SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x

Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the quarterly period ended June 30, 2007

 

 

or

 

 

o

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 o

Golden State Water Company

 

Yes x   No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a nonaccelerated file. See definition of “accelerated filer and large accelerated file” in Rule 12b-2 of the Exchange Act. (Check one):

American States Water Company

 

Large accelerated filer o

 

Accelerated filer x

 

Nonaccelerated filer o

Golden State Water Company

 

Large accelerated filer o

 

Accelerated filer o

 

Nonaccelerated filer x

 

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

 

As of August 8, 2007, the number of Common Shares outstanding, of American States Water Company was 17,113,878 shares.

As of August 8, 2007, all of the 122 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

 




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

INDEX

Part I

Financial Information

 

 

 

 

 

 

Item 1:

Financial Statements

 

 

 

 

 

 

 

Consolidated Balance Sheets of American States Water Company as of June 30, 2007 and December 31, 2006

 

 

 

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Balance Sheets of Golden State Water Company as of June 30, 2007 and December 31, 2006

 

 

 

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Statements of Income of Golden State Water Company for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Six Months Ended June 30, 2007 and 2006

 

 

 

 

 

 

 

Notes to Consolidated Financial Statements

 

 

 

 

 

 

Item 2:

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

 

 

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

 

 

 

 

 

 

Item 4:

Controls and Procedures

 

 

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 1:

Legal Proceedings

 

 

 

 

 

 

Item 1A:

Risk Factors

 

 

 

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

 

 

 

 

 

 

Item 3:

Defaults Upon Senior Securities

 

 

 

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

 

 

 

 

 

 

Item 5:

Other Information

 

 

 

 

 

 

Item 6:

Exhibits

 

 

 

 

 

 

 

Signatures

 

 

 




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

This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: American States Water Company (hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”). For more information, please see Note 1 to 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 relating to AWR and its subsidiaries, other than GSWC.

Forward-Looking Information

Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Registrant “believes,” “anticipates,” “expects” or words of similar import. Similarly, statements that describe Registrant’s future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rates, water quality and other regulatory matters, adequacy of water supplies,  the ability to recover supply costs from ratepayers, contract operations, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as changes in utility regulation, including ongoing local, state and federal activities; recovery of regulatory assets not yet included in rates; future economic conditions, including changes in customer demand and changes in water and energy supply costs; future climatic conditions; and legislative, legal proceedings, regulatory and other circumstances affecting anticipated revenues and costs.

1




AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

 

 

June 30,

 

December 31,

 

(in thousands)

 

2007

 

2006

 

Utility Plant, at cost

 

 

 

 

 

Water

 

$

948,153

 

$

936,810

 

Electric

 

64,609

 

64,103

 

 

 

1,012,762

 

1,000,913

 

Less - Accumulated depreciation

 

(302,053

)

(286,951

)

 

 

710,709

 

713,962

 

Construction work in progress

 

46,416

 

36,639

 

Net utility plant

 

757,125

 

750,601

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

11,593

 

11,614

 

Other property and investments

 

10,003

 

9,977

 

Total other property and investments

 

21,596

 

21,591

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

5,274

 

3,223

 

Accounts receivable-customers (less allowance for doubtful accounts of $659 in 2007 and $796 in 2006)

 

15,714

 

14,816

 

Unbilled revenue

 

20,318

 

15,696

 

Receivable from the U.S. government

 

4,883

 

6,388

 

Other accounts receivable (less allowance for doubtful accounts of $420 in 2007 and $300 in 2006)

 

5,379

 

5,368

 

Income taxes receivable

 

247

 

1,100

 

Materials and supplies, at average cost

 

1,649

 

1,565

 

Regulatory assets - current

 

4,271

 

3,905

 

Prepayments and other current assets

 

2,628

 

2,787

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

5,865

 

4,495

 

Deferred income taxes - current

 

3,982

 

5,093

 

Total current assets

 

70,210

 

64,436

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

88,819

 

84,686

 

Other accounts receivable

 

9,564

 

9,335

 

Deferred income taxes

 

2

 

16

 

Other

 

8,525

 

6,290

 

Total regulatory and other assets

 

106,910

 

100,327

 

 

 

 

 

 

 

Total Assets

 

$

955,841

 

$

936,955

 

 

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

2




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

 

 

June 30,

 

December 31,

 

(in thousands)

 

2007

 

2006

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

177,442

 

$

175,135

 

Earnings reinvested in the business

 

114,996

 

108,599

 

Total common shareholders’ equity

 

292,438

 

283,734

 

Long-term debt

 

267,628

 

267,833

 

Total capitalization

 

560,066

 

551,567

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

28,500

 

32,000

 

Long-term debt - current

 

596

 

603

 

Accounts payable

 

25,020

 

23,984

 

Income taxes payable

 

2,208

 

103

 

Accrued employee expenses

 

5,564

 

5,320

 

Accrued interest

 

2,469

 

2,583

 

Unrealized loss on purchased power contracts

 

1,180

 

3,654

 

Regulatory liabilities - current

 

3,919

 

3,546

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

1,739

 

2,038

 

Other

 

12,660

 

12,072

 

Total current liabilities

 

83,855

 

85,903

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

83,169

 

83,203

 

Contributions in aid of construction - net

 

98,302

 

91,702

 

Deferred income taxes

 

85,500

 

80,727

 

Unamortized investment tax credits

 

2,382

 

2,427

 

Accrued pension and other postretirement benefits

 

31,595

 

31,042

 

Regulatory liabilities

 

572

 

588

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

2,477

 

2,005

 

Other

 

7,923

 

7,791

 

Total other credits

 

311,920

 

299,485

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

955,841

 

$

936,955

 

 

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

3




AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2007 AND 2006
(Unaudited)

 

 

Three Months Ended

 

 

 

June 30,

 

(in thousands, except per share amounts)

 

2007

 

2006

 

Operating Revenues

 

 

 

 

 

Water

 

$

60,826

 

$

53,444

 

Electric

 

6,255

 

7,027

 

Contracted services

 

12,165

 

2,567

 

Total operating revenues

 

79,246

 

63,038

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

12,077

 

10,916

 

Power purchased for pumping

 

2,673

 

2,416

 

Groundwater production assessment

 

2,549

 

2,239

 

Power purchased for resale

 

2,915

 

3,248

 

Unrealized loss on purchased power contracts

 

236

 

923

 

Supply cost balancing accounts

 

(1,190

)

(825

)

Other operating expenses

 

6,559

 

5,886

 

Administrative and general expenses

 

13,664

 

10,902

 

Depreciation and amortization

 

7,088

 

6,610

 

Maintenance

 

4,353

 

3,246

 

Property and other taxes

 

2,843

 

2,480

 

Construction expenses

 

8,260

 

809

 

Net gain on sale of property

 

(238

)

 

Total operating expenses

 

61,789

 

48,850

 

 

 

 

 

 

 

Operating Income

 

17,457

 

14,188

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,570

)

(5,433

)

Interest income

 

586

 

963

 

Other

 

63

 

 

Total other income and expenses

 

(4,921

)

(4,470

)

 

 

 

 

 

 

Income from operations before income tax expense

 

12,536

 

9,718

 

 

 

 

 

 

 

Income tax expense

 

5,214

 

3,449

 

 

 

 

 

 

 

Net Income

 

$

7,322

 

$

6,269

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,094

 

16,881

 

Basic Earnings Per Common Share

 

$

0.42

 

$

0.36

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,146

 

16,947

 

Fully Diluted Earnings Per Share

 

$

0.42

 

$

0.36

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.235

 

$

0.225

 

 

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

4




AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2007 AND 2006

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands, except per share amounts)

 

2007

 

2006

 

Operating Revenues

 

 

 

 

 

Water

 

$

111,153

 

$

104,199

 

Electric

 

15,124

 

15,372

 

Contracted services

 

25,239

 

7,867

 

Total operating revenues

 

151,516

 

127,438

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

20,950

 

19,260

 

Power purchased for pumping

 

4,791

 

4,020

 

Groundwater production assessment

 

4,828

 

4,322

 

Power purchased for resale

 

7,196

 

7,811

 

Unrealized (gain) loss on purchased power contracts

 

(2,474

)

3,078

 

Supply cost balancing accounts

 

(1,910

)

(338

)

Other operating expenses

 

13,156

 

10,587

 

Administrative and general expenses

 

26,671

 

22,015

 

Depreciation and amortization

 

14,177

 

13,092

 

Maintenance

 

7,326

 

5,719

 

Property and other taxes

 

5,773

 

5,027

 

Construction expenses

 

17,329

 

4,511

 

Net gain on sale of property

 

(605

)

 

Total operating expenses

 

117,208

 

99,104

 

 

 

 

 

 

 

Operating Income

 

34,308

 

28,334

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(11,066

)

(10,688

)

Interest income

 

1,152

 

1,776

 

Other

 

132

 

 

Total other income and expenses

 

(9,782

)

(8,912

)

 

 

 

 

 

 

Income from operations before income tax expense

 

24,526

 

19,422

 

 

 

 

 

 

 

Income tax expense

 

10,220

 

7,252

 

 

 

 

 

 

 

Net Income

 

$

14,306

 

$

12,170

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,066

 

16,844

 

Basic Earnings Per Common Share

 

$

0.83

 

$

0.71

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,121

 

16,905

 

Fully Diluted Earnings Per Share

 

$

0.82

 

$

0.71

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.470

 

$

0.450

 

 

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

5




AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2007

 

2006

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

14,306

 

$

12,170

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

14,177

 

13,092

 

Provision for doubtful accounts

 

194

 

264

 

Deferred income taxes and investment tax credits

 

3,248

 

3,704

 

Unrealized (gain) loss on purchased power contracts

 

(2,474

)

3,078

 

Stock based compensation expense

 

530

 

325

 

Net gain on sale of property

 

(605

)

 

Other - net

 

520

 

421

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable - customers

 

(982

)

(130

)

Unbilled revenue

 

(4,622

)

(3,730

)

Other accounts receivable

 

(350

)

1,717

 

Receivable from the U.S. government

 

1,505

 

(1,434

)

Materials and supplies

 

(84

)

(129

)

Prepayments and other current assets

 

2,633

 

832

 

Regulatory assets — supply cost balancing accounts

 

(1,910

)

(338

)

Other assets

 

616

 

(6,227

)

Accounts payable

 

1,036

 

1,222

 

Income taxes receivable/payable

 

3,150

 

1,559

 

Other liabilities

 

(541

)

660

 

Net cash provided

 

30,347

 

27,056

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(19,880

)

(34,122

)

Proceeds from sale of property

 

623

 

 

Net cash used

 

(19,257

)

(34,122

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

507

 

1,023

 

Proceeds from stock option exercises

 

1,127

 

3,421

 

Tax benefits from exercise of stock-based awards

 

122

 

897

 

Receipt of advances for and contributions in aid of construction

 

4,391

 

5,892

 

Refunds on advances for construction

 

(3,418

)

(2,196

)

Repayments of long-term debt

 

(212

)

(260

)

Net change in notes payable to banks

 

(3,500

)

1,000

 

Cash received on financing portion of purchased power contracts

 

 

1,333

 

Dividend equivalent rights

 

(67

)

(127

)

Tax benefits from payment of dividend equivalent rights

 

28

 

52

 

Dividends paid

 

(8,017

)

(7,567

)

Net cash (used) provided

 

(9,039

)

3,468

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

2,051

 

(3,598

)

Cash and cash equivalents, beginning of period

 

3,223

 

13,032

 

Cash and cash equivalents, end of period

 

$

5,274

 

$

9,434

 

 

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

6




GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

 

 

June 30,

 

December 31,

 

(in thousands)

 

2007

 

2006

 

Utility Plant, at cost

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

890,009

 

$

884,719

 

Electric

 

64,609

 

64,103

 

 

 

954,618

 

948,822

 

Less - Accumulated depreciation

 

(285,847

)

(271,716

)

 

 

668,771

 

677,106

 

Construction work in progress

 

45,111

 

34,438

 

Net utility plant

 

713,882

 

711,544

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Other property and investments

 

7,721

 

7,745

 

Total other property and investments

 

7,721

 

7,745

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

3,135

 

1,735

 

Accounts receivable-customers (less allowance for doubtful accounts of $633 in 2007 and $771 in 2006)

 

15,296

 

14,465

 

Unbilled revenue

 

19,895

 

15,371

 

Inter-company receivable

 

22

 

111

 

Other accounts receivable (less allowance for doubtful accounts of $367 in 2007 and $283 in 2006)

 

4,448

 

4,066

 

Materials and supplies, at average cost

 

1,634

 

1,550

 

Regulatory assets - current

 

4,200

 

3,834

 

Prepayments and other current assets

 

2,411

 

2,575

 

Deferred income taxes - current

 

3,853

 

5,024

 

Total current assets

 

54,894

 

48,731

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

88,819

 

84,686

 

Other accounts receivable

 

9,564

 

9,335

 

Other

 

8,082

 

5,620

 

Total regulatory and other assets

 

106,465

 

99,641

 

 

 

 

 

 

 

Total Assets

 

$

882,962

 

$

867,661

 

 

The accompanying notes are an integral part of these financial statements

7




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

 

 

June 30,

 

December 31,

 

(in thousands)

 

2007

 

2006

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

162,098

 

$

161,459

 

Earnings reinvested in the business

 

109,394

 

105,506

 

Total common shareholder’s equity

 

271,492

 

266,965

 

Long-term debt

 

261,043

 

261,248

 

Total capitalization

 

532,535

 

528,213

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt - current

 

316

 

323

 

Accounts payable

 

21,224

 

19,818

 

Inter-company payable

 

13,449

 

12,272

 

Income taxes payable to Parent

 

3,489

 

1,642

 

Accrued employee expenses

 

5,078

 

4,887

 

Accrued interest

 

2,427

 

2,445

 

Unrealized loss on purchased power contracts

 

1,180

 

3,654

 

Regulatory liabilities – current

 

3,919

 

3,546

 

Other

 

12,277

 

11,654

 

Total current liabilities

 

63,359

 

60,241

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

77,033

 

76,646

 

Contributions in aid of construction – net

 

87,449

 

85,513

 

Deferred income taxes

 

81,635

 

76,678

 

Unamortized investment tax credits

 

2,382

 

2,427

 

Accrued pension and other postretirement benefits

 

31,595

 

31,042

 

Other

 

6,974

 

6,901

 

Total other credits

 

287,068

 

279,207

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

882,962

 

$

867,661

 

 

The accompanying notes are an integral part of these financial statements

8




GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2007 AND 2006

(Unaudited)

 

 

Three Months Ended

 

 

 

June 30,

 

(in thousands)

 

2007

 

2006

 

Operating Revenues

 

 

 

 

 

Water

 

$

58,894

 

$

51,396

 

Electric

 

6,255

 

7,027

 

Total operating revenues

 

65,149

 

58,423

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

11,877

 

10,702

 

Power purchased for pumping

 

2,506

 

2,218

 

Groundwater production assessment

 

2,549

 

2,239

 

Power purchased for resale

 

2,915

 

3,248

 

Unrealized loss on purchased power contracts

 

236

 

923

 

Supply cost balancing accounts

 

(1,190

)

(825

)

Other operating expenses

 

5,631

 

4,906

 

Administrative and general expenses

 

11,676

 

8,910

 

Depreciation and amortization

 

6,645

 

6,134

 

Maintenance

 

4,037

 

3,022

 

Property and other taxes

 

2,733

 

2,373

 

Net gain on sale of property

 

(238

)

 

Total operating expenses

 

49,377

 

43,850

 

 

 

 

 

 

 

Operating Income

 

15,772

 

14,573

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,182

)

(4,875

)

Interest income

 

528

 

928

 

Other

 

47

 

 

Total other income and expenses

 

(4,607

)

(3,947

)

 

 

 

 

 

 

Income from operations before income tax expense

 

11,165

 

10,626

 

 

 

 

 

 

 

Income tax expense

 

4,695

 

3,867

 

 

 

 

 

 

 

Net Income

 

$

6,470

 

$

6,759

 

 

The accompanying notes are an integral part of these financial statements

9




GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2007 AND 2006

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2007

 

2006

 

Operating Revenues

 

 

 

 

 

Water

 

$

107,582

 

$

100,367

 

Electric

 

15,124

 

15,372

 

Total operating revenues

 

122,706

 

115,739

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

20,586

 

18,877

 

Power purchased for pumping

 

4,522

 

3,733

 

Groundwater production assessment

 

4,828

 

4,322

 

Power purchased for resale

 

7,196

 

7,811

 

Unrealized (gain) loss on purchased power contracts

 

(2,474

)

3,078

 

Supply cost balancing accounts

 

(1,910

)

(338

)

Other operating expenses

 

11,331

 

9,434

 

Administrative and general expenses

 

23,171

 

19,094

 

Depreciation and amortization

 

13,289

 

12,165

 

Maintenance

 

6,807

 

5,341

 

Property and other taxes

 

5,562

 

4,802

 

Net gain on sale of property

 

(605

)

 

Total operating expenses

 

92,303

 

88,319

 

 

 

 

 

 

 

Operating Income

 

30,403

 

27,420

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(10,201

)

(9,678

)

Interest income

 

1,061

 

1,724

 

Other

 

99

 

 

Total other income and expenses

 

(9,041

)

(7,954

)

 

 

 

 

 

 

Income from operations before income tax expense

 

21,362

 

19,466

 

 

 

 

 

 

 

Income tax expense

 

8,990

 

7,362

 

 

 

 

 

 

 

Net Income

 

$

12,372

 

$

12,104

 

 

The accompanying notes are an integral part of these financial statements

10




GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2007 AND 2006

(Unaudited)

 

 

Six Months Ended

 

 

 

June 30,

 

(in thousands)

 

2007

 

2006

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

12,372

 

$

12,104

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

13,289

 

12,165

 

Provision for doubtful accounts

 

154

 

239

 

Deferred income taxes and investment tax credits

 

3,309

 

3,417

 

Unrealized (gain) loss on purchased power contracts

 

(2,474

)

3,078

 

Stock based compensation expense

 

492

 

310

 

Net gain on sale of property

 

(605

)

 

Other — net

 

467

 

346

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable - customers

 

(911

)

(74

)

Unbilled revenue

 

(4,524

)

(3,639

)

Other accounts receivable

 

(685

)

2,822

 

Materials and supplies

 

(84

)

(130

)

Prepayments and other current assets

 

2,638

 

874

 

Regulatory assets - supply cost balancing accounts

 

(1,910

)

(338

)

Other assets

 

1,937

 

(2,446

)

Accounts payable

 

1,406

 

857

 

Inter-company receivable/payable

 

266

 

(35

)

Income taxes receivable/payable from/to Parent

 

2,036

 

2,358

 

Other liabilities

 

(679

)

(200

)

Net cash provided

 

26,494

 

31,708

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(18,697

)

(33,116

)

Proceeds from sale of property

 

623

 

 

Net cash used

 

(18,074

)

(33,116

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Tax benefits from exercise of stock-based awards

 

121

 

897

 

Receipt of advances for and contributions in aid of construction

 

4,124

 

5,241

 

Refunds on advances for construction

 

(3,418

)

(2,173

)

Repayments of long-term debt

 

(212

)

(190

)

Net change in inter-company borrowings

 

1,000

 

2,500

 

Cash received on financing portion of purchased power contracts

 

 

1,333

 

Dividend equivalent rights

 

(61

)

(116

)

Tax benefits from payment of dividend equivalent rights

 

26

 

47

 

Dividends paid

 

(8,600

)

(8,600

)

Net cash used

 

(7,020

)

(1,061

)

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

1,400

 

(2,469

)

Cash and cash equivalents, beginning of period

 

1,735

 

8,788

 

Cash and cash equivalents, end of period

 

$

3,135

 

$

6,319

 

 

The accompanying notes are an integral part of these financial statements

11




AMERICAN STATES WATER COMPANY
AND
GOLDEN STATE WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Summary of Significant Accounting Policies:

General / Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), Chaparral City Water Company (“CCWC”), and American States Utility Services, Inc. (“ASUS”) and its subsidiaries.  More than 90% of AWR’s assets consist of the common stock of GSWC and its revenues and operations are primarily those of GSWC. GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 255,000 water customers. GSWC also distributes electricity in several California mountain communities serving over 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric business, including properties, rates, services, facilities and other matters. CCWC is a public utility regulated by the Arizona Corporation Commission (“ACC”) serving over 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. ASUS performs water related services and operations on a contract basis. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of the contracted services provided by ASUS and its wholly-owned subsidiaries or AWR.

ASUS, through its wholly-owned subsidiaries, has entered into agreements with the U.S. government to operate and maintain the water and wastewater systems at various military bases pursuant to 50-year fixed price contracts.  In December 2006, ASUS, through one of its wholly-owned subsidiaries, finalized an agreement with the U.S. government for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas.  The $20.6 million project is a firm-fixed price contract and is an amendment to the original 50-year contract with the U.S. government to manage the entire water and wastewater systems at Fort Bliss.  Construction on this project began in 2007 and revenues from this agreement have been recognized under the percentage-of-completion method of accounting during the three and six months ended June 30, 2007.  The project is scheduled to be completed by August 15, 2007 and there will be no further construction revenues associated with this amendment after that date.  Earnings and cash flows from amendments to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in future periods.

Basis of Presentation: 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. Investments in partially-owned affiliates are accounted for by the equity method when Registrant’s interest exceeds 20%.  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”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. 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 revenue 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, 2006 filed with the SEC. Certain prior-period amounts were reclassified to conform to the June 30, 2007 financial statement presentation.

GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves. In addition, AWR has an $85 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations. Amounts owed to AWR for borrowings under this facility represent the majority of the inter-company payables on GSWC’s balance sheets as of June 30, 2007 and December 31, 2006. The interest rate charged to GSWC is equal to the amounts sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliates using agreed upon allocation factors.

12




Advances for Construction and Contributions in Aid of Construction:  For CCWC, advances for construction represent amounts advanced by developers which are refundable over 10 to 20 years. Refund amounts under the CCWC contracts are based on annual revenues from the extensions, as authorized by the ACC.  After all refunds are made, any remaining balance is transferred to contributions-in-aid of construction.  Contributions-in-aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. During the second quarter of 2007, approximately $2.2 million of CCWC advances that expired were transferred to contributions-in-aid of construction.

New Accounting Pronouncements:  In March 2006, the Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) issued EITF No. 06-03, “How Sales Taxes Collected From Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement.”  A consensus was reached that entities may adopt a policy of presenting sales taxes in the income statement on either a gross or net basis, based on their accounting policy, which should be disclosed.  If such taxes are significant, and are presented on a gross basis, an entity should also disclose the amounts of those taxes.  Effective January 1, 2007, Registrant adopted the guidance of EITF No. 06-03.  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to operate within the limits of the municipality. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $619,000 and $554,000 for the three months ended June 30, 2007 and 2006, respectively, and $1,352,000 and $1,132,000 for the six months ended June 30, 2007 and 2006, respectively. When GSWC acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis.

In July 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”).  Effective January 1, 2007, Registrant adopted the provisions of FIN 48.  In addition, in May 2007, the FASB Staff Position (“FSP”) issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48”, which amends FIN 48 to provide guidance on how an enterprise should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits.  See Note 5 for further details and information on the impact of the adoption of FIN 48 and FSP FIN 48-1 on Registrant.

In September 2006, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that Registrant has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. Registrant will implement the new standard effective January 1, 2008. Registrant is currently evaluating the impact SFAS No. 157 may have on its financial statements and disclosures.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”.  SFAS No. 159 allows measurement at fair value of eligible financial assets and liabilities that are not otherwise measured at fair value.  The election to measure a financial asset or liability at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in fair value are recognized in earnings.  SFAS No. 159 also establishes additional disclosure requirements designed to facilitate comparison between companies that choose different measurement attributes for similar type assets and liabilities.  SFAS No. 159 is effective for Registrant’s fiscal year beginning January 1, 2008.  Registrant is evaluating the potential impact that SFAS No. 159 may have on its financial statements.

In March 2007, the FASB issued EITF 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment”, which concludes that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital.  Registrant will commence recognizing this tax benefit as an increase in additional paid- in capital commencing January 1, 2008. The impact of this change is not expected to be material to Registrant’s financial statements.

13




Note 2 — Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future revenue associated with certain costs that will be recovered from customers through the ratemaking process, and regulatory liabilities, which represent probable future reductions in revenue associated with amounts that are to be credited to customers through the ratemaking process. At June 30, 2007, Registrant had $7.4 million of regulatory assets not accruing carrying costs. Of this amount, $6.6 million relates to deferred income tax representing accelerated tax benefits flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense. In addition, there are other expenses that Registrant recovers in rates over a short period that do not provide for recovery of carrying costs. At June 30, 2007, $784,000 was recorded as other regulatory assets for such expenses to be recovered.  Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

 

 

June 30,

 

December 31,

 

(In thousands)

 

2007

 

2006

 

GSWC

 

 

 

 

 

Supply cost balancing accounts

 

$

18,585

 

$

17,321

 

Supply cost memorandum accounts net under-collections

 

8,132

 

7,429

 

Costs deferred for future recovery on Aerojet case

 

21,362

 

21,313

 

Pensions and other postretirement obligations

 

21,062

 

22,815

 

Flow-through taxes, net

 

6,591

 

7,243

 

Electric transmission line abandonment costs

 

3,230

 

3,288

 

Asset retirement obligations

 

3,372

 

3,197

 

Low income rate assistance balancing accounts

 

4,247

 

3,807

 

Refund of water right lease revenues

 

(3,293

)

(3,565

)

Santa Maria adjudication memorandum accounts

 

3,928

 

 

Other regulatory assets

 

1,884

 

2,126

 

Total GSWC

 

$

89,100

 

$

84,974

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

50

 

$

48

 

Other regulatory liabilities, net

 

(551

)

(565

)

Total AWR

 

$

88,599

 

$

84,457

 

 

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2006 filed with the SEC.  Discussion below focuses on significant matters and changes since December 31, 2006.

Supply Cost Balancing and Memorandum Accounts:

Electric Supply Cost Balancing Account — Electric power costs incurred by GSWC’s Bear Valley Electric division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $18.7 million at June 30, 2007. The balance in the electric supply balancing account is primarily impacted by: (i) a surcharge to decrease previously under-collected energy costs, (ii) changes in purchased energy costs, and (iii) changes in power system delivery costs.

The CPUC has authorized GSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable GSWC to recover an under-collection of approximately $23.1 million at the end of 2001 which had been incurred during the energy crisis in late 2000 and 2001. GSWC sold 30,724,243 and 33,448,999 kilowatt hours of electricity to its Bear Valley Electric division customers for the three months ended June 30, 2007 and 2006, respectively, and  sold 73,408,022 and 75,743,077 kilowatt hours of electricity to its customers for the six months ended June 30, 2007 and 2006, respectively.   As a result, the supply cost balancing account was reduced by approximately $663,000 and $687,000 for the three months ended June 30, 2007 and 2006, respectively, and $1,581,000 and $1,567,000 for the six months ended June 30, 2007 and 2006, respectively.  Approximately $15.6 million of the under-collection incurred during the energy crisis in late 2000 and 2001 has been recovered through this surcharge. GSWC anticipates the surcharge, based on electricity sales, to be sufficient for it to recover by August 2011 the amount of the under-collected balance incurred during the energy crisis.  However, in 2011, if GSWC has not fully recovered the amount of this under collection, GSWC will seek recovery of any amounts not recovered through this surcharge.

14




The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of the 2001 CPUC decision. The Bear Valley Electric division of GSWC is allowed to include up to a weighted average annual purchased energy cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing account.  To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed. There were no amounts expensed over the $77 per MWh cap during the three months ended June 30, 2007 and 2006.  During the six months ended June 30, 2007 and 2006, the amounts expensed were $29,000 and $40,000, respectively.

Charges to GSWC by Southern California Edison (“Edison”), a subsidiary of Edison International,  associated with the transportation of energy over Edison’s power system and the abandonment of a transmission line upgrade have increased under Edison’s tariff to levels that exceed the amounts authorized by the CPUC in Bear Valley Electric’s retail power rates to its customers. The incremental cost increase to GSWC from the tariff for the abandonment of a transmission line upgrade, which is not included in rates, is $38,137 per month. These increases have been included in the balancing account for subsequent recovery from customers, subject to CPUC approval. The incoming power system delivery costs are not subject to the $77 per MWh price cap referenced above.  Other components, such as interest accrued on the cumulative under-collected balance and power loss during transmission, also affect the balance of the electric supply cost balancing account.

In summary, for the three months ended June 30, 2007 and 2006, the under-collection decreased by approximately $406,000 and $367,000, respectively, and $1,189,000 and $586,000 for the six months ended June 30, 2007 and 2006, respectively.

Water Supply Cost Memorandum/Balancing Accounts — All water utilities regulated by the CPUC were required to seek review of supply cost under- and over- collections by filing an advice letter annually and to reduce the utility’s recovery of such expenses by the amount exceeding the authorized rate of return. Upon approval by the CPUC, the memorandum accounts are transferred to water supply cost balancing accounts.  On April 13, 2006, the CPUC approved a decision eliminating the earnings test that limited recovery of expenses recorded in these accounts. The decision also eliminated the need to make an annual filing. Pursuant to this order, GSWC recognized a cumulative under-collection of approximately $636,000 to the supply cost memorandum account provisions in the second quarter of 2006 for the under-collected balances not recognized at March 31, 2006 and began recording under- and over- collections on a monthly basis thereafter commencing with the second quarter of 2006.  For the three months ended June 30, 2007 and 2006, approximately, $1.6 million and $599,000 of under-collections, respectively, were recorded in the water supply cost memorandum/balancing accounts, including amortization of approximately $250,000 over-collection and $283,000 under-collection, respectively.  For the six months ended June 30, 2007 and 2006, approximately, $3.1 million and $361,000 of under-collections, respectively, were recorded in the water supply cost memorandum/balancing accounts, including amortization of approximately $570,000 over-collection and $520,000 under-collection, respectively.

GSWC filed advice letters with the CPUC in October 2006 for review of $2.0 million net under-collections of Region I’s  2005 and 2006 water supply cost memorandum account balance as of August 31, 2006 and its net balance after amortization of the 2001-2003 balancing account.  On January 3, 2007, the CPUC approved the advice letters as filed.  As a result, the total $2.0 million net under-collection was transferred to the water supply cost balancing account in January 2007.  There was no impact to earnings in 2007 as this net under-collection was recorded as a regulatory asset in prior periods.

Costs Deferred for Future Recovery:

In 1999, GSWC sued Aerojet-General Corporation (“Aerojet”) for contaminating the Sacramento County Groundwater Basin, which affected certain GSWC wells. On a related matter, GSWC also filed a lawsuit against the State of California (the “State”). The CPUC authorized memorandum accounts to allow for recovery, from customers, of costs incurred by GSWC in prosecuting the cases against Aerojet and the State, less any recovery from the defendants or others. On July 21, 2005, the CPUC authorized GSWC to collect approximately $21.3 million of the Aerojet litigation memorandum account, through a rate surcharge, which will continue for no longer than 20 years. Beginning in October 2005, new rates went into effect to begin amortizing the memorandum account over a 20-year period.

A rate surcharge generating approximately $285,000 and $289,000 was billed to customers during the three months ended June 30, 2007 and 2006, respectively, and $505,000 and $499,000 for the six months ended June 30, 2007 and 2006, respectively. GSWC will keep the Aerojet memorandum account open until the earlier of full amortization of the balance or 20 years.  However, no costs will be added to the memorandum account, other than on-going interest charges approved by the decision.  Pursuant to the decision, additional interest of approximately $278,000 and $554,000 was added to the Aerojet litigation memorandum account during the three and six months ended June 30, 2007, respectively.  It is management’s intention to offset any settlement proceeds received from Aerojet pursuant to the settlement agreement against the balance in

15




the memorandum account, with the exception of an $8.0 million payment guaranteed by Aerojet. The $8.0 million plus interest on the unpaid balance is scheduled to be paid in installments over five years beginning in 2009 and is expected to be used to make certain capital investments useful in managing the contamination which was the basis of the suit against Aerojet.  Pursuant to such settlement agreement, Aerojet has agreed to reimburse GSWC an additional $17.5 million, plus interest accruing from January 1, 2004, for GSWC’s past legal and expert costs. The recovery of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development.

On April 7, 2006, GSWC filed an advice letter with the CPUC to incorporate the Westborough development, which represents a portion of the defined property, into its Rancho Cordova service area and to provide water service to that new development. The City of Folsom (the “City”) filed a protest of GSWC’s advice letter on April 27, 2006. On January 30, 2007, the CPUC rejected the advice letter without prejudice, and invited GSWC to refile the advice letter once the City’s protest was resolved, or file an application for CPUC approval of the service territory expansion.  In June 2007, GSWC signed an agreement with the City.  Pursuant to the agreement, the City relinquishes all claims concerning GSWC’s providing water service to the Westborough area, and as compensation to the City to resolve its claim, GSWC has agreed to pay the City $550,000 as the settlement payment, of which Aerojet will reimburse GSWC for 50% or $275,000.  Accordingly, as of and for the three and six months ended June 30, 2007, GSWC has recorded an obligation of $550,000 to the City, an additional receivable of $275,000 from Aerojet for the amount to be reimbursed, and a net charge to expense in the amount of $275,000 for GSWC’s share of the settlement payment.  GSWC intends to refile the application for service territory expansion with the CPUC.

Santa Maria Adjudication Memorandum Accounts:

As more fully discussed in Note 7, GSWC has incurred costs of approximately $6.5 million as of June 30, 2007, including legal and expert witness fees, in defending its water supply from the Santa Maria Basin dedicated to customer service in Santa Barbara and San Luis Obispo Counties.  Such costs had been recorded in utility plant for rate recovery.  In February 2006, GSWC filed an application with the CPUC for recovery of $5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005.  In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates authorizing recovery of the $5.5 million requested in GSWC’s application.  The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit.  In May 2007, the CPUC issued a decision that approved the settlement with the Division of Ratepayer Advocates.  Pursuant to the decision, GSWC was ordered to place in rate base $2.7 million of the $5.5 million of previously incurred litigation costs in the Santa Maria groundwater basin adjudication.  GSWC was also ordered to amortize, with interest, the remaining $2.8 million of the $5.5 million in rates over a ten-year period.  This amount has been transferred into a separate memorandum account included within regulatory assets and a surcharge has been implemented in the third quarter of 2007 for recovery of these costs.  All litigation costs that have been incurred since December 31, 2005, totaling approximately $1.1 million, have also been transferred from rate base to a separate new memorandum account, subject to a reasonableness review by the CPUC in a subsequent phase of this proceeding or in a new proceeding.  Management believes that these additional costs will be approved and the recovery of these costs through rates is probable.

Other Regulatory Matters:

On February 15, 2007, the CPUC issued a subpoena to GSWC in connection with an investigation of certain work orders and charges paid to a specific contractor used by GSWC for numerous construction projects.  The CPUC’s investigation focuses on whether these charges were approved in customer rates and whether they were just and reasonable.  In June 2007, GSWC received notification from the CPUC instituting an audit.  The purpose of the audit will be to examine for the period 1994 to the present, GSWC’s policies, procedures, and practices throughout all of its Regions regarding the granting or awarding of construction contracts or jobs. Management cannot predict the outcome of the investigation or audit at this time.

On April 16, 2007, GSWC’s Bear Valley Electric division filed a compliance report with the CPUC regarding its purchases of energy from renewable energy resources.  The filing included an indication that Bear Valley Electric had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a possible penalty.  GSWC has formally contested the potential penalty reflected in the compliance report.  Management does not believe it is probable that GSWC will ultimately be assessed any penalty (which the form indicates would be as high as $592,000), and accordingly, no provision for loss has been recorded in the financial statements.  The CPUC is considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like Bear Valley Electric.  It is GSWC’s objective to comply with the 20% renewable energy requirement by the year 2010.

16




Note 3 — Earnings per Share/Capital Stock:

Registrant computes earnings per share (“EPS”) in accordance with EITF No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”.  EITF No. 03-06 provides the accounting guidance for the effect of participating securities on EPS calculations and the use of the “two-class” method. The guidance requires the use of the “two-class” method of computing EPS for companies with participating securities. The “two-class” method is an earnings allocations formula that determines EPS for each class of common stock and participating security.  AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with Common Shares that have been issued under AWR’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan. 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 for calculating basic earnings per share:

 

 

For The Three

 

For The Six Months

 

Basic EPS

 

Months Ended June 30,

 

Ended June 30,

 

(in thousands, except per share amounts)

 

2007

 

2006

 

2007

 

2006

 

Net income

 

$

7,322

 

$

6,269

 

$

14,306

 

$

12,170

 

Less:

(a)

Distributed earnings to common shareholders

 

4,017

 

3,798

 

8,021

 

7,580

 

 

 

Distributed earnings to participating securities

 

64

 

79

 

128

 

154

 

Undistributed earnings

 

3,241

 

2,392

 

6,157

 

4,436

 

 

 

 

 

 

 

 

 

 

 

(b)

Undistributed earnings allocated to common shareholders

 

3,190

 

2,345

 

6,061

 

4,348

 

 

Undistributed earnings allocated to participating securities

 

51

 

48

 

96

 

88

 

 

 

 

 

 

 

 

 

 

 

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

 

$

7,207

 

$

6,143

 

$

14,082

 

$

11,928

 

 

 

 

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

17,094

 

16,881

 

17,066

 

16,844

 

Basic earnings per Common Share

 

$

0.42

 

$

0.36

 

$

0.83

 

$

0.71

 

 

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 Registrant’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income available to common shareholders. At June 30, 2007 and 2006 there were 580,215 and 645,389 stock options outstanding, respectively, under these Plans. At June 30, 2007 and 2006, there were also approximately 61,081 and 47,129 restricted stock units outstanding, respectively. The following is a reconciliation of Registrant’s net income available to common shareholders and weighted average Common Shares outstanding for calculating diluted earnings per share:

 

 

For The Three

 

For The Six Months

 

Diluted EPS

 

Months Ended June 30,

 

Ended June 30,

 

(in thousands, except per share amounts)

 

2007

 

2006

 

2007

 

2006

 

Common shareholders earnings, basic

 

$

7,207

 

$

6,143

 

$

14,082

 

$

11,928

 

Undistributed earnings for dilutive stock options (1)

 

 

 

 

 

Total common shareholders earnings, diluted

 

$

7,207

 

$

6,143

 

$

14,082

 

$

11,928

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

17,094

 

16,881

 

17,066

 

16,844

 

Stock-based compensation (2)

 

52

 

66

 

55

 

61

 

Weighted average common shares outstanding, diluted

 

17,146

 

16,947

 

17,121

 

16,905

 

Diluted earnings per Common Share

 

$

0.42

 

$

0.36

 

$

0.82

 

$

0.71

 

 


(1)        Undistributed earnings allocated to participating securities were not included due to their antidilutive effect on diluted earnings per share.

(2)          In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 276,574 and 241,962 stock options at June 30, 2007 and 2006, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”.

17




Stock options of 87,041 and 94,917 were outstanding at June 30, 2007 and 2006, respectively, but not included in the computation of diluted EPS because the related option exercise price was greater than the average market price of AWR’s Common Shares for the six months ended June 30, 2007 and 2006.  Stock options of 216,600 and 308,510, and restricted stock units of 61,081 and 47,129 were outstanding at June 30, 2007 and 2006, respectively, but not included in the computation of diluted EPS because they were antidilutive.

Registrant has a Shareholder Rights Plan designed to protect the Company’s shareholders in the event of an unsolicited unfair offer to acquire the Company. The rights for Junior Participating Preferred Shares (the “Rights”) are exercisable based solely on “a non-market-based contingency”, and are not contingent upon the market price of  AWR’s stock. Therefore, the shares that would be issued if the Rights are exercised are not included in the calculation of diluted earnings per share.

During the three months ended June 30, 2007 and 2006, Registrant issued 6,419 and 13,245 Common Shares, for approximately $235,000 and $494,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment (“DRP”) Plan and the 401(k) Plan. During the six months ended June 30, 2007 and 2006, Registrant issued 13,494 and 29,102 Common Shares, for approximately $507,000 and $1,023,000, respectively, under the Registrant’s DRP Plan and the 401(k) Plan.  In addition, during the six months ended June 30, 2007 and 2006, Registrant issued 46,787 and 148,832 Common Shares for approximately $1,127,000 and $3,421,000, respectively, as a result of the exercise of stock options under the Company’s stock incentive plans.  No cash proceeds received by AWR as a result of the exercise of these stock options have been distributed to any subsidiaries of AWR.

During the three months ended June 30, 2007 and 2006, Registrant purchased 3,271 and 10,737, respectively, and 3,553 and 24,821 for the six months ended June 30, 2007 and 2006, respectively, Common Shares on the open market under the Registrant’s DRP and 401(k) Plans, which were used to satisfy the requirements of these plans.

During the three months ended June 30, 2007 and 2006, AWR paid quarterly dividends to the shareholders of approximately $4.0 million, or $0.235 per share, and $3.8 million, or $0.225 per share, respectively.  During the six months ended June 30, 2007 and 2006, AWR paid quarterly dividends to the shareholders of approximately $8.0 million, or $0.470 per share, and $7.6 million, or $0.450 per share, respectively.

Note 4 — Derivative Instruments:

Registrant has certain block-forward purchase power contracts that are subject to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and 149. A derivative financial instrument or other contract derives its value from another investment or designated benchmark. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, and to measure those instruments at their fair value.  During 2002, GSWC became a party to block-forward purchase power contracts that qualified as derivative instruments under SFAS No. 133. Contracts with Pinnacle West Marketing & Trading Company, LLC (formerly Pinnacle West Capital Corporation), which became effective in November 2002 have not been designated as normal purchases and normal sales. As a result, on a monthly basis, the related asset or liability is adjusted to reflect the fair market value at the end of the month. For the three months ended June 30, 2007 and 2006, GSWC recognized a pretax unrealized loss of $236,000 and $923,000, respectively.  For the six months ended June 30, 2007 and 2006, GSWC recognized a pretax unrealized gain of $2,474,000 and a pretax unrealized loss of $3,078,000, respectively. As this contract is settled, the realized gains or losses are recorded in power purchased for resale, and the previously recorded unrealized gains or losses are reversed. These contracts have been recognized at fair market value on the balance sheets resulting in a cumulative unrealized loss of $1,180,000 as of June 30, 2007.

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. Settlement of this contract occurred on a cash or net basis through 2006 and by physical delivery thereafter through 2008. Registrant has no other derivative financial instruments.

18




Note 5 — Income Taxes:

As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal and state income tax rates in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise.

In July 2006, the FASB issued FIN 48.  FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements.  FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition.  Effective January 1, 2007, Registrant adopted FIN 48. As a result of adoption, Registrant increased retained earnings by $181,000.  As of the adoption date and at June 30, 2007, Registrant’s total amount of unrecognized tax benefits was $4.8 million, of which $118,000, if recognized, would affect the effective tax rate.

With the adoption of FIN 48, Registrant continued its policy of classifying interest on income tax over/underpayments in interest income/expense and penalties in “other operating expenses.”  At June 30, 2007, Registrant included $404,000 of net interest receivables from taxing authorities in other assets ($103,000 as current), of which $42,000 and $83,000 were included in interest income for the three and six months ended June 30, 2007, respectively.  For the three and six months ended June 30, 2006, Registrant recognized $381,000 of income-tax-related interest income.  At June 30, 2007, Registrant had no accruals for income-tax-related penalties and did not recognize any such penalty expense during the three and six months ended June 30, 2007 and 2006.

Registrant files federal and various state income tax returns.  The U.S. federal filings for the years 1997 through 1999 and 2002 came under examination during the first quarter of 2007 as a result of Registrant having filed an amended 2002 return during the third quarter of 2006 for which Internal Revenue Service (“IRS”) and Congressional Joint Committee of Taxation (“JCT”) reviews are required.  The 2002 return was amended primarily as a result of the IRS consenting to Registrant’s request for approval to change a tax accounting method.  In relation to this consent, Registrant’s total amount of unrecognized tax benefits could significantly increase or decrease within twelve months of June 30, 2007.  An estimate of the range of the reasonably possible change cannot be made at June 30, 2007.  Registrant is unable to anticipate when the IRS and JCT reviews will be concluded.

The California filing for 2001 also came under examination by the Franchise Tax Board during the first quarter of 2007 as a result of Registrant having filed an amended 2001 return in the first quarter of 2006.  The Franchise Tax Board completed its review during July 2007 without proposing any material changes to the amended return as filed by Registrant.

Registrant’s 2003 through 2005 tax years also remain subject to examination by the IRS and its 2002 through 2005 tax years remain subject to examination by state taxing authorities.

There were no material differences between AWR and GSWC with respect to their accounting for income taxes.

Note 6 — Employee Benefit Plans:

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and six months ended June 30, 2007 and 2006 are as follows:

 

 

For The Three Months Ended June 30,

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

Pension Benefits

 

Benefits

 

SERP

 

(dollars in thousands)

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

940

 

$

991

 

$

105

 

$

107

 

$

106

 

$

32

 

Interest cost

 

1,243

 

1,175

 

168

 

155

 

41

 

35

 

Expected return on plan assets

 

(1,133

)

(984

)

(57

)

(50

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost

 

41

 

41

 

(50

)

(50

)

40

 

37

 

Amortization of actuarial (gain) loss

 

154

 

292

 

25

 

37

 

(6

)

(3

)

Net periodic pension cost

 

$

1,245

 

$

1,515

 

$

296

 

$

304

 

$

181

 

$

101

 

 

19




 

 

 

For The Six Months Ended June 30,

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

Pension Benefits

 

Benefits

 

SERP

 

(dollars in thousands)

 

2007

 

2006

 

2007

 

2006

 

2007

 

2006

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,880

 

$

1,982

 

$

210

 

$

214

 

$

212

 

$

64

 

Interest cost

 

2,486

 

2,350

 

336

 

310

 

82

 

70

 

Expected return on plan assets

 

(2,266

)

(1,968

)

(114

)

(100

)

 

 

Amortization of transition

 

 

 

210

 

210

 

 

 

Amortization of prior service cost

 

82

 

82

 

(100

)

(100

)

80

 

74

 

Amortization of actuarial (gain) loss

 

308

 

584

 

50

 

74

 

(12

)

(6

)

Net periodic pension cost

 

$

2,490

 

$

3,030

 

$

592

 

$

608

 

$

362

 

$

202

 

 

Registrant expects to contribute a minimum of approximately $4,974,000 and $800,000 to the pension and postretirement medical plans in 2007, respectively.  Registrant contributed its first payment of $1,125,000 to the pension plan during the second quarter of 2007.  A second payment of $695,000 was made in July 2007.  No contributions to the postretirement plan were made during the three and six months ended June 30, 2007.

As of December 31, 2006, Registrant’s pension obligation was determined by an actuarial valuation using actual beginning -of-year (January 1, 2006) census data.  During the second quarter of 2007, Registrant’s actuaries completed a revised valuation with updated census data as of December 31, 2006.  As a result of using updated data, Registrant recorded a $1.1 million reduction to the projected benefit obligation with a corresponding decrease to the regulatory asset during the second quarter of 2007.

Note 7 — Contingencies:

Water Quality-Related Litigation:

In 1997, GSWC was named as a defendant in nineteen lawsuits that alleged that GSWC and other water utilities delivered unsafe water to their customers in the San Gabriel Valley and Pomona Valley areas of Los Angeles County. Plaintiffs in these actions sought damages, including general, special, and punitive damages, as well as attorney’s fees on certain causes of action, costs of suit, and other unspecified relief.  On August 4, 2004, GSWC was dismissed from all nineteen Los Angeles County cases. The Court found GSWC did not violate established water quality standards and dismissed the cases after allowing reasonable time and opportunity for the plaintiffs to prove otherwise. GSWC has long asserted that it provides water within the standards established by the CPUC in cooperation with the health authorities. On September 21, 2004, GSWC received notice that all of the plaintiffs filed an appeal to the trial court’s order dismissing GSWC. Briefs and reply briefs were filed in the appeal. On February 7, 2006, the Second Appellate District in which the briefs were filed, moved the California Supreme Court to transfer the appeal to the First Appellate District, the District in which prior appeals regarding these cases had been heard.  The Supreme Court granted the transfer.  Argument in the court of appeal was held before the First Appellate District on June 20, 2007, and a ruling is expected by September 20, 2007.  GSWC is unable to predict the outcome of this appeal.

GSWC is subject to self-insured retention (deductible) provisions in its applicable insurance policies and has either expensed the self-insured amounts or has reserved against payment of these amounts as appropriate. GSWC’s various insurance carriers have, to date, provided reimbursement for much of the costs incurred above the self-insured amounts for defense against these lawsuits, subject to a reservation of rights. In addition, the CPUC has issued certain decisions, which authorize GSWC to establish a memorandum account to accumulate costs for future recovery.

Perchlorate and/or Volatile Organic Compounds (“VOC”) have been detected in five wells servicing GSWC’s South San Gabriel System. GSWC filed suit in federal court, along with two other affected water purveyors and the San Gabriel Basin Water Quality Authority (“WQA”), against some of those allegedly responsible for the contamination of two of these wells. Some of the other potential defendants settled with GSWC, other water purveyors and the WQA (the “Water Entities”) on VOC related issues prior to the filing of the lawsuit. In response to the filing of the lawsuit, the Potentially Responsible Party (“PRP”) defendants filed motions to dismiss the suit or strike certain portions of the suit. The judge issued a ruling on April 1, 2003 granting in part and denying in part the PRP’s motions. A key ruling of the court was that the water purveyors, including GSWC, by virtue of their ownership of wells contaminated with hazardous chemicals are themselves PRPs under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

20




Registrant has, pursuant to permission of the court, amended its suit to claim certain affirmative defenses as an “innocent” party under CERCLA. Registrant is presently unable to predict the outcome of this ruling on its ability to fully recover from the PRPs future costs associated with the treatment of these wells. In this same suit, the PRPs have filed cross-complaints against the Water Entities, the Metropolitan Water District, the Main San Gabriel Basin Watermaster and others on the theory that they arranged for and did transport contaminated water into the Main San Gabriel Basin for use by Registrant and the other two affected water purveyors and for other related claims.

On August 29, 2003, the US Environmental Protection Agency (“EPA”) issued Unilateral Administrative Orders (“UAO”) against 41 parties deemed responsible for polluting the groundwater in that portion of the San Gabriel Valley from which two of GSWC’s impacted wells draw water. GSWC was not named as a party to the UAO. The UAO requires that these parties remediate the contamination. The judge in the lawsuit has appointed a special master to oversee mandatory settlement discussions between the PRPs and the Water Entities. EPA is also conducting settlement discussions with several PRPs regarding the UAO. The Water Entities and EPA are working to coordinate their settlement discussions under the special master in order to arrive at a complete resolution of all issues affecting the lawsuit and the UAO.  Settlements with a number of the PRPs are being finalized; however, Registrant is presently unable to predict the ultimate outcome of these settlement discussions.

Registrant is unable to predict an estimate of the loss, if any, resulting from any of these suits or administrative proceedings.

Condemnation of Properties:

The laws of the State of California and the State of Arizona provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation, where doing so is necessary and in the public interest. In addition, however, the laws of the State of California provide: (i) that the owner of utility property may contest whether the condemnation is actually necessary and in the public interest, and (ii) that the owner is entitled to receive the fair market value of its property if the property is ultimately taken.

Although the City of Claremont, California located in GSWC’s Region III, has not initiated the formal condemnation process pursuant to California law, the City has expressed various concerns to GSWC about the rates charged by GSWC and the effectiveness of the CPUC’s rate setting procedures. The City hired a consultant to perform an appraisal of the value of GSWC’s water system serving the City. The value was estimated in 2004 by the City’s consultant at $40 - $45 million. GSWC disagrees with the consultant’s valuation assessment. As of June 30, 2007, management believes that the fair market value of the Claremont water system exceeds the $38.3 million recorded net book value and also exceeds the consultant’s estimates of its value.  The Claremont City Council held a project priorities workshop in April 2007.  The council members agreed that the acquisition of GSWC’s water system was to remain a priority and authorized staff to obtain updated appraisals for the value of the water systems.  Requests for proposals have been sent to consulting firms.

The Town of Apple Valley is located in GSWC’s Region III and was evaluating the potential takeover of GSWC’s Apple Valley water systems as well as the water systems of another utility serving the Town.  On March 13, 2007, the Town Council voted to formally abandon its review of the potential acquisitions.  GSWC was notified of the Town Council’s action by a letter from the Town Manager dated April 3, 2007.

Except for the City of Claremont and the Town of Apple Valley, Registrant has not been, within the last three years, involved in activities related to the potential condemnation of any of its other water customer service areas or in its Bear Valley Electric customer service area. No formal condemnation proceedings have been filed against any of the Registrant’s  service areas during the past three years.

Santa Maria Groundwater Basin Adjudication:

In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit seeks an adjudication of the Santa Maria Groundwater Basin.  A stipulated settlement of the lawsuit has been reached, subject to CPUC approval. The settlement, among other things, if approved by the CPUC, would preserve GSWC’s historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the Basin. There are also a few nonsettling parties, and the case is going forward as to these parties. The settlement, if approved, would preserve GSWC’s position with the settling parties independent of the outcome of the case as it moves forward with the nonsettling parties.

21




Air Quality Management District:

In 1998, the South Coast Air Quality Management District (“AQMD”) issued a permit to GSWC for the installation and use of air stripping equipment at one of GSWC’s groundwater treatment systems in its Region II service area.   In 2005, the AQMD conducted an inspection of this facility and issued a Notice of Violation (“NOV”) for exceeding the amount of groundwater permitted to be treated by the treatment system during calendar year 2004.  Since receiving the NOV, changes in GSWC procedures have avoided additional violations at the facility.  The AQMD could have assessed penalties associated with an NOV that can range from $10,000 up to $75,000 per day of violation.  GSWC estimates that it was in violation approximately 180 days in 2004.  GSWC met with AQMD on numerous occasions to resolve the NOV and to ensure future compliance.  As part of this process, GSWC also submitted an application to amend the permit, because an amendment may have been necessary for continued operation of the subject air stripping equipment.

GSWC finalized a settlement of the NOV with the AQMD in June 2007.  As part of the settlement, GSWC agreed to withdraw its application for an amended air discharge permit and perform a Supplemental Environmental Program (“SEP”).  A SEP typically involves capital expenditures resulting in a change of process, equipment, material, or indirect source reduction for the purposes of eliminating or reducing air contaminant emissions.  The SEP prepared by GSWC involves installation and operation of granular activated carbon filters at the facility.  Installation of the filters will eliminate the use of the air stripping equipment at the facilities involved with the NOV and thus improve air quality.  The AQMD accepted the SEP and assessed a nominal penalty of $25,000.  During the six months ended June 30, 2007, GSWC paid the penalty of $25,000 and agreed to perform its obligations under the SEP.  It is estimated that the total capital cost of the SEP will be approximately $1.8 million with a required estimated completion date of April 30, 2009.  Upon timely performance of all its obligations under the SEP, GSWC shall be deemed released from any and all claims or penalties arising from the NOV.  Management believes that GSWC will be able to timely fulfill its obligations under the SEP and no further penalties are expected to be assessed.  Management also believes it is probable that the capital costs of the SEP will be approved in rate base by the CPUC.

Other Litigation:

A former officer of the Company has asserted a potential claim against the Company for retaliation against the former officer and others in connection with alleged discriminatory conduct by the Company and its Board of Directors. Although management believes that the allegations are without merit and intends to vigorously defend against them, the Company retained an independent investigator to review the allegations and investigate the facts. Based upon the results of such investigation, the Company does not believe that the ultimate resolution of this matter will have a material adverse effect on its financial position, results of operations, or cash flows.

Registrant is also subject to other ordinary routine litigation incidental to its business.  Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business.

22




Note 8 — Business Segments:

AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water-service utility operation conducted through CCWC, and a contracted services unit conducted through ASUS and its subsidiaries. All activities of GSWC are geographically located within California. All activities of CCWC are located in the state of Arizona.  Activities of ASUS and its subsidiaries are conducted in California, Maryland, New Mexico, Texas and Virginia.  Both GSWC and CCWC are regulated utilities. On a stand-alone basis, AWR has no material assets other than its investments in its subsidiaries. The tables below set forth information relating to GSWC’s operating segments, CCWC, ASUS and its subsidiaries, and other matters.  Certain assets, revenues and expenses have been allocated in the amounts set forth. The identifiable assets are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property installed by developers and conveyed to GSWC or CCWC.

 

 

As Of And For The Three Months Ended June 30, 2007

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

58,894

 

$

6,255

 

$

1,932

 

$

12,165

 

$

 

$

79,246

 

Pretax operating income (loss)

 

15,812

 

(40

)(1)

169

 

1,527

 

(11

)

17,457

 

Interest expense, net

 

4,284

 

370

 

97

 

272

 

(39

)

4,984

 

Identifiable assets

 

674,361

 

39,521

 

42,179

 

1,064

 

 

757,125

 

Depreciation and amortization expense

 

6,111

 

534

 

395

 

48

 

 

7,088

 

Capital additions

 

8,524

 

634

 

444

 

313

 

 

9,915

 

 

 

 

As Of And For The Three Months Ended June 30, 2006

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

51,396

 

$

7,027

 

$

2,048

 

$

2,567

 

$