Document
-
 
 
 
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
(Mark One)
x       Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 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
 
Registrant, State of Incorporation
Address, Zip Code and Telephone Number
 
IRS Employer
Identification No.
001-14431
 
American States Water Company
(Incorporated in California)
630 E. Foothill Boulevard, San Dimas, CA 91773-1212
(909) 394-3600
 
95-4676679
 
 
 
 
 
001-12008
 
Golden State Water Company
(Incorporated in California)
630 E. Foothill Boulevard, San Dimas, CA 91773-1212
(909) 394-3600
 
95-1243678
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
American States Water Company Common Shares
 
New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:   None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
American States Water Company
 
Yes x No ¨
 
 
Golden State Water Company
 
Yes ¨No x
 
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
American States Water Company
 
Yes ¨ No x
 
 
Golden State Water Company
 
Yes ¨ No x
 
 
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).
 
American States Water Company
 
Yes x No ¨
 
 
Golden State Water Company
 
Yes x No ¨
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   ¨




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 ¨
 
Emerging growth company ¨
Golden State Water Company
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨
 
Emerging growth 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 ¨ No x
 
 
Golden State Water Company
 
Yes ¨ No x
 
 
The aggregate market value of all voting Common Shares held by non-affiliates of American States Water Company was approximately $1,737,328,000 and $1,963,913,000 on June 30, 2017 and February 22, 2018, respectively. The closing price per Common Share of American States Water Company on February 22, 2018, as traded on the New York Stock Exchange, was $53.49.  As of February 22, 2018, the number of Common Shares of American States Water Company outstanding was 36,715,525. As of that same date, American States Water Company owned all 146 outstanding Common Shares of Golden State Water Company. The aggregate market value of all voting stock held by non-affiliates of Golden State Water Company was zero on June 30, 2017 and February 22, 2018.
Golden State Water Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.
 Documents Incorporated by Reference:
Portions of the Proxy Statement of American States Water Company will be subsequently filed with the Securities and Exchange Commission as to Part III, Item Nos. 10, 11, 13 and 14 and portions of Item 12, in each case as specifically referenced herein.
 
 
 
 
 



Table of Contents
AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
 
FORM 10-K
 
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 16.
 
Form 10-K Summary
 
 
 
 
 
 

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PART I 

Item 1. Business
 
This annual report on Form 10-K is a combined report being filed by two separate Registrants, American States Water Company (“AWR”) and Golden State Water Company (“GSWC”). References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than GSWC.
 
AWR makes its periodic reports, Form 10-Q and Form 10-K, and current reports, Form 8-K, available free of charge through its website, www.aswater.com, as soon as material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Such reports are also available on the SEC’s website at www.sec.gov. AWR also makes available free of charge its code of business conduct and ethics, its corporate governance guidelines and the charters of its Nominating and Governance Committee, Compensation Committee, and Audit and Finance Committee through its website or by calling (877) 463-6297. AWR and GSWC have filed the certification of officers required by Section 302 of the Sarbanes-Oxley Act as Exhibits 31.1 and 31.2 to its Form 10-K for the year ended December 31, 2017.
 
Overview
 
AWR is the parent company of GSWC and American States Utility Services, Inc. (“ASUS”) (and its wholly owned 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”), Emerald Coast Utility Services, Inc. (“ECUS”) and Fort Riley Utility Services, Inc. (FRUS)). AWR was incorporated as a California corporation in 1998 as a holding company.  AWR has three reportable segments: water, electric and contracted services. Within the segments, AWR has two principal business units, water and electric service utility operations, conducted through GSWC, and contracted services conducted through ASUS and its subsidiaries. FBWS, TUS, ODUS, PSUS, ONUS, ECUS and FRUS may be referred to herein collectively as the “Military Utility Privatization Subsidiaries.”
 
GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in 10 counties in the State of California.  GSWC is regulated by the California Public Utilities Commission (“CPUC”).  It was incorporated as a California corporation on December 31, 1929. GSWC also distributes electricity in several San Bernardino County mountain communities in California through its Bear Valley Electric Service (“BVES”) division.
 
GSWC served 258,949 water customers and 24,274 electric customers at December 31, 2017, or a total of 283,223 customers, compared with 261,002 water customers and 23,940 electric customers at December 31, 2016, or a total of 284,942 customers. GSWC’s operations exhibit seasonal trends. Although GSWC’s water utility operations have a diversified customer base, residential and commercial customers account for the majority of GSWC’s water sales and revenues. Revenues derived from commercial and residential water customers accounted for approximately 90% of total water revenues for the years ended December 31, 2017, 2016 and 2015.
 
ASUS, itself or through the Military Utility Privatization Subsidiaries, has contracted with the U.S. government to provide water and/or wastewater services at various military installations. ASUS operates, maintains and performs construction activities (including renewal and replacement capital work) on water and/or wastewater systems at various U.S. military bases pursuant to 50-year firm, fixed-price contracts.  Each of the contracts with the U.S. government is subject to termination, in whole or in part, prior to the end of its 50-year term for convenience of the U.S. government or as a result of default or nonperformance by the subsidiary performing the contract. The contract price for each of these contracts is subject to annual economic price adjustments. Contracts are also subject to 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.  AWR guarantees performance of ASUS’s military privatization contracts.


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Pursuant to the terms of these contracts, the Military Utility Privatization Subsidiaries operate the following water and wastewater systems:
 
Subsidiary
 
Military Base
 
Type of System
 
Location
FBWS
 
Fort Bliss
 
Water and Wastewater
 
Near El Paso, Texas and extending into southeastern New Mexico
TUS
 
Joint Base Andrews
 
Water and Wastewater
 
Maryland
ODUS
 
Fort Lee
 
Wastewater
 
Virginia
ODUS
 
Joint-Base Langley Eustis and Joint Expeditionary Base Little Creek-Fort Story
 
Water and Wastewater
 
Virginia
PSUS
 
Fort Jackson
 
Water and Wastewater
 
South Carolina
ONUS
 
Fort Bragg, Pope Army Airfield and Camp Mackall
 
Water and Wastewater
 
North Carolina
ECUS
 
Eglin Air Force Base
 
Water and Wastewater
 
Florida
FRUS
 
Fort Riley*
 
Water and Wastewater
 
Kansas

*ASUS is expected to begin operations at Fort Riley in 2018 pursuant to a contract awarded in September 2017.

Certain financial information for each of AWR’s business segments - water distribution, electric distribution, and contracted services - is set forth in Note 15 to the Notes to Consolidated Financial Statements of American States Water Company and its subsidiaries. AWR’s water and electric utility segments are not dependent upon a single or only a few customers.  The U.S. government is the primary customer for ASUS’s contracted services.  ASUS, from time to time, performs work at military bases for other prime contractors of the U.S. government.
 
A large portion of the revenue from AWR’s segments is seasonal. The impact of seasonality on these AWR businesses is discussed in more detail in Item 1A. “Risk Factors.”
 
Environmental matters and compliance with such laws and regulations are discussed in detail in Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the section titled “Environmental Matters.”
 
Competition
 
The businesses of GSWC are substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies within their existing service territories.  However, GSWC may be subject to eminent domain proceedings in which governmental agencies, under state law, may acquire GSWC’s water systems if doing so is necessary and in the public’s interest. GSWC competes with governmental agencies and other investor-owned utilities in connection with offering service to new real estate developments on the basis of financial terms, availability of water and ability to commence providing service on a timely basis. ASUS actively competes for business with other investor-owned utilities, other third-party providers of water and/or wastewater services and governmental entities primarily on the basis of quality of service and price.
 
AWR Workforce
 
AWR and its subsidiaries had a total of 758 employees as of January 31, 2018.  GSWC had 549 employees as of January 31, 2018.  Fifteen employees of BVES are covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers, which expires in December 2020.  
 
ASUS had 209 employees as of January 31, 2018.  Fifteen of FBWS's employees are covered by a collective bargaining agreement with the International Union of Operating Engineers. This agreement expires in September 2020.


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Forward-Looking Information
 
This Form 10-K 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 CPUC;
 
timeliness of CPUC action on GSWC rates;

availability of GSWC's water supplies, which may be adversely affected by drought, changes in weather patterns, 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;

wildfires in our electric division's service territory, as well as court decisions and regulatory actions that may affect our ability to recover the costs associated with such events or the defense or payment of resulting claims;

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;

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 taken, or recovery of all charges associated with the condemnation of such assets, and the impact on future revenues if we are no longer entitled to any portion of the revenues generated from such assets;

liabilities of GSWC associated with the inherent risks of damage to private property and injuries to employees and the public if our or their property should come into contact with electrical current or equipment, including through downed power lines or equipment malfunctions 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, settlement of liabilities and revenues subject to refund or regulatory disallowances and the timing of such recovery, and the amounts set aside for uncollectible accounts receivable,

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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 recycled water 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 water supplies 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 any 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, liabilities to customers or other third parties or
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 in an amount sufficient to offset reduced demand;

changes in accounting treatment for regulated utilities;

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

changes in estimates used in ASUS’s cost-to-cost method for revenue recognition of 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;


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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, that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely or that damage the property of our customers or other third parties or cause bodily injury resulting in liabilities that we may be unable to recover from insurance or other third parties or that the CPUC or the courts do not permit us to recover from ratepayers;
 
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 as you read this Form 10-K.  We qualify all of our forward-looking statements by these cautionary statements.


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Item 1A. Risk Factors
 
You should carefully read the risks described below and other information in this Form 10-K in order to understand certain of the risks of our business.
 
Our business is heavily regulated and, as a result, decisions by regulatory agencies and changes in laws and regulations can significantly affect our business
 GSWC's revenues depend substantially on the rates and fees it charges its customers and the ability to recover its costs on a timely basis, including the ability to recover the costs of purchased water, groundwater assessments, electricity, natural gas, chemicals, water treatment, security at water facilities and preventative maintenance and emergency repairs. Any delays by the CPUC in granting rate relief to cover increased operating and capital costs at our public utilities or delays in obtaining approval of our requests at ASUS for economic price or equitable adjustments for contracted services from the U.S. government may adversely affect our financial performance. We may file for interim rates in California in situations where there may be delays in granting final rate relief during a general rate case proceeding. If the CPUC approves lower rates, the CPUC will require us to refund to customers the difference between the interim rates and the rates approved by the CPUC. Similarly, if the CPUC approves rates that are higher than the interim rates, the CPUC may authorize us to recover the difference between the interim rates and the final rates. 
 
Regulatory decisions affecting GSWC may also impact prospective revenues and earnings, affect the timing of the recognition of revenues and expenses, may overturn past decisions used in determining our revenues and expenses and could result in impairment charges and customer refunds. Management continually evaluates the anticipated recovery of regulatory assets, settlement of liabilities and revenues subject to refund and provides for allowances and reserves as deemed necessary. In the event that our assessment of the probability of recovery or settlement through the ratemaking process is incorrect, we will adjust the associated regulatory asset or liability to reflect the change in our assessment or any regulatory disallowances.  A change in our evaluation of the probability of recovery of regulatory assets or a regulatory disallowance of all or a portion of our costs could have a material adverse effect on our financial results.
 
We are also, in some cases, required to estimate future expenses and, in others, we are required to incur the expense before recovering costs. As a result, our revenues and earnings may fluctuate depending on the accuracy of our estimates, the timing of our investments or expenses or other factors. If expenses increase significantly over a short period of time, we may experience delays in recovery of these expenses, the inability to recover carrying costs for these expenses and increased risks of regulatory disallowances or write-offs.
 
Regulatory agencies may also change their rules and policies which may adversely affect our profitability and cash flows. Changes in policies of the U.S. government may also adversely affect one or more of our Military Utility Privatization Subsidiaries. In certain circumstances, the U.S. government may be unwilling or unable to appropriate funds to pay costs mandated by changes in rules and policies of federal or state regulatory agencies. The U.S. government may disagree with the increases that we request and may delay approval of requests for equitable adjustment or economic price adjustments which could adversely affect our anticipated rates of return.
 
We may also be subject to fines or penalties if a regulatory agency, including the U.S. government, determines that we have failed to comply with laws, regulations or orders applicable to our businesses, unless we successfully appeal such an adverse determination. Regulatory agencies may also disallow certain costs if audit findings determine that we have failed to comply with our policies and procedures for procurement or other practices.
 
Our costs involved in maintaining water quality and complying with environmental regulation have increased and are expected to continue to increase
 Our capital and operating costs at GSWC can increase substantially as a result of increases in environmental regulation arising from increases in the cost of upgrading and building new water treatment plants, disposing of residuals from our water treatment plants, compliance-monitoring activities and securing alternative supplies when necessary.  GSWC may be able to recover these costs through the ratemaking process. We may also be able to recover these costs under settlement and contractual arrangements.

    

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We may be subject to financial losses, penalties and other liabilities if we fail to maintain safe work sites, equipment or facilities
Our safety record is critical to our reputation. We maintain health and safety standards to protect our employees, customers, vendors and the public. Although we are vigilant in adhering to such health and safety standards, it is unlikely that we will be able to avoid accidents or other events resulting in damage to property or the public at all times.
Our business sites, including construction and maintenance sites, often put our employees and others in close proximity with large pieces of equipment, moving vehicles, pressurized water, chemicals and other regulated materials. On many sites we are responsible for safety and, accordingly, must implement safety procedures. If we fail to implement such procedures or if the procedures we implement are ineffective or are not followed by our employees or others, our employees and others may be injured or die. Unsafe work sites also have the potential to increase our operating costs. Any of the foregoing could result in financial losses, which could have a material adverse impact on our business, financial condition, and results of operations.

Our operations may involve the handling and storage of hazardous chemicals which, if improperly handled, stored or disposed of, could subject us to penalties or other liabilities. We are also subject to regulations dealing with occupational health and safety. Although we maintain functional employee groups whose primary purpose is to ensure that we implement effective health, safety, and environmental work procedures throughout our organization, including construction sites and maintenance sites, a failure to comply with such regulations could subject us to liability.

Electrical facilities also have an inherent risk of damage to persons or property should such persons or property come into contact with such facilities which could, depending upon the circumstances, subject us to penalties and damages.

We may sustain losses that exceed or are excluded from our insurance coverage or for which we are not insured
We are, from time to time, parties to legal or regulatory proceedings.  These proceedings may pertain to regulatory investigations, employment matters or other disputes.  Management periodically reviews its assessment of the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, and the availability and extent of insurance coverage.  On the basis of this review, management establishes reserves for such matters.  We may, however, from time to time be required to pay fines, penalties or damages that exceed our insurance coverage and/or reserves if our estimate of the probable outcome of such proceedings proves to be inaccurate.
 
We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities.  However, our insurance policies contain exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance policies cover property, workers' compensation, employer liability, general liability and automobile liability. Each policy includes deductibles or self-insured retentions and policy limits for covered claims.  As a result, we may sustain losses that exceed or that are excluded from our insurance coverage or for which we are not insured.

We have experienced increased costs and difficulties in obtaining insurance coverage for wildfires that could impact or potentially arise from BVES’s ordinary operations. Uninsured losses and increases in the cost of insurance may not be recoverable in customer rates. A loss which is not insured or not fully insured or cannot be recovered in customer rates could materially affect GSWC’s financial condition and results of operations.

Additional Risks Associated with our Public Utility Operations
 
Our operating costs may increase as a result of groundwater contamination
 Our operations can be impacted by groundwater contamination in certain service territories.  Historically, we have taken a number of steps to address contamination, including the removal of wells from service, decreasing the amount of groundwater pumped from wells in order to facilitate remediation of plumes of contaminated water, constructing water treatment facilities and securing alternative sources of supply from other areas not affected by the contamination.  In emergency situations, we have supplied our customers with bottled water until the emergency situation has been resolved.
 
Our ability to recover these types of costs depends upon a variety of factors, including approval of rate increases, the willingness of potentially responsible parties to settle litigation and otherwise address the contamination and the extent and magnitude of the contamination. We may recover costs from certain third parties that may be responsible, or potentially responsible, for groundwater contamination. However, we often experience delays in obtaining recovery of these costs and incur additional costs associated with seeking recovery from responsible or potentially responsible parties which may adversely impact our liquidity. In some events we may be unable to recover all of these costs from third parties due to the inability to

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identify the potentially responsible parties, the lack of financial resources of responsible parties or the high litigation costs associated with obtaining recovery from responsible or potentially responsible parties.

We can give no assurance regarding the adequacy of any such recovery to offset the costs associated with contamination or the cost of recovery of any legal costs. To date, the CPUC has permitted us to establish memorandum accounts for potential recovery of these types of costs when they arise.
 
Management believes that rate recovery, proper insurance coverage and reserves are in place to appropriately manage these types of contamination issues.  However, such issues, if ultimately resolved unfavorably to us, could, in the aggregate, have a material adverse effect on our results of operations and financial condition.
 
The adequacy of our water supplies depends upon weather and a variety of other uncontrollable factors
The adequacy of our water supplies varies from year to year depending upon a variety of factors, including:
rainfall, basin replenishment, flood control, snow pack levels in California and the West, reservoir levels and availability of reservoir storage;
availability of Colorado River water and imported water from the State Water Project;
the amount of usable water stored in reservoirs and groundwater basins;
the amount of water used by our customers and others;
water quality;
legal limitations on production, diversion, storage, conveyance and use; and
climate change.
 
More frequent and extended California drought conditions and changes in weather patterns and population growth in California cause increased stress on surface water supplies and groundwater basins. In addition, low or no allocations of water from the State Water Project and court-ordered pumping restrictions on water obtained from the Sacramento-San Joaquin Delta decrease or eliminate the amount of water that the Metropolitan Water District of Southern California ("MWD") and other state water contractors are able to import from northern California.

We have implemented tiered rates and other practices, as appropriate, in order to encourage water conservation. We have also implemented programs to assist customers in complying with water usage reductions. Over the long term, we are acting to secure additional supplies from desalination and increase use of reclaimed water, where appropriate and feasible. We cannot predict the extent to which these efforts to reduce stress on our water supplies will be successful or sustainable, or the extent to which these efforts will enable us to continue to satisfy all of the water needs of our customers.
Water shortages at GSWC may:
adversely affect our supply mix, for instance, by causing increased reliance upon more expensive water sources;
adversely affect our operating costs, for instance, by increasing the cost of producing water from more highly contaminated aquifers or requiring us to transport water over longer distances, truck water to water systems or adopt other emergency measures to enable us to continue to provide water service to our customers;
result in an increase in our capital expenditures over the long term, for example, by requiring future construction of pipelines to connect to alternative sources of supply, new wells to replace those that are no longer in service or are otherwise inadequate to meet the needs of our customers, and other facilities to conserve or reclaim water;
adversely affect the volume of water sold as a result of such factors as mandatory or voluntary conservation efforts by customers, changes in customer conservation patterns, recycling of water by customers and imposition of new regulations impacting such things as landscaping and irrigation patterns;
adversely affect aesthetic water quality if we are unable to flush our water systems as frequently due to water shortages or drought restrictions; and
result in customer dissatisfaction and harm to our reputation if water service is reduced, interrupted or otherwise adversely affected as a result of drought, water contamination or other causes.


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Our liquidity may be adversely affected by changes in water supply costs
We obtain our water supplies for GSWC from a variety of sources, which vary among our water systems. Certain systems obtain all of their supply from water that is pumped from aquifers within our service areas; some systems purchase all of the supply from wholesale suppliers; some systems obtain the supply from treating surface water sources; and other systems obtain the supply from a combination of wells, surface water sources and/or wholesale suppliers. The cost of obtaining these supplies varies, and overall costs can be impacted as use within a system varies from time to time. As a result, our cost of providing, distributing and treating water for our customers’ use can vary significantly.

Furthermore, imported water wholesalers, such as MWD, may not always have an adequate supply of water to sell to us. Wholesale water suppliers may increase their prices for water delivered to us based on factors that affect their operating costs. Purchased water rate increases are beyond our control.

GSWC has implemented a modified supply cost balancing account ("MCBA") to track and recover costs from supply mix changes and rate changes by wholesale suppliers, as authorized by the CPUC. However, cash flows from operations can be significantly affected since much of the balance we recognize in the MCBA is collected from or refunded to customers primarily through surcharges or surcredits, respectively, generally over twelve- to eighteen-month periods.

Our liquidity and earnings may be adversely affected by maintenance costs
Some of our infrastructure in California is aging.  We have experienced leaks and mechanical problems in some of these older systems.  In addition, well and pump maintenance expenses are affected by labor and material costs and more stringent environmental regulations. These costs can increase substantially and unexpectedly.
 
We include estimated increases in maintenance costs for future years in each general rate case filed by GSWC for possible recovery.
Our liquidity and earnings may be adversely affected by our conservation efforts
Our water utility business is heavily dependent upon revenue generated from rates charged to our customers based on the volume of water used. The rates we charge for water are regulated by the CPUC and may not be adequately adjusted to reflect changes in demand. Declining usage also negatively impacts our long-term operating revenues if we are unable to secure rate increases or if growth in the customer base does not occur to the extent necessary to offset per-customer usage decline. 

Conservation by all customer classes at GSWC is a top priority.  However, customer conservation will result in lower volumes of water sold.  We may experience a decline in per-customer water usage due to factors such as:
conservation efforts to reduce costs;
drought conditions resulting in additional water conservation;
the use of more efficient household fixtures and appliances by consumers to save water;
voluntary or mandatory changes in landscaping and irrigation patterns;
recycling of water by our customers; and
regulation of groundwater rights.

These types of changes may result in permanent decreases in demand even if our water supplies are sufficient to meet higher levels of demand after a drought ends.  In addition, governmental restrictions on water usage during drought conditions may result in a decreased demand for water, even if our sources of supply are sufficient to serve our customers during such drought conditions.

We implemented a CPUC-approved water-revenue adjustment mechanism ("WRAM") at GSWC, which has the effect of reducing the adverse impact of our customers’ conservation efforts on revenues.  However, cash flows from operations can be significantly affected since much of the balance we recognize in the WRAM account is collected from or refunded to customers generally over twelve-, eighteen- or thirty-six-month periods.

Our earnings may be affected by weather during different seasons
The demand for water and electricity varies by season.  For instance, there can be a higher level of water consumption during the third quarter of each year when weather in California tends to be hot and dry.  During unusually wet weather, our customers generally use less water.  The CPUC-approved WRAM helps mitigate fluctuations in revenues due to changes in water consumption by our customers in California.

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The demand for electricity in our electric customer service area is greatly affected by winter snow levels. An increase in winter snow levels reduces the use of snowmaking machines at ski resorts in the Big Bear area and, as a result, reduces our electric revenues.  Likewise, unseasonably warm weather during a skiing season may result in temperatures too high for snowmaking conditions, which also reduces our electric revenues.  GSWC has implemented a CPUC-approved base-revenue-requirement adjustment mechanism for our electric business which helps mitigate fluctuations in the revenues of our electric business due to changes in the amount of electricity used by GSWC’s electric customers.
Our liquidity and earnings may be adversely affected by wildfires
It is possible that wildfires in our electric service territory may occur more frequently, be of longer duration or impact larger areas as a result of drought damaged plants and trees, lower humidity or higher winds that might be occurring as result of changed weather patterns. Our liquidity, earnings and operations may be materially adversely affected by wildfires in our electric service territory. We may be required to (i) incur greater costs to relocate lines or increase our trimming of trees and other plants near our electric facilities, and (ii) bear the costs of damages to property or injuries to the public if it is determined that our power lines or other electrical equipment was a cause, in whole or in part, of such damages or injuries.

Losses by insurance companies resulting from wildfires in California may cause insurance coverage for wildfire risks to become more expensive or unavailable, under reasonable terms, and our insurance may, in any event, be inadequate to recover all our losses incurred in a wildfire. We might not be allowed to recover in our rates any increased costs of wildfire insurance, or the costs of any uninsured wildfire losses.

Our liquidity may be adversely affected by increases in electricity and natural gas prices in California
We purchase most of the electric energy sold to customers in our electric customer service area from others under purchased power contracts.  In addition to purchased power contracts, we purchase additional energy from the spot market to meet peak demand and following the expiration of purchased power contracts if there are delays in obtaining CPUC authorization of new purchase power contracts.  We may sell surplus power to the spot market during times of reduced energy demand.  As a result, our cash flows may be affected by increases in spot market prices of electricity purchased and decreases in spot market prices for electricity sold.  However, GSWC has implemented supply-cost balancing accounts, as approved by the CPUC, to mitigate fluctuations in supply costs.  We also operate a natural-gas-fueled 8.4 megawatt generator in our electric service area.
 
Unexpected generator downtime or a failure to perform by any of the counterparties to our electric and natural gas purchase contracts could further increase our exposure to fluctuating natural gas and electricity prices.
 
Changes in electricity prices also affect the unrealized gains and losses on our block forward purchased power contracts that qualify as derivative instruments since we adjust the asset or liability on these contracts to reflect the fair market value of the contracts at the end of each month.  The CPUC has authorized us to establish a memorandum account to track the changes in the fair market value of our purchased power contracts.  As a result, unrealized gains and losses on these types of purchased power contracts do not impact earnings.
 
We may not be able to procure sufficient renewable energy resources to comply with CPUC rules
We are required to procure a portion of our electricity for BVES from renewable energy resources to meet the CPUC’s renewable procurement requirements.  We have an agreement with a third party to purchase renewable energy credits which we believe enables us to meet these requirements through 2023.  In the event that the third party fails to perform in accordance with the terms of the agreement, we may not be able to obtain sufficient resources to meet the renewable procurement requirements. We may be subject to fines and penalties by the CPUC if it determines that we are not in compliance with the renewable resource procurement rules.
 
Our assets are subject to condemnation
Municipalities and other governmental subdivisions may, in certain circumstances, seek to acquire certain of our assets through eminent domain proceedings.  It is generally our practice to contest these proceedings, which may be costly and may temporarily divert the attention of management from the operation of our business.  If a municipality or other governmental subdivision succeeds in acquiring our assets, there is a risk that we will not receive adequate compensation for the assets taken or be able to recover all charges associated with the condemnation of such assets. In addition, we would no longer be entitled to any portion of revenue generated from the use of such assets.
 

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Our costs of obtaining and complying with the terms of franchise agreements are increasing
Cities and counties in which GSWC operates have granted GSWC franchises to construct, maintain and use pipes and appurtenances in public streets and rights of way.  The costs of obtaining, renewing and complying with the terms of these franchise agreements have been increasing as cities and counties attempt to regulate GSWC’s operations within the boundaries of the city or unincorporated areas of the counties in which GSWC operates.  Cities and counties have also been attempting to impose new fees on GSWC’s operations, including pipeline abandonment fees and road-cut or other types of capital improvement fees.  At the same time, there is increasing opposition from consumer groups to rate increases that may be necessary to compensate GSWC for the increased costs of regulation by local governments. These trends may adversely affect GSWC’s ability to recover its costs of providing water service in rates and to efficiently manage capital expenditures and operating and maintenance expenses within CPUC authorized levels.

The generation, transmission and distribution of electricity are dangerous and involve inherent risks of damage to private property and injury to employees and the general public
Electricity is dangerous for employees and the general public should they come in contact with electrical current or equipment, including through downed power lines, sparking during high wind events or equipment malfunctions. Injuries and property damage caused by such events may subject GSWC to significant liabilities that may not be covered or fully covered by insurance. Additionally, the CPUC has delegated to its staff the authority to issue citations, which carry a fine of $50,000 per-violation per day, to electric utilities subject to its jurisdiction for violations of safety rules found in statutes, regulations, and the General Orders of the CPUC which could also materially affect GSWC's liquidity and results of operations.
    
Additional Risks Associated with our Contracted Services Operations
 
We derive revenues from contract operations primarily from the operation and maintenance of water and/or wastewater systems at military bases and the construction of water and wastewater infrastructure on these bases (including renewal and replacement of these systems). As a result, these operations are subject to risks that are different from those of our public utility operations.
 
Our 50-year contracts for servicing military bases create certain risks that are different from our public utility operations
 We have entered into contracts to provide water and/or wastewater services at military bases pursuant to 50-year contracts, subject to termination, in whole or in part, for the convenience of the U.S. government.  In addition, the U.S. government may stop work under the terms of one or more of the contracts, delay performance of our obligations under the contracts or modify the contracts at its convenience.
 
Our contract pricing is based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials. We may be unable to recover all costs if any of these assumptions are inaccurate or if all costs incurred in connection with performing the work were not considered. Our contracts are also subject to annual economic price adjustments or other changes permitted by the terms of the contracts. Prices are also subject to equitable adjustment based upon changes in circumstances, laws or regulations and service-requirement changes to the extent provided in each of the contracts.

We are required to record all costs under these types of contracts as they are incurred. As a result, we may record losses associated with unanticipated conditions, higher than anticipated infrastructure levels and emergency work at the time such expenses occur.  We recognize additional revenue for such work as, and to the extent that, our economic price adjustments and/or requests for equitable adjustments are approved.  Delays in obtaining approval of economic price adjustments and/or equitable adjustments can negatively impact our results of operations and cash flows.

 Certain payments under these contracts are subject to appropriations by Congress. We may experience delays in receiving payment or delays in price adjustments due to canceled or delayed appropriations specific to our projects or reductions in government spending for the military generally or military-base operations specifically. Appropriations and the timing of payment may be influenced by, among other things, the state of the economy, competing political priorities, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures.

Management also reviews goodwill for impairment at least annually.  ASUS has $1.1 million of goodwill which may be at risk for potential impairment if requested economic price adjustments and/or equitable adjustments are not granted.
  

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Risks associated with wastewater systems are different from those of our water distribution operations
The wastewater-collection-system operations of our subsidiaries providing wastewater services on military bases are subject to substantial regulation and involve significant environmental risks. If collection, treatment or disposal systems fail, overflow or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and economic damages. The cost of addressing such damages may not be recoverable. This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflows and system failures.  Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. In the event that we are deemed liable for any damage caused by overflows, our losses may not be recoverable under our contracts with the U.S. government or covered by insurance policies. We may also find it difficult to secure insurance for this business in the future at acceptable rates.

We may have responsibility for water quality at the military bases we serve
While it is the responsibility of the U.S. government to provide the source of water supply to meet the Military Utility Privatization Subsidiaries’ water distribution system requirements under their contracts, the Military Utility Privatization Subsidiaries, as the water system permit holders for most of the bases they serve, are responsible for ensuring the continued compliance of the provided source of supply with all federal, state and local regulations. We believe, however, that the terms of the contracts between the Military Utility Privatization Subsidiaries and the U.S. government provide the opportunity for us to recover costs incurred in the treatment or remediation of any quality issue that arises from the source of water supply.
Our contracts for the construction of infrastructure improvements on military bases create risks that are different from those of our operations and maintenance activities
We have entered into contract modifications with the U.S. government and agreements with third parties for the construction of new water and/or wastewater infrastructure at the military bases on which we operate. Most of these contracts are firm fixed-price contracts. Under firm fixed-price contracts, we will benefit from cost savings, but are generally unable (except for changes in scope or circumstances approved by the U.S. government or third party) to recover any cost overruns to the approved contract price. Under most circumstances, the U.S. government or third party has approved increased-cost change orders due to changes in scope of work performed.
 
We generally recognize contract revenues from these types of contracts over time using input methods to measure progress towards satisfying a performance obligation. The measurement of performance over time is based on cost incurred relative to total estimated costs, or the physical completion of the construction projects. The earnings or losses recognized on individual contracts are based on periodic estimates of contract revenues, costs and profitability as these construction projects progress.
 
We establish prices for these types of firm fixed-price contracts and the overall 50-year contracts taken as a whole, based, in part, on cost estimates that are subject to a number of assumptions, including assumptions regarding future economic conditions. If these estimates prove inaccurate or circumstances change, cost overruns could have a material adverse effect on our contracted business operations and results of operations.
 
We may be adversely affected by disputes with the U.S. government regarding our performance of contracted services on military bases
 We are periodically audited or reviewed by the Defense Contract Auditing Agency (“DCAA”) and/or the Defense Contract Management Agency ("DCMA") for compliance with federal acquisition regulations, cost-accounting standards and other laws, regulations and standards that are not applicable to the operations of GSWC. During the course of these audits/reviews, the DCAA or DCMA may question our incurred project costs or the manner in which we have accounted for such costs and recommend to our U.S. government administrative contracting officer that such costs be disallowed.

If there is a dispute with the U.S. government regarding performance under these contracts or the amounts owed to us, the U.S. government may delay, reject or withhold payment, delay price adjustments or assert its right to offset damages against amounts owed to us.  If we are unable to collect amounts owed to us on a timely basis or the U.S. government asserts its offset rights, profits and cash flows could be adversely affected.
 
If we fail to comply with the terms of one or more of our U.S. government contracts, other agreements with the U.S. government or U.S. government statutes and regulations, we could also be suspended or barred from future U.S. government contracts for a period of time and be subject to possible damages, fines and penalties as well as damage to our reputation in the water and wastewater industry.
 

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We depend, to some extent, upon subcontractors to assist us in the performance of contracted services on military bases
We rely, to some extent, on subcontractors to assist us in the operation and maintenance of the water and wastewater systems at military bases. The failure of any of these subcontractors to perform services for us in accordance with the terms of our contracts with the U.S. government could result in the termination of our contract to provide water and/or wastewater services at the affected base(s), a loss of revenues or increases in costs to correct a subcontractor’s performance failures.
 
We are also required to make a good faith effort to achieve our small business subcontracting plan goals pursuant to U.S. government regulations. If we fail to use good faith efforts to meet these goals, the U.S. government may assess damages against us at the end of the contract. The U.S. government has the right to offset claimed damages against any amounts owed to us.
 We also rely on third-party manufacturers, as well as third-party subcontractors, to complete our construction projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount of costs we incur for these projects exceeds the amount we have estimated in our bid, we could experience reduced profits or losses in the performance of these contracts. In addition, if a subcontractor or manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.
If these subcontractors fail to perform services to be provided to us or fail to provide us with the proper equipment or materials, we may be penalized for their failure to perform; however, our contracts with these subcontractors include certain protective provisions, which may include the assessment of liquidated damages.  We also mitigate these risks by requiring our subcontractors, as appropriate, to obtain performance bonds and to compensate us for any penalties we may be required to pay as a result of their failure to perform. 
Our earnings may be affected, to some extent, by weather during different seasons
Seasonal weather conditions, such as hurricanes, heavy rainfall or significant winter storms, occasionally cause temporary office closures and/or result in temporary halts to construction activity at military bases.  To the extent that our construction activities are impeded by these events, we will experience a delay in recognizing revenues from these construction projects.
We continue to incur costs associated with the expansion of our contract activities
We continue to incur additional costs in connection with the expansion of our contract operations associated with the preparation of bids for new contract operations on prospective and existing military bases. Our ability to recover these costs and to earn a profit on our contract operations will depend upon the extent to which we are successful in obtaining new contracts and recovering these costs and other costs from new contract revenues.
We face competition for new military privatization contracts
An important part of our growth strategy is the expansion of our contracted services business through new contract awards to serve additional military bases for the U.S. government. ASUS competes with other regulated utilities, municipalities, and other entities for these contracts.
 
Other Risks
The accuracy of our judgments and estimates about financial and accounting matters will impact our operating results and financial condition
The quality and accuracy of estimates and judgments used have an impact on our operating results and financial condition. If our estimates are not accurate, we will be required to make an adjustment in a future period. We make certain estimates and judgments in preparing our financial statements regarding, among others:
timing of recovering WRAM and MCBA regulatory assets;
amounts to set aside for uncollectible accounts receivable, inventory obsolescence and uninsured losses;
our legal exposure and the appropriate accrual for claims, including general liability and workers' compensation claims;
future costs and assumptions for pensions and other post-retirement benefits;
regulatory recovery of deferred items; and
possible tax uncertainties.

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Our business requires significant capital expenditures
The utility business is capital intensive. We spend significant sums of money for additions to, or replacement of, our property, plant and equipment at our water and electric utilities. We obtain funds for these capital projects from operations, contributions by developers and others and advances from developers (which are repaid over a period of time at no interest). We also periodically borrow money or issue equity for these purposes. In addition, we have a syndicated bank credit facility that is partially used for these purposes. We cannot provide assurance that these sources will continue to be adequate or that the cost of funds will remain at levels permitting us to earn a reasonable rate of return.
 
Our Military Utility Privatization Subsidiaries providing water and wastewater services on military bases also expect to incur significant capital expenditures. To the extent that the U.S. government does not reimburse us for these expenditures as the work is performed or completed, the U.S. government will repay us over time. 
 
We may be adversely impacted by economic conditions
Access to external financing on reasonable terms depends, in part, on conditions in the debt and equity markets.  When business and market conditions deteriorate, we may no longer have access to the capital markets on reasonable terms.  Our ability to obtain funds is dependent upon our ability to access the capital markets by issuing debt or equity to third parties or obtaining funds from our revolving credit facility.  In the event of financial turmoil affecting the banking system and financial markets, consolidation of the financial services industry, significant financial service institution failures or our inability to renew or replace our existing revolving credit facility on favorable terms, it may become necessary for us to seek funds from other sources on less favorable terms.

Market conditions and demographic changes may adversely impact the value of our benefit plan assets and liabilities
Market factors can affect assumptions we use in determining funding requirements with respect to our pension and other postretirement benefit plans. For example, a relatively modest change in our assumptions regarding discount rates can materially affect our calculation of funding requirements. To the extent that market data compels us to reduce the discount rate used in our assumptions, our benefit obligations could materially increase, which could adversely affect our financial position and cash flows. Further, changes in demographics, such as increases in life expectancy assumptions may also increase the funding requirements of our obligations related to the pension and other postretirement benefit plans.

Market conditions also affect the values of the assets that are held in trusts to satisfy significant future obligations under our pension and other postretirement benefit plans. These assets are subject to market fluctuations, which may cause investment returns to fall below our projected rates of return. A decline in the market value of our pension and other postretirement benefit plan assets will increase the funding requirements under these plans if future returns on these assets are insufficient to offset the decline in value. Future increases in pension and other postretirement costs as a result of the reduced value of plan assets may not be fully recoverable in rates, and our results of operations and financial position could be negatively affected. These risks are mitigated to some extent by the two-way pension balancing accounts authorized by the CPUC, which permits us to track differences between forecasted annual pension expense adopted in water and electric rates and actual pension expenses for future recovery or refund to customers.
 
Payment of our debt may be accelerated if we fail to comply with restrictive covenants in our debt agreements
Our failure to comply with restrictive covenants in our debt agreements could result in an event of default.  If the default is not cured or waived, we may be required to repay or refinance this debt before it becomes due.  Even if we are able to obtain waivers from our creditors, we may only be able to do so on unfavorable terms.

The price of our Common Shares may be volatile and may be affected by market conditions beyond our control
The trading price of our Common Shares may fluctuate in the future because of the volatility of the stock market and a variety of other factors, many of which are beyond our control. Factors that could cause fluctuations in the trading price of our Common Shares include: regulatory developments; general economic conditions and trends; price and volume fluctuations in the overall stock market from time to time; actual or anticipated changes or fluctuations in our results of operations; actual or anticipated changes in the expectations of investors or securities analysts; actual or anticipated developments in other utilities' businesses or the competitive landscape generally; litigation involving us or our industry; major catastrophic events, or sales of large blocks of our stock.


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AWR is a holding company that depends on cash flow from its subsidiaries to meet its financial obligations and to pay dividends on its Common Shares
 As a holding company, our subsidiaries conduct substantially all operations and our only significant assets are investments in our subsidiaries. This means that we are dependent on distributions of funds from our subsidiaries to meet our debt service obligations and to pay dividends on our Common Shares.
 
Our subsidiaries are separate and distinct legal entities and generally have no obligation to pay any amounts due on our credit facility.  Our subsidiaries only pay dividends if and when declared by the respective subsidiary board.  Moreover, GSWC is obligated to give first priority to its own capital requirements and to maintain a capital structure consistent with that determined to be reasonable by the CPUC in its most recent decision on capital structure in order that customers not be adversely affected by the holding company structure.  Furthermore, our right to receive cash or other assets in the unlikely event of liquidation or reorganization of any of our subsidiaries is generally subject to the prior claims of creditors of that subsidiary.  If we are unable to obtain funds from a subsidiary in a timely manner, we may be unable to meet our financial obligations, make additional investments or pay dividends.

Failure to attract, retain, train, motivate, develop and transition key employees could adversely affect our business
In order to be successful, we must attract, retain, train, motivate, and develop key employees, including those in managerial, operational, financial, business-development and information-technology support positions.  Our regulated business and contracted services operations are complex. Attracting and retaining high quality staff allows us to minimize the cost of providing quality service.  In order to attract and retain key employees in a competitive marketplace, we must provide a competitive compensation package and be able to effectively recruit qualified candidates.  The failure to successfully hire key employees or the loss of a material number of key employees could have a significant impact on the quality of our operations in the short term. Further, changes in our management team may be disruptive to our business, and any failure to successfully transition key new hires or promoted employees could adversely affect our business and results of operations.
 
 We must successfully maintain and/or upgrade our information technology systems as we are increasingly dependent on the continuous and reliable operation of these systems
 We rely on various information technology systems to manage our operations. Such systems require periodic modifications, upgrades and/or replacement, which subject us to inherent costs and risks including potential disruption of our internal control structure, substantial capital expenditures, additional administrative and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
 
We rely on our computer, information and communications technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and the monitoring and operation of our treatment, storage and pumping facilities.  Our computer and communications systems and operations could be damaged or interrupted by weather, natural disasters, telecommunications failures or acts of war or terrorism or similar events or disruptions.  Any of these or other events could cause system interruption, delays and loss of critical data, or delay or prevent operations and adversely affect our financial results.
 
Security risks, data protection breaches and cyber-attacks could disrupt our internal operations, and any such disruption could increase our expenses, damage our reputation and adversely affect our stock price
There have been an increasing number of cyber-attacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data.  These attacks have occurred over the internet, through malware, viruses or attachments to e-mails or through persons inside the organization or with access to systems inside the organization.  Although we do not believe that our systems are at a materially greater risk of cyber security attacks than other similar organizations, our information technology systems remain vulnerable to damage or interruption from:
computer viruses;
malware;
hacking; and
denial of service actions.
We have implemented security measures and will continue to devote significant resources to address any security vulnerabilities in an effort to prevent cyber-attacks.  Despite our efforts, we cannot be assured that a cyber-attack will not cause water, wastewater or electric system problems, disrupt service to our customers, compromise important data or systems or

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result in unintended release of customer or employee information.  Moreover, if a computer security breach affects our systems or results in the unauthorized release of sensitive data, our reputation could be materially damaged. We could also be exposed to a risk of loss or litigation and possible liability. In addition, pursuant to U.S. government regulations regarding cyber-security of government contractors, we might be subject to fines, penalties or other actions, including debarment, with respect to current contracts or with respect to future contract opportunities.

Our operations are geographically concentrated in California
 Although we operate water and wastewater facilities in a number of states, our water and electric operations are concentrated in California, particularly Southern California.  As a result, our financial results are largely subject to political, water supply, labor, utility cost and regulatory risks, economic conditions, natural disasters and other risks affecting California. 

We operate in areas subject to natural disasters
We operate in areas that are prone to earthquakes, fires, mudslides, hurricanes, tornadoes, flooding or other natural disasters.  While we maintain insurance policies to help reduce our financial exposure, a significant seismic event in Southern California, where GSWC's operations are concentrated, or other natural disasters in any of the areas that we serve could adversely impact our ability to deliver water and electricity or provide wastewater service and adversely affect our costs of operations.  With respect to GSWC, the CPUC has historically allowed utilities to establish a catastrophic event memorandum account to potentially recover such costs. With respect to the Military Utility Privatization Subsidiaries, costs associated with response to natural disasters have been recoverable through requests for equitable adjustment.
 
Our operations may be the target of terrorist activities
Terrorists could seek to disrupt service to our customers by targeting our assets.  We have invested in additional security for facilities throughout our regulated service areas to mitigate the risks of terrorist activities. We also may be prevented from providing water and/or wastewater services at the military bases we serve in times of military crisis affecting these bases.

The final determination of our income tax liability may be materially different from our income tax provision
Significant judgment is required in determining our provision for income taxes. Our calculation of the provision for income taxes is subject to our interpretation of applicable tax laws in the jurisdictions in which we file. In addition, our income tax returns are subject to periodic examination by the Internal Revenue Service and other taxing authorities.

On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into federal law. The provisions of this major tax reform are generally effective January 1, 2018. The most significant change impacting Registrant is the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Registrant was able to make reasonable estimates in order to remeasure its deferred tax balances and account for the effects of the Tax Act, which have been reflected in the December 31, 2017 financial statements. Any further technical corrections or other forms of guidance addressing the Tax Act, as well as regulatory or governmental actions, could result in adjustments to Registrant's remeasurement and accounting for the effects of the Tax Act.

In December 2014, the Company also changed its tax method of accounting to permit the expensing of qualifying utility asset improvement costs that were previously being capitalized and depreciated for tax purposes. As a result of the change, which included a cumulative adjustment for 2013 and prior years, the Company deducted a significant amount of asset costs that consisted primarily of water mains and connections. Our determination of costs that qualify as a capital asset versus an immediate tax deduction for utility asset improvements is subject to subsequent adjustment arising from review by taxing authorities, and may impact the deductions that have been taken on recently filed income tax returns. Although we believe our income tax estimates are appropriate, there is no assurance that the final determination of our current taxes payable will not be materially different, either higher or lower, from the amounts reflected in our financial statements. In the event we are assessed additional income taxes, our financial condition and cash flows could be adversely affected.
    

Item 1B. Unresolved Staff Comments
 
None.


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Item 2. Properties
 
Water Properties
 
As of December 31, 2017, GSWC’s physical properties consisted of water transmission and distribution systems which included 2,783 miles of pipeline together with services, meters and fire hydrants and approximately 425 parcels of land, generally less than one acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities, including four surface water treatment plants.  GSWC also has franchises, easements and other rights of way for the purpose of accessing wells and tanks and constructing and using pipes and appurtenances for transmitting and distributing water. All of GSWC's properties are located in California.
 
As of December 31, 2017, GSWC owned 241 wells, of which 200 are active with an aggregate production capacity of approximately 212 million gallons per day. GSWC has 62 connections to the water distribution facilities of the MWD and other municipal water agencies. GSWC’s storage reservoirs and tanks have an aggregate capacity of approximately 113.8 million gallons. GSWC owns no dams. The following table provides information regarding the water utility plant of GSWC: 
Pumps
 
Distribution Facilities
 
Reservoirs
 
Well
 
Booster
 
Mains*
 
Services
 
Hydrants
 
Tanks
 
Capacity*
 
241

 
392

 
2,783

 
259,018

 
26,041

 
142

 
113.8

(1)

* Reservoir capacity is measured in millions of gallons. Mains are in miles.
 
(1)  GSWC has additional capacity in its Bay Point system through an exclusive capacity right to use 4.4 million gallons per day from a treatment plant owned by the Contra Costa Water District.  GSWC also has additional reservoir capacity through an exclusive right to use an eight-million-gallon reservoir, one-half of another eight-million-gallon reservoir, and one-half of a treatment plant’s capacity, all owned by the Three Valleys Municipal Water District, to serve the cities of Claremont and San Dimas.
 
Electric Properties
 
GSWC’s electric properties are located in the Big Bear area of San Bernardino County, California. As of December 31, 2017, GSWC owned and operated approximately 87.8 miles of overhead 34.5 kilovolt (kv) transmission lines, 2.8 miles of underground 34.5 kv transmission lines, 489.2 miles of 4.16 kv or 2.4 kv distribution lines, 96.6 miles of underground cable, 13 sub-stations and a natural gas-fueled 8.4 MW peaking generation facility. GSWC also has franchises, easements and other rights of way for the purpose of constructing and using poles, wires and other appurtenances for transmitting electricity.
 
Adjudicated and Other Water Rights
 
GSWC owns groundwater and surface water rights in California.  Groundwater rights are further subject to classification as either adjudicated or unadjudicated rights.  Adjudicated rights have been subjected to comprehensive litigation in the courts, are typically quantified and are actively managed for optimization and sustainability of the resource. Unadjudicated rights are subject to further regulation by the State Water Resources Control Board (“SWRCB”) and the California Department of Water Resources. Surface water rights are quantified and managed by the SWRCB, unless the surface water rights originated prior to 1914. As of December 31, 2017, GSWC had adjudicated groundwater rights and surface water rights of 73,611 and 11,335 acre-feet per year, respectively. GSWC also has a number of unadjudicated groundwater rights, which have not been quantified, but are typically measured by historical usage.
 
Office Buildings
 
GSWC owns its general headquarters facility in San Dimas, California. GSWC also owns and leases certain facilities throughout California that house district and customer service offices. ASUS leases office facilities in Georgia, Virginia and North Carolina.  ECUS and FRUS rent temporary service center facilities in Florida and Kansas, respectively, pending the completion of facilities to be constructed at those locations.  FBWS has a renewable, no-cost license for use of space in a U.S. government building at Fort Bliss pending construction of an owned service center.  TUS, PSUS, ODUS and ONUS own service centers in Maryland, South Carolina, Virginia and North Carolina, respectively.


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Mortgage and Other Liens
 
As of December 31, 2017, neither AWR, GSWC, nor ASUS, or any of its subsidiaries, had any mortgage debt or liens securing indebtedness outstanding.
 
Under the terms of certain debt instruments, AWR and GSWC are prohibited from issuing any secured debt, without providing equal and ratable security to the holders of this existing debt.
 
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 constitutes a more necessary use. In addition, these laws provide that the owner of utility property (i) may contest whether the condemnation is actually necessary, and (ii) is entitled to receive the fair market value of its property if the property is ultimately taken.
Environmental Clean-Up and Remediation of Properties
GSWC has been involved in environmental remediation and clean-up at a plant site ("Chadron Plant") that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.

GSWC has accrued an estimated liability which includes costs for two years of continued activities of cleanup and monitoring, 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 for inclusion in rate base by the CPUC.

Item 3. Legal Proceedings

On December 9, 2014, the City of Claremont, California ("Claremont") filed an eminent domain lawsuit in the County of Los Angeles Superior Court against GSWC (City of Claremont v. Golden State Water Company, Case No. BC 566125) to acquire GSWC's Claremont system which serves the City of Claremont and parts of surrounding communities. 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 be 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 in December 2017 paid $2.0 million to GSWC as partial satisfaction of the Judgment Amount and interest accrued through the end of 2017. 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 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, then on January 1, 2030, the unpaid Judgment Amount will be deemed satisfied by Claremont without further payment required to be made to GSWC. 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.
On May 12, 2016, Casitas Municipal Water District filed an eminent domain lawsuit in Ventura County Superior Court against GSWC (Casitas Municipal Water District v. Golden State Water Company, Case No. 56-2016-00481628-CU-EI-VTA) to acquire the property and assets of GSWC located in its Ojai service area. 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.
    

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On November 13, 2015, the owners of a commercial building filed suit in Ventura County Superior Court against GSWC (Khaled A. Al-Awar et al v. Golden State Water Company, Case No. 56-2015-00474589-CU-PO-VTA) for damages to their building caused by a water main break that occurred in 2014. Repairs to the building had been delayed for a variety of reasons, including a dispute and litigation between two of GSWC's insurance carriers regarding their respective coverage obligations. In September 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. Subsequently, the Court also awarded the plaintiffs' attorney fees and other costs. In December 2017, GSWC entered into settlement agreements with its insurance carriers, as well as with the owners of the commercial building, resolving all disputes. The final resolution of this matter resulted in GSWC recording an immaterial charge to expense during the fourth quarter of 2017.

Registrant is subject to ordinary routine litigation incidental to its business, some of which may include claims for compensatory and punitive damages. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against, among other things, property, general liability, employment, and workers’ compensation claims incurred in the ordinary course of business. Insurance coverage may not cover certain claims involving punitive damages.


Item 4. Mine Safety Disclosure
 
Not applicable.

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PART II 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Performance Graph
 
The graph below compares the cumulative 5-year total return provided shareholders on American States Water Company's Common Shares relative to the cumulative total returns of the S&P 500 index and a peer group of eight publicly traded companies headquartered in the United States. The eight companies included in the Company's customized peer group are: American Water Works Company Inc., Aqua America Inc., Artesian Resources Corporation, California Water Service Group, Connecticut Water Service Inc., Middlesex Water Company, York Water Company and SJW Group.
An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Common Shares, and in the common stock in the index and in the peer group on December 31, 2012. Relative performance is tracked through December 31, 2017.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
among American States Water Company, the S&P 500 Index,
and a Peer Group
 
chart-089a01373a905b82b3f.jpg
 
 
 
 
 
*$100 invested on December 31, 2012 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright©2017 S&P, a division of McGraw Hill Financial. All rights reserved.
 
12/2012
 
12/2013
 
12/2014
 
12/2015
 
12/2016
 
12/2017
American States Water Company
$
100.00

 
$
123.05

 
$
165.74

 
$
188.80

 
$
209.58

 
$
271.96

S&P 500
$
100.00

 
$
132.39

 
$
150.51

 
$
152.59

 
$
170.84

 
$
208.14

Peer Group
$
100.00

 
$
117.70

 
$
143.28

 
$
161.61

 
$
199.92

 
$
254.77

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.


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Market Information Relating to Common Shares
Common Shares of American States Water Company are traded on the New York Stock Exchange (“NYSE”) under the symbol “AWR”. The intra-day high and low NYSE prices on the Common Shares for each quarter during the past two years were:
 
Stock Prices
 
High
 
Low
2017
 
 
 

First Quarter
$
45.92

 
$
41.14

Second Quarter
$
50.86

 
$
43.08

Third Quarter
$
51.78

 
$
46.62

Fourth Quarter
$
58.44

 
$
49.55

 
 
 
 
2016
 

 
 

First Quarter
$
47.24

 
$
38.25

Second Quarter
$
43.83

 
$
37.28

Third Quarter
$
44.46

 
$
37.51

Fourth Quarter
$
46.39

 
$
37.47

The closing price of the Common Shares of American States Water Company on the NYSE on February 22, 2018 was $53.49.
 
Approximate Number of Holders of Common Shares
As of February 22, 2018, there were 2,300 holders of record of the 36,715,525 outstanding Common Shares of American States Water Company. AWR owns all of the outstanding Common Shares of GSWC and ASUS. ASUS owns all of the outstanding stock of the Military Utility Privatization Subsidiaries.
 
Frequency and Amount of Any Dividends Declared and Dividend Restrictions
For the last two years, AWR has paid dividends on its Common Shares on or about March 1, June 1, September 1 and December 1. The following table lists the amounts of dividends paid on Common Shares of American States Water Company:
 
2017
 
2016
First Quarter
$
0.242

 
$
0.224

Second Quarter
$
0.242

 
$
0.224

Third Quarter
$
0.255

 
$
0.224

Fourth Quarter
$
0.255

 
$
0.242

Total
$
0.994

 
$
0.914

 AWR’s ability to pay dividends is subject to the requirement in its $150.0 million revolving credit facility to maintain compliance with all covenants described in footnote (14) to the table in the section entitled “Contractual Obligations, Commitments and Off Balance Sheet Arrangements” included in Part II, Item 7, in Management’s Discussion and Analysis of Financial Condition and Results of Operation. GSWC’s maximum ability to pay dividends is restricted by certain Note Agreements to the sum of $21.0 million plus 100% of consolidated net income from certain dates plus the aggregate net cash proceeds received from capital stock offerings or other instruments convertible into capital stock from various dates. Under the most restrictive of the Note Agreements, $400.8 million was available from GSWC to pay dividends to AWR as of December 31, 2017. GSWC is also prohibited under the terms of senior notes from paying dividends if, after giving effect to the dividend, its total indebtedness to capitalization ratio (as defined) would be more than 0.6667-to-1.  GSWC would have to issue additional debt of $586.4 million to invoke this covenant as of December 31, 2017.

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Under California law, AWR, GSWC and ASUS are each permitted to distribute dividends to its shareholders and repurchase its shares so long as the Board of Directors determines, in good faith, that either: (i) the value of the corporation’s assets equals or exceeds the sum of its total liabilities immediately after the dividend, or (ii) its retained earnings equals or exceeds the amount of the distribution.  Under the least restrictive of the California tests, approximately $279.8 million was available to pay dividends to AWR’s common shareholders and repurchase shares from AWR’s common shareholders at December 31, 2017. Approximately $232.2 million was available for GSWC to pay dividends to AWR at December 31, 2017 and approximately $62.0 million was available for ASUS to pay dividends to AWR at December 31, 2017. However, ASUS's ability to pay dividends is further subject to the ability of each of its subsidiaries to pay dividends to it, which may, in turn, be restricted by the laws under the state in which the applicable subsidiary was formed.
AWR paid $36.4 million in dividends to shareholders for the year ended December 31, 2017, as compared to $33.4 million for the year ended December 31, 2016. GSWC paid dividends of $27.7 million and $25.5 million to AWR in 2017 and 2016, respectively. ASUS paid dividends of $8.9 million and $8.3 million to AWR in 2017 and 2016, respectively.

Other Information

The shareholders of AWR have approved the material features of all equity-compensation plans under which AWR directly issues equity securities. AWR did not directly issue any unregistered equity securities during 2017.
The following table provides information about AWR repurchases of its Common Shares during the fourth quarter of 2017:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs (1)
 
Maximum Number
of Shares That May
Yet Be Purchased
under the Plans or Programs (1)(3)
October 1 - 31, 2017
 
1,869

 
$
53.02

 

 

November 1 - 30, 2017
 
17,107

 
$
54.46

 

 

December 1 - 31, 2017
 
47,434

 
$
55.95

 

 

Total
 
66,410

(2)
$
55.48

 

 


 
(1)         None of the common shares were repurchased pursuant to any publicly announced stock repurchase program.
(2)         Of this amount, 59,359 Common Shares were acquired on the open market for employees pursuant to AWR's 401(k) Plan and the remainder of the Common Shares were acquired on the open market for participants in the Common Share Purchase and Dividend Reinvestment Plan.
(3)         Neither the 401(k) plan nor the Common Share Purchase and Dividend Reinvestment Plan contains a maximum number of common shares that may be purchased in the open market.



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Item 6. Selected Financial Data
AMERICAN STATES WATER COMPANY (AWR):
(in thousands, except per share amounts)
 
2017 (1)
 
2016
 
2015
 
2014
 
2013
Income Statement Information:
 
 

 
 

 
 

 
 

 
 

Total Operating Revenues
 
$
440,603

 
$
436,087

 
$
458,641

 
$
465,791

 
$
472,077

Total Operating Expenses
 
313,527

 
321,371

 
340,152

 
346,746

 
353,005

Operating Income
 
127,076

 
114,716

 
118,489

 
119,045

 
119,072

Interest Expense
 
22,582

 
21,992

 
21,088

 
21,617

 
22,415

Interest Income
 
1,790

 
757

 
458

 
927

 
707

Net Income
 
$
69,367

 
$
59,743

 
$
60,484

 
$
61,058

 
$
62,686

Basic Earnings per Common Share
 
$
1.88

 
$
1.63

 
$
1.61

 
$
1.57

 
$
1.61

Fully Diluted Earnings per Common Share
 
$
1.88

 
$
1.62

 
$
1.60

 
$
1.57

 
$
1.61

Average Shares Outstanding
 
36,638

 
36,552

 
37,389

 
38,658

 
38,639

Average number of Diluted Shares Outstanding
 
36,844

 
36,750

 
37,614

 
38,880

 
38,869

Dividends paid per Common Share
 
$
0.994

 
$
0.914

 
$
0.874

 
$
0.831

 
$
0.760

 
 
 
 
 
 
 
 
 
 
 
Balance Sheet Information:
 
 

 
 

 
 

 
 

 
 

Total Assets (2) (3)
 
$
1,416,734

 
$
1,470,493

 
$
1,343,959

 
$
1,373,316

 
$
1,305,041

Common Shareholders’ Equity
 
529,945

 
494,297

 
465,945

 
506,801

 
492,404

Long-Term Debt (3)
 
321,039

 
320,981

 
320,900

 
320,816

 
320,937

Total Capitalization
 
$
850,984

 
$
815,278

 
$
786,845

 
$
827,617

 
$
813,341

GOLDEN STATE WATER COMPANY (GSWC):
(in thousands)
 
2017 (1)
 
2016
 
2015
 
2014
 
2013
Income Statement Information:
 
 
 
 
 
 
 
 
 
 
Total Operating Revenues
 
$
340,301

 
$
338,702

 
$
364,550

 
$
361,059

 
$
358,540

Total Operating Expenses
 
234,253

 
242,883

 
264,141

 
261,317

 
256,197

Operating Income
 
106,048

 
95,819

 
100,409

 
99,742

 
102,343

Interest Expense
 
22,055

 
21,782

 
20,998

 
21,524

 
22,287

Interest Income
 
1,766

 
749

 
440

 
894

 
615

Net Income
 
$
53,757

 
$
46,969

 
$
47,591

 
$
47,857

 
$
48,642

Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
Total Assets (2) (3)
 
$
1,326,823

 
$
1,384,178

 
$
1,271,879

 
$
1,277,392

 
$
1,228,239

Common Shareholder’s Equity
 
474,374

 
446,770

 
423,730

 
435,190

 
437,613

Long-Term Debt (3)
 
321,039

 
320,981

 
320,900

 
320,816

 
320,937

Total Capitalization
 
$
795,413

 
$
767,751

 
$
744,630

 
$
756,006

 
$
758,550


(1) 2017 results include an $8.3 million pretax gain, or $0.13 per share, from the sale of GSWC's Ojai water system.

(2) Registrant adopted Accounting Standards Update 2015-17, Balance Sheet Classification of Deferred Taxes, as of December 31, 2015 on a prospective basis, whereby all deferred tax assets and liabilities are classified as noncurrent on the Registrant's balance sheet. Prior periods were not retrospectively adjusted.
(3) Registrant adopted Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs as of December 31, 2016, whereby debt issuance costs and redemption premiums are presented as a direct reduction from the carrying value of the associated debt rather than as an asset. Total Assets and Long-Term Debt have been restated for all periods presented above.


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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
The following discussion and analysis provides information on AWR’s consolidated operations and assets, and, where necessary, includes specific references to AWR’s individual segments and/or its subsidiaries: GSWC and ASUS and its subsidiaries.  Included in the following analysis is a discussion of water and electric gross margins.  Water and electric gross margins are computed by subtracting total supply costs from total revenues.  Registrant uses these gross margins as important measures in evaluating its operating results.  Registrant believes these measures are useful internal benchmarks in evaluating the performance of GSWC.
 
The discussions and tables included in the following analysis also present Registrant’s operations in terms of earnings per share by business segment.  Registrant believes that the disclosure of earnings per share by business segment provides investors with clarity surrounding the performance of its different services.  Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with Generally Accepted Accounting Principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income or earnings per share, which are determined in accordance with GAAP. A reconciliation of water and electric gross margins to the most directly comparable GAAP measures is included in the table under the section titled “Operating Expenses: Supply Costs.”  Reconciliations to AWR’s diluted earnings per share are included in the discussions under the sections titled “Summary Results by Segment.

Overview
Factors affecting our financial performance are summarized under Forward-Looking Information.
Water and Electric Segments:
GSWC's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California and the delivery of electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC customers are determined by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital.  GSWC plans to continue to seek additional rate increases in future years from the CPUC to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC are expected to remain at higher levels than depreciation expense. When necessary, GSWC obtains funds from external sources in the capital markets and through bank borrowings.
Cost of Capital Proceeding for GSWC's Water Regions:
In early April 2017, GSWC filed its water cost of capital application with the CPUC in which it requested an overall weighted return on rate base of 9.11%, including an updated cost of debt of 6.6% and a return on equity ("ROE") of 11%. On February 6, 2018, GSWC, along with three other investor-owned water utilities that serve California, received a Proposed Decision from the CPUC issued in connection with the pending cost of capital proceeding. The Proposed Decision recommends an authorized ROE of 8.23% and a return on rate base of 7.39% for GSWC’s water segment, effective January 1, 2018. GSWC’s current authorized ROE for its water segment is 9.43% and its return on rate base is 8.34%. The Proposed Decision also continues the water cost of capital adjustment mechanism. If the CPUC adopts the recommendations in the Proposed Decision, the lower return on rate base is expected to decrease GSWC’s annual revenue requirement by approximately $9.5 million beginning in 2018. GSWC filed comments on the Proposed Decision on February 26, 2018 with a final decision expected in late March 2018.
Claremont System:
GSWC successfully defended against an eminent domain lawsuit filed by the City of Claremont, California (the "City") to seize GSWC’s water system serving the City and parts of surrounding communities. In December 2016, the presiding judge issued a decision in the six week right-to-take trial, rejecting the City's attempt to take over the water system. In February 2017, it was further ordered that GSWC be entitled to recover $7.6 million (“Judgment Amount”) of its litigation expenses and related defense costs from the City. During the first quarter of 2017, the City appealed both decisions. In October 2017, GSWC and the City entered into a settlement agreement whereby the City agreed to drop its appeals and in December 2017 paid $2.0 million to GSWC as partial satisfaction of the Judgment Amount, including interest accrued through the end of 2017. GSWC recorded the $2.0 million as a reduction to legal fees of $1.8 million and an increase in interest income of $200,000 in the fourth quarter of 2017. Furthermore, under the settlement agreement, quarterly interest-only payments calculated on the unpaid Judgment Amount of $5.9 million are to be made by the City to GSWC over the next 12 years. If the City (i) makes 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, then on January 1, 2030, the unpaid Judgment Amount will be deemed satisfied by the City without further payment required to be made to GSWC. However, if the City were to take formal action within the next 12 years or miss any of the required quarterly payments, the unpaid Judgment Amount and any unpaid accrued interest

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would immediately become due and payable. GSWC is unable to predict the actions that the City will take over the next 12 years and, as a result, will record the quarterly payments only to the extent that they are collected from the City over this period. GSWC serves approximately 11,000 customers in Claremont.
Ojai System:
In accordance with the terms of a settlement agreement reached in April 2017, on June 8, 2017 Casitas Municipal Water District ("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 along with certain interveners dismissed all claims against GSWC. As a result of this transaction, GSWC recorded a pretax gain of $8.3 million, or $0.13 per share, 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.
Contracted Services Segment:
ASUS's revenues, operating income and cash flows are earned by providing water and/or wastewater services, including operation and maintenance services and construction of facilities at the water and/or wastewater systems at various military installations, pursuant to 50-year firm fixed-price contracts. The contract price for each of these 50-year contracts is subject to annual economic price adjustments. Additional revenues generated by contract operations are primarily dependent on new construction activities under contract modifications with the U.S. government or agreements with other third-party prime contractors.
New Privatization Contract Award:
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 $601.4 million over the 50-year period and is subject to annual economic price adjustments. This initial value is subject to adjustment based on the results of a joint inventory of assets to be performed. ASUS will assume operations at Fort Riley following the completion of a six- to twelve-month transition period currently underway.
Eglin Air Force Base (“Eglin”):
On June 15, 2017, ASUS assumed operations of the water and wastewater systems at Eglin in Florida after completing a transition period and a detailed joint inventory study. The value of the 50-year contract is approximately $702.4 million. The contract is subject to annual economic price adjustments.
Tax Cuts and Jobs Act:
On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into federal law. The provisions of this major tax reform are generally effective January 1, 2018. Among its significant provisions, the Tax Act (i) reduces the federal corporate income tax rate from 35% to 21%; (ii) eliminates bonus depreciation for regulated utilities, but allows 100% expensing for the cost of qualified property for non-regulated businesses; (iii) eliminates the provision that treated contributions in aid of construction provided to regulated water utilities as non-taxable; (iv) eliminates the domestic production activities deduction, and (v) limits the amount of net interest that can be deducted; however, this limitation is not applicable to regulated utilities and, therefore is not anticipated to have a material impact to Registrant’s ability to deduct net interest.
The most significant change impacting Registrant is the reduction of the corporate federal income tax rate from 35% to 21% effective January 1, 2018. As of December 31, 2017, the cumulative net deferred income tax liabilities (for both flow-through and normalized temporary differences) related to GSWC’s rate-regulated activities were reduced by approximately $90.1 million to reflect the new 21% tax rate. However, this did not impact earnings since this reduction in net deferred income tax liabilities was offset by a corresponding increase to a regulatory liability. The impact to future customer rates related to this regulatory liability is anticipated to generally occur over a period consistent with the remaining lives of the property giving rise to this regulatory liability. The remeasurement of other deferred income tax balances not related to rate-regulated activities did not have a significant impact to Registrant's consolidated results of operations. However, the Tax Act did have a negative impact on earnings at the water segment, which was mostly offset by an increase in earnings at AWR (parent) and, to a lesser extent, at the other two business segments.
GSWC expects the Tax Act to lower rates charged to customers. The estimated benefit to customers is primarily driven by the reduction in the federal income tax rate used in computing customer rates. The effect of the excess deferred income taxes created by the reduction in the federal tax rate and tracked in the regulatory liability, discussed above, is expected to be refunded to customers and may also affect future customer rates.  Property-related deferred tax liabilities reduce GSWC's rate base; however, the remeasurement of deferred tax liabilities resulting from the implementation of the Tax Act will not

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impact GSWC's rate base because of the offsetting increase in a regulatory liability discussed above. Going forward, as new plant is placed in service, the lower federal corporate tax rate will result in lower deferred tax liabilities.
The Tax Act also eliminates bonus depreciation for utilities. As a result of the lower federal tax rate and elimination of bonus depreciation, GSWC expects the Tax Act will create growth in rate base for the same level of expected capital expenditures, partially offset by the impact of higher cost of capital from an increased need to raise debt and/or equity due to lower cash flows from operating activities.
Summary Results by Segment
  
The table below sets forth diluted earnings per share by business segment for AWR’s operations: 
 
Diluted Earnings per Share
 
Year Ended
 
 
 
12/31/2017
 
12/31/2016
 
CHANGE
Water
$
1.35

 
$
1.17

 
$
0.18

Electric
0.11

 
0.10

 
0.01

Contracted services
0.37

 
0.33

 
0.04

AWR (parent)
0.05

 
0.02

 
0.03

Totals from operations, as reported
$
1.88

 
$
1.62

 
$
0.26

Water Segment:
For the year ended December 31, 2017, fully diluted earnings per share for the water segment increased by $0.18 per share to $1.35 per share, as compared to $1.17 per share for 2016 due, in large part, to the one-time $0.13 per share pretax gain on the sale of Ojai assets in June 2017. In addition, in February 2017, the CPUC approved recovery of incremental costs related to California's drought state of emergency, which were previously expensed. As a result of this approval, during the first quarter of 2017 GSWC recorded a regulatory asset and a corresponding increase to pretax earnings of $1.5 million, or $0.02 per share, of which $1.2 million was reflected as a reduction to other operation expenses and approximately $260,000 was reflected as additional revenue.
Excluding the impact of the items discussed above and an increase in billed surcharges which have no impact to earnings, diluted earnings from the water segment for 2017 increased by $0.03 per share as compared to 2016 due to the following items, which impacted the comparability between the two periods:
A decrease in operating expenses (excluding supply costs) of $3.4 million, or $0.05 per share, due mostly to (i) lower legal expenses related to condemnation matters, including the $1.8 million reduction in legal fees recorded in December 2017 pursuant to the Claremont settlement agreement, (ii) lower maintenance costs, and (iii) incurring only a partial year of Ojai-related operating expenses as a result of the sale. These decreases were partially offset by higher medical insurance costs, conservation costs, general rate-case-related expenses, and property and other taxes, as well as an $800,000 reduction in operating expenses recorded in the fourth quarter of 2016 as a result of the CPUC's water general rate case decision, which granted recovery of previously incurred costs tracked in memorandum accounts.
An increase in interest and other income, net of interest expense, of $2.0 million, or $0.03 per share, due primarily to (i) higher gains recorded on investments as compared to 2016, (ii) amounts collected from developers on certain outstanding balances owed to GSWC, (iii) higher interest income on GSWC's regulatory assets resulting mostly from an increase in the 90-day commercial paper rate, and (iv) interest income related to the Claremont settlement payment received in December 2017 previously discussed.
The increase in diluted earnings from the water segment discussed above were partially offset by the following:
An overall decrease in the water gross margin of $2.3 million, or $0.03 per share, largely due to the cessation of Ojai operations in June 2017. This was partially offset by revenues generated from CPUC-approved second-year rate increases effective January 1, 2017.
An overall increase in water's effective income tax rate ("ETR"), which negatively impacted water earnings by approximately $0.02 per share. The increase in the ETR was due, in large part, to the remeasurement of certain non-rate-regulated deferred tax assets (primarily compensation- and benefit-related items) in connection with the Tax Act, which negatively impacted water earnings by approximately $0.03 per share. This was partially offset by changes in flow-through and permanent items at the water segment.

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Table of Contents

Electric Segment:
For the year ended December 31, 2017, diluted earnings from the electric segment increased by $0.01 per share as compared to the same period in 2016. Operating expenses (other than supply costs) decreased by $1.2 million primarily due to additional costs incurred in 2016 in response to power outages caused by severe winter storms experienced in January 2016, lower regulatory costs, and lower costs associated with energy efficiency and solar power programs approved by the CPUC. There was also a decrease in the effective income tax rate for the electric segment as compared to the same period in 2016 resulting from flow-through items. These increases to earnings were partially offset by a lower electric gross margin, which was due to a downward adjustment to the revenue requirement to reflect a decrease in the general office allocation as stipulated in the CPUC's December 2016 decision on the water general rate case.
Contracted Services Segment:
For the year ended December 31, 2017, diluted earnings from contracted services were $0.37 per share, compared to $0.33 per share for the same period in 2016. There was an increase in management fee revenues from the successful resolution of various price adjustments and asset transfers received during 2016 and 2017. This includes approximately $1.0 million, or $0.02 per share, of retroactive management fees recorded in 2017 which related to periods prior to 2017, as compared to $421,000, or $0.01 per share, of retroactive management fees recorded in 2016 which related to periods prior to 2016. There was also an increase in management fees and construction revenues generated from the operations at Eglin Air Force Base ("Eglin"), which began in June 2017. These increases to earnings were partially offset by higher operating costs due to Eglin's transition activities and joint inventory study, as well as increases in labor and outside services costs related to business development and compliance.
AWR (parent):
For the year ended December 31, 2017, diluted earnings from AWR (parent) increased $0.03 per share compared to 2016 due to lower state taxes, as well as the remeasurement of federal deferred tax liabilities associated with the California state unitary deferred tax balances. The remeasurement was based on the Tax Act's lower federal corporate tax rate of 21% as compared to 35%, which increased earnings at AWR (parent) by approximately $0.02 per share during 2017.
The following discussion and analysis for the years ended December 31, 2017, 2016 and 2015 provides information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC and ASUS and its subsidiaries.

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Table of Contents

Consolidated Results of Operations — Years Ended December 31, 2017 and 2016 (amounts in thousands, except per share amounts):
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
OPERATING REVENUES
 

 
 

 
 

 
 

Water
$
306,332

 
$
302,931

 
$
3,401

 
1.1
 %
Electric
33,969

 
35,771

 
(1,802
)
 
-5.0
 %
Contracted services
100,302

 
97,385

 
2,917

 
3.0
 %
Total operating revenues
440,603

 
436,087

 
4,516

 
1.0
 %
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 

 
 

 
 

 
 

Water purchased
68,302

 
64,442

 
3,860

 
6.0
 %
Power purchased for pumping
8,518

 
8,663

 
(145
)
 
-1.7
 %
Groundwater production assessment
18,638

 
14,993

 
3,645

 
24.3
 %
Power purchased for resale
10,720

 
10,387

 
333

 
3.2
 %
Supply cost balancing accounts
(17,939
)
 
(12,206
)
 
(5,733
)
 
47.0
 %
Other operation
29,994

 
28,257

 
1,737

 
6.1
 %
Administrative and general
81,662

 
80,994

 
668

 
0.8
 %
Depreciation and amortization
39,031

 
38,850

 
181

 
0.5
 %
Maintenance
15,176

 
16,470

 
(1,294
)
 
-7.9
 %
Property and other taxes
17,905

 
16,801

 
1,104

 
6.6
 %
ASUS construction
49,838

 
53,720

 
(3,882
)
 
-7.2
 %
Gain on sale of assets
(8,318
)
 

 
(8,318
)
 
*

Total operating expenses
313,527

 
321,371

 
(7,844
)
 
-2.4
 %
 
 
 
 
 
 
 
 
OPERATING INCOME
127,076

 
114,716

 
12,360

 
10.8
 %
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 

 
 

 
 

 
 

Interest expense
(22,582
)
 
(21,992
)
 
(590
)
 
2.7
 %
Interest income
1,790

 
757

 
1,033

 
136.5
 %
Other, net
2,057

 
997

 
1,060

 
106.3
 %
 
(18,735
)
 
(20,238
)
 
1,503

 
-7.4
 %
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
108,341

 
94,478

 
13,863

 
14.7
 %
 
 
 
 
 
 
 
 
Income tax expense
38,974

 
34,735

 
4,239

 
12.2
 %
 
 
 
 
 
 
 
 
NET INCOME
$
69,367

 
$
59,743

 
$
9,624

 
16.1
 %
 
 
 
 
 
 
 
 
Basic earnings per Common Share
$
1.88

 
$
1.63

 
$
0.25

 
15.3
 %
 
 
 
 
 
 
 
 
Fully diluted earnings per Common Share
$
1.88

 
$
1.62

 
$
0.26

 
16.0
 %
* not applicable

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Table of Contents

Operating Revenues
General
Registrant relies upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant for GSWC. Registrant relies on economic price adjustments and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS.  If adequate rate relief or adjustments are not granted in a timely manner, current operating revenues and earnings can be negatively impacted.  ASUS’s earnings are also impacted by the level of additional construction projects at the Military Utility Privatization Subsidiaries, which may or may not continue at current levels in future periods.
Water
For the year ended December 31, 2017, revenues from water operations increased by $3.4 million to $306.3 million, compared to $302.9 million for the year ended December 31, 2016. The increase was primarily due to second-year rate increases effective January 1, 2017, and rate increases to specifically cover increases in supply costs experienced in certain rate-making areas. The rate changes related to supply costs are largely offset by a corresponding increase in supply costs, resulting in an insignificant change to the water gross margin. There were also new surcharges implemented during 2017 to recover previously incurred costs, which were offset by a corresponding increase in operating expenses (primarily administrative and general) totaling $3.6 million, resulting in no impact to earnings. These increases in revenues were partially offset by lower revenues due to the cessation of Ojai operations in June 2017.
Billed water consumption for the year ended December 31, 2017 increased approximately 4% as compared to 2016. In general, changes in consumption do not have a significant impact on recorded revenues due to the CPUC-approved WRAM accounts in place in the majority of GSWC's rate-making areas. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
Electric
In 2016, the CPUC granted BVES's request to defer the filing of its next electric general rate case to 2017, setting new rates for the years 2018 through 2021. As a result, adopted base revenues for 2017 were based on 2016 adopted base revenues, adjusted for the change in the general office allocation approved by the CPUC in the water general rate case. For the year ended December 31, 2017, revenues from electric operations were $34.0 million as compared to $35.8 million for the year ended December 31, 2016. This decrease was primarily due to the reduction in the adopted revenue requirement for electric to reflect a decrease in the general office allocation. In May 2017, BVES filed its general rate case application with the CPUC. A final decision is expected in 2018.

 Billed electric usage for the year ended December 31, 2017 decreased slightly as compared to the same period in 2016.  Due to the CPUC-approved base revenue requirement adjustment mechanism ("BRRAM"), which adjusts base revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.
Contracted Services
Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the year ended December 31, 2017, revenues from contracted services were $100.3 million as compared to $97.4 million for 2016.  There was an increase in ongoing operations and maintenance management fees due to the successful resolution of various price adjustments and asset transfers during 2016 and 2017, as well as the commencement of operations at Eglin in June 2017. Included in management fees for 2017 was approximately $1.0 million in retroactive revenues related to periods prior to 2017, as compared to $421,000 of retroactive management fees recorded in 2016 which related to periods prior to 2016. These increases were partially offset by a decrease in construction activity in 2017 as compared to 2016.
ASUS's subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served. During 2017, ASUS was awarded approximately $20.2 million in new construction projects, the majority of which are expected to be completed during 2018. Earnings and cash flows from modifications to the original 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

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Table of Contents

Operating Expenses:
     Supply Costs
Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. Supply costs for the electric segment consist of purchased power for resale, the cost of natural gas used by BVES’s generating unit, the cost of renewable energy credits and changes in the electric supply cost balancing account. Water and electric gross margins are computed by subtracting total supply costs from total revenues. Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results. Registrant believes these measures are useful internal benchmarks in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with GAAP, may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income, which is determined in accordance with GAAP.
Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for 28.1% and 26.8% of total operating expenses for the years ended December 31, 2017 and 2016, respectively.
     The table below provides the amounts (in thousands) of increases (decreases) and percent changes in water and electric revenues, supply costs and gross margins during the years ended December 31, 2017 and 2016:
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
WATER OPERATING REVENUES (1)
$
306,332

 
$
302,931

 
$
3,401

 
1.1
 %
WATER SUPPLY COSTS:
 
 
 
 
 
 
 

Water purchased (1)
68,302

 
64,442

 
3,860

 
6.0
 %
Power purchased for pumping (1)
8,518

 
8,663

 
(145
)
 
-1.7
 %
Groundwater production assessment (1)
18,638

 
14,993

 
3,645

 
24.3
 %
Water supply cost balancing accounts (1)
(20,289
)
 
(14,813
)
 
(5,476
)
 
37.0
 %
TOTAL WATER SUPPLY COSTS
$
75,169

 
$
73,285

 
$
1,884

 
2.6
 %
WATER GROSS MARGIN (2)
$
231,163

 
$
229,646

 
$
1,517

 
0.7
 %
 
 
 
 
 
 
 


ELECTRIC OPERATING REVENUES (1)
$
33,969

 
$
35,771

 
$
(1,802
)
 
-5.0
 %
ELECTRIC SUPPLY COSTS:
 
 
 
 
 
 


Power purchased for resale (1)
10,720

 
10,387

 
333

 
3.2
 %
Electric supply cost balancing accounts (1)
2,350

 
2,607

 
(257
)
 
-9.9
 %
TOTAL ELECTRIC SUPPLY COSTS
$
13,070

 
$
12,994

 
$
76

 
0.6
 %
ELECTRIC GROSS MARGIN (2)
$
20,899

 
$
22,777

 
$
(1,878
)
 
-8.2
 %
 
 
 
 
 
 
(1)         As reported on AWR’s Consolidated Statements of Income, except for supply-cost-balancing accounts. The sums of water and electric supply-cost balancing accounts in the table above are shown on AWR’s Consolidated Statements of Income and totaled $(17.9) million and $(12.2) million for the years ended December 31, 2017 and 2016, respectively. Revenues include surcharges, which increase both revenues and operating expenses by corresponding amounts, thus having no net earnings impact. 
(2)         Water and electric gross margins do not include depreciation and amortization, maintenance, administrative and general, property and other taxes, and other operation expenses.
 
Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. Under the CPUC-approved Modified Cost Balancing Account ("MCBA"), GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power and pump tax expenses. GSWC recovers from or refunds to customers the amount of such variances.  GSWC tracks these variances individually for each water ratemaking area.


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Table of Contents

The overall actual percentages for purchased water for the years ended December 31, 2017 and 2016 were 42% and 40%, respectively, as compared to the adopted percentages of 28% and 29% for 2017 and 2016, respectively. The higher actual percentages of purchased water as compared to adopted percentages resulted primarily from several wells being out of service.
 
Purchased water costs for the year ended December 31, 2017 increased to $68.3 million as compared to $64.4 million for the same period in 2016 primarily due to an increase of purchased water in the supply mix as a result of several wells being out of service, as well as an increase in wholesale water costs as compared to the year ended December 31, 2016.
 
For the year ended December 31, 2017, the cost of power purchased for pumping decreased slightly to $8.5 million as compared to $8.7 million for the same period in 2016 primarily due to decreases in pumped water. Groundwater production assessments were $18.6 million in 2017 as compared to $15.0 million in 2016 due to an increase in pump tax rates and pump taxes paid for water storage rights during 2017 as compared to 2016.
 
The under-collection in the water supply cost balancing account increased $5.5 million during the year ended December 31, 2017 as compared to the same period in 2016 due to the higher purchased water costs as well as higher groundwater production assessments as compared to adopted water supply costs.

For the year ended December 31, 2017, the cost of power purchased for resale to BVES's customers was $10.7 million as compared to $10.4 million for the same period in 2016. The average price per megawatt-hour ("MWh"), including fixed costs, increased to $73.03 per MWh in 2017 from $69.54 per MWh for the year ended December 31, 2016.

Other Operation
The primary components of other operation expenses for GSWC include payroll, materials and supplies, chemicals and water treatment costs and outside service costs of operating the regulated water and electric systems, including the costs associated with transmission and distribution, pumping, water quality, meter reading, billing and operations of district offices.  Registrant’s contracted services operations incur many of the same types of expenses.  For the years ended December 31, 2017 and 2016, other operation expenses by business segment consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
22,189

 
$
21,649

 
$
540

 
2.5
 %
Electric Services
2,688

 
3,122

 
(434
)
 
-13.9
 %
Contracted Services
5,117

 
3,486

 
1,631

 
46.8
 %
Total other operation
$
29,994

 
$
28,257

 
$
1,737

 
6.1
 %
     During 2017, there was a $433,000 increase in surcharges billed to customers to recover previously incurred other operation expenses approved by the CPUC as part of the final decision on the water general rate case. These surcharges increased revenues and water gross margin with a corresponding increase in other operation expenses, resulting in no impact to earnings. Furthermore, in February 2017, the CPUC approved the recovery of incremental drought-related costs incurred in 2015 and 2016 during the drought state of emergency in California. As a result of the CPUC's approval, GSWC recorded a $1.2 million regulatory asset with a corresponding reduction in other operation expenses during the first quarter of 2017. Excluding the impact of surcharges and the recovery of drought-related costs, other operation expenses at the water segment increased by $1.3 million during the year ended December 31, 2017 as compared to the same period in 2016. The increase was due primarily to higher conservation costs, labor and bad debt expense.
The decrease in other operation expenses at the electric segment was due to outside services costs and labor costs incurred in response to power outages caused by severe winter storms experienced in January 2016. There were no similar events in 2017.
For the year ended December 31, 2017, total other operation expenses for the contracted services segment increased mainly due to transition costs incurred at Eglin, including a joint inventory study conducted with the U.S. government for the water and wastewater system infrastructure. ASUS assumed operations at Eglin in June 2017, which further increased other operation expenses in 2017 as compared to 2016. A joint inventory study with the U.S. government is currently underway at Fort Riley as part of its transition to ASUS. In accordance with the 50-year contract with the U.S. government, ASUS receives revenues to help cover the cost of the transition at Fort Riley. ASUS will assume the operations at Fort Riley in 2018 following the completion of a transition period currently underway.

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Table of Contents

Administrative and General
Administrative and general expenses include payroll related to administrative and general functions, the related employee benefits, insurance expenses, outside legal and consulting fees, regulatory utility commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the years ended December 31, 2017 and 2016, administrative and general expenses by business segment, including AWR (parent), consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
55,352

 
$
56,165

 
$
(813
)
 
-1.4
 %
Electric Services
6,879

 
7,901

 
(1,022
)
 
-12.9
 %
Contracted Services
19,335

 
16,909

 
2,426

 
14.3
 %
AWR (parent)
96

 
19

 
77

 
405.3
 %
Total administrative and general
$
81,662

 
$
80,994

 
$
668

 
0.8
 %
     Surcharges were implemented in 2017 to recover previously incurred administrative and general costs approved by the CPUC as part of the final decision on the water general rate case issued in March 2017.  A $3.3 million increase in revenues and water gross margin from these surcharges was offset by a corresponding increase in administrative and general expense to reflect the recovery of these costs, resulting in no impact to earnings. Excluding the increase in billed surcharges, administrative and general expenses at the water segment decreased by $4.1 million due primarily to lower legal expenses related to condemnation matters as compared to 2016. In addition, the Claremont settlement payment received in December 2017 included approximately $1.8 million in reimbursement of litigation costs, which was reflected as a reduction to legal expenses in 2017. These decreases were partially offset by higher medical insurance costs and general-rate-case-related expenses, as well as an $800,000 reduction to administrative and general expenses recorded in 2016 to reflect the CPUC's approval for recovery of previously incurred costs that were being tracked in CPUC-authorized memorandum accounts.
For the year ended December 31, 2017, administrative and general expenses for the electric segment decreased by $1.0 million as compared to 2016 due to lower regulatory costs, as well as decreases in costs associated with the energy-efficiency and solar-initiative programs approved by the CPUC.

For the year ended December 31, 2017, administrative and general expenses for contracted services increased by $2.4 million due primarily to (i) an increase in labor-related costs, (ii) the start of operations at Eglin in June 2017, which increased administrative and general expenses in 2017 as compared to 2016, and (iii) an increase in outside services costs related to new business development and compliance.
Depreciation and Amortization
For the years ended December 31, 2017 and 2016, depreciation and amortization expense by segment consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
35,706

 
$
35,777

 
$
(71
)
 
-0.2
 %
Electric Services
2,146

 
2,027

 
119

 
5.9
 %
Contracted Services
1,179

 
1,046

 
133

 
12.7
 %
Total depreciation and amortization
$
39,031

 
$
38,850

 
$
181

 
0.5
 %
For the year ended December 31, 2017, depreciation and amortization expense at the water segment decreased due primarily to retirements recorded during 2017 and 2016, as well as the sale of the Ojai utility assets in June 2017. These decreases were largely offset by additions to utility plant during 2017. The increases for the electric and contracted services segments were due primarily to additions to plant in 2017.


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Table of Contents

Maintenance
For the years ended December 31, 2017 and 2016, maintenance expense by segment consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
12,101

 
$
13,783

 
$
(1,682
)
 
-12.2
 %
Electric Services
869

 
736

 
133

 
18.1
 %
Contracted Services
2,206

 
1,951

 
255

 
13.1
 %
Total maintenance
$
15,176

 
$
16,470

 
$
(1,294
)
 
-7.9
 %
Maintenance expense for water services decreased by $1.7 million due to an overall lower level of planned and unplanned maintenance in 2017. Maintenance expense for contracted services increased due primarily to the commencement of operations at Eglin in June 2017.
    
Property and Other Taxes
For the years ended December 31, 2017 and 2016, property and other taxes by segment, consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
15,336

 
$
14,362

 
$
974

 
6.8
 %
Electric Services
1,066

 
1,082

 
(16
)
 
-1.5
 %
Contracted Services
1,503

 
1,357

 
146

 
10.8
 %
Total property and other taxes
$
17,905

 
$
16,801

 
$
1,104

 
6.6
 %
 Property and other taxes increased overall by $1.1 million during 2017 as compared to 2016 due primarily to capital additions at the water segment.

ASUS Construction
For the year ended December 31, 2017, construction expenses for contracted services were $49.8 million, decreasing by $3.9 million compared to the same period in 2016 due to an overall decrease in construction activity.
Gain on Sale of Assets
In June 2017, GSWC completed the sale of its Ojai water system to Casitas for $34.3 million, resulting in a pretax gain of $8.3 million on the sale of the assets.

Interest Expense
     For the years ended December 31, 2017 and 2016, interest expense by segment, including AWR (parent), consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
20,670

 
$
20,430

 
$
240

 
1.2
%
Electric Services
1,385

 
1,352

 
33

 
2.4
%
Contracted Services
269

 
76

 
193

 
253.9
%
AWR (parent)
258

 
134

 
124

 
92.5
%
Total interest expense
$
22,582

 
$
21,992

 
$
590

 
2.7
%
     Overall, interest expense for the year ended December 31, 2017 increased by $590,000 as compared to the same period in 2016 due largely to higher average borrowings on the revolving credit facility as compared to 2016. The borrowings were used to fund operations and a portion of capital expenditures. The proceeds received in June 2017 from the completed sale of GSWC's Ojai system were used to repay a portion of these borrowings. Borrowings on the revolving credit facility are expected to continue in 2018 to fund operations and a portion of capital expenditures.

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Table of Contents

Interest Income
For the years ended December 31, 2017 and 2016, interest income by business segment, including AWR (parent), consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
1,761

 
$
734

 
$
1,027

 
139.9
 %
Electric Services
5

 
15

 
(10
)
 
-66.7
 %
Contracted Services
14

 
8

 
6

 
75.0
 %
AWR (parent)
10

 

 
10

 
 %
Total interest income
$
1,790

 
$
757

 
$
1,033

 
136.5
 %
     Interest income increased by $1.0 million for the year ended December 31, 2017 as compared to the same period in 2016 due primarily to (i) the collection of certain amounts from developers previously owed to GSWC, (ii) higher interest income on GSWC's regulatory assets resulting mostly from an increase in the 90-day commercial paper rate, and (iii) interest income related to the Claremont settlement payment received in December 2017.
 
Other, net
For the year ended December 31, 2017, other income increased by $1.1 million primarily due to higher gains recorded on investments held for a retirement benefit plan resulting from more favorable market conditions as compared to 2016.
 
Income Tax Expense
For the years ended December 31, 2017 and 2016, income tax expense by segment, including AWR (parent), consisted of the following amounts (in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2017
 
12/31/2016
 
CHANGE
 
CHANGE
Water Services
$
32,212

 
$
25,894

 
$
6,318

 
24.4
 %
Electric Services
1,847

 
2,715

 
(868
)
 
-32.0
 %
Contracted Services
7,136

 
6,672

 
464

 
7.0
 %
AWR (parent)
(2,221
)
 
(546
)
 
(1,675
)
 
306.8
 %
Total income tax expense
$
38,974

 
$
34,735

 
$
4,239

 
12.2
 %
 
Consolidated income tax expense for the year ended December 31, 2017 increased by $4.2 million due primarily to an increase in pretax income. AWR's effective income tax rate ("ETR") was 36.0% and 36.8% for the years ended December 31, 2017 and 2016, respectively. The ETR for GSWC was 38.8% for 2017 as compared to 37.9% for 2016 due, in part, to the remeasurement of non rate-regulated deferred tax assets as a result of the Tax Act, which reduced the federal corporate tax rate from 35% to 21%. The earnings impact of this increase in GSWC's ETR was largely offset by a reduction in deferred tax liabilities at AWR (parent), due also to the remeasurement of federal deferred tax liabilities associated with the California state unitary deferred tax balance.

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Table of Contents

Consolidated Results of Operations — Years Ended December 31, 2016 and 2015 (amounts in thousands, except per share amounts):
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2016
 
12/31/2015
 
CHANGE
 
CHANGE
OPERATING REVENUES
 

 
 

 
 

 
 

Water
$
302,931

 
$
328,511

 
$
(25,580
)
 
-7.8
 %
Electric
35,771

 
36,039

 
(268
)
 
-0.7
 %
Contracted services
97,385

 
94,091

 
3,294

 
3.5
 %
Total operating revenues
436,087

 
458,641

 
(22,554
)
 
-4.9
 %
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 

 
 

 
 

 
 

Water purchased
64,442

 
62,726

 
1,716

 
2.7
 %
Power purchased for pumping
8,663

 
8,988

 
(325
)
 
-3.6
 %
Groundwater production assessment
14,993

 
13,648

 
1,345

 
9.9
 %
Power purchased for resale
10,387

 
10,395

 
(8
)
 
-0.1
 %
Supply cost balancing accounts
(12,206
)
 
7,785

 
(19,991
)
 
-256.8
 %
Other operation
28,257

 
28,429

 
(172
)
 
-0.6
 %
Administrative and general
80,994

 
79,817

 
1,177

 
1.5
 %
Depreciation and amortization
38,850

 
42,033

 
(3,183
)
 
-7.6
 %
Maintenance
16,470

 
16,885

 
(415
)
 
-2.5
 %
Property and other taxes
16,801

 
16,636

 
165

 
1.0
 %
ASUS construction
53,720

 
52,810

 
910

 
1.7
 %
Total operating expenses
321,371

 
340,152

 
(18,781
)
 
-5.5
 %
 
 
 
 
 
 
 
 
OPERATING INCOME
114,716

 
118,489

 
(3,773
)
 
-3.2
 %
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 

 
 

 
 

 
 

Interest expense
(21,992
)
 
(21,088
)
 
(904
)
 
4.3
 %
Interest income
757

 
458

 
299

 
65.3
 %
Other, net
997

 
356

 
641

 
180.1
 %
 
(20,238
)
 
(20,274
)
 
36

 
-0.2
 %
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
94,478

 
98,215

 
(3,737
)
 
-3.8
 %
 
 
 
 
 
 
 
 
Income tax expense
34,735

 
37,731

 
(2,996
)
 
-7.9
 %
 
 
 
 
 
 
 
 
NET INCOME
$
59,743

 
$
60,484

 
$
(741
)
 
-1.2
 %
 
 
 
 
 
 
 
 
Basic earnings per Common Share
$
1.63

 
$
1.61

 
$
0.02

 
1.2
 %
 
 
 
 
 
 
 
 
Fully diluted earnings per Common Share
$
1.62

 
$
1.60

 
$
0.02

 
1.3
 %


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Table of Contents

The table below sets forth diluted earnings per share by business segment for AWR’s operations: 
 
Diluted Earnings per Share
 
Year Ended
 
 
 
12/31/2016
 
12/31/2015
 
CHANGE
Water
$
1.17

 
$
1.19

 
$
(0.02
)
Electric
0.10

 
0.07

 
0.03

Contracted services
0.33

 
0.32

 
0.01

AWR (parent)
0.02

 
0.02

 

Totals from operations, as reported
$
1.62

 
$
1.60

 
$
0.02

Water Segment:
For the year ended December 31, 2016, fully diluted earnings per share for the water segment decreased by $0.02 per share to $1.17 per share, as compared to $1.19 per share for 2015.  The discussion below includes the major items, which impacted the comparability of the two periods.
The water gross margin decreased by $9.9 million as a result of lower 2016 adopted revenues authorized by the CPUC's decision in the water general rate case ("GRC"), which sets new rates for the years 2016 - 2018. The adopted gross margin in this rate cycle (starting with 2016) was lower due, in large part, to decreases in adopted expenses including depreciation expense resulting from an updated depreciation study, and many other operating expenses resulting from GSWC's cost containment initiatives. The reduction in the water gross margin was mostly offset by corresponding decreases in depreciation and certain other operating expenses as discussed below. The decrease in the adopted water gross margin was also partially offset by (i) the recognition of a portion of the 2015 WRAM revenues that had previously been deferred as required under the accounting guidance for revenue programs such as the WRAM, (ii) new revenues generated from a water system acquired in October 2015, (iii) higher revenues due to increased consumption as compared to 2015 from customers that are not subject to conservation rates, and (iv) revenues from advice letter capital projects approved by the CPUC in 2015.
Total operating expenses (excluding supply costs, and condemnation-related costs discussed below) decreased by approximately $7.6 million. The lower operating expenses, most of which were reflected in the lower gross margin, included a decrease in (i) depreciation expense resulting from a new depreciation study approved in the water GRC, (ii) allocated costs to the water segment from corporate headquarters as stipulated in the water GRC, and (iii) pension and other operating expenses. In addition, the CPUC's approval for recovery of approximately $800,000 of previously incurred costs, which were being tracked in CPUC-authorized memorandum accounts, was reflected as a decrease in operating expenses.
Negatively impacting the water segment’s results was an increase of approximately $4.0 million in legal and other outside service costs incurred on condemnation-related matters.
Favorably impacting the water segment’s results was (i) a decrease in the effective income tax rate for the water segment due to differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, and (ii) the cumulative impact of lower Common Shares outstanding resulting from stock repurchase programs in 2014 and 2015.
Electric Segment:
For the year ended December 31, 2016, diluted earnings from the electric segment increased by $0.03 per share as compared to the same period in 2015. There was an increase in the electric gross margin resulting from CPUC approval of fourth-year rate increases effective January 1, 2016, as well as CPUC-approved rate increases generated from advice letter filings approved in 2015 and 2016. There was also a decrease in allocated costs to the electric segment from corporate headquarters as stipulated in the water GRC decision and a decrease in expenses associated with the CPUC-approved solar-initiative program.
Contracted Services Segment:
For the year ended December 31, 2016, diluted earnings from contracted services were $0.33 per share, compared to $0.32 per share for the same period in 2015. The increase in earnings was due to higher contracted services revenue resulting from an increase in ongoing operations and maintenance revenues due to the successful resolution of price redeterminations, economic price adjustments and asset transfers, and an overall increase in construction activity and a higher direct construction margin percentage resulting from improved cost efficiencies. The effect of these favorable variances was partially offset by (i) an increase in the allocation of administrative and general expenses from corporate headquarters to the contracted services

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Table of Contents

segment as stipulated in the water GRC, (ii) an increase in ASUS labor and outside services costs, and (iii) a higher effective income tax rate resulting primarily from an increase in state income taxes as compared to the same period in 2015. State income taxes vary among the jurisdictions in which the contracted services business operates. In addition, there was $3.0 million of retroactive revenues recorded in 2015 related to periods prior to 2015 resulting from the resolution of several price redeterminations, as compared to approximately $421,000 in retroactive revenues recorded in 2016 related to 2015.
The following discussion and analysis for the years ended December 31, 2016 and 2015 provides information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC and ASUS and its subsidiaries.

Operating Revenues
Water
For the year ended December 31, 2016, revenues from water operations decreased by $25.6 million to $302.9 million, compared to $328.5 million for the year ended December 31, 2015. The 2016 adopted revenues in the CPUC's December 2016 decision on the water general rate case were approximately $29.8 million lower than the 2015 adopted revenues mainly due to reductions in the revenue requirement for: (i) supply costs caused by lower consumption, (ii) depreciation expense resulting from an updated depreciation study, and (iii) other operating expenses resulting from GSWC's cost containment initiatives. This reduction in water revenues was mostly offset by corresponding decreases in supply costs, depreciation and certain other operating expenses.
The reduction in adopted revenues was partially offset by (i) revenues generated from a water system acquired in October 2015, (ii) higher revenues due to increased consumption as compared to 2015 from customers that are not subject to conservation rates, (iii) revenues from advice letter capital projects approved by the CPUC in 2015, and (iv) the recognition of a portion of the 2015 WRAM revenues that had previously been deferred as required under the accounting guidance for alternative revenue programs such as the WRAM. Under the accounting guidance, GSWC is required to collect its WRAM balances, net of MCBA, within 24 months following the year in which they are recorded. During the fourth quarter of 2015, GSWC did not record water revenues of $1.4 million related to its 2015 under-collected WRAM balances as it was estimated that this amount would not be fully collected within 24 months following the end of 2015 using the required CPUC amortization guidelines. During 2016, GSWC recognized approximately $910,000 of the $1.4 million as water revenue.
Billed water consumption for the year ended December 31, 2016 increased slightly as compared to the same period in 2015. In general, changes in consumption do not have a significant impact on recorded revenues due to the CPUC-approved WRAM accounts in place in all three water regions. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
Electric
For the year ended December 31, 2016, revenues from electric operations were $35.8 million as compared to $36.0 million for the year ended December 31, 2015. The decrease was due to the termination in August 2015 of a supply cost surcharge to recover previously incurred energy costs. The decrease in revenues from the termination of this surcharge was approximately $1.4 million and had no impact on pretax operating income due to an offsetting decrease in supply costs. This decrease in revenue was mostly offset by CPUC-approved fourth-year rate increases effective January 1, 2016, and rate increases generated from advice letter filings approved by the CPUC during 2015 and 2016.
 Billed electric usage for the year ended December 31, 2016 decreased by approximately 4% as compared to the same period in 2015.  The cold weather and storms experienced in the Big Bear area in late 2016 resulted in less need for snowmaking. In addition, solar and energy efficiency programs offered by BVES have resulted in less customer usage. Due to the CPUC-approved BRRAM, which adjusts base revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.
Contracted Services
Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the year ended December 31, 2016, revenues from contracted services were $97.4 million as compared to $94.1 million for 2015.  There was an increase in ongoing operations and maintenance management fees due to the successful resolution of price redeterminations, economic price adjustments and asset transfers. There was also an overall increase in construction activity at various military bases as compared to 2015. These increases were partially offset by a decrease in retroactive revenues received in 2016 as compared to 2015. In 2015, there was $3.0 million of retroactive management fee revenues recorded related to periods prior to 2015 resulting from the resolution of several price redeterminations, as compared to approximately $421,000 in retroactive revenues recorded in 2016 related to 2015.

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Table of Contents

Operating Expenses:
     Supply Costs
Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for 26.8% and 30.4% of total operating expenses for the years ended December 31, 2016 and 2015, respectively.     The table below provides the amounts (in thousands) of increases (decreases) and percent changes in water and electric revenues, supply costs and gross margins during the years ended December 31, 2016 and 2015:
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2016
 
12/31/2015
 
CHANGE
 
CHANGE
WATER OPERATING REVENUES (1)
$
302,931

 
$
328,511

 
$
(25,580
)
 
-7.8
 %
WATER SUPPLY COSTS: