electricity 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 customers 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, which may impact our long-term operating revenues if we are unable to secure rate increases, if growth in the residential customer base does not occur to the extent necessary to offset the decline in per-customer residential usage or GSWC's customer base declines as a result of condemnation actions or the use of recycled or reclaimed water from other third-party sources;
 
changes in accounting treatment for regulated utilities;

effects of changes in or interpretations of tax laws, rates or policies;


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changes in estimates used in ASUS’s revenue recognition under the percentage-of-completion method of accounting for construction activities;
 
termination, in whole or in part, of one or more of our military utility privatization contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default;

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;

delays by the U.S. government in making 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 or otherwise;
 
delays in obtaining redetermination of prices or economic price 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 or negotiating periodic price adjustments;

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 or manufacturers to perform services for us in accordance with the terms of our military privatization contracts;
 
issues with the implementation, maintenance or upgrading of 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, 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/or wastewater systems on military bases under varying geographic conditions;
 
the impact of storms, earthquakes, floods, mudslides, droughts, 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;

increases in the cost of obtaining insurance or in uninsured losses that may not be recovered in rates, including increase due to difficulties in obtaining insurance for certain risks, such as wildfires and earthquakes in California;
 
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; and

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 2015 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,
2016
 
December 31, 2015
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,607,283

 
$
1,578,865

Non-utility property, at cost
 
12,127

 
11,627

Total
 
1,619,410

 
1,590,492

Less - Accumulated depreciation
 
(540,092
)
 
(529,698
)
Net property, plant and equipment
 
1,079,318

 
1,060,794

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
18,687

 
18,710

Total other property and investments
 
19,803

 
19,826

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
8,457

 
4,364

Accounts receivable — customers (less allowance for doubtful accounts of $730 in 2016 and $790 in 2015)
 
16,183

 
18,940

Unbilled receivable
 
18,233

 
19,490

Receivable from the U.S. government
 
4,076

 
5,861

Other accounts receivable (less allowance for doubtful accounts of $59 in 2016 and $154 in 2015)
 
1,448

 
2,302

Income taxes receivable
 
7,571

 
10,793

Materials and supplies, at average cost
 
5,180

 
5,415

Regulatory assets — current
 
33,555

 
30,134

Prepayments and other current assets
 
5,453

 
3,229

Costs and estimated earnings in excess of billings on uncompleted contracts
 
30,969

 
32,169

Total current assets
 
131,125

 
132,697

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
110,643

 
102,562

Costs and estimated earnings in excess of billings on uncompleted contracts
 
21,253

 
21,330

Other
 
6,749

 
6,750

Total regulatory and other assets
 
138,645

 
130,642

 
 
 
 
 
Total Assets
 
$
1,368,891

 
$
1,343,959

 
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,
2016
 
December 31,
2015
Capitalization
 
 

 
 

Common shares, no par value
 
$
244,568

 
$
245,022

Earnings reinvested in the business
 
222,833

 
220,923

Total common shareholders’ equity
 
467,401

 
465,945

Long-term debt
 
320,910

 
320,900

Total capitalization
 
788,311

 
786,845

 
 
 
 
 
Current Liabilities
 
 

 
 

Notes payable to banks
 
43,000

 
28,000

Long-term debt — current
 
318

 
312

Accounts payable
 
47,856

 
50,585

Income taxes payable
 
454

 
68

Accrued other taxes
 
5,882

 
8,142

Accrued employee expenses
 
11,966

 
11,748

Accrued interest
 
6,623

 
3,626

Unrealized loss on purchased power contracts
 
7,245

 
7,053

Billings in excess of costs and estimated earnings on uncompleted contracts
 
5,540

 
3,764

Other
 
10,167

 
10,209

Total current liabilities
 
139,051

 
123,507

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,802

 
68,041

Contributions in aid of construction - net
 
117,386

 
117,810

Deferred income taxes
 
195,511

 
192,852

Unamortized investment tax credits
 
1,591

 
1,612

Accrued pension and other postretirement benefits
 
47,653

 
42,666

Other
 
10,586

 
10,626

Total other credits
 
441,529

 
433,607

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,368,891

 
$
1,343,959

 
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, 2016 AND 2015
(Unaudited)


 
 
Three Months Ended March 31,
(in thousands, except per share amounts)
 
2016
 
2015
Operating Revenues
 
 

 
 

Water
 
$
66,312

 
$
71,504

Electric
 
10,573

 
10,969

Contracted services
 
16,642

 
18,460

Total operating revenues
 
93,527

 
100,933

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
13,799

 
12,291

Power purchased for pumping
 
1,632

 
2,017

Groundwater production assessment
 
2,700

 
3,389

Power purchased for resale
 
2,871

 
2,499

Supply cost balancing accounts
 
(3,415
)
 
1,813

Other operation
 
6,966

 
6,160

Administrative and general
 
20,773

 
19,527

Depreciation and amortization
 
9,791

 
10,548

Maintenance
 
4,070

 
3,477

Property and other taxes
 
4,378

 
4,276

ASUS construction
 
8,729

 
10,046

Total operating expenses
 
72,294

 
76,043

 
 
 
 
 
Operating Income
 
21,233

 
24,890

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,623
)
 
(5,228
)
Interest income
 
172

 
112

Other, net
 
181

 
273

Total other income and expenses
 
(5,270
)
 
(4,843
)
 
 
 
 
 
Income from operations before income tax expense
 
15,963

 
20,047

 
 
 
 
 
Income tax expense
 
5,813

 
7,898

 
 
 
 
 
Net Income
 
$
10,150

 
$
12,149

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,521

 
38,205

Basic Earnings Per Common Share
 
$
0.28

 
$
0.32

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,697

 
38,408

Fully Diluted Earnings Per Common Share
 
$
0.28

 
$
0.32

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.224

 
$
0.213

 
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, 2016 AND 2015
(Unaudited)

 
 
Three Months Ended 
 March 31,
(in thousands)
 
2016
 
2015
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
10,150

 
$
12,149

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

 
 

Depreciation and amortization
 
9,965

 
10,771

Provision for doubtful accounts
 
41

 
112

Deferred income taxes and investment tax credits
 
2,266

 
1,255

Stock-based compensation expense
 
786

 
853

Other — net
 
191

 
339

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
2,625

 
1,958

Unbilled receivable
 
1,257

 
4,497

Other accounts receivable
 
945

 
1,507

Receivables from the U.S. government
 
1,785

 
(1,235
)
Materials and supplies
 
235

 
(316
)
Prepayments and other assets
 
(2,236
)
 
(3,310
)
Costs and estimated earnings in excess of billings on uncompleted contracts
 
1,277

 
8,055

Regulatory assets
 
(5,897
)
 
(4,612
)
Accounts payable
 
(3,091
)
 
(2,765
)
Income taxes receivable/payable
 
3,608

 
6,589

Billings in excess of costs and estimated earnings on uncompleted contracts
 
1,776

 
(386
)
Accrued pension and other post-retirement benefits
 
1,088

 
2,099

Other liabilities
 
873

 
935

Net cash provided
 
27,644

 
38,495

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(29,454
)
 
(17,390
)
Other investing activities
 
(79
)
 
(71
)
Net cash used
 
(29,533
)
 
(17,461
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
126

 
292

Repurchase of Common Shares
 

 
(13,891
)
Receipt of advances for and contributions in aid of construction
 
1,054

 
714

Refunds on advances for construction
 
(443
)
 
(429
)
Retirement or repayments of long-term debt
 
(77
)
 
(69
)
Proceeds from notes payable to banks
 
15,000

 

Dividends paid
 
(8,181
)
 
(8,155
)
Other
 
(1,497
)
 
(809
)
Net cash (used) provided
 
5,982

 
(22,347
)
Net change in cash and cash equivalents
 
4,093

 
(1,313
)
Cash and cash equivalents, beginning of period
 
4,364

 
75,988

Cash and cash equivalents, end of period
 
$
8,457

 
$
74,675

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,017

 
$
11,003

Property installed by developers and conveyed
 
$
806

 
$
289



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,
2016
 
December 31,
2015
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,607,283

 
$
1,578,865

Less - Accumulated depreciation
 
(532,885
)
 
(522,749
)
Net utility plant
 
1,074,398

 
1,056,116

 
 
 
 
 
Other Property and Investments
 
16,561

 
16,581

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
3,486

 
2,501

Accounts receivable-customers (less allowance for doubtful accounts of $730 in 2016 and $790 in 2015)
 
16,183

 
18,940

Unbilled receivable
 
16,497

 
18,181

Inter-company receivable
 
329

 
54

Other accounts receivable (less allowance for doubtful accounts of $59 in 2016 and $129 in 2015)
 
928

 
1,455

Income taxes receivable from Parent
 
7,852

 
11,000

Materials and supplies, at average cost
 
4,345

 
4,860

Regulatory assets — current
 
33,555

 
30,134

Prepayments and other current assets
 
4,546

 
2,793

Total current assets
 
87,721

 
89,918

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
110,643

 
102,562

Other
 
6,714

 
6,702

Total regulatory and other assets
 
117,357

 
109,264

 
 
 
 
 
Total Assets
 
$
1,296,037

 
$
1,271,879

 
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,
2016
 
December 31, 2015
Capitalization
 
 

 
 

Common shares, no par value
 
$
238,233

 
$
238,795

Earnings reinvested in the business
 
185,567

 
184,935

Total common shareholder’s equity
 
423,800

 
423,730

Long-term debt
 
320,910

 
320,900

Total capitalization
 
744,710

 
744,630

 
 
 
 
 
Current Liabilities
 
 

 
 

Inter-company payable
 
27,033

 
12,000

Long-term debt — current
 
318

 
312

Accounts payable
 
40,039

 
39,610

Accrued other taxes
 
5,522

 
7,830

Accrued employee expenses
 
10,657

 
10,630

Accrued interest
 
6,352

 
3,599

Unrealized loss on purchased power contracts
 
7,245

 
7,053

Other
 
9,895

 
9,921

Total current liabilities
 
107,061

 
90,955

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,802

 
68,041

Contributions in aid of construction — net
 
117,386

 
117,810

Deferred income taxes
 
198,362

 
195,658

Unamortized investment tax credits
 
1,591

 
1,612

Accrued pension and other postretirement benefits
 
47,653

 
42,666

Other
 
10,472

 
10,507

Total other credits
 
444,266

 
436,294

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,296,037

 
$
1,271,879

 
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, 2016 AND 2015
(Unaudited)


 
 
Three Months Ended March 31,
(in thousands)
 
2016
 
2015
Operating Revenues
 
 
 
 
Water
 
$
66,312

 
$
71,504

Electric
 
10,573

 
10,969

Total operating revenues
 
76,885

 
82,473

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
13,799

 
12,291

Power purchased for pumping
 
1,632

 
2,017

Groundwater production assessment
 
2,700

 
3,389

Power purchased for resale
 
2,871

 
2,499

Supply cost balancing accounts
 
(3,415
)
 
1,813

Other operation
 
6,083

 
5,458

Administrative and general
 
16,516

 
15,557

Depreciation and amortization
 
9,530

 
10,241

Maintenance
 
3,539

 
2,817

Property and other taxes
 
3,987

 
3,918

Total operating expenses
 
57,242

 
60,000

 
 
 
 
 
Operating Income
 
19,643

 
22,473

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,570
)
 
(5,218
)
Interest income
 
170

 
104

Other, net
 
181

 
273

Total other income and expenses
 
(5,219
)
 
(4,841
)
 
 
 
 
 
Income from operations before income tax expense
 
14,424

 
17,632

 
 
 
 
 
Income tax expense
 
5,440

 
7,247

 
 
 
 
 
Net Income
 
$
8,984

 
$
10,385

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


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GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2016 AND 2015
(Unaudited)

 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2016
 
2015
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
8,984

 
$
10,385

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

 
 

Depreciation and amortization
 
9,705

 
10,464

Provision for doubtful accounts
 
62

 
112

Deferred income taxes and investment tax credits
 
2,308

 
1,361

Stock-based compensation expense
 
578

 
627

Other — net
 
180

 
329

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
2,625

 
1,958

Unbilled receivable
 
1,684

 
1,096

Other accounts receivable
 
597

 
989

Materials and supplies
 
515

 
(433
)
Prepayments and other assets
 
(1,765
)
 
(2,558
)
Regulatory assets
 
(5,897
)
 
(4,612
)
Accounts payable
 
74

 
558

Inter-company receivable/payable
 
(242
)
 
188

Income taxes receivable/payable from/to Parent
 
3,148

 
5,898

Accrued pension and other post-retirement benefits
 
1,088

 
2,099

Other liabilities
 
411

 
377

Net cash provided
 
24,055

 
28,838

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(28,961
)
 
(17,318
)
Note receivable from AWR parent
 
(4,000
)
 

Receipt of payment of note receivable from AWR parent
 
4,000

 

Other investing activities
 
(79
)
 
(79
)
Net cash used
 
(29,040
)
 
(17,397
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
1,054

 
714

Refunds on advances for construction
 
(443
)
 
(429
)
Retirement or repayments of long-term debt
 
(77
)
 
(69
)
Net change in inter-company borrowings
 
15,000

 

Dividends paid
 
(8,300
)
 
(13,000
)
Other
 
(1,264
)
 
(689
)
Net cash (used) provided
 
5,970

 
(13,473
)
 
 
 
 
 
Net change in cash and cash equivalents
 
985

 
(2,032
)
Cash and cash equivalents, beginning of period
 
2,501

 
44,005

Cash and cash equivalents, end of period
 
$
3,486

 
$
41,973

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,010

 
$
10,989

Property installed by developers and conveyed
 
$
806

 
$
289

 
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 are collectively referred to 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 260,000 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 months ended March 31, 2016 and 2015. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses in matters including properties, rates, services, facilities 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 or economic price adjustments and modifications for changes in circumstances, changes in laws and regulations and additions to the contract value for new construction of facilities at the military bases.

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 presented in a combined report filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified.
 
AWR owns all of the outstanding Common Shares of GSWC and ASUS. ASUS owns all of the outstanding Common Shares of the Military Utility Privatization Subsidiaries. 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, 2015 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States of America. 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 these 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, 2015 filed with the SEC.
 
GSWC's Related Party Transactions: GSWC and ASUS provide and/or 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, 2016 and 2015, GSWC allocated to ASUS approximately $1.0 million and $707,000, 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.

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In October 2015, AWR issued interest bearing promissory notes (the "Notes") to GSWC and ASUS for $40 million and $10 million, respectively, which expire on May 23, 2018. Under the terms of these Notes, AWR may borrow from GSWC and ASUS amounts up to $40 million and $10 million, respectively, for working capital purposes. AWR agrees to pay any unpaid principal amounts outstanding under these notes, plus accrued interest. As of March 31, 2016, there were no amounts outstanding under these Notes.
 
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 rights 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 them from its customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $867,000 and $871,000 for the three months ended March 31, 2016 and 2015, 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 states in which their operations are conducted, the Military Utility Privatization 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 U.S. government reimburses these assessments under the 50-year contracts.  The non-income tax assessments are accounted for on a gross basis and totaled $62,000 and $32,000 during the three months ended March 31, 2016 and 2015, respectively.
 
Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued updated accounting guidance on revenue recognition. The guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what the entity expects in exchange for the goods or services. The guidance also requires more detailed disclosures to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and adoption is not permitted earlier than the original effective date, that is, no earlier than 2017. The guidance allows entities to select one of two methods of adoption, either the full retrospective approach, meaning the guidance would be applied to all periods presented, or modified retrospective approach, meaning the cumulative effect of applying the guidance would be recognized as an adjustment to opening retained earnings at January 1, 2018, along with providing certain additional disclosures. Registrant will adopt this guidance in the fiscal year beginning January 1, 2018. Management has not yet selected a transition method nor has it determined the effect of the standard on the Company's ongoing financial reporting.
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 was adopted January 1, 2016. Accordingly, as of March 31, 2016 and December 31, 2015, Registrant had debt issuance costs, excluding credit facility costs, of $4.5 million and $4.6 million, respectively, reflected in "Long-term debt." Prior to the adoption of this new guidance, debt issuance costs, excluding credit facility costs, of $4.6 million as of December 31, 2015 were reported in noncurrent "Other Assets."
On February 25, 2016, the FASB issued a new lease accounting standard, Leases (ASC 842). Under the new guidance, lessees will be required to recognize a right-of-use asset and a lease liability for virtually all of their leases (other than leases that meet the definition of a short-term lease). Extensive quantitative and qualitative disclosures, including significant judgments made by management, will be required in order to provide greater insight into the extent of revenue and expense recognized, and expected to be recognized, from existing contracts. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Management has not yet determined the effect of the standard on the Company's ongoing financial reporting.
On March 30, 2016, the FASB issued Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends ASC Topic 718, Compensation - Stock Compensation. Under the new guidance, the tax effects related to share-based payments at settlement (or expiration) will be required to be recorded through the income statement rather than through equity, further increasing the volatility of income tax expense. The new standard also removes the requirement to delay recognition of a windfall tax benefit until an employer reduces its current taxes payable. It also permits entities to make an accounting policy election for the impact of forfeitures on the recognition of expense for shared-based payment awards. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2016. Management has not yet determined the effect of the standard on the Company's ongoing financial reporting.

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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, 2016, Registrant had approximately $54.0 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $23.7 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $7.2 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES' purchase power contracts over the term of the contracts, and $16.6 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.
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 requires it to write-down the assets’ value. 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. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows: 
(dollars in thousands)
 
March 31,
2016
 
December 31,
2015
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
53,948

 
$
45,171

Costs deferred for future recovery on Aerojet case
 
12,567

 
12,699

Pensions and other post-retirement obligations (Note 7)
 
25,538

 
21,996

Derivative unrealized loss (Note 4)
 
7,245

 
7,053

Flow-through taxes, net (Note 6)
 
16,551

 
16,176

Low income rate assistance balancing accounts
 
8,810

 
8,699

Other regulatory assets
 
25,298

 
25,668

Various refunds to customers
 
(5,759
)
 
(4,766
)
Total
 
$
144,198

 
$
132,696

 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, 2015 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2015.
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.  The over- or under-collection of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and bears interest at the current 90-day commercial paper rate. 
GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2015.  For the three months ended March 31, 2016 and 2015, surcharges (net of surcredits) of approximately $1.4 million and $600,000, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts.  During the three months ended March 31, 2016, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of $10.1 million using 2015 adopted revenues since the CPUC has not approved the pending water rate case, which will set new rates for the years 2016 - 2018 as discussed below. As of March 31, 2016, GSWC had a net aggregated regulatory asset of $53.9 million which is comprised of a $55.0 million under-collection in the WRAM accounts and $1.1 million over-collection in the MCBA accounts.

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As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded.  In April 2012, the CPUC issued a final decision which, among other things, sets the recovery period for under-collected balances that are up to 15% of adopted annual revenues at 18 months or less.  For under-collected balances greater than 15%, the recovery period is 19 to 36 months. In addition to adopting a new amortization schedule, the final decision sets a cap on total net WRAM/MCBA surcharges in any given calendar year of 10% of the last authorized revenue requirement. As of March 31, 2016, the recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within the 12 to 18-month period; however, there were some ratemaking areas that had recovery periods related to the 2015 WRAM balances greater than 24 months. As a result, during the fourth quarter of 2015, GSWC did not record $1.4 million of the 2015 WRAM under-collection balance as revenue. This amount will be recognized as revenue in future periods when it is determined that the amounts will be collected within 24 months. In February 2016, GSWC filed with the CPUC for recovery of the 2015 WRAM balances, including the $1.4 million.

 Other Regulatory Matters:
     Pending Water General Rate Case:
In 2014, GSWC filed a general rate case (“GRC”) for all of its water regions and the general office to determine new rates for the years 2016-2018.  A final decision is expected sometime during 2016. Once the decision is issued, the rates will be retroactive to January 1, 2016. GSWC has settled with the CPUC's Office of Ratepayer Advocates ("ORA") the majority of GSWC’s operating expenses, as well as the consumption levels used to calculate rates for 2016-2018, which reflect the state-mandated conservation targets. The primary unresolved issues relate to GSWC’s capital budget requests and compensation for managerial level employees. At this time, GSWC cannot predict the final outcome of this GRC. The final decision, once issued, could result in a material change to GSWC's net income recorded during the first quarter of 2016, which would need to be adjusted in the quarter that the final decision is issued.
Year-to-date 2016 billed revenue has been based on 2015 adopted rates established in the prior GRC. The adopted revenues for 2016, once the CPUC issues a final decision in the current GRC, are expected to be lower than the 2015 adopted levels due primarily to decreases in supply costs caused by lower consumption, depreciation expense resulting from an updated depreciation study, and other operating expenses. As a result of the anticipated reduction in the 2016 adopted revenue level, GSWC has adjusted its water revenues downward for the three months ended March 31, 2016 with corresponding decreases to supply costs, depreciation expense and certain other expenses, to reflect the settled positions with ORA. The adjustment to 2016 recorded water revenues also reflects GSWC’s positions on unresolved capital budget and compensation related issues in the pending GRC. These adjustments did not have a significant impact to pretax operating income for the three months ended March 31, 2016 as the overall reduction in the water margin is mostly offset by the lower depreciation and other operating expenses.
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 10 years from the date the settlement was approved by the CPUC.  The audits cover GSWC’s procurement practices for contracts with other contractors from 1994 forward. The first audit started in 2014 and covered almost a 20-year period from January 1, 1994 through September 30, 2013.
In March 2015, the accounting firm engaged by the CPUC to conduct the first independent audit issued its final report to the CPUC’s Division of Water and Audits (“DWA”). The final report, which was issued on a confidential basis, included GSWC's responses to the accounting firm’s findings, as well as the firm’s responses to GSWC's comments. DWA informed GSWC that it does not intend to pursue further investigation, refunds, or penalties in respect of past procurement activities as a result of the final report. Furthermore, in June 2015 the CPUC's Office of Ratepayer Advocates ("ORA") notified the administrative law judge in the ongoing general rate case that, having reviewed the final audit report, its potential concerns with the audit report were satisfied and, as such, ORA withdrew its request to have further review of this matter in the pending general rate case. At this time, GSWC does not believe that a loss associated with any disallowances and/or penalties from this first audit is likely.


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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 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 Stock Incentive Plans and the 2003 and 2013 Non-Employee Directors Stock Plans.  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)
 
2016
 
2015
Net income
 
$
10,150

 
$
12,149

Less: (a) Distributed earnings to common shareholders
 
8,181

 
8,138

Distributed earnings to participating securities
 
45

 
45

Undistributed earnings
 
1,924

 
3,966

 
 
 
 
 
          (b) Undistributed earnings allocated to common shareholders
 
1,914

 
3,945

Undistributed earnings allocated to participating securities
 
10

 
21

 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
10,095

 
$
12,083

 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
36,521

 
38,205

 
 
 
 
 
Basic earnings per Common Share
 
$
0.28

 
$
0.32

 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 Stock Incentive Plans, and the 2003 and 2013 Non-Employee Directors Stock Plans, and net income. At March 31, 2016 and 2015, there were 142,402 and 198,764 options outstanding, respectively, under these Plans. At March 31, 2016 and 2015, there were also 215,129 and 226,319 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.
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)
 
2016
 
2015
Common shareholders earnings, basic
 
$
10,095

 
$
12,083

Undistributed earnings for dilutive stock-based awards
 
10

 
21

Total common shareholders earnings, diluted
 
$
10,105

 
$
12,104

 
 
 
 
 
Weighted average common shares outstanding, basic
 
36,521

 
38,205

Stock-based compensation (1)
 
176

 
203

Weighted average common shares outstanding, diluted
 
36,697

 
38,408

 
 
 
 
 
Diluted earnings per Common Share
 
$
0.28

 
$
0.32

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 142,402 and 198,764 stock options at March 31, 2016 and 2015, respectively, were deemed to be outstanding in accordance with the accounting guidance on earnings per share.  All of the 215,129 and 226,319 restricted stock

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Table of Contents

units at March 31, 2016 and 2015, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2016 and 2015.
 
No stock options outstanding at March 31, 2016 had an exercise price greater than the average market price of AWR’s Common Shares for the three months ended March 31, 2016. There were no stock options outstanding at March 31, 2016 or 2015 that were anti-dilutive.
 
During the three months ended March 31, 2016 and 2015, AWR issued 52,153 and 47,422 common shares for approximately $126,000 and $292,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, 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. This stock repurchase program was completed in 2015.
 
During the three months ended March 31, 2016 and 2015, AWR paid quarterly dividends of approximately $8.2 million, or $0.224 per share, and $8.2 million, or $0.213 per share, respectively.


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Table of Contents

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. 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.  In December 2014, the CPUC approved an application that allowed BVES to immediately execute new long-term purchased power contracts with energy providers on December 9, 2014. BVES 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 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 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 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, 2016, there was a $7.2 million unrealized loss in the memorandum account for the purchased power contracts as a result of the recent drop in energy prices. The notional volume of derivatives remaining under these long-term contracts as of March 31, 2016 was approximately 457,000 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, 2016 and 2015:
(dollars in thousands)
 
2016
 
2015
Fair value at beginning of the period
 
$
(7,053
)
 
$
(3,339
)
Unrealized loss on purchased power contracts
 
(192
)
 
(2,837
)
Fair value at end of the period
 
$
(7,245
)
 
$
(6,176
)


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Table of Contents

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 $10.0 million as of March 31, 2016. 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, 2016 and December 31, 2015 were determined using rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions. The interest rates used for the March 31, 2016 valuation decreased as compared to December 31, 2015, increasing the fair value of long-term debt as of March 31, 2016. Changes in the assumptions will produce differing results.
 
 
March 31, 2016
 
December 31, 2015
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC (1)
 
$
325,776

 
$
418,104

 
$
325,853

 
$
403,844

 
(1)           Excludes debt issuance costs and redemption premiums.

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 37.7% and 41.1% for the three months ended March 31, 2016 and 2015, respectively. The GSWC ETRs deviate from the statutory rate primarily due to state tax and differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally plant-, rate-case- and compensation-related items). The ETR at the AWR consolidated level may also fluctuate as a result of certain permanent differences recorded at AWR (parent) and ASUS and its subsidiaries, as well as state taxes recorded at AWR (parent) and ASUS and its subsidiaries (where the amounts of state taxes vary among the jurisdictions in which they operate).
Changes in Tax Law:

In December 2015, the Protecting Americans From Tax Hikes Act of 2015 extended bonus depreciation for qualifying property through 2019. For 2015 through 2017, bonus depreciation was extended at a 50% rate. For 2018-2019, bonus depreciation will be phased down to 40% and 30%, respectively. Although the change in law reduces AWR’s current taxes payable over these years, it does not reduce its 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, 2016 and 2015 are as follows:
 
 
For The Three Months Ended March 31,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,232

 
$
1,686

 
$
68

 
$
95

 
$
200

 
$
204

Interest cost
 
1,930

 
1,939

 
97

 
114

 
186

 
163

Expected return on plan assets
 
(2,460
)
 
(2,446
)
 
(122
)
 
(123
)
 

 

Amortization of transition
 

 

 

 

 

 

Amortization of prior service cost (benefit)
 
12

 
30

 
(9
)
 
(50
)
 
6

 
29

Amortization of actuarial (gain) loss
 
127

 
469

 
(150
)
 
(53
)
 
73

 
108

Net periodic pension cost under accounting standards
 
841

 
1,678

 
(116
)
 
(17
)
 
465

 
504

Regulatory adjustment — deferred
 
359

 
11

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,200

 
$
1,689

 
$
(116
)
 
$
(17
)
 
$
465

 
$
504

Registrant expects to contribute approximately $5.5 million to its pension plan during 2016.
During 2015, Registrant updated key assumptions used for the valuation of the pension, post-retirement and supplemental executive retirement plans.  These updates included: (i) an increase in the discount rates; (ii) updates in demographic assumptions, such as retirement and termination rates, to reflect recent changes in participant behavior, and (iii) salary increases based on Registrant’s recent and future expected experience.  As a result of these updates in actuarial assumptions, as well as the pension plan closure to new employees hired after December 31, 2010, net periodic benefit costs decreased for the three months ended March 31, 2016 as compared to the same period in 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 in rates or expected to be in rates and the actual annual expense recorded by GSWC in accordance with the accounting guidance for pension costs.  As of March 31, 2016, GSWC has a total $1.8 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 that the owner of utility property (i) may contest whether the condemnation is actually necessary and in the public interest, and (ii) is entitled to receive the fair market value of its property if the property is ultimately taken.
Claremont System:
In December 2014, the City of Claremont filed a complaint in eminent domain against GSWC. GSWC plans to vigorously defend against the eminent domain action. The trial determining the City’s rights to seize the system by eminent domain is scheduled to begin on June 13, 2016. At this time, management cannot predict the outcome of the eminent domain proceeding. The Claremont water system has a net book value of approximately $49.1 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 Communities 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 through eminent domain. In February 2016, CMWD made an offer to acquire GSWC's water system servicing Ojai. GSWC rejected the offer and informed CMWD that the system is not for sale. At this time, management cannot predict the outcome of the eminent domain proceeding; however, management believes that it is likely that CMWD will file an eminent domain lawsuit in the near future. In April 2016, CMWD adopted a resolution of necessity to acquire the water system. GSWC serves approximately 3,000 customers in Ojai.

Environmental Clean-Up and Remediation:
GSWC has been involved in environmental remediation and cleanup 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, 2016, the total spent to clean-up and remediate GSWC’s plant facility was approximately $5 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, 2016, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.4 million to complete the cleanup 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.

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 its investments in its subsidiaries on a stand-alone basis. 
 
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, as appropriate, with the 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 U.S. government-funded and third-party prime contractor funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.

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As Of And For The Three Months Ended March 31, 2016
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
66,312

 
$
10,573

 
$
16,642

 
$

 
$
93,527

Operating income (loss)
 
17,408

 
2,235

 
1,592

 
(2
)
 
21,233

Interest expense, net
 
5,075

 
325

 
7

 
44

 
5,451

Utility plant
 
1,022,525

 
51,873

 
4,920

 

 
1,079,318

Depreciation and amortization expense (1)
 
9,023

 
507

 
261

 

 
9,791

Income tax expense (benefit)
 
4,586

 
854

 
573

 
(200
)
 
5,813

Capital additions
 
28,141

 
820

 
493

 

 
29,454


 
 
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

 
(1)         Depreciation computed on GSWC’s transportation equipment is recorded in other operating expenses and totaled $175,000 and $223,000 for the three months ended March 31, 2016 and 2015, respectively.

The following table reconciles total utility plant (a key figure for rate-making) to total consolidated assets (in thousands):
 
 
March 31,
 
 
2016
 
2015
Total utility plant
 
$
1,079,318

 
$
1,007,563

Other assets
 
289,573

 
354,939

Total consolidated assets (2)
 
$
1,368,891

 
$
1,362,502

 
(2) Total consolidated assets shown as of March 31, 2015 exclude $4.9 million of debt issuance costs, (except for credit facility costs), which were previously reported as "Other assets" prior to adoption of Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs as disclosed in Note 1. Credit facility costs continue to be reported as "Other assets."

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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 its subsidiaries: GSWC and ASUS and its subsidiaries.  The subsidiaries of ASUS are also collectively referred to as the "Military Utility Privatization Subsidiaries".
Included in the following analysis is a discussion of water and electric gross margins.  Water and electric gross margins are computed by subtracting total supply costs from total revenues.  Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results.  Registrant believes this measure is a useful internal benchmark 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, which is each business segment's net income divided by AWR's weighted average number of diluted shares.  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 its 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 is 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 related 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 customers and purchases of recycled water by customers from other third parties; capital expenditures needed to upgrade water systems; 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; fines, penalties and liabilities arising from failure to comply with health and safety standards and other liabilities related to hazards associated with electricity and chemicals used in our business; increasing costs of obtaining and complying with the terms of our franchise agreements; the impact of the accuracy of our judgments and estimates about financial and accounting matters on our operating results and financial condition; adverse impacts on our business if we are unable to attract, retain, train, motivate, develop and transition key employees; the increased risk of data breaches and cyber-attacks which could disrupt our business operations and increase our expenses; market conditions and demographic changes which may adversely impact the value of our benefit plan assets and liabilities; the impact of increasing maintenance expenses on our liquidity and earnings; and increased costs and difficulties in obtaining insurance protecting BVES from wildfires in its service territory. 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 or economic price adjustments. 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 economic price or 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 statutes and regulations in connection with military utility privatization activities.  ASUS' financial performance is also dependent upon its

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ability to accurately estimate costs in bidding on firm fixed-price contracts for additional construction work at existing bases 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.  ASUS is actively pursuing utility privatization contracts of other military bases to expand the contracted services segment.
Pending Water General Rate Case
In 2014, GSWC filed a general rate case (“GRC”) for all of its water regions and the general office to determine new rates for the years 2016-2018.  A final decision is expected sometime during 2016. GSWC has settled with the CPUC's Office of Ratepayer Advocates ("ORA") the majority of GSWC’s operating expenses, as well as the consumption levels used to calculate rates for 2016-2018, which reflect the state-mandated conservation targets. The primary unresolved issues relate to GSWC’s capital budget requests and compensation for managerial level employees. At this time, GSWC cannot predict the final outcome of this GRC. The final decision, once issued, could result in a material change to GSWC's net income recorded during the first quarter of 2016, which would need to be adjusted in the quarter that the final decision is issued.
Year-to-date 2016 billed revenue has been based on 2015 adopted rates established in the prior GRC. The adopted revenues for 2016, once the CPUC issues a final decision in the current GRC, are expected to be lower than the 2015 adopted levels due primarily to decreases in supply costs caused by lower consumption, depreciation expense resulting from an updated depreciation study, and other operating expenses. As a result of the anticipated reduction in the 2016 adopted revenue level, GSWC has adjusted its water revenues downward for the three months ended March 31, 2016 with corresponding decreases to supply costs, depreciation expense and certain other expenses, to reflect the settled positions with ORA. The adjustment to 2016 recorded water revenues also reflects GSWC’s positions on unresolved capital budget and compensation related issues in the pending GRC. These adjustments did not have a significant impact to pretax operating income for the three months ended March 31, 2016 as the overall reduction in the water margin is mostly offset by the lower depreciation and other operating expenses.

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
 
 
 
 
3/31/2016
 
3/31/2015
 
CHANGE
Water
 
$
0.22

 
$
0.24

 
$
(0.02
)
Electric
 
0.03

 
0.03

 

Contracted services
 
0.03

 
0.04

 
(0.01
)
AWR (parent)
 

 
0.01

 
(0.01
)
Consolidated diluted earnings per share, as reported
 
$
0.28

 
$
0.32

 
$
(0.04
)
Water Segment:    
For the three months ended March 31, 2016, diluted earnings from the water segment decreased by $0.02 to $0.22 per share as compared to the same period in 2015, due primarily to an overall increase in operating expenses (excluding water supply costs and depreciation expense) of approximately $1.7 million due, in large part, to an increase in: (i) planned and unplanned maintenance expense, and (ii) administrative and general expenses resulting from higher legal and outside services costs related to condemnation matters. These increases were partially offset by a decrease in the effective income tax rate for the water segment primarily due to differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements.
During the three months ended March 31, 2016, billed water revenue was based on 2015 adopted rates established in the prior GRC as the current GRC, which would establish new rates for 2016-2018, has not yet been approved by the CPUC. The adopted revenues for 2016, once the CPUC issues a final decision in the current GRC, will be retroactive to January 1, 2016, and are expected to be lower than the 2015 adopted levels due primarily to decreases in supply costs caused by lower consumption, depreciation expense resulting from an updated depreciation study, and other operating expenses. As a result of the anticipated reduction in the 2016 adopted revenue level, GSWC has adjusted its water revenues downward for the three months ended March 31, 2016, with corresponding decreases to supply costs, depreciation expense, and certain other expenses. These adjustments did not have a significant impact on pretax operating income for the three months ended March 31, 2016 as the overall reduction in the water gross margin is mostly offset by the lower depreciation and other operating expenses. A final GRC decision is expected sometime during 2016.

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Electric Segment:
For the three months ended March 31, 2016 and 2015, diluted earnings from the electric segment were $0.03 per share. An increase in the electric gross margin resulting from CPUC approvals of fourth-year rate increases effective January 1, 2016 and rate increases generated from advice letter filings, was mostly offset by an overall increase in operating expenses. Operating expenses (other than supply costs) increased by $932,000 due primarily to an increase in: (i) other operation expenses resulting from additional costs incurred in response to power outages caused by severe winter storms experienced in January 2016; (ii) depreciation expense resulting from additions to utility plant, and (iii) administrative and general expenses resulting from higher costs associated with energy-efficiency and solar-initiative programs approved by the CPUC. The costs of the energy-efficiency and solar-initiative programs have been included in customer rates equally over the rate cycle.
Contracted Services Segment:
For the three months ended March 31, 2016, diluted earnings per share from contracted services decreased by $0.01 to $0.03 per share as compared to the same period in 2015. A decrease in construction activity was partially offset by an increase in management fees resulting from successful resolutions on price redeterminations received during the third quarter of 2015. Construction activity in the first quarter of the year was lower due largely to the timing of engineering and bidding activities on capital work at the Military Utility Privatization Subsidiaries. The majority of the work on these projects is expected to occur during 2016, which will result in an increase in construction activity during each of the remaining quarters in 2016 as compared to the first quarter.
AWR (parent):
Diluted earnings from AWR (parent) decreased by $0.01 per share during the first quarter of 2016 as compared to the same period in 2015 due primarily to higher state income taxes and an increase in interest expense resulting from higher short-term borrowings.

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Consolidated Results of Operations — Three Months Ended March 31, 2016 and 2015 (amounts in thousands, except per share amounts):
 
 
Three Months Ended 
 March 31, 2016
 
Three Months Ended 
 March 31, 2015
 
$
CHANGE
 
%
CHANGE
OPERATING REVENUES
 
 

 
 

 
 

 
 

Water
 
$
66,312

 
$
71,504

 
$
(5,192
)
 
(7.3
)%
Electric
 
10,573

 
10,969

 
(396
)
 
(3.6
)%
Contracted services
 
16,642

 
18,460

 
(1,818
)
 
(9.8
)%
Total operating revenues
 
93,527

 
100,933

 
(7,406
)
 
(7.3
)%
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 

 
 

 
 

 
 

Water purchased
 
13,799

 
12,291

 
1,508

 
12.3
 %
Power purchased for pumping
 
1,632

 
2,017

 
(385
)
 
(19.1
)%
Groundwater production assessment
 
2,700

 
3,389

 
(689
)
 
(20.3
)%
Power purchased for resale
 
2,871

 
2,499

 
372

 
14.9
 %
Supply cost balancing accounts
 
(3,415
)
 
1,813

 
(5,228
)
 
(288.4
)%
Other operation
 
6,966

 
6,160

 
806

 
13.1
 %
Administrative and general
 
20,773

 
19,527

 
1,246

 
6.4
 %
Depreciation and amortization
 
9,791

 
10,548

 
(757
)
 
(7.2
)%
Maintenance
 
4,070

 
3,477

 
593

 
17.1
 %
Property and other taxes
 
4,378

 
4,276

 
102

 
2.4
 %
ASUS construction
 
8,729

 
10,046

 
(1,317
)
 
(13.1
)%
Total operating expenses
 
72,294

 
76,043

 
(3,749
)
 
(4.9
)%
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
21,233

 
24,890

 
(3,657
)
 
(14.7
)%
 
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 
 

 
 

 
 

 
 

Interest expense
 
(5,623
)
 
(5,228
)
 
(395
)
 
7.6
 %
Interest income
 
172

 
112

 
60

 
53.6
 %
Other, net
 
181

 
273

 
(92
)
 
(33.7
)%
 
 
(5,270
)
 
(4,843
)
 
(427
)
 
8.8
 %
 
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
 
15,963

 
20,047

 
(4,084
)
 
(20.4
)%
Income tax expense
 
5,813

 
7,898

 
(2,085
)
 
(26.4
)%
 
 
 
 
 
 
 
 
 
NET INCOME
 
$
10,150

 
$
12,149

 
$
(1,999
)
 
(16.5
)%
 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.28

 
$
0.32

 
$
(0.04
)
 
(12.5
)%
 
 
 
 
 
 
 
 
 
Fully diluted earnings per Common Share
 
$
0.28

 
$
0.32

 
$
(0.04
)
 
(12.5
)%


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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 economic price 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 and adjustments 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, 2016, revenues from water operations decreased $5.2 million to $66.3 million as compared to the same period in 2015. Year-to-date 2016 billed water revenue has been based on 2015 adopted rates established in the 2013-2015 GRC since the pending GRC, which would establish new rates for 2016-2018, has not been approved by the CPUC. However, during the first quarter of 2016, water revenues were adjusted for the lower revenue requirement stipulated within the pending water general rate case, resulting in a decrease in revenues of approximately $5.8 million as compared to the first quarter of 2015. This decrease in revenues from the lower revenue requirement is partially offset by corresponding decreases in operating expenses (primarily supply costs and depreciation expense). Supply costs are lower due to the decrease in consumption, while depreciation expense is lower as a result of an updated depreciation study. This decrease in water revenues was partially offset by rate increases generated from advice letter filings approved by the CPUC during 2015.
 Billed water consumption for the first quarter of 2016 decreased by approximately 8% as compared to the same period in 2015 due to continued conservation efforts. In general, changes in consumption do not have a significant impact on recorded revenues due to the CPUC-approved Water Revenue Adjustment Mechanism ("WRAM") accounts in place in all three water regions. However, under the accounting guidance for alternative revenue programs such as the WRAM, significant decreases in consumption may impact the timing of when revenues are recorded. 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, 2016, revenues from electric operations were $10.6 million as compared to $11.0 million for the same period in 2015.  The decrease was primarily due to the termination in July of 2015 of a supply cost surcharge to recover previously incurred energy costs. The decrease in revenues from this surcharge totaled approximately $700,000 and was offset by a corresponding decrease in supply costs, resulting in no impact to pretax operating income. This decrease in electric revenue was partially offset by the CPUC-approved fourth-year rate increases effective January 1, 2016, and rate increases generated from advice letter filings approved by the CPUC during 2015.
Billed electric usage decreased by approximately 6% during the three months ended March 31, 2016 as compared to the three months ended March 31, 2015.  Higher natural snowfall levels during the first quarter of 2016 reduced the need 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 renewal 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, 2016, revenues from contracted services decreased to $16.6 million as compared to $18.5 million for the same period in 2015. The decrease was due primarily to an overall decrease in construction revenues. Construction activity in the first quarter of the year was lower due largely to the timing of engineering and bidding activities on capital work at the Military Utility Privatization Subsidiaries. The majority of the work on these projects is expected to occur during 2016, which will result in an increase in construction activity during each of the remaining quarters in 2016 as compared to the first quarter. The decrease in construction activity was partially offset by an increase in management fees resulting from successful resolutions on price redeterminations received during the third quarter of 2015.
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. During the third quarter of 2015, the U.S. government awarded ASUS approximately $50.0 million in new construction projects, the majority of which are expected to be completed during 2016. 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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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’ generating unit, the cost of renewable energy credits and the electric supply cost balancing account. Water and electric gross margins are computed by subtracting total supply costs from total revenues. 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 24.3% and 28.9% of total operating expenses for the three months ended March 31, 2016 and 2015, 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, 2016 and 2015 (dollar amounts in thousands):
 
 
Three Months End