AWR-2014.12.31-10K

 
 
 
 
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
 
FORM 10-K
 
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 
(Mark One)
x       Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended December 31, 2014 or
¨       Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from          to
Commission
File Number
 
Registrant, State of Incorporation
Address, Zip Code and Telephone Number
 
IRS Employer
Identification No.
001-14431
 
American States Water Company
(Incorporated in California)
630 E. Foothill Boulevard, San Dimas, CA 91773-1212
(909) 394-3600
 
95-4676679
 
 
 
 
 
001-12008
 
Golden State Water Company
(Incorporated in California)
630 E. Foothill Boulevard, San Dimas, CA 91773-1212
(909) 394-3600
 
95-1243678
 
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
American States Water Company Common Shares
 
New York Stock Exchange
 Securities registered pursuant to Section 12(g) of the Act:   None
 
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
 
American States Water Company
 
Yes x No ¨
 
 
Golden State Water Company
 
Yes ¨No x
 
 
Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
 
American States Water Company
 
Yes ¨ No x
 
 
Golden State Water Company
 
Yes ¨ No x
 
 
Indicate by check mark whether Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
 
American States Water Company
 
Yes x No ¨
 
 
Golden State Water Company
 
Yes x No ¨
 
 
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).
 
American States Water Company
 
Yes x No ¨
 
 
Golden State Water Company
 
Yes x No ¨
 
 
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 



American States Water Company
 
 
 
 
 
 
Large accelerated filer x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Golden State Water Company
 
 
 
 
 
 
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨
 
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
 
 
The aggregate market value of all voting Common Shares held by non-affiliates of American States Water Company was approximately $1,288,725,000 and $1,517,357,000 on June 30, 2014 and February 23, 2015, respectively. The closing price per Common Share of American States Water Company on February 23, 2015, as quoted in The Wall Street Journal website, was $39.70.  As of February 23, 2015, the number of Common Shares of American States Water Company outstanding was 38,220,567. As of that same date, American States Water Company owned all 146 outstanding Common Shares of Golden State Water Company. The aggregate market value of all voting stock held by non-affiliates of Golden State Water Company was zero on June 30, 2014 and February 23, 2015.
Golden State Water Company meets the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.
 Documents Incorporated by Reference:
Portions of the Proxy Statement of American States Water Company will be subsequently filed with the Securities and Exchange Commission as to Part III, Item Nos. 10, 11, 13 and 14 and portions of Item 12, in each case as specifically referenced herein.
 
 
 
 
 



Table of Contents
AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
 
FORM 10-K
 
INDEX

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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PART I 

Item 1. Business
 
This annual report on Form 10-K is a combined report being filed by two separate Registrants, American States Water Company (hereinafter “AWR”), and Golden State Water Company (hereinafter “GSWC”). 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.
 
AWR makes its periodic reports, Form 10-Q and Form 10-K, and current reports, Form 8-K, available free of charge through its website, www.aswater.com, as soon as material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”). Such reports are also available on the SEC’s internet website at http://www.sec.gov. AWR also makes available free of charge its code of business conduct and ethics, its corporate governance guidelines and the charters of its Board of Directors, Nominating and Governance Committee, Compensation Committee, and Audit and Finance Committee through its website or by calling (800) 999-4033. AWR and GSWC have filed the certification of officers required by Section 302 of the Sarbanes-Oxley Act as Exhibits 31.1 and 31.2 to its Form 10-K for the year ended December 31, 2014.
 
General
 
AWR is the parent company of GSWC and American States Utility Services, Inc. (“ASUS”) and its subsidiaries (Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) 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 two principal business units, water and electric service utility operations, conducted through GSWC, and contracted services conducted through ASUS and its subsidiaries. FBWS, TUS, ODUS, PSUS and ONUS may be referred to herein individually as a “Military Utility Privatization Subsidiary” or collectively as the “Military Utility Privatization Subsidiaries.”
 
GSWC is a California public utility company engaged principally in the purchase, production and distribution of water in 75 communities in 10 counties in the State of California.  GSWC is regulated by the California Public Utilities Commission (“CPUC”).  It was incorporated as a California corporation on December 31, 1929. GSWC also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County, California through its Bear Valley Electric Service (“BVES”) division.
 
GSWC served 258,191 water customers and 23,716 electric customers at December 31, 2014, or a total of 281,907 customers, compared with 257,102 water customers and 23,615 electric customers at December 31, 2013, or a total of 280,717 customers. 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 years ended December 31, 2014, 2013 and 2012.
 
ASUS, through its wholly-owned subsidiaries, has contracted with the U.S. government to provide water and/or wastewater services at various military installations. ASUS operates, maintains and performs construction activities on water and/or wastewater systems at various United States military bases pursuant to 50-year firm, fixed-price with prospective price-redetermination contracts.  Each of the contracts with the U.S. government may be subject to termination, 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. The contract price for each of these contracts is subject to redetermination every three years following the initial two years of the contract. Prices are also 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 the contract.  AWR guarantees performance of ASUS’s military privatization 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 and extending into southeastern New Mexico effective October 1, 2004;
 
TUS - water and wastewater systems at Andrews Air Force Base in Maryland effective February 1, 2006;


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

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 Army Airfield and Camp Mackall, North Carolina effective March 1, 2008.
 
Certain financial information for each of AWR’s business segments - water distribution, electric distribution, and contracted services - is set forth in Note 16 to the Notes to Consolidated Financial Statements of American States Water Company and its subsidiaries. AWR’s water and electric distribution segments are not dependent upon a single or only a few customers.  The U.S. government is the primary customer for ASUS’s contracted services.  ASUS, from time to time, performs work at military bases for other prime contractors of the U.S. government.
 
The revenue from AWR’s segments is seasonal. The impact of seasonality on these AWR businesses is discussed in more detail in Item 1A — “Risk Factors.”
 
Environmental matters and compliance with such laws and regulations are discussed in detail in Item 7 — “Management’s Discussion and Analysis of Financial Condition and Results of Operation” under the section titled “Environmental Matters.”
 
Competition
 
The businesses of GSWC are substantially free from direct and indirect competition with other public utilities, municipalities and other public agencies within their existing service territories.  However, GSWC may be subject to eminent domain proceedings in which government agencies, under state law, may acquire GSWC’s water systems if doing so is necessary and in the public’s interest. GSWC competes with governmental agencies and other investor-owned utilities in connection with offering service to new real estate developments on the basis of financial terms, availability of water and ability to commence providing service on a timely basis. AWR’s other subsidiary, ASUS, actively competes for business with other investor-owned utilities, other third party providers of water and/or wastewater services and governmental entities primarily on the basis of price and quality of service.
 
AWR Workforce
 
AWR and its subsidiaries had a total of 707 employees as of February 19, 2015.  GSWC had 552 employees as of February 19, 2015.  Sixteen employees in GSWC’s Bear Valley Electric Service (“BVES”) customer service area are covered by a collective bargaining agreement with the International Brotherhood of Electrical Workers, which expires in December 2017.  Sixty-three employees in GSWC’s Region II are covered by a collective bargaining agreement with the Utility Workers Union of America, which expired in 2014. GSWC is currently in negotiations with this union on a new labor agreement. GSWC has no other unionized employees.
 
ASUS had 155 employees as of February 19, 2015.  Fifteen of the employees at FBWS are covered by a collective bargaining agreement with the International Union of Operating Engineers. This agreement expires in 2017.

Forward-Looking Information
 
This Form 10-K and the documents incorporated herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.  For example, when we use words such as “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements.  We are not able to predict all the factors that may affect future results.  We caution you that any forward-looking statements made by us are not guarantees of future performance and actual results may differ materially from those in our forward-looking statements.  Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements, or from historical results, include, but are not limited to:
 

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The outcome of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in our general rate cases and the results of independent audits of our construction contracting procurement practices or other independent audits of our costs
 
Changes in the policies and procedures of the CPUC
 
Timeliness of CPUC action on rates

Availability of water supplies, which may be adversely affected by the California drought, changes in weather patterns in the West, contamination and court decisions or other governmental actions restricting the use of water from the Colorado River, the California State Water Project, and/or pumping of groundwater

Our ability to efficiently manage GSWC capital expenditures and operating and maintenance expenses within CPUC authorized levels and timely recovery of our costs through rates

The impact of increasing opposition to GSWC rate increases on our ability to recover our costs through rates

The impact of condemnation actions on the size of our customer base

Our ability to forecast the costs of maintaining GSWC’s aging water and electric infrastructure

Our ability to recover increases in permitting costs and in costs associated with negotiating and complying with the terms of our franchise agreements with cities and counties and other demands made upon us by the cities and counties in which GSWC operates

Changes in accounting valuations and estimates, including changes resulting from our assessment of anticipated recovery of regulatory assets, liabilities and revenues subject to refund or regulatory disallowances

Changes in environmental laws and water and wastewater quality requirements and increases in costs associated with complying with these laws and requirements

Our ability to obtain adequate, reliable and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our water and wastewater operations
 
Our ability to recover the costs associated with the contamination of GSWC’s groundwater supplies from parties responsible for the contamination or through the ratemaking process, and the time and expense incurred by us in obtaining recovery of such costs
 
Adequacy of our electric division's power supplies and the extent to which we can manage and respond to the volatility of electric and natural gas prices
 
Our electric operation's ability to comply with the CPUC’s renewable energy procurement requirements
 
Changes in GSWC long-term customer demand due to changes in customer usage patterns as a result of conservation efforts, regulatory changes affecting demand such as new landscaping or irrigation requirements, recycling of water by the customer or purchase of recycled water supplied by other parties, unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions and cost increases
 
Changes in accounting treatment for regulated utilities

Changes in estimates used in ASUS’s revenue recognition under the percentage of completion method of accounting for construction activities at our contracted services business
 
Termination, in whole or in part, of one or more of our Military Utility Privatization Subsidiaries' contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default

Termination of contracts and suspension or debarment for a period of time from contracting with the government due to violations of federal law or regulations in connection with military utility privatization activities


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Failure of the U.S. government to make timely payments to ASUS for water and/or wastewater services at military bases as a result of fiscal uncertainties over the funding of the U.S. government
 
Delays in obtaining redetermination of prices or equitable adjustments to our prices on one or more of our contracts to provide water and/or wastewater services at military bases

Disallowance of costs on any of our contracts to provide water and/or wastewater services at military bases as a result of audits, cost reviews or investigations by contracting agencies
 
Inaccurate assumptions used in preparing bids in our contracted services business

Failure of the wastewater systems that we operate on military bases resulting in untreated wastewater or contaminants spilling into nearby properties, streams or rivers

Failure to comply with the terms of our military privatization contracts

Failure of any of our subcontractors to perform services for us in accordance with the terms of our military privatization contracts
 
Issues with the implementation, maintenance and/or upgrading of our information technology systems
 
General economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers
 
Explosions, fires, accidents, mechanical breakdowns, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions
 
The impact of storms, earthquakes, floods, mudslides, drought, wildfires, disease and similar natural disasters, or acts of terrorism or vandalism, that affect customer demand or that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely
 
Potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber-attack or other cyber incident
 
Restrictive covenants in our debt instruments or changes to our credit ratings on current or future debt that may increase our financing costs or affect our ability to borrow or make payments on our debt

Our ability to access capital markets and other sources of credit in a timely manner on acceptable terms

Please consider our forward-looking statements in light of these risks as you read this Form 10-K.  We qualify all of our forward-looking statements by these cautionary statements.


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Item 1A — Risk Factors
 
You should carefully read the risks described below and other information in this Form 10-K in order to understand certain of the risks of our business.
 
Our business is heavily regulated and, as a result, decisions by regulatory agencies and changes in laws and regulations can significantly affect our business
 
Our revenues at GSWC depend substantially on the rates and fees we charge our customers and the ability to recover our costs on a timely basis, including the ability to recover the costs of purchased water, groundwater assessments, electric power, natural gas, chemicals, water treatment, security at water facilities and preventative maintenance and emergency repairs. Any delays by the CPUC in granting rate relief to cover increased operating and capital costs at our public utilities or delays in obtaining approval of our requests at ASUS for equitable adjustments or price redeterminations for contracted services from the U.S. government may adversely affect our financial performance. We may file for interim rates in California in situations where there may be delays in granting final rate relief during a general rate case proceeding. If the CPUC approves lower rates, the CPUC will require us to refund to customers the difference between the interim rates and the rates approved by the CPUC. Similarly, if the CPUC approves rates that are higher than the interim rates, the CPUC may authorize us to recover the difference between the interim rates and the final rates.  Interim rates may also be granted by the U.S. government, should there be delays in the price redetermination process.
 
Regulatory decisions may also impact prospective revenues and earnings, affect the timing of the recognition of revenues and expenses, may overturn past decisions used in determining our revenues and expenses and could result in impairment charges and customer refunds. Management continually evaluates the anticipated recovery of regulatory assets, liabilities and revenues subject to refund and provides for allowances and/or reserves as deemed necessary. In the event that our assessment of the probability of recovery through the ratemaking process is incorrect, we will adjust the associated regulatory asset or liability to reflect the change in our assessment or any regulatory disallowances.  A change in our evaluation of the probability of recovery of regulatory assets or a regulatory disallowance of all or a portion of our costs could have a material adverse effect on our financial results.
 
We are also, in some cases, required to estimate future expenses and in others, we are required to incur the expense before recovering costs. As a result, our revenues and earnings may fluctuate depending on the accuracy of our estimates, the timing of our investments or expenses or other factors. If expenses increase significantly over a short period of time, we may experience delays in recovery of these expenses, the inability to recover carrying costs for these expenses and increased risks of regulatory disallowances or write-offs.
 
Regulatory agencies may also change their rules and policies which may adversely affect our profitability and cash flows. Changes in policies of the U.S. government may also adversely affect one or more of our Military Utility Privatization Subsidiaries. In certain circumstances, the U.S. government may be unwilling or unable to appropriate funds to pay costs mandated by changes in rules and policies of federal or state regulatory agencies. The U.S. government may disagree with the increases that we request and may delay approval of requests for equitable adjustment or redetermination of prices which could adversely affect our anticipated rates of return.
 
We may also be subject to fines or penalties if a regulatory agency determines that we have failed to comply with laws, regulations or orders applicable to our businesses, unless we appeal this determination, or our appeal of an adverse determination is denied. Regulatory agencies may also disallow certain costs if audit findings determine that we have failed to comply with our policies and procedures for procurement or other practices.
 
Our costs involved in maintaining water quality and complying with environmental regulation have increased and are expected to continue to increase
 
Our capital and operating costs at GSWC can increase substantially as a result of increases in environmental regulation arising from increases in the cost of disposing of residuals from our water treatment plants, upgrading and building new water treatment plants, compliance monitoring activities and securing alternative supplies when necessary.  GSWC may be able to recover these costs through the ratemaking process. We may also be able to recover these costs under settlement and contractual arrangements.
 




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We may sustain losses that exceed or are excluded from our insurance coverage or for which we are not insured
 
We are, from time to time, parties to legal or regulatory proceedings.  These proceedings may pertain to regulatory investigations, employment matters or other disputes.  Management periodically reviews its assessment of the probable outcome of these proceedings, the costs and expenses reasonably expected to be incurred, and the availability and extent of insurance coverage.  On the basis of this review, management establishes reserves for such matters.  We may, however, from time to time be required to pay fines, penalties or damages that exceed our insurance coverage and/or reserves if our estimate of the probable outcome of such proceedings proves to be inaccurate.
 
We maintain insurance coverage as part of our overall legal and risk management strategy to minimize our potential liabilities.  However, our insurance policies contain exclusions and other limitations that may not cover our potential liabilities. Generally, our insurance policies cover property, worker’s compensation, employer’s liability, general liability and automobile liability. Each policy includes deductibles or self-insured retentions and policy limits for covered claims.  As a result, we may sustain losses that exceed or that are excluded from our insurance coverage or for which we are not insured.
 
Additional Risks Associated with our Public Utility Operations
 
Our operating costs may increase as a result of groundwater contamination
 
Our operations can be impacted by groundwater contamination in certain service territories.  Historically, we have taken a number of steps to address contamination, including the removal of wells from service, decreasing the amount of groundwater pumped from wells in order to slow the movement of plumes of contaminated water, constructing water treatment facilities and securing alternative sources of supply from other areas not affected by the contamination.  In emergency situations, we have supplied our customers with bottled water until the emergency situation has been resolved.
 
Our ability to recover these types of costs depends upon a variety of factors, including approval of rate increases, the willingness of potentially responsible parties to settle litigation and otherwise address the contamination and the extent and magnitude of the contamination. We may recover costs from certain third parties that may be responsible, or potentially responsible, for groundwater contamination. However, we often experience delays in obtaining recovery of these costs and incur additional costs associated with seeking recovery from responsible or potentially responsible parties which may adversely impact our liquidity. In some events we may be unable to recover all of these costs from third parties due to the inability to identify the potentially responsible parties, the lack of financial resources of responsible parties or the high litigation costs associated with obtaining recovery from responsible or potentially responsible parties.

We can give no assurance regarding the adequacy of any such recovery to offset the costs associated with contamination or the cost of recovery of any legal costs. To date, the CPUC has permitted us to establish memorandum accounts for potential recovery of these types of costs when they arise.
 
Management believes that rate recovery, proper insurance coverage and reserves are in place to appropriately manage these types of contamination issues.  However, such issues, if ultimately resolved unfavorably to us, could, in the aggregate, have a material adverse effect on our results of operations and financial condition.
 
The adequacy of our water supplies depends upon weather and a variety of other uncontrollable factors

The adequacy of our water supplies varies from year to year depending upon a variety of factors, including:

*
Rainfall, basin replenishment, flood control, snow pack levels in California and the West, reservoir levels and availability of reservoir storage;
*
Availability of Colorado River water and imported water from the State Water Project;
*
The amount of usable water stored in reservoirs and groundwater basins;
*
The amount of water used by our customers and others;
*
Water quality;
*
Legal limitations on production, diversion, storage, conveyance and use; and
*
Climate change.
 

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The extended California drought and changes in weather patterns in the West, population growth and changes in customer usage patterns in California have caused increased stress on surface water supplies and groundwater basins. In addition, low or no allocations of water from the State Water Project, low reservoir levels and court-ordered pumping restrictions on water obtained from the Sacramento-San Joaquin Delta decrease or eliminate the amount of water Metropolitan Water District of Southern California, or MWD, and other state water contractors are able to import from northern California. We have implemented tiered rates and other practices in order to encourage water conservation. We are also acting to secure additional supplies from desalination and water transfers. It is unlikely, however, that any of these efforts will enable us to address the near term impacts of the extended drought in California. Moreover, we cannot predict the extent to which these efforts to reduce stress on our water supplies will be successful or sustainable, or the extent to which these efforts will enable us to continue to satisfy all of the water needs of our customers.

Water shortages at GSWC may:
 
*
adversely affect our supply mix, for instance, by causing increased reliance upon more expensive water sources;
*
adversely affect our operating costs, for instance, by increasing the cost of producing water from more highly contaminated aquifers or requiring us to transport water over longer distances, truck water to water systems or adopt other emergency measures to enable us to continue to provide water service to our customers;
*
result in an increase in our capital expenditures over the long-term, for example by requiring future construction of pipelines to connect to alternative sources of supply, new wells to replace those that are no longer in service or are otherwise inadequate to meet the needs of our customers and reservoirs and other facilities to conserve or reclaim water;
*
adversely affect the volume of water sold as a result of such factors as mandatory or voluntary conservation efforts by customers, changes in customer conservation patterns, recycling of water by customers and imposition of new regulations impacting such things as landscaping and irrigation patterns;
*
adversely affect aesthetic water quality if we are unable to flush our water systems as frequently due to water shortages or drought restrictions; and
*
result in customer dissatisfaction and harm to our reputation if water service is reduced, interrupted or otherwise adversely affected as a result of the California drought, water contamination or other causes.

Our liquidity may be adversely affected by changes in water supply costs
 
We obtain our water supplies for GSWC from a variety of sources. For example, water is pumped from aquifers within our service areas to meet a portion of the demands of our customers. Our source of supply varies among our water systems. Certain systems obtain all of their supply from wells; some systems purchase all of the supply from wholesale suppliers; and other systems obtain the supply from a combination of wells and wholesale suppliers. When water produced from wells is insufficient to meet customer demand or when such production is interrupted, we have purchased water from other suppliers. As a result, our cost of providing, distributing and treating water for our customers’ use can vary significantly.

Furthermore, imported water wholesalers, such as MWD may not always have an adequate supply of water to sell to us. Wholesale water suppliers may increase their prices for water delivered to us based on factors that affect their operating costs. Purchased water rate increases are beyond our control.

GSWC has implemented a modified supply cost balancing account ("MCBA") to track and recover costs from supply mix changes and rate changes by wholesale suppliers, as authorized by the CPUC. However, cash flows from operations can be significantly affected as much of the surcharges or surcredits we recognize in the MCBA account are collected from or refunded to customers primarily through surcharges generally over a twelve to eighteen month period.

Our liquidity and earnings may be adversely affected by maintenance costs
 
Some of our infrastructure in California is more than 50 years old.  We have experienced leaks and mechanical problems in some of these older systems.  In addition, well and pump maintenance expenses are affected by labor and material costs and more stringent water discharge requirements. These costs can increase substantially and unexpectedly.
 
We include estimated increases in maintenance costs for future years in each general rate case filed by GSWC for possible recovery. We may not recover overages from those estimates in rates.

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Our liquidity and earnings may be adversely affected by our conservation efforts

Our water utility business is heavily dependent upon revenue generated from rates charged to our residential customers for the volume of water used. The rates we charge for water are regulated by the CPUC and may not be adequately adjusted to reflect changes in demand. Declining usage also negatively impacts our long-term operating revenues if we are unable to secure rate increases or if growth in the residential customer base does not occur to the extent necessary to offset the per customer residential usage decline. 

Conservation by all customer classes at GSWC is a top priority.  However, customer conservation will result in lower volumes of water sold.  We may experience a decline in per residential customer water usage due to factors such as:

*      conservation efforts to reduce costs;
*      drought conditions resulting in additional water conservation;
*      the use of more efficient household fixtures and appliances by residential consumers to save water;
*      voluntary or mandatory changes in landscaping and irrigation patterns; and
*      recycling of water by our customers.

            These types of changes may result in permanent decreases in demand even if our water supplies are sufficient to meet higher levels of demand after the current drought ends.  In addition, governmental restrictions on water usage during drought conditions may result in a decreased demand for our water, even if our water reserves are sufficient to serve our customers during these drought conditions.

We implemented a CPUC-approved water revenue adjustment mechanism ("WRAM") at GSWC which has the effect of reducing the adverse impact of our customers’ conservation efforts on revenues.  However, cash flows from operations can be significantly affected as much of the surcharges or surcredits we recognize in these accounts are collected from or refunded to customers primarily through surcharges generally over a twelve, eighteen or thirty-six month period. Regardless of whether we may surcharge our customers during a conservation period, they may use less water even after a drought has passed because of conservation patterns developed during the drought.

Our earnings may be affected, to some extent, by weather during different seasons
 
The demand for water and electricity varies by season.  For instance, there can be a higher level of water consumption during the third quarter of each year when weather in California tends to be hot and dry.  During unusually wet weather, our customers generally use less water.  The CPUC-approved WRAM helps mitigate fluctuations in revenues due to changes in water consumption by our customers in California.
 
The demand for electricity in our electric customer service area is greatly affected by winter snows. An increase in winter snows reduces the use of snowmaking machines at ski resorts in the Big Bear area and, as a result, reduces our electric revenues.  Likewise, unseasonably warm weather during a skiing season may result in temperatures too high for snowmaking conditions, which also reduces our electric revenues.  GSWC has implemented a CPUC-approved base revenue requirement adjustment mechanism for our electric business which helps mitigate fluctuations in the revenues of our electric business due to changes in the amount of electricity used by GSWC’s electric customers.

Our liquidity may be adversely affected by increases in electricity and natural gas prices in California
 
We generally purchase most of the electric energy sold to customers in our electric customer service area from others under purchased power contracts.  In addition to purchased power contracts, we purchase additional energy from the spot market to meet peak demand and following expiration of power purchase contracts if there are delays in obtaining CPUC authorization of new power purchase contracts.  We may sell surplus power to the spot market during times of reduced energy demand.  As a result, our cash flow may be affected by the increases in spot market prices of electricity purchased and decreases in spot market prices for electricity sold.  However, GSWC has implemented supply cost balancing accounts, as approved by the CPUC, to alleviate any fluctuation to supply costs.  We also operate a natural gas-fueled 8.4 megawatt generator in our electric service area.
 
Unexpected generator downtime or a failure to perform by any of the counterparties to our electric and natural gas purchase contracts could further increase our exposure to fluctuating natural gas and electric prices.
 

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Changes in electricity prices also affect the unrealized gains and losses on our block forward purchased power contracts that qualify as derivative instruments as we adjust the asset or liability on these contracts to reflect the fair market value of the contracts at the end of each month.  The CPUC has authorized us to establish a memorandum account to track the changes in the fair market value of our purchased power contracts.  As a result, unrealized gains and losses on these types of purchased power contracts do not impact earnings.
 
We may not be able to procure sufficient renewable energy resources to comply with CPUC rules
 
We are required to procure a portion of our electricity from renewable energy resources to meet the CPUC’s renewable procurement requirements.  We have an agreement with a third party to purchase renewable energy credits which we believe allows us to meet these requirements through 2023.  In the event that the third party fails to perform in accordance with the terms of the agreement, we may not be able to obtain sufficient resources to meet the renewable procurement requirements. We may be subject to fines and penalties by the CPUC if the CPUC determines that we are not in compliance with the renewable resource procurement rules.
 
Our assets are subject to condemnation
 
Municipalities and other government subdivisions may, in certain circumstances, seek to acquire certain of our assets through eminent domain proceedings.  It is generally our practice to contest these proceedings which may be costly and may divert the attention of management from the operation of our business.  If a municipality or other government subdivision succeeds in acquiring our assets, there is a risk that we will not receive adequate compensation for the assets acquired or be able to recover all charges associated with the condemnation of these assets. In addition, we would no longer be entitled to any portion of revenue generated from the use of such assets going forward.
 
Our costs of obtaining and complying with the terms of franchise agreements are increasing
 
Cities and counties in which GSWC operates have granted GSWC a franchise to construct, maintain and use pipes and appurtenances in public streets and rights of way.  The costs of obtaining, renewing and complying with the terms of these franchise agreements have been increasing as cities and counties attempt to regulate GSWC’s operations within the boundaries of the city or unincorporated area of the counties in which GSWC operates.  Cities and counties have also been attempting to impose new fees on GSWC’s operations, including pipeline abandonment fees and road cut or other types of capital improvement fees.  At the same time, there is increasing opposition from consumer groups to rate increases that may be necessary to compensate GSWC for the increased costs of local government regulation.  These trends may adversely affect GSWC’s ability to recover its costs of providing water service in rates and to efficiently manage capital expenditures and operating and maintenance expenses within CPUC authorized levels.

Additional Risks Associated with our Contracted Services
 
We derive revenues from contract operations primarily from the operation and maintenance of water and/or wastewater systems at military bases and the construction of water and wastewater infrastructure on these bases (including renewal and replacement of these systems). As a result, these operations are subject to risks that are different than those of our public utility operations.
 
Our 50-year contracts for servicing military bases create certain risks that are different from our public utility operations
 
We have entered into contracts to provide water and/or wastewater services at military bases pursuant to 50-year contracts, subject to termination, in whole or in part, for the convenience of the U.S. government.  In addition, the U.S. government may stop work under the terms of one or more of the contracts, delay performance of our obligations under the contracts or modify the contracts at its convenience.
 
Our contract pricing was based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials. We may be unable to recover all costs if any of these assumptions are inaccurate or if all costs incurred in connection with performing the work were not considered. Our contracts are also subject to periodic price adjustments at the time of price redetermination or in connection with requests for equitable adjustment or other changes permitted by the terms of the contracts. The contract price for each of these contracts is subject to redetermination every three years following the initial two years of the contracts. Prices are also subject to equitable adjustment based upon changes in circumstances, laws or regulations and service requirement changes with respect to wages and fringe benefits to the extent provided in each of the contracts.

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 We are required to record all costs under these types of contracts as they are incurred. As a result, we may record losses associated with unanticipated conditions, higher than anticipated infrastructure levels and emergency work at the time such expenses occur.  We recognize additional revenue for such work as, and to the extent that, our price redeterminations and/or requests for equitable adjustments are approved.  Delays in obtaining approval of price redeterminations and/or equitable adjustments can negatively impact our results of operations and cash flows.

  Certain payments under these contracts are subject to appropriations by Congress. We may experience delays in receiving payment or delays in redetermination of prices or other price adjustments due to canceled or delayed appropriations specific to our projects or reductions in government spending for the military generally or military base operations specifically. Appropriations and the timing of payment may be influenced by, among other things, the state of the economy, competing political priorities, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures for the military generally or military base operations specifically.

Management also reviews goodwill for impairment at least annually.  ASUS has $1.1 million of goodwill which may be at risk for potential impairment if requested price redeterminations and/or equitable adjustments are not granted.
  
Risks associated with the collection of wastewater are different, in some respects, from that of our water distribution operations
 
The wastewater collection system operations of our subsidiaries providing wastewater services on military bases are subject to substantial regulation and involve significant environmental risks. If collection or sewage systems fail, overflow or do not operate properly, untreated wastewater or other contaminants could spill onto nearby properties or into nearby streams and rivers, causing damage to persons or property, injury to aquatic life and/or economic damages. The cost of addressing such damages may not be recoverable. This risk is most acute during periods of substantial rainfall or flooding, which are common causes of sewer overflows and system failures.  Liabilities resulting from such damage could adversely and materially affect our business, results of operations and financial condition. In the event that we are deemed liable for any damage caused by overflows, our losses might not be recoverable under our contracts with the U.S. government, covered by insurance policies or we may find it difficult to secure insurance for this business in the future at acceptable rates.

Our contracts for the construction of infrastructure improvements on military bases create risks that are different, in some respects, from that of our operations and maintenance activities
 
We have entered into contract modifications with the U.S. government and agreements with third parties for the construction of new water and/or wastewater infrastructure at the military bases on which we operate. Most of these contracts are firm fixed-price contracts. Under firm fixed-price contracts, we will benefit from cost savings, but are generally unable (except for changes in scope or circumstances approved by the U.S. government or third party) to recover any cost overruns to the approved contract price. Under most circumstances, the U.S. government or third party has approved increased cost change orders due to changes in scope of work performed.
 
We generally recognize revenues from these types of contracts using the percentage-of-completion method of accounting. This accounting practice results in our recognizing contract revenues and earnings ratably over the contract term in proportion to contract costs incurred or the physical completion of the construction projects. The earnings or losses recognized on individual contracts are based on periodic estimates of contract revenues, costs and profitability as the construction projects progress.
 
We establish prices for these types of firm fixed-price contracts and the overall 50-year contracts taken as a whole, based, in part, on cost estimates that are subject to a number of assumptions, including assumptions regarding future economic conditions. If these estimates prove inaccurate or circumstances change, cost overruns could have a material adverse effect on our contracted business operations and results of operations.
 
We may be adversely affected by disputes with the U.S. government regarding our performance of contracted services on military bases
 
We are routinely audited by the Defense Contract Auditing Agency (“DCAA”) for compliance with federal acquisition regulations, cost accounting standards and other laws regulations and standards that are not applicable to the operations of GSWC. During the course of these audits, the DCAA may question our incurred project costs or the manner in which we have accounted for such costs and recommend to our U.S. government corporate administrative contracting officer that such costs be disallowed.


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If there is a dispute with the U.S. government regarding performance under these contracts or the amounts owed to us, the U.S. government may delay, reject or withhold payment, delay price redeterminations or assert its right to offset damages against amounts owed to us.  If we are unable to collect amounts owed to us on a timely basis or the U.S. government asserts its offset rights, profits and cash flows could be adversely affected.
 
If we fail to comply with the terms of one or more of our U.S. government contracts, other agreements with the U.S. government or U.S. government regulations and statutes, we could also be suspended or barred from future U.S. government contracts for a period of time and be subject to possible damages, fines and penalties and damage to our reputation in the water and wastewater industry.
 
We depend, to some extent, upon subcontractors to assist us in the performance of contracted services on military bases
 
We rely, to some extent, on subcontractors to assist us in the operation and maintenance of the water and wastewater systems at military bases. The failure of any of these subcontractors to perform services for us in accordance with the terms of our contracts with the U.S. government could result in the termination of our contract to provide water and/or wastewater services at the affected base(s), a loss of revenues or increases in costs to correct a subcontractor’s performance failures.
 
We are also required to make a good faith effort to achieve our small business subcontracting plan goals pursuant to U.S. government regulation. If we fail to use good faith efforts to meet these goals, the U.S. government may assess damages against us either at the end of each price redetermination period or at the end of the contract. The U.S. government has the right to offset claimed damages against any amounts owed to us.
 
We also rely on third-party manufacturers as well as third-party subcontractors to complete our construction projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount of costs we incur for these projects exceeds the amount we have estimated in our bid, we could experience reduced profits or losses in the performance of these contracts. In addition, if a subcontractor or manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment or materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.
 
If these subcontractors fail to perform services to be provided to us or fail to provide us with the proper equipment or materials, we may be penalized for their failure to perform; however, our contracts with these subcontractors include certain protective provisions, which may include the assessment of liquidated damages.  We mitigate these risks by requiring many of our subcontractors to obtain performance bonds and to compensate us for any penalties we may be required to pay as a result of their failure to perform.
 
Our earnings may be affected, to some extent, by weather during different seasons
 
Seasonal weather conditions, such as hurricanes, heavy rainfall or significant winter storms, occasionally cause temporary office closures and/or result in temporary halts to construction activity at military bases.  To the extent that our construction activities are impeded by these events, we will experience a delay in recognizing revenues from these construction projects.

 We continue to incur costs associated with the expansion of our contract activities
 
We continue to incur additional costs in connection with the attempted expansion of our contract operations associated with the preparation of bids for new contracts for contract operations on prospective and existing military bases. Our ability to recover these costs and to earn a profit on our contract operations will depend upon the extent to which we are successful in obtaining new contracts and recovering these costs and other costs from new contract revenues.
 

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Other Risks
 
Our business requires significant capital expenditures
 
The utility business is capital intensive. We spend significant sums of money for additions to, or replacement of, our property, plant and equipment at our water and electric utilities. We obtain funds for these capital projects from operations, contributions by developers and others and advances from developers (which are repaid over a period of time at no interest). We also periodically borrow money or issue equity for these purposes. In addition, we have a syndicated bank credit facility that is partially used for these purposes. We cannot provide assurance that these sources will continue to be adequate or that the cost of funds will remain at levels permitting us to earn a reasonable rate of return.
 
Our subsidiaries providing water and wastewater services on military bases also expect to incur significant capital expenditures. To the extent that the U.S. government does not reimburse us for these expenditures as the work is performed or completed, the U.S. government will repay us over time. 
 
We may be adversely impacted by economic conditions
 
Access to external financing on reasonable terms depends, in part, on conditions in the debt and equity markets.  When business and market conditions deteriorate, we may no longer have access to the capital markets on reasonable terms.  Our ability to obtain funds is dependent upon our ability to access the capital markets by issuing debt or equity to third parties or obtaining funds from our revolving credit facility.  In the event of financial turmoil affecting the banking system and financial markets, consolidation of the financial services industry, significant financial service institution failures or our inability to renew or replace our existing revolving credit facility on attractive terms, it may become necessary for us to seek funds from other sources on less attractive terms.

Market conditions and demographic changes may adversely impact the value of our benefit plan assets and liabilities
Market factors can affect assumptions we use in determining funding requirements with respect to our pension and postretirement plans. For example, a relatively modest change in our assumptions regarding discount rates can materially affect our calculation of funding requirements. To the extent that market data compels us to reduce the discount rate used in our assumptions, our benefit obligations could materially increase, which could adversely affect our financial position and our cash flow position. Further, changes in demographics, such as increases in life expectancy assumptions may also increase the funding requirements of our obligations related to the pension and other postretirement benefit plans.

Market conditions also affects the values of the assets that are held in trust to satisfy significant future obligations under our pension and postretirement benefit plans. These assets are subject to market fluctuations, which may cause investment returns to fall below our projected rates of return. A decline in the market value of our pension and postretirement benefit plan assets will increase the funding requirements under our pension and postretirement benefit plans if future returns on these assets are insufficient to offset the decline in value. Future increases in pension and other postretirement costs as a result of the reduced value of plan assets may not be fully recoverable in rates, and our results of operations and financial position could be negatively affected. These risks are mitigated to some extent by the two-way pension balancing account authorized by the CPUC which permits us to track differences between forecasted annual expense adopted in rates and actual expenses for future recovery or refund to customers.
 
Payment of our debt may be accelerated if we fail to comply with restrictive covenants in our debt agreements
 
Our failure to comply with restrictive covenants in our debt agreements could result in an event of default.  If the default is not cured or waived, we may be required to repay or refinance this debt before it becomes due.  Even if we are able to obtain waivers from our creditors, we may only be able to do so on unfavorable terms.


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The price of our Common Shares may be volatile and may be affected by market conditions beyond our control

The trading price of our Common Shares may fluctuate in the future because of the volatility of the stock market and a variety of other factors, many of which are beyond our control. Factors that could cause fluctuations in the trading price of our Common Shares include: regulatory developments; general economic conditions and trends; price and volume fluctuations in the overall stock market from time to time; actual or anticipated changes or fluctuations in our results of operations; actual or anticipated changes in the expectations of investors or securities analysts; actual or anticipated developments in other utilities' businesses or the competitive landscape generally; litigation involving us or our industry; and major catastrophic events or sales of large blocks of our stock.

We (AWR) are a holding company that depends on cash flow from our subsidiaries to meet our financial obligations and to pay dividends on our Common Shares
 
As a holding company, our subsidiaries conduct substantially all operations and our only significant assets are investments in our subsidiaries. This means that we are dependent on distributions of funds from our subsidiaries to meet our debt service obligations and to pay dividends on our Common Shares.
 
Our subsidiaries are separate and distinct legal entities and generally have no obligation to pay any amounts due on our credit facility.  Our subsidiaries only pay dividends if and when declared by the subsidiary board.  Moreover, GSWC is obligated to give first priority to its own capital requirements and to maintain a capital structure consistent with that determined to be reasonable by the CPUC in its most recent decision on capital structure, in order that customers not be adversely affected by the holding company structure.  Furthermore, our right to receive cash or other assets in the unlikely event of liquidation or reorganization of any of our subsidiaries is generally subject to the prior claims of creditors of that subsidiary.  If we are unable to obtain funds from a subsidiary in a timely manner, we may be unable to meet our financial obligations, make additional investments or pay dividends.

Failure to attract, retain, train, motivate, develop and transition key employees could adversely affect our business

In order to be successful, we must attract, retain, train, motivate, and develop key employees, including those in managerial, operational, financial, business development and IT support positions.  Our regulated business and contracted services operations are complex. Attracting and retaining high quality staff allows us to minimize the cost of providing quality service.  In order to attract and retain key employees in a competitive marketplace, we must provide a competitive compensation package and be able to effectively recruit qualified candidates.  The failure to successfully hire key employees or the loss of a material number of key employees could have a significant impact on the quality of our operations in the short-term. Further, changes in our management team may be disruptive to our business, and any failure to successfully transition key new hires or promoted employees could adversely affect our business and results of operations.
 
 We must successfully maintain and/or upgrade our information technology systems as we are increasingly dependent on the continuous and reliable operation of these systems
 
We rely on various information technology systems to manage our operations. Such systems require periodic modifications, upgrades and or replacement which subject us to inherent costs and risks including potential disruption of our internal control structure, substantial capital expenditures, additional administration and operating expenses, retention of sufficiently skilled personnel to implement and operate the new systems, and other risks and costs of delays or difficulties in transitioning to new systems or of integrating new systems into our current systems. In addition, the difficulties with implementing new technology systems may cause disruptions in our business operations and have an adverse effect on our business and operations, if not anticipated and appropriately mitigated.
 
We rely on our computer, information and communications technology systems in connection with the operation of our business, especially with respect to customer service and billing, accounting and, in some cases, the monitoring and operation of our treatment, storage and pumping facilities.  Our computer and communications systems and operations could be damaged or interrupted by natural disasters, telecommunications, failures or acts of war or terrorism or similar events or disruptions.  Any of these or other events could cause system interruption, delays and loss of critical data or delay or prevent operations and adversely affect our financial results.
 

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System security risks, data protection breaches and cyber-attacks could disrupt our internal operations, and any such disruption could increase our expenses, damage our reputation and adversely affect our stock price.

There have been an increasing number of cyber-attacks on companies around the world, which have caused operational failures or compromised sensitive corporate or customer data.  These attacks have occurred over the internet, through malware, viruses or attachments to e-mails or through persons inside the organization or with access to systems inside the organization.  We have implemented security measures and will continue to devote significant resources to address any security vulnerabilities in an effort to prevent cyber-attacks.  Despite our efforts, we cannot be assured that a cyber-attack will not cause water, wastewater or electric system problems, disrupt service to our customers, compromise important data or systems or result in unintended release of customer or employee information.  Moreover, if a computer security breach affects our systems or results in the unauthorized release of sensitive data, our reputation could be materially damaged. We could also be exposed to a risk of loss or litigation and possible liability.

 Our operations are geographically concentrated in California
 
Although we operate water and wastewater facilities in a number of states, our operations are concentrated in California, particularly southern California.  As a result, our financial results are largely subject to political, water supply, labor, utility cost and regulatory risks, economic conditions, natural disasters and other risks affecting California. 

We operate in areas subject to natural disasters or that may be the target of terrorist activities
 
We operate in areas that are prone to earthquakes, fires, mudslides, hurricanes, tornadoes and other natural disasters.  While we maintain insurance policies to help reduce our financial exposure, a significant seismic event in southern California, where GSWC's operations are concentrated, or other natural disasters in any of the areas that we serve could adversely impact our ability to deliver water and electricity or provide wastewater service and adversely affect our costs of operations.  With respect to GSWC, the CPUC has historically allowed utilities to establish a catastrophic event memorandum account to potentially recover these costs for our public utility operations.
 
Terrorists could seek to disrupt service to our customers by targeting our assets.  We have invested in additional security for facilities throughout our regulated service areas to mitigate the risks of terrorist activities. We also may be prevented from providing water and/or wastewater services at the military bases we serve in times of military crisis affecting these bases.

Item 1B — Unresolved Staff Comments
 
None.


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Item 2 - Properties
 
Water Properties
 
As of December 31, 2014, GSWC’s physical properties consisted of water transmission and distribution systems which included 2,792 miles of pipeline together with services, meters and fire hydrants and approximately 425 parcels of land, generally less than 1 acre each, on which are located wells, pumping plants, reservoirs and other water utility facilities, including three surface water treatment plants.  GSWC also has franchises, easements and other rights of way for the purpose of accessing wells and tanks and constructing and using pipes and appurtenances for transmitting and distributing water. All of GSWC's properties are located in California.
 
As of December 31, 2014, GSWC owned 239 wells, of which 192 are active operable wells equipped with pumps with an aggregate production capacity of approximately 202.3 million gallons per day. GSWC has 63 connections to the water distribution facilities of the MWD, and other municipal water agencies. GSWC’s storage reservoirs and tanks have an aggregate capacity of approximately 112 million gallons. GSWC owns no dams. The following table provides, in greater detail, information regarding the water utility plant of GSWC: 
Pumps
 
Distribution Facilities
 
Reservoirs
 
Well
 
Booster
 
Mains*
 
Services
 
Hydrants
 
Tanks
 
Capacity*
 
239

 
381

 
2,792

 
258,281

 
25,332

 
142

 
111,816

(1)

* Reservoir capacity is measured in thousands of gallons. Mains are in miles.
 
(1)  GSWC has additional capacity in its Bay Point system, through an exclusive capacity right to use 4.4 million gallons from a treatment plant owned by Contra Costa Water District.  GSWC also has additional reservoir capacity through an exclusive right to use all of one 8 million gallon reservoir, one-half of another 8 million gallon reservoir, and one-half of a treatment plant’s capacity, all owned by Three Valleys Municipal Water District.
 
Electric Properties
 
GSWC’s electric properties are located in the Big Bear area of San Bernardino County, California. As of December 31, 2014, GSWC owned and operated 29.6 miles of overhead 34.5 kilovolt (“kv”) transmission lines, 1.4 miles of underground 34.5 kv transmission lines, 180.0 miles of 4.16 kv or 2.4 kv distribution lines, 54.0 miles of underground cable, 13 sub-stations and a natural gas-fueled 8.4 MW peaking generation facility.  GSWC also has franchises, easements and other rights of way for the purpose of constructing and using poles, wires and other appurtenances for transmitting electricity.
 
Adjudicated and Other Water Rights
 
GSWC owns groundwater and surface water rights in California.  Groundwater rights are further subject to classification as either adjudicated or unadjudicated rights.  Adjudicated rights have been subjected to comprehensive litigation in the courts, are typically quantified and are actively managed for optimization and sustainability of the resource. Surface water rights are quantified and managed by the State Water Resources Control Board, unless they originated prior to 1914. As of December 31, 2014, GSWC had adjudicated groundwater water rights and surface water rights of 73,330 and 11,335 acre feet per year, respectively. GSWC also has a number of unadjudicated groundwater rights, which have not been quantified and are not subject to predetermined limitations, but are typically measured by historical usage.
 
Office Buildings
 
Registrant’s general headquarters is owned and located in San Dimas, California. GSWC also owns and/or leases certain facilities that house regional, district and customer service offices. ASUS leases office facilities in California, Georgia and Virginia.  TUS rents a temporary service center facility in Maryland, pending the completion of a facility expected to be constructed at that location.  FBWS has a ten-year, renewable, no cost license for use of space in a U.S. government building at Fort Bliss as a service center.  PSUS, ODUS and ONUS own service centers in South Carolina, Virginia and North Carolina, respectively. ONUS rents temporary support facilities.


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Mortgage and Other Liens
 
As of December 31, 2014, GSWC had no mortgage debt outstanding or liens securing indebtedness.
 
As of December 31, 2014, neither AWR nor ASUS, or any of its subsidiaries, had any mortgage debt or liens securing indebtedness outstanding.
 
Under the terms of certain debt of AWR and GSWC, AWR and GSWC are prohibited from issuing any secured debt, without providing equal and ratable security to the holders of this existing debt.
 
Condemnation of Properties
 
The laws of the State of California 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, these laws 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.
Claremont System:    
On November 4, 2014 voters passed a measure authorizing the City to issue up to $135.0 million in water revenue bonds to finance the acquisition of the Claremont water system. On December 9, 2014, the City filed an eminent domain lawsuit against GSWC.  GSWC intends to vigorously contest this action. GSWC serves approximately 11,000 customers in Claremont. 
Ojai System:
In March 2013, Casitas Municipal Water District ("CMWD") passed resolutions under the Mello-Roos Communities Facilities District Act of 1982 ("Mello-Roos Act") authorizing the establishment of a Community Facilities District and the issuance of bonds to finance the potential acquisition of GSWC’s Ojai system by eminent domain. In August 2013, Ojai residents approved the levying of a special tax to satisfy the planned bond obligations. GSWC filed a petition in the Superior Court, Ventura County, which, among other things, challenged the legality of CMWD’s effort to utilize the Mello-Roos Act to acquire property by eminent domain and to fund legal and expert costs of the planned condemnation. Ojai FLOW ("Friends of Locally Owned Water") members filed a motion with the Superior Court asking that all residents of GSWC’s Ojai service area be certified as class defendants in GSWC's pending action. They contend that the class would later be entitled to sue GSWC for damages if GSWC's challenge is denied.  Without deciding whether such a lawsuit would be permitted, the Court granted the motion for class certification.  On March 13, 2014, the Court denied GSWC's petition. On April 9, 2014, GSWC filed a Notice of Appeal. GSWC is unable to predict the outcome of the appeal at this time. GSWC serves approximately 3,000 customers in Ojai.
Apple Valley System:
In recent years, the Town of Apple Valley has considered a potential condemnation of the water systems serving its area, including GSWC's Apple Valley system. In August 2014, Apple Valley's Town Council issued a request for proposal for an updated feasibility study on the potential acquisition of the water systems. The feasibility study has been completed. However, the Town of Apple Valley has not taken any action against GSWC. GSWC serves approximately 2,900 customers in the Town of Apple Valley.
Artesia System:
On October 13, 2014, the City of Artesia's City Council approved the funding of a feasibility study on the potential acquisition of GSWC's water system in Artesia. GSWC serves approximately 3,300 customers in Artesia.

Environmental Clean-Up and Remediation of Properties:
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 analysis indicates that offsite monitoring wells may also be necessary to document effectiveness of remediation.

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 The Company has accrued an estimated liability which includes costs for two years of continued activities of groundwater cleanup and monitoring, future soil treatment and site closure related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will be approved in rate base by the CPUC.

Item 3 - Legal Proceedings

On December 9, 2014, the City of Claremont filed an eminent domain lawsuit in the County of Los Angeles Superior Court against GSWC (City of Claremont v. Golden State Water Company, Case No. BC 566125), to acquire the portion of GSWC's system which serves the City of Claremont. GSWC intends to vigorously contest this action.
Registrant is subject to ordinary routine litigation incidental to its business. Management believes that the opportunity for 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.  Management is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.

Item 4. Mine Safety Disclosure
 
Not applicable.

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PART II 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
 
Stock Performance Graph
 
The graph below compares the cumulative 5-year total return provided shareholders on American States Water Company's Common Shares relative to the cumulative total returns of the S&P 500 index and two customized peer groups of five companies and eight companies respectively. The companies in each of the peer groups are listed in footnotes 1 and 2 below. The new peer group includes three additional water companies that were not included in the prior peer group. AWR believes that the expansion of the peer group to include larger water utilities is appropriate in light of AWR's increase in market capitalization in recent years. An investment of $100 (with reinvestment of all dividends) is assumed to have been made in our Common Shares, and in the common stock in each index and in each of the peer groups on December 31, 2009. Relative performance is tracked through December 31, 2014.
(1) There are five companies included in the Company's first customized peer group which are: Artesian Resources Corp, California Water Service Group, Connecticut Water Service Inc., Middlesex Water Co and SJW Corp.
(2) The eight companies included in the Company's second customized peer group include all companies in the prior peer group and American Water Works Company Inc., Aqua America Inc., and York Water Co.
 
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among American States Water Company, the S&P 500 Index,
Prior Peer Group and Current Peer Group
 
 
 
 
 
 
*$100 invested on 12/31/09 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
 
Copyright©2014 S&P, a division of The McGraw-Hill Companies Inc. All rights reserved.

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12/09
 
12/10
 
12/11
 
12/12
 
12/13
 
12/14
American States Water Company
$
100.00

 
$
100.25

 
$
104.80

 
$
148.66

 
$
182.92

 
$
246.40

S&P 500
$
100.00

 
$
115.06

 
$
117.49

 
$
136.30

 
$
180.44

 
$
205.14

Prior Peer Group
$
100.00

 
$
110.69

 
$
110.34

 
$
121.73

 
$
146.54

 
$
160.28

Current Group
$
100.00

 
$
120.40

 
$
137.37

 
$
161.90

 
$
190.56

 
$
231.98

 

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

Market Information Relating to Common Shares
Common Shares of American States Water Company are traded on the New York Stock Exchange (“NYSE”) under the symbol “AWR”. The intra-day high and low NYSE prices on the Common Shares for each quarter during the past two years, and reflecting the two-for-one stock split effective September 3, 2013, were:
 
Stock Prices
 
High
 
Low
2014
 

 
 

First Quarter
$
32.97

 
$
27.02

Second Quarter
$
33.27

 
$
27.82

Third Quarter
$
34.00

 
$
30.11

Fourth Quarter
$
38.74

 
$
30.26

 
 
 
 
2013
 

 
 

First Quarter
$
28.88

 
$
24.01

Second Quarter
$
28.90

 
$
25.65

Third Quarter
$
33.09

 
$
25.07

Fourth Quarter
$
29.89

 
$
26.45

The closing price of the Common Shares of American States Water Company on the NYSE on February 23, 2015 was $39.70.
 
Approximate Number of Holders of Common Shares
As of February 23, 2015, there were 2,475 holders of record of the 38,220,567 outstanding Common Shares of American States Water Company. AWR owns all of the outstanding Common Shares of GSWC and ASUS. ASUS owns all of the outstanding stock of the Military Utility Privatization Subsidiaries.
 
Frequency and Amount of Any Dividends Declared and Dividend Restrictions
For the last two years, AWR has paid dividends on its Common Shares on or about March 1, June 1, September 1 and December 1. The following table lists the amount of dividends paid on Common Shares of American States Water Company:
 
2014
 
2013
First Quarter
$
0.2025

 
$
0.1775

Second Quarter
$
0.2025

 
$
0.1775

Third Quarter
$
0.2130

 
$
0.2025

Fourth Quarter
$
0.2130

 
$
0.2025

Total
$
0.8310

 
$
0.7600


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 AWR’s ability to pay dividends is subject to the requirement in its $100.0 million revolving credit facility to maintain compliance with all covenants described in footnote (14) to the table in the section entitled “Contractual Obligations, Commitments and Off Balance Sheet Arrangements” included in Part II, Item 7 in Management’s Discussion and Analysis of Financial Condition and Results of Operation. GSWC’s maximum ability to pay dividends is restricted by certain Note Agreements to the sum of $21.0 million plus 100% of consolidated net income from certain dates plus the aggregate net cash proceeds received from capital stock offerings or other instruments convertible into capital stock from various dates. Under the most restrictive of the Note Agreements, $367.7 million was available from GSWC to pay dividends to AWR as of December 31, 2014. GSWC is also prohibited under the terms of senior notes from paying dividends if, after giving effect to the dividend, its total indebtedness to capitalization ratio (as defined) would be more than 0.6667 to 1.  GSWC would have to issue additional debt of $533.2 million to invoke this covenant as of December 31, 2014.
Under California law, AWR, GSWC and ASUS are each permitted to distribute dividends to its shareholders and repurchase its shares so long as the Board of Directors determines, in good faith, that either: (i) the value of the corporation’s assets equals or exceeds the sum of its total liabilities immediately after the dividend, or (ii) its retained earnings equals or exceeds the amount of the distribution.  Under the least restrictive of the California tests, approximately $253.6 million was available to pay dividends to AWR’s common shareholders and repurchase shares from AWR’s common shareholders at December 31, 2014. Approximately $199.6 million was available for GSWC to pay dividends to AWR at December 31, 2014. Approximately $41.3 million was available for ASUS to pay dividends to AWR at December 31, 2014.
AWR paid $32.1 million in dividends to shareholders for the year ended December 31, 2014, as compared to $29.4 million for the year ended December 31, 2013. GSWC paid dividends of $52.0 million and $29.4 million to AWR in 2014 and 2013, respectively. ASUS did not pay dividends to AWR in 2014 or 2013. AWR paid $17.2 million to repurchase its Common Shares in 2014.

Other Information

The shareholders of AWR have approved the material features of all equity compensation plans under which AWR directly issues equity securities. AWR did not directly issue any unregistered equity securities during 2014.
The following table provides information about AWR repurchases of its Common Shares during the fourth quarter of 2014:
Period
 
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or Programs
 
Maximum Number
of Shares That May
Yet To Be Purchased
under the Plans or Programs (2)
October 1 - 31, 2014
 
185,950

 
$
30.58

 
184,688

 
834,014

November 1 - 30, 2014
 
33,758

 
$
34.84

 

 
834,014

December 1 - 31, 2014
 
171,501

 
$
34.19

 
129,232

 
704,782

Total
 
391,209

(1)
$
32.53

 
313,920

 


 
(1)         Of this amount, 67,600 Common Shares were acquired on the open market for employees pursuant to our 401(k) Plan and 9,689 of the Common Shares were acquired on the open market for participants in AWR’s Common Share Purchase and Dividend Reinvestment Plan. The remainder of the Common Shares were purchased under the stock repurchase program.
(2)         On March 27, 2014, AWR's Board of Directors approved a stock repurchase program authorizing AWR to repurchase up to 1.25 million shares of AWR's Common Shares from time to time through June 30, 2016.

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Table of Contents

Item 6. Selected Financial Data
AMERICAN STATES WATER COMPANY (AWR):
(in thousands, except per share amounts)
 
2014
 
2013
 
2012
 
2011
 
2010 (3)
Income Statement Information:
 
 

 
 

 
 

 
 

 
 

Total Operating Revenues
 
$
465,791

 
$
472,077

 
$
466,908

 
$
419,913

 
$
399,776

Total Operating Expenses
 
346,746

 
353,005

 
355,814

 
324,809

 
325,957

Operating Income
 
119,045

 
119,072

 
111,094

 
95,104

 
73,819

Interest Expense
 
21,617

 
22,415

 
22,765

 
23,681

 
21,636

Interest Income
 
927

 
707

 
1,333

 
859

 
2,406

Income from Continuing Operations
 
$
61,058

 
$
62,686

 
$
54,148

 
$
42,010

 
$
31,091

Income from Discontinued Operations, net of tax (2)
 
$

 
$

 
$

 
$
3,849

 
$
2,106

 
 
 
 
 
 
 
 
 
 
 
Basic Earnings per Common Share (1):
 
 

 
 

 
 

 
 

 
 

 Income from Continuing Operations
 
$
1.57

 
$
1.61

 
$
1.42

 
$
1.12

 
$
0.84

Income from Discontinued Operations (2)
 

 

 

 
0.10

 
0.06

Total
 
$
1.57

 
$
1.61

 
$
1.42

 
$
1.22

 
$
0.90

 
 
 
 
 
 
 
 
 
 
 
Fully Diluted Earnings per Common Share (1):
 
 

 
 

 
 

 
 

 
 

Income from Continuing Operations
 
$
1.57

 
$
1.61

 
$
1.41

 
$
1.11

 
$
0.83

Income from Discontinued Operations (2)
 

 

 

 
0.10

 
0.06

Total
 
$
1.57

 
$
1.61

 
$
1.41

 
$
1.21

 
$
0.89

 
 
 
 
 
 
 
 
 
 
 
Average Shares Outstanding
 
38,658

 
38,639

 
37,998

 
37,386

 
37,170

Average number of Diluted Shares Outstanding
 
38,880

 
38,869

 
38,262

 
37,674

 
37,472

Dividends Declared per Common Share
 
$
0.831

 
$
0.760

 
$
0.635

 
$
0.550

 
$
0.520

Balance Sheet Information:
 
 

 
 

 
 

 
 

 
 

Total Assets
 
$
1,378,298

 
$
1,310,183

 
$
1,280,943

 
$
1,238,362

 
$
1,192,035

Common Shareholders’ Equity
 
506,801

 
492,404

 
454,579

 
408,666

 
377,541

Long-Term Debt
 
325,798

 
326,079

 
332,463

 
340,395

 
299,839

Total Capitalization
 
$
832,599

 
$
818,483

 
$
787,042

 
$
749,061

 
$
677,380

GOLDEN STATE WATER COMPANY (GSWC):
(in thousands)
 
2014
 
2013
 
2012
 
2011
 
2010 (3)
Income Statement Information:
 
 
 
 
 
 
 
 
 
 
Total Operating Revenues
 
$
361,059

 
$
358,540

 
$
342,931

 
$
336,725

 
$
327,416

Total Operating Expenses
 
261,317

 
256,197

 
256,326

 
253,047

 
263,615

Operating Income
 
99,742

 
102,343

 
86,605

 
83,678

 
63,801

Interest Expense
 
21,524

 
22,287

 
22,609

 
23,292

 
21,215

Interest Income
 
894

 
615

 
1,293

 
801

 
1,914

Net Income
 
$
47,857

 
$
48,642

 
$
39,220

 
$
34,822

 
$
25,110

Balance Sheet Information:
 
 
 
 
 
 
 
 
 
 
Total Assets
 
$
1,282,374

 
$
1,233,381

 
$
1,214,052

 
$
1,173,383

 
$
1,078,478

Common Shareholder’s Equity
 
435,190

 
437,613

 
416,257

 
384,806

 
358,295

Long-Term Debt
 
325,798

 
326,079

 
332,463

 
340,395

 
299,839

Total Capitalization
 
$
760,988

 
$
763,692

 
$
748,720

 
$
725,201

 
$
658,134

(1) On September 3, 2013, a two-for-one stock split became effective. The number of shares outstanding, and basic and diluted earnings per share (“EPS”) have been restated for all periods presented above to reflect the stock split.
(2) In May 2011, AWR completed its sale of Chaparral City Water Company (“CCWC”) and recorded a gain on the sale (net of taxes and transaction costs) of approximately $2.2 million, or $0.06 per share. The results of CCWC for all periods included have been presented as a discontinued operation.
(3) In 2010, results include a $16.6 million charge related to the impairment of assets and loss contingencies in connection with regulatory matters.

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Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation
 
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 and ASUS and its subsidiaries.  Included in the following analysis is a discussion of water and electric gross margins.  Water and electric gross margins are computed by taking total revenues, less total supply costs.  Registrant uses these gross margins and related percentages as an important measure in evaluating its operating results.  Registrant believes this measure is a useful internal benchmark in evaluating the performance of GSWC.
 
The discussions and tables included in the following analysis also present Registrant’s operations in terms of earnings per share by business segment.  Registrant believes that the disclosure of earnings per share by business segment provides investors with clarity surrounding the performance of our differing services.  Registrant reviews these measurements regularly and compares them to historical periods and to our operating budget. However, these measures, which are not presented in accordance with Generally Accepted Accounting Principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income or earnings per share, which are determined in accordance with GAAP. A reconciliation of water and electric gross margins to the most directly comparable GAAP measures are included in the table under the section titled “Operating Expenses: Supply Costs.”  Reconciliations to AWR’s diluted earnings per share are included in the discussions under the sections titled “Summary Results by Segment.

Overview
 
GSWC's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California and the delivery of electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC customers are determined by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital.  Factors affecting the financial performance of GSWC are described under Forward-Looking Information and Risk Factors and 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 overhead costs; pressures on water supply caused by the drought in California, changing weather patterns in the West, population growth, more stringent water quality standards and water supply from a variety of causes; fines, penalties and disallowances by the CPUC arising from failures to comply with regulatory requirements; the impact of increased water quality standards and environmental regulations on the cost of operations and capital expenditures; changes in long-term customer demand due to changes in usage patterns as a result of conservation efforts, mandatory regulatory changes impacting the use of water, such as new landscaping or irrigation requirements, recycling of water by the customer and purchases of recycled water by customers from other third parties; 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 GSWC to protect its water supply and condemnation actions initiated by municipalities. GSWC plans to continue to seek additional rate increases in future years from the CPUC to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC are expected to remain at much higher levels than depreciation expense. When necessary, GSWC obtains funds from external sources in the capital markets and through bank borrowings.
On June 26, 2014, the CPUC approved a Certificate of Public Convenience and Necessity application granting GSWC the authority to provide water utility services to an area to be developed near Sacramento, in Sutter County, California, called Sutter Pointe. With the CPUC's approval, GSWC will create a water service district to supply the Sutter Pointe development, approximately 17,000 residential customers, with groundwater and surface water from the Sacramento River. The decision also sets a cap on the revenue requirement per Sutter Pointe customer during the first two rate cycles. As part of the agreement, GSWC will also request approval from the CPUC to acquire the water system that currently serves the community of Robbins in Sutter County. In August 2014, the Office of Ratepayer Advocates filed an application for rehearing on the application. At this time, management cannot predict if a rehearing will be granted or the outcome of any rehearing if granted.
In July 2014, GSWC filed a general rate case for all of its water regions and the general office. The application will determine rates for the years 2016, 2017 and 2018.  GSWC’s requested capital budgets in the application average approximately $90 million a year for the three year period. The 2016 adopted water gross margin is expected to decrease by approximately $700,000 as compared to the currently adopted levels due, in part, to a decrease in annual depreciation expense resulting from an updated depreciation study.
In February 2012, BVES filed its general rate case (“GRC”) for new rates in years 2013 through 2016.  On May 7, 2014, GSWC filed a settlement agreement with the CPUC covering all matters in the case. On November 6, 2014, the CPUC approved the settlement agreement retroactive to January 1, 2013. This decision did not have a significant impact on GSWC's 2014 financial results.

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Table of Contents

ASUS's revenues, operating income and cash flows are earned by providing water and/or wastewater services, including the operation, maintenance, renewal and replacement of the water and/or wastewater systems, at various military installations pursuant to 50-year firm, fixed-price contracts. The contract price for each of these contracts is subject to prospective price redeterminations. Additional revenues generated by contract operations are primarily dependent on new construction activities under contract modifications with the U.S, government or agreements with other third party prime contractors. As a result, ASUS is subject to risks that are different than those of GSWC. Factors affecting the financial performance of our Military Utility Privatization Subsidiaries are described under Forward-Looking Information and under Risk Factors and include delays in receiving payments from and the redetermination and equitable adjustment of prices under the contracts with the U.S. government; fines, penalties or disallowance of costs by the U.S. government; and termination of contracts and suspension or debarment for a period of time from contracting with the government due to violations of federal law and regulations in connection with military utility privatization activities.  Our financial performance is also dependent upon our ability to accurately estimate our costs in bidding on firm fixed-price construction contracts and the costs of seeking new contracts for the operation and maintenance and renewal and replacement of water and/or wastewater services at military bases and for additional construction work at existing bases.  ASUS is actively pursuing utility privatization contracts of other military bases to expand the contracted services segment.
In September 2014, ASUS received retroactive contract modifications from the U.S. government for price redeterminations and other matters related to the operations at Fort Bragg, Fort Jackson and Andrews Air Force Base. As a result, included in earnings for the year ended December 31, 2014 was approximately $1.7 million in retroactive revenues for years prior to 2014, or $0.03 per share, related to these contract modifications.

Summary Results by Segment
  
The table below sets forth diluted earnings per share by business segment for AWR’s operations: 
 
Diluted Earnings per Share
 
Year Ended
 
 
 
12/31/2014
 
12/31/2013
 
CHANGE
Water
$
1.16

 
$
1.19

 
$
(0.03
)
Electric
0.07

 
0.06

 
0.01

Contracted services
0.31

 
0.30

 
0.01

AWR (parent)
0.03

 
0.06

 
(0.03
)
Totals from operations, as reported
$
1.57

 
$
1.61

 
$
(0.04
)
 
For the year ended December 31, 2014, fully diluted earnings per share for the water segment decreased by $0.03 per share to $1.16 per share, as compared to $1.19 per share for 2013.  In May 2013, the CPUC issued a final decision on GSWC's water general rate case which approved, among other things, recovery of $3.1 million of previously incurred costs. The approval of these items increased earnings for the year ended December 31, 2013 by $0.05 per share, with no similar increase in 2014. Excluding this $0.05 per share impact, diluted earnings from the water segment increased by $0.02 per share for the year ended December 31, 2014 as compared to the same period in 2013. Impacting the comparability of the two periods were the following items: 
An increase in the water gross margin of $0.05 per share, primarily resulting from second-year rate increases and additional revenues approved by the CPUC for advice letter capital projects. There was also a decrease of approximately $580,000 in revenues with a corresponding decrease in operating expenses representing lower surcharges billed to customers to recover previously incurred costs. These surcharges had no impact on net earnings.
Excluding supply costs, the one-time recovery of previously incurred costs and the impact of the surcharges discussed above, there was an increase in operating expenses of approximately $2.1 million, or $0.03 per share, due primarily to increases in outside service costs, depreciation expense and property taxes. These increases were partially offset by lower planned maintenance.
A decrease in interest expense and other non-operating expenses (net of interest income), increasing earnings by $0.01 per share due primarily to the refinance of certain long-term notes with notes at a lower interest rate as well as other debt maturing during the fourth quarter of 2013 and 2014.
An increase in the effective income tax rate for the water segment during the year ended December 31, 2014 as compared to 2013, which decreased earnings by approximately $0.01 per share. The change in the tax rate is primarily due to changes between book and taxable income from items that are treated as flow-through adjustments in accordance with regulatory requirements as well as changes in permanent items.

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Table of Contents

 
For the year ended December 31, 2014, diluted earnings from the electric segment increased by $0.01 per share as compared to 2013 due primarily to an overall decrease in operating expenses and a lower electric effective income tax rate. The decrease in expenses in 2014 was partially offset by the recovery of legal and outside services costs in connection with the CPUC's renewables portfolio standard approved by the CPUC in May 2013. As a result, in the second quarter of 2013, GSWC recorded an $834,000 reduction in legal and outside services costs, increasing earnings by $0.01 per share. There was no similar reduction in 2014. The final decision on BVES's general rate case approved by the CPUC in November 2014 did not have a significant impact on BVES's earnings for 2014.
 
For the year ended December 31, 2014, diluted earnings from contracted services were $0.31 per share, compared to $0.30 per share for the same period in 2013. Impacting the comparability of the two periods were the following items:
An increase in management fees as a result of successful resolutions of various price redeterminations received during the third quarter of 2014, increasing earnings by $0.05 per share for 2014. Included in this increase were retroactive amounts totaling $1.7 million, or $0.03 per share, related to prior years.
An increase of $0.02 per share due to the recording of additional revenues during the close-out of a large pipe replacement construction project at Fort Bragg. ONUS began work on this large project in 2010, which was completed and closed-out during the fourth quarter of 2014.
An overall decrease in construction activity reducing earnings by $0.03 per share due to significant work on several projects being substantially completed during 2013, with less work performed during 2014.
A decrease of $0.03 per share as compared to 2013 as a result of cumulative tax deductions taken in 2013 related to certain construction activities for years 2013 and prior. There was no similar cumulative amount deducted for 2014.

Diluted earnings from AWR (parent) decreased $0.03 per share as compared to the same period in 2013 due primarily to a cumulative tax benefit recorded during the third quarter of 2013 for deductions related to an employee benefit program, with no similar cumulative benefit recorded in 2014.

The following discussion and analysis for the years ended December 31, 2014, 2013 and 2012 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 and ASUS and its subsidiaries.

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Table of Contents

Consolidated Results of Operations — Years Ended December 31, 2014 and 2013 (amounts in thousands, except per share amounts):
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
OPERATING REVENUES
 

 
 

 
 

 
 

Water
$
326,672

 
$
320,131

 
$
6,541

 
2.0
 %
Electric
34,387

 
38,409

 
(4,022
)
 
-10.5
 %
Contracted services
104,732

 
113,537

 
(8,805
)
 
-7.8
 %
Total operating revenues
465,791

 
472,077

 
(6,286
)
 
-1.3
 %
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 

 
 

 
 

 
 

Water purchased
57,790

 
58,930

 
(1,140
)
 
-1.9
 %
Power purchased for pumping
10,700

 
9,518

 
1,182

 
12.4
 %
Groundwater production assessment
16,450

 
15,541

 
909

 
5.8
 %
Power purchased for resale
9,649

 
13,392

 
(3,743
)
 
-27.9
 %
Supply cost balancing accounts
6,346

 
214

 
6,132

 
*

Other operation
28,288

 
27,767

 
521

 
1.9
 %
Administrative and general
78,323

 
77,291

 
1,032

 
1.3
 %
Depreciation and amortization
41,073

 
40,090

 
983

 
2.5
 %
Maintenance
16,092

 
17,772

 
(1,680
)
 
-9.5
 %
Property and other taxes
16,722

 
15,865

 
857

 
5.4
 %
ASUS construction
65,368

 
76,627

 
(11,259
)
 
-14.7
 %
Net gain on sale of property
(55
)
 
(2
)
 
(53
)
 
*

Total operating expenses
346,746

 
353,005

 
(6,259
)
 
-1.8
 %
 
 
 
 
 
 
 
 
OPERATING INCOME
119,045

 
119,072

 
(27
)
 
 %
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 

 
 

 
 

 
 

Interest expense
(21,617
)
 
(22,415
)
 
798

 
-3.6
 %
Interest income
927

 
707

 
220

 
31.1
 %
Other, net
751

 
1,105

 
(354
)
 
-32.0
 %
 
(19,939
)
 
(20,603
)
 
664

 
-3.2
 %
 
 
 
 
 
 
 
 
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
99,106

 
98,469

 
637

 
0.6
 %
 
 
 
 
 
 
 
 
Income tax expense
38,048

 
35,783

 
2,265

 
6.3
 %
 
 
 
 
 
 
 
 
NET INCOME
$
61,058

 
$
62,686

 
$
(1,628
)
 
-2.6
 %
 
 
 
 
 
 
 
 
Basic earnings per Common Share
$
1.57

 
$
1.61

 
$
(0.04
)
 
-2.5
 %
 
 
 
 
 
 
 
 
Fully diluted earnings per Common Share
$
1.57

 
$
1.61

 
$
(0.04
)
 
-2.5
 %
* Not meaningful


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Table of Contents


Operating Revenues
General
Registrant relies upon rate approvals by the CPUC to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant for GSWC. ASUS files price redeterminations and requests for equitable adjustments with the U.S. government in order to recover operating expenses and provide profit margin for contracted services.  If adequate rate relief and price redeterminations and adjustments are not granted in a timely manner, operating revenues and earnings can be negatively impacted.  ASUS’s earnings have also been positively impacted by additional construction projects at each of the Military Utility Privatization Subsidiaries.
 
Water
For the year ended December 31, 2014, revenues from water operations increased by $6.5 million to $326.7 million, compared to $320.1 million for the year ended December 31, 2013. During 2014, the CPUC approved an increase in rates to specifically cover increases in supply costs experienced in certain rate-making areas. This $3.5 million increase in revenues for the year ended December 31, 2014 is offset by a corresponding increase in supply cost, resulting in no impact to the water gross margin. There were also second-year rate increases approved by the CPUC effective January 1, 2014 for certain rate-making areas as well as increases related to advice letter filings. These increases were partially offset by a decrease of approximately $580,000 in surcharges during the year ended December 31, 2014 to recover previously incurred costs approved by the CPUC. The decrease in revenues from these surcharges is offset by a corresponding decrease in operating expenses (primarily administrative and general) resulting in no impact to pretax operating income.
Billed water consumption for the year ended December 31, 2014 decreased by approximately 2.8% as compared to the same period in 2013. Changes in consumption do not have a significant impact on revenues due to the CPUC-approved Water Revenue Adjustment Mechanism (“WRAM”) account in place in all three water regions. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
Electric
For the year ended December 31, 2014, revenues from electric operations were $34.4 million compared to $38.4 million for 2013. In November 2014, the CPUC issued a final decision on BVES's general rate case which sets new rates for the years 2013 - 2016. The new rates were retroactive to January 1, 2013. Prior to the decision, electric revenues for 2013 and 2014 were recorded based on 2012 adopted levels. The new adopted revenues for years 2013 through 2016 are lower than revenues in the previous rate cycle resulting from a revised return on equity of 9.95%, as well as lower depreciation and certain other operating expenses. As a result of the decision, a $2.2 million cumulative reduction in revenues was recorded during the fourth quarter of 2014, along with a cumulative reduction in depreciation expense. The impact of the retroactive effect of the new rates to BVES's 2014 net earnings was not significant. There was also a $936,000 decrease in surcharges to recover previously incurred costs during 2014 as compared to 2013, with a corresponding $936,000 decrease in operating expenses resulting in no impact to pretax income. The remaining decrease in electric revenues was primarily due to lower electric usage, resulting in lower revenues and lower electric supply costs.
 Billed electric usage for the year ended December 31, 2014 decreased 5.4% as compared to 2013.  The winter experienced in the Big Bear area during the first quarter of 2014 was too warm for snowmaking, resulting in less electric usage than in the prior year. Due to the CPUC approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, this change in usage did not have a significant impact on earnings.
Contracted Services
Revenues from contracted services are composed of construction revenues and management fees for operating and maintaining the water and/or wastewater systems at military bases.  For the year ended December 31, 2014, revenues from contracted services decreased to $104.7 million as compared to $113.5 million for 2013.  The decrease was mainly due to lower construction activity at various military bases, including a reduction in initial capital upgrade work at Fort Bragg and the military bases in Virginia. In addition, ASUS subsidiaries completed or are nearing completion of significant work on major capital projects at Fort Bliss and Fort Bragg, resulting in less revenue during the year ended December 31, 2014 as compared to the same period in 2013. The decrease in construction activity was partially offset by the resolution of price redeterminations at Fort Bragg, Fort Jackson and Andrews Air Force Base resulting in increased management fee revenues during the third quarter of 2014, including retroactive amounts related to prior years totaling $1.7 million. Additionally, ASUS recorded $1.6 million of additional revenues during the fourth quarter of 2014 in conjunction with the close-out of a large construction project at Fort Bragg. ONUS began work on this large project in 2010, which was completed and closed-out during the fourth quarter of 2014.

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ASUS subsidiaries continue to enter into U.S. government awarded contract modifications and agreements with third-party prime contractors for new construction projects at the Military Utility Privatization Subsidiaries. During the third quarter of 2014, the U.S. government awarded ASUS $27.0 million in new construction projects, the majority of which are expected to be completed during the next twelve months. Earnings and cash flows from modifications to the original 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.
Operating Expenses:
 
Supply Costs
 
Supply costs for the water segment consist of purchased water, power purchased for pumping, groundwater production assessments and water supply cost balancing accounts. Supply costs for the electric segment consist of power purchased for resale, the cost of natural gas used by BVES’s generating unit, renewable energy credits and the electric supply cost balancing account. Water and electric gross margins are computed by taking total revenues, less total supply costs. Registrant uses these gross margins and related percentages as important measures in evaluating its operating results. Registrant believes these measures are useful internal benchmarks in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to its operating budget. However, these measures, which are not presented in accordance with Generally Accepted Accounting Principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as alternatives to operating income, which is determined in accordance with GAAP.
 
Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for 29.1% and 27.6% of total operating expenses for the years ended December 31, 2014 and 2013, respectively.
 
The table below provides the amount of increases (decreases), percent changes in supply costs, and gross margins during the years ended December 31, 2014 and 2013 (dollar amounts in thousands):
 
Year Ended
 
Year Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
WATER OPERATING REVENUES (1)
$
326,672

 
$
320,131

 
$
6,541

 
2.0
 %
WATER SUPPLY COSTS:
 
 
 
 
 
 
 

Water purchased (1)
57,790

 
58,930

 
(1,140
)
 
-1.9
 %
Power purchased for pumping (1)
10,700

 
9,518

 
1,182

 
12.4
 %
Groundwater production assessment (1)
16,450

 
15,541

 
909

 
5.8
 %
Water supply cost balancing accounts (1)
1,378

 
(1,958
)
 
3,336

 
-170.4
 %
TOTAL WATER SUPPLY COSTS
$
86,318

 
$
82,031

 
$
4,287

 
5.2
 %
WATER GROSS MARGIN (2)
$
240,354

 
$
238,100

 
$
2,254

 
0.9
 %
PERCENT MARGIN - WATER
73.6
%
 
74.4
%
 
0.7

 


 
 
 
 
 
 
 


ELECTRIC OPERATING REVENUES (1)
$
34,387

 
$
38,409

 
$
(4,022
)
 
-10.5
 %
ELECTRIC SUPPLY COSTS:
 
 
 
 
 
 


Power purchased for resale (1)
9,649

 
13,392

 
(3,743
)
 
-27.9
 %
Electric supply cost balancing accounts (1)
4,968

 
2,172

 
2,796

 
128.7
 %
TOTAL ELECTRIC SUPPLY COSTS
$
14,617

 
$
15,564

 
$
(947
)
 
-6.1
 %
ELECTRIC GROSS MARGIN (2)
$
19,770

 
$
22,845

 
$
(3,075
)
 
-13.5
 %
PERCENT MARGIN - ELECTRIC
57.5
%
 
59.5
%
 
0.6

 
 

 
 
 
 
 
 
(1)         As reported on AWR’s Consolidated Statements of Income, except for supply cost balancing accounts. The sum of water and electric supply cost balancing accounts in the table above is shown on AWR’s Consolidated Statements of Income and totaled $6,346,000 and $214,000 for the years ended December 31, 2014 and 2013, respectively. Revenues include surcharges, which increase both revenues and operating expenses by corresponding amounts, thus having no net earnings impact. 


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(2)         Water and electric gross margins do not include any depreciation and amortization, maintenance, administrative and general, property or other tax, or other operation expenses.
 
Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. Under the modified cost balancing account (“MCBA”), GSWC tracks adopted and actual expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual water purchased, power purchased, and pump tax expenses as regulatory assets or liabilities. GSWC recovers from or refunds to customers the amount of such variances.  GSWC tracks these variances individually for each water ratemaking area.
 
The overall actual percentages for purchased water for the years ended December 31, 2014 and 2013 approximated the adopted overall percentage of 35%. The overall water gross margin percent was 73.6% for the year ended December 31, 2014 as compared to 74.4% in the same period of 2013.
 
Purchased water costs for the year ended December 31, 2014 decreased by 1.9% to $57.8 million as compared to $58.9 million in 2013 primarily due to a decrease in customer usage, partially offset by increases in wholesale water costs.
 
For the year ended December 31, 2014, the cost of power purchased for pumping increased to $10.7 million as compared to $9.5 million for 2013 primarily due to an increase in average electric costs. Groundwater production assessments were $16.5 million in 2014 as compared to $15.5 million in 2013 due to an increase in rates levied by government agencies.
 
The water supply cost balancing account increased $3.3 million during the year ended December 31, 2014 as compared to the same period in 2013 due to an increase in rates specifically to cover increases in supply costs for certain rate-making areas, as previously discussed. This increase in revenues is offset by a corresponding increase in the water supply cost balancing account, resulting in no impact to the water gross margin.
 
For the year ended December 31, 2014, the cost of power purchased for resale to customers in GSWC’s BVES division decreased to $9.6 million, as compared to $13.4 million for the year ended December 31, 2013, due primarily to a decrease in the average price per MWh during the year ended December 31, 2014. The average price per MWh decreased from $62.18 per MWh for the year ended December 31, 2013 to $48.00 per MWh for the same period in 2014. There was also a 5.4% decrease in customer usage as compared to the year ended December 31, 2013. The electric supply cost balancing account included in total supply costs increased by $2.8 million due to the decrease in the average price per MWh.
 
Other Operation
 
The primary components of other operation expenses for GSWC include payroll, materials and supplies, chemicals and water treatment, and outside service costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing and operations of district offices.  Registrant’s contracted services operations incur many of the same types of costs as well.  For the years ended December 31, 2014 and 2013, other operation expenses by segment consisted of the following (dollar amounts in thousands):
 
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
22,871

 
$
22,356

 
$
515

 
2.3
 %
Electric Services
2,677

 
2,754

 
(77
)
 
-2.8
 %
Contracted Services
2,740

 
2,657

 
83

 
3.1
 %
Total other operation expenses
$
28,288

 
$
27,767

 
$
521

 
1.9
 %
 
For the year ended December 31, 2014, other operation expense for water services increased by $515,000 as compared to 2013. As part of the CPUC's final decision on the water rate case approved in May 2013, during the first quarter of 2013 GSWC recorded a $1.0 million reduction in other operation expense as a result of the CPUC approval for recovery of certain previously expensed costs. There was no similar reduction in 2014. Excluding the impact of this item, other operation expense for water services decreased by approximately $485,000 due primarily to a decrease in labor resulting from a lower number of employees, and a decrease in conservation and outside service costs. Conservation costs are expected to increase in 2015.


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Table of Contents

For the year ended December 31, 2014, other operation expenses for electric services decreased by $77,000 as compared to 2013. Billed surcharges in 2014 for the recovery of certain operation costs previously incurred decreased by $435,000 as compared to the same period in 2013. As these surcharges are billed each month, a corresponding dollar amount is recorded to other operation expenses, having no impact on pretax operating income. Excluding this decrease, other operation expenses for electric services increased by $358,000 due to increases in costs of operating BVES's generating unit.

Administrative and General
 
Administrative and general expenses include payroll related to administrative and general functions, the related employee benefits, insurance expenses, outside legal and consulting fees, regulatory utility commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the years ended December 31, 2014 and 2013, administrative and general expenses by segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
57,729

 
$
55,053

 
$
2,676

 
4.9
 %
Electric Services
8,085

 
9,592

 
(1,507
)
 
-15.7
 %
Contracted Services
12,461

 
12,639

 
(178
)
 
-1.4
 %
AWR (parent)
48

 
7

 
41

 
585.7
 %
Total administrative and general expenses
$
78,323

 
$
77,291

 
$
1,032

 
1.3
 %
 
For the year ended December 31, 2014, administrative and general expenses for water services increased by $2.7 million compared to 2013. During the first quarter of 2013, as part of the CPUC's final decisions on the water rate case, GSWC recorded a $1.7 million reduction in administrative and general expenses as a result of the CPUC approval of recovery of certain previously expensed costs. There was no similar reduction in 2014. Additionally, during the year ended December 31, 2014, there was a decrease of $547,000 in surcharges billed for the recovery of various administrative and general costs previously incurred, as compared to the same period in 2013. As these costs are recovered in revenue through surcharges, a corresponding dollar amount is recorded to administrative and general expenses, having no impact on pretax operating income. Excluding the effect of these two items, administrative and general expenses for water services increased by approximately $1.5 million due primarily to an increase in legal and outside service costs, partially offset by lower general liability and workers' compensation reserves and pension expense. Registrant expects pension expense to increase during 2015 as a result of lower discount rates and new mortality tables. CPUC-approved rate increases effective January 1, 2015 are expected to provide adequate rate recovery for these expected increases. In addition, for the water and electric segments, differences between actual pension expense and forecasted pension expense included in rates are tracked in the two-way pension balancing accounts, resulting in no impact to pretax income.

For the year ended December 31, 2014, administrative and general expenses for electric services decreased by $1.5 million compared to 2013. Surcharges billed in 2014 for the recovery of various previously incurred administrative and general costs decreased by $501,000 as compared to the same period in 2013. As discussed previously, as these surcharges are recorded as revenue, a corresponding dollar amount is recorded to administrative and general expenses, having no impact on pretax operating income. In May 2013 the CPUC approved recovery of $834,000 in legal and outside service costs related to compliance with the CPUC's renewables portfolio standard. There was no similar reduction in 2014. Excluding the impact of these items, administrative and general expenses for electric services decreased by $1.8 million due primarily to decreases in legal and outside service costs, pension expense and workers' compensation and general liability reserves.
 
For the year ended December 31, 2014, administrative and general expenses for contracted services decreased by $178,000 primarily due to a decrease in legal and outside service costs and pension expense, partially offset by an increase in labor costs.


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Table of Contents

Depreciation and Amortization
 
For the years ended December 31, 2014 and 2013, depreciation and amortization expense by segment consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
38,388

 
$
36,636

 
$
1,752

 
4.8
 %
Electric Services
1,466

 
2,316

 
(850
)
 
-36.7
 %
Contracted Services
1,219

 
1,138

 
81

 
7.1
 %
Total depreciation and amortization
$
41,073

 
$
40,090

 
$
983

 
2.5
 %
 
For the year ended December 31, 2014, depreciation and amortization expense for water services increased by $1.8 million due primarily to approximately $91 million of additions to utility plant during 2013, partially offset by approximately $11 million of asset retirements.

For the year ended December 31, 2014, depreciation and amortization expense for electric services decreased by $850,000 primarily due to lower depreciation composite rates approved by the CPUC in the electric general rate case in November 2014.
 
Maintenance
 
For the years ended December 31, 2014 and 2013, maintenance expense by segment consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
13,067

 
$
14,994

 
$
(1,927
)
 
-12.9
 %
Electric Services
878

 
829

 
49

 
5.9
 %
Contracted Services
2,147

 
1,949

 
198

 
10.2
 %
Total maintenance
$
16,092

 
$
17,772

 
$
(1,680
)
 
-9.5
 %
 
For the year ended December 31, 2014, maintenance expense for water services decreased by $1.9 million compared to the year ended December 31, 2013 due to a higher level of planned maintenance performed in 2013. Planned maintenance expense for water services is expected to increase in 2015 as compared to 2014.
 
For the year ended December 31, 2014, maintenance expense for contracted services increased by $198,000 due to increased maintenance activities performed at various military bases as compared to the same period in 2013.

Property and Other Taxes
 
For the years ended December 31, 2014 and 2013, property and other taxes by segment, consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
14,285

 
$
13,130

 
$
1,155

 
8.8
 %
Electric Services
936

 
942

 
(6
)
 
-0.6
 %
Contracted Services
1,501

 
1,793

 
(292
)
 
-16.3
 %
Total property and other taxes
$
16,722

 
$
15,865

 
$
857

 
5.4
 %
 
For the year ended December 31, 2014, property and other taxes for water and electric services increased by $1.2 million due primarily to increases in property taxes of approximately $985,000 resulting from capital additions and associated higher assessed property values. There was also an increase in franchise fees.
 

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Table of Contents

For the year ended December 31, 2014, property and other taxes for contracted services decreased by $292,000 due to lower accrued gross receipt taxes for the military bases in Virginia as a result of lower construction activity, and also at Fort Bragg as a result of the elimination of the gross receipt tax in North Carolina effective July 1, 2014.
 
ASUS Construction
 
For the year ended December 31, 2014, construction expenses for contracted services were $65.4 million, decreasing by $11.3 million compared to the same period in 2013 due to lower construction activity, primarily at FBWS and ODUS, partially offset by higher construction activity at TUS. As previously discussed, ASUS subsidiaries completed or are nearing completion of significant work on major capital projects at Fort Bliss and Fort Bragg, resulting in less construction expenses during the year ended December 31, 2014 as compared to the same period in 2013.
 
Interest Expense
 
For the years ended December 31, 2014 and 2013, interest expense by segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
20,260

 
$
20,849

 
$
(589
)
 
-2.8
 %
Electric Services
1,264

 
1,438

 
(174
)
 
-12.1
 %
Contracted Services
151

 
286

 
(135
)
 
-47.2
 %
AWR (parent)
(58
)
 
(158
)
 
100

 
-63.3
 %
Total interest expense
$
21,617

 
$
22,415

 
$
(798
)
 
-3.6
 %
 
Overall, interest expense for the year ended December 31, 2014 decreased by $798,000 as compared to 2013 due primarily to the redemption of $15.0 million of certain long-term notes in July 2014, as well as other debt maturing during the fourth quarter of 2013 totaling $3.1 million. This was partially offset by an increase in short-term borrowings under the credit facility. The average bank balances under Registrant's revolving credit facility was $6.2 million during 2014. There were no borrowings under the credit facility during 2013. The average interest rate on short term borrowings was 0.81% during 2014.

Interest Income
 
For the years ended December 31, 2014 and 2013, interest income by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
890

 
$
613

 
$
277

 
45.2
 %
Electric Services
4

 
2

 
2

 
100.0
 %
Contracted Services
9

 
22

 
(13
)
 
-59.1
 %
AWR (parent)
24

 
70

 
(46
)
 
-65.7
 %
Total interest income
$
927

 
$
707

 
$
220

 
31.1
 %
 
Interest income increased by $220,000 for the year ended December 31, 2014 as compared to 2013 due primarily to interest collected on certain outstanding balances owed to GSWC. There was no similar item in 2013.
 

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Table of Contents

Other, net
 
For the year ended December 31, 2014, other income decreased by $354,000 primarily due to lower accrued interest related to GSWC's allowance for funds used during construction and lower gains on investments held in a Rabbi Trust for the Supplemental Executive Retirement Plan as compared to the same period in 2013.
 
Income Tax Expense
 
For the years ended December 31, 2014 and 2013, income tax expense by segment, including AWR (parent), consisted of the following (dollar amounts in thousands):
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2014
 
12/31/2013
 
CHANGE
 
CHANGE
Water Services
$
30,410

 
$
30,679

 
$
(269
)
 
-0.9
 %
Electric Services
1,596

 
2,455

 
(859
)
 
-35.0
 %
Contracted Services
7,038

 
4,911

 
2,127

 
43.3
 %
AWR (parent)
(996
)
 
(2,262
)
 
1,266

 
-56.0
 %
Total income tax expense
$
38,048

 
$
35,783

 
$
2,265

 
6.3
 %
 
For the year ended December 31, 2014, income tax expense for water and electric services decreased to $32.0 million compared to $33.1 million for the same period in 2013 due primarily to a decrease in pretax income. The effective tax rate (“ETR”) for GSWC for the year ended December 31, 2014 decreased slightly to 40.1% as compared to 40.5% in 2013.  The ETR deviates from the federal statutory rate primarily due to state taxes and changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally plant-, rate-case- and compensation-related items), and changes in permanent items.  Flow-through adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period.
 
Income tax expense for contracted services increased to $7.0 million compared to $4.9 million. This was due to an increase in pretax income and a higher ETR than in 2013.  The ETR for contracted services was 36.6% for 2014 as compared to 29.8% for 2013. In 2013, cumulative deductions were taken for 2013 and prior years related to certain construction activities.

For the year ended December 31, 2014, income tax benefit at AWR (parent) decreased by $1.3 million as compared to 2013 due primarily to a cumulative tax benefit recorded in 2013 for deductions taken related to an employee benefit program, with no similar cumulative benefit recorded in 2014.

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Table of Contents

Consolidated Results of Operations — Years Ended December 31, 2013 and 2012 (dollar amounts in thousands, except per share amounts): 
 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2013
 
12/31/2012
 
CHANGE
 
CHANGE
OPERATING REVENUES
 

 
 

 
 

 
 

Water
$
320,131

 
$
305,898

 
$
14,233

 
4.7
 %
Electric
38,409

 
37,033

 
1,376

 
3.7
 %
Contracted services
113,537

 
123,977

 
(10,440
)
 
-8.4
 %
Total operating revenues
472,077

 
466,908

 
5,169

 
1.1
 %
 
 
 
 
 
 
 
 
OPERATING EXPENSES
 

 
 

 
 

 
 

Water purchased
58,930

 
54,010

 
4,920

 
9.1
 %
Power purchased for pumping
9,518

 
8,355

 
1,163

 
13.9
 %
Groundwater production assessment
15,541

 
14,732

 
809

 
5.5
 %
Power purchased for resale
13,392

 
12,120

 
1,272

 
10.5
 %
Supply cost balancing accounts
214

 
11,709

 
(11,495
)
 
-98.2
 %
Other operation
27,767

 
29,790

 
(2,023
)
 
-6.8
 %
Administrative and general
77,291

 
70,556

 
6,735

 
9.5
 %
Depreciation and amortization
40,090

 
41,385

 
(1,295
)
 
-3.1
 %
Maintenance
17,772

 
15,887

 
1,885

 
11.9
 %
Property and other taxes
15,865

 
15,381

 
484

 
3.1
 %
ASUS construction
76,627

 
81,957

 
(5,330
)
 
-6.5
 %
Net gain on sale of property
(2
)
 
(68
)
 
66

 
-97.1
 %
Total operating expenses
353,005

 
355,814

 
(2,809
)
 
-0.8
 %
 
 
 
 
 
 
 
 
OPERATING INCOME
119,072

 
111,094

 
7,978

 
7.2
 %
 
 
 
 
 
 
 
 
OTHER INCOME AND EXPENSES
 

 
 

 
 

 
 

Interest expense
(22,415
)
 
(22,765
)
 
350

 
-1.5
 %
Interest income
707

 
1,333

 
(626
)
 
-47.0
 %
Other, net
1,105

 
431

 
674

 
156.4
 %
 
(20,603
)
 
(21,001
)
 
398

 
-1.9
 %
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
98,469

 
90,093

 
8,376

 
9.3
 %
 
 
 
 
 
 
 
 
Income tax expense
35,783

 
35,945

 
(162
)
 
-0.5
 %
 
 
 
 
 
 
 
 
INCOME FROM CONTINUING OPERATIONS
62,686

 
54,148

 
8,538

 
15.8
 %
 
 
 
 
 
 
 
 
Basic earnings from continuing operations
$
1.61

 
$
1.42

 
$
0.19

 
13.4
 %
 
 
 
 
 
 
 
 
Diluted earnings from continuing operations
$
1.61

 
$
1.41

 
$
0.20

 
14.2
 %

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Table of Contents



The table below sets forth diluted earnings per share by business segment for AWR’s operations:
 
Diluted Earnings per Share
 
Year Ended
 
 
 
12/31/2013
 
12/31/2012
 
CHANGE
Water
$
1.19

 
$
0.90

 
$
0.29

Electric
0.06

 
0.12

 
(0.06
)
Contracted services
0.30

 
0.39

 
(0.09
)
AWR (parent)
0.06

 

 
0.06

Totals from operations, as reported
$
1.61

 
$
1.41


$
0.20

 
For the year ended December 31, 2013, fully diluted earnings per share contributed by the water segment increased by $0.29 per share to $1.19 per share, as compared to $0.90 per share for 2012. Items impacting the comparability of the two periods were:

An increase in the water gross margin of approximately $13.4 million, or $0.20 per share, due primarily to rate increases and a higher adopted water gross margin effective January 1, 2013 approved by the CPUC on May 9, 2013 in connection with the water general rate case. In addition, there was an increase of $4.6 million in revenues with a corresponding increase in operating expenses, representing new surcharges billed to customers during 2013 to recover previously incurred costs. These surcharges had no impact to net earnings.
GSWC recorded a $2.7 million, or $0.04 per share, decrease in operating expenses as a result of the CPUC's approval for recovery of previously incurred operating expenses in connection with the water general rate case final decision issued in May 2013. Among other things, the final decision approved the one-time recovery of various memorandum accounts, which tracked certain costs that were previously expensed as incurred. As a result, GSWC recorded regulatory assets for these memorandum accounts with a corresponding reduction in operating expenses during the first quarter of 2013.
Excluding supply costs, the $4.6 million of surcharges and the impact of the memorandum accounts discussed above, operating expenses decreased by approximately $1.7 million, or $0.03 per share, due primarily to decreases in: (i) depreciation expense as a result of lower composite depreciation rates approved in the water rate case, and (ii) operation-related expenses resulting from lower bad debt expense, labor and other employee-related expenses. These decreases were partially offset by increases in: (i) administrative and general expenses resulting from higher legal and other outside services cost and workers compensation costs, and (ii) maintenance expense for planned maintenance work.
A decrease in the water effective income tax rate for the water segment during the year ended December 31, 2013 as compared to 2012, which increased earnings by approximately $0.02 per share primarily resulting from changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. Flow-through tax adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period.

Diluted earnings from electric operations decreased by $0.06 per share as compared to 2012. In May 2013, the CPUC approved recovery of legal and outside services costs previously expensed in connection with GSWC's effort to procure renewable resources under the CPUC's renewables portfolio standard (“RPS”). As a result, GSWC recorded an $834,000 reduction in other operating expenses during 2013 as compared to the RPS recovery approved during 2012 of $1.2 million. The difference resulted in a decrease of $416,000 in pretax income, or $0.01 per share for 2013. In addition to the impact of this RPS recovery, there was an increase of $1.2 million, or $0.03 per share, in other operating expenses, excluding supply costs and surcharges billed to customers during 2013 to recover previously incurred costs. These surcharges had no impact to net earnings. Finally, there was a higher electric effective income tax rate during 2013, negatively impacting earnings by $0.02 per share.
 

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Diluted earnings from contracted services decreased by $0.09 per share during the year ended December 31, 2013 due primarily to: (i) an overall decrease in construction activities on major construction projects as compared to 2012; (ii) an increase in administrative expenses related to employee related costs and consulting and other outside services costs, incurred in part, to pursue new military base utility privatization opportunities, and (iii) a contract modification received in April 2012 for a major water and wastewater pipeline replacement project at Fort Bragg resulting in additional pretax operating income of $820,000, or approximately $0.01 per share with no similar contract modification received during 2013. The decrease in construction activities was due, in part, to delays in construction caused by unfavorable weather conditions and permitting delays outside the Company’s control, which have now been resolved. These decreases were partially offset by a lower effective tax rate as the result of a cumulative tax deduction for certain construction activities taken on a recently filed tax return and expected to be taken on amended tax returns. As a result, the lower effective income tax rate for contracted services increased earnings by $0.04 per share as compared to 2012.
    
Diluted earnings from AWR (parent) increased by $0.06 per share as compared to 2012 resulting primarily from a cumulative tax benefit related to an employee benefit program of approximately $1.5 million recorded during the third quarter of 2013 for deductions taken on recently filed tax returns and amounts expected to be taken on amended income tax returns. Approximately $1.3 million of this tax benefit related to periods prior to 2013. It is management's intention to amend tax returns for open years to reflect these deductions.

The following discussion and analysis for the years ended December 31, 2013 and 2012 provide information on AWR’s consolidated operations and assets and where necessary, includes specific references to AWR’s individual segments and/or subsidiaries, GSWC and ASUS and its subsidiaries.
 
Operating Revenues
 
Water
For the year ended December 31, 2013, revenues from water operations increased by $14.2 million to $320.1 million, compared to $305.9 million for the year ended December 31, 2012. The increase in water revenues is primarily due to higher water rates approved by the CPUC effective January 1, 2013 in connection with the general rate case for all three water regions and the general office, as previously discussed. The revenue increase adopted by the CPUC for 2013 was approximately $10 million over 2012 adopted levels. In addition, there was also a $4.6 million increase in surcharges during the year ended December 31, 2013 to recover previously incurred costs approved by the CPUC. The increase in revenues from these surcharges is offset by a corresponding increase in operating expenses (primarily administrative and general) resulting in no impact to pretax operating income.
 GSWC’s revenue requirement and volumetric revenues are adopted as part of a general rate case (“GRC”) every three years. GSWC filed a GRC for all three water regions in July of 2014 with rates expected to be effective January 1, 2016. For the year ended December 31, 2013, GSWC’s billed customer water usage increased by approximately 3.0% as compared to 2012, but was lower than adopted consumption.  Changes in consumption do not have a significant impact on revenues due to the CPUC-approved Water Revenue Adjustment Mechanism (“WRAM”) account in place in all three water regions. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.
Electric
For the year ended December 31, 2013, revenues from electric operations were $38.4 million compared to $37.0 million for 2012. There was a $1.4 million increase in surcharges during 2013 to recover previously incurred costs approved by the CPUC. As previously discussed, increases in revenues from these surcharges is offset by a corresponding increase in operating expenses (primarily administrative and general) resulting in no impact to pretax operating income. Excluding the impact of these surcharges, electric revenues remained unchanged compared to 2013 as a result of the delay in the rate case. In February 2012, GSWC filed its BVES rate case for rates in years 2013 through 2016. A final decision from the CPUC was received in November 2014. Due to the delay in receiving a final decision on the BVES rate case, 2013 electric revenues were recorded using 2012 adopted levels authorized by the CPUC.
 Billed electric usage for the year ended December 31, 2013 increased 2.6% as compared to 2012.  Due to the CPUC approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, this change in usage did not have a significant impact on revenues.

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Contracted Services
For the year ended December 31, 2013, revenues from contracted services decreased to $113.5 million as compared to $124.0 million for the year ended December 31, 2012. The decrease was mainly due to lower construction activity at various military bases, particularly at Fort Bliss in Texas and Fort Bragg in North Carolina. This decrease in construction activities was due, in part, to construction delays caused by unfavorable weather conditions and permitting delays outside the applicable Military Utility Privatization Subsidiary's control, which were resolved. This was partially offset by an increase in construction revenues at the military bases in Virginia as compared to 2012.

Operating Expenses:
Supply Costs
Supply costs accounted for 27.6% and 28.4% of total operating expenses for the years ended December 31, 2013 and 2012, respectively.
The table below provides the amount of increases (decreases), percent changes in supply costs, and gross margins during the years ended December 31, 2013 and 2012 (dollar amounts in thousands):

 
Year
Ended
 
Year
Ended
 
$
 
%
 
12/31/2013
 
12/31/2012
 
CHANGE
 
CHANGE
WATER OPERATING REVENUES (1)
$
320,131

 
$
305,898

 
$
14,233