Document
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 September 30, 2017
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                    to                   
 
Commission file number   001-14431 
American States Water Company
(Exact Name of Registrant as Specified in Its Charter)
 
California
 
95-4676679
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Commission file number   001-12008 
Golden State Water Company
(Exact Name of Registrant as Specified in Its Charter)
California
 
95-1243678
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American States Water Company
 
Yes x No ¨
Golden State Water Company
 
Yes x No ¨
 
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).


Table of Contents

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
 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 November 1, 2017, the number of Common Shares outstanding of American States Water Company was 36,679,175 shares. As of November 1, 2017, 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 outcome 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 GSWC's water supplies, which may be adversely affected by 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 longer in service (or are otherwise inadequate to meet the needs of GSWC's customers), and other facilities to conserve or reclaim water;


1

Table of Contents

the impact of opposition by GSWC customers to rate increases associated with tiered rate structures as well as potential future restrictions on water use mandated in California, which decreases adopted usage and increases customer rates;

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 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 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 GSWC's upgrading and building new water treatment plants, GSWC's disposing of residuals from our water treatment plants, handling and storing hazardous chemicals, compliance monitoring activities and GSWC's 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;

the breakdown or failure of equipment at GSWC's electric division that can cause fires and unplanned electric outages, and whether GSWC will be subject to investigations, penalties, and other costs in connection with such events;
 
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 division'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;


2

Table of Contents

changes in estimates used in ASUS’s revenue recognition under the percentage of completion method of accounting for certain 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 laws 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 or construction activities at military bases because of fiscal uncertainties over the funding of the U.S. government or otherwise;
 
delays in obtaining 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 because 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 to perform services for us in accordance with the terms of our military privatization contracts;

competition for new 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, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions;
 
the impact of storms, earthquakes, floods, mudslides, drought, wildfires, disease and similar natural disasters, or acts of terrorism or vandalism, that affect customer demand or that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely;
 
potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption due to 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, or under our contracts with the U.S. government, 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 2016 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all our forward-looking statements by these cautionary statements.

3

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


(in thousands)
 
September 30,
2017
 
December 31, 2016
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,699,631

 
$
1,670,238

Non-utility property, at cost
 
14,826

 
13,441

Total
 
1,714,457

 
1,683,679

Less - Accumulated depreciation
 
(532,841
)
 
(532,753
)
Net property, plant and equipment
 
1,181,616

 
1,150,926

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
23,346

 
20,836

Total other property and investments
 
24,462

 
21,952

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
6,661

 
436

Accounts receivable — customers (less allowance for doubtful accounts of $770 in 2017 and $702 in 2016)
 
29,392

 
19,993

Unbilled receivable
 
25,833

 
24,391

Receivable from the U.S. government
 
7,112

 
8,467

Other accounts receivable (less allowance for doubtful accounts of $219 in 2017 and $62 in 2016)
 
4,945

 
3,151

Income taxes receivable
 
74

 
17,867

Materials and supplies, at average cost
 
5,377

 
4,294

Regulatory assets — current
 
27,385

 
43,296

Prepayments and other current assets
 
5,248

 
3,735

Costs and estimated earnings in excess of billings on contracts
 
34,636

 
41,245

Total current assets
 
146,663

 
166,875

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
103,521

 
102,985

Costs and estimated earnings in excess of billings on contracts
 
21,720

 
22,687

Other
 
8,504

 
5,068

Total regulatory and other assets
 
133,745

 
130,740

 
 
 
 
 
Total Assets
 
$
1,486,486

 
$
1,470,493

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





4

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

(in thousands)
 
September 30,
2017
 
December 31,
2016
Capitalization
 
 

 
 

Common shares, no par value
 
 
 
 
Authorized: 60,000,000 shares
 
 
 
 
Outstanding: 36,679,175 shares in 2017 and 36,571,360 shares in 2016
 
$
249,468

 
$
247,232

Earnings reinvested in the business
 
276,344

 
247,065

Total common shareholders’ equity
 
525,812

 
494,297

Long-term debt
 
320,949

 
320,981

Total capitalization
 
846,761

 
815,278

 
 
 
 
 
Current Liabilities
 
 

 
 

Notes payable to bank
 
46,000

 
90,000

Long-term debt — current
 
333

 
330

Accounts payable
 
53,804

 
43,724

Income taxes payable
 
6,013

 
149

Accrued other taxes
 
9,195

 
9,112

Accrued employee expenses
 
11,211

 
12,304

Accrued interest
 
6,576

 
3,864

Unrealized loss on purchased power contracts
 
3,837

 
4,901

Billings in excess of costs and estimated earnings on contracts
 
2,466

 
2,263

Other
 
12,434

 
11,297

Total current liabilities
 
151,869

 
177,944

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
67,438

 
69,722

Contributions in aid of construction - net
 
123,569

 
120,518

Deferred income taxes
 
234,719

 
224,530

Unamortized investment tax credits
 
1,453

 
1,529

Accrued pension and other postretirement benefits
 
46,868

 
49,856

Other
 
13,809

 
11,116

Total other credits
 
487,856

 
477,271

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,486,486

 
$
1,470,493

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

5

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)


 
 
Three Months Ended September 30,
(in thousands, except per share amounts)
 
2017
 
2016
Operating Revenues
 
 

 
 

Water
 
$
91,919

 
$
90,617

Electric
 
7,994

 
8,146

Contracted services
 
24,505

 
25,043

Total operating revenues
 
124,418

 
123,806

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
20,576

 
19,631

Power purchased for pumping
 
2,913

 
2,988

Groundwater production assessment
 
5,870

 
4,482

Power purchased for resale
 
2,439

 
2,394

Supply cost balancing accounts
 
(4,621
)
 
(4,213
)
Other operation
 
7,657

 
7,448

Administrative and general
 
21,790

 
19,768

Depreciation and amortization
 
9,854

 
9,486

Maintenance
 
3,222

 
4,203

Property and other taxes
 
4,475

 
4,317

ASUS construction
 
11,693

 
13,685

Gain on sale of assets
 
(17
)
 

Total operating expenses
 
85,851

 
84,189

 
 
 
 
 
Operating Income
 
38,567

 
39,617

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,775
)
 
(5,730
)
Interest income
 
321

 
206

Other, net
 
401

 
254

Total other income and expenses, net
 
(5,053
)
 
(5,270
)
 
 
 
 
 
Income before income tax expense
 
33,514

 
34,347

 
 
 
 
 
Income tax expense
 
12,508

 
12,708

 
 
 
 
 
Net Income
 
$
21,006

 
$
21,639

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,659

 
36,561

Basic Earnings Per Common Share
 
$
0.57

 
$
0.59

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,856

 
36,762

Fully Diluted Earnings Per Common Share
 
$
0.57

 
$
0.59

 
 
 
 
 
Dividends Declared Per Common Share
 
$
0.255

 
$
0.224

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

6

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

 
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2017
 
2016
Operating Revenues
 
 

 
 

Water
 
$
239,057

 
$
237,987

Electric
 
26,108

 
26,420

Contracted services
 
71,258

 
64,880

Total operating revenues
 
336,423

 
329,287

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
50,619

 
49,265

Power purchased for pumping
 
6,667

 
6,752

Groundwater production assessment
 
14,176

 
11,150

Power purchased for resale
 
7,847

 
7,481

Supply cost balancing accounts
 
(11,663
)
 
(10,145
)
Other operation
 
21,989

 
21,331

Administrative and general
 
62,534

 
61,829

Depreciation and amortization
 
29,184

 
28,878

Maintenance
 
10,292

 
11,908

Property and other taxes
 
13,386

 
12,863

ASUS construction
 
34,589

 
35,351

Gain on sale of assets
 
(8,318
)
 

Total operating expenses
 
231,302

 
236,663

 
 
 
 
 
Operating Income
 
105,121

 
92,624

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(17,606
)
 
(16,956
)
Interest income
 
1,200

 
568

Other, net
 
1,454

 
872

Total other income and expenses, net
 
(14,952
)
 
(15,516
)
 
 
 
 
 
Income before income tax expense
 
90,169

 
77,108

 
 
 
 
 
Income tax expense
 
33,670

 
28,577

 
 
 
 
 
Net Income
 
$
56,499

 
$
48,531

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,625

 
36,546

Basic Earnings Per Common Share
 
$
1.53

 
$
1.32

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,813

 
36,743

Fully Diluted Earnings Per Common Share
 
$
1.53

 
$
1.32

 
 
 
 
 
Dividends Declared Per Common Share
 
$
0.739

 
$
0.672


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

7

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2017
 
2016
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
56,499

 
$
48,531

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

 
 

Depreciation and amortization
 
29,365

 
29,080

Provision for doubtful accounts
 
720

 
420

Deferred income taxes and investment tax credits
 
9,004

 
11,295

Stock-based compensation expense
 
2,303

 
1,965

Gain on sale of assets
 
(8,318
)
 

Other — net
 
(802
)
 
(360
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(10,683
)
 
(4,471
)
Unbilled receivable
 
(1,442
)
 
(1,139
)
Other accounts receivable
 
(1,951
)
 
36

Receivables from the U.S. government
 
1,355

 
(3,623
)
Materials and supplies
 
(1,083
)
 
682

Prepayments and other assets
 
(1,401
)
 
(1,149
)
Costs and estimated earnings in excess of billings on contracts
 
7,576

 
(8,274
)
Regulatory assets
 
10,344

 
(13,823
)
Accounts payable
 
5,337

 
(1,545
)
Income taxes receivable/payable
 
23,657

 
16,653

Billings in excess of costs and estimated earnings on contracts
 
203

 
1,777

Accrued pension and other post-retirement benefits
 
(2,285
)
 
(1,529
)
Other liabilities
 
1,831

 
2,983

Net cash provided
 
120,229

 
77,509

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(77,896
)
 
(99,907
)
Proceeds from sale of assets
 
34,324

 

Other investing activities
 
(1,299
)
 
(1,448
)
Net cash used
 
(44,871
)
 
(101,355
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
884

 
210

Receipt of advances for and contributions in aid of construction
 
6,132

 
2,902

Refunds on advances for construction
 
(3,477
)
 
(3,449
)
Retirement or repayments of long-term debt
 
(320
)
 
(305
)
Net change in notes payable to banks
 
(44,000
)
 
49,000

Dividends paid
 
(27,064
)
 
(24,558
)
Other financing activities
 
(1,288
)
 
(1,529
)
Net cash (used) provided
 
(69,133
)
 
22,271

Net change in cash and cash equivalents
 
6,225

 
(1,575
)
Cash and cash equivalents, beginning of period
 
436

 
4,364

Cash and cash equivalents, end of period
 
$
6,661

 
$
2,789

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,978

 
$
19,843

Property installed by developers and conveyed
 
$
1,796

 
$
4,853



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

8

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

(in thousands)
 
September 30,
2017
 
December 31,
2016
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,699,631

 
$
1,670,238

Less - Accumulated depreciation
 
(524,288
)
 
(524,927
)
Net utility plant
 
1,175,343

 
1,145,311

 
 
 
 
 
Other Property and Investments
 
21,232

 
18,719

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
6,254

 
209

Accounts receivable-customers (less allowance for doubtful accounts of $770 in 2017 and $702 in 2016)
 
29,392

 
19,993

Unbilled receivable
 
20,838

 
17,700

Other accounts receivable (less allowance for doubtful accounts of $59 in 2017 and 2016)
 
3,617

 
1,959

Income taxes receivable from Parent
 

 
21,856

Materials and supplies, at average cost
 
4,615

 
3,724

Regulatory assets — current
 
27,385

 
43,296

Prepayments and other current assets
 
4,594

 
3,520

Total current assets
 
96,695

 
112,257

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
103,521

 
102,985

Other
 
8,407

 
4,906

Total regulatory and other assets
 
111,928

 
107,891

 
 
 
 
 
Total Assets
 
$
1,405,198

 
$
1,384,178

 
The accompanying notes are an integral part of these financial statements

9

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

(in thousands)
 
September 30,
2017
 
December 31, 2016
Capitalization
 
 

 
 

Common Shares, no par value:
 
 
 
 
 Authorized: 1,000 shares
 
 
 
 
 Outstanding: 146 shares in 2017 and 2016
 
$
241,684

 
$
240,482

Earnings reinvested in the business
 
234,299

 
206,288

Total common shareholder’s equity
 
475,983

 
446,770

Long-term debt
 
320,949

 
320,981

Total capitalization
 
796,932

 
767,751

 
 
 
 
 
Current Liabilities
 
 

 
 

Inter-company payable
 
29,103

 
61,726

Long-term debt — current
 
333

 
330

Accounts payable
 
45,415

 
34,648

Income taxes payable to Parent
 
1,136

 

Accrued other taxes
 
9,078

 
8,870

Accrued employee expenses
 
9,809

 
10,983

Accrued interest
 
6,305

 
3,588

Unrealized loss on purchased power contracts
 
3,837

 
4,901

Other
 
12,088

 
10,925

Total current liabilities
 
117,104

 
135,971

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
67,438

 
69,722

Contributions in aid of construction — net
 
123,569

 
120,518

Deferred income taxes
 
238,110

 
227,798

Unamortized investment tax credits
 
1,453

 
1,529

Accrued pension and other postretirement benefits
 
46,868

 
49,856

Other
 
13,724

 
11,033

Total other credits
 
491,162

 
480,456

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,405,198

 
$
1,384,178

 
The accompanying notes are an integral part of these financial statements

10

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

 
 
Three Months Ended September 30,
(in thousands)
 
2017
 
2016
Operating Revenues
 
 
 
 
Water
 
$
91,919

 
$
90,617

Electric
 
7,994

 
8,146

Total operating revenues
 
99,913

 
98,763

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
20,576

 
19,631

Power purchased for pumping
 
2,913

 
2,988

Groundwater production assessment
 
5,870

 
4,482

Power purchased for resale
 
2,439

 
2,394

Supply cost balancing accounts
 
(4,621
)
 
(4,213
)
Other operation
 
6,493

 
6,604

Administrative and general
 
16,847

 
15,833

Depreciation and amortization
 
9,509

 
9,240

Maintenance
 
2,692

 
3,644

Property and other taxes
 
4,144

 
4,018

Gain on sale of assets
 
(17
)
 

Total operating expenses
 
66,845

 
64,621

 
 
 
 
 
Operating Income
 
33,068

 
34,142

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,638
)
 
(5,673
)
Interest income
 
318

 
200

Other, net
 
401

 
255

Total other income and expenses, net
 
(4,919
)
 
(5,218
)
 
 
 
 
 
Income before income tax expense
 
28,149

 
28,924

 
 
 
 
 
Income tax expense
 
10,813

 
11,041

 
 
 
 
 
Net Income
 
$
17,336

 
$
17,883

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


11

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)


 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2017
 
2016
Operating Revenues
 
 

 
 

Water
 
$
239,057

 
$
237,987

Electric
 
26,108

 
26,420

Total operating revenues
 
265,165

 
264,407

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
50,619

 
49,265

Power purchased for pumping
 
6,667

 
6,752

Groundwater production assessment
 
14,176

 
11,150

Power purchased for resale
 
7,847

 
7,481

Supply cost balancing accounts
 
(11,663
)
 
(10,145
)
Other operation
 
18,142

 
18,843

Administrative and general
 
48,152

 
49,348

Depreciation and amortization
 
28,341

 
28,117

Maintenance
 
8,662

 
10,426

Property and other taxes
 
12,316

 
11,828

Gain on sale of assets
 
(8,318
)
 

Total operating expenses
 
174,941

 
183,065

 
 
 
 
 
Operating Income
 
90,224

 
81,342

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(17,170
)
 
(16,829
)
Interest income
 
1,175

 
560

Other, net
 
1,454

 
667

Total other income and expenses, net
 
(14,541
)
 
(15,602
)
 
 
 
 
 
Income before income tax expense
 
75,683

 
65,740

 
 
 
 
 
Income tax expense
 
29,235

 
25,203

 
 
 
 
 
Net Income
 
$
46,448

 
$
40,537

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


12

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2017 AND 2016
(Unaudited)

 
 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2017
 
2016
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
46,448

 
$
40,537

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

 
 

Depreciation and amortization
 
28,522

 
28,319

Provision for doubtful accounts
 
563

 
431

Deferred income taxes and investment tax credits
 
9,139

 
10,782

Stock-based compensation expense
 
1,970

 
1,672

Gain on sale of assets
 
(8,318
)
 

Other — net
 
(866
)
 
(367
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(10,683
)
 
(4,471
)
Unbilled receivable
 
(3,138
)
 
(1,941
)
Other accounts receivable
 
(1,658
)
 
212

Materials and supplies
 
(891
)
 
724

Prepayments and other assets
 
(976
)
 
(1,143
)
Regulatory assets
 
10,344

 
(13,823
)
Accounts payable
 
5,999

 
1,920

Inter-company receivable/payable
 
(623
)
 
(933
)
Income taxes receivable/payable from/to Parent
 
22,992

 
12,863

Accrued pension and other post-retirement benefits
 
(2,285
)
 
(1,529
)
Other liabilities
 
1,905

 
2,991

Net cash provided
 
98,444

 
76,244

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(76,373
)
 
(98,161
)
Proceeds from sale of assets
 
34,324

 

Other investing activities
 
(1,299
)
 
(1,484
)
Net cash used
 
(43,348
)
 
(99,645
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
6,132

 
2,902

Refunds on advances for construction
 
(3,477
)
 
(3,449
)
Retirement or repayments of long-term debt
 
(320
)
 
(305
)
Net change in inter-company borrowings
 
(32,000
)
 
42,000

Dividends paid
 
(18,300
)
 
(16,600
)
Other financing activities
 
(1,086
)
 
(1,301
)
Net cash (used) provided
 
(49,051
)
 
23,247

 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
6,045

 
(154
)
Cash and cash equivalents, beginning of period
 
209

 
2,501

Cash and cash equivalents, end of period
 
$
6,254

 
$
2,347

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
21,975

 
$
19,843

Property installed by developers and conveyed
 
$
1,796

 
$
4,853

 
The accompanying notes are an integral part of these financial statements

13

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


Note 1 — Summary of Significant Accounting Policies
 
Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”), Old North Utility Services, Inc. (“ONUS”), and Emerald Coast Utility Services, Inc. ("ECUS")).  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 259,000 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 nine months ended September 30, 2017 and 2016. 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 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.

On September 29, 2017, ASUS was awarded a new 50-year contract by the U.S. government to operate, maintain, and provide construction management services for the water distribution and wastewater collection and treatment facilities at Fort Riley, a United States Army installation located in Kansas. The initial value of the contract is approximately $601 million over the 50-year period and is subject to annual economic price adjustments. This initial value is also subject to adjustment based on the results of a joint inventory of assets to be performed during the transition period. ASUS will assume operations at Fort Riley following the completion of a six-to-twelve-month transition period.

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, 2016 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, 2016 filed with the SEC.
 

14

Table of Contents

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 $1.0 million during each of the three months ended September 30, 2017 and 2016, and approximately $3.0 million during each of the nine months ended September 30, 2017 and 2016. In addition, AWR has a $150.0 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, GSWC and ASUS, in support of their operations.  As of September 30, 2017, there was $46.0 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 September 30, 2017 and 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 $1.1 million for the three months ended September 30, 2017 and 2016, respectively, and $2.8 million and $3.0 million for the nine months ended September 30, 2017 and 2016, respectively. 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 $55,000 and $62,000 during the three months ended September 30, 2017 and 2016, respectively, and $177,000 and $209,000 for the nine months ended September 30, 2017 and 2016, respectively.
 
Recently Issued Accounting Pronouncements: In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standard Update 2016-09, Improvements to Employee Share-Based Payment Accounting, which amends Accounting Standards Codification ("ASC") Topic 718, Compensation - Stock Compensation. Under the new guidance, the tax effects related to share-based payments at settlement (or expiration) are required to be recorded through the income statement rather than through equity, therefore increasing the volatility of income tax expense. The new standard also removed 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. Income tax benefits in excess of compensation costs or tax deficiencies for share-based compensation are recorded to the income tax provision, instead of to shareholders' equity, which can impact the effective tax rate. Registrant adopted the new standard effective January 1, 2017 (see Note 6). On a prospective basis, the excess tax benefits are classified as an operating activity along with other income tax cash flows on the statement of cash flows.

In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, an entity recognizes 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 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and adoption is not permitted 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 to prior periods would be recognized as an adjustment to opening retained earnings at January 1, 2018, and requires certain additional disclosures. Registrant intends to use the modified retrospective approach beginning January 1, 2018. Management continues to assess all potential impacts of the standard, and to-date has not identified any material impact on earnings or material impacts on how Registrant recognizes revenue. The previously disclosed issue regarding contributions in aid of construction (CIAC) has been resolved, subject to finalization of implementation guidance. GSWC does not expect CIAC to be in the scope of the guidance and, therefore, will continue to record CIAC as liabilities and as a reduction to rate base. The guidance will also require enhanced disclosures, including a disaggregated revenue disclosure from contracts with customers. Some revenue arrangements which meet the definition of alternative revenue programs under ASC 980 Regulated Operations, such as GSWC's Water Revenue Adjustment Mechanism and Base Revenue Requirement Adjustment Mechanisms, are excluded from the

15

Table of Contents

scope of the new standard and, therefore, will be disclosed separately from revenues from contracts with customers under the new guidance.

In February 2016, the FASB issued a new lease accounting standard, Leases (ASC 842). Under the new guidance, lessees will recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. 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 Registrant's financial statements.

In March 2017, the FASB issued Accounting Standards Update 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the financial statement presentation for the costs of defined benefit pension plans and other retirement benefits. Under current GAAP, the components of net benefit cost for retirement plans (such as service cost, interest cost, expected return on assets, and the amortization of various deferred items), are aggregated as operating costs for financial statement presentation purposes. Under the new guidance, the service cost component will continue to be presented as operating costs, while all other components of net benefit cost will be presented outside of operating income. The new guidance also limits any capitalization of net periodic benefits cost to the service cost component. The new guidance is effective for annual and interim periods beginning after December 15, 2017, with early adoption permitted. Registrant is currently evaluating the impact of this new standard on its financial statements, and to-date has not identified a material impact on its consolidated financial statements. Registrant will adopt the standard beginning in 2018.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and early adoption is permitted. Registrant does not expect the adoption of this new standard to have a significant impact on its cash flow statements.
    
In May 2017, the FASB issued Accounting Standards Update 2017-10, Service Concession Arrangements (Topic 853): Determining the Customer of the Operation Services, which addresses the accounting for a service concession arrangement. A service concession arrangement is an arrangement between a grantor and an operating entity for which the terms provide that the operating entity will operate the grantor’s infrastructure (such as water and wastewater facilities) for a specified period of time. Under this guidance, revenue from service concession arrangements will be accounted for in accordance with Topic 605 on revenue recognition, or Topic 606 on revenue from contracts with customers, as applicable. In addition, the infrastructure that is the subject of a service concession arrangement will not be recognized as property, plant, and equipment of the operating entity. For Registrant, the effective date of this new guidance will be January 1, 2018, the same date that Registrant will adopt the provisions under Topic 606. Registrant does not expect the adoption of the guidance on service concession arrangements to have a significant impact on its consolidated financial statements.

Note 2 — Regulatory Matters
 
In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At September 30, 2017, Registrant had approximately $55.7 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $26.1 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $3.8 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 $21.2 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense. The remainder relates to other items that do not provide for or incur carrying costs.
 

16

Table of Contents

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment 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)
 
September 30,
2017
 
December 31,
2016
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
40,230

 
$
47,340

Costs deferred for future recovery on Aerojet case
 
10,983

 
11,820

Pensions and other post-retirement obligations (Note 7)
 
24,944

 
28,118

Derivative unrealized loss (Note 4)
 
3,837

 
4,901

Flow-through taxes, net (Note 6)
 
21,231

 
20,134

Low income rate assistance balancing accounts
 
6,779

 
8,272

General rate case memorandum accounts
 
12,369

 
13,929

Other regulatory assets
 
15,322

 
17,633

Various refunds to customers
 
(4,789
)
 
(5,866
)
Total
 
$
130,906

 
$
146,281

 
Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2016 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2016.

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 aggregated with the MCBA over- or under-collection for the corresponding ratemaking 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, 2016. For the three months ended September 30, 2017 and 2016, surcharges (net of surcredits) of approximately $11.4 million and $6.5 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. For the nine months ended September 30, 2017 and 2016, surcharges (net of surcredits) of approximately $24.8 million and $12.9 million, respectively, were billed to customers. During the nine months ended September 30, 2017, GSWC recorded additional under-collections in the WRAM/MCBA accounts of $19.5 million due to higher than adopted supply costs as well as lower than adopted customer water usage. As of September 30, 2017, GSWC had an aggregated regulatory asset of $40.2 million which is comprised of a $20.0 million under-collection in the WRAM accounts and a $20.2 million under-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 in order to recognize such amounts as revenue.  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 has been recognized as revenue in the periods in which it was determined the amounts would be collected within 24 months. Approximately $450,000 and $910,000 of the 2015 WRAM balance was recognized during the first nine months of 2017 and during the year ended December 31, 2016, respectively.  
 

17

Table of Contents

Water General Rate Case:
In December 2016, the CPUC issued a decision in GSWC's water general rate case for all its water ratemaking areas and the general office to determine new rates for the years 2016, 2017 and 2018. The new rates approved were retroactive to January 1, 2016. However, because of delays in issuing a final decision, the CPUC ordered GSWC to bypass implementing 2016 rates and to implement 2017 rates after the correction of minor rate calculations in the December 2016 decision, which the CPUC completed with the issuance of a final decision in March 2017. A net revenue shortfall of $9.9 million, representing the rate difference between interim rates and final rates authorized by the CPUC in March 2017 that were retroactive to January 1, 2016, was approved for recovery by the CPUC in August 2017. CPUC-approved surcharges to recover this shortfall were implemented on September 1, 2017 with amortization periods ranging between 12 - 36 months for GSWC's various water ratemaking areas.
Other Regulatory Matters:
 
Formal Complaint Filed with the CPUC
In June 2016, a third party filed a formal complaint with the CPUC against GSWC about a water main break that occurred in 2014 causing 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 order GSWC to complete repairs immediately. In September 2017, the CPUC dismissed the complaint on the grounds that the CPUC lacks jurisdiction to impose monetary damages for injuries to property, as requested by the third party, and the third party lacks standing with respect to the property as it is not the owner of the damaged property.

Previously, the owners of the commercial building filed suit in Ventura County Superior Court against GSWC for damages to the building. On September 11, 2017, the Ventura County Superior Court issued a statement of decision in favor of the plaintiffs, and awarded damages to the plaintiffs in the amount of $2.6 million.  In October 2017, the Court held a hearing and also awarded the plaintiffs attorneys’ fees in the amount of approximately $895,000.  GSWC believes it has sufficient insurance coverage to cover the judgment and attorney fees totaling $3.5 million entered by the Court in this lawsuit.  However, GSWC cannot predict the final outcome of the dispute and litigation between its insurers. At this time, GSWC does not believe the final outcome will materially affect GSWC's consolidated results of operations, financial position or cash flows. 
   


18

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 Stock Incentive Plans for employees and the 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 September 30,
 
 For The Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Net income
 
$
21,006

 
$
21,639

 
56,499

 
48,531

Less: (a) Distributed earnings to common shareholders
 
9,349

 
8,189

 
27,064

 
24,558

Distributed earnings to participating securities
 
50

 
48

 
139

 
141

Undistributed earnings
 
11,607

 
13,402

 
29,296

 
23,832

 
 
 
 
 
 
 
 
 
(b) Undistributed earnings allocated to common shareholders
 
11,546

 
13,323

 
29,147

 
23,696

Undistributed earnings allocated to participating securities
 
61

 
79

 
149

 
136

 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
20,895

 
$
21,512

 
$
56,211

 
$
48,254

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
36,659

 
36,561

 
36,625

 
36,546

 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.57

 
$
0.59

 
$
1.53

 
$
1.32

 
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 Stock Incentive Plans for employees and the Non-Employee Directors Stock Plans, and net income. At September 30, 2017 and 2016, there were 70,702 and 138,060 options outstanding, respectively, under these Plans. At September 30, 2017 and 2016, there were also 195,457 and 216,733 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.

19

Table of Contents

 The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted:
 
For The Three Months Ended September 30,
 
 For The Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2017
 
2016
 
2017
 
2016
Common shareholders earnings, basic
 
$
20,895

 
$
21,512

 
$
56,211

 
$
48,254

Undistributed earnings for dilutive stock-based awards
 
61

 
79

 
149

 
136

Total common shareholders earnings, diluted
 
$
20,956

 
$
21,591

 
$
56,360

 
$
48,390

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
36,659

 
36,561

 
36,625

 
36,546

Stock-based compensation (1)
 
197

 
201

 
188

 
197

Weighted average common shares outstanding, diluted
 
36,856

 
36,762

 
36,813

 
36,743

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.57

 
$
0.59

 
$
1.53

 
$
1.32

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 70,702 and 138,060 stock options at September 30, 2017 and 2016, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 195,457 and 216,733 restricted stock units at September 30, 2017 and 2016, respectively, were included in the calculation of diluted EPS for the three and nine months ended September 30, 2017 and 2016.
 
No stock options outstanding at September 30, 2017 had an exercise price greater than the average market price of AWR’s Common Shares for the three and nine months ended September 30, 2017. There were no stock options outstanding at September 30, 2017 or 2016 that were anti-dilutive.
 
During the nine months ended September 30, 2017 and 2016, AWR issued 107,815 and 67,832 common shares, for approximately $884,000 and $210,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, the 2000, 2008 and 2016 Stock Incentive Plans, and the 2003 and 2013 Non-Employee Directors Stock Plans.

During the three months ended September 30, 2017 and 2016, AWR paid quarterly dividends of approximately $9.3 million, or $0.255 per share, and $8.2 million, or $0.224 per share, respectively. During the nine months ended September 30, 2017 and 2016, AWR paid quarterly dividends to shareholders of approximately $27.1 million, or $0.739 per share, and $24.6 million, or $0.672 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 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. BVES began taking power under these long-term contracts effective January 1, 2015 over three- and five-year terms.
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 monthly 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 September 30, 2017, there was a $3.8 million unrealized loss in the memorandum account for the purchased power contracts as a result of a drop in energy prices. The notional volume of derivatives remaining under these long-term contracts as of September 30, 2017 was approximately 245,000 megawatt hours.

20

Table of Contents

The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are 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 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 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 nine months ended September 30, 2017 and 2016:
 
 
For The Three Months Ended September 30,
 
 For The Nine Months Ended 
 September 30,
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
Fair value at beginning of the period
 
$
(4,493
)
 
$
(4,933
)
 
$
(4,901
)
 
$
(7,053
)
Unrealized gain (loss) on purchased power contracts
 
656

 
(648
)
 
1,064

 
1,472

Fair value at end of the period
 
$
(3,837
)
 
$
(5,581
)
 
$
(3,837
)
 
$
(5,581
)

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 these items.

Investments held in a Rabbi Trust for the supplemental executive retirement plan ("SERP") are measured at fair value and totaled $14.8 million as of September 30, 2017. 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 September 30, 2017 and December 31, 2016 were determined using rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions. The interest rates used for the September 30, 2017 valuation decreased slightly as compared to December 31, 2016, increasing the fair value of long-term debt as of September 30, 2017. Changes in the assumptions will produce different results.
 
 
September 30, 2017
 
December 31, 2016
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC (1)
 
$
325,275

 
$
423,841

 
$
325,582

 
$
423,124

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

Note 6 — Income Taxes
AWR's consolidated effective income tax rate (“ETR”) was 37.3% and 37.0% for the three months ended September 30, 2017 and 2016, respectively, and was 37.3% and 37.1% for the nine months ended September 30, 2017 and 2016, respectively. AWR’s ETR increased slightly during the three and nine months ended September 30, 2017 primarily due to the increase in GSWC's ETR. GSWC's ETR was 38.4% and 38.2% for the three months ended September 30, 2017 and 2016, respectively, and was 38.6% and 38.3% for the nine months ended September 30, 2017 and 2016, respectively. GSWC's ETR increased and also deviated from the statutory rate 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).

21

Table of Contents

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 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.
Change in Accounting Guidance:
Effective January 1, 2017, Registrant adopted the new accounting standard addressing share-based payments (see Note 1). Under the new guidance, the tax effects related to share-based payments are required to be recorded through the income statement. Previously, tax benefits in excess of compensation cost ("windfalls") were recorded directly to equity and tax deficiencies ("shortfalls") were recorded to equity to the extent of any pool of windfall tax benefits from prior awards, with the remainder recognized in income tax expense. AWR and GSWC adopted the guidance effective January 1, 2017 and, therefore, all excess tax benefits resulting from share-based payments during the three and nine months ended September 30, 2017 were reflected in the income statements. For the three months ended September 30, 2017, this change reduced income tax expense by approximately $279,000 and $288,000 for AWR and GSWC, respectively. For the nine months ended September 30, 2017, the reduction to income tax expense was approximately $1,019,000 and $989,000 for AWR and GSWC, respectively.



22

Table of Contents

Note 7 — Employee Benefit Plans
     The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan and SERP for the three and nine months ended September 30, 2017 and 2016 are as follows:
 
 
For The Three Months Ended September 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,250

 
$
1,274

 
$
53

 
$
68

 
$
232

 
$
200

Interest cost
 
1,976

 
1,978

 
73

 
97

 
223

 
186

Expected return on plan assets
 
(2,428
)
 
(2,457
)
 
(107
)
 
(122
)
 

 

Amortization of prior service cost (benefit)
 

 
12

 

 
(9
)
 
3

 
6

Amortization of actuarial (gain) loss
 
231

 
228

 
(242
)
 
(150
)
 
194

 
73

Net periodic pension cost under accounting standards
 
1,029

 
1,035

 
(223
)
 
(116
)
 
652

 
465

Regulatory adjustment — deferred
 
266

 
221

 

 

 

 

Total expense recognized, before surcharges and allocation to overhead pool
 
$
1,295

 
$
1,256

 
$
(223
)
 
$
(116
)
 
$
652

 
$
465


 
 
 For The Nine Months Ended September 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
3,750

 
$
3,822

 
$
171

 
$
204

 
$
696

 
$
600

Interest cost
 
5,928

 
5,934

 
243

 
291

 
669

 
558

Expected return on plan assets
 
(7,278
)
 
(7,377
)
 
(351
)
 
(366
)
 

 

Amortization of prior service cost (benefit)
 

 
36

 

 
(27
)
 
9

 
18

Amortization of actuarial (gain) loss
 
693

 
684

 
(582
)
 
(450
)
 
582

 
219

Net periodic pension cost under accounting standards
 
3,093

 
3,099

 
(519
)
 
(348
)
 
1,956

 
1,395

Regulatory adjustment — deferred
 
791

 
644

 

 

 

 

Total expense recognized, before surcharges and allocation to overhead pool
 
$
3,884

 
$
3,743

 
$
(519
)
 
$
(348
)
 
$
1,956

 
$
1,395

Registrant contributed $6.5 million to its pension plan during the nine months ended September 30, 2017.
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 September 30, 2017, GSWC had a total of $1.1 million over-collection in the two-way pension balancing accounts included as part of the pension regulatory asset (Note 2).

Note 8 — Contingencies and Gain on Sale of Assets

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 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.

23

Table of Contents

Claremont System:
In December 2014, the City of Claremont, California (“Claremont”) filed an eminent-domain action against GSWC to condemn GSWC's Claremont water system.  In December 2016, the County of Los Angeles Superior Court (the “Court”) issued a decision rejecting Claremont’s attempt to take over GSWC’s Claremont water system. In February 2017, the Court further ordered that GSWC was entitled to recover $7.6 million (“Judgment Amount”) of its litigation expenses and related defense costs from Claremont. During the first quarter of 2017, Claremont appealed both decisions. 
In October 2017, GSWC and Claremont entered into a settlement agreement whereby Claremont agreed to drop its appeals and to pay $2.0 million on or before December 31, 2017 to GSWC as partial satisfaction of the Judgment Amount plus interest accrued through the end of 2017. Upon receipt of the $2.0 million, which is expected during the fourth quarter of 2017 pursuant to the settlement agreement, GSWC will reflect this $2.0 million payment as a reduction to operating expenses. Furthermore, quarterly interest-only payments calculated on the unpaid Judgment Amount of $5.9 million are to be made by Claremont to GSWC over the next 12 years. If Claremont (i) makes its initial payment of $2.0 million and all of the quarterly payments as required, and (ii) does not take formal action to condemn GSWC's Claremont water system before December 31, 2029, GSWC will waive payment of the unpaid Judgment Amount. However, if Claremont were to take formal action within the next 12 years or miss any of the required payments specified in the settlement agreement, the unpaid Judgment Amount and any unpaid accrued interest would immediately become due and payable. At this time, GSWC is unable to predict the actions that Claremont will take over the next 12 years. GSWC serves approximately 11,000 customers in Claremont.

Ojai Water System and Gain on Sale of Assets:
On April 12, 2017, the Board of Directors of Casitas Municipal Water District (“Casitas”) approved a settlement agreement with GSWC, and a group of citizens referred to as Ojai Friends of Locally Owned Water (“Ojai FLOW”), to resolve the eminent domain action and other litigation brought by Casitas and Ojai FLOW against GSWC. In accordance with the terms of the settlement agreement, on June 8, 2017 Casitas acquired the operating assets of GSWC’s 2,900-connection Ojai water system by eminent domain for $34.3 million in cash, including payments for customer receivables and regulatory assets, and Casitas and Ojai FLOW dismissed all claims against GSWC. As a result of this transaction, GSWC recorded a pretax gain of $8.3 million on the sale of the Ojai water system during the second quarter of 2017. The proceeds received from this transaction were used to repay a portion of GSWC’s short-term borrowings. On June 8, 2017, the closing date of the transaction, the assets and liabilities related to the Ojai water system acquired and assumed by Casitas were as follows:
Assets and Liabilities Sold:
 
 
(dollars in thousands)
 
As of June 8, 2017
 
 
 
Net utility plant, including construction work in progress
 
$
22,256

Accounts receivable
 
721

Regulatory assets
 
3,944

Assets sold
 
$
26,921

 
 
 
Advances for construction
 
$
(366
)
Contributions in aid of construction — net
 
(532