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, 2008

 

 

 

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, a non-accelerated filer, or a smaller reporting company. See definitions 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 o

 

Accelerated filer x

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Golden State Water Company

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

 

American States Water Company

 

Yes ¨  No x

Golden State Water Company

 

Yes ¨  No x

 

As of May 7, 2008, the number of Common Shares outstanding, of American States Water Company was 17,245,224 shares.

 

As of May 7, 2008, 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

1

 

 

 

 

Consolidated Balance Sheets of American States Water Company as of March 31, 2008 and December 31, 2007

2

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended March 31, 2008 and 2007

4

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Three Months Ended March 31, 2008 and 2007

5

 

 

 

 

Balance Sheets of Golden State Water Company as of March 31, 2008 and December 31, 2007

6

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended March 31, 2008 and 2007

8

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Three Months Ended March 31, 2008 and 2007

9

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2:

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

24

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

46

 

 

 

Item 4:

Controls and Procedures

46

 

 

 

Item 4T:

Controls and Procedures

46

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

47

 

 

 

Item 1A:

Risk Factors

47

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

47

 

 

 

Item 3:

Defaults Upon Senior Securities

47

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

47

 

 

 

Item 5:

Other Information

47

 

 

 

Item 6:

Exhibits

48

 

 

 

 

Signatures

49

 



 

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 (hereinafter “AWR”) is the parent company of Golden State Water Company (hereinafter “GSWC”), Chaparral City Water Company (hereinafter “CCWC”) and American States Utility Services, Inc. (hereinafter “ASUS”) and its subsidiaries.

 

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 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 ability to raise capital, capital expenditures, earnings, litigation, rates, water sales, water quality and other regulatory matters, adequacy of water supplies, the ability of GSWC and CCWC to recover electric, natural gas and water 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; delays in customer payments or price redeterminations on contracts executed by ASUS and its subsidiaries; and legislative, legal proceedings, regulatory and other circumstances affecting anticipated revenues and costs.

 

1



 

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

 

(in thousands)

 

March 31,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

Water

 

$

988,474

 

$

982,708

 

Electric

 

65,288

 

65,078

 

 

 

1,053,762

 

1,047,786

 

Less - Accumulated depreciation

 

(324,311

)

(316,038

)

 

 

729,451

 

731,748

 

Construction work in progress

 

55,337

 

44,631

 

Net utility plant

 

784,788

 

776,379

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

12,431

 

11,354

 

Other property and investments

 

10,878

 

10,245

 

Total other property and investments

 

23,309

 

21,599

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

765

 

1,698

 

Accounts receivable-customers (less allowance for doubtful accounts of $563 in 2008 and $539 in 2007)

 

14,514

 

16,095

 

Unbilled revenue

 

17,180

 

16,035

 

Receivable from the U.S. government (less allowance for doubtful accounts of $512 in 2008 and $496 in 2007)

 

7,296

 

7,556

 

Other accounts receivable (less allowance for doubtful accounts of $543 in 2008 and $629 in 2007)

 

3,166

 

4,154

 

Income taxes receivable

 

1,042

 

60

 

Materials and supplies, at average cost

 

1,638

 

1,576

 

Regulatory assets - current

 

4,553

 

5,187

 

Prepayments and other current assets

 

2,232

 

2,765

 

Unrealized gain on purchased power contracts

 

1,289

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

3,240

 

3,842

 

Deferred income taxes - current

 

2,925

 

4,047

 

Total current assets

 

59,840

 

63,015

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

82,518

 

82,539

 

Other accounts receivable

 

9,842

 

9,723

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

6,662

 

2,284

 

Deferred income taxes

 

67

 

28

 

Other

 

8,359

 

8,331

 

Total regulatory and other assets

 

107,448

 

102,905

 

 

 

 

 

 

 

Total Assets

 

$

975,385

 

$

963,898

 

 

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

 

2



 

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

 

(in thousands)

 

March 31,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

182,202

 

$

181,796

 

Earnings reinvested in the business

 

121,307

 

120,333

 

Total common shareholders’ equity

 

303,509

 

302,129

 

Long-term debt

 

267,174

 

267,226

 

Total capitalization

 

570,683

 

569,355

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

47,600

 

37,200

 

Long-term debt - current

 

601

 

609

 

Accounts payable

 

27,785

 

29,091

 

Income taxes payable

 

212

 

398

 

Accrued employee expenses

 

6,033

 

6,228

 

Accrued interest

 

5,243

 

2,467

 

Unrealized loss on purchased power contracts

 

 

1,554

 

Regulatory liabilities - current

 

231

 

173

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

3,234

 

2,641

 

Other

 

12,137

 

13,890

 

Total current liabilities

 

103,076

 

94,251

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

83,952

 

84,479

 

Contributions in aid of construction - net

 

99,057

 

98,657

 

Deferred income taxes

 

82,294

 

82,480

 

Unamortized investment tax credits

 

2,314

 

2,336

 

Accrued pension and other postretirement benefits

 

22,170

 

20,851

 

Regulatory liabilities

 

529

 

557

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

2,471

 

2,037

 

Other

 

8,839

 

8,895

 

Total other credits

 

301,626

 

300,292

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

975,385

 

$

963,898

 

 

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 MARCH 31, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

52,089

 

$

50,327

 

Electric

 

8,803

 

8,869

 

Contracted services

 

8,050

 

13,074

 

Total operating revenues

 

68,942

 

72,270

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

7,953

 

8,873

 

Power purchased for pumping

 

1,680

 

2,118

 

Groundwater production assessment

 

2,375

 

2,279

 

Power purchased for resale

 

4,239

 

4,281

 

Unrealized gain on purchased power contracts

 

(2,843

)

(2,710

)

Supply cost balancing accounts

 

(107

)

(720

)

Other operating expenses

 

7,996

 

6,597

 

Administrative and general expenses

 

14,827

 

13,007

 

Depreciation and amortization

 

7,793

 

7,089

 

Maintenance

 

3,772

 

2,973

 

Property and other taxes

 

2,920

 

2,930

 

Construction expenses

 

3,875

 

9,069

 

Net gain on sale of property

 

 

(367

)

Total operating expenses

 

54,480

 

55,419

 

 

 

 

 

 

 

Operating Income

 

14,462

 

16,851

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,378

)

(5,496

)

Interest income

 

361

 

566

 

Other

 

114

 

69

 

Total other income and expenses

 

(4,903

)

(4,861

)

 

 

 

 

 

 

Income from operations before income tax expense

 

9,559

 

11,990

 

 

 

 

 

 

 

Income tax expense

 

4,255

 

5,006

 

 

 

 

 

 

 

Net Income

 

$

5,304

 

$

6,984

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,239

 

17,055

 

Basic Earnings Per Common Share

 

$

0.31

 

$

0.40

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,357

 

17,114

 

Fully Diluted Earnings Per Share

 

$

0.30

 

$

0.40

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.250

 

$

0.235

 

 

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

 

4



 

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

5,304

 

$

6,984

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

7,793

 

7,089

 

Provision for doubtful accounts

 

212

 

5

 

Deferred income taxes and investment tax credits

 

1,476

 

2,072

 

Unrealized gain on purchased power contracts

 

(2,843

)

(2,710

)

Stock-based compensation expense

 

205

 

193

 

Net gain on sale of property

 

 

(367

)

Other – net

 

(8

)

192

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable – customers

 

1,368

 

2,256

 

Unbilled revenue

 

(1,145

)

(358

)

Other accounts receivable

 

886

 

(910

)

Receivable from the U.S. government

 

244

 

(3,864

)

Materials and supplies

 

(62

)

(102

)

Prepayments and other current assets

 

533

 

(215

)

Regulatory assets — supply cost balancing accounts

 

(107

)

(720

)

Other assets

 

(3,636

)

574

 

Accounts payable

 

(1,306

)

(981

)

Income taxes receivable/payable

 

(1,168

)

829

 

Other liabilities

 

3,448

 

4,226

 

Net cash provided

 

11,194

 

14,193

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(17,219

)

(9,965

)

Business acquisition

 

(2,298

)

 

Proceeds from sale of property

 

 

380

 

Net cash used

 

(19,517

)

(9,585

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

216

 

272

 

Proceeds from stock option exercises

 

39

 

12

 

Tax benefits from exercise or conversion of stock-based awards

 

7

 

3

 

Receipt of advances for and contributions in aid of construction

 

1,877

 

1,501

 

Refunds on advances for construction

 

(659

)

(427

)

Repayments of long-term debt

 

(60

)

(112

)

Net change in notes payable to banks

 

10,400

 

4,000

 

Dividends paid

 

(4,309

)

(4,008

)

Other

 

(121

)

(20

)

Net cash provided

 

7,390

 

1,221

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(933

)

5,829

 

Cash and cash equivalents, beginning of period

 

1,698

 

3,223

 

Cash and cash equivalents, end of period

 

$

765

 

$

9,052

 

 

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

 

5



 

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

 

(in thousands)

 

March 31,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

927,256

 

$

922,459

 

Electric

 

65,288

 

65,078

 

 

 

992,544

 

987,537

 

Less - Accumulated depreciation

 

(306,478

)

(298,856

)

 

 

686,066

 

688,681

 

Construction work in progress

 

53,510

 

43,552

 

Net utility plant

 

739,576

 

732,233

 

 

 

 

 

 

 

Other Property and Investments

 

7,874

 

7,838

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

750

 

1,389

 

Accounts receivable-customers (less allowance for doubtful accounts of $538 in 2008 and $519 in 2007)

 

14,227

 

15,741

 

Unbilled revenue

 

16,836

 

15,701

 

Inter-company receivable

 

441

 

563

 

Other accounts receivable (less allowance for doubtful accounts of $480 in 2008 and $442 in 2007)

 

2,593

 

3,195

 

Materials and supplies, at average cost

 

1,611

 

1,562

 

Regulatory assets - current

 

4,121

 

5,116

 

Prepayments and other current assets

 

2,115

 

2,595

 

Unrealized gain on purchased power contracts

 

1,289

 

 

Deferred income taxes - current

 

2,732

 

3,845

 

Total current assets

 

46,715

 

49,707

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

82,878

 

82,539

 

Other accounts receivable

 

9,842

 

9,723

 

Other

 

7,995

 

7,933

 

Total regulatory and other assets

 

100,715

 

100,195

 

 

 

 

 

 

 

Total Assets

 

$

894,880

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

6



 

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

 

(in thousands)

 

March 31,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

163,278

 

$

163,180

 

Earnings reinvested in the business

 

121,159

 

115,261

 

Total common shareholder’s equity

 

284,437

 

278,441

 

Long-term debt

 

260,889

 

260,941

 

Total capitalization

 

545,326

 

539,382

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt - current

 

301

 

309

 

Accounts payable

 

24,141

 

24,402

 

Inter-company payable

 

23,754

 

23,764

 

Income taxes payable to Parent

 

1,581

 

2,469

 

Accrued employee expenses

 

5,374

 

5,677

 

Accrued interest

 

5,109

 

2,424

 

Unrealized loss on purchased power contracts

 

 

1,554

 

Regulatory liabilities - current

 

230

 

173

 

Other

 

11,689

 

13,459

 

Total current liabilities

 

72,179

 

74,231

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

78,403

 

78,917

 

Contributions in aid of construction - net

 

87,688

 

87,323

 

Deferred income taxes

 

78,744

 

78,805

 

Unamortized investment tax credits

 

2,314

 

2,336

 

Accrued pension and other postretirement benefits

 

22,170

 

20,851

 

Other

 

8,056

 

8,128

 

Total other credits

 

277,375

 

276,360

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

894,880

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

7



 

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED MARCH 31, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

50,506

 

$

48,688

 

Electric

 

8,803

 

8,869

 

Total operating revenues

 

59,309

 

57,557

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

7,787

 

8,709

 

Power purchased for pumping

 

1,575

 

2,016

 

Groundwater production assessment

 

2,375

 

2,279

 

Power purchased for resale

 

4,239

 

4,281

 

Unrealized gain on purchased power contracts

 

(2,843

)

(2,710

)

Supply cost balancing accounts

 

(107

)

(720

)

Other operating expenses

 

6,116

 

5,700

 

Administrative and general expenses

 

11,667

 

11,495

 

Depreciation and amortization

 

7,242

 

6,644

 

Maintenance

 

3,324

 

2,770

 

Property and other taxes

 

2,761

 

2,829

 

Net gain on sale of property

 

 

(367

)

Total operating expenses

 

44,136

 

42,926

 

 

 

 

 

 

 

Operating Income

 

15,173

 

14,631

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,052

)

(5,019

)

Interest income

 

357

 

533

 

Other

 

86

 

52

 

 

 

(4,609

)

(4,434

)

 

 

 

 

 

 

Income from operations before income tax expense

 

10,564

 

10,197

 

 

 

 

 

 

 

Income tax expense

 

4,646

 

4,295

 

 

 

 

 

 

 

Net Income

 

$

5,918

 

$

5,902

 

 

The accompanying notes are an integral part of these financial statements

 

8



 

GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE THREE MONTHS ENDED MARCH 31, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

5,918

 

$

5,902

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

7,242

 

6,644

 

Provision for doubtful accounts

 

185

 

(5

)

Deferred income taxes and investment tax credits

 

1,631

 

2,167

 

Unrealized gain on purchased power contracts

 

(2,843

)

(2,710

)

Stock-based compensation expense

 

157

 

177

 

Net gain on sale of property

 

 

(367

)

Other — net

 

(94

)

139

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable - customers

 

1,312

 

2,173

 

Unbilled revenue

 

(1,135

)

(306

)

Other accounts receivable

 

500

 

(1,252

)

Materials and supplies

 

(49

)

(102

)

Prepayments and other current assets

 

480

 

(269

)

Regulatory assets - supply cost balancing accounts

 

(107

)

(720

)

Other assets

 

135

 

520

 

Accounts payable

 

(261

)

(2,799

)

Inter-company receivable/payable

 

552

 

(568

)

Income taxes receivable/payable from/to Parent

 

(888

)

112

 

Other liabilities

 

2,216

 

4,239

 

Net cash provided

 

14,951

 

12,975

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(16,039

)

(9,539

)

Proceeds from sale of property

 

 

380

 

Net cash used

 

(16,039

)

(9,159

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Tax benefits from exercise or conversion of stock-based awards

 

3

 

3

 

Receipt of advances for and contributions in aid of construction

 

1,709

 

1,274

 

Refunds on advances for construction

 

(653

)

(427

)

Repayments of long-term debt

 

(60

)

(67

)

Net change in inter-company borrowings

 

(440

)

2,000

 

Dividends paid

 

 

(4,300

)

Other

 

(110

)

(18

)

Net cash provided (used)

 

449

 

(1,535

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(639

)

2,281

 

Cash and cash equivalents, beginning of period

 

1,389

 

1,735

 

Cash and cash equivalents, end of period

 

$

750

 

$

4,016

 

 

The accompanying notes are an integral part of these financial statements

 

9



 

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, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”). 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 San Bernardino Mountain communities serving approximately 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 and wastewater 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 by AWR. The consolidated financial statements include the accounts of AWR, GSWC, CCWC  and ASUS and its subsidiaries.  AWR’s assets, revenues and operations are primarily those of GSWC.

 

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, which are subject to periodic price redeterminations and modifications for changes in circumstances.  In September and October of 2007, ASUS was awarded contracts to operate and maintain the water and wastewater systems at Fort Jackson, South Carolina and at Fort Bragg, North Carolina, respectively, pursuant to such contracts with substantially similar terms as the agreements previously executed with the U.S. government.  PSUS commenced operations at Fort Jackson on January 2, 2008 and ONUS commenced operations at Fort Bragg on March 1, 2008, both following the expiration of transition 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 ownership 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 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, 2007 filed with the SEC.

 

10



 

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 GSWC’s inter-company payables on GSWC’s balance sheets as of March 31, 2008 and December 31, 2007. The interest rate charged to GSWC is 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 allocation factors agreed upon by the CPUC.

 

Sales and Use Taxes:  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to use public right of way for utility purposes. 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 $698,000 and $733,000 for the three months ended March 31, 2008 and 2007, 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.

 

New Accounting Pronouncements:   In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”.  SFAS No. 157 defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007.   In February 2008, the FASB delayed the effective date of SFAS No. 157 for certain nonfinancial assets and liabilities until January 1, 2009.  These nonfinancial items include assets and liabilities that are recognized and disclosed at fair value in the financial statements on a nonrecurring basis, such as Registrant’s reporting units measured at fair value in a goodwill impairment test and asset retirement obligations.  As it applies to its financial instruments, Registrant implemented the new standard effective January 1, 2008.  The partial adoption of SFAS No. 157 for financial assets and liabilities did not have any impact on Registrant’s consolidated financial position, results of operations or cash flows, however it does require additional disclosures.  See Note 4 for information and related disclosures regarding the fair value measurements on Registrant’s derivatives.  The carrying value of other financial assets and liabilities, including cash, accounts receivable, accounts payable and short-term debt, approximate fair value due to their short maturities or variable-rate nature of the respective borrowings.  Long-term debt is not carried at fair value but SFAS No. 107, “Disclosures about Fair Value of Financial Instruments” requires fair value disclosure on an annual basis.  Registrant’s pension and postretirement plan assets are comprised of actively traded debt and equity securities, and therefore the market related value is equal to the fair value of plan assets which are used to compute the funded status recognized in Registrant’s financial statements.

 

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 beginning 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 was effective for Registrant’s fiscal year beginning January 1, 2008.  Registrant has not elected to apply the fair value option to any of its financial assets and liabilities. Therefore, the adoption of SFAS No. 159 in the first quarter of 2008 did not have any impact on Registrant’s consolidated financial position, results of operations or cash flows.

 

11



 

In March 2007, the FASB Emerging Issues Task Force (“EITF”) issued EITF No. 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 and directors for equity classified as nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. Registrant has commenced recognizing this tax benefit as an increase in additional paid-in capital beginning January 1, 2008. The impact of this change was not material to Registrant’s consolidated financial statements.

 

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, “Share-Based Payment”. Effective January 1, 2008, Registrant adopted the guidance of  SAB No. 110, which requires Registrant to develop expected option terms by reviewing detailed external information about employee exercise behavior.  The simplified method is no longer permitted if such information is available.

 

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), “Business Combinations”. SFAS No. 141(R) which establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. SFAS No. 141(R) also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. SFAS No. 141(R) is effective for financial statements issued for fiscal years beginning after December 15, 2008. Accordingly, any business combinations Registrant engages in will be recorded and disclosed following existing accounting standards until January 1, 2009.

 

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations.  SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). Registrant is evaluating the potential impact of SFAS No. 160; however, this standard is not expected to have any material impact on Registrant’s future consolidated financial statements and disclosures.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities,” (“SFAS No. 161”).  SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  SFAS No. 161 requires qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.  This statement is effective for financial statements issued for fiscal years beginning after November 15, 2008.  Registrant is currently assessing the impact of SFAS No. 161 on its consolidated financial position and results of operations.

 

12



 

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 March 31, 2008, Registrant had approximately $14.0 million of regulatory assets not accruing carrying costs. Of this amount, $4.6 million relates to deferred income taxes representing accelerated tax benefits flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense, and a $7.0 million “non-yielding” regulatory asset related to general rate case memorandum accounts to be recovered over 24 months.  The remainder relates to  other expenses that do not provide for recovery of carrying costs that Registrant expects to recover in rates over a short period.  Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

 

(In thousands)

 

March 31, 2008

 

December 31, 2007

 

GSWC

 

 

 

 

 

Electric supply cost balancing account

 

$

17,300

 

$

18,318

 

Water supply cost balancing accounts

 

9,687

 

8,525

 

Costs deferred for future recovery on Aerojet case

 

21,177

 

21,244

 

Pensions and other postretirement obligations

 

11,142

 

11,443

 

Flow-through taxes, net

 

4,619

 

5,220

 

Electric transmission line abandonment costs

 

3,120

 

3,157

 

Asset retirement obligations

 

3,634

 

3,547

 

Low income rate assistance balancing accounts

 

4,492

 

4,147

 

General rate case memorandum accounts

 

7,026

 

7,162

 

Santa Maria adjudication memorandum accounts

 

4,055

 

4,005

 

Refund of water right lease revenues

 

(2,844

)

(2,945

)

Other regulatory assets, net

 

3,361

 

3,659

 

Total GSWC

 

$

86,769

 

$

87,482

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

52

 

$

52

 

Other regulatory liabilities, net

 

(510

)

(538

)

Total AWR

 

$

86,311

 

$

86,996

 

 

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, 2007 filed with the SEC.  The discussion below focuses on significant matters and changes since December 31, 2007.

 

Supply Cost Balancing Accounts:

 

Electric Supply Cost Balancing Account—Electric power costs incurred by GSWC’s Bear Valley Electric Service (“BVES”) division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $17.3 million at March 31, 2008. The balance in the electric supply cost 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 43,697,643 and 42,683,779 kilowatt hours of electricity to its BVES customers for the three months ended March 31, 2008 and 2007, respectively. As a result of the surcharge, the supply cost balancing account was reduced by approximately $970,000 and $918,000 million for the three months ended March 31, 2008 and 2007, respectively.  Approximately $18 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 regulatory approval of any amounts not recovered through this surcharge.

 

13



 

Changes in purchased energy and power system delivery costs also impact the electric supply cost balancing account. The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of a 2001 CPUC decision. The BVES 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.  During the three months ended March 31, 2008 there were no amounts expensed over the $77 per MWh cap. During the three months ended March 31, 2007, the amount expensed was $29,000.

 

Charges to GSWC by Southern California Edison (“Edison”) 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 BVES’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 currently included in rates, is $38,137 per month.  The incremental costs not included in rates have been included in the balancing account at March 31, 2008 for subsequent recovery from customers, subject to CPUC approval. BVES plans to file a rate case in 2008 which will include a request for recovery of these costs.

 

The 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 March 31, 2008 and 2007, the under-collection decreased by approximately $1,017,000 and $783,000, respectively.

 

Water Supply Cost Balancing Accounts—As permitted by the CPUC, Registrant maintains water supply cost balancing accounts for GSWC to account for under-collections and over-collections of revenues designed to recover such costs.  The supply cost balancing accounts track differences between the current cost for supply items (water, power, and pump taxes) charged by GSWC’s suppliers and the cost for those items incorporated into GSWC’s rates. Under-collections (recorded as regulatory assets) occur when the current cost exceeds the amount in rates for these items and, conversely, over-collections (recorded as regulatory liabilities) occur when the current cost of these items is less than the amount in rates.  Typically, under-collections or over-collections, when they occur, are tracked in the supply cost balancing accounts for future recovery or refund through a surcharge (in the event of an under-collection) or through a surcredit (in the event of an over-collection) on customers’ bills.  Registrant accrues interest on its under-collections in the supply cost balancing accounts at the rate prevailing for 90-day commercial paper.  Registrant does not maintain a supply cost balancing account for CCWC.

 

For the three months ended March 31, 2008 and 2007, approximately $1.2 million and $1.5 million of under-collections, respectively, were recorded in the water supply cost balancing accounts.  Amortization of surcharges that are in rates to recover under-collections from customers and surcredits that are in rates to refund over-collections to customers also increased or decreased the water supply cost balancing accounts, as applicable.  During the three months ended March 31, 2008 and 2007, approximately $295,000 and $320,000 of under-collection amortization decreased the water supply cost balancing accounts, respectively.

 

As of March 31, 2008, there is approximately $9.7 million net under-collections in the water supply cost balancing accounts.  Of this amount, approximately $7.3 million relates to GSWC’s Region III customer service area.  GSWC filed an advice letter in March 2008 to implement a surcharge to begin recovery of  this under-collection.   The amortization of this surcharge will be at least over 24 months.   The advice letter is currently under review by the CPUC.  The remaining $2.4 million net under-collections in the water supply cost balancing accounts relate to GSWC’s Region I net under-collection of $2.1 million and Region II’s net under-collection of $243,000.  Currently, there is a surcharge in place in Region I expiring in January 2009 to recover this under-collection, and a surcredit at Region II to refund a previous over-collection expiring in August 2008.

 

14



 

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 $213,000 and $220,000 was billed to customers during the three months ended March 31, 2008 and 2007, 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 CPUC decision. Pursuant to the decision, additional interest of approximately $147,000 and $276,000 was added to the Aerojet litigation memorandum account during the three months ended March 31, 2008 and 2007, respectively.

 

It is management’s intention to offset any settlement proceeds received from Aerojet, pursuant to the settlement agreement, against the balance in the memorandum account, with the exception of an $8.0 million payment guaranteed by Aerojet.  This payment, plus interest on the unpaid balance, is scheduled to be paid by Aerojet in installments over five years beginning in 2009.  Aerojet has also 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.

 

Santa Maria Adjudication Memorandum Accounts:

 

As more fully discussed in Note 7, GSWC has incurred costs of approximately $6.8 million as of March 31, 2008, including legal and expert witness fees, in defending its groundwater supply in the Santa Maria Basin for use by its customers in Santa Barbara and San Luis Obispo Counties. Such costs had been recorded in utility plant for future 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 (“DRA”) 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 DRA. Pursuant to the decision, GSWC was authorized 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 authorized 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. A rate surcharge generating approximately $51,000 was billed to customers during the three months ended March 31, 2008.  All litigation costs, including interest, that have been incurred since December 31, 2005, totaling approximately $1.5 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.  In April 2008, the Administrative Law Judge closed the proceeding without ruling on the stipulation or authorizing recovery of the remaining costs.  The ruling directed GSWC to file a new application.  GSWC intends to file a new application.  Management believes that these additional costs will be approved and the recovery of these costs through rates is probable.

 

15



 

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 that it was instituting an audit. The purpose of the audit was 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.  GSWC is currently responding to a third data request submitted by the CPUC.  Management cannot predict the outcome of the investigation or audit at this time.

 

On April 16, 2007, GSWC’s BVES division filed a compliance report with the CPUC regarding its purchases of energy from renewable energy resources. The filing indicated that BVES had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a potential penalty. GSWC has formally contested the potential penalty reflected in the compliance report. The CPUC has been considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like BVES.   On April 25, 2008, the assigned Administrative Law Judge issued a Proposed Decision (“PD”) on the renewable responsibilities of small utilities (including BVES). The PD, if adopted, would clarify that certain renewable obligations of the small utilities may be deferred. If adopted by the CPUC as written, BVES will need to continue its efforts to procure renewable resources each year going forward, and where that may prove difficult because the market for such resources is very constrained, then BVES will be required to describe in detail the problems that warrant further deferral, in accordance with the CPUC’s flexible compliance rules.  The PD would also allow BVES to alter previously filed compliance reports to reflect the changes adopted in this decision.  At this time, management does not believe it is probable that GSWC will ultimately be assessed any penalty (which could be as high as $931,000 based on the latest filing as of December 31, 2007), and accordingly, no provision for loss has been recorded in the financial statements.

 

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 net income per share:

 

Basic

 

For The Three Months Ended March 31,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Net income

 

$

5,304

 

$

6,984

 

Less: (a)  Distributed earnings to common shareholders

 

4,310

 

4,008

 

Distributed earnings to participating securities

 

25

 

86

 

Undistributed earnings

 

969

 

2,890

 

 

 

 

 

 

 

(b) Undistributed earnings allocated to common shareholders

 

964

 

2,830

 

Undistributed earnings allocated to participating securities

 

5

 

60

 

 

 

 

 

 

 

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

 

$

5,274

 

$

6,838

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

17,239

 

17,055

 

Basic earnings per Common Share

 

$

0.31

 

$

0.40

 

 

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. At March 31, 2008 and 2007 there were 567,468 and 704,591 options outstanding, respectively, under these Plans. At March 31, 2008 and 2007, there were also approximately 71,938 and 60,352 restricted stock units outstanding, respectively.

 

16



 

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)

 

2008

 

2007

 

Common shareholders earnings, basic

 

$

5,274

 

$

6,838

 

Undistributed earnings for dilutive stock options (1)

 

3

 

 

Total common shareholders earnings, diluted

 

$

5,277

 

$

6,838

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

17,239

 

17,055

 

Stock-based compensation (2)

 

118

 

59

 

Weighted average common shares outstanding, diluted

 

17,357

 

17,114

 

Diluted earnings per Common Share

 

$

0.30

 

$

0.40

 

 


(1)   Undistributed earnings allocated to participating securities were not included as of March 31, 2007 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, 356,619 and 297,991 stock options at March 31, 2008 and 2007, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”.  All of the 71,938 restricted stock units at March 31, 2008 were included in the calculation of diluted EPS for the three months ended March 31, 2008.

 

Stock options of 111,711 and 101,090 were outstanding at March 31, 2008 and 2007, 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 three months ended March 31, 2008 and 2007.  Stock options of 99,138 and 305,510 were outstanding at March 31, 2008 and 2007, respectively, but not included in the computation of diluted EPS because they were antidilutive. Also not included in the calculation of EPS were 60,352 restricted stock units at March 31, 2007 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 March 31, 2008 and 2007, Registrant issued 12,798 and 10,532 Common Shares, for approximately $255,000 and $284,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, and the stock incentive plans. In addition, Registrant purchased 14,360 and 282 Common Shares on the open market during the three months ended March 31, 2008 and 2007, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan and 401(k) Plan.  The Common Shares purchased by Registrant  were used to satisfy the requirements of these plans.

 

During the three months ended March 31, 2008 and 2007, AWR paid quarterly dividends to shareholders of approximately $4.3 million, or $0.250 per share, and $4.0 million, or $0.235 per share, respectively.

 

17



 

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 Capital Corporation (“PWCC”) which became effective in November 2002 have not been designated as normal purchases and normal sales.  In June 2007, PWCC sold the contracts between PWCC and GSWC to Morgan Stanley Capital Group, Inc. (“MSCG”) effective November 1, 2007.   Settlement of these contracts occurred on a cash or net basis through 2006 and by physical delivery thereafter through the expiration of the contracts on December 31, 2008. Registrant has no other derivative financial instruments.

 

As a result of the contracts with MSCG, on a monthly basis, the related asset or liability is adjusted to reflect the fair market value at the end of the month.  Registrant adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis.  SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact in the adoption of SFAS No. 157 to the consolidated financial statements. However, SFAS No. 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements to be 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).

 

Registrant’s valuation model utilizes 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. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.  Accordingly, the valuation of the derivative on Registrant’s purchased power contract with MSCG has been classified as Level 3.   The following table presents changes in the fair value of the derivative for the three months ended March 31, 2008.

 

(dollars in thousands)

 

Gains (Losses)

 

Balance, December 31, 2007

 

$

(1,554

)

Unrealized gain on purchased power contracts included in operating expenses

 

2,843

 

Balance, March 31, 2008

 

$

1,289

 

 

As these contracts are settled, the realized gains or losses are recorded in power purchased for resale, and the previously recorded unrealized gains or losses are reversed. The fair market value of $1.3 million recognized on the balance sheet as of March 31, 2008 is expected to be recognized as a reduction to income by the end of the contracts which expire on December 31, 2008.

 

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 income tax rate in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise.

 

Registrant’s policy is to classify interest on income tax over/underpayments in interest income/expense and penalties in “other operating expenses.”

 

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 months ended March 31, 2008 and 2007 are as follows:

 

 

 

Pension Benefits

 

Other
Postretirement
Benefits

 

SERP

 

(dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

909

 

$

980

 

$

86

 

$

105

 

$

60

 

$

106

 

Interest cost

 

1,342

 

1,261

 

161

 

168

 

63

 

41

 

Expected return on plan assets

 

(1,235

)

(1,122

)

(63

)

(57

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost (benefit)

 

30

 

41

 

(50

)

(50

)

230

 

40

 

Amortization of actuarial loss (gain)

 

 

171

 

 

25

 

(14

)

(6

)

Net periodic pension cost

 

$

1,046

 

$

1,331

 

$

239

 

$

296

 

$

339

 

$

181

 

 

Registrant expects to contribute a minimum of approximately $4,183,000 and $650,000 to pension and postretirement medical plans in 2008, respectively.  No contributions were made during the three months ended March 31, 2008.

 

Note 7 — Contingencies:

 

Water Quality-Related Litigation:

 

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”).

 

GSWC 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 (“MWD”), 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 GSWC and the other two affected water purveyors and for other related claims.

 

19



 

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 pending 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 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 (the “City”) 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 March 31, 2008, management believes that the fair market value of the Claremont water system exceeds the $37.7 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 by the City.  In a recent meeting held in February 2008, the Claremont City Council stated that they had decided to authorize additional studies of the acquisition of GSWC’s water system.

 

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 water customer service areas or in its BVES customer service area. No formal condemnation proceedings have been filed against any of the Registrant’s service areas during the past three years.  The Town of Apple Valley abandoned its activities related to a potential condemnation of GSWC’s water system serving the Town in 2007.

 

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 sought an adjudication of the Santa Maria Groundwater Basin (the “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. GSWC, under the stipulation, has a right to 10,000 acre-feet of groundwater replenishment provided by the Twitchell Project, a storage and flood control reservoir project operated by the Santa Maria Valley Conservation District.  A monitoring and annual reporting program has been established to allow the parties to responsibly manage the Basin and to respond to shortage conditions.  If severe water shortage conditions are found over a period of five years, the management area engineer will make findings and recommendations to alleviate such shortages.  In the unlikely case that the Basin experiences severe shortage conditions, the court has the authority to limit GSWC’s groundwater production to 10,248 acre-feet per year, based on developed water in the Basin.

 

On February 11, 2008, the court issued its final judgment, which approves and incorporates the stipulation.  The judgment awards GSWC prescriptive rights to groundwater against the non-stipulating parties.  In addition, the

 

20



 

judgment grants GSWC the right to use the Basin for temporary storage and to recapture 45 percent of the return flows that are generated from its importation of State Water Project water.  Pursuant to this judgment, the court retains jurisdiction over all of the parties to make supplemental orders or to amend the judgment as necessary.  On March 20, 2008, the non-stipulating parties filed notices of appeal.  Registrant is unable to predict the outcome of the appeal.

 

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 (“Watson Well”) 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’s procedures have helped to avoid additional violations at the facility. The AQMD could have assessed penalties associated with an NOV; however, GSWC finalized a settlement of the NOV with the AQMD in June 2007.  As part of the settlement, GSWC agreed to 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 (“GAC”) 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 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 will be 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. GSWC began execution of the SEP and has spent approximately $177,000 as of March 31, 2008.

 

In January 2008, GSWC removed the air stripper from the Watson Plant.  An AQMD inspector visited the Watson Plant and confirmed the removal of the air stripping equipment.  GSWC submitted a request to deactivate the air quality permit in February 2008.  As a requirement of the SEP, GSWC installed a temporary GAC treatment system.  The temporary treatment system was put in service in March 2008.  The return to service of the Watson Well will improve local groundwater supply reliability.  GSWC also completed the design of a permanent GAC treatment system.

 

Environmental Clean-Up and Remediation:

 

Chadron Plant:

 

GSWC has been involved in environmental remediation and clean-up at a plant site (“Chadron Plant”) that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. As required at the time, a tank removal report was submitted to the Los Angeles Department of Public Works (“DPW”). At the request of DPW, soil samples were collected beneath the tank and the results indicated gasoline impacted soil in the northern portion of the former tank pit. Quarterly monitoring began in July 1994. Between July 1994 and November 1995, additional monitoring wells were installed and pilot remediation tests were conducted. A site assessment report was completed in April 1996.

 

In January 1998 a plan for the underground storage tank site remediation and closure was prepared. The remediation system plan was installed and fully operational by October 1998 with an estimated two years thereafter  for site closure. This plan was approved by the Los Angeles Regional Water Quality Control Board of the California Environmental Protection Agency (“LARWQCB”). In November 2002, the LARWQCB commented on the methodology selected for cleanup of dissolved contaminants in the shallow groundwater. Data from operation of the technology implemented at the subject site has indicated that the technology did not work as expected. Other remedial alternatives have been considered and evaluated to mitigate dissolved contaminants in the groundwater at the site.  In October 2007, an interim remedial action plan was approved by the LARWQCB and all appropriate permits have been acquired to begin remediation.  In March 2008, construction began on Phase 1 of the new remediation system.

 

21



 

Based on recent estimates, the total project may take 3-5 more years and cost approximately $1.1 million. Remediation should be completed in two more years, followed by at least one year of monitoring and reporting. The estimate also includes quarterly monitoring and reporting costs. As of March 31, 2008, the total amount spent to clean-up and remediate GSWC’s plant facility is approximately $2.5 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund (the “Fund”).  Amounts paid by GSWC not reimbursed from the Fund have been included in rate-base and approved by the CPUC for recovery. During the three months ended March 31, 2008, GSWC spent approximately $102,000 to clean-up and remediate this site.  As of March 31, 2008, GSWC has an accrued liability of $1.0 million for the estimated additional cost to complete the clean-up at the site. 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 also believes it is probable that the estimated additional costs will be approved in rate-base by the CPUC and, therefore, GSWC has recorded the additional estimated cost as a regulatory asset as of March 31, 2008.

 

Ballona Plant:

 

During the first quarter of 2008, hydrocarbon contaminated soil was found at a plant site (“Ballona Plant”)  located in GSWC’s Southwest customer service area where an abandoned water tank was demolished.  The contamination is shallow and likely the result of past corrosion control practices and is not due to a leaking pipe of the tank.  An initial investigation and characterization will be completed during the second quarter of 2008 to determine the extent of contamination before any soil extraction is initiated. At this time, GSWC is unable to reasonably estimate the cost of clean-up.   Historically, the cost for this type of clean-up has been included in rates as approved by the CPUC.

 

Contracted Services:

 

On March 4, 2008, ASUS received a letter from the U.S. Army demanding payment of approximately $7.5 million in liquidated damages for alleged failure at one subsidiary of ASUS to make a good faith effort to achieve its small business subcontracting goals. In April 2008, ASUS filed a Notice of Appeal stating its disagreement with the position taken by the U. S. Army.  No provision for loss has been recorded.  The U. S. Army has the right to offset the claimed damages against amounts owed to this subsidiary, but has not exercised this right.

 

Other Litigation:

 

Two former officers of GSWC filed a lawsuit against both AWR and GSWC alleging among other things, wrongful termination and retaliation against the former officers. Management believes that the allegations are without merit and intends to vigorously defend against them. Based on our understanding of all the claims, management does not believe that the ultimate resolution of this matter will have a material adverse effect on GSWC’s 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 have been conducted in California, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Both GSWC and CCWC are rate-regulated utilities.  ASUS’ wholly-owned subsidiaries are regulated by the respective state in which the military base operation is being conducted.  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 March 31, 2008

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

50,506

 

$

8,803

 

$

1,583

 

$

8,050

 

$

 

$

68,942

 

Operating income (loss)

 

11,763

 

3,410

(1)

(68

)

(541

)

(102

)

14,462

 

Interest expense, net

 

4,179

 

516

 

117

 

230

 

(25

)

5,017

 

Identifiable assets

 

701,396

 

38,180

 

43,550

 

1,662

 

 

784,788

 

Depreciation and amortization expense

 

6,690

 

552

 

460

 

91

 

 

7,793

 

Capital additions

 

15,840

 

199

 

871

 

309

 

 

17,219

 

 


(1)  Includes $2,843,000 unrealized gain on purchased power contracts.

 

 

 

As Of And For The Three Months Ended March 31, 2007

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

48,688

 

$

8,869

 

$

1,639

 

$

13,074

 

$

 

$

72,270

 

Operating income (loss)

 

10,979

 

3,652

(2)

151

 

2,163

 

(94

)

16,851

 

Interest expense, net

 

4,138

 

348

 

118

 

285

 

41

 

4,930

 

Identifiable assets

 

674,339

 

39,651

 

38,724

 

799

 

 

753,513

 

Depreciation and amortization expense

 

6,111

 

533

 

397

 

48

 

 

7,089

 

Capital additions

 

8,978

 

561

 

395

 

31

 

 

9,965

 

 


(2)  Includes $2,710,000 unrealized gain on purchased power contracts.

 

Note 9 — Business Acquisition:

 

ASUS, through its wholly-owned subsidiaries, 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 firm, fixed price contracts with prospective price redeterminations.  ASUS, through its wholly owned subsidiaries, entered into  subcontracts with a single subcontractor pursuant to which the subcontractor agreed to provide wastewater services to ASUS’ subsidiaries at bases in Maryland, New Mexico, Texas and Virginia.  On January 31, 2008, ASUS and its subsidiaries agreed to buy-out all rights which this subcontractor had to provide wastewater services at these bases and any future rights that the subcontractor or any of its affiliates might have to provide wastewater services as a subcontractor to ASUS or any of its subsidiaries at any other bases for an aggregate purchase price of approximately $2.5 million, including a charge to income of $213,000 during the first quarter of 2008 for settlement of the preexisting relationship with the subcontractor.  The purchase also included the acquisition of substantially all assets used by the subcontractor in providing the wastewater services, including all vehicles, tools, supplies, equipment and books and records totaling approximately $611,000.  The acquisition also resulted in the recording of approximately $1.1 million of goodwill and $571,000 of identifiable intangible assets subject to amortization.   This acquisition was not material to Registrant’s financial position or results of operations. 

 

23



 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

General

 

AWR is the parent company of GSWC, CCWC and ASUS and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”). AWR was incorporated as a California corporation in 1998 as a holding company.  AWR has three reportable segments: water, electric and contracted services. Within the segments, AWR has 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.

 

GSWC is a California public utility company engaged principally in the purchase, production and distribution of water. GSWC also distributes electricity in one customer service area. GSWC is regulated by the California Public Utilities Commission (“CPUC”) and was incorporated as a California corporation on December 31, 1929. GSWC is organized into one electric customer service area and three water service regions operating within 75 communities in 10 counties in the State of California and provides water service in 21 customer service areas. Region I consists of 7 customer service areas in northern and central California; Region II consists of 4 customer service areas located in Los Angeles County; and Region III consists of 10 customer service areas in eastern Los Angeles County, and in Orange, San Bernardino and Imperial counties. GSWC also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County through its Bear Valley Electric Service (“BVES”) division.

 

GSWC served 254,364 water customers and 23,141 electric customers at March 31, 2008, or a total of 277,505 customers, compared with 277,303 total customers at March 31, 2007. GSWC’s utility operations exhibit seasonal trends. Although GSWC’s water utility operations have a diversified customer base, residential and commercial customers account for the majority of GSWC’s water sales and revenues. Revenues derived from commercial and residential water customers accounted for approximately 91% of total water revenues for the three months ended March 31, 2008 and 2007.

 

CCWC is an Arizona public utility company serving 13,482 customers as of March 31, 2008, compared with 13,395 customers at March 31, 2007. Located in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona, the majority of CCWC’s customers are residential. The Arizona Corporation Commission (“ACC”) regulates CCWC.

 

ASUS, through its wholly-owned subsidiaries, has contracted with the U.S. government to provide water and wastewater services, including the operation and maintenance of water and wastewater systems pursuant to 50-year fixed price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances. During the first quarter of 2008, ASUS commenced operations at two bases located in North Carolina and South Carolina.  All of the contracts with the U.S. government may be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government or as a result of default or nonperformance by the subsidiary performing the contract. In either event, the ASUS subsidiary is entitled to recover the remaining amount of its capital investment pursuant to the terms of a termination settlement with the U.S. government at the time of termination as provided in each of the contracts. The contract price for each of these contracts is subject to redetermination two years after commencement of operations and every three years thereafter to the extent provided in each of the contracts. Prices are also subject to equitable adjustment based upon changes in circumstances and changes in wages and fringe benefits to the extent provided in each of the contracts.

 

ASUS and GSWC have been pursuing an opportunity to provide retail water services within the service area of the Natomas Central Mutual Water Company (“Natomas”). Natomas is a California mutual water company which currently provides water service to its shareholders, primarily for agricultural irrigation in portions of Sacramento and Sutter counties in northern California. In August 2004, Natomas and ASUS entered into a contract under which ASUS acts as the exclusive agent for marketing water that has become temporarily surplus to the internal needs of Natomas, to third parties outside the Natomas service area, and that arises under water rights permits and contracts owned or controlled by Natomas. On January 31, 2006, ASUS and Natomas entered into a water purchase and sale agreement under which ASUS will acquire 5,000 acre-feet of permanent Sacramento River water diversion rights from Natomas. Pursuant to the terms of this agreement, Natomas will sell, transfer and convey to ASUS, in perpetuity, water rights and entitlements to divert from the Sacramento River up to 5,000 acre-feet of water per year for consumptive use, subject to certain regulatory approvals. Terms of the acquisition, among other

 

24



 

things, include a base price of $2,500 per acre-foot of water, with payments contingent on achievement of specific milestones and events over a 10-year period. After first determining whether a need for the water exists in Sutter County, ASUS may use the water rights acquired from Natomas to serve existing customers, to re-sell to other beneficial users, or to pursue and serve expanded service territories.

 

Pursuant to the marketing services agreement described above, ASUS will attempt to arrange for the sale and transfer of Natomas’ temporarily surplus water for beneficial use beyond the Natomas service area.  Natomas will pay to ASUS a commission of 16% of the lease or sale price for any such water successfully marketed by ASUS. At the same time that the water purchase agreement was completed, Natomas and ASUS also entered into a settlement agreement that released Natomas from previously established reimbursement obligations under prior agreements.  In accordance with the marketing agreement, Natomas shareholders voted in December 2007 to approve the sale of 8,000 to 10,000 acre-feet of Natomas’ Central Valley Project water to the City of Folsom, subject to certain regulatory and environmental approvals. The base price to be paid by Folsom is $4,000 per acre-foot.

 

GSWC and Natomas have also entered into an agreement under which GSWC agreed to purchase and Natomas agreed to sell up to 30,000 acre-feet per year of water to be used exclusively by GSWC to serve customers in Sutter County, California. Additionally, GSWC filed for a Certificate of Public Convenience and Necessity with the CPUC on May 31, 2006 to provide retail water service in a portion of Sutter County, California within the Natomas service area. CPUC review of the application has been deferred pending completion of an environmental assessment for the proposed new water service. All of the agreements with Natomas are subject to receipt of various regulatory approvals required for their full implementation.

 

Overview

 

Registrant’s revenues, operating income, and cash flows are earned primarily through delivering potable water to homes and businesses through approximately 2,900 miles of water distribution pipelines. Rates charged to customers of GSWC and CCWC are determined by the CPUC and ACC, respectively. These rates are intended to allow recovery of operating costs and a fair rate of return on capital. Factors recently affecting financial performance include the process and timing of setting rates charged to customers; the ability to recover, and the process for recovering in rates, the costs of distributing water and electricity; weather; the impact of increased water quality standards on the cost of operations and capital expenditures; pressures on water supply caused by population growth, more stringent water quality standards, deterioration in source water quality, climate change and restrictions on the  delivery of purchased water affecting deliveries of water from the Colorado River and the State Water Project; capital expenditures needed to upgrade water systems and increased costs and risks associated with litigation relating to water quality and water supply, including suits initiated by Registrant to protect its water supply; and delays in receiving payments from the U.S. government and receiving redetermination of prices and equitable adjustment of prices under contracts with the U.S. government.

 

Registrant plans to continue to seek additional rate increases in future years to recover operating and supply costs and receive fair returns on invested capital. Capital expenditures in future years are expected to remain at much higher levels than depreciation expense. Cash solely from operations is not expected to be sufficient to fund Registrant’s needs for capital expenditures, dividends, investments in Registrant’s contract business and other cash requirements. Registrant expects to fund a portion of these needs through a combination of debt and common stock offerings in the ensuing years. AWR expects to issue equity in 2008.

 

Operating revenues and income from contracted services at ASUS and its subsidiaries are earned primarily from the operation and maintenance of water and wastewater systems for the U.S. government at various military bases. All of the operations and maintenance contracts with the U.S. government are 50-year firm, fixed-price contracts with prospective price redeterminations. ASUS also may generate revenues from the construction of infrastructure improvements at these bases pursuant to the terms of these 50-year contracts or pursuant to supplemental contracts. Revenues generated by contract operations are primarily dependent on these new business activities, including military base operations and the construction of new and/or replacement infrastructure at these military bases. ASUS plans to continue seeking contracts for the operation and maintenance of water and wastewater services at military bases.

 

Derivative accounting is required for the purchased power contracts at GSWC’s Bear Valley Electric Service (“BVES”) division.  Unrealized gains and losses on purchased power contracts have been impacting GSWC’s earnings since 2002 when GSWC entered into certain purchased power contracts.  These contracts

 

25



 

qualified as derivative instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”  The purpose of the purchased power contract, which qualifies as a derivative instrument, is to stabilize Registrant’s purchased power costs.  The power purchased under the contract is only used to service electric customers’ demand and Registrant does not engage in trading of purchased power.   Although the unrealized gains and losses result in significant fluctuations to the income statement, there is no effect on Registrant’s cash flows.  When analyzing the financial performance of AWR, Registrant excludes the effect of unrealized derivative gains or losses, as they are not reflective of day-to-day operations.  The unrealized derivative gains and losses are reflective of changes in future electricity costs that are outside of management’s control.  Due to increasing energy prices, during the three months ended March 31, 2008 and 2007, Registrant recorded pretax unrealized gains on purchased power contracts of $2.8 million and $2.7 million, respectively.  Diluted earnings per share for the three months ended March 31, 2008 and 2007 were $0.30 and $0.40, respectively.  Eliminating the effects of these unrealized derivative gains, diluted earnings per share for the three months ended March 31, 2008 and 2007 would have decreased by $0.10 per share and $0.09 per share, respectively.

 

Summary Results by Segment

 

AWR has three reportable segments: water, electric and contracts operation. 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 through ASUS and its subsidiaries.  The tables below set forth summaries of the results by segment (amounts in thousands):

 

 

 

Operating Revenues

 

Pretax Operating Income

 

 

 

3 Months

 

3 Months

 

 

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2008

 

3/31/2007

 

CHANGE

 

CHANGE

 

3/31/2008

 

3/31/2007

 

CHANGE

 

CHANGE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

52,089

 

$

50,327

 

$

1,762

 

3.5

%

$

11,695

 

$

11,130

 

$

565

 

5.1

%

Electric

 

8,803

 

8,869

 

(66

)

-0.7

%

3,410

 

3,652

 

(242

)

-6.6

%

Contracted services

 

8,050

 

13,074

 

(5,024

)

-38.4

%

(541

)

2,163

 

(2,704

)

-125.0

%

AWR parent

 

 

 

 

 

(102

)

(94

)

(8

)

-8.5

%

Totals from operation

 

$

68,942

 

$

72,270

 

$

(3,328

)

-4.6

%

$

14,462

 

$

16,851

 

$

(2,389

)

-14.2

%

 

Water - For the three months ended March 31, 2008, pretax operating income for water increased by $565,000, or 5.1%, primarily due to a $2.7 million increase in water margin as compared to the same period of 2007 caused by higher water rates approved by the CPUC that were effective January 1, 2008 and a favorable change in the water supply mix, partially offset by lower consumption.  There was an 8.1% decrease in water consumption during the first quarter of 2008 compared to the same period in 2007.  The 2007 first quarter results benefited from lower than average precipitation.  Due to the decrease in consumption, Registrant’s water revenues were lower by approximately $2.6 million, or approximately $0.06 per share.  Differences in temperature and rainfall in Registrant’s service areas impact sales of water to customers, causing fluctuations in Registrant’s revenues and earnings between comparable periods.  Higher operating expenses, as more fully described later, also decreased pretax operating income by $2.1 million.

 

Electric - For the three months ended March 31, 2008, pretax operating income from electric operations decreased by $242,000 or 6.6% due to a $273,000 decrease in electric margin primarily caused by: (i) a decrease of $141,000 in other electric revenues which are comprised of new connection and reconnection fees, and (ii) the recording of a regulatory liability of approximately $104,000, with a corresponding reduction in electric revenues, for probable refunds to customers related to the 8.4 MW natural gas-fueled generation plant. In April 2005, new customer rates went into effect related to this generation plant, which resulted in an increase of approximately $2.3 million in annual revenue based on an estimated total capital-related cost of $13 million. The rates are subject to refund pending the CPUC’s final cost review, which is scheduled to occur in 2008 as part of  the filing of BVES’ general rate case. The CPUC also ordered GSWC to establish a memorandum account to track the capital-related costs of the generation plant. If actual recorded costs in the memorandum account are less than the costs authorized by the CPUC of $13 million, the revenue requirement for the difference is to be refunded to customers. During the third quarter of 2007, GSWC received vendor credits of approximately $851,000, which reduced the actual recorded costs of the generation plant to approximately $12.5 million. As mentioned earlier, there were unrealized gains on BVES’s purchased power contracts in the first quarters of 2008 and 2007 due to increasing energy prices.  The

 

26



 

unrealized gain on purchased power contracts increased operating income by approximately $2.8 million for the three months ended March 31, 2008, as compared to $2.7 million for the same period in 2007.

 

Contracted Services - For the three months ended March 31, 2008, pretax operating income for contracted services decreased by $2.7 million.  This was primarily due to a significant wastewater expansion construction project in 2007 with the U.S. government. In December 2006, a subsidiary of ASUS 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 special project was a firm-fixed price contract, and was an amendment to the 50-year contract with the U.S. government to manage the entire water and wastewater systems at Fort Bliss.  This project generated approximately $2.2 million in pretax operating income during the first quarter of 2007. The project was completed in August 2007. There was no similar significant project during the three months ended March 31, 2008. Earnings and cash flows from amendments and modifications to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in the future periods.

 

Higher administrative and general expenses in the first quarter of 2008 also contributed to the decrease in ASUS’ pretax operating income caused primarily by higher labor and employee benefits, and an increase in outside services for legal and consulting work.  Higher outside services were incurred during the first quarter of 2008 in connection with the acquisition of the subcontractor that provided wastewater services to ASUS’ subsidiaries at the various military bases.  On January 31, 2008, ASUS and its subsidiaries agreed to buy-out all rights which this subcontractor had to provide wastewater services at these bases and any future rights that the subcontractor or any of its affiliates might have to provide wastewater services as a subcontractor to ASUS or any of its subsidiaries at any other bases for an aggregate purchase price of approximately $2.5 million.  The purchase also included the acquisition of substantially all assets used by the subcontractor in providing the wastewater services, including all vehicles, tools, supplies, equipment and books and records.  As a result of this transaction, ASUS also recorded a charge of $213,000 during the first quarter of 2008 for settlement of the preexisting relationship with the subcontractor.

 

Furthermore, final decisions on the general rate case for GSWC’s Region II and the application to recover general office expenses at the corporate headquarters allocated to Regions II and III were approved on November 16, 2007.  The decisions also imposed an increased allocation of corporate headquarters’ expenses to ASUS and its wholly-owned subsidiaries, which caused a decrease in contracted services’ first quarter 2008 pretax operating income of approximately $151,000.  This higher allocation of expenses was not contemplated at the time the contracts with the U.S. government were negotiated.

 

The timely receipt of price redeterminations is critical in order to cover ASUS’ increasing costs for operating and maintaining the water and wastewater systems at the military bases.  The contract price for each of these military contracts is subject to price redetermination two years after commencement of operations and every three years thereafter to the extent provided in each of the contracts.  Redeterminations have been submitted and are under review by the U.S. government for ASUS’ ODUS and TUS operations in Virginia and Maryland, respectively.  Resolution of these redeterminations is expected during 2008.  ASUS has experienced delays in the redetermination of prices at Fort Bliss following completion of the first two years of operation in October 2006.  At Fort Bliss, management fees for operation and maintenance of the water and wastewater systems, which were based on cost levels prevailing in 2002 when the contract was first being negotiated, have not been adjusted as yet to adequately cover increased operating costs.  Further, the contract pricing was also based on assumptions about the size and age of the infrastructure being operated and maintained over the 50-year contract.  A request for equitable adjustment has been filed as a claim with the U.S. government to adequately reflect the amount of assets included in the infrastructure at Fort Bliss, which is substantially more than originally estimated by the U.S. government as part of its solicitation for this contract.   Requests for equitable adjustments provide opportunity for both retrospective and prospective adjustments to revenues and are subject to the terms of the contract and regulations. With the filing of this claim, ASUS is also preparing the price redetermination for Fort Bliss and expects to file it by the third quarter of 2008.   These price redeterminations, which include adjustments to reflect changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts as well as inflation in costs, are expected to provide added revenues prospectively to help offset increased costs and provide Registrant the opportunity to generate positive operating income from operating activities.

 

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 other subsidiaries: GSWC, CCWC, ASUS and its subsidiaries.

 

27



 

Consolidated Results of Operations — Three Months Ended March 31, 2008 and 2007 (amounts in thousands):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2008

 

3/31/2007

 

CHANGE

 

CHANGE

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Water

 

$

52,089

 

$

50,327

 

$

1,762

 

3.5

%

Electric

 

8,803

 

8,869

 

(66

)

-0.7

%

Contracted services

 

8,050

 

13,074

 

(5,024

)

-38.4

%

Total operating revenues

 

68,942

 

72,270

 

(3,328

)

-4.6

%

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Water purchased

 

7,953

 

8,873

 

(920

)

-10.4

%

Power purchased for pumping

 

1,680

 

2,118

 

(438

)

-20.7

%

Groundwater production assessment

 

2,375

 

2,279

 

96

 

4.2

%

Power purchased for resale

 

4,239

 

4,281

 

(42

)

-1.0

%

Unrealized gain on purchased power contracts

 

(2,843

)

(2,710

)

(133

)

4.9

%

Supply cost balancing accounts

 

(107

)

(720

)

613

 

-85.1

%

Other operating expenses

 

7,996

 

6,597

 

1,399

 

21.2

%

Administrative and general expenses

 

14,827

 

13,007

 

1,820

 

14.0

%

Depreciation and amortization

 

7,793

 

7,089

 

704

 

9.9

%

Maintenance

 

3,772

 

2,973

 

799

 

26.9

%

Property and other taxes

 

2,920

 

2,930

 

(10

)

-0.3

%

Construction expenses

 

3,875

 

9,069

 

(5,194

)

-57.3

%

Net gain on sale of property

 

 

(367

)

367

 

-100.0

%

Total operating expenses

 

54,480

 

55,419

 

(939

)

-1.7

%

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

14,462

 

16,851

 

(2,389

)

-14.2

%

 

 

 

 

 

 

 

 

 

 

OTHER INCOME AND EXPENSES

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,378

)

(5,496

)

118

 

-2.1

%

Interest income

 

361

 

566

 

(205

)

-36.2

%

Other

 

114

 

69

 

45

 

65.2

%

 

 

(4,903

)

(4,861

)

(42

)

0.9

%

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE

 

9,559

 

11,990

 

(2,431

)

-20.3

%

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

4,255

 

5,006

 

(751

)

-15.0

%

 

 

 

 

 

 

 

 

 

 

NET INCOME

 

$

5,304

 

$

6,984

 

$

(1,680

)

-24.1

%

 

Net income for the three months ended March 31, 2008 was $5.3 million, equivalent to $0.31 and $0.30 per common share on a basic and fully diluted basis, respectively, compared to $7.0 million or $0.40 per basic and diluted common share for the three months ended March 31, 2007, a reduction of 24.1%. Impacting the comparability in the results of the two periods on a diluted per share basis are the following significant items:

 

·       An 8.1% decrease in water consumption during the first quarter 2008 resulted in a $2.6 million decrease in water revenues, or $0.06 per share. The 2007 first quarter results benefited from lower than average precipitation.

 

28



 

·                    The water margin increased by $4.4 million, or $0.15 per share, during the first quarter 2008, after adjusting for the lower consumption described previously, due to increased water rates approved by the CPUC that were effective January 1, 2008 and a favorable supply mix change.  However, this increase was partially offset by the decrease in consumption previously discussed, resulting in an actual net increase of $2.7 million in water margin, or $0.09 per share.

 

·                    Operating and maintenance expenses increased at GSWC by $1.0 million, or $0.03 per share, for the first quarter 2008 resulting from higher chemical and water treatment costs along with an increase in routine and emergency maintenance expenses on GSWC’s wells and other water supply sources.

 

·                    Pretax operating income for contracted services declined by  $2.7 million, or $0.09 per share, during the first quarter 2008 due primarily to a significant wastewater construction project in 2007 at Fort Bliss.  ASUS recognized pretax operating income of $2.2 million from the wastewater expansion project during the first quarter 2007.  There was no similar special project during the three months ended March 31, 2008.  Higher administrative and general expenses also contributed to the decrease in pretax operating income.

 

·                    GSWC recorded a net gain on disposal of property of $367,000, or $0.01 per share, during the three months ended March 31, 2007.  There was no similar gain in the same period of 2008.

 

·                    Higher other expenses primarily consisting of administrative and general expenses and depreciation expense, as well an increase in the effective tax rate and other items described below, contributed to an overall decrease of $0.06 per diluted share to the results of operations.

 

Operating Revenues

 

Water

 

For the three months ended March 31, 2008, revenues from water operations increased by 3.5% to $52.1 million, compared to $50.3 million for the three months ended March 31, 2007. Contributing to this increase were rate increases approved by the CPUC effective January 1, 2008, which added approximately $4.3 million in the first quarter of 2008 to water revenues.  This increase was partially offset by a decrease of 8.1% in water consumption due to wetter weather which caused water revenues to be lower by approximately $2.6 million.  Differences in temperature and rainfall in Registrant’s service areas impact sales of water to customers, causing fluctuations in Registrant’s revenues and earnings between comparable periods.

 

Electric

 

For the three months ended March 31, 2008, revenues from electric operations decreased slightly by 0.7% to $8.8 million compared to $8.9 million for the three months ended March 31, 2007 due primarily to the increase of $104,000 in the regulatory liability, with a corresponding decrease in revenues, for probable refunds to customers related to the 8.4 MW natural gas-fueled generation plant, previously discussed.  There was also a decrease in other electric revenues which are comprised of new connection and reconnection fees.  These decreases were partially offset by higher electric usage.

 

Contracted Services

 

Revenues from contracted services are comprised of construction revenues and management fees for operating and maintaining the water and wastewater systems at military bases. For the three months ended March 31, 2008, revenues from contracted services decreased by $5.0 million, or 38.4%, to $8.1 million compared to $13.1 million for the three months ended March 31, 2007 primarily due to revenues in 2007 related to the wastewater expansion project at Fort Bliss, previously discussed.  This special project, which began in early 2007, generated $10.4 million of construction revenues for the three months ended March 31, 2007.  The project was completed in August 2007. Earnings and cash flows from amendments and modifications to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in the future periods. The year over year revenue decrease resulting from this special project was partially offset by an increase in construction revenues at Andrews Air Force Base pursuant to its 50-year firm-fixed price contract, as well as other construction revenues at the other military bases, during the three months ended March 31, 2008.  There were also additional revenues during 2008

 

29



 

generated from operating and maintaining the water and wastewater systems under the two new contracts in North Carolina and South Carolina, both of which began during the first quarter of 2008.

 

Registrant relies upon rate approvals by state regulatory agencies in California and Arizona to provide for a return on invested and borrowed capital used to fund utility plant, and price redeterminations and equitable adjustments by the U.S. government in order to recover operating expenses and profit margin. If adequate rate relief and price redeterminations and adjustments are not granted in a timely manner, operating revenues and earnings can be negatively impacted.

 

Operating Expenses:

 

Supply Costs

 

Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and water supply cost balancing accounts. Supply costs for the electric segment consist of purchased power for resale (including the cost of natural gas) and the electric supply cost balancing account. Water and electric margins are computed by taking total revenues, less total supply costs. Registrant uses these margins and related percentages as an important measure in evaluating its operating results. Registrant believes this measure is a useful internal benchmark in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to our operating budget as approved. However, this measure, which is not presented in accordance with Generally Accepted Accounting Principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income, which is determined in accordance with GAAP, as an indicator of operating performance.

 

Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for approximately 30% of total operating expenses for the three months ended March 31, 2008 and 2007, respectively. The table below provides the amount of increases (decreases), percent changes in supply costs, and margins during the three months ended March 31, 2008 and 2007 (amounts in thousands):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%