Document
Table of Contents

 

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
 
(Mark One)
 
x
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended March 31, 2018
or
¨
Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from                    to                   
 
Commission file number   001-14431 
American States Water Company
(Exact Name of Registrant as Specified in Its Charter)
 
California
 
95-4676679
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Commission file number   001-12008 
Golden State Water Company
(Exact Name of Registrant as Specified in Its Charter)
California
 
95-1243678
(State or Other Jurisdiction of Incorporation or Organization)
 
(IRS Employer Identification No.)
630 E. Foothill Blvd, San Dimas, CA
 
91773-1212
(Address of Principal Executive Offices)
 
(Zip Code)
(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)
Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
American States Water Company
 
Yes x No ¨
Golden State Water Company
 
Yes x No ¨
 
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).


Table of Contents

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

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
 Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)
American States Water Company
 
Yes ¨ Nox
Golden State Water Company
 
Yes ¨ Nox
As of May 1, 2018, the number of Common Shares outstanding of American States Water Company was 36,733,416 shares. As of May 1, 2018, all of the 146 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.
Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.
 



AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
FORM 10-Q
 
INDEX


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


Table of Contents

PART I
Item 1. Financial Statements
General
 The basic financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.
 Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consisting of normal recurring items and estimates necessary for a fair statement of results for the interim period have been made.
 It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the latest Annual Report on Form 10-K of American States Water Company and its wholly owned subsidiary, Golden State Water Company. 
Filing Format
American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. and its subsidiaries ("ASUS").
This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: AWR and GSWC. For more information, please see Note 1 of the Notes to Consolidated Financial Statements and the heading entitled "General" in "Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations." References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report other than with respect to itself.
 
Forward-Looking Information
 This Form 10-Q and the documents incorporated herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.  For example, when we use words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements.  We are not able to predict all the factors that may affect future results.  We caution you that any forward-looking statements made by us are not guarantees of future performance and the actual results may differ materially from those in our forward-looking statements.  Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements or from historical results, include, but are not limited to: 

the outcome of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in GSWC's general rate cases and the results of independent audits of GSWC's construction contracting procurement practices or other independent audits of our costs;
 
changes in the policies and procedures of the California Public Utilities Commission ("CPUC");
 
timeliness of CPUC action on 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;


1

Table of Contents

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

the impact of condemnation actions on future GSWC revenues and other aspects of our business if we do not receive adequate compensation for the assets taken, or recovery of all charges associated with the condemnation of such assets, as well as 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;

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, 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's 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;

2

Table of Contents

 
termination, in whole or in part, of one or more of ASUS's 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 of ASUS 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 ASUS 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 ASUS's contracts to provide water and/or wastewater services at military bases because of audits, cost reviews or investigations by contracting agencies;
 
inaccurate assumptions used by ASUS in preparing bids in our contracted services business;

failure of wastewater systems that ASUS operates 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 ASUS 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, other third parties and/or the U.S. government 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 (which are more fully disclosed in our 2017 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all our forward-looking statements by these cautionary statements.

3

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


(in thousands)
 
March 31,
2018
 
December 31, 2017
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,740,785

 
$
1,722,421

Non-utility property, at cost
 
18,740

 
15,941

Total
 
1,759,525

 
1,738,362

Less - Accumulated depreciation
 
(540,695
)
 
(533,370
)
Net property, plant and equipment
 
1,218,830

 
1,204,992

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
23,744

 
24,070

Total other property and investments
 
24,860

 
25,186

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
5,984

 
214

Accounts receivable — customers (less allowance for doubtful accounts of $786 in 2018 and $806 in 2017)
 
19,224

 
26,127

Unbilled receivable
 
27,959

 
26,411

Receivable from the U.S. government
 
20,357

 
3,725

Other accounts receivable (less allowance for doubtful accounts of $219 in 2018 and $235 in 2017)
 
3,849

 
8,251

Income taxes receivable
 
2,074

 
4,737

Materials and supplies, at average cost
 
4,601

 
4,795

Regulatory assets — current
 
30,844

 
34,220

Prepayments and other current assets
 
8,783

 
5,596

Contract assets
 
22,001

 

Costs and estimated earnings in excess of billings on contracts
 

 
41,387

Total current assets
 
145,676

 
155,463

 
 
 
 
 
Other Assets
 
 

 
 

Receivable from the U.S. government
 
28,026

 

Contract assets
 
564

 

Costs and estimated earnings in excess of billings on contracts
 

 
25,426

Other
 
5,708

 
5,667

Total regulatory and other assets
 
34,298

 
31,093

 
 
 
 
 
Total Assets
 
$
1,423,664

 
$
1,416,734

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





4

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

(in thousands)
 
March 31,
2018
 
December 31,
2017
Capitalization
 
 

 
 

Common shares, no par value
 
 
 
 
Authorized: 60,000,000 shares
 
 
 
 
Outstanding: 36,733,416 shares in 2018 and 36,680,794 shares in 2017
 
$
250,339

 
$
250,124

Earnings reinvested in the business
 
281,185

 
279,821

Total common shareholders’ equity
 
531,524

 
529,945

Long-term debt
 
281,053

 
321,039

Total capitalization
 
812,577

 
850,984

 
 
 
 
 
Current Liabilities
 
 

 
 

Notes payable to bank
 
69,000

 
59,000

Long-term debt — current
 
40,321

 
324

Accounts payable
 
38,794

 
50,978

Income taxes payable
 
238

 
225

Accrued other taxes
 
5,939

 
7,344

Accrued employee expenses
 
13,647

 
12,969

Accrued interest
 
6,617

 
3,861

Unrealized loss on purchased power contracts
 
2,625

 
2,941

Contract liabilities
 
6,583

 
3,911

Other
 
12,727

 
15,109

Total current liabilities
 
196,491

 
156,662

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
67,364

 
67,465

Contributions in aid of construction - net
 
123,715

 
123,602

Deferred income taxes
 
116,816

 
115,703

Regulatory liabilities
 
35,572

 
32,178

Unamortized investment tax credits
 
1,419

 
1,436

Accrued pension and other postretirement benefits
 
58,626

 
57,695

Other
 
11,084

 
11,009

Total other credits
 
414,596

 
409,088

 
 
 
 
 
Commitments and Contingencies (Note 9)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,423,664

 
$
1,416,734

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

5

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2018 AND 2017
(Unaudited)


 
 
Three Months Ended March 31,
(in thousands, except per share amounts)
 
2018
 
2017
Operating Revenues
 
 

 
 

Water
 
$
64,412

 
$
66,404

Electric
 
9,832

 
10,502

Contracted services
 
20,484

 
21,904

Total operating revenues
 
94,728

 
98,810

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
13,607

 
12,106

Power purchased for pumping
 
1,693

 
1,597

Groundwater production assessment
 
4,651

 
3,375

Power purchased for resale
 
3,408

 
3,100

Supply cost balancing accounts
 
(3,869
)
 
(1,749
)
Other operation
 
7,988

 
6,160

Administrative and general
 
20,293

 
20,448

Depreciation and amortization
 
9,666

 
9,683

Maintenance
 
3,829

 
3,464

Property and other taxes
 
4,799

 
4,566

ASUS construction
 
9,972

 
11,484

Total operating expenses
 
76,037

 
74,234

 
 
 
 
 
Operating Income
 
18,691

 
24,576

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,923
)
 
(5,905
)
Interest income
 
536

 
259

Other, net
 
42

 
626

Total other income and expenses, net
 
(5,345
)
 
(5,020
)
 
 
 
 
 
Income before income tax expense
 
13,346

 
19,556

 
 
 
 
 
Income tax expense
 
2,564

 
6,855

 
 
 
 
 
Net Income
 
$
10,782

 
$
12,701

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,712

 
36,590

Basic Earnings Per Common Share
 
$
0.29

 
$
0.35

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,874

 
36,782

Fully Diluted Earnings Per Common Share
 
$
0.29

 
$
0.34

 
 
 
 
 
Dividends Declared Per Common Share
 
$
0.255

 
$
0.242

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

6

Table of Contents
AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(Unaudited)

 
 
Three Months Ended 
 March 31,
(in thousands)
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
10,782

 
$
12,701

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

 
 

Depreciation and amortization
 
9,726

 
9,744

Provision for doubtful accounts
 
151

 
157

Deferred income taxes and investment tax credits
 
440

 
6,225

Stock-based compensation expense
 
998

 
1,030

Other — net
 
303

 
(349
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
6,743

 
4,097

Unbilled receivable
 
(1,548
)
 
4,221

Other accounts receivable
 
4,411

 
1,318

Receivables from the U.S. government
 
(6,629
)
 
(554
)
Materials and supplies
 
194

 
(523
)
Prepayments and other assets
 
(3,178
)
 
(1,308
)
Contract assets
 
6,219

 

Costs and estimated earnings in excess of billings on contracts
 

 
(989
)
Regulatory assets
 
6,716

 
(8,972
)
Accounts payable
 
(5,963
)
 
1,488

Income taxes receivable/payable
 
2,676

 
2,853

Contract liabilities / billings in excess of costs and estimated earnings on contracts
 
2,672

 
(1,520
)
Accrued pension and other post-retirement benefits
 
1,356

 
1,216

Other liabilities
 
(341
)
 
(2,813
)
Net cash provided
 
35,728

 
28,022

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(30,364
)
 
(23,994
)
Other investing activities
 
130

 
40

Net cash used
 
(30,234
)
 
(23,954
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
340

 
35

Receipt of advances for and contributions in aid of construction
 
1,083

 
1,078

Refunds on advances for construction
 
(486
)
 
(767
)
Retirement or repayments of long-term debt
 
(89
)
 
(83
)
Net change in notes payable to banks
 
10,000

 
6,000

Dividends paid
 
(9,362
)
 
(8,854
)
Other financing activities
 
(1,210
)
 
(1,292
)
Net cash provided (used)
 
276

 
(3,883
)
Net change in cash and cash equivalents
 
5,770

 
185

Cash and cash equivalents, beginning of period
 
214

 
436

Cash and cash equivalents, end of period
 
$
5,984

 
$
621

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
13,910

 
$
12,286

Property installed by developers and conveyed
 
$
421

 
$
101



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

7

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

(in thousands)
 
March 31,
2018
 
December 31,
2017
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,740,785

 
$
1,722,421

Less - Accumulated depreciation
 
(531,486
)
 
(524,481
)
Net utility plant
 
1,209,299

 
1,197,940

 
 
 
 
 
Other Property and Investments
 
21,642

 
21,956

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
2,261

 
214

Accounts receivable-customers (less allowance for doubtful accounts of $786 in 2018 and $806 in 2017)
 
19,224

 
26,127

Unbilled receivable
 
17,578

 
18,852

Other accounts receivable (less allowance for doubtful accounts of $59 in 2018 and $59 in 2017)
 
2,721

 
6,105

Income taxes receivable from Parent
 
3,994

 
6,590

Materials and supplies, at average cost
 
3,949

 
4,046

Regulatory assets — current
 
30,844

 
34,220

Prepayments and other current assets
 
7,370

 
5,090

Total current assets
 
87,941

 
101,244

 
 
 
 
 
Other Assets
 
 

 
 

Other
 
5,674

 
5,683

Total other assets
 
5,674

 
5,683

 
 
 
 
 
Total Assets
 
$
1,324,556

 
$
1,326,823

 
The accompanying notes are an integral part of these financial statements

8

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

(in thousands)
 
March 31,
2018
 
December 31, 2017
Capitalization
 
 

 
 

Common Shares, no par value:
 
 
 
 
 Authorized: 1,000 shares
 
 
 
 
 Outstanding: 146 shares in 2018 and 2017
 
$
241,964

 
$
242,181

Earnings reinvested in the business
 
231,654

 
232,193

Total common shareholder’s equity
 
473,618

 
474,374

Long-term debt
 
281,053

 
321,039

Total capitalization
 
754,671

 
795,413

 
 
 
 
 
Current Liabilities
 
 

 
 

Inter-company payable
 
40,785

 
34,836

Long-term debt — current
 
40,321

 
324

Accounts payable
 
31,312

 
42,497

Accrued other taxes
 
5,675

 
7,108

Accrued employee expenses
 
11,698

 
11,338

Accrued interest
 
6,338

 
3,585

Unrealized loss on purchased power contracts
 
2,625

 
2,941

Other
 
11,998

 
14,705

Total current liabilities
 
150,752

 
117,334

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
67,364

 
67,465

Contributions in aid of construction — net
 
123,715

 
123,602

Deferred income taxes
 
121,452

 
120,780

Regulatory liabilities
 
35,572

 
32,178

Unamortized investment tax credits
 
1,419

 
1,436

Accrued pension and other postretirement benefits
 
58,626

 
57,695

Other
 
10,985

 
10,920

Total other credits
 
419,133

 
414,076

 
 
 
 
 
Commitments and Contingencies (Note 9)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,324,556

 
$
1,326,823

 
The accompanying notes are an integral part of these financial statements

9

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2018 AND 2017
(Unaudited)

 
 
Three Months Ended March 31,
(in thousands)
 
2018
 
2017
Operating Revenues
 
 
 
 
Water
 
$
64,412

 
$
66,404

Electric
 
9,832

 
10,502

Total operating revenues
 
74,244

 
76,906

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
13,607

 
12,106

Power purchased for pumping
 
1,693

 
1,597

Groundwater production assessment
 
4,651

 
3,375

Power purchased for resale
 
3,408

 
3,100

Supply cost balancing accounts
 
(3,869
)
 
(1,749
)
Other operation
 
6,434

 
4,553

Administrative and general
 
15,148

 
15,499

Depreciation and amortization
 
9,334

 
9,438

Maintenance
 
3,155

 
2,921

Property and other taxes
 
4,386

 
4,190

Total operating expenses
 
57,947

 
55,030

 
 
 
 
 
Operating Income
 
16,297

 
21,876

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,759
)
 
(5,757
)
Interest income
 
380

 
237

Other, net
 
87

 
666

Total other income and expenses, net
 
(5,292
)
 
(4,854
)
 
 
 
 
 
Income before income tax expense
 
11,005

 
17,022

 
 
 
 
 
Income tax expense
 
2,115

 
6,273

 
 
 
 
 
Net Income
 
$
8,890

 
$
10,749

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


10

Table of Contents
GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2018 AND 2017
(Unaudited)

 
 
 
Three Months Ended 
 March 31,
(in thousands)
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
8,890

 
$
10,749

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

 
 

Depreciation and amortization
 
9,394

 
9,499

Provision for doubtful accounts
 
160

 
157

Deferred income taxes and investment tax credits
 
72

 
6,364

Stock-based compensation expense
 
752

 
806

Other — net
 
280

 
(367
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
6,743

 
4,097

Unbilled receivable
 
1,274

 
2,691

Other accounts receivable
 
3,384

 
800

Materials and supplies
 
97

 
(306
)
Prepayments and other assets
 
(2,271
)
 
(676
)
Regulatory assets
 
6,716

 
(8,972
)
Accounts payable
 
(4,937
)
 
2,531

Inter-company receivable/payable
 
(51
)
 
(729
)
Income taxes receivable/payable from/to Parent
 
2,596

 
2,419

Accrued pension and other post-retirement benefits
 
1,356

 
1,216

Other liabilities
 
(1,025
)
 
(3,271
)
Net cash provided
 
33,430

 
27,008

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(27,592
)
 
(23,707
)
Other investing activities
 
130

 
40

Net cash used
 
(27,462
)
 
(23,667
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
1,083

 
1,078

Refunds on advances for construction
 
(486
)
 
(767
)
Retirement or repayments of long-term debt
 
(89
)
 
(83
)
Net change in inter-company borrowings
 
6,000

 
(2,500
)
Dividends paid
 
(9,380
)
 

Other financing activities
 
(1,049
)
 
(1,091
)
Net cash used
 
(3,921
)
 
(3,363
)
 
 
 
 
 
Net increase (decrease) in cash and cash equivalents
 
2,047

 
(22
)
Cash and cash equivalents, beginning of period
 
214

 
209

Cash and cash equivalents, end of period
 
$
2,261

 
$
187

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
13,880

 
$
12,286

Property installed by developers and conveyed
 
$
421

 
$
101

 
The accompanying notes are an integral part of these financial statements

11

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


Note 1 — Summary of Significant Accounting Policies
 
Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. (“ASUS”) (and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”), Old North Utility Services, Inc. (“ONUS”), Emerald Coast Utility Services, Inc. ("ECUS"), and Fort Riley Utility Services, Inc. ("FRUS")).  The subsidiaries of ASUS are collectively referred to as the “Military Utility Privatization Subsidiaries.”
 
GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 259,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 24,000 customers through its Bear Valley Electric Service (“BVES”) division. . The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses in matters including properties, rates, services, facilities and transactions by GSWC with its affiliates. 
 
ASUS, through its wholly owned subsidiaries, operates, maintains and performs construction activities (including renewal and replacement capital work) on water and/or wastewater systems at various U.S. military bases pursuant to 50-year firm fixed-price contracts. These contracts are subject to economic price adjustments and modifications for changes in circumstances, changes in laws and regulations and additions to the contract value for new construction of facilities at the military bases. In September 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 contract over the 50-year period is subject to annual economic price adjustments. ASUS will assume operations at Fort Riley following the completion of a six-to-twelve-month transition period currently underway.

There is no direct regulatory oversight by the CPUC over AWR or the operations, rates or services provided by ASUS or any of its wholly owned subsidiaries.
 
Basis of Presentation: The consolidated financial statements and notes thereto are presented in a combined report filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified. Certain prior period amounts have been reclassified on the income statements to conform to the current period presentation of net periodic pension and postretirement benefit costs.
 
AWR owns all of the outstanding Common Shares of GSWC and ASUS. ASUS owns all of the outstanding Common Shares of the Military Utility Privatization Subsidiaries. The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements.
 
The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  The December 31, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2017 filed with the SEC.
 
GSWC's Related Party Transactions: GSWC and ASUS provide and/or receive various support services to and from their parent, AWR, and among themselves. GSWC also allocates certain corporate office administrative and general costs to its affiliate, ASUS, using allocation factors approved by the CPUC. GSWC allocated corporate office administrative and general costs to ASUS of approximately $1.0 million during each of the three months ended March 31, 2018 and 2017. In addition, AWR

12

Table of Contents

has a $150.0 million syndicated credit facility, which expires on May 23, 2018. AWR has the ability to extend the maturity of the facility to December 31, 2018. Management expects to either renew or extend this facility prior to its current expiration date. AWR borrows under this facility and provides funds to its subsidiaries, GSWC and ASUS, in support of their operations.  As of March 31, 2018, there was $69.0 million outstanding under this facility. The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest expense under the credit facility.

In October 2015, AWR issued interest-bearing promissory notes (the "Notes") to GSWC and ASUS for $40 million and $10 million, respectively, which expire on May 23, 2018. Under the terms of these Notes, AWR may borrow from GSWC and ASUS amounts up to $40 million and $10 million, respectively, for working capital purposes. AWR agrees to pay any unpaid principal amounts outstanding under these notes, plus accrued interest. As of March 31, 2018 and 2017, there were no amounts outstanding under these notes.

GSWC Long-Term Debt: In March of 2019, $40 million of GSWC's 6.70% senior note will mature, which has been included in "Current Liabilities" in Registrant's balance sheets as of March 31, 2018. GSWC intends to draw down on its short-term borrowings and/or issue additional long-term debt to fund the repayment of this note and fund its ongoing capital expenditure program.
 
Recently Issued Accounting Pronouncements: In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, an entity recognizes revenue when it transfers promised goods or services to customers in an amount that reflects what the entity expects in exchange for the goods or services. Registrant adopted this guidance under the modified retrospective approach beginning January 1, 2018. The adoption of this guidance did not have a material impact on its measurement or timing of revenue recognition but requires additional disclosures (see Note 2).

In March 2017, the FASB issued Accounting Standards Update 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the financial statement presentation for the costs of defined benefit pension plans and other retirement benefits. Prior to this guidance, the components of net benefit cost for retirement plans (such as service cost, interest cost, expected return on assets, and the amortization of prior service costs and actuarial gains and losses), were aggregated as operating costs for financial statement presentation purposes. Under the new guidance, the service cost component continues to be presented as operating costs, while all other components of net benefit cost are presented outside of operating income. The new guidance also limits any capitalization of net periodic benefits cost to the service cost component. Registrant adopted the new guidance beginning January 1, 2018, which did not have a material impact on Registrant's financial statements. Registrant used prior year's disclosure of its pension and other employee benefit plans as an estimation for applying the retrospective presentation requirements of this guidance. The components of net periodic benefits cost, other than the service cost component, have been included in the line item “Other, net” in Registrant's income statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The adoption of this new guidance in 2018 did not have an impact on Registrant's cash flow statements.
        
In February 2016, the FASB issued a new lease accounting standard, Leases (ASC 842). Under the new standard, lessees will recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Registrant will use the practical methods available under this standard and will not reassess: (i) whether any expired to existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) any initial direct costs for existing leases, if any. Management has not yet determined the effect of the standard on Registrant's financial statements, which will depend on Registrant’s lease portfolio as of the adoption date.

13

Table of Contents

Note 2 — Revenues from Contracts with Customers
 
Most of Registrant's revenues are derived from contracts with customers, including tariff-based revenues from its regulated utilities. The adoption of the new revenue recognition accounting standard, "Revenue from Contracts with Customers - (Topic 606)," did not have a material impact on Registrant's measurement or timing of revenue recognition.

GSWC's performance obligations for its water and electric utility operations involve providing water and electric utility services to customers. The transaction prices for water and electric revenues are based on tariff rates authorized by the CPUC, which have both quantity and flat charges. Tariff revenues represent the adopted revenue requirement authorized by the CPUC intended to provide GSWC with a reasonable opportunity to recover its costs and earn a return on its net capital investment. The annual revenue requirements are comprised of authorized operation and maintenance costs, administrative and general costs, depreciation, taxes and a return on rate base consistent with the authorized capital structure.

Water and electric revenues are recognized over time as customers simultaneously receive and use the utility services provided. Water and electric revenues include amounts billed to customers on a cycle basis based on meter readings for services provided. Customer bills also include surcharges for cost-recovery activities, which represent CPUC-authorized balancing and memorandum accounts that allow for the recovery of previously incurred operating costs. Revenues from these surcharges result in no impact to earnings as they are offset by corresponding increases in operating expenses to reflect the recovery of the associated costs. Customer payment terms are approximately 20 business days from the billing date. Unbilled revenues are amounts estimated to be billed for usage since the last meter-reading date to the end of the accounting period. Historical customer usage forms the basis for estimating unbilled revenue.

GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on their ordinances) in order to use public rights of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate for each ratemaking area as applicable. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect them from its customers, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $853,000 and $827,000 for the three months ended March 31, 2018 and 2017, respectively. When GSWC acts as an agent, and a tax is not required to be remitted if it is not collected from customers, the tax is accounted for on a net basis.

GSWC revenues tracked under the Water Revenue Adjustment Mechanism (“WRAM”) regulatory accounts for its water segment, and the Base Revenue Requirement Adjustment Mechanism ("BRRAM") regulatory account for its electric segment, are alternative revenue programs accounted for under Accounting Standards Codification ("ASC") Topic 980, Regulated Operations.

For ASUS, performance obligations consist of: (i) performing ongoing operation and maintenance of the water and/or wastewater systems for each military base served, and (ii) performing construction activities (including renewal and replacement capital work) on each military base served. The transaction price for each of ASUS's performance obligations is either delineated in, or initially derived from, each 50-year contract and/or any subsequent contract modifications. Depending on the state in which their operations are conducted, the Military Utility Privatization Subsidiaries are also subject to certain state non-income tax assessments, which are accounted for on a gross basis and have been immaterial to date.

The ongoing performance of operation and maintenance of the water and/or wastewater systems is viewed as a single performance obligation for each 50-year contract with the U.S. government. Registrant recognizes revenue for operations and maintenance fees monthly using the "right to invoice" practical expedient under ASC Topic 606. ASUS has a right to consideration from the U.S. government in an amount that corresponds directly with the value to the U.S. government of ASUS’s performance completed to date. The contractual operations and maintenance fees are firm-fixed, and the level of effort or resources expended in the performance of the operations-and-maintenance-fees performance obligation is largely consistent over the 50-year term. Therefore, Registrant has determined that the monthly amounts invoiced for operations and maintenance performance are a fair reflection of the value transferred to the U.S. government. Invoices to the U.S. government for operations and maintenance service, as well as construction activities, are due upon receipt.
ASUS's construction activities consist of various projects to be performed. Each of these projects' transaction prices is delineated in either the 50-year contract or through a specific contract modification for each construction project, which includes the transaction price for that project. Each construction project is viewed as a separate, single performance obligation. Therefore, it is generally not necessary to allocate a construction transaction price to more than one construction performance obligation. Revenues for construction activities are recognized over time, with progress toward completion measured based on the input method using costs incurred relative to the total estimated costs (cost-to-cost method). Due to the nature of these construction projects, Registrant has determined cost-to-cost input measurement to be the best method to measure progress towards satisfying its construction contract performance obligations, as compared to using an output measurement such as units produced. Changes

14

Table of Contents

in job performance, job site conditions, change orders and/or estimated profitability may result in revisions to costs and income for ASUS, and are recognized in the period in which any such revisions are determined. Pre-contract costs for ASUS, which consist of design and engineering labor costs, are deferred if recovery is probable, and are expensed as incurred if recovery is not probable.  Deferred pre-contract costs have been immaterial to date.
Contracted services revenues recognized during the three months ended March 31, 2018 from performance obligations satisfied in previous periods were not material.

Although GSWC has a diversified base of residential, commercial, industrial and other customers, revenues derived from residential and commercial customers accounted for approximately 90% and 85% of total water and electric revenues, respectively, during the three months ended March 31, 2018. For the three months ended March 31, 2018, disaggregated revenues from contracts with customers by segment are as follows:
(dollar in thousands)
 
Three Months Ended March 31, 2018
Water:
 
 
Tariff-based revenues
 
$
65,775

Surcharges (cost-recovery activities)
 
793

Other
 
442

Water revenues from contracts with customers
 
67,010

WRAM over-collection (alternative revenue program)
 
(2,598
)
Total water revenues
 
64,412

 
 
 
Electric:
 
 
Tariff-based revenues
 
10,019

Surcharges (cost-recovery activities)
 
47

Electric revenues from contracts with customers
 
10,066

BRRAM over-collection (alternative revenue program)
 
(234
)
Total electric revenues
 
9,832

 
 
 
Contracted services:
 
 
Water
 
13,000

Wastewater
 
7,484

Contracted services revenues from contracts with customers
 
20,484

 
 
 
Total revenues
 
$
94,728


The opening and closing balances of receivable from the U.S. government, contract assets and contract liabilities from contracts with customers, which related entirely to ASUS, are as follows:    
(dollar in thousands)
 
March 31, 2018
 
January 1, 2018
 
 
 
 
 
Receivable from the U.S. government
 
$
48,383

 
$
40,150

Contract assets
 
$
22,565

 
$
30,388

Contract liabilities
 
$
6,583

 
$
3,911

    
As a result of the adoption of ASC Topic 606, amounts previously reported under "Costs and estimated earnings in excess of billings on contracts" are now reflected as either "Receivable from U.S. government" or "Contract assets," depending on whether receipt of these amounts is conditional on something other than the passage of time. Amounts previously reported under "Billings in excess of costs and estimated earnings on contracts" are now reflected as "Contract liabilities."

Contract Assets - Contract assets are those of ASUS and consist of unbilled revenues recognized from work-in-progress construction projects, where the right to payment is conditional on something other than the passage of time. The classification of this asset as current or noncurrent is based on the timing of when ASUS expects to bill these amounts.

15

Table of Contents

Contract Liabilities - Contract liabilities are those of ASUS and consist of billings in excess of revenue recognized. The classification of this liability as current or noncurrent is based on the timing of when ASUS expects to recognize revenue.
Revenue for the three months ended March 31, 2018, which was included in contract liabilities at the beginning of the period was not material.
As of March 31, 2018, Registrant's aggregate remaining performance obligations, which consists entirely of the contracted services segment, was $3.1 billion. Registrant expects to recognize revenue on these remaining performance obligations over the remaining term of each of the 50-year contracts, which range from 37 to 50 years. 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.

Note 3 — Regulatory Matters
 
In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At March 31, 2018, Registrant had approximately $59.1 million of regulatory liabilities, net of regulatory assets, not accruing carrying costs. Of this amount, (i) $82.7 million of regulatory liabilities are excess deferred income taxes arising from the lower federal income tax rate due to the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017 that are expected to be refunded to customers, (ii) $17.1 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $34.2 million of regulatory assets relates to the underfunded position in Registrant's pension and other post-retirement obligations (not including the two-way pension balancing accounts), and (iv) $2.6 million of regulatory assets relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES's purchase power contracts over the term of the contracts. The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment that requires it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next twelve months have been classified as current assets and current liabilities by rate-making area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:
(dollars in thousands)
 
March 31,
2018
 
December 31,
2017
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
29,011

 
$
29,556

Costs deferred for future recovery on Aerojet case
 
10,510

 
10,656

Pensions and other post-retirement obligations (Note 8)
 
32,178

 
33,019

Derivative unrealized loss (Note 5)
 
2,625

 
2,941

Low income rate assistance balancing accounts
 
5,640

 
5,972

General rate case memorandum accounts
 
9,264

 
10,522

Excess deferred income taxes
 
(82,680
)
 
(83,231
)
Flow-through taxes, net
 
(17,133
)
 
(17,716
)
Other regulatory assets
 
15,449

 
14,875

Various refunds to customers
 
(9,592
)
 
(4,552
)
Total
 
$
(4,728
)
 
$
2,042

 
Regulatory matters are discussed in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2017 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2017.


16

Table of Contents

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the WRAM and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC.   The over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding ratemaking area and bears interest at the current 90-day commercial paper rate. 
As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded in order to recognize such amounts as revenue.  The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 12 to 24 months. GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2017. For the three months ended March 31, 2018 and 2017, surcharges (net of surcredits) of approximately $4.2 million and $4.0 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the three months ended March 31, 2018, GSWC recorded additional under-collections in the WRAM/MCBA accounts of $3.7 million due to higher than adopted supply costs as well as lower than adopted customer water usage. As of March 31, 2018, GSWC had an aggregated regulatory asset of $29.0 million, which is comprised of a $3.3 million under-collection in the WRAM accounts and a $25.7 million under-collection in the MCBA accounts.

Other Regulatory Matters:
 
Tax Cuts and Jobs Act:
In March 2018, GSWC filed updated testimony revising the revenue requirements to reflect the impacts of the Tax Act in its pending water general rate case that will set new rates for the years 2019 - 2021. Also, as a result of the CPUC's Water Division having directed water utilities to establish a memorandum account, effective January 1, 2018, to track the impact on the revenue requirements resulting from the Tax Act, GSWC established a regulatory liability during the first quarter to begin capturing this impact for the year ending December 31, 2018. For the three months ended March 31, 2018, approximately $2.3 million of reduced water-revenue requirements was tracked and recorded as a regulatory liability. The timing to refund the liability to water customers has not been determined. In April 2018, GSWC also updated its pending electric general rate case filing, which will determine electric rates for the years 2018 - 2021, to reflect the impacts of the Tax Act. As a result, for the three months ended March 31, 2018, GSWC reduced electric revenues by approximately $335,000 and recorded a corresponding regulatory liability that will be satisfied as part of implementing overall new rates from the general rate case on a retroactive basis to January 1, 2018. Reductions in the water and electric revenue requirements resulting from the impacts of the Tax Act are offset by decreases in GSWC's income tax expense (see Note 7).
Cost of Capital Proceeding:    
In March 2018, the CPUC adopted a revised proposed decision in the cost of capital proceeding for GSWC and three other water utilities for the years 2018 - 2020. Among other things, the final decision adopted for GSWC a return on equity of 8.90%, with a return on rate base of 7.91%. The previously authorized return on equity for GSWC’s water segment was 9.43%, with a return on rate base of 8.34%. Including the effects of the Tax Act, the lower return on equity and rate base is expected to decrease GSWC’s annual adopted revenue requirement beginning in 2018 by approximately $3.6 million. Since the decision is expected to be retroactive to January 1, 2018, for the first quarter ended March 31, 2018, GSWC recorded a regulatory liability with a corresponding decrease in water revenues of approximately $780,000 resulting from the lower return on rate base.

17

Table of Contents

Note 4 — Earnings per Share/Capital Stock

In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares that have been issued under AWR's stock incentive plans for employees and the non-employee directors stock plans.  In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities.
The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding used for calculating basic net income per share:
Basic:
 
For The Three Months Ended March 31,
(in thousands, except per share amounts)
 
2018
 
2017
Net income
 
$
10,782

 
$
12,701

Less: (a) Distributed earnings to common shareholders
 
9,362

 
8,854

Distributed earnings to participating securities
 
46

 
42

Undistributed earnings
 
1,374

 
3,805

 
 
 
 
 
          (b) Undistributed earnings allocated to common shareholders
 
1,367

 
3,787

Undistributed earnings allocated to participating securities
 
7

 
18

Total income available to common shareholders, basic (a)+(b)
 
$
10,729

 
$
12,641

 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
36,712

 
36,590

Basic earnings per Common Share
 
$
0.29

 
$
0.35

 Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under AWR’s stock incentive plans for employees and the non-employee directors stock plans, and net income. At March 31, 2018 and 2017, there were 47,792 and 120,138 options outstanding, respectively, under these plans. At March 31, 2018 and 2017, there were also 193,740 and 194,031 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.
The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted:
 
For The Three Months Ended March 31,
(in thousands, except per share amounts)
 
2018
 
2017
Common shareholders earnings, basic
 
$
10,729

 
$
12,641

Undistributed earnings for dilutive stock-based awards
 
8

 
18

Total common shareholders earnings, diluted
 
$
10,737

 
$
12,659

 
 
 
 
 
Weighted average common shares outstanding, basic
 
36,712

 
36,590

Stock-based compensation (1)
 
162

 
192

Weighted average common shares outstanding, diluted
 
36,874

 
36,782

 
 
 
 
 
Diluted earnings per Common Share
 
$
0.29

 
$
0.34

 
(1)      In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 47,792 and 120,138 stock options at March 31, 2018 and 2017, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 193,740 and 194,031 restricted stock units at March 31, 2018 and 2017, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2018 and 2017.
 

18

Table of Contents

No stock options outstanding at March 31, 2018 had an exercise price greater than the average market price of AWR’s Common Shares for the three and three months ended March 31, 2018. There were no stock options outstanding at March 31, 2018 or 2017 that were anti-dilutive.
 
During the three months ended March 31, 2018 and 2017, AWR issued 52,622 and 44,832 common shares, for approximately $340,000 and $35,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, the stock incentive plans for employees, and the non-employee directors stock plans.

During the three months ended March 31, 2018 and 2017, AWR paid quarterly dividends of approximately $9.4 million, or $0.255 per share, and $8.9 million, or $0.242 per share, respectively. During the three months ended March 31, 2018, GSWC paid dividends of $9.4 million to AWR. No dividends were paid by GSWC to AWR during the three months ended March 31, 2017.

Note 5 — Derivative Instruments

Derivative financial instruments are used to manage exposure to commodity price risk. Commodity price risk represents the potential impact that can be caused by a change in the market value of a commodity. BVES purchases power under long-term contracts at a fixed cost depending on the amount of power and the period during which the power is purchased under such contracts.  In December 2014, the CPUC approved an application that allowed BVES to immediately execute new long-term purchased power contracts with energy providers. BVES began taking power under these long-term contracts effective January 1, 2015 over three- and five-year terms.
The long-term contracts executed in December 2014 are subject to the accounting guidance for derivatives and require mark-to-market derivative accounting. Among other things, the CPUC also authorized GSWC to establish a regulatory asset and liability memorandum account to offset the mark-to-market entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the purchased power contracts executed in December 2014 are deferred monthly into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivative throughout the term of the contract. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of March 31, 2018, there was a $2.6 million unrealized loss in the memorandum account for the purchased power contracts as a result of a drop in energy prices. The notional volume of derivatives remaining under these long-term contracts as of March 31, 2018 was approximately 175,000 megawatt hours.
The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are measured and reported on a fair value basis. Under the accounting guidance, GSWC makes fair value measurements that are classified and disclosed in one of the following three categories:
 Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;
 Level 2: Quoted prices in markets that are not active or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability; or
Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).
To value the contracts, Registrant applies the Black-76 model, utilizing various inputs that include quoted market prices for energy over the duration of the contracts. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market.  Registrant received one broker quote to determine the fair value of its derivative instruments.  When such inputs have a significant impact on the measurement of fair value, the instruments are categorized as Level 3. Accordingly, the valuation of the derivatives on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.
 The following table presents changes in the fair value of GSWC’s Level 3 derivatives for the three months ended March 31, 2018 and 2017:
 
 
For The Three Months Ended March 31,
(dollars in thousands)
 
2018
 
2017
Fair value at beginning of the period
 
$
(2,941
)
 
$
(4,901
)
Unrealized gain (loss) on purchased power contracts
 
316

 
(559
)
Fair value at end of the period
 
$
(2,625
)
 
$
(5,460
)

19

Table of Contents

Note 6 — Fair Value of Financial Instruments
 
For cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amount is assumed to approximate fair value due to the short-term nature of these items.

Investments held in a Rabbi Trust for the supplemental executive retirement plan ("SERP") are measured at fair value and totaled $15.0 million as of March 31, 2018. All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The investments held in the Rabbi Trust are included in "Other Property and Investments" on Registrant's balance sheets.

The table below estimates the fair value of long-term debt held by GSWC. The fair values as of March 31, 2018 and December 31, 2017 were determined using rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions. The interest rates used for the March 31, 2018 valuation increased as compared to December 31, 2017, decreasing the fair value of long-term debt as of March 31, 2018. Changes in the assumptions will produce different results.
 
 
March 31, 2018
 
December 31, 2017
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC (1)
 
$
325,176

 
$
412,531

 
$
325,265

 
$
424,042

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


Note 7 — Income Taxes
On December 22, 2017, the Tax Act was signed into federal law. The provisions of this major tax reform were generally effective January 1, 2018. Among its significant provisions, the Tax Act reduced the federal corporate income tax rate from 35% to 21% and eliminated bonus depreciation for regulated utilities. AWR's effective income tax rate (“ETR”) was 19.2% and 35.1% for the three months ended March 31, 2018 and 2017, respectively, and GSWC's ETR was 19.2% and 36.9% for the three months ended March 31, 2018 and 2017, respectively. Both decreases were due primarily to the reduction in the federal corporate income tax rate.
AWR's ETR differed from the new federal statutory tax rate primarily as a result of the differences between GSWC's ETR and the new federal statutory rate. These differences resulted primarily from: (i) state taxes, (ii) permanent differences including the excess tax benefits from share-based payments, which were reflected in the income statements and resulted in a reduction to income tax expense during the three months ended March 31, 2018 and 2017, (iii) differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally from plant, rate-case, and compensation expenses), and (iv) commencement of the amortization of the excess deferred income tax liability brought about by the lower federal tax rate. There were no material updates to the excess deferred income tax liability balance during the three months ended March 31, 2018 in accordance with Staff Accounting Bulletin 118.

20

Table of Contents

Note 8 — Employee Benefit Plans
     The components of net periodic benefit costs for Registrant’s pension plan, postretirement plan and SERP for the three months ended March 31, 2018 and 2017 are as follows:
 
 
For The Three Months Ended March 31,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,401

 
$
1,251

 
$
57

 
$
59

 
$
274

 
$
232

Interest cost
 
1,921

 
1,967

 
72

 
85

 
222

 
223

Expected return on plan assets
 
(2,791
)
 
(2,610
)
 
(123
)
 
(122
)
 

 

Amortization of prior service cost (benefit)
 

 

 

 

 

 
3

Amortization of actuarial (gain) loss
 
345

 
209

 
(182
)
 
(170
)
 
262

 
194

Net periodic pension cost under accounting standards
 
876

 
817

 
(176
)
 
(148
)
 
758

 
652

Regulatory adjustment — deferred
 

 
433

 

 

 

 

Total expense recognized, before surcharges and allocation to overhead pool
 
$
876

 
$
1,250

 
$
(176
)
 
$
(148
)
 
$
758

 
$
652

In accordance with new accounting guidance (Note 1), effective January 1, 2018, Registrant changed the financial statement presentation for the costs of its defined benefit pension plans and other retirement benefits. The components of net periodic benefits cost, other than the service cost component, have been included in the line item “Other, net” in Registrant's income statements. Prior period amounts have been reclassified on the income statements to conform to the current period presentation.
Registrant expects to contribute approximately $6.1 million to its pension plan during 2018.
Regulatory Adjustment:
As authorized by the CPUC in the most recent water and electric general rate case decisions, GSWC utilizes two-way balancing accounts for its water and electric regions and the general office to track differences between the forecasted annual pension expenses in rates or expected to be in rates and the actual annual expense recorded by GSWC in accordance with the accounting guidance for pension costs.  As of March 31, 2018, GSWC had a total of $2.1 million over-collection in the two-way pension balancing accounts included as part of the pension regulatory asset (Note 3).
Note 9 — Contingencies
Environmental Clean-Up and Remediation:
GSWC has been involved in environmental remediation and cleanup at a plant site ("Chadron Plant") that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.  Analysis indicates that off-site monitoring wells may be necessary to document effectiveness of remediation.
As of March 31, 2018, the total spent to clean-up and remediate GSWC’s plant facility was approximately $5.5 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of March 31, 2018, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.3 million to complete the cleanup at the site. The estimate includes costs for two years of continued activities of groundwater cleanup and monitoring, source material excavation, future soil treatment and site-closure-related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management believes it is probable that the estimated additional costs will continue to be approved in rate base by the CPUC. 
Other Litigation:
     Registrant is also subject to other 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. However, Registrant does not believe the outcome from any pending suits or administrative proceedings will have a material effect on Registrant's consolidated results of operations, financial position or cash flows.

21

Table of Contents

Note 10 — Business Segments
AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. On a stand-alone basis, AWR has no material assets other than its investments in its subsidiaries. 
All activities of GSWC, a rate-regulated utility, are geographically located within California. Activities of ASUS and its subsidiaries are conducted in California, Georgia, Florida, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  In September 2017, ASUS was awarded a new 50-year contract by the U.S. government for water and wastewater operations at Fort Riley located in Kansas. ASUS expects to assume operations at Fort Riley following the completion of a six-to-twelve-month transition period currently underway. Each of ASUS’s wholly owned subsidiaries is regulated, if applicable, by the state in which the subsidiary primarily conducts water and/or wastewater operations.  Fees charged for operations and maintenance and renewal and replacement services are based upon the terms of the contracts with the U.S. government which have been filed, as appropriate, with the commissions in the states in which ASUS’s subsidiaries are incorporated.
 The tables below set forth information relating to GSWC’s operating segments, ASUS and its subsidiaries and other matters. Total assets by segment are not presented below, as certain of Registrant’s assets are not tracked by segment.  The utility plant amounts are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash, and exclude U.S. government- and third-party contractor-funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.
 
 
As Of And For The Three Months Ended March 31, 2018
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
64,412

 
$
9,832

 
$
20,484

 
$

 
$
94,728

Operating income (loss)
 
14,058

 
2,239

 
2,397

 
(3
)
 
18,691

Interest expense, net
 
5,009

 
370

 
(66
)
 
74

 
5,387

Utility plant
 
1,149,038

 
60,261

 
9,531

 

 
1,218,830

Depreciation and amortization expense (1)
 
8,769

 
565

 
332

 

 
9,666

Income tax expense (benefit)
 
1,649

 
466

 
554

 
(105
)
 
2,564

Capital additions
 
26,618

 
974

 
2,772

 

 
30,364

 
 
As Of And For The Three Months Ended March 31, 2017
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
66,404

 
$
10,502

 
$
21,904

 
$

 
$
98,810

Operating income (loss) (2)
 
19,097

 
2,779

 
2,704

 
(4
)
 
24,576

Interest expense, net
 
5,145

 
375

 
74

 
52

 
5,646

Utility plant
 
1,075,513

 
56,015

 
5,631

 

 
1,137,159

Depreciation and amortization expense (1)
 
8,901

 
537

 
245

 

 
9,683

Income tax expense (benefit)
 
5,485

 
788

 
861

 
(279
)
 
6,855

Capital additions
 
22,984

 
723

 
287

 

 
23,994

 
(1)      Depreciation computed on GSWC’s transportation equipment is recorded in other operating expenses and totaled $60,000
and $61,000 for the three months ended March 31, 2018 and 2017, respectively.
(2) Adjusted to conform to current year presentation pursuant to the adoption of ASU 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
The following table reconciles total utility plant (a key figure for ratemaking) to total consolidated assets (in thousands):
 
 
March 31,
 
 
2018
 
2017
Total utility plant
 
$
1,218,830

 
$
1,137,159

Other assets
 
204,834

 
343,109

Total consolidated assets
 
$
1,423,664

 
$
1,480,268

 


22

Table of Contents

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
 
General
 
The following discussion and analysis provides information on AWR’s consolidated operations and assets, and where necessary, includes specific references to AWR’s individual segments and/or 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. These measures, which are not presented in accordance with the accounting principles generally accepted in the United States of America ("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 of First Quarter Results by Segment”.

Overview
Factors affecting our financial performance are summarized under Forward-Looking Information.
Cost of Capital Proceeding for GSWC's Water Segment:
In March 2018, the CPUC issued a final decision in the cost of capital proceeding for GSWC and three other investor-owned water utilities that serve California. Among other things, the final decision adopts for GSWC (i) a return on equity of 8.90%, (ii) a cost of debt of 6.6%, (iii) a capital structure with 57% equity and 43% debt, (iv) a return on rate base of 7.91%, and (v) the continuation of the water cost of capital adjustment mechanism. GSWC’s prior authorized return on equity and equity ratio for its water segment were 9.43% and 55%, respectively, with a return on rate base of 8.34%. The newly authorized return on rate base of 7.91% reflects a true-up of GSWC’s embedded debt cost from 6.99% to 6.6%.  The reduced debt costs contributed approximately 18 basis points to the 43-basis-point drop in the authorized return on rate base. Including the effects of the Tax Act, the lower return on rate base beginning in 2018 is expected to decrease GSWC’s 2018 adopted annual revenue requirement by approximately $3.6 million, or $0.07 per share.

Tax Cuts and Jobs Act ("Tax Act"):
On December 22, 2017, the Tax Act was signed into federal law. The provisions of this major tax reform were generally effective January 1, 2018. The most significant provisions of the Tax Act impacting GSWC are the reduction of the federal corporate income tax rate from 35% to 21% and the elimination of bonus depreciation for regulated utilities. Pursuant to a CPUC directive, the 2018 impact of the Tax Act on the water segment’s adopted revenue requirement is being captured in a memorandum account effective January 1, 2018. Accordingly, for the three months ended March 31, 2018, approximately $2.3 million of reduced water-revenue requirements was added to the memorandum account and recorded as a regulatory liability, which was offset by a decrease in income tax expense. In March 2018, GSWC filed updated testimony revising the revenue requirements to reflect the impacts of the Tax Act in its pending water general rate case that will set new rates for the years 2019 - 2021. The CPUC also ordered GSWC to update its pending electric general rate case filing, which will determine new electric rates for the years 2018 - 2021, to reflect the lower corporate tax rate. As a result, for the three months ended March 31, 2018, GSWC reduced electric revenues by approximately $335,000, which was also offset by a decrease in income tax expense.
GSWC expects the Tax Act to reduce customer rates due primarily to the reduction in the federal income tax rate used in computing customer rates. Property-related deferred tax liabilities reduce GSWC's rate base. As new plant is placed in service, the lower federal corporate tax rate will result in lower deferred tax liabilities. As a result of the lower federal tax rate and elimination of bonus depreciation by the Tax Act, GSWC expects that its rate base and earnings will increase for the same level of expected capital expenditures. This increase is expected to be partially offset by higher financing costs arising from a greater need to fund capital expenditures through the issuance of debt and/or equity due to lower cash flows from operating activities.

23

Table of Contents

Summary of First Quarter Results by Segment
The table below sets forth the first quarter diluted earnings per share by business segment:
 
 
Diluted Earnings per Share
 
 
Three Months Ended
 
 
 
 
3/31/2018
 
3/31/2017
 
CHANGE
Water
 
$
0.20

 
$
0.25

 
$
(0.05
)
Electric
 
0.04

 
0.04

 

Contracted services
 
0.05

 
0.05

 

Consolidated diluted earnings per share, as reported
 
$
0.29

 
$
0.34

 
$
(0.05
)
Water Segment:
For the three months ended March 31, 2018, diluted earnings per share from the water segment decreased by $0.05 to $0.20 per share as compared to the same period in 2017. Included in net earnings for the three months ended March 31, 2017 was the one-time recovery of incremental drought-related items approved by the CPUC in February 2017 resulting in an increase to pretax earnings of $1.5 million, or $0.02 per share, which did not recur in 2018. Approximately $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 this item, diluted earnings from GSWC’s water operations decreased compared to the same period in 2017 due mostly to the following two items which, when combined, decreased water’s earnings by $0.03 per share:
Lower net earnings due to a new cost of capital decision approved by the CPUC in March 2018, which lowered GSWC's return on rate base. The lower return is expected to decrease GSWC’s 2018 adopted annual revenue requirement by approximately $3.6 million, or $0.07 per share.
Losses incurred due to market conditions during the three months ended March 31, 2018 on Registrant's investments held to fund a retirement benefit plan, as compared to gains generated in the same period of 2017.
Excluding an increase in billed surcharges, which have no impact on earnings, and the effects of the CPUC’s cost of capital decision discussed previously, the water gross margin decreased by $2.6 million largely because of the effects of the Tax Act enacted in December 2017. The lower revenue requirement to reflect the reduced federal corporate income tax rate was offset by a reduction in income tax expense, resulting in no earnings impact. In addition, the impact of third-year rate increases on the water gross margin in the first quarter was offset by the cessation of GSWC’s Ojai district due to the condemnation and related sale of the system in June 2017. However, before reflecting the effects from the new cost of capital and tax reform, third-year rate increases will add approximately $4.5 million to the 2018 full year adopted water gross margin (net of the loss of the Ojai system). Overall operating expenses at the water segment (other than supply costs) remained flat during the first quarter of 2018 compared to 2017 due, in part, to the cessation of the Ojai operations.

Electric Segment:
For the three months ended March 31, 2018 and 2017, diluted earnings from the electric segment were $0.04 per share. GSWC filed its electric general rate case in May 2017 for new rates in the years 2018-2021. Year-to-date 2018 billed revenues have been based on 2017 adopted rates, pending a final CPUC decision on this general rate case, which is expected later in 2018 and retroactive to January 1, 2018. There was a decrease in the electric gross margin due to a downward adjustment to adopted revenues to reflect the lower corporate tax rate, which was offset by a corresponding decrease in income tax expense.
Contracted Services Segment:
For the three months ended March 31, 2018 and 2017, diluted earnings per share from the contracted services segment were $0.05 per share. There were increases in management fee revenue due (i) to the successful resolution of various price adjustments during 2017, (ii) revenue generated from Eglin Air Force Base ("Eglin") upon the commencement of the operation of its water and wastewater systems by ASUS in June 2017, and (iii) transition revenue for Fort Riley, a U.S. Army installation located in Kansas. ASUS expects to assume operations of the water distribution and wastewater collection and treatment facilities at Fort Riley in mid-2018 pursuant to the terms of a 50-year contract awarded in September 2017. These increases were mostly offset by lower construction activity and higher operating expenses during the first quarter of 2018 as compared to the same period last year. The decrease in construction activity is largely due to timing, and ASUS expects construction activity for 2018 overall to increase as compared to 2017. The increase in operating expenses was due to the commencement of operations at Eglin in June 2017, and the commencement of the transition period at Fort Riley in September 2017.
The following discussion and analysis for the three months ended March 31, 2018 and 2017 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.

24

Table of Contents

Consolidated Results of Operations — Three Months Ended March 31, 2018 and 2017 (amounts in thousands, except per share amounts):
 
 
Three Months Ended 
 March 31, 2018
 
Three Months Ended 
 March 31, 2017
 
$
CHANGE
 
%
CHANGE
OPERATING REVENUES
 
 

 
 

 
 

 
 

Water
 
$
64,412

 
$
66,404

 
$
(1,992
)
 
(3.0
)%
Electric
 
9,832

 
10,502

 
(670
)
 
(6.4
)%
Contracted services
 
20,484

 
21,904

 
(1,420
)
 
(6.5
)%
Total operating revenues
 
94,728

 
98,810

 
(4,082
)
 
(4.1
)%
 
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 
 

 
 

 
 

 
 

Water purchased
 
13,607

 
12,106

 
1,501

 
12.4
 %
Power purchased for pumping
 
1,693

 
1,597

 
96

 
6.0
 %
Groundwater production assessment
 
4,651

 
3,375

 
1,276

 
37.8
 %
Power purchased for resale
 
3,408

 
3,100

 
308

 
9.9
 %
Supply cost balancing accounts
 
(3,869
)
 
(1,749
)
 
(2,120
)
 
121.2
 %
Other operation
 
7,988

 
6,160

 
1,828

 
29.7
 %
Administrative and general
 
20,293

 
20,448

 
(155
)
 
(0.8
)%
Depreciation and amortization
 
9,666

 
9,683

 
(17
)
 
(0.2
)%
Maintenance
 
3,829

 
3,464

 
365

 
10.5
 %
Property and other taxes
 
4,799

 
4,566

 
233

 
5.1
 %
ASUS construction
 
9,972

 
11,484

 
(1,512
)
 
(13.2
)%
Total operating expenses
 
76,037

 
74,234

 
1,803

 
2.4
 %
 
 
 
 
 
 
 
 
 
OPERATING INCOME
 
18,691

 
24,576

 
(5,885
)
 
(23.9
)%
 
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 
 

 
 

 
 

 
 

Interest expense
 
(5,923
)
 
(5,905
)
 
(18
)
 
0.3
 %
Interest income
 
536

 
259

 
277

 
106.9
 %
Other, net
 
42

 
626

 
(584
)
 
(93.3
)%
 
 
(5,345
)
 
(5,020
)
 
(325
)
 
6.5