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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended June 30, 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 August 1, 2016, the number of Common Shares outstanding of American States Water Company was 36,558,468 shares. As of August 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 GSWC's costs;
 
changes in the policies and procedures of the California Public Utilities Commission ("CPUC");
 
timeliness of CPUC action on rates;

availability of GSWC's 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;

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

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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 GSWC 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 of GSWC 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 if safe construction and maintenance work sites are not maintained;

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 electric and natural gas prices;
 
our electric operation's ability to comply with the CPUC’s renewable energy procurement requirements;
 
changes in GSWC long-term customer demand due to changes in customer usage patterns as a result of conservation efforts, regulatory changes affecting demand such as mandatory restrictions on water use, new landscaping or irrigation requirements, recycling of water by 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 our information technology systems;
 
general economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers;
 
explosions, fires, accidents, mechanical breakdowns, 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 increases 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)
 
June 30,
2016
 
December 31, 2015
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,643,084

 
$
1,578,865

Non-utility property, at cost
 
12,606

 
11,627

Total
 
1,655,690

 
1,590,492

Less - Accumulated depreciation
 
(548,553
)
 
(529,698
)
Net property, plant and equipment
 
1,107,137

 
1,060,794

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
18,936

 
18,710

Total other property and investments
 
20,052

 
19,826

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
4,518

 
4,364

Accounts receivable — customers (less allowance for doubtful accounts of $701 in 2016 and $790 in 2015)
 
20,414

 
18,940

Unbilled receivable
 
17,957

 
19,490

Receivable from the U.S. government
 
7,836

 
5,861

Other accounts receivable (less allowance for doubtful accounts of $73 in 2016 and $154 in 2015)
 
2,587

 
2,302

Income taxes receivable
 
1,973

 
10,793

Materials and supplies, at average cost
 
5,294

 
5,415

Regulatory assets — current
 
32,378

 
30,134

Prepayments and other current assets
 
4,619

 
3,229

Costs and estimated earnings in excess of billings on contracts
 
35,240

 
32,169

Total current assets
 
132,816

 
132,697

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
117,682

 
102,562

Costs and estimated earnings in excess of billings on contracts
 
21,874

 
21,330

Other
 
6,738

 
6,750

Total regulatory and other assets
 
146,294

 
130,642

 
 
 
 
 
Total Assets
 
$
1,406,299

 
$
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)
 
June 30,
2016
 
December 31,
2015
Capitalization
 
 

 
 

Common shares, no par value
 
$
245,360

 
$
245,022

Earnings reinvested in the business
 
231,336

 
220,923

Total common shareholders’ equity
 
476,696

 
465,945

Long-term debt
 
320,910

 
320,900

Total capitalization
 
797,606

 
786,845

 
 
 
 
 
Current Liabilities
 
 

 
 

Notes payable to bank
 
63,500

 
28,000

Long-term debt — current
 
318

 
312

Accounts payable
 
53,975

 
50,585

Income taxes payable
 
51

 
68

Accrued other taxes
 
6,357

 
8,142

Accrued employee expenses
 
11,129

 
11,748

Accrued interest
 
3,852

 
3,626

Unrealized loss on purchased power contracts
 
4,933

 
7,053

Billings in excess of costs and estimated earnings on contracts
 
5,910

 
3,764

Other
 
10,185

 
10,209

Total current liabilities
 
160,210

 
123,507

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
70,383

 
68,041

Contributions in aid of construction - net
 
117,054

 
117,810

Deferred income taxes
 
200,113

 
192,852

Unamortized investment tax credits
 
1,570

 
1,612

Accrued pension and other postretirement benefits
 
48,858

 
42,666

Other
 
10,505

 
10,626

Total other credits
 
448,483

 
433,607

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,406,299

 
$
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 JUNE 30, 2016 AND 2015
(Unaudited)


 
 
Three Months Ended June 30,
(in thousands, except per share amounts)
 
2016
 
2015
Operating Revenues
 
 

 
 

Water
 
$
81,058

 
$
87,581

Electric
 
7,701

 
7,889

Contracted services
 
23,195

 
19,148

Total operating revenues
 
111,954

 
114,618

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
15,835

 
16,415

Power purchased for pumping
 
2,132

 
2,123

Groundwater production assessment
 
3,968

 
4,122

Power purchased for resale
 
2,216

 
2,566

Supply cost balancing accounts
 
(2,517
)
 
1,816

Other operation
 
6,917

 
7,362

Administrative and general
 
21,288

 
20,471

Depreciation and amortization
 
9,601

 
10,536

Maintenance
 
3,635

 
4,205

Property and other taxes
 
4,168

 
4,060

ASUS construction
 
12,937

 
10,412

Total operating expenses
 
80,180

 
84,088

 
 
 
 
 
Operating Income
 
31,774

 
30,530

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,603
)
 
(5,527
)
Interest income
 
190

 
102

Other, net
 
437

 
77

Total other income and expenses
 
(4,976
)
 
(5,348
)
 
 
 
 
 
Income from operations before income tax expense
 
26,798

 
25,182

 
 
 
 
 
Income tax expense
 
10,056

 
9,534

 
 
 
 
 
Net Income
 
$
16,742

 
$
15,648

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,554

 
37,702

Basic Earnings Per Common Share
 
$
0.46

 
$
0.41

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,752

 
37,909

Fully Diluted Earnings Per Common Share
 
$
0.45

 
$
0.41

 
 
 
 
 
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 INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2016 AND 2015
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2016
 
2015
Operating Revenues
 
 

 
 

Water
 
$
147,370

 
$
159,085

Electric
 
18,274

 
18,858

Contracted services
 
39,837

 
37,608

Total operating revenues
 
205,481

 
215,551

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
29,634

 
28,706

Power purchased for pumping
 
3,764

 
4,140

Groundwater production assessment
 
6,668

 
7,511

Power purchased for resale
 
5,087

 
5,065

Supply cost balancing accounts
 
(5,932
)
 
3,629

Other operation
 
13,883

 
13,522

Administrative and general
 
42,061

 
39,998

Depreciation and amortization
 
19,392

 
21,084

Maintenance
 
7,705

 
7,682

Property and other taxes
 
8,546

 
8,336

ASUS construction
 
21,666

 
20,458

Total operating expenses
 
152,474

 
160,131

 
 
 
 
 
Operating Income
 
53,007

 
55,420

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,226
)
 
(10,755
)
Interest income
 
362

 
214

Other, net
 
618

 
350

Total other income and expenses
 
(10,246
)
 
(10,191
)
 
 
 
 
 
Income from operations before income tax expense
 
42,761

 
45,229

 
 
 
 
 
Income tax expense
 
15,869

 
17,432

 
 
 
 
 
Net Income
 
$
26,892

 
$
27,797

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,538

 
37,952

Basic Earnings Per Common Share
 
$
0.73

 
$
0.73

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,730

 
38,153

Fully Diluted Earnings Per Common Share
 
$
0.73

 
$
0.73

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.448

 
$
0.426


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

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AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2016
 
2015
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
26,892

 
$
27,797

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

 
 

Depreciation and amortization
 
19,759

 
21,458

Provision for doubtful accounts
 
214

 
370

Deferred income taxes and investment tax credits
 
6,476

 
(432
)
Stock-based compensation expense
 
1,460

 
1,321

Other — net
 
(188
)
 
426

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(1,765
)
 
(774
)
Unbilled receivable
 
1,533

 
3,473

Other accounts receivable
 
(208
)
 
1,248

Receivables from the U.S. government
 
(1,975
)
 
(579
)
Materials and supplies
 
121

 
(564
)
Prepayments and other assets
 
(1,403
)
 
932

Costs and estimated earnings in excess of billings on contracts
 
(3,615
)
 
5,546

Regulatory assets
 
(12,499
)
 
(13,493
)
Accounts payable
 
2,557

 
511

Income taxes receivable/payable
 
8,803

 
17,655

Billings in excess of costs and estimated earnings on contracts
 
2,146

 
(2,283
)
Accrued pension and other post-retirement benefits
 
2,554

 
2,907

Other liabilities
 
(2,323
)
 
(2,517
)
Net cash provided
 
48,539

 
63,002

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(65,334
)
 
(34,207
)
Other investing activities
 
(125
)
 
(1,401
)
Net cash used
 
(65,459
)
 
(35,608
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
126

 
512

Repurchase of Common Shares
 

 
(41,847
)
Receipt of advances for and contributions in aid of construction
 
2,075

 
1,751

Refunds on advances for construction
 
(2,576
)
 
(2,571
)
Retirement or repayments of long-term debt
 
(169
)
 
(169
)
Proceeds from notes payable to banks
 
35,500

 

Dividends paid
 
(16,369
)
 
(16,171
)
Other financing activities
 
(1,513
)
 
(1,025
)
Net cash (used) provided
 
17,074

 
(59,520
)
Net change in cash and cash equivalents
 
154

 
(32,126
)
Cash and cash equivalents, beginning of period
 
4,364

 
75,988

Cash and cash equivalents, end of period
 
$
4,518

 
$
43,862

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,488

 
$
13,110

Property installed by developers and conveyed
 
$
4,345

 
$
784



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

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GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

(in thousands)
 
June 30,
2016
 
December 31,
2015
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,643,084

 
$
1,578,865

Less - Accumulated depreciation
 
(541,223
)
 
(522,749
)
Net utility plant
 
1,101,861

 
1,056,116

 
 
 
 
 
Other Property and Investments
 
16,813

 
16,581

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
411

 
2,501

Accounts receivable-customers (less allowance for doubtful accounts of $701 in 2016 and $790 in 2015)
 
20,414

 
18,940

Unbilled receivable
 
17,311

 
18,181

Inter-company receivable
 
718

 
54

Other accounts receivable (less allowance for doubtful accounts of $59 in 2016 and $129 in 2015)
 
1,614

 
1,455

Income taxes receivable from Parent
 
4,495

 
11,000

Materials and supplies, at average cost
 
4,447

 
4,860

Regulatory assets — current
 
32,378

 
30,134

Prepayments and other current assets
 
3,910

 
2,793

Total current assets
 
85,698

 
89,918

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
117,682

 
102,562

Other
 
6,715

 
6,702

Total regulatory and other assets
 
124,397

 
109,264

 
 
 
 
 
Total Assets
 
$
1,328,769

 
$
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)
 
June 30,
2016
 
December 31, 2015
Capitalization
 
 

 
 

Common shares, no par value
 
$
238,974

 
$
238,795

Earnings reinvested in the business
 
190,892

 
184,935

Total common shareholder’s equity
 
429,866

 
423,730

Long-term debt
 
320,910

 
320,900

Total capitalization
 
750,776

 
744,630

 
 
 
 
 
Current Liabilities
 
 

 
 

Inter-company payable
 
48,000

 
12,000

Long-term debt — current
 
318

 
312

Accounts payable
 
44,267

 
39,610

Accrued other taxes
 
6,126

 
7,830

Accrued employee expenses
 
10,027

 
10,630

Accrued interest
 
3,582

 
3,599

Unrealized loss on purchased power contracts
 
4,933

 
7,053

Other
 
9,955

 
9,921

Total current liabilities
 
127,208

 
90,955

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
70,383

 
68,041

Contributions in aid of construction — net
 
117,054

 
117,810

Deferred income taxes
 
202,528

 
195,658

Unamortized investment tax credits
 
1,570

 
1,612

Accrued pension and other postretirement benefits
 
48,858

 
42,666

Other
 
10,392

 
10,507

Total other credits
 
450,785

 
436,294

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,328,769

 
$
1,271,879

 
The accompanying notes are an integral part of these financial statements

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Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2016 AND 2015
(Unaudited)

 
 
Three Months Ended June 30,
(in thousands)
 
2016
 
2015
Operating Revenues
 
 
 
 
Water
 
$
81,058

 
$
87,581

Electric
 
7,701

 
7,889

Total operating revenues
 
88,759

 
95,470

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
15,835

 
16,415

Power purchased for pumping
 
2,132

 
2,123

Groundwater production assessment
 
3,968

 
4,122

Power purchased for resale
 
2,216

 
2,566

Supply cost balancing accounts
 
(2,517
)
 
1,816

Other operation
 
6,156

 
6,540

Administrative and general
 
16,999

 
17,003

Depreciation and amortization
 
9,347

 
10,235

Maintenance
 
3,243

 
3,667

Property and other taxes
 
3,823

 
3,748

Total operating expenses
 
61,202

 
68,235

 
 
 
 
 
Operating Income
 
27,557

 
27,235

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,586
)
 
(5,516
)
Interest income
 
190

 
97

Other, net
 
231

 
(67
)
Total other income and expenses
 
(5,165
)
 
(5,486
)
 
 
 
 
 
Income from operations before income tax expense
 
22,392

 
21,749

 
 
 
 
 
Income tax expense
 
8,722

 
8,800

 
 
 
 
 
Net Income
 
$
13,670

 
$
12,949

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


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Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2016 AND 2015
(Unaudited)


 
 
Six Months Ended 
 June 30,
(in thousands)
 
2016
 
2015
Operating Revenues
 
 

 
 

Water
 
$
147,370

 
$
159,085

Electric
 
18,274

 
18,858

Total operating revenues
 
165,644

 
177,943

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
29,634

 
28,706

Power purchased for pumping
 
3,764

 
4,140

Groundwater production assessment
 
6,668

 
7,511

Power purchased for resale
 
5,087

 
5,065

Supply cost balancing accounts
 
(5,932
)
 
3,629

Other operation
 
12,239

 
11,998

Administrative and general
 
33,515

 
32,560

Depreciation and amortization
 
18,877

 
20,476

Maintenance
 
6,782

 
6,484

Property and other taxes
 
7,810

 
7,666

Total operating expenses
 
118,444

 
128,235

 
 
 
 
 
Operating Income
 
47,200

 
49,708

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,156
)
 
(10,734
)
Interest income
 
360

 
201

Other, net
 
412

 
206

Total other income and expenses
 
(10,384
)
 
(10,327
)
 
 
 
 
 
Income from operations before income tax expense
 
36,816

 
39,381

 
 
 
 
 
Income tax expense
 
14,162

 
16,047

 
 
 
 
 
Net Income
 
$
22,654

 
$
23,334

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


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GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2016 AND 2015
(Unaudited)

 
 
 
Six Months Ended 
 June 30,
(in thousands)
 
2016
 
2015
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
22,654

 
$
23,334

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

 
 

Depreciation and amortization
 
19,244

 
20,850

Provision for doubtful accounts
 
221

 
370

Deferred income taxes and investment tax credits
 
6,081

 
(827
)
Stock-based compensation expense
 
1,209

 
1,062

Other — net
 
(186
)
 
409

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(1,765
)
 
(774
)
Unbilled receivable
 
870

 
(80
)
Other accounts receivable
 
(89
)
 
664

Materials and supplies
 
413

 
(629
)
Prepayments and other assets
 
(1,130
)
 
(216
)
Regulatory assets
 
(12,499
)
 
(13,493
)
Accounts payable
 
3,824

 
5,408

Inter-company receivable/payable
 
(664
)
 
196

Income taxes receivable/payable from/to Parent
 
6,505

 
25,186

Accrued pension and other post-retirement benefits
 
2,554

 
2,907

Other liabilities
 
(2,405
)
 
(2,477
)
Net cash provided
 
44,837

 
61,890

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(64,216
)
 
(33,841
)
Note receivable from AWR parent
 

 
(3,000
)
Other investing activities
 
(158
)
 
(1,427
)
Net cash used
 
(64,374
)
 
(38,268
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
2,075

 
1,751

Refunds on advances for construction
 
(2,576
)
 
(2,571
)
Retirement or repayments of long-term debt
 
(169
)
 
(169
)
Net change in inter-company borrowings
 
36,000

 

Dividends paid
 
(16,600
)
 
(26,000
)
Other financing activities
 
(1,283
)
 
(702
)
Net cash (used) provided
 
17,447

 
(27,691
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(2,090
)
 
(4,069
)
Cash and cash equivalents, beginning of period
 
2,501

 
44,005

Cash and cash equivalents, end of period
 
$
411

 
$
39,936

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,488

 
$
13,108

Property installed by developers and conveyed
 
$
4,345

 
$
784

 
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 261,000 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 GSWC has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 90% of total water revenues during the three and six months ended June 30, 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. Intercompany 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 those estimates. In the opinion of management, all adjustments consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 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. GSWC allocated corporate office administrative and general costs to ASUS of approximately $969,000 and $609,000 during the three months ended June 30, 2016 and 2015, respectively, and approximately $2.0 million and $1.3 million during the six months ended June 30, 2016 and 2015, respectively. In addition, AWR has a $100.0 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, GSWC and

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ASUS, in support of their operations.  As of June 30, 2016, there was $63.5 million outstanding under this facility. The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest expense under the credit facility.

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 June 30, 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 ratemaking area as applicable. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect them from its customers, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $1.0 million and $996,000 for the three months ended June 30, 2016 and 2015, respectively, and $1.9 million for each of the six months ended June 30, 2016 and 2015. When GSWC acts as an agent, and a tax is not required to be remitted if it is not collected from customers, the tax is 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 $84,000 and $53,000 during the three months ended June 30, 2016 and 2015, respectively, and $146,000 and $86,000 for the six months ended June 30, 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 the 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 on 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 June 30, 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.


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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.
 
Note 2 — Regulatory Matters:
 
In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At June 30, 2016, Registrant had approximately $53.5 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $23.5 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $4.9 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES's purchase power contracts over the term of the contracts, and $16.9 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 requiring it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each ratemaking area. Amounts expected to be collected or refunded in the next 12 months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows: 
(dollars in thousands)
 
June 30,
2016
 
December 31,
2015
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
61,627

 
$
45,171

Costs deferred for future recovery on Aerojet case
 
12,375

 
12,699

Pensions and other post-retirement obligations (Note 7)
 
25,215

 
21,996

Derivative unrealized loss (Note 4)
 
4,933

 
7,053

Flow-through taxes, net (Note 6)
 
16,923

 
16,176

Low income rate assistance balancing accounts
 
8,744

 
8,699

Other regulatory assets
 
26,264

 
25,668

Various refunds to customers
 
(6,021
)
 
(4,766
)
Total
 
$
150,060

 
$
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 ratemaking area and bears interest at the current 90-day commercial paper rate. 

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GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2015. For the six months ended June 30, 2016 and 2015, surcharges (net of surcredits) of approximately $6.4 million and $96,000, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the six months ended June 30, 2016, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of $22.9 million mostly caused by 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 June 30, 2016, GSWC had a net aggregated regulatory asset of $61.6 million which is comprised of a $64.8 million under-collection in the WRAM accounts and $3.2 million over-collection in the MCBA accounts.

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.  The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 24 months; however, as of December 31, 2015 there were some ratemaking areas that had recovery periods related to the 2015 WRAM balances that were 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 is recognized as revenue in the periods in which it is determined that the amounts will be collected within 24 months. During the three and six months ended June 30, 2016, GSWC recognized $690,000 of this amount as revenue as it was determined that this amount would be recovered within 24 months from June 30, 2016. In 2016, GSWC implemented CPUC-approved surcharges for recovery of the 2015 WRAM balances, including the $1.4 million discussed above.
 
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 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 to be used to calculate rates for 2016-2018, which reflect state-mandated conservation targets that were previously in place. 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 six months of 2016 that would need to be adjusted in the quarter in which the final decision is issued.
Year-to-date 2016 billed revenues have 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: (i) supply costs caused by lower consumption, (ii) depreciation expense resulting from an updated depreciation study, and (iii) other operating expenses. As a result of the anticipated reduction in the 2016 adopted revenues, GSWC has adjusted its water revenues downward for the three and six months ended June 30, 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 on pretax operating income for the three and six months ended June 30, 2016 as the overall reduction in water revenues is mostly offset by lower supply costs, 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 over a period of ten years from the date the settlement was approved by the CPUC. The audits cover GSWC's policies and procedures for the procurement of outside contracts for engineering or construction for capital projects related to other contractors after 1993. The first audit started in 2014 and covered an almost 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 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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Formal Complaint Filed at the CPUC:
In June 2016, a third party filed a formal complaint with the CPUC against GSWC in connection with a water main break that occurred in 2014. The water main break caused damage to a commercial building. Repairs to the building have been delayed for a variety of reasons, including a dispute and litigation between two of GSWC's insurance carriers regarding their respective coverage obligations, as well as questions as to the nature and extent of the building’s damage and the costs associated therewith. The complaint filed with the CPUC requests, among other things, that the CPUC investigate the main break, the damage to the commercial building, and the delay of its repairs, and the complaint asks the CPUC to order GSWC to immediately complete repairs. GSWC believes it has reasonable defenses to the complaint filed with the CPUC. In July 2016, GSWC filed an answer to the formal complaint with the CPUC as well as a motion to dismiss the complaint. Previously, the owners of the commercial building filed suit in Ventura County Superior Court against GSWC for damages to the building. The trial of this lawsuit is set for December 2016. At this time, GSWC believes it has sufficient insurance coverage to cover any judgment entered in the civil suit pending in Superior Court. However, GSWC cannot predict the outcome of the Superior Court litigation, the dispute and litigation between its insurers, or the CPUC proceeding.

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 June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Net income
 
$
16,742

 
$
15,648

 
26,892

 
27,797

Less: (a) Distributed earnings to common shareholders
 
8,188

 
8,016

 
16,369

 
16,171

Distributed earnings to participating securities
 
50

 
47

 
94

 
89

Undistributed earnings
 
8,504

 
7,585

 
10,429

 
11,537

 
 
 
 
 
 
 
 
 
(b) Undistributed earnings allocated to common shareholders
 
8,453

 
7,541

 
10,369

 
11,474

Undistributed earnings allocated to participating securities
 
51

 
44

 
60

 
63

 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
16,641

 
$
15,557

 
$
26,738

 
$
27,645

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
36,554

 
37,702

 
36,538

 
37,952

 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.46

 
$
0.41

 
$
0.73

 
$
0.73

 
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 June 30, 2016 and 2015, there were 142,402 and 187,152 options outstanding, respectively, under these Plans. At June 30, 2016 and 2015, there were also 227,364 and 225,074 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.

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 The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted:
 
For The Three Months Ended June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2016
 
2015
 
2016
 
2015
Common shareholders earnings, basic
 
$
16,641

 
$
15,557

 
$
26,738

 
$
27,645

Undistributed earnings for dilutive stock-based awards
 
51

 
44

 
60

 
63

Total common shareholders earnings, diluted
 
$
16,692

 
$
15,601

 
$
26,798

 
$
27,708

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
36,554

 
37,702

 
36,538

 
37,952

Stock-based compensation (1)
 
198

 
207

 
192

 
201

Weighted average common shares outstanding, diluted
 
36,752

 
37,909

 
36,730

 
38,153

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.45

 
$
0.41

 
$
0.73

 
$
0.73

 
(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 187,152 stock options at June 30, 2016 and 2015, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 227,364 and 225,074 restricted stock units at June 30, 2016 and 2015, respectively, were included in the calculation of diluted EPS for the six months ended June 30, 2016 and 2015.
 
No stock options outstanding at June 30, 2016 had an exercise price greater than the average market price of AWR’s Common Shares for the six months ended June 30, 2016. There were no stock options outstanding at June 30, 2016 or 2015 that were anti-dilutive.
 
During the six months ended June 30, 2016 and 2015, AWR issued 52,212 and 69,617 common shares, for approximately $126,000 and $512,000, 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.

In 2014 and 2015, AWR's Board of Directors approved stock repurchase programs, authorizing AWR to repurchase up to 2.45 million shares of its Common Shares from time to time through June 30, 2016. Both programs were completed during 2015. Under these programs, Registrant repurchased 1.1 million shares during the six months ended June 30, 2015. The repurchase of Common Shares is restricted by California law under the same standards which apply to dividend distributions.

During the three months ended June 30, 2016 and 2015, AWR paid quarterly dividends of approximately $8.2 million, or $0.224 per share, and $8.0 million, or $0.213 per share, respectively. During the six months ended June 30, 2016 and 2015, AWR paid quarterly dividends to shareholders of approximately $16.4 million, or $0.448 per share, and $16.2 million, or $0.426 per share, respectively.

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, BVES entered into several CPUC-approved long-term purchased power contracts with energy providers. 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 the 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 derivatives throughout the terms of the contracts. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of June 30, 2016, there was a $4.9 million unrealized loss in the memorandum account for the purchased power contracts as a result

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of the drop in energy prices. The notional volume of derivatives remaining under these long-term contracts as of June 30, 2016 was approximately 427,000 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 contracts, Registrant applies the Black-76 model, utilizing various inputs that include quoted market prices for energy over the duration of the contracts. The market prices used to determine the fair value for these derivative instruments may be 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 instruments.  When such inputs have a significant impact on the measurement of fair value, the instruments are categorized as Level 3. Accordingly, the valuation of the derivatives 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 and six months ended June 30, 2016 and 2015:
 
 
For The Three Months Ended June 30,
 
 For The Six Months Ended 
 June 30,
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
Fair value at beginning of the period
 
$
(7,245
)
 
$
(6,176
)
 
$
(7,053
)
 
$
(3,339
)
Unrealized gain (loss) on purchased power contracts
 
2,312

 
514

 
2,120

 
(2,323
)
Fair value at end of the period
 
$
(4,933
)
 
$
(5,662
)
 
$
(4,933
)
 
$
(5,662
)

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 ("SERP") are measured at fair value and totaled $10.3 million as of June 30, 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 June 30, 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 June 30, 2016 valuation decreased as compared to December 31, 2015, increasing the fair value of long-term debt as of June 30, 2016. Changes in the assumptions will produce different results.
 
 
June 30, 2016
 
December 31, 2015
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC (1)
 
$
325,684

 
$
442,389

 
$
325,853

 
$
403,844

___________________
(1) Excludes debit issuance costs and redemption premiums.


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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.  GSWC's ETR was 39.0% and 40.5% for the three months ended June 30, 2016 and 2015, respectively, and 38.5% and 40.7% for the six months ended June 30, 2016 and 2015, respectively. The GSWC ETRs deviated from the statutory rate primarily due to state taxes and differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (primarily plant-, rate-case- and compensation-related items). The ETR at the AWR consolidated level may also fluctuate as a result of certain permanent differences as well as state taxes recorded at AWR (parent) and at 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 Registrant’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 SERP for the three and six months ended June 30, 2016 and 2015 are as follows:
 
 
For The Three Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,316

 
$
1,452

 
$
68

 
$
95

 
$
200

 
$
204

Interest cost
 
2,026

 
1,905

 
97

 
114

 
186

 
163

Expected return on plan assets
 
(2,460
)
 
(2,452
)
 
(122
)
 
(123
)
 

 

Amortization of unrecognized transition (asset)/obligation
 

 

 

 

 

 

Amortization of prior service cost (benefit)
 
12

 
30

 
(9
)
 
(50
)
 
6

 
29

Amortization of actuarial (gain) loss
 
329

 
427

 
(150
)
 
(53
)
 
73

 
108

Net periodic pension cost under accounting standards
 
1,223

 
1,362

 
(116
)
 
(17
)
 
465

 
504

Regulatory adjustment — deferred
 
64

 
251

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,287

 
$
1,613

 
$
(116
)
 
$
(17
)
 
$
465

 
$
504


 
 
For The Six Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2016
 
2015
 
2016
 
2015
 
2016
 
2015
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
2,548

 
$
3,138

 
$
136

 
$
190

 
$
400

 
$
408

Interest cost
 
3,956

 
3,844

 
194

 
228

 
372

 
326

Expected return on plan assets
 
(4,920
)
 
(4,898
)
 
(244
)
 
(246
)
 

 

Amortization of unrecognized transition (asset)/obligation
 

 

 

 

 

 

Amortization of prior service cost (benefit)
 
24

 
60

 
(18
)
 
(100
)
 
12

 
58

Amortization of actuarial (gain) loss
 
456

 
896

 
(300
)
 
(106
)
 
146

 
216

Net periodic pension cost under accounting standards
 
2,064

 
3,040

 
(232
)
 
(34
)
 
930

 
1,008

Regulatory adjustment — deferred
 
423

 
262

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
2,487

 
$
3,302

 
$
(232
)
 
$
(34
)
 
$
930

 
$
1,008

Registrant expects to contribute $5.3 million to its pension plan during 2016.
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 June 30, 2016, GSWC had 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

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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 it is ultimately taken.
Claremont System:
In December 2014, the City of Claremont, California filed a complaint in eminent domain against GSWC. GSWC is in the process of vigorously defending against the eminent domain action. The trial determining the City's rights to seize the system by eminent domain began on June 14, 2016. Closing arguments are expected to occur in August 2016, with a decision expected within 90 days after the closing arguments. At this time, management cannot predict the outcome of this eminent domain proceeding. The Claremont water system has a net book value of approximately $49.2 million. GSWC serves approximately 11,000 customers in Claremont. 
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, California system through eminent domain. On May 12, 2016, CMWD filed a complaint in eminent domain against GSWC. The complaint included additional causes of action related to claims of potential damages resulting from any delay caused by GSWC seeking relief in prior action regarding the use of Mello-Roos funds for such a taking of property. On June 28, 2016, a group of citizens referred to as "Friends of Locally Owned Water" filed a motion for intervention to also seek potential damages resulting from the additional causes of actions listed above. At this time, management cannot predict the outcome of this eminent domain proceeding. GSWC serves approximately 3,000 customers in Ojai.

Environmental Clean-Up and Remediation:
     GSWC has been involved in environmental remediation and clean-up at a plant site 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 June 30, 2016, the total amount spent to clean-up and remediate GSWC’s plant facility was approximately $5.1 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of June 30, 2016, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.4 million to complete the clean-up at the site. The estimate includes costs for two years of continued activities of groundwater cleanup and monitoring, future soil treatment and site-closure-related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management believes it is probable that the estimated additional costs will be approved in rate base by the CPUC.
 
Other Litigation:
 
Registrant is also subject to other ordinary routine litigation incidental to its business. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business. Registrant is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.


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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- and third-party contractor-funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.
 
 
As Of And For The Three Months Ended June 30, 2016
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
81,058

 
$
7,701

 
$
23,195

 
$

 
$
111,954

Operating income (loss)
 
26,452

 
1,105

 
4,219

 
(2
)
 
31,774

Interest expense, net
 
5,052

 
344