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American States Water Company 10-Q 2008

Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q/A

Amendment No. 1 to 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 September 30, 2008

 

 

 

or

 

 

 

o

 

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

 

for the transition period from                      to

 

Commission file number   001-14431

 

American States Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-4676679

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Commission file number   001-12008

 

Golden State Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-1243678

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

American States Water Company

 

Yes x

No o

Golden State Water Company

 

Yes x

No o

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See 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 November 5, 2008, the number of Common Shares outstanding, of American States Water Company was 17,288,918 shares. As of November 5, 2008, 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

 

Explanatory Note

 

We are filing this Amendment No. 1 to the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2008, which we originally filed with the Securities and Exchange Commission on November 7, 2008, to correct a typographical error in the date of the certification attached as Exhibit 31.2.1 to the original Form 10-Q included in Item 6.  No revisions are being made to the Company’s financial statements or any other disclosure contained in the Quarterly Report on Form 10-Q originally filed.

 



Table of Contents

 

AMERICAN STATES WATER COMPANY

and

GOLDEN STATE WATER COMPANY

FORM 10-Q/A - INDEX

 

Part I

Financial Information

 

 

 

 

Item 1:

Financial Statements

1

 

 

 

 

Consolidated Balance Sheets of American States Water Company as of September 30, 2008 and December 31, 2007

2

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended September 30, 2008 and 2007

4

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Nine Months Ended September 30, 2008 and 2007

5

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Nine Months Ended September 30, 2008 and 2007

6

 

 

 

 

Balance Sheets of Golden State Water Company as of September 30, 2008 and December 31, 2007

7

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended September 30, 2008 and 2007

9

 

 

 

 

Statements of Income of Golden State Water Company for the Nine Months Ended September 30, 2008 and 2007

10

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Nine Months Ended September 30, 2008 and 2007

11

 

 

 

 

Notes to Consolidated Financial Statements

12

 

 

 

Item 2:

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

28

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

66

 

 

 

Item 4:

Controls and Procedures

66

 

 

 

Item 4T:

Controls and Procedures

66

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

67

 

 

 

Item 1A:

Risk Factors

67

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

67

 

 

 

Item 3:

Defaults Upon Senior Securities

67

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

67

 

 

 

Item 5:

Other Information

67

 

 

 

Item 6:

Exhibits

68

 

 

 

 

Signatures

69

 



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

 

Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Registrant “believes,” “anticipates,” “expects” or words of similar import. Similarly, statements that describe Registrant’s future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning the ability to raise capital, capital expenditures, earnings, litigation, rates, water sales, water quality and other regulatory matters, adequacy of water supplies, the ability of GSWC and CCWC to recover electric, natural gas and water supply costs from ratepayers, contract operations, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as changes in utility regulation, including ongoing local, state and federal activities; recovery of regulatory assets not yet included in rates; future economic conditions which affect a variety of matters, including customer demand, water and energy supply costs and pension and post-retirement benefit costs; future weather and climatic conditions; the effects of conservation; delays in customer payments, processing of requests for equitable adjustments or price redeterminations on government contracts; potential assessments for failure to comply with the terms of contracts with the U.S. government; 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)

 

September 30,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

Water

 

$

1,043,539

 

$

982,708

 

Electric

 

65,566

 

65,078

 

 

 

1,109,105

 

1,047,786

 

Less - Accumulated depreciation

 

(340,591

)

(316,038

)

 

 

768,514

 

731,748

 

Construction work in progress

 

46,945

 

44,631

 

Net utility plant

 

815,459

 

776,379

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

12,393

 

11,354

 

Other property and investments

 

10,720

 

10,245

 

Total other property and investments

 

23,113

 

21,599

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

1,241

 

1,698

 

Accounts receivable-customers (less allowance for doubtful accounts of $627 in 2008 and $539 in 2007)

 

19,345

 

16,095

 

Unbilled revenue

 

19,777

 

16,035

 

Receivable from the U.S. government (less allowance for doubtful accounts of $303 in 2008 and $496 in 2007)

 

7,964

 

7,556

 

Other accounts receivable (less allowance for doubtful accounts of $298 in 2008 and $629 in 2007)

 

2,943

 

4,154

 

Income taxes receivable

 

2,528

 

60

 

Materials and supplies, at average cost

 

1,817

 

1,576

 

Regulatory assets – current

 

11,023

 

5,187

 

Prepayments and other current assets

 

1,943

 

2,765

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

5,599

 

3,842

 

Deferred income taxes – current

 

2,212

 

4,047

 

Total current assets

 

76,392

 

63,015

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

77,385

 

82,539

 

Other accounts receivable

 

10,085

 

9,723

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

7,037

 

2,284

 

Deferred income taxes

 

209

 

28

 

Other

 

10,503

 

8,331

 

Total regulatory and other assets

 

105,219

 

102,905

 

 

 

 

 

 

 

Total Assets

 

$

1,020,183

 

$

963,898

 

 

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)

 

September 30,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

184,520

 

$

181,796

 

Earnings reinvested in the business

 

126,481

 

120,333

 

Total common shareholders’ equity

 

311,001

 

302,129

 

Long-term debt

 

266,945

 

267,226

 

Total capitalization

 

577,946

 

569,355

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

65,500

 

37,200

 

Long-term debt – current

 

618

 

609

 

Accounts payable

 

37,618

 

29,091

 

Income taxes payable

 

 

398

 

Accrued employee expenses

 

6,131

 

6,228

 

Accrued interest

 

5,230

 

2,467

 

Unrealized loss on purchased power contracts

 

788

 

1,554

 

Regulatory liabilities – current

 

 

173

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

5,280

 

2,641

 

Deferred income taxes – current

 

35

 

 

Other

 

13,771

 

13,890

 

Total current liabilities

 

134,971

 

94,251

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

85,082

 

84,479

 

Contributions in aid of construction – net

 

100,865

 

98,657

 

Deferred income taxes

 

84,848

 

82,480

 

Unamortized investment tax credits

 

2,268

 

2,336

 

Accrued pension and other postretirement benefits

 

20,774

 

20,851

 

Regulatory liabilities

 

458

 

557

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

4,189

 

2,037

 

Other

 

8,782

 

8,895

 

Total other credits

 

307,266

 

300,292

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,020,183

 

$

963,898

 

 

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 SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

69,365

 

$

65,445

 

Electric

 

6,743

 

6,289

 

Contracted services

 

9,153

 

4,108

 

Total operating revenues

 

85,261

 

75,842

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

15,087

 

14,740

 

Power purchased for pumping

 

3,484

 

3,517

 

Groundwater production assessment

 

2,791

 

2,666

 

Power purchased for resale

 

3,345

 

3,176

 

Unrealized loss on purchased power contracts

 

3,741

 

896

 

Supply cost balancing accounts

 

(490

)

(1,541

)

Other operating expenses

 

7,366

 

7,004

 

Administrative and general expenses

 

16,307

 

11,789

 

Depreciation and amortization

 

7,882

 

7,439

 

Maintenance

 

4,027

 

3,897

 

Property and other taxes

 

3,461

 

2,820

 

ASUS construction expenses

 

5,117

 

1,903

 

Net loss on sale of property

 

 

11

 

Total operating expenses

 

72,118

 

58,317

 

 

 

 

 

 

 

Operating Income

 

13,143

 

17,525

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,428

)

(5,347

)

Interest income

 

293

 

590

 

Other

 

(30

)

102

 

Total other income and expenses

 

(5,165

)

(4,655

)

 

 

 

 

 

 

Income from operations before income tax expense

 

7,978

 

12,870

 

 

 

 

 

 

 

Income tax expense

 

3,426

 

5,241

 

 

 

 

 

 

 

Net Income

 

$

4,552

 

$

7,629

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,268

 

17,197

 

Basic Earnings Per Common Share

 

$

0.26

 

$

0.44

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,404

 

17,239

 

Fully Diluted Earnings Per Share

 

$

0.26

 

$

0.44

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.250

 

$

0.235

 

 

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

 

4



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

186,824

 

$

176,598

 

Electric

 

21,754

 

21,413

 

Contracted services

 

25,938

 

29,347

 

Total operating revenues

 

234,516

 

227,358

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

36,119

 

35,690

 

Power purchased for pumping

 

7,819

 

8,308

 

Groundwater production assessment

 

8,056

 

7,494

 

Power purchased for resale

 

10,179

 

10,372

 

Unrealized gain on purchased power contracts

 

(766

)

(1,578

)

Supply cost balancing accounts

 

(1,269

)

(3,451

)

Other operating expenses

 

22,415

 

20,160

 

Administrative and general expenses

 

46,077

 

38,460

 

Depreciation and amortization

 

23,485

 

21,616

 

Maintenance

 

12,569

 

11,223

 

Property and other taxes

 

9,220

 

8,593

 

ASUS construction expenses

 

13,426

 

19,232

 

Net gain on sale of property

 

 

(594

)

Total operating expenses

 

187,330

 

175,525

 

 

 

 

 

 

 

Operating Income

 

47,186

 

51,833

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(16,100

)

(16,413

)

Interest income

 

1,429

 

1,742

 

Other

 

91

 

234

 

Total other income and expenses

 

(14,580

)

(14,437

)

 

 

 

 

 

 

Income from operations before income tax expense

 

32,606

 

37,396

 

 

 

 

 

 

 

Income tax expense

 

13,467

 

15,461

 

 

 

 

 

 

 

Net Income

 

$

19,139

 

$

21,935

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,252

 

17,091

 

Basic Earnings Per Common Share

 

$

1.10

 

$

1.26

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,378

 

17,132

 

Fully Diluted Earnings Per Share

 

$

1.10

 

$

1.26

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.750

 

$

0.705

 

 

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

 

5



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

19,139

 

$

21,935

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

23,485

 

21,616

 

Provision for doubtful accounts

 

661

 

562

 

Deferred income taxes and investment tax credits

 

4,276

 

2,090

 

Unrealized gain on purchased power contracts

 

(766

)

(1,578

)

Stock-based compensation expense

 

1,097

 

674

 

Net gain on sale of property

 

 

(594

)

Other – net

 

401

 

303

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable – customers

 

(3,902

)

(5,036

)

Unbilled revenue

 

(3,742

)

(3,003

)

Other accounts receivable

 

855

 

428

 

Receivable from the U.S. government

 

(423

)

173

 

Materials and supplies

 

(241

)

(227

)

Prepayments and other current assets

 

822

 

1,016

 

Regulatory assets — supply cost balancing accounts

 

(1,269

)

(3,451

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(6,510

)

(1,343

)

Other assets

 

(1,719

)

(1,572

)

Accounts payable

 

6,168

 

1,295

 

Income taxes receivable/payable

 

(2,866

)

1,342

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

4,791

 

383

 

Accrued pension and other postretirement benefits

 

(77

)

815

 

Other liabilities

 

3,162

 

6,395

 

Net cash provided

 

43,342

 

42,223

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(58,987

)

(32,832

)

Business acquisition

 

(2,298

)

 

Proceeds from sale of property

 

 

612

 

Net cash used

 

(61,285

)

(32,220

)

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of Common Shares

 

708

 

690

 

Proceeds from stock option exercises

 

666

 

3,097

 

Receipt of advances for and contributions in aid of construction

 

4,339

 

5,655

 

Refunds on advances for construction

 

(3,339

)

(4,326

)

Repayments of long-term debt

 

(272

)

(273

)

Net change in notes payable to banks

 

28,300

 

(3,000

)

Dividends paid

 

(12,934

)

(12,040

)

Other

 

18

 

605

 

Net cash provided (used)

 

17,486

 

(9,592

)

Net (decrease) increase in cash and cash equivalents

 

(457

)

411

 

Cash and cash equivalents, beginning of period

 

1,698

 

3,223

 

Cash and cash equivalents, end of period

 

$

1,241

 

$

3,634

 

 

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

 

6



Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS
(Unaudited)

 

(in thousands)

 

September 30,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

979,292

 

$

922,459

 

Electric

 

65,566

 

65,078

 

 

 

1,044,858

 

987,537

 

Less - Accumulated depreciation

 

(321,505

)

(298,856

)

 

 

723,353

 

688,681

 

Construction work in progress

 

45,299

 

43,552

 

Net utility plant

 

768,652

 

732,233

 

 

 

 

 

 

 

Other Property and Investments

 

7,739

 

7,838

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

532

 

1,389

 

Accounts receivable-customers (less allowance for doubtful accounts of $603 in 2008 and $519 in 2007)

 

18,929

 

15,741

 

Unbilled revenue

 

19,403

 

15,701

 

Inter-company receivable

 

148

 

563

 

Other accounts receivable (less allowance for doubtful accounts of $275 in 2008 and $442 in 2007)

 

2,044

 

3,195

 

Materials and supplies, at average cost

 

1,714

 

1,562

 

Regulatory assets – current

 

10,952

 

5,116

 

Prepayments and other current assets

 

1,746

 

2,595

 

Deferred income taxes - current

 

2,111

 

3,845

 

Total current assets

 

57,579

 

49,707

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

77,385

 

82,539

 

Other accounts receivable

 

10,085

 

9,723

 

Other

 

9,588

 

7,933

 

Total regulatory and other assets

 

97,058

 

100,195

 

 

 

 

 

 

 

Total Assets

 

$

931,028

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

 

(in thousands)

 

September 30,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

194,381

 

$

163,180

 

Earnings reinvested in the business

 

127,277

 

115,261

 

Total common shareholder’s equity

 

321,658

 

278,441

 

Long-term debt

 

260,660

 

260,941

 

Total capitalization

 

582,318

 

539,382

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt - current

 

318

 

309

 

Accounts payable

 

31,011

 

24,402

 

Inter-company payable

 

11,145

 

23,764

 

Income taxes payable to Parent

 

790

 

2,469

 

Accrued employee expenses

 

5,420

 

5,677

 

Accrued interest

 

5,065

 

2,424

 

Unrealized loss on purchased power contracts

 

788

 

1,554

 

Regulatory liabilities - current

 

 

173

 

Deferred income taxes - current

 

70

 

 

Other

 

13,353

 

13,459

 

Total current liabilities

 

67,960

 

74,231

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

80,303

 

78,917

 

Contributions in aid of construction - net

 

88,462

 

87,323

 

Deferred income taxes

 

80,962

 

78,805

 

Unamortized investment tax credits

 

2,268

 

2,336

 

Accrued pension and other postretirement benefits

 

20,774

 

20,851

 

Other

 

7,981

 

8,128

 

Total other credits

 

280,750

 

276,360

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

931,028

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Three Months Ended
September 30,

 

(in thousands)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

67,316

 

$

63,180

 

Electric

 

6,743

 

6,289

 

Total operating revenues

 

74,059

 

69,469

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

14,889

 

14,472

 

Power purchased for pumping

 

3,293

 

3,319

 

Groundwater production assessment

 

2,791

 

2,666

 

Power purchased for resale

 

3,345

 

3,176

 

Unrealized loss on purchased power contracts

 

3,741

 

896

 

Supply cost balancing accounts

 

(490

)

(1,541

)

Other operating expenses

 

6,055

 

5,943

 

Administrative and general expenses

 

13,054

 

9,997

 

Depreciation and amortization

 

7,252

 

6,925

 

Maintenance

 

3,289

 

3,706

 

Property and other taxes

 

2,791

 

2,738

 

Net loss on sale of property

 

 

11

 

Total operating expenses

 

60,010

 

52,308

 

 

 

 

 

 

 

Operating Income

 

14,049

 

17,161

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,018

)

(4,995

)

Interest income

 

284

 

570

 

Other

 

(22

)

77

 

 

 

(4,756

)

(4,348

)

 

 

 

 

 

 

Income from operations before income tax expense

 

9,293

 

12,813

 

 

 

 

 

 

 

Income tax expense

 

3,945

 

5,205

 

 

 

 

 

 

 

Net Income

 

$

5,348

 

$

7,608

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

181,235

 

$

170,762

 

Electric

 

21,754

 

21,413

 

Total operating revenues

 

202,989

 

192,175

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

35,572

 

35,058

 

Power purchased for pumping

 

7,365

 

7,841

 

Groundwater production assessment

 

8,056

 

7,494

 

Power purchased for resale

 

10,179

 

10,372

 

Unrealized gain on purchased power contracts

 

(766

)

(1,578

)

Supply cost balancing accounts

 

(1,269

)

(3,451

)

Other operating expenses

 

17,799

 

17,274

 

Administrative and general expenses

 

36,655

 

33,168

 

Depreciation and amortization

 

21,746

 

20,214

 

Maintenance

 

10,408

 

10,513

 

Property and other taxes

 

8,200

 

8,300

 

Net gain on sale of property

 

 

(594

)

Total operating expenses

 

153,945

 

144,611

 

 

 

 

 

 

 

Operating Income

 

49,044

 

47,564

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(15,035

)

(15,196

)

Interest income

 

1,370

 

1,631

 

Other

 

69

 

176

 

 

 

(13,596

)

(13,389

)

 

 

 

 

 

 

Income from operations before income tax expense

 

35,448

 

34,175

 

 

 

 

 

 

 

Income tax expense

 

14,576

 

14,195

 

 

 

 

 

 

 

Net Income

 

$

20,872

 

$

19,980

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY

STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

 

 

 

Nine Months Ended
September 30,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

20,872

 

$

19,980

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

21,746

 

20,214

 

Provision for doubtful accounts

 

628

 

383

 

Deferred income taxes and investment tax credits

 

4,180

 

2,214

 

Unrealized gain on purchased power contracts

 

(766

)

(1,578

)

Stock-based compensation expense

 

940

 

609

 

Net gain on sale of property

 

 

(594

)

Other — net

 

377

 

276

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable - customers

 

(3,810

)

(4,837

)

Unbilled revenue

 

(3,702

)

(2,874

)

Other accounts receivable

 

783

 

167

 

Materials and supplies

 

(152

)

(227

)

Prepayments and other current assets

 

849

 

1,029

 

Regulatory assets - supply cost balancing accounts

 

(1,269

)

(3,451

)

Other assets

 

(1,524

)

(1,643

)

Accounts payable

 

4,236

 

2,442

 

Inter-company receivable/payable

 

338

 

(1,012

)

Income taxes payable from Parent

 

(1,679

)

262

 

Accrued pension and other postretirement benefits

 

(77

)

815

 

Other liabilities

 

3,032

 

6,297

 

Net cash provided

 

45,002

 

38,472

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(55,455

)

(31,501

)

Proceeds from sale of property

 

 

612

 

Net cash used

 

(55,455

)

(30,889

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of Common Shares to Parent

 

30,000

 

 

Receipt of advances for and contributions in aid of construction

 

4,197

 

5,303

 

Refunds on advances for construction

 

(3,047

)

(4,126

)

Repayments of long-term debt

 

(272

)

(273

)

Net change in inter-company borrowings

 

(12,510

)

4,400

 

Dividends paid

 

(8,800

)

(12,900

)

Other

 

28

 

549

 

Net cash provided (used)

 

9,596

 

(7,047

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(857

)

536

 

Cash and cash equivalents, beginning of period

 

1,389

 

1,735

 

Cash and cash equivalents, end of period

 

$

532

 

$

2,271

 

 

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 255,000 water customers. GSWC also distributes electricity in several San Bernardino Mountain communities serving approximately 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric business, including properties, rates, services, facilities and other matters. CCWC is a public utility regulated by the Arizona Corporation Commission (“ACC”) serving over 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. ASUS performs water and wastewater related services and operations on a contract basis. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of the contracted services provided by ASUS and its wholly owned subsidiaries or by AWR. The consolidated financial statements include the accounts of AWR, GSWC, CCWC  and ASUS and its subsidiaries.  AWR’s assets, revenues and operations are primarily those of GSWC.

 

ASUS, through its wholly-owned subsidiaries, has entered into agreements with the U.S. government to operate and maintain the water and/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.  In September and October of 2007, ASUS was awarded contracts to operate and maintain the water and wastewater systems at Fort Jackson, South Carolina and at Fort Bragg/Pope AFB, North Carolina, respectively. These contracts  have substantially similar terms as the agreements previously executed by ASUS with the U.S. government.  PSUS commenced operations at Fort Jackson on January 2, 2008 and ONUS commenced operations at Fort Bragg on March 1, 2008, both following the expiration of transition periods.

 

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. Investments in partially-owned affiliates are accounted for by the equity method when Registrant’s ownership interest exceeds 20%. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal, recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2007 filed with the SEC.

 

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GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves.   On August 25, 2008, AWR amended its $85 million syndicated credit facility, to increase the aggregate bank commitments by $30 million to $115 million. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations.   GSWC also has the right to obtain letters of credit under this facility. Amounts owed to AWR by GSWC for borrowings under this facility represent the majority of GSWC’s inter-company payables on GSWC’s balance sheets as of September 30, 2008 and December 31, 2007. The interest rate charged to GSWC is sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliates using allocation factors agreed upon by the CPUC.

 

Sales and Use Taxes:  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to use public right of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $718,000 and $716,000 for the three months ended September 30, 2008 and 2007, respectively, and $2,052,000 and $2,069,000 for the nine months ended September 30, 2008 and 2007, respectively. When GSWC acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis.

 

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

 

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

 

In March 2007, the FASB Emerging Issues Task Force (“EITF”) issued EITF No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment”, which concludes that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees and directors for equity classified as nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. Registrant has commenced recognizing this tax

 

13



Table of Contents

 

benefit as an increase in additional paid-in capital beginning January 1, 2008. The impact of this change was not material to Registrant’s consolidated financial statements.

 

In December 2007, the SEC issued Staff Accounting Bulletin (“SAB”) No. 110, “Share-Based Payment”. Effective January 1, 2008, Registrant adopted the guidance of  SAB No. 110, which requires Registrant to develop expected option terms by reviewing detailed external information about employee exercise behavior.  The simplified method is no longer permitted if such information is available.  As a result of the new guidance, Registrant’s expected term used for options granted in 2008 was 5 years as compared to 6 years which was derived under the simplified method used for grants in prior years.

 

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

 

In December 2007, the FASB also issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51”. The objective of SFAS No. 160 is to improve the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. This statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations.  SFAS No. 160 amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It also amends certain of ARB 51’s consolidation procedures for consistency with the requirements of SFAS No. 141(R). SFAS No. 160 is effective for financial statements issued for fiscal years beginning after December 15, 2008.  Registrant is evaluating the potential impact of SFAS No. 160; however, this standard is not expected to have any material impact on Registrant’s future consolidated financial statements and disclosures.

 

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

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles”.  SFAS No. 162 identifies the sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States.  SFAS No. 162 will be effective 60 days following the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411(The Meaning of Present Fairly in Conformity With Generally Accepted Accounting Principles). The FASB does not expect SFAS No. 162 will result in a change in current practice. However, transition provisions have been provided in the unusual circumstance that the application of the provisions of SFAS No. 162 results in a change in practice.  Registrant does not expect any impact as a result of adopting SFAS No. 162.

 

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 September 30, 2008, Registrant had approximately $13.4 million of regulatory assets not accruing carrying costs. Of this amount, $4.9 million relates to deferred income taxes representing accelerated tax benefits flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense, and a $5.9 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)

 

September 30,
2008

 

December 31,
2007

 

GSWC

 

 

 

 

 

Electric supply cost balancing account

 

$

16,193

 

$

18,318

 

Water supply cost balancing accounts

 

12,035

 

8,525

 

Costs deferred for future recovery on Aerojet case

 

20,822

 

21,244

 

Pensions and other postretirement obligations

 

10,542

 

11,443

 

Flow-through taxes, net

 

4,933

 

5,220

 

Electric transmission line abandonment costs

 

3,041

 

3,157

 

Asset retirement obligations

 

3,809

 

3,547

 

Low income rate assistance balancing accounts

 

4,948

 

4,147

 

General rate case memorandum accounts

 

5,933

 

7,162

 

Santa Maria adjudication memorandum accounts

 

4,039

 

4,005

 

Refund of water right lease revenues

 

(2,521

)

(2,945

)

Other regulatory assets, net

 

4,563

 

3,659

 

Total GSWC

 

$

88,337

 

$

87,482

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

54

 

$

52

 

Other regulatory liabilities, net

 

(441

)

(538

)

Total AWR

 

$

87,950

 

$

86,996

 

 

Regulatory matters are discussed in detail in the consolidated financial statements and the notes thereto included in the Form 10-K for the year ended December 31, 2007 filed with the SEC.  The discussion below focuses on significant matters and changes since December 31, 2007.

 

Supply Cost Balancing Accounts:

 

Electric Supply Cost Balancing Account—Electric power costs incurred by GSWC’s Bear Valley Electric Service (“BVES”) division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $16.2 million at September 30, 2008.  Of this amount, approximately $3.7 million relates to the under-collection remaining as of September 30, 2008 that was incurred during the energy crisis in late 2000 and 2001, discussed below.  The remaining $12.5 million in the electric supply cost balancing account relates to $3.3 million from the tariff charged to GSWC by Southern California Edison (“Edison”) for the abandonment of a transmission line upgrade discussed below, and $9.2 million for changes in purchased energy and power system delivery costs including interest, also 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 31,939,690 and 31,294,179 kilowatt hours of electricity to its BVES customers for the three months ended September 30, 2008 and 2007, respectively, and sold 105,354,442 and 104,702,201 kilowatt hours of electricity to its customers for the nine months ended September 30, 2008 and 2007, respectively. As a result of the surcharge, the supply cost balancing account was reduced by approximately $720,000 and $684,000 for the three months September 30, 2008 and 2007, respectively, and $2,361,000 and $2,265,000 for the nine months ended September 30, 2008 and 2007, respectively. 

 

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Approximately $19.4 million of the $23.1 million under-collection incurred during the energy crisis in late 2000 and 2001 has been 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 regulatory approval of any amounts not recovered through this surcharge.

 

Changes in purchased energy and power system delivery costs also impact the electric supply cost balancing account. The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of a 2001 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 September 30, 2008 and 2007 and the nine months ended September 30, 2008.  During the nine months ended September 30, 2007, the amount expensed was $29,000.

 

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 not included in rates have been included in the balancing account at September 30, 2008 for subsequent recovery from customers, subject to CPUC approval.

 

The power system delivery costs are not subject to the $77 per MWh price cap referenced above.  Other components, such as interest accrued on the cumulative under-collected balance and power lost during transmission, also affect the balance of the electric supply cost balancing account.

 

In summary, for the three months ended September 30, 2008 and 2007, the under-collection decreased by approximately $378,000 and $345,000, respectively, and $2,125,000 and $1,534,000 for the nine months ended September 30, 2008 and 2007, respectively.

 

Water Supply Cost Balancing Accounts—As permitted by the CPUC, Registrant maintains water supply cost balancing accounts for GSWC to account for under-collections and over-collections of revenues designed to recover such costs.  The supply cost balancing accounts track differences between the current cost for supply items (water, power, and pump taxes) charged by GSWC’s suppliers and the cost for those items incorporated into GSWC’s rates. Under-collections (recorded as regulatory assets) occur when the current cost exceeds the amount in rates for these items and, conversely, over-collections (recorded as regulatory liabilities) occur when the current cost of these items is less than the amount in rates.  Typically, under-collections or over-collections, when they occur, are tracked in the supply cost balancing accounts for future recovery or refund through a surcharge (in the event of an under-collection) or through a surcredit (in the event of an over-collection) on customers’ bills.  Registrant accrues interest on its 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 September 30, 2008 and 2007, approximately $1.8 million and $1.7 million of under-collections (including interest), respectively, were recorded in the water supply cost balancing accounts.  For the nine months ended September 30, 2008 and 2007, approximately $3.9 million and $4.3 million 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 and nine months ended September 30, 2008, approximately $860,000 and $613,000, respectively, of net under-collection amortization  decreased the water supply cost balancing accounts.   During the three and nine months ended September 30, 2007, approximately $195,000 and $765,000, respectively, of net over-collection amortization increased the water supply cost balancing accounts.

 

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As of September 30, 2008, there is approximately $12.0 million net under-collection in the water supply cost balancing accounts.  Of this amount, approximately $8.2 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.   The remaining $1.2 million for Region III will be included for recovery in a future filing.  Further, the remaining $3.8 million net under-collections in the water supply cost balancing accounts relate to GSWC’s Region I net under-collection of $1.9 million and Region II’s net under-collection of $1.9 million.  Currently, there are surcharges in place in Region I expiring in 2009 and 2010 to recover this under-collection. A surcredit in Region II to refund a previous over-collection expired in August 2008.   During the fourth quarter of 2008, GSWC intends to file for supply expense offsets in Regions II and III to reduce the level of under-collections being accumulated.

 

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 that will permit GSWC to  recover supply costs  related to changes in water supply mix. GSWC intends to implement this  modified supply cost balancing account in November 2008.  This account will  replace the current water supply cost balancing account procedure for costs incurred after the modified supply cost balancing account is implemented.

 

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 $299,000 and $309,000 was billed to customers during the three months ended September 30, 2008 and 2007, respectively, and $789,000 and $813,000 during the nine months ended September 30, 2008 and 2007, respectively.  GSWC will keep the Aerojet memorandum account open until the earlier of full amortization of the balance or 20 years.  However, no costs will be added to the memorandum account, other than on-going interest charges approved by the CPUC decision. Pursuant to the decision, additional interest of approximately $111,000 and $273,000 was added to the Aerojet litigation memorandum account during the three months ended September 30, 2008 and 2007, respectively, and $367,000 and $827,000 was added to this account during the nine months ended September 30, 2008 and 2007, respectively.

 

It is management’s intention to offset any settlement proceeds received from Aerojet, pursuant to the settlement agreement, against the balance in the memorandum account, with the exception of an $8.0 million payment guaranteed by Aerojet.  This payment, plus interest on the unpaid balance, is scheduled to be paid by Aerojet in installments over five years beginning in 2009.  Aerojet has also agreed to reimburse GSWC an additional $17.5 million, plus interest accruing from January 1, 2004, for GSWC’s past legal and expert costs. The recovery of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development.

 

Santa Maria Adjudication Memorandum Accounts:

 

As more fully discussed in Note 7, GSWC has incurred costs of approximately $7.0 million as of September 30, 2008, including legal and expert witness fees, in defending its rights to the groundwater supply in the Santa Maria Basin for use by its customers in Santa Barbara and San Luis Obispo Counties. Such costs had been recorded in utility plant for future rate recovery. In February 2006, GSWC filed an application with the CPUC for recovery of $5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005. In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates (“DRA”) authorizing recovery of the $5.5 million requested in GSWC’s application. The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit. In May 2007, the CPUC issued a decision that approved the settlement with the DRA. Pursuant to the decision, GSWC was authorized to place in rate base $2.7 million of the $5.5 million of previously incurred litigation costs in the Santa Maria groundwater basin adjudication.

 

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GSWC was also authorized to amortize, with interest, the remaining $2.8 million of the $5.5 million in rates over a ten-year period. This amount has been transferred into a separate memorandum account included within regulatory assets and a surcharge has been implemented in the third quarter of 2007 for recovery of these costs. A rate surcharge generating approximately $113,000 and $79,000 was billed to customers during the three months ended September  30, 2008 and 2007, respectively, and $247,000 and $79,000 was billed to customers during the nine months ended September 30, 2008 and 2007, respectively.  All litigation costs, including interest, that have been incurred since December 31, 2005, totaling approximately $1.5 million, have also been transferred from rate base to a separate new memorandum account, subject to a reasonableness review by the CPUC in a subsequent phase of this proceeding or in a new proceeding.  In April 2008, the Administrative Law Judge closed the proceeding without ruling on the stipulation or authorizing recovery of the remaining costs. The ruling directed GSWC to file a new application. In accordance with this ruling, GSWC intends to file a new application.  Management believes that these additional costs will be approved and that recovery of these costs through rates is probable.

 

General Rate Case Memorandum Accounts:

 

For GSWC’s Region III rate case approved by the CPUC on January 12, 2006, the CPUC also approved the second year increases for Region III in an estimated amount of approximately $2.3 million, effective January 1, 2007. Based on certain corrections to the rate calculation, GSWC also filed an Application for Rehearing to request additional revenues in connection with the January 2006 decision.  On July 31, 2008, the CPUC adopted a stipulation jointly filed by GSWC and DRA.  The stipulation addressed all of the pending issues including proposing a 12-month surcharge enabling GSWC to recover revenues of approximately $541,000 for the period January 1, 2006 through May of 2008.  As a result of the CPUC’s approval, a regulatory asset of $541,000 was recorded in July 2008 with a corresponding increase to income.  GSWC expects to recover this regulatory asset  through the 12-month surcharge.

 

Other Regulatory Matters:

 

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

 

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. GSWC has formally contested the potential penalty reflected in the compliance report. The CPUC has been considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like BVES.   On 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 is not expecting to 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 September 30, 2008.

 

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Note 3 — Earnings per Share/Capital Stock:

 

Registrant computes earnings per share (“EPS”) in accordance with EITF No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”.  EITF No. 03-06 provides the accounting guidance for the effect of participating securities on EPS calculations and the use of the “two-class” method. The guidance requires the use of the “two-class” method of computing EPS for companies with participating securities. The “two-class” method is an earnings allocations formula that determines EPS for each class of common stock and participating security.  AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with common shares that have been issued under AWR’s 2000 Stock Incentive Plan, 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 September 30,

 

For The Nine Months Ended September 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

2008

 

2007

 

Net income

 

$

4,552

 

$

7,629

 

$

19,139

 

$

21,935

 

Less: (a)  Distributed earnings to common shareholders

 

4,317

 

4,041

 

12,939

 

12,049

 

                Distributed earnings to participating securities

 

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