Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

 

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

 

for the quarterly period ended March 31, 2009

 

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 Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).

 

American States Water Company

 

Yes o

No o

Golden State Water Company

 

Yes o

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 definition of “large accelerated filer”, “accelerated filer” and smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

American States Water Company

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

Golden State Water Company

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

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 8, 2009, the number of Common Shares outstanding, of American States Water Company was 17,326,742 shares. As of May 8, 2009, all of the 134 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

 

Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.

 

 

 



Table of Contents

 

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, 2009 and December 31, 2008

2

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended March 31, 2009 and 2008

4

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Three Months Ended March 31, 2009 and 2008

5

 

 

 

 

Balance Sheets of Golden State Water Company as of March 31, 2009 and December 31, 2008

6

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended March 31, 2009 and 2008

8

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Three Months Ended March 31, 2009 and 2008

9

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2:

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

25

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

49

 

 

 

Item 4:

Controls and Procedures

49

 

 

 

Item 4T:

Controls and Procedures

49

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

50

 

 

 

Item 1A:

Risk Factors

50

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

50

 

 

 

Item 3:

Defaults Upon Senior Securities

50

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

50

 

 

 

Item 5:

Other Information

50

 

 

 

Item 6:

Exhibits

51

 

 

 

 

Signatures

52

 



Table of Contents

 

PART I

 

Item 1. Financial Statements

 

General

 

The basic financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission.

 

Certain information and footnote disclosures normally included in financial statements, prepared in accordance with accounting principles generally accepted in the United States of America, have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments consisting of normal recurring items and estimates necessary for a fair statement of results for the interim period have been made.

 

It is suggested that these financial statements be read in conjunction with the financial statements and notes thereto in the latest Annual Report on Form 10-K of American States Water Company and its wholly-owned subsidiary, Golden State Water Company.

 

Filing Format

 

American States Water Company (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

 

This Form 10-Q contains forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements regarding our goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.   For example, when we use words such as  “believes,” “anticipates,” “expects, “ “plans”, “estimates,” “intends,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. Such statements address future events and conditions concerning such matters as our ability to raise capital, capital expenditures, earnings, litigation, rates, water sales, water quality and other regulatory matters, adequacy of water supplies, our ability  to recover electric, natural gas and water supply costs from ratepayers, contract operations, liquidity and capital resources, and accounting matters. We caution you that any forward-looking statements made by us are not guarantees of future performance and that actual results  may differ materially from those currently anticipated in such statements, by reason of factors such as: changes in utility regulation; recovery of regulatory assets not yet included in rates; future economic conditions which affect changes in customer demand and changes in water and energy supply costs; repayment of amounts owed to us; changes in pension and postretirement benefit plan costs; future climatic conditions; delays in customer payments or price redeterminations or equitable adjustments on contracts executed by ASUS and its subsidiaries; potential assessments for failure to meet interim targets for the purchase of renewable energy; and legislative, legal proceedings, regulatory and other circumstances affecting anticipated revenues and costs.

 

1



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

 

(in thousands)

 

March 31,
2009

 

December 31,
2008

 

Utility Plant

 

 

 

 

 

Utility plant, at cost

 

$

1,190,128

 

$

1,171,284

 

Less - Accumulated depreciation

 

(353,626

)

(346,022

)

Net utility plant

 

836,502

 

825,262

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

4,610

 

4,610

 

Other property and investments

 

10,600

 

10,689

 

Total other property and investments

 

15,210

 

15,299

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

24,893

 

7,283

 

Accounts receivable – customers (less allowance for doubtful accounts of $722 in 2009 and $656 in 2008)

 

13,633

 

14,315

 

Unbilled revenue

 

17,971

 

17,958

 

Receivable from the U.S. government (less allowance for doubtful accounts of $121 in 2009 and 2008)

 

5,971

 

8,094

 

Other accounts receivable (less allowance for doubtful accounts of $470 in 2009 and $474 in 2008)

 

5,000

 

6,341

 

Income taxes receivable

 

77

 

1,526

 

Materials and supplies, at average cost

 

1,857

 

2,109

 

Regulatory assets – current

 

17,949

 

16,071

 

Prepayments and other current assets

 

2,343

 

2,950

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

15,600

 

11,836

 

Deferred income taxes – current

 

1,967

 

2,131

 

Total current assets

 

107,261

 

90,614

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

110,313

 

104,521

 

Other accounts receivable

 

8,267

 

8,167

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

7,063

 

6,897

 

Deferred income taxes

 

291

 

254

 

Other

 

10,365

 

10,273

 

Total regulatory and other assets

 

136,299

 

130,112

 

 

 

 

 

 

 

Total Assets

 

$

1,095,272

 

$

1,061,287

 

 

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

 

2



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

 

(in thousands)

 

March 31,
2009

 

December 31,
2008

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

186,270

 

$

185,499

 

Earnings reinvested in the business

 

125,587

 

125,004

 

Total common shareholders’ equity

 

311,857

 

310,503

 

Long-term debt

 

306,469

 

266,536

 

Total capitalization

 

618,326

 

577,039

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

54,370

 

74,700

 

Long-term debt – current

 

640

 

636

 

Accounts payable

 

35,974

 

36,582

 

Income taxes payable

 

1,067

 

974

 

Accrued employee expenses

 

6,545

 

5,625

 

Accrued interest

 

5,331

 

2,463

 

Unrealized loss on purchased power contracts

 

8,428

 

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

5,271

 

2,094

 

Other

 

13,649

 

14,323

 

Total current liabilities

 

131,275

 

137,397

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

87,399

 

86,816

 

Contributions in aid of construction - net

 

100,706

 

101,593

 

Deferred income taxes

 

83,841

 

84,750

 

Unamortized investment tax credits

 

2,223

 

2,245

 

Accrued pension and other postretirement benefits

 

54,122

 

52,235

 

Regulatory liabilities

 

424

 

425

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

7,987

 

9,866

 

Other

 

8,969

 

8,921

 

Total other credits

 

345,671

 

346,851

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,095,272

 

$

1,061,287

 

 

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

 

3



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2009 AND 2008

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands, except per share amounts)

 

2009

 

2008

 

Operating Revenues

 

 

 

 

 

Water

 

$

56,794

 

$

52,089

 

Electric

 

8,632

 

8,803

 

Contracted services

 

14,183

 

8,050

 

Total operating revenues

 

79,609

 

68,942

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

8,214

 

7,953

 

Power purchased for pumping

 

1,688

 

1,680

 

Groundwater production assessment

 

2,517

 

2,375

 

Power purchased for resale

 

3,962

 

4,239

 

Unrealized gain on purchased power contracts

 

 

(2,843

)

Supply cost balancing accounts

 

3,528

 

(107

)

Other operating expenses

 

7,153

 

7,996

 

Administrative and general expenses

 

16,865

 

14,827

 

Depreciation and amortization

 

8,361

 

7,793

 

Maintenance

 

4,073

 

3,772

 

Property and other taxes

 

3,400

 

2,920

 

Construction expenses

 

8,445

 

3,875

 

Net gain on sale of property

 

(15

)

 

Total operating expenses

 

68,191

 

54,480

 

 

 

 

 

 

 

Operating Income

 

11,418

 

14,462

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,294

)

(5,378

)

Interest income

 

202

 

361

 

Other

 

(30

)

114

 

Total other income and expenses

 

(5,122

)

(4,903

)

 

 

 

 

 

 

Income from operations before income tax expense

 

6,296

 

9,559

 

 

 

 

 

 

 

Income tax expense

 

1,364

 

4,255

 

 

 

 

 

 

 

Net Income

 

$

4,932

 

$

5,304

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,312

 

17,239

 

Basic Earnings Per Common Share

 

$

0.28

 

$

0.31

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,440

 

17,357

 

Fully Diluted Earnings Per Share

 

$

0.28

 

$

0.30

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.250

 

$

0.250

 

 

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

 

4



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2009

 

2008

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

4,932

 

$

5,304

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

8,361

 

7,793

 

Provision for doubtful accounts

 

358

 

212

 

Deferred income taxes and investment tax credits

 

(1,194

)

1,476

 

Unrealized gain on purchased power contracts

 

 

(2,843

)

Stock-based compensation expense

 

383

 

205

 

Other – net

 

(605

)

(8

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable – customers

 

324

 

1,368

 

Unbilled revenue

 

(13

)

(1,145

)

Other accounts receivable

 

1,241

 

886

 

Receivable from the U.S. government

 

2,123

 

244

 

Materials and supplies

 

252

 

(62

)

Prepayments and other current assets

 

607

 

533

 

Regulatory assets – supply cost balancing accounts

 

3,528

 

(107

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(3,930

)

(3,776

)

Other assets

 

(2,760

)

140

 

Accounts payable

 

(2,406

)

(1,306

)

Income taxes receivable/payable

 

1,542

 

(1,168

)

Billings in excess of costs and estimated earnings on uncompleted contracts

 

1,298

 

1,027

 

Accrued pension and other postretirement benefits

 

1,887

 

1,319

 

Other liabilities

 

3,861

 

1,102

 

Net cash provided

 

19,789

 

11,194

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(17,682

)

(17,219

)

Business acquisition

 

 

(2,298

)

Net cash used

 

(17,682

)

(19,517

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

462

 

216

 

Proceeds from stock option exercises

 

10

 

39

 

Tax benefits from exercise or conversion of stock-based awards

 

 

7

 

Receipt of advances for and contributions in aid of construction

 

332

 

1,877

 

Refunds on advances for construction

 

(422

)

(659

)

Repayments of long-term debt

 

(63

)

(60

)

Proceeds from issuance of long-term debt, net of issuance cost

 

39,777

 

 

Net change in notes payable to banks

 

(20,330

)

10,400

 

Dividends paid

 

(4,328

)

(4,309

)

Other – net

 

65

 

(121

)

Net cash provided

 

15,503

 

7,390

 

Net increase (decrease) in cash and cash equivalents

 

17,610

 

(933

)

Cash and cash equivalents, beginning of period

 

7,283

 

1,698

 

Cash and cash equivalents, end of period

 

$

24,893

 

$

765

 

 

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

 

5



Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS

(Unaudited)

 

(in thousands)

 

March 31,
2009

 

December 31,
2008

 

Utility Plant

 

 

 

 

 

Utility plant, at cost

 

$

1,122,152

 

$

1,103,932

 

Less - Accumulated depreciation

 

(332,941

)

(326,089

)

Net utility plant

 

789,211

 

777,843

 

 

 

 

 

 

 

Other Property and Investments

 

7,641

 

7,719

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

22,477

 

3,812

 

Accounts receivable-customers (less allowance for doubtful accounts of $693 in 2009 and $632 in 2008)

 

13,341

 

13,969

 

Unbilled revenue

 

17,627

 

17,641

 

Inter-company receivable

 

220

 

309

 

Other accounts receivable (less allowance for doubtful accounts of $443 in 2009 and 2008)

 

4,245

 

4,348

 

Materials and supplies, at average cost

 

1,653

 

1,543

 

Regulatory assets – current

 

17,913

 

16,018

 

Prepayments and other current assets

 

2,145

 

2,714

 

Deferred income taxes – current

 

2,057

 

2,144

 

Total current assets

 

81,678

 

62,498

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

110,313

 

104,521

 

Other accounts receivable

 

8,267

 

8,167

 

Other

 

9,568

 

9,402

 

Total regulatory and other assets

 

128,148

 

122,090

 

 

 

 

 

 

 

Total Assets

 

$

1,006,678

 

$

970,150

 

 

The accompanying notes are an integral part of these financial statements

 

6



Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

 

(in thousands)

 

March 31,
2009

 

December 31,
2008

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

194,903

 

$

194,728

 

Earnings reinvested in the business

 

129,078

 

129,805

 

Total common shareholder’s equity

 

323,981

 

324,533

 

Long-term debt

 

300,494

 

260,561

 

Total capitalization

 

624,475

 

585,094

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt – current

 

330

 

326

 

Accounts payable

 

27,427

 

25,897

 

Inter-company payable

 

61

 

18,392

 

Income taxes payable to Parent

 

4,637

 

2,794

 

Accrued employee expenses

 

5,775

 

4,940

 

Accrued interest

 

5,199

 

2,391

 

Deferred income taxes – current

 

34

 

39

 

Unrealized loss on purchased power contracts

 

8,428

 

 

Other

 

12,287

 

13,245

 

Total current liabilities

 

64,178

 

68,024

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

81,173

 

80,977

 

Contributions in aid of construction - net

 

88,813

 

89,519

 

Deferred income taxes

 

83,362

 

83,765

 

Unamortized investment tax credits

 

2,223

 

2,245

 

Accrued pension and other postretirement benefits

 

54,122

 

52,235

 

Other

 

8,332

 

8,291

 

Total other credits

 

318,025

 

317,032

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,006,678

 

$

970,150

 

 

The accompanying notes are an integral part of these financial statements

 

7



Table of Contents

 

 

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2009 AND 2008

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2009

 

2008

 

Operating Revenues

 

 

 

 

 

Water

 

$

55,178

 

$

50,506

 

Electric

 

8,632

 

8,803

 

Total operating revenues

 

63,810

 

59,309

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

7,987

 

7,787

 

Power purchased for pumping

 

1,567

 

1,575

 

Groundwater production assessment

 

2,517

 

2,375

 

Power purchased for resale

 

3,962

 

4,239

 

Unrealized gain on purchased power contracts

 

 

(2,843

)

Supply cost balancing accounts

 

3,528

 

(107

)

Other operating expenses

 

6,069

 

6,116

 

Administrative and general expenses

 

13,809

 

11,667

 

Depreciation and amortization

 

7,713

 

7,242

 

Maintenance

 

3,041

 

3,324

 

Property and other taxes

 

3,009

 

2,761

 

Net gain on sale of property

 

(15

)

 

Total operating expenses

 

53,187

 

44,136

 

 

 

 

 

 

 

Operating Income

 

10,623

 

15,173

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(4,996

)

(5,052

)

Interest income

 

199

 

357

 

Other

 

(22

)

86

 

Total other income and expenses

 

(4,819

)

(4,609

)

 

 

 

 

 

 

Income from operations before income tax expense

 

5,804

 

10,564

 

 

 

 

 

 

 

Income tax expense

 

2,111

 

4,646

 

 

 

 

 

 

 

Net Income

 

$

3,693

 

$

5,918

 

 

The accompanying notes are an integral part of these financial statements

 

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GOLDEN STATE WATER COMPANY

STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2009

 

2008

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

3,693

 

$

5,918

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

7,713

 

7,242

 

Provision for doubtful accounts

 

347

 

185

 

Deferred income taxes and investment tax credits

 

(731

)

1,631

 

Unrealized gain on purchased power contracts

 

 

(2,843

)

Stock-based compensation expense

 

232

 

157

 

Other – net

 

(598

)

(94

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable – customers

 

281

 

1,312

 

Unbilled revenue

 

14

 

(1,135

)

Other accounts receivable

 

3

 

500

 

Materials and supplies

 

(110

)

(49

)

Prepayments and other current assets

 

569

 

480

 

Regulatory assets – supply cost balancing accounts

 

3,528

 

(107

)

Other assets

 

(2,768

)

135

 

Accounts payable

 

(569

)

(261

)

Inter-company receivable/payable

 

(42

)

552

 

Income taxes receivable/payable from/to Parent

 

1,843

 

(888

)

Accrued pension and other postretirement benefits

 

1,887

 

1,319

 

Other liabilities

 

3,423

 

897

 

Net cash provided

 

18,715

 

14,951

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(17,176

)

(16,039

)

Net cash used

 

(17,176

)

(16,039

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Tax benefits from exercise or conversion of stock-based awards

 

 

3

 

Receipt of advances for and contributions in aid of construction

 

317

 

1,709

 

Refunds on advances for construction

 

(395

)

(653

)

Proceeds from the issuance of long-term debt, net of issuance cost

 

39,777

 

 

Repayments of long-term debt

 

(63

)

(60

)

Net change in inter-company borrowings

 

(18,200

)

(440

)

Dividends paid

 

(4,400

)

 

Other – net

 

90

 

(110

)

Net cash provided

 

17,126

 

449

 

 

 

 

 

 

 

Net increase (decrease) in cash and cash equivalents

 

18,665

 

(639

)

Cash and cash equivalents, beginning of period

 

3,812

 

1,389

 

Cash and cash equivalents, end of period

 

$

22,477

 

$

750

 

 

The accompanying notes are an integral part of these financial statements

 

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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 254,000 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. Through its wholly-owned subsidiaries, ASUS has entered into agreements with the U.S. government to operate and maintain the water and/or 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. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of either the contracted services provided by ASUS and its wholly owned subsidiaries or AWR.  AWR’s assets, revenues and operations are primarily those of GSWC.

 

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, 2008 filed with the SEC.

 

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 a $115 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 are included in inter-company payables on GSWC’s balance sheets as of March 31, 2009 and December 31, 2008. The interest rate charged to GSWC and other affiliates 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.

 

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Long-Term Debt:  A senior note was issued on March 10, 2009, to CoBank, ACB (“Co-Bank”). Under the terms of this senior note, CoBank purchased a 6.7% Senior Note due March 10, 2019 in the aggregate principal amount of $40.0 million from GSWC. This note also provides for patronage, where GSWC shares in the profits of CoBank.  If the current amount of patronage continues to be paid, the annual cost of the note is at or below 6.0%. The proceeds have been used to pay down short-term borrowings, until used to fund capital expenditures.  The terms of the new agreement are substantially the same as the terms of a previous note agreement with CoBank executed in October 2005.

 

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 $626,000 and $698,000 for the three months ended March 31, 2009 and 2008, 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.

 

Depending on the state in which the operations are conducted, ASUS and its subsidiaries are also subject to certain state non-income tax assessments generally computed on a “gross receipts” or “gross revenues” basis.  These non-income tax assessments are required to be paid regardless of whether the subsidiary is reimbursed by the U.S. government for these assessments under its 50-year contracts  with the U.S. government.  The non-income tax assessments are accounted for on a gross basis and totaled $170,000 during the three months ended March 31, 2009.

 

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 was 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.  As it applies to its nonfinancial items, Registrant implemented the new standard effective January 1, 2009.  The adoption of SFAS No. 157 has not had any impact on Registrant’s consolidated financial position, results of operations or cash flows.

 

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.   Registrant has  elected not to apply the fair value option to any of its financial assets and liabilities. Therefore, the adoption of SFAS No. 159 has not had any impact on Registrant’s consolidated financial position, results of operations or cash flows.

 

In December 2007, the FASB issued SFAS No. 141(R) (revised 2007), “Business Combinations” 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 that Registrant may engage in subsequent to that date will be recorded and disclosed under the new standard.

 

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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.  SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008.  The adoption of SFAS No. 160 did not have any impact on Registrant’s consolidated financial position, results of operations or cash flows.

 

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.  The adoption of SFAS No. 161 did not have any impact on Registrant’s consolidated financial position, results of operations or cash flows.  The adoption of the standard did result in enhanced qualitative disclosure of Registrant’s derivative instrument as discussed in Note 4.

 

In December 2008, the FASB issued FASB Staff Position (“FSP”) No. FAS 132(R)-1, “Employers’ Disclosures about Postretirement Benefit Plan Assets.  FSP No. FAS 132(R)-1 amends SFAS No. 132(R), Employers’ Disclosures about Pensions and Other Postretirement Benefits”, to require additional disclosures about plan assets held in an employer’s defined benefit pension or other postretirement plan, and to provide users of financial statements with an understanding of (i) how investment allocation decisions are made, including the factors that are pertinent to an understanding of investment policies and strategies, (ii) the major categories of plan assets, (iii) the inputs and valuation techniques used to measure the fair value of plan assets including the level within the fair value hierarchy, using the guidance in SFAS No. 157, and (iv) significant concentrations of risk within plan assets. FSP No. FAS 132(R)-1 is effective for financial statements issued for fiscal years ending after December 15, 2009.  Registrant is evaluating the potential impact of FSP No. FAS 132(R)-1.

 

In April 2009, the FASB issued FSP SFAS No. 107-1 and APB No. 28-1, “Interim Disclosures about Fair Value of Financial Instruments”.  This position requires disclosures beginning in the second quarter of 2009 about the fair value of all financial instruments, for which it is practicable to estimate that fair value, for interim reporting periods as well as annual statements. Registrant will adopt this position in the second quarter of 2009 and begin including the fair value disclosures of its financial instruments including long-term debt, in its quarterly filings. Since FSP SFAS No. 107-1 and APB No. 28-1 impacts disclosure only, the adoption of this position will not have an impact on Registrant’s consolidated results of operations, financial position or cash flows.

 

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on Registrant’s consolidated financial statements upon adoption.

 

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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, 2009, Registrant had approximately $23.2 million of regulatory assets not accruing carrying costs. Of this amount, $7.5 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, $8.4 million related to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchased power contracts, and a $4.2 million “non-yielding” regulatory asset related to general rate case memorandum accounts to be recovered over 12 - 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,
2009

 

December 31,
2008

 

GSWC

 

 

 

 

 

Electric supply cost balancing account

 

$

14,968

 

$

16,077

 

Water supply cost balancing accounts

 

10,496

 

11,807

 

Water revenue adjustment mechanism, net of modified cost balancing accounts

 

3,445

 

825

 

Costs deferred for future recovery on Aerojet case

 

20,422

 

20,613

 

Pensions and other postretirement obligations

 

40,242

 

40,939

 

Flow-through taxes, net

 

7,522

 

7,134

 

Electric transmission line abandonment costs

 

2,959

 

3,001

 

Asset retirement obligations

 

3,731

 

3,646

 

Low income rate assistance balancing accounts

 

4,643

 

4,758

 

General rate case memorandum accounts

 

4,152

 

4,922

 

Santa Maria adjudication memorandum accounts

 

4,000

 

4,011

 

Derivative (gains)/losses memorandum account

 

8,428

 

 

Refund of water right lease revenues

 

(2,248

)

(2,360

)

Other regulatory assets, net

 

5,466

 

5,166

 

Total GSWC

 

$

128,226

 

$

120,539

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

56

 

$

55

 

Other regulatory liabilities, net

 

(444

)

(427

)

Total AWR

 

$

127,838

 

$

120,167

 

 

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, 2008 filed with the SEC.  The discussion below focuses on significant matters and changes since December 31, 2008.

 

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 $15.0 million at March 31, 2009.  For the three months ended March 31, 2009 and 2008, the under-collection decreased by approximately $1.1 million and $1.0 million, respectively.  As of March 31, 2009, the electric supply cost balancing account consists of under-collections incurred during the energy crisis in late 2000 and 2001, costs of abandonment of a transmission line upgrade and increases in purchased energy and power system delivery costs discussed below.

 

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 41,607,327 and 43,697,643 kilowatt hours of electricity to its BVES customers for the three months ended March 31, 2009 and

 

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2008, respectively.  As a result of the surcharge, the supply cost balancing account was reduced by approximately $921,000 and $970,000 for the three months ended March 31, 2009 and 2008, respectively.  Approximately $20.9 million of the $23.1 million under-collection incurred during the energy crisis in late 2000 and 2001 has been recovered through this surcharge.  Therefore, as of March 31, 2009 approximately $2.2 million related to the energy crisis remains to be recovered through this surcharge.   GSWC anticipates the surcharge, based on projected 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 additional recovery from the CPUC of any amounts not recovered through this surcharge.

 

Changes in purchased energy and power system delivery costs as compared to CPUC authorized rates have also impacted the electric supply cost balancing account by $9.3 million as of March 31, 2009. The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of a 2001 settlement which was subsequently approved in a CPUC decision. The BVES division of GSWC is allowed to include its actual recorded purchased energy costs up to a weighted annual average cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing account.  To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed.  There were no amounts expensed over the $77 per MWh cap during the three months ended March 31, 2009 and 2008.

 

Charges to GSWC by 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 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 of $3.5 million at March 31, 2009 not included in rates have been included in the balancing account at March 31, 2009 for subsequent recovery from customers, subject to CPUC approval.

 

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 lost during transmission, also affect the balance of the electric supply cost balancing account.

 

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 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, 2009 and 2008, approximately $280,000 and $867,000 of under-collections (including interest), 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, 2009, approximately $1.6 million of surcharges were billed to customers to decrease previously incurred under-collections in the water supply cost balancing accounts.   During the three months ended March 31, 2008, approximately $295,000 was credited to customers to decrease the previously incurred over-collection in the water supply cost balancing accounts.

 

As of March 31, 2009, there is an approximately $10.5 million net under-collection in the water supply cost balancing accounts.  Of this amount, approximately $6.8 million relates to GSWC’s Region III customer service area.  In May 2008, the CPUC approved a surcharge to begin recovering $7.0 million of this under-collection over 24 months.   Any remaining balances for Region III will be included for recovery in a future filing.   The remaining $3.7 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 $1.6 million.  Currently, there are surcharges in

 

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place in Region I expiring in 2009 and 2010 to recover this under-collection. Effective January and February 2009, the CPUC approved surcharges in GSWC’s Regions II and III to recover under-collections in supply costs.

 

On August 21, 2008, the CPUC issued a final decision which approved a settlement agreement between GSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”) regarding conservation rate design.  As a result of this decision, GSWC is permitted to establish a Modified Cost Balancing Account (“MCBA”) that will permit GSWC to recover supply costs related to changes in water supply mix in addition to rate changes by GSWC’s suppliers. GSWC implemented this MCBA in November 2008 for Regions II and III.  This account replaces the current water supply cost balancing account procedure for costs incurred after the modified supply cost balancing account was implemented.

 

Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account:

 

Effective November 25, 2008 with the adoption of the WRAM and the MCBA, GSWC began recording the difference between what is billed to its regulated customers in Regions II and III and that which is authorized by the CPUC. Under the WRAM, GSWC records the adopted level of volumetric revenues as authorized by the CPUC for metered accounts (adopted volumetric revenues).  While the WRAM tracks volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted volumetric revenues considers the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a regulatory asset or liability balancing account (tracked individually for Region II and III).  The variance amount may be positive (under-collection) or negative (over-collection) and represents amounts that will be billed or refunded to customers in the future.

 

Under the MCBA, GSWC began tracking adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. Variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses are recorded as a component of the supply cost balancing account provision, as the amount of such variances will be recovered from or refunded to GSWC’s customers at a later date. This is reflected with an offsetting entry to a regulatory asset or liability balancing account (tracked individually for Regions II and III).

 

The balances in the WRAM and MCBA assets and liabilities accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding Region and is interest bearing at the current 90 day commercial paper rate. When the net amount for Regions II and III achieves a pre-determined level (i.e., at least 2.5 percent over- or under-recovery of the approved revenue requirement), GSWC will seek approval from the CPUC to refund or collect the balance in the accounts. Account balances less than those levels may be refunded or collected in GSWC’s general rate case proceedings or aggregated with future calendar year balances for comparison with the pre-determined recovery level of 2.5 percent of adopted revenues. As of March 31, 2009, GSWC has a net aggregated regulatory asset of $3.4 million which is comprised of a $5.0 million under-collection in the WRAM accounts and $1.6 million over-collection in the MCBA accounts.

 

On May 7, 2009, the CPUC approved tiered rates for Region I and the establishment of a WRAM and MCBA which will go into effect on or about September 1, 2009.

 

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 $211,000 and $213,000 was billed to customers during the three months ended March 31, 2009 and 2008, 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

 

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memorandum account, other than on-going interest charges approved by the CPUC decision. Pursuant to the decision, additional interest of approximately $20,000 and $147,000 was added to the Aerojet litigation memorandum account during the three months ended March 31, 2009 and 2008, respectively.

 

Aerojet has also agreed to reimburse GSWC $17.5 million, plus interest accruing from January 1, 2004, for GSWC’s past legal and expert costs, which is included in the Aerojet litigation memorandum account. The reimbursement 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. The Westborough development is within the defined area in the settlement agreement.  It is management’s intention to offset certain proceeds from the housing development by Aerojet in the Westborough areas, pursuant to the settlement agreement, against the balance in this litigation memorandum account.  At this time, management believes the full balance of the Aerojet litigation memorandum account will be collected by 2025.

 

Pensions and Other Postretirement Obligations:

 

There was an increase in the pensions and other postretirement regulatory asset during 2008 which was caused by a significant increase in the underfunded status of the pension plan. This increase in the underfunded status of the pension plan was primarily due to a decrease in the discount rate as well as a significant decrease in the fair value of plan assets.  As a result of this increase, Registrant will experience higher costs than have been estimated for inclusion in customer rates in 2009 and, if asset performance do not improve or applicable discount rates do not change in the future, Registrant may experience such a shortfall in future years, as well.

 

In March 2009, GSWC filed an advice letter with the CPUC requesting authorization to establish a Pension Costs Memorandum Account.  If this account is approved, GSWC will track the difference between the pension costs authorized by the CPUC and included in customer rates, and actual pension costs.  GSWC will not record the amounts in this account as a regulatory asset until they are reviewed and approved by the CPUC.  If approved by the CPUC, GSWC will then establish a regulatory asset with a corresponding increase to earnings. Until then, Registrant expects that earnings will be negatively affected by increasing pension costs. In April 2009, the CPUC’s Water Division rejected GSWC’s filing.  GSWC has filed an appeal; however, at this time, management cannot predict the outcome of this matter as it relates to 2009.  GSWC also amended its current rate case application to request a two-way balancing account to track fluctuations in the forecasted annual pension expense adopted in rates and the actual annual expense to be recorded by GSWC in 2010, 2011 and 2012 in accordance with SFAS No. 87, “Employers’ Accounting for Pensions”.  If approved as filed, GSWC will establish a regulatory asset with a corresponding increase to earnings in those years, for any shortfalls.

 

Derivative Gains and Losses on Purchased Power Contracts Memorandum Account:

 

As described in Note 4, in October 2008 GSWC executed a new purchased power contract.  GSWC began receiving power under this contract on January 1, 2009 at a fixed cost over three and five year terms depending on the amount of power and period during which the power will be purchased under the contract.  The new contract is also subject to SFAS No. 133,”Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and 149, and requires mark-to-market derivative accounting.  In 2009, the CPUC issued a proposed decision (“PD”) approving the new purchased power contract.  In the PD, the CPUC also authorized the establishment of a regulatory asset and liability memorandum account to offset the entries required by SFAS No. 133.  Accordingly, all unrealized gains and losses generated from the new purchased power contract will be deferred on a monthly basis into the non-interest bearing regulatory memorandum account that would track the changes in fair value of the derivative throughout the term of the contract.  As of March 31, 2009, $8.4 million of unrealized losses have been included in this memorandum account.

 

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 totaling approximately $18.0 million. The CPUC’s investigation focuses on whether GSWC was overcharged for these construction projects and whether these overcharges were approved in customer rates.  The construction projects completed by this specific contractor related primarily to work on water treatment and pumping plants which have been placed in service and are used and useful.  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,

 

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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 data requests submitted by the CPUC including recent data requests which asked for information prior to 1994.  Management cannot predict the outcome of the investigation or audit at this time.

 

In January 2009, the ACC staff requested information regarding the CPUC subpoena and on-going audit.  GSWC has been working with the ACC staff to provide responsive materials that are relevant to CCWC.  Management cannot predict the outcome of the ACC’s request and whether it could affect the processing of CCWC’s pending general rate case.

 

GSWC’s BVES division has been regularly filing compliance reports with the CPUC regarding its purchases of energy from renewable energy resources. The filings 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. The CPUC considered the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like BVES and on May 30, 2008, the CPUC issued its final decision regarding the renewable responsibilities of small utilities (including BVES).  The final decision affirmed the renewable obligation targets for the small utilities but also allowed for the small utilities to defer compliance under the CPUC’s flexible compliance rules.  BVES is continuing 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. Because the final decision deferred BVES’ interim target purchase levels for the years 2004 through 2007, management believes that the CPUC’s decision effectively forecloses any exposure to financial penalties for the year 2007 and earlier.  For the 2008 year, BVES did not meet the interim targets and expects that the CPUC will waive any potential fines in accordance with the flexible compliance  rules.  Accordingly, no provision for loss has been recorded in the financial statements as of March 31, 2009.  At this time, management cannot determine if interim targets for the 2009 year will be met.

 

Note 3 — Earnings per Share/Capital Stock:

 

Registrant computes earnings per share (“EPS”) in accordance with Emerging Issues Task Force (“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 that earn dividend equivalents on an equal basis with Common Shares that have been issued under AWR’s 2003 Non-Employee Directors Stock Plan and restricted stock units under AWR’s 2000 Stock Incentive Plan, 2008 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)

 

2009

 

2008

 

Net income

 

$

4,932

 

$

5,304

 

Less: (a)  

Distributed earnings to common shareholders

 

4,328

 

4,310

 

 

Distributed earnings to participating securities

 

25

 

25

 

Undistributed earnings

 

579

 

969

 

 

 

 

 

 

 

(b)  

Undistributed earnings allocated to common shareholders

 

576

 

964

 

 

Undistributed earnings allocated to participating securities

 

3

 

5

 

 

 

 

 

 

 

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

 

$

4,904

 

$

5,274

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

17,312

 

17,239

 

Basic earnings per Common Share

 

$

0.28

 

$

0.31

 

 

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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  granted under Registrant’s 2003 Non-Employee Directors Stock Plan in 2006 and restricted stock units issued under Registrant’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. At March 31, 2009 and 2008 there were 680,008 and 567,468 options outstanding, respectively, under these Plans. At March 31, 2009 and 2008, there were also approximately 87,373 and 71,938 restricted stock units outstanding, respectively.

 

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)

 

2009

 

2008

 

Common shareholders earnings, basic

 

$

4,904

 

$

5,274

 

Undistributed earnings for dilutive stock options

 

3

 

3

 

Total common shareholders earnings, diluted

 

$

4,907

 

$

5,277

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

17,312

 

17,239

 

Stock-based compensation (1)

 

128

 

118

 

Weighted average common shares outstanding, diluted

 

17,440

 

17,357

 

Diluted earnings per Common Share

 

$

0.28

 

$

0.30

 

 


(1)          In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 425,053 and 356,619 stock options at March 31, 2009 and 2008, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”.  All of the 87,373 and 71,938 restricted stock units at March 31, 2009 and 2008, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2009 and 2008.

 

Stock options of 254,271 and 111,711 were outstanding at March 31, 2009 and 2008, 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, 2009 and 2008.  Stock options of 684 and 99,138 were outstanding at March 31, 2009 and 2008, respectively, but not included in the computation of diluted EPS because they were antidilutive.

 

During the three months ended March 31, 2009 and 2008, Registrant issued 19,957 and 12,798 Common Shares, for approximately $472,000 and $255,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, and the stock incentive plans. In addition, Registrant purchased 304 Common Shares on the open market during the three months ended March 31, 2009 under Registrant’s Common Share Purchase and Dividend Reinvestment Plan and 14,360 Common Shares during the three months ended March 31, 2008, under 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 each of the three months ended March 31, 2009 and 2008, AWR paid quarterly dividends to shareholders of approximately $4.3 million, or $0.250 per share.

 

Note 4 — Derivative Instruments:

 

Most of the electric energy sold by BVES to its customers is purchased from others.  To mitigate exposure to spot-market prices, Registrant has entered into purchased power contracts, which are subject to derivative accounting, to serve its BVES customer service area.  By entering into these fixed-priced purchased power contracts, Registrant has been able to limit the amount of risk and uncertainty due to spot-market price variability.  Changes in electricity costs are outside of management’s control, therefore, the purpose of entering into these fixed price contracts is to stabilize purchased power costs.  Except for the resale of small amounts of power in the spot market that are in excess of BVES’ customers’ needs, the power purchased under the contracts is only used to service BVES customers’ demand.

 

Registrant had certain block-forward purchased power contracts that were subject to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and 149. During 2002, GSWC became a party to block-forward purchased power contracts that qualified as derivative instruments

 

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under SFAS No. 133.  As a result, unrealized gains and losses were recorded on a monthly basis to reflect the fair market value of the derivative at the end of each month. These contracts expired on December 31, 2008.  During the three months ended March 31, 2008, a $2.8 million unrealized gain on purchased power contracts was recorded.

 

In October 2008,  GSWC executed a new purchased power contract.  GSWC began receiving power under this contract on January 1, 2009 at a fixed cost over three and five year terms depending on the amount of power and period during which the power will be purchased under the contract. The new contract was subject to CPUC approval and in 2009, the CPUC issued a PD approving the contract.  The new contract is also subject to SFAS No. 133 and requires mark-to-market derivative accounting.  In connection with the filing to review and approve the new contract, BVES also requested and the CPUC authorized the establishment of a regulatory asset and liability memorandum account to offset the entries required by SFAS No. 133.  Accordingly, all unrealized gains and losses generated from the new purchased power contract will be deferred on a monthly basis into the non-interest bearing regulatory memorandum account that will track the changes in fair value of the derivative throughout the term of the contract.  As a result, unrealized derivative gains and losses from the new contract will not affect GSWC’s earnings, and will have no impact on power purchased for resale due to regulatory accounting treatment.

 

As a result of the new purchase power contract, 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. Registrant receives one broker quote to determine the fair value of its derivative instrument.  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 new purchased power contract 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, 2009 and 2008.

 

 

 

For the Three Months Ended
March 31,

 

(dollars in thousands)

 

2009

 

2008

 

Balance, at beginning of the period

 

$

 

$

(1,554

)

Unrealized (loss)/gain on purchased power contracts

 

(8,428

)

2,843

 

Balance, at end of the period

 

$

(8,428

)

$

1,289

 

 

For the three months ended March 31, 2009, the unrealized loss was included in regulatory assets.  For the three months ended March 31, 2008, the unrealized gain was included in operating expenses.

 

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 operating expenses.

 

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On February 20, 2009, California’s governor signed two bills into law that amended and added several new provisions to California’s Revenue and Taxation Code.  One of the provisions in these bills changed the manner by which most taxpayers may compute the portion of their income derived from multiple jurisdictions that is subject to California taxation.  During the first quarter of 2009, AWR applied the changes in tax law resulting from enactment of the bills based on its understanding of the legislature’s intent, which is to permit taxpayers to apply an alternative apportionment method commencing with the 2011 tax year.  As a result of management’s intention to apply the alternative method, AWR adjusted its deferred tax balances at March 31, 2009 to reflect the expected amount at which it will realize its California deferred taxes consistent with the changes in tax law, as well as refining certain related estimates.  This resulted in the recording of a benefit of approximately $918,000 during the first quarter of 2009. While the effect of the tax law change will continue to affect AWR’s state taxes, the future effects may be beneficial or detrimental depending on a combination of the profitability of AWR’s non-California activities as well as the relative proportion of the factor(s) applied by its apportionment method.  Quarterly, management will assess its intention to apply the alternative method and will adjust its deferred tax balances accordingly.

 

GSWC continues to compute its state tax provision as if it were autonomous and not a member of AWR’s unitary group.  This approach is consistent with the methodology used for ratemaking purposes.  Given that 100 percent of GSWC’s activities are conducted within California, GSWC’s state tax provision does not reflect apportionment of its income; consequently, the change in California law has had no effect upon GSWC’s state taxes.

 

Note 6 — Employee Benefit Plans:

 

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three months ended March 31, 2009 and 2008 are as follows:

 

 

 

Pension Benefits

 

Other
Postretirement
Benefits

 

SERP

 

(dollars in thousands)

 

2009

 

2008

 

2009

 

2008

 

2009

 

2008

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,044

 

$

909

 

$

86

 

$

86

 

$

93

 

$

60

 

Interest cost

 

1,444

 

1,342

 

160

 

161

 

86

 

63

 

Expected return on plan assets

 

(971

)

(1,235

)

(52

)

(63

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost (benefit)

 

30

 

30

 

(50

)

(50

)

40

 

230

 

Amortization of actuarial loss (gain)

 

572

 

 

 

 

 

(14

)

Net periodic pension cost

 

$

2,119

 

$

1,046

 

$

249

 

$

239

 

$

219

 

$

339

 

 

Registrant expects to contribute a minimum of approximately $8,476,000 and $725,000 to pension and postretirement medical plans in 2009, respectively.  No contributions were made during the three months ended March 31, 2009.  There was a significant increase in the underfunded status of the pension plan during 2008.  This was primarily due to a significant decrease in the fair value of plan assets due to market conditions during 2008.  The increase in the underfunded status of the pension plan resulted in higher pension costs during the three months ended March 31, 2009 compared to the same period in 2008.

 

In addition, during the four months ended April 30, 2009, the fair value of the pension plan assets declined further by approximately 1% since December 31, 2008.  Continued decreases in plan asset values will: (i) result in an increase in Registrant’s underfunded positions on the balance sheet with a corresponding increase in regulatory assets for pensions and other postretirement obligations at year-end; (ii) potentially increase pension and postretirement expense in the next fiscal year, to the extent the effects are not offset by the effects of a change in the discount rate, and (iii) potentially require greater cash contributions in 2010 and subsequent years.

 

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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, 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.

 

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 the two impacted GSWC 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.

 

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, 2009, management believes that the fair market value of the Claremont water system exceeds the $41.5 million recorded net book value and also exceeds the consultant’s estimates of its value. 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.  In  meetings held in 2008, the Claremont City Council stated that they had decided to authorize additional studies of the acquisition of GSWC’s water system and planned to move forward on this matter.

 

The Town of Apple Valley (the “Town”) abandoned its activities related to a potential condemnation of GSWC’s water system serving the Town in 2007. However, in April 2009, the Town announced that it will again consider a potential takeover of GSWC’s Apple Valley water systems.  The Town has approved the cost to perform a feasibility study which will be used by the Town in making a determination whether to move forward with an eminent domain action.

 

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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.

 

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 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 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.

 

Aerojet Note Receivable:

 

Pursuant to the settlement agreement with Aerojet, GSWC has an $8.0 million note receivable, plus $2.3 million of accrued interest, guaranteed by Aerojet.  This note, plus interest on the unpaid balance, is scheduled to be paid by Aerojet in installments over five years beginning in December 2009.  In January 2009, Moody’s Investors Service downgraded the corporate family ratings of GenCorp Inc., Aerojet’s parent, further to B3 from B2 and its probability of default rating to Caa1 from B2.  Obligations rated “B” by Moody’s are considered speculative by Moody’s and are, in Moody’s view, subject to high credit risk and have generally poor credit quality.  Obligations rated Caa1 are judged by Moody’s to be of poor credit standing and are, in Moody’s view, subject to very high credit risk and have extremely poor credit quality.   On March 31, 2009, Standard & Poor’s Ratings Services, or S&P, lowered its ratings on GenCorp to CCC+ from B+ with a developing outlook.  An S&P rating of “CCC” indicates a current identifiable vulnerability to default by S&P that is, in S&P’s view, dependent upon favorable business, financial and economic conditions to meet timely payment of interest and repayment of principal.  At this time, management believes the note receivable from Aerojet is still fully collectible and has not provided a reserve for uncollectible amounts as of March 31, 2009.  GSWC will continue to assess recoverability of this note receivable.

 

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. In 2007, GSWC reached a settlement of the NOV with the AQMD.  As part of the settlement, GSWC agreed to install and operate 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 this agreement and assessed a nominal penalty.  In February 2009, GSWC began operating the permanent GAC treatment system at the Watson Plant.  Management believes that GSWC has fulfilled

 

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its obligations under the settlement with AQMD and no further penalties are expected to be assessed. Upon AQMD inspection and approval, GSWC will be deemed released from any and all claims or penalties arising from the NOV.  GSWC has spent approximately $1.1 million as of March 31, 2009 on the GAC treatment system. Management also believes it is probable that the capital costs incurred on this project will be approved in rate-base by the CPUC.

 

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. Since then, GSWC has been involved in various remediation activities at this site.  Recent site assessments have been conducted which showed that there was more gasoline at higher concentrations spread over a larger area than previously measured.  Remediation is estimated to take two more years, followed by at least one year of monitoring and reporting.  As of March 31, 2009, the total spent to clean-up and remediate GSWC’s plant facility is approximately $2.1 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund and $600,000 has been included in rate-base and approved by the CPUC for recovery.

 

As of March 31, 2009, GSWC has an accrued liability for the estimated additional cost of $1.3 million 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 additional costs of remediation will be approved in rate-base by the CPUC.

 

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 appears to be shallow and is believed likely to be the result of past corrosion control practices. An initial investigation and characterization of the contaminated area has been conducted.  The investigation report indicates that contamination levels are below normal cleanup goals.  GSWC is contacting the local agency to get direction on what cleanup, if any, is required.  Historically, the cost for this type of clean-up has been included in rates as approved by the CPUC.

 

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 management’s understanding of all the claims, management does not believe that the ultimate resolution of this matter will have a material adverse effect on AWR’s and 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. Registrant is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.

 

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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 on which they operate is located.  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 AWR Parent. 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, 2009

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

55,178

 

$

8,632

 

$

1,616

 

$

14,183

 

$

 

$

79,609

 

Operating income (loss)

 

11,167

 

(544

)

(223

)

1,068

 

(50

)

11,418

 

Interest expense, net

 

4,286

 

511

 

105

 

99

 

91

 

5,092

 

Identifiable assets

 

751,745

 

37,466

 

45,127

 

2,164

 

 

836,502

 

Depreciation and amortization expense

 

7,148

 

565

 

486

 

162

 

 

8,361

 

Capital additions

 

16,865

 

311

 

488

 

18

 

 

17,682

 

 

 

 

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

 

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

 

General

 

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”)). 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. FBWS, TUS, ODUS, PSUS and ONUS may be referred to herein collectively as the “Military Utility Privatization 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 254,451 water customers and 23,094 electric customers at March 31, 2009, or a total of 277,545 customers, compared with 254,364 water customers and 23,141 electric customers, or a total of 277,505 customers at March 31, 2008. 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 90% of total water revenues for the three months ended March 31, 2009 and 2008.

 

CCWC is an Arizona public utility company serving 13,405 customers at March 31, 2009, compared with 13,482 customers at March 31, 2008. 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/or wastewater services, including both the operation and maintenance and renewal and replacement of the water and/or wastewater systems pursuant to 50-year fixed price contracts, which are subject to periodic prospective price redeterminations and modifications for changes in circumstances.  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 Military Utility Privatization 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 for 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 under the terms of these contracts. Prices are subject to equitable adjustment based upon changes in circumstances, changes in laws and/or regulations, and changes in wages and fringe benefits to the extent provided in each of the contracts.  Pursuant to the terms of these contracts, the Military Utility Privatization Subsidiaries operate, as of the effective date of their respective contracts, the following water and wastewater systems:

 

·                  FBWS - water and wastewater systems at Fort Bliss located near El Paso, Texas effective October 1, 2004;

·                  TUS - water and wastewater systems at Andrews Air Force Base in Maryland effective February 1, 2006;

·                  ODUS - wastewater systems at Fort Lee in Virginia effective February 23, 2006 and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginia effective April 3, 2006 (collectively, the “TRADOC bases”);

 

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·                  PSUS - water and wastewater systems at Fort Jackson in South Carolina effective February 16, 2008; and

·                  ONUS - water and wastewater systems at Fort Bragg, Pope Air Force Base and Camp MacKall, North Carolina effective March 1, 2008.

 

ASUS and GSWC have also been pursuing opportunities 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. GSWC and Natomas have entered into various agreements including the purchase of certain water and water rights that may allow GSWC the ability to serve portions of Sutter county in the future.

 

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 and the delivery of electricity in the Big Bear area of San Bernardino county. 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 reasonable rate of return on capital.  Factors affecting financial performance of our regulated utilities 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 and our overhead costs; weather; the impact of increased water quality standards and environmental regulations on the cost of operations and capital expenditures; pressures on water supply caused by population growth, more stringent water quality standards, deterioration in water quality and water supply from a variety of causes; 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.

 

Operating revenues and income from contracted services at ASUS and its subsidiaries are earned primarily from the operation and maintenance and renewal and replacement of the water and/or 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.  Additional revenues generated by contract operations are primarily dependent on these new construction activities.  As a result, ASUS is subject to risks that are different than those of Registrant’s regulated water and electric utilities.  ASUS plans to continue seeking contracts for the operation and maintenance and renewal and replacement of water and/or wastewater services at military bases.  Factors affecting the financial performance of our Military Utility Privatization Subsidiaries include delays in receiving payments from the U.S. government and the redetermination 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 reasonable 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 common stock offerings over the next twelve months depending on market conditions. On August 25, 2008, AWR amended its $85 million syndicated credit facility, to increase its aggregate bank commitments by $30 million to $115 million.  In addition, GSWC issued a senior note in the amount of $40.0 million on March 10, 2009, to CoBank, ACB (“CoBank”). The proceeds are being used to pay down GSWC’s intercompany short-term borrowings and to fund capital expenditures.

 

For three months ended March 31, 2009, net income was $4.9 million compared to $5.3  million in the same period of 2008, a decrease of 7.0%. Diluted earnings per share for the three months ended March 31, 2009 were $0.28 compared to $0.30 in the same period of 2008.  The decrease in earnings is due primarily to: (i) a $2.8 million pretax unrealized gain on purchased power contracts, or $0.10 per share, for the three months ended March 31, 2008 with no corresponding entry in 2009, as more fully discussed below; and (ii) higher operating expenses at GSWC of $2.5 million, or $0.08 per share.  These decreases to earnings were partially offset by: (i) an increase of $0.03 per share in the dollar water margin due to higher customer rates approved by the CPUC and effective January 1, 2009;  (ii) the improved financial performance of the Military Utility Privatization Subsidiaries resulting in an increase in ASUS’ pretax operating income of $1.6 million, or $0.05 per share, during the three months ended

 

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March 31, 2009 when compared to 2008; and (ii) an overall decrease in the effective income tax rate due to changes in enacted state law as well as refining certain related estimates, and changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, all of which favorably impacted earnings by $0.08 per share during the first quarter of 2009.

 

Unrealized gains and losses on previous purchased power contracts impacted GSWC’s earnings if the contracts qualified as derivative instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Power purchased contracts that qualified as derivative instruments terminated at December 31, 2008. GSWC filed an application with the CPUC to review its new purchased power contract, effective after December 31, 2008.  This purchased power contract was subject to CPUC approval and is also subject to derivative accounting.  In connection with the filing to review and approve the new contract, GSWC also requested that the CPUC authorize the establishment of a memorandum account to track the changes in the fair market value of the contracts resulting in unrealized gains and losses.

 

In 2009, the CPUC issued a proposed decision approving the new purchase power contract and authorizing GSWC to establish the memorandum account to track unrealized gains and losses on the new contract throughout the term of the contract.   Accordingly, during the three months ended March 31, 2009, there was an $8.4 million unrealized loss which has been included in the memorandum account therefore not impacting GSWC’s earnings.  There was a $2.8 million pretax unrealized gain on purchased power contracts included in earnings for the three months ended March 31, 2008.  Diluted earnings for the three months ended March 31, 2008 were $0.30 per share.  Eliminating the effects of the unrealized derivative gains, adjusted diluted earnings per share for the three months ended March 31, 2008 would have decreased by $0.10 per share to $0.20 per share compared to recorded diluted earnings per share of $0.28 for the three months ended March 31, 2009, which did not contain any unrealized gains or losses on purchased power contracts in earnings.

 

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

 

$

 

%

 

 

 

3/31/2009

 

3/31/2008

 

CHANGE

 

CHANGE

 

3/31/2009

 

3/31/2008

 

CHANGE

 

CHANGE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

56,794

 

$

52,089

 

$

4,705

 

9.0

%

$

10,944

 

$

11,695

 

$

(751

)

-6.4

%

Electric

 

8,632

 

8,803

 

(171

)

-1.9

%

(544

)

3,410

 

(3,954

)

-116.0

%

Contracted services

 

14,183

 

8,050

 

6,133

 

76.2

%

1,068

 

(541

)

1,609

 

297.4

%

AWR parent

 

 

 

 

 

(50

)

(102

)

52

 

51.0

%

Totals from operation

 

$

79,609

 

$

68,942

 

$

10,667

 

15.5

%

$

11,418

 

$

14,462

 

$

(3,044

)

-21.0

%

 

Water - Pretax operating income for water decreased by 6.4% due to higher operating expenses of $1.5 million, as more fully described later.   Higher operating expenses were partially offset by an increase in the dollar water margin of $755,000.  Higher water rates approved by the CPUC effective January 1, 2009 increased water revenues by $1.8 million, partially offset by a 3.5% decrease in actual consumption, or $1.0 million, when compared to the first quarter of 2008, mostly due to the continued effects of statewide customer conservation efforts.  However, as a result of the implementation of a Water Revenue Adjustment Mechanism (“WRAM”) account for Regions II and Region III in late November of 2008, GSWC recorded $3.7 million in additional revenues in the WRAM account to adjust the first quarter 2009 revenues to consumption levels approved by the CPUC.

 

Although the recording of the WRAM added $3.7 million of water revenues, this favorable impact to earnings was reduced by $1.1 million of water supply over-collection costs tracked in the Modified Cost Balancing Account (“MCBA”) account, also implemented in late November 2008.  The over-collection in the MCBA account is due to: (i) lower consumption in the first quarter 2009 as compared to the consumption level approved by the CPUC, and (ii) a lower percentage of purchased water in the supply mix during 2009 when compared to the supply mix included in customer rates, partially offset by increases in rates charged by GSWC’s suppliers. The

 

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implementation of the WRAM and MCBA help mitigate fluctuations in the Company’s earnings caused by changes in the volume of water sold and supply costs.

 

The CPUC also approved an advice letter filing in a separate proceeding to allow GSWC to create and implement a Water Conservation Memorandum Account (“WCMA”) to track the extraordinary expenses and revenue shortfall associated with conservation measures in conjunction with the declared drought in California.  The WCMA was effective August 18, 2008 and was used to track the revenue shortfall until the WRAM was implemented on November 25, 2008.  At November 24, 2008, approximately $1.9 million of net under-collections was included in the WCMA for Regions II and III prior to the implementation of the WRAM.

 

 Unlike the WRAM which is probable for recovery according to the August 2008 CPUC decision, the recovery of the WCMA was less certain and therefore GSWC did not record the under-collection as of March 31, 2009.  On April 16, 2009, the CPUC approved the advice letter filed by GSWC to recover $1.9 million included in the WCMA and authorized GSWC to establish a 12-month surcharge to customers’ bills. The surcharge went into effect on April 21, 2009.  Accordingly, GSWC established a $1.9 million regulatory asset, which will result in a corresponding increase to income for the second quarter of 2009 of $0.07 per share.

 

Electric – For the three months ended March 31, 2009, pretax operating income from electric operations decreased by $4.0 million due in large part to a decrease of $2.8 million in the pretax unrealized gain on purchased power contracts.  The unrealized gain on purchased power contracts increased operating income by approximately $2.8 million during the first quarter of 2008, or $0.10 per share, with no corresponding gain in 2009.  As previously discussed, the purchased power contract that resulted in unrealized gains and losses to BVES’ earnings terminated at December 31, 2008.  The remainder of the decrease in pretax operating income was due to an increase in operating expenses including higher outside consulting and legal costs related to the general rate case, as well as an increase in the allocation of costs from the corporate headquarters’ to BVES pursuant to CPUC requirements.

 

Contracted Services - For the three months ended March 31, 2009, pretax operating income for contracted services increased by $1.6 million, or $0.05 per share.  This was primarily due to an increase in new construction projects at Fort Bliss and the TRADOC bases.  Pretax operating income increased $1.6 million at these bases.  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.  There was also an increase of approximately $338,000 to pretax operating income related to TUS and ASUS’ corporate office resulting from lower legal and consulting fees.  Partially offsetting these increases were continued losses incurred at military bases under the PSUS and ONUS contracts.  ASUS began operating and maintaining the water and wastewater systems under these contracts in North Carolina and South Carolina in March and January of 2008, respectively.  Pretax operating losses at these two bases increased by $319,000 due to increased maintenance expenses at both bases coupled with the fact that expenses for ONUS in 2009 reflect a full quarter whereas in 2008 it reflected only one month.  In September 2008, PSUS submitted a Request for Equitable Adjustment (“REA”) for the water and wastewater systems at Fort Jackson, South Carolina requesting a contract modification for initial capital upgrades and emergency construction costs incurred during 2008 due to pre-existing conditions that were not anticipated at the time the contract was executed.  The aggregate value of the REA relating to construction work is approximately $1.6 million.  The REA has not yet been approved by the U.S. government.

 

The timely receipt of price redeterminations continues to be critical in order for ASUS to recover increasing costs for operating and maintaining the water and wastewater systems at the military bases.  In addition, higher allocations of corporate headquarters’ expenses to ASUS and its wholly-owned subsidiaries by the CPUC were not contemplated at the time the contracts with the U.S. government were negotiated and will be addressed in future price redeterminations.  Under the terms of these contracts, the contract price is subject to price redetermination two years after commencement of operations and every three years thereafter.  Redeterminations have been submitted and are under review by the U.S. government for  operations of ODUS and TUS in Virginia and Maryland, respectively.   The price redeterminations are expected to be completed in 2009.  Pending redetermination of prices, ASUS has received interim inflation adjustments during 2008 to the management fees for operating and maintaining the water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe in Virginia, and the wastewater system at Fort Lee also in Virginia effective on the second anniversary of the date when ASUS began operating these bases (February 23, 2008 for Fort Lee and April 3, 2008 for the other three bases).  In March 2009, ONUS filed a REA related to a joint inventory report at Fort Bragg, North Carolina.  The report indicated the quantity of the Fort Bragg infrastructure to be about 40% greater than what was assumed under the original 50-year contract.  The REA is expected to be resolved by the third quarter of 2009.

 

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Table of Contents

 

FBWS 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 are based on cost levels prevailing in 2003 when the contract with the U.S. government was bid.   Further, the contract pricing was also based on assumptions about the size and age of the infrastructure to be operated and maintained over the 50-year contract.  An REA 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.  In December 2008, the U.S. government approved an interim adjustment at Fort Bliss which increased the monthly water and wastewater fees by 50% and 59%, respectively, related to operating and maintaining the Fort Bliss systems. The increase was retroactive to October 1, 2008 and expired on March 31, 2009.  The U.S. government has prepared a modification extending the interim increases through September 30, 2009.  FBWS is continuing negotiations with Fort Bliss to finalize the adjustment necessary due to the increased infrastructure.  FBWS  also intends to file a price redetermination request for Fort Bliss by mid-2009.

 

These price redeterminations and equitable adjustments, 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 at its Military Utility Privatization Subsidiaries.  As of March 31, 2009, ASUS has $1.1 million of goodwill, which may be at risk for potential impairment if requested price redeterminations and equitable adjustments that have not yet been approved, are not received.

 

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.

 

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Table of Contents

 

Consolidated Results of Operations — Three Months Ended March 31, 2009 and 2008 (amounts in thousands):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2009

 

3/31/2008

 

CHANGE

 

CHANGE

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Water

 

$

56,794

 

$

52,089

 

$

4,705

 

9.0

%

Electric

 

8,632

 

8,803

 

(171

)

-1.9

%

Contracted services

 

14,183

 

8,050

 

6,133

 

76.2

%

Total operating revenues

 

79,609

 

68,942

 

10,667

 

15.5

%

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Water purchased

 

8,214

 

7,953

 

261

 

3.3

%

Power purchased for pumping

 

1,688

 

1,680

 

8

 

0.5

%

Groundwater production assessment

 

2,517

 

2,375

 

142

 

6.0

%

Power purchased for resale

 

3,962

 

4,239

 

(277

)

-6.5

%

Unrealized gain on purchased power contracts

 

 

(2,843

)

2,843

 

-100.0

%

Supply cost balancing accounts

 

3,528

 

(107

)

3,635

 

3397.2

%

Other operating expenses

 

7,153

 

7,996

 

(843

)

-10.5

%

Administrative and general expenses

 

16,865

 

14,827

 

2,038

 

13.7

%

Depreciation and amortization

 

8,361

 

7,793

 

568

 

7.3

%

Maintenance

 

4,073

 

3,772

 

301

 

8.0

%

Property and other taxes

 

3,400

 

2,920

 

480

 

16.4

%

Construction expenses

 

8,445

 

3,875

 

4,570

 

117.9

%

Net gain on sale of property

 

(15

)

 

(15

)

100.0

%

Total operating expenses

 

68,191

 

54,480

 

13,711

 

25.2

%

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

11,418

 

14,462

 

(3,044

)

-21.0

%

 

 

 

 

 

 

 

 

 

 

OTHER INCOME AND EXPENSES

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,294

)

(5,378

)

84

 

-1.6

%

Interest income

 

202

 

361

 

(159

)

-44.0

%

Other

 

(30

)

114

 

(144

)

-126.3

%

 

 

(5,122

)

(4,903

)

(219

)

4.5

%

 

 

 

 

 

 

 

 

 

 

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE

 

6,296

 

9,559

 

(3,263

)

-34.1

%

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

1,364

 

4,255

 

(2,891

)

-67.9

%