Edgar Filing: AMERICAN STATES WATER CO

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended June 30, 2006 or

o		Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to

Commission file number 001-14431

American States Water Company
(Exact Name of Registrant as Specified in Its Charter)

California		95-4676679
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

630 E. Foothill Blvd, San Dimas, CA		91773-1207
(Address of Principal Executive Offices)		(Zip Code)

(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)

Not Applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Commission file number 001-12008

Golden State Water Company
(Exact Name of Registrant as Specified in Its Charter)

California		95-1243678
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

630 E. Foothill Blvd, San Dimas, CA		91773-1212
(Address of Principal Executive Offices)		(Zip Code)

(909) 394-3600
(Registrant’s Telephone Number, Including Area Code)

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

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

American States Water Company		Yes x No o
Golden State Water Company		Yes x No o

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

American States Water Company		Large accelerated filer o		Accelerated filer x		Nonaccelerated filer o
Golden State Water Company		Large accelerated filer o		Accelerated filer o		Nonaccelerated filer x

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

American States Water Company		Yes o No x
Golden State Water Company		Yes o No x

As of August 9, 2006, the number of Common Shares outstanding, of American States Water Company was 16,981,858 shares.

As of August 9, 2006, all of the 122 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

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

INDEX

		Page No.
Part I	Financial Information
Item 1:	Financial Statements
	Consolidated Balance Sheets of American States Water Company as of June 30, 2006 and December 31, 2005	3-4

	Consolidated Statements of Income of American States Water Company for the Three Months Ended June 30, 2006 and 2005	5

	Consolidated Statements of Income of American States Water Company for the Six Months Ended June 30, 2006 and 2005	6

	Consolidated Statements of Cash Flow of American States Water Company for the Six Months Ended June 30, 2006 and 2005	7

	Balance Sheets of Golden State Water Company as of June 30, 2006 and December 31, 2005	8-9

	Statements of Income of Golden State Water Company for the Three Months Ended June 30, 2006 and 2005	10

	Statements of Income of Golden State Water Company for the Six Months Ended June 30, 2006 and 2005	11

	Statements of Cash Flow of Golden State Water Company for the Six Months Ended June 30, 2006 and 2005	12

	Notes to Consolidated Financial Statements	13

Item 2:	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	44

Item 4:	Controls and Procedures	44

Part II	Other Information
Item 1:	Legal Proceedings	45

Item 1A:	Risk Factors	45

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	45

Item 3:	Defaults Upon Senior Securities	45

Item 4:	Submission of Matters to a Vote of Security Holders	46

Item 5:	Other Information	46

Item 6:	Exhibits	46

	Signatures	47

PART I

Item 1. Financial Statements

General

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

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

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

Filing Format

This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: American States Water Company (hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”) (formerly known as Southern California Water Company). For more information, please see Note 1 to the Notes to Consolidated Financial Statements and the heading entitled General in Item 2 - Management’s Discussion and Analysis of Financial Condition and Results of Operations. References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than GSWC.

Forward-Looking Information

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

	June 30,			December 31,
*(in thousands)*	2006			2005
Utility Plant, at cost

Water	$	882,870		$	869,471
Electric	61,928			61,386
	944,798			930,857
Less - Accumulated depreciation	(274,173		)	(259,915		)
	670,625			670,942
Construction work in progress	60,777			42,283
Net utility plant	731,402			713,225

Other Property and Investments
Goodwill	11,799			11,841
Other property and investments	9,695			9,740
Total other property and investments	21,494			21,581

Current Assets
Cash and cash equivalents	9,434			13,032
Accounts receivable-customers (less allowance for doubtful accounts of $760 in 2006 and $789 in 2005)	13,207			13,341
Unbilled revenue	18,925			15,195
Other accounts receivable (less allowance for doubtful accounts of $313 in 2006 and $337 in 2005)	10,344			10,844
Income taxes receivable	23			822
Materials and supplies, at average cost	1,550			1,421
Regulatory assets - current	6,188			6,104
Prepayments and other current assets	2,166			2,998
Unrealized gain on purchased power contracts	339			3,417
Costs and estimated earnings in excess of billings on uncompleted contracts	3,767			—
Deferred income taxes - current	2,785			1,692
Total current assets	68,728			68,866

Regulatory and Other Assets
Regulatory assets	60,036			55,866
Other accounts receivable	9,037			8,820
Deferred income taxes	38			—
Other	8,322			8,419
Total regulatory and other assets	77,433			73,105

Total Assets	$	899,057		$	876,777

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

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

	June 30,			December 31,
*(in thousands)*	2006			2005
Capitalization
Common shares, no par value, no stated value	$	172,358		$	166,529
Earnings reinvested in the business	105,613			101,121
Accumulated other comprehensive loss	(3,556		)	(3,556		)
Total common shareholders’ equity	274,415			264,094
Long-term debt	268,209			268,405
Total capitalization	542,624			532,499

Current Liabilities
Notes payable to banks	28,000			27,000
Long-term debt - current	571			635
Accounts payable	20,875			19,653
Income taxes payable	2,294			1,534
Accrued employee expenses	5,120			5,879
Accrued interest	2,547			2,254
Regulatory liabilities - current	5,189			5,592
Deferred income taxes - current	—			86
Other	12,071			14,952
Total current liabilities	76,667			77,585

Other Credits
Advances for construction	86,642			85,168
Contributions in aid of construction - net	86,153			83,976
Deferred income taxes	75,433			69,669
Unamortized investment tax credits	2,473			2,518
Accrued pension and other postretirement benefits	17,313			13,562
Regulatory liabilities	760			1,823
Billings in excess of costs and estimated earnings on uncompleted contracts	3,090			2,207
Other	7,902			7,770
Total other credits	279,766			266,693

Commitments and Contingencies (Note 8)	—			—

Total Capitalization and Liabilities	$	899,057		$	876,777

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Three Months Ended
	June 30,
*(in thousands, except per share amounts)*	2006			2005
Operating Revenues
Water	$	53,122		$	53,574
Electric	7,027			6,091
Other	1,989			867
Total operating revenues	62,138			60,532

Operating Expenses
Water purchased	10,916			12,277
Power purchased for pumping	2,416			2,184
Groundwater production assessment	2,239			1,843
Power purchased for resale	3,248			2,710
Unrealized loss (gain) on purchased power contracts	923			(459		)
Supply cost balancing accounts	(825		)	(550		)
Other operating expenses	5,886			5,218
Administrative and general expenses	10,902			11,608
Depreciation and amortization	6,610			5,725
Maintenance	3,246			2,484
Property and other taxes	2,475			2,244
Total operating expenses	48,036			45,284

Operating Income	14,102			15,248

Interest expense	(5,347		)	(4,809		)
Interest income	963			35

Income from operations before income tax expense	9,718			10,474

Income tax expense	3,449			4,739

Net Income	$	6,269		$	5,735

Weighted Average Number of Shares Outstanding	16,881			16,773
Basic Earnings Per Common Share	$	0.36		$	0.34

Weighted Average Number of Diluted Shares	16,947			16,834
Fully Diluted Earnings Per Share	$	0.36		$	0.34

Dividends Declared Per Common Share	$	0.225		$	0.225

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Six Months Ended
	June 30,
*(in thousands, except per share amounts)*	2006			2005
Operating Revenues
Water	$	101,271		$	95,071
Electric	15,372			13,561
Other	6,102			1,713
Total operating revenues	122,745			110,345

Operating Expenses
Water purchased	19,260			19,963
Power purchased for pumping	4,020			3,671
Groundwater production assessment	4,322			3,764
Power purchased for resale	7,811			6,847
Unrealized loss (gain) on purchased power contracts	3,078			(3,474		)
Supply cost balancing accounts	(338		)	528
Other operating expenses	10,587			10,287
Administrative and general expenses	22,015			21,909
Depreciation and amortization	13,092			11,389
Maintenance	5,719			4,822
Property and other taxes	5,018			4,539
Gain on settlement for removal of wells	—			(760		)
Total operating expenses	94,584			83,485

Operating Income	28,161			26,860

Interest expense	(10,515		)	(9,534		)
Interest income	1,776			56

Income from operations before income tax expense	19,422			17,382

Income tax expense	7,252			7,883

Net Income	$	12,170		$	9,499

Weighted Average Number of Shares Outstanding	16,844			16,769
Basic Earnings Per Common Share	$	0.71		$	0.57

Weighted Average Number of Diluted Shares	16,905			16,821
Fully Diluted Earnings Per Share	$	0.71		$	0.56

Dividends Declared Per Common Share	$	0.450		$	0.450

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Six Months Ended
	June 30,
*(in thousands)*	2006			2005
Cash Flows From Operating Activities:
Net income	$	12,170		$	9,499
Adjustments for non-cash items:
Depreciation and amortization	13,092			11,389
Provision for doubtful accounts	264			235
Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits	3,704			3,219
Unrealized loss (gain) on purchased power contracts	3,078			(3,474		)
Stock-based compensation expense	325			97
Other - net	421			(165		)
Changes in assets and liabilities:
Accounts receivable - customers	(130		)	(1,182		)
Unbilled revenue	(3,730		)	(3,890		)
Other accounts receivable	283			52
Materials and supplies	(129		)	60
Prepayments and other current assets	832			1,549
Regulatory assets - supply cost balancing accounts	(338		)	528
Other assets	(6,227		)	336
Accounts payable	1,222			576
Income taxes receivable/payable	1,559			9,189
Other liabilities	660			4,871
Net cash provided	27,056			32,889

Cash Flows From Investing Activities:
Construction expenditures	(34,122		)	(35,834		)
Net cash used	(34,122		)	(35,834		)

Cash Flows From Financing Activities:
Proceeds from issuance of common shares	1,023			555
Proceeds from stock option exercises	3,421			—
Tax benefits from exercise of stock-based awards	897			—
Receipt of advances for and contributions in aid of construction	5,892			8,128
Refunds on advances for construction	(2,196		)	(2,372		)
Repayments of long-term debt	(260		)	(353		)
Net change in notes payable to banks	1,000			4,000
Cash received on financing portion of purchased power contracts	1,333			1,333
Dividend equivalent rights paid	(127		)	—
Tax benefits from payment of dividend equivalent rights	52			—
Dividends paid	(7,567		)	(7,545		)
Net cash provided	3,468			3,746

Net (decrease) increase in cash and cash equivalents	(3,598		)	801
Cash and cash equivalents, beginning of period	13,032			4,303
Cash and cash equivalents, end of period	$	9,434		$	5,104

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

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

	June 30,			December 31,
*(in thousands)*	2006			2005
Utility Plant, at cost

Water	$	832,638		$	819,958
Electric	61,928			61,386
	894,566			881,344
Less - Accumulated depreciation	(259,927		)	(246,649		)
	634,639			634,695
Construction work in progress	58,240			38,334
Net utility plant	692,879			673,029


Other Property and Investments
Other property and investments	7,318			7,364
Total other property and investments	7,318			7,364

Current Assets
Cash and cash equivalents	6,319			8,788
Accounts receivable-customers (less allowance for doubtful accounts of $715 in 2006 and $765 in 2005)	12,754			12,919
Unbilled revenue	18,495			14,856
Inter-company receivable	298			263
Other accounts receivable (less allowance for doubtful accounts of $310 in 2006 and $334 in 2005)	3,067			6,106
Materials and supplies, at average cost	1,534			1,404
Regulatory assets - current	6,113			6,033
Prepayments and other current assets	1,921			2,795
Unrealized gain on purchased power contracts	339			3,417
Deferred income taxes - current	2,751			1,693
Total current assets	53,591			58,274

Regulatory and Other Assets
Regulatory assets	59,834			55,627
Other accounts receivable	9,037			8,820
Other	7,477			7,575
Total regulatory and other assets	76,348			72,022

Total Assets	$	830,136		$	810,689

The accompanying notes are an integral part of these financial statements

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

	June 30,			December 31,
*(in thousands)*	2006			2005
Capitalization
Common shares, no par value, no stated value	$	160,897		$	159,531
Earnings reinvested in the business	103,045			99,645
Accumulated other comprehensive loss	(3,556		)	(3,556		)
Total common shareholder’s equity	260,386			255,620
Long-term debt	261,344			261,540
Total capitalization	521,730			517,160

Current Liabilities
Long-term debt - current	301			295
Accounts payable	18,771			17,914
Inter-company payable	2,500			—
Income taxes payable to Parent	4,626			2,268
Accrued employee expenses	4,750			5,507
Accrued interest	2,515			2,218
Regulatory liabilities - current	5,189			5,592
Deferred income taxes - current	—			109
Other	11,366			12,390
Total current liabilities	50,018			46,293

Other Credits
Advances for construction	76,114			74,790
Contributions in aid of construction - net	84,750			83,055
Deferred income taxes	70,896			65,469
Unamortized investment tax credits	2,473			2,518
Accrued pension and other postretirement benefits	17,313			13,562
Regulatory liabilities	—			1,063
Other	6,842			6,779
Total other credits	258,388			247,236

Commitments and Contingencies (Note 8)	—			—

Total Capitalization and Liabilities	$	830,136		$	810,689

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Three Months Ended June 30,
*(in thousands)*	2006			2005
Operating Revenues
Water	$	51,073		$	51,797
Electric	7,027			6,091
Other	318			36
Total operating revenues	58,418			57,924

Operating Expenses
Water purchased	10,702			12,100
Power purchased for pumping	2,218			2,045
Groundwater production assessment	2,239			1,878
Power purchased for resale	3,248			2,710
Unrealized loss (gain) on purchased power contracts	923			(459		)
Supply cost balancing accounts	(825		)	(550		)
Other operating expenses	4,906			4,697
Administrative and general expenses	8,910			9,763
Depreciation and amortization	6,134			5,444
Maintenance	3,022			2,268
Property and other taxes	2,368			2,135
Total operating expenses	43,845			42,031

Operating Income	14,573			15,893

Interest expense	(4,875		)	(4,481		)
Interest income	928			15

Income from operations before income tax expense	10,626			11,427

Income tax expense	3,867			5,130

Net Income	$	6,759		$	6,297

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Six Months Ended June 30,
*(in thousands)*	2006			2005
Operating Revenues
Water	$	97,440		$	91,951
Electric	15,372			13,561
Other	2,919			56
Total operating revenues	115,731			105,568

Operating Expenses
Water purchased	18,877			19,670
Power purchased for pumping	3,733			3,457
Groundwater production assessment	4,322			3,799
Power purchased for resale	7,811			6,847
Unrealized loss (gain) on purchased power contracts	3,078			(3,474		)
Supply cost balancing accounts	(338		)	528
Other operating expenses	9,434			9,310
Administrative and general expenses	19,094			18,742
Depreciation and amortization	12,165			10,830
Maintenance	5,341			4,461
Property and other taxes	4,794			4,318
Total operating expenses	88,311			78,488

Operating Income	27,420			27,080

Interest expense	(9,678		)	(8,900		)
Interest income	1,724			32

Income from operations before income tax expense	19,466			18,212

Income tax expense	7,362			8,236

Net Income	$	12,104		$	9,976

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
CASH FLOW STATEMENTS
FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005
(Unaudited)

	Six Months Ended June 30,
*(in thousands)*	2006			2005
Cash Flows From Operating Activities:
Net income	$	12,104		$	9,976
Adjustments for non-cash items:
Depreciation and amortization	12,165			10,830
Provision for doubtful accounts	239			218
Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits	3,417			2,782
Unrealized loss (gain) on purchased power contracts	3,078			(3,474		)
Stock-based compensation expense	310			97
Other - net	346			37
Changes in assets and liabilities:
Accounts receivable - customers	(74		)	(1,181		)
Unbilled revenue	(3,639		)	(3,789		)
Other accounts receivable	2,822			172
Materials and supplies	(130		)	63
Prepayments and other current assets	874			1,503
Regulatory assets - supply cost balancing accounts	(338		)	528
Other assets	(2,446		)	501
Accounts payable	857			234
Inter-company receivable/payable	(35		)	(2,423		)
Income taxes receivable/payable from/to Parent	2,358			7,979
Other liabilities	(200		)	3,920
Net cash provided	31,708			27,973

Cash Flows From Investing Activities:
Construction expenditures	(33,116		)	(33,437		)
Net cash used	(33,116		)	(33,437		)

Cash Flows From Financing Activities:
Tax benefits from exercise of stock-based awards	897			—
Receipt of advances for and contributions in aid of construction	5,241			7,013
Refunds on advances for construction	(2,173		)	(2,377		)
Repayments of long-term debt	(190		)	(184		)
Net change in inter-company borrowings	2,500			8,300
Cash received on financing portion of purchased power contracts	1,333			1,333
Dividend equivalent rights paid	(116		)	—
Tax benefits from payment of dividend equivalent rights	47			—
Dividends paid	(8,600		)	(8,000		)
Net cash (used) provided	(1,061		)	6,085

Net (decrease) increase in cash and cash equivalents	(2,469		)	621
Cash and cash equivalents, beginning of period	8,788			2,702
Cash and cash equivalents, end of period	$	6,319		$	3,323

The accompanying notes are an integral part of these financial statements

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

Note 1 — Summary of Significant Accounting Policies:

General / Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), American States Utility Services, Inc. (“ASUS”) (and its subsidiaries: Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”) and Old Dominion Utility Services, Inc. (“ODUS”)), and Chaparral City Water Company (“CCWC”). More than 90% of AWR’s assets consist of the common stock of GSWC and its revenues and operations are primarily those of GSWC. GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 254,000 water customers. GSWC also distributes electricity in several California mountain communities serving approximately 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, including properties, rates, services, facilities and other matters. CCWC is a public utility regulated by the Arizona Corporation Commission (“ACC”) serving approximately 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. ASUS performs water-related services and operations on a contract basis. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of the contracted services provided by ASUS and its wholly owned subsidiaries or by AWR.

FBWS operates the water and wastewater systems at Fort Bliss located near El Paso, Texas pursuant to the terms of a 50-year contract with the U.S. Government. FBWS holds a certificate of convenience and necessity from the Texas Commission on Environmental Quality (“TCEQ”). TUS took over the operation and maintenance of the water and wastewater systems at Andrews Air Force Base in Maryland on February 1, 2006 and commenced operation of these systems on that date pursuant to the terms of a 50-year contract with the U.S. Government. On December 14, 2005, the Maryland Public Service Commission determined it was in the public interest and consistent with public convenience and necessity to conditionally approve the right of TUS to operate in accordance with the terms and conditions of the contract with the U.S. Government. Furthermore, ODUS took over the operation and maintenance of the wastewater systems at Fort Lee in Virginia on February 23, 2006 and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginia on April 3, 2006 and commenced operation and maintenance of these systems on those dates pursuant to the terms of a 50-year contract with the U.S. Government. The Virginia State Corporation Commission exercises jurisdiction over ODUS as a public service company.

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. The consolidated financial statements included herein have been prepared by Registrant, without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted pursuant to such rules and regulations. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. In the opinion of management, all adjustments, consisting of normal recurring items and estimates necessary for a fair statement of the results for the interim periods, have been made. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements, and the notes thereto, included in the Form 10-K for the year ended December 31, 2005 filed with the SEC. Certain prior-period amounts were reclassified to conform to the June 30, 2006 financial statement presentation.

GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves. In addition, AWR has an $85 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations. Amounts owed to AWR for borrowings under this facility represent the majority of GSWC’s inter-company payables on GSWC’s balance sheets as of June 30, 2006 and December 31, 2005. The interest rate charged to GSWC is sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliates using agreed upon allocation factors.

Note 2 — Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future revenues associated with certain costs that will be recovered from customers through the ratemaking process, and regulatory liabilities, which represent probable future reductions in revenues associated with amounts that are to be credited to customers through the ratemaking process. At June 30, 2006, Registrant had $9.4 million of regulatory assets not accruing carrying costs. Of this amount, $7.7 million represents deferred income taxes due to accelerated tax benefits previously flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated tax expense. In addition, $1.7 million in deferred charges for rate case applications was recorded as other regulatory assets that Registrant recovers in rates over a short period and for which no recovery of carrying costs is earned.

Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

	June 30,			December 31,
*(In thousands)*	2006			2005
GSWC
Supply cost balancing accounts	$	18,518		$	19,624
Supply cost memorandum accounts net under-collections	4,668			3,151
Costs deferred for future recovery on Aerojet case	21,346			21,109
Flow-through taxes, net	7,737			6,939
Electric transmission line abandonment costs	3,355			3,428
Asset retirement obligations	3,102			2,928
Low income balancing accounts	3,212			2,846
General rate case memorandum accounts	—			209
Refund of water rights lease revenues	(3,902		)	(6,474		)
Other regulatory assets	2,722			1,245
Total GSWC	$	60,758		$	55,005
CCWC
Asset retirement obligations	46			44
Other regulatory assets/liabilities, net	(529		)	(494		)
Total AWR	$	60,275		$	54,555

Supply Cost Balancing and Memorandum Accounts:

Electric Supply Cost Balancing Account — Electric power costs incurred by GSWC’s Bear Valley Electric division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $20.5 million at June 30, 2006. The balance in the electric supply balancing account is primarily impacted by (i) a surcharge to decrease previously under-collected energy costs; (ii) changes in purchased energy costs; and (iii) changes in power system delivery costs.

The CPUC has authorized GSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable GSWC to recover an under-collection of approximately $23.1 million at the end of 2001 which had been incurred during the energy crisis in late 2000 and 2001. GSWC sold 34,381,187 and 30,120,267 kilowatt hours of electricity to its Bear Valley Electric division customers for the three months ended June 30, 2006 and 2005, respectively, and 77,075,265 and 70,314,814 kilowatt hours for the six months ended June 30, 2006 and 2005, respectively. As a result, the supply cost balancing account was reduced by approximately $761,000 and $667,000 for the three months ended June 30, 2006 and 2005, respectively, and approximately $1,706,000 and $1,557,000 for the six months ended June 30, 2006 and 2005, respectively. Approximately $13.6

million of the under-collection incurred during the energy crisis in late 2000 and 2001 has been recovered through this surcharge. GSWC anticipates the surcharge, based on electricity sales, to be sufficient for it to recover the amount of the under-collected balance incurred during the energy crisis by August 2011.

The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of the 2001 settlement with the CPUC. GSWC is allowed to include up to a weighted average annual energy purchase cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing account for purchased energy costs. To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed. During the three months ended June 30, 2006 and 2005, there was no expense over the $77 per MWh cap because of increases in GSWC’s sales of surplus energy into the spot market. During the six months ended June 30, 2006 and 2005, GSWC expensed approximately $40,000 and $48,000 for costs over $77 per MWh, respectively.

Charges to GSWC by Southern California Edison (Edison) associated with the transportation of energy over Edison’s power system and the abandonment of a transmission line upgrade have increased under Edison’s tariff to levels that exceed the amounts authorized by the CPUC in Bear Valley Electric’s retail power rates to its customers. The incremental cost increase to GSWC from this tariff above the amounts included in rates is $38,137 per month, or approximately $114,000 and $229,000 for the three and six months ended June 30, 2006 and 2005, respectively, both of which do not include prepayments. These increases have been included in the balancing account for subsequent recovery from customers. The incoming power system delivery costs are not subject to any price caps.

Other components, such as interest accrued on cumulative under-collected balance and power loss during transmission, also affect the balance of the electric supply cost balancing account.

Water Supply Cost Memorandum/Balancing Accounts - In a CPUC decision issued on June 19, 2003 related to memorandum supply cost accounts, all water utilities regulated by the CPUC were required to seek review of under- and over- collections by filing an advice letter annually and the utility’s recovery of such expenses has been reduced by the amount exceeding the authorized rate of return. On April 13, 2006, the CPUC approved a decision eliminating the earnings test adopted in the June 2003 decision. The recent decision also eliminated the need to make an annual filing. Pursuant to this order, GSWC recognized a cumulative under-collection of approximately $636,000 to the supply cost memorandum account provisions in the second quarter of 2006 for the under-collected balances not recognized at March 31, 2006 and began recording under- and over- collections on a monthly basis thereafter commencing with the second quarter of 2006. In addition, for the three months ended June 30, 2006 and 2005, approximately $599,000 and $1,141,000 of under-collections, respectively, were recorded in the water supply cost memorandum/balancing accounts, net of amortization of approximately $283,000 and $172,000. For the six months ended June 30, 2006 and 2005, approximately $361,000 and $799,000 of under-collections were recorded in the memorandum/balancing accounts, respectively, net of amortization of approximately $520,000 and $291,000, respectively.

Costs Deferred for Future Recovery:

In 1999, GSWC sued Aerojet-General Corporation (“Aerojet”) for contaminating the Sacramento County Groundwater Basin, which affected certain GSWC wells. On a related matter, GSWC also filed a lawsuit against the State of California (the “State”). The CPUC authorized memorandum accounts to allow for recovery, from customers, of costs incurred by GSWC in prosecuting the cases against Aerojet and the State, less any recovery from the defendants or others.

On July 21, 2005, the CPUC authorized GSWC to collect approximately $21.3 million of the Aerojet litigation memorandum account, through a rate surcharge, which will continue for no longer than 20 years. Beginning in October 2005, new rates went into effect to begin amortizing the memorandum account over a 20-year period. A rate surcharge generating approximately $289,000 and $499,000 was billed to customers during the three and six months ended June 30, 2006, respectively. GSWC will keep the Aerojet memorandum account open until it is fully amortized. However, no costs will be added to the memorandum account, other than on-going interest charges approved by the decision.

It is management’s intention to offset any settlement proceeds from Aerojet that may occur pursuant to the settlement agreement against the balance in the memorandum account, with the exception of an $8 million payment (for capital investments) with interest due GSWC guaranteed by Aerojet, to be paid in full over 5 years, beginning in

2009. Pursuant to such settlement agreement, Aerojet has agreed to reimburse GSWC $17.5 million, plus interest accruing from January 1, 2004, for its past legal and expert costs. The recovery of the $17.5 million is contingent upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development. On April 7, 2006, GSWC filed an advice letter with the CPUC to incorporate the Westborough development into the Arden Cordova service area and to provide water service to that new development. The City of Folsom filed a protest of GSWC’s advice letter on April 27, 2006. GSWC has until September 15, 2006 to respond to the protest. GSWC cannot predict the outcome of the City’s protest nor the future development within Aerojet’s property.

Refund of Water Rights Lease Revenues:

In 1994, GSWC entered into a contract to lease to the City of Folsom, 5,000 acre-feet per year of water rights from the American River. GSWC included all associated revenues in a nonoperating income account. In a decision issued on March 16, 2004, the CPUC ordered GSWC to refund 70 percent of the total amount of lease revenues received since 1994, plus interest, to customers. Pursuant to the order, refunds of approximately $144,000 and $150,000 were provided to customers during the three months ended June 30, 2006 and 2005, respectively, and approximately $255,000 and $269,000 were provided to customers during the six months ended June 30, 2006 and 2005, respectively. The refunds will be made over a 9-year period which commenced in June 2004.

Pursuant to the March 2004 CPUC order, the apportionment of any lease revenues that GSWC collects commencing in January 2004 was to be determined by a later decision. Pending that later decision and beginning in the first quarter of 2004, all amounts billed to the City of Folsom had been included in a regulatory liability account and no amounts were recognized as revenue until uncertainties about this matter were resolved with the CPUC. On April 13, 2006, the CPUC authorized GSWC to reinvest all lease revenues received from the City of Folsom since January, 2004, inclusive of the balances in the regulatory liability accounts, in water system infrastructure and to include such investments in the rate base upon which GSWC earns a rate of return. As a result, GSWC transferred approximately $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005 from the regulatory liability account into other operating revenues in the first quarter of 2006. GSWC also recorded additional other operating revenues of approximately $299,000 and $598,000 reflecting water rights revenues for the three and six months ended June 30, 2006, respectively.

Outside Services Memorandum Account:

In April 2006, the CPUC approved GSWC’s Region II advice letter which requested recovery of the expenses recorded in the Outside Services Memorandum Account (“OSMA”), as of December 31, 2005. The decision authorized the recovery of this memorandum account to record costs incurred while working with the Water Replenishment District (“WRD”), WRD Technical Advisory Committee, Central and West Basin Municipal Water Districts, Metropolitan Water District, West Basin Water Association and Central Basin Water Association on water supply reliability and rate-related issues in Region II. GSWC incurred approximately $374,000 and $345,000 in the OSMA in 2004 and 2005, respectively. GSWC sought and received authorization to amortize the cumulative total of approximately $719,000 over a 12-month period through customer rates. Accordingly, GSWC recorded a regulatory asset for this amount in April of 2006 with an offset and reduction to outside legal services recorded in administrative and general expenses for the three months ended June 30, 2006. A surcharge went into effect in April of 2006 and accordingly, GSWC began amortizing the OSMA account. Revenues of approximately $104,000 were received from customers during the three months ended June 30, 2006 relating to this surcharge. GSWC also booked the amortization for these amounts received to its OSMA memorandum account; therefore, there was no net impact on earnings. The surcharge will be in place for a 12-month period from the effective date.

Note 3 — Earnings per Share/Capital Stock:

In accordance with the Emerging Issues Task Force (“EITF”) No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”, Registrant uses the “two-class” method of computing earnings per share (“EPS”). The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”) that have been issued under AWR’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan. In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities. The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating basic net income per share:

*Basic*	For The Three Months Ended June 30,				For The Six Months Ended June 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005
Net income	$	6,269	$	5,735	$	12,170	$	9,499
Less: distributed earnings to common shareholders (a)	3,798		3,774		7,580		7,546
distributed earnings to participating securities	79		—		154		—
Undistributed earnings	2,392		1,961		4,436		1,953

Undistributed earnings allocated to common (b)	2,345		1,961		4,348		1,953
Undistributed earnings allocated to participating	48		—		88		—

Total income available to common shareholders, basic (a)+(b)	$	6,143	$	5,735	$	11,928	$	9,499

Weighted average Common Shares outstanding, basic	16,881		16,773		16,844		16,769
Basic earnings per Common Share	$	0.36	$	0.34	$	0.71	$	0.57

Diluted EPS is based upon the weighted average number of Common Shares including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under Registrant’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. At June 30, 2006 and 2005 there were 645,389 and 688,045 options outstanding, respectively, under these Plans. At June 30, 2006 and 2005, there were also 47,129 and 30,300 restricted stock units outstanding, respectively. The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:

*Diluted*	For The Three Months Ended June 30,				For The Six Months Ended June 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005
Common shareholders earnings, basic	$	6,143	$	5,735	$	11,928	$	9,499
Undistributed earnings for dilutive stock options (1)	—		—		—		—
Total common shareholders earnings, diluted	$	6,143	$	5,735	$	11,928	$	9,499

Weighted average Common Shares outstanding, basic	16,881		16,773		16,844		16,769
Stock-based compensation (2)	66		61		61		52
Weighted average Common Shares outstanding, diluted	16,947		16,834		16,905		16,821

Diluted earnings per Common Share	$	0.36	$	0.34	$	0.71	$	0.56

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

(2) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in calculation of diluted EPS, 241,962 stock options at June 30, 2006 were deemed to be outstanding in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share”. All of the stock options and restricted stock units at June 30, 2005 were included in the calculation of diluted EPS for the three and six months ended June 30, 2005.

Stock options of 403,427 and restricted stock units of 47,129 were outstanding at June 30, 2006, but not included in the computation of diluted EPS because they were antidilutive.

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

During the three months ended June 30, 2006 and 2005, Registrant issued 13,245 and 8,588 Common Shares, for approximately $494,000 and $237,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), and the 401(k) Plan. During the six months ended June 30, 2006 and 2005, Registrant issued 29,102 and 20,685 Common Shares, for approximately $1,023,000 and $555,000, respectively, under the Registrant’s DRP and 401(k) Plan. In addition, during the three and six months ended June 30, 2006, Registrant issued 140,588 and 148,832 Common Shares for approximately $3,231,000 and $3,421,000, respectively, as a result of the exercise of stock options. None of the cash proceeds received by AWR as a result of the exercise of these stock options have been distributed to any subsidiaries of AWR.

In addition, during the three months ended June 30, 2006 and 2005, Registrant purchased 10,737 and 12,897, respectively, Common Shares on the open market under the Registrant’s DRP and 401(k) Plan, which were used to satisfy the requirements of these plans and programs. During the six months ended June 30, 2006 and 2005, Registrant purchased 24,821 and 21,506, respectively, Common Shares on the open market under the Registrant’s DRP and 401(k) Plan, for the same reason.

During the three months ended June 30, 2006 and 2005, AWR paid quarterly dividends to shareholders, totaling approximately $3.8 million or $0.225 per share. During the six months ended June 30, 2006 and 2005, AWR paid quarterly dividends to shareholders, totaling approximately $7.6 million and $7.5 million, respectively, or $0.450 per share.

Note 4 — Derivative Instruments:

Registrant has certain block-forward purchase power contracts that are subject to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and 149. A derivative financial instrument or other contract derives its value from another investment or designated benchmark. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, and to measure those instruments at their fair value. Certain of these contracts qualify as an exception provided under SFAS No. 133 for activities that are considered normal purchases and normal sales. These contracts are reflected in the statements of income at the time of contract settlement.

During 2002, GSWC became a party to block-forward purchase power contracts that qualified as derivative instruments under SFAS No. 133. Contracts with Pinnacle West Capital Corporation (“PWCC”) which became effective in November 2002 have not been designated as normal purchases and normal sales. As a result, on a monthly basis, the related asset or liability is adjusted to reflect the fair market value at the end of the month. For the three months ended June 30, 2006 and 2005, GSWC recognized a pretax unrealized loss of approximately $923,000 and a pretax unrealized gain of approximately $459,000, respectively. For the six months ended June 30, 2006 and 2005, GSWC recognized a pretax unrealized loss of approximately $3,078,000 and a pretax unrealized gain of approximately $3,474,000, respectively. As this contract is settled, the realized gains or losses are recorded in power purchased for resale, and the unrealized gains or losses are reversed. These contracts have been recognized at fair market value on the balance sheets resulting in a cumulative unrealized gain of approximately $339,000 as of June 30, 2006 since the inception of the contracts.

The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications. Settlement of this contract occurs on a cash or net basis through 2006 and by physical delivery through 2008. Registrant has no other derivative financial instruments.

Note 5 — Taxes:

As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal income tax rate in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise. During the second quarter of 2005, the recognition of the federal effect of state taxes was adjusted to conform to the flow-through method reflected in the tax calculation for ratemaking purposes, which partially defers the recognition of the effect to the subsequent tax year. This reduced income tax expense by approximately $63,000 and $204,000 for the three and six months ended June 30, 2006, respectively. During the third quarter of 2005, AWR filed an amended tax return for 2001 with the Internal Revenue Service (“IRS”) which was subject to IRS and Congressional Joint Committee of Taxation (“JCT”) review. During the second quarter of 2006, the IRS and JCT reviews were completed and AWR received a refund in the amount of its original claim of $3.0 million, with

interest. Consequently, in the second quarter of 2006, AWR recorded a tax benefit of approximately $400,000, of which $351,000 was attributable to GSWC.

In June 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109.” This Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 31, 2006. Registrant is currently assessing the impact of the Interpretation on its financial statements.

In March 2006, the FASB Emerging Issues Task Force issued EITF No. 06-03, “How Sales Taxes Collected from Customers and Remitted to Governmental Authorities Should Be Presented in the Income Statement (That Is, Gross Versus Net Presentation)”, which provides clarifying guidance on how to present sales taxes in the income statement. This guidance is effective for periods beginning after December 15, 2006, with early application of the guidance permitted. Registrant is currently assessing the impact of the Issue on its financial statements.

Note 6 — Stock-Based Compensation:

Summary Description of Stock Incentive Plans

AWR currently has two primary stock incentive plans for employee and non-employee directors: the 2000 Stock Incentive Plan (the “2000 Employee Stock Plan”) and the 2003 Non-Employee Directors Stock Plan (the “Directors Stock Plan”), more fully described below.

2000 Employee Stock Plan — AWR adopted the 2000 Employee Stock Plan at the annual meeting of shareholders in 2000 to provide stock-based incentive awards in the form of stock options, and restricted stock to employees as a means of promoting the success of the Company by attracting, retaining and aligning the interests of employees with those of shareholders generally. The 2000 Employee Stock Plan was amended in January 2006 to also permit the grant of restricted stock units. There are 1,050,000 Common Shares reserved for issuance under the 2000 Employee Stock Plan, 278,500 of which remain available for issuance as of June 30, 2006. The 2000 Employee Stock Plan is administered by the Compensation Committee of the Board of Directors (the “Committee”). For stock options, the Committee determines, among other things, the date of grant, the form, term, option exercise price, vesting and exercise terms of each option. Stock options granted by AWR have been in the form of nonqualified stock options, expire ten years from the date of grant, vest over a period of three years and are subject to earlier termination as provided in the form of option agreement approved by the Committee.

The option price per share is determined by the Committee at the time of grant, but may not be less than 100% of the fair market value of Common Shares on the date of grant. In addition, AWR may grant employees receiving a grant of stock options the right to receive cash dividends pursuant to the terms of a dividend equivalent rights agreement for a period of up to three years from the date of the option grant. For restricted stock, the Committee determines, among other things, the dividend, voting and other rights prior to vesting and the restrictions (which may be based on performance criteria, passage of time or other factors) imposed on the shares. For restricted stock units, the Committee determines, among other things, the vesting terms and form of pay-out. Each employee who receives a grant of a restricted stock unit is also generally entitled to dividend equivalents rights in the form of additional restricted stock units until vesting of the restricted stock units. The restricted stock units are a non-voting unit of measurement relative to one Common Share.

Directors Stock Plan — On May 20, 2003, the Board of Directors adopted the Directors Stock Plan, subject to shareholder approval. The shareholders approved the Directors Stock Plan at the May 2004 Annual Meeting. The Directors Stock Plan provides the non-employee directors with supplemental stock-based compensation and encourages them to increase their stock ownership in AWR. There are 250,000 Common Shares reserved for issuance under the Directors Stock Plan, 169,300 of which remain available for issuance as of June 30, 2006. Pursuant to the Directors Stock Plan, non-employee directors are entitled to receive options to purchase 3,000 Common Shares at each annual meeting of shareholders commencing with the 2005 annual meeting of shareholders. AWR also granted options to each non-employee director to purchase 1,000 Common Shares at its annual shareholder meetings in 2003 and 2004. In addition, each non-employee director with no more than ten years of service with AWR is entitled to receive restricted stock units at each annual meeting in an amount equal to the then current annual retainer payable by AWR to each non-employee director divided by the fair market value of Common Shares on the last trading day prior to

the annual meeting. All grants of stock options and restricted stock units are entitled to dividend equivalents payable in the form of additional restricted stock units under the terms of the Directors Stock Plan.

The stock options granted under the Directors Stock Plan are 10-year nonqualified stock options. The exercise price of the stock options must be 100% of the fair market value of Common Shares on the date of grant. Stock options granted under the Directors Stock Plan are fully vested and exercisable upon the date of grant. The restricted stock units are a non-voting unit of measurement relative to one Common Share. Restricted stock units with respect to dividend equivalent rights on stock options credited to the non-employee director are payable in Common Shares on the earlier of the date on which the stock option is exercised and three years from the date of grant of the stock option. Restricted stock units granted at each annual meeting of shareholders and restricted stock units with respect to dividend equivalent rights with respect thereto are payable solely in Common Shares on the date that the participant terminates service as a director. Restricted stock units credited to each non-employee director’s account are at all times fully vested and non-forfeitable.

Change in Accounting Principle

Prior to January 1, 2006, Registrant accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. Registrant also followed the disclosure requirements of SFAS No. 123, “Accounting for Stock-Based Compensation”, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure”. Except for costs related to restricted stock units and restricted stock granted to directors and employees, no stock-based compensation cost was recognized in net income.

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “Share-Based Payment,” which requires the recognition of compensation expense related to the fair value of stock-based compensation awards. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured by the Registrant at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Registrant elected to adopt the modified prospective transition method as provided by SFAS No. 123(R). Accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.

Effect of Stock-Based Compensation on Net Income

Prior to January 1, 2006, Registrant had previously adopted the “disclosure-only” provisions of SFAS No. 123, as amended by SFAS No. 148. Had Registrant accounted for stock-based compensation plans using the fair value based accounting method described by SFAS No. 123 for the periods prior to fiscal year 2006, Registrant’s net income and earnings per share for the three and six months ended June 30, 2005 would have been changed to the pro forma amounts indicated below:

*(dollars in thousands, except EPS)*	Three Months Ended June 30, 2005			Six Months Ended June 30, 2005
Net income, as reported	$	5,735		$	9,499
Add: Stock-based compensation expense included in reported net income, net of tax	52			57
Less: Stock-based compensation expense determined under the fair-value accounting method, net of tax	(106		)	(672		)
Pro forma	$	5,681		$	8,884

Basic earnings per share:
As reported	$	0.34		$	0.57
Pro forma	$	0.34		$	0.53

Diluted earnings per share:
As reported	$	0.34		$	0.56
Pro forma	$	0.34		$	0.53

There were no material differences between the consolidated 2005 pro forma disclosures for AWR and the 2005 pro forma disclosures for GSWC.

The following table presents share-based compensation expenses for the three and six months ended June 30, 2006 and 2005 and included in administrative and general expenses in AWR and GSWC’s statements of income resulting from stock options, restricted stock and restricted stock units:

	AWR												GSWC
	Three Months Ended June 30,						Six Months Ended June 30,						Three Months Ended June 30,						Six Months Ended June 30,
*(in thousands)*	2006			2005			2006			2005			2006			2005			2006			2005
Stock-based compensation related to:
Stock options granted to employees and directors	$	182		$	—		$	219		$	—		$	176		$	—		$	209		$	—
Restricted stock units granted to employees	55			—			78			—			52			—			73			—
Restricted stock units granted to directors	28			87			28			97			28			87			28			97
Stock-based compensation recognized in the income statement, before taxes	$	265		$	87		$	325		$	97		$	256		$	87		$	310		$	97
Income tax benefit	(106		)	(35		)	(130		)	(40		)	(102		)	(35		)	(124		)	(40		)
Total stock-based compensation after income taxes	$	159		$	52		$	195		$	57		$	154		$	52		$	186		$	57

Compensation cost capitalized as part of utility plant for the three and six months ended June 30, 2006 was approximately $106,000 and $127,000, respectively. In addition, pursuant to SFAS No. 123(R), dividend equivalent rights paid in cash in the amount of $127,000 and $116,000 for AWR and GSWC, respectively, for the six months ended June 30, 2006 were recognized as a reduction to retained earnings, net of tax benefit of $52,000 and $47,000, respectively.

With the adoption of SFAS No. 123(R), Registrant elected to amortize stock-based compensation for awards granted on or after the adoption of SFAS No. 123(R) on January 1, 2006 on a straight-line basis over the requisite (vesting) period for the entire award. Registrant did not recognize compensation expense for employee share-based awards for the three and six months ended June 30, 2005, when the exercise price of Registrant’s employee stock awards equaled the market price of the underlying stock on the date of grant. Registrant did recognize compensation expense under APB No. 25 relating to restricted stock units granted to directors. Non-vested stock options granted to employees prior to January 1, 2006 have terms that provide for the continuation of vesting upon termination of employment. Accordingly, these awards were deemed to be granted for past services from an accounting standpoint and any measured compensation cost was recognized in full in the pro forma disclosures at the date of grant. Therefore, upon implementation of SFAS No. 123(R), there was no remaining compensation cost to be recognized for these options granted prior to, but not yet vested as of January 1, 2006.

Valuation of Stock Options

Registrant estimated the fair value of stock options granted during the three and six months ended June 30, 2006 and 2005 using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Registrant’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Registrant’s expected annual dividend yield. Registrant believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of Registrant’s stock options granted during the three and six months ended June 30, 2006 and 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. The fair value of stock units and restricted stock was determined based on the closing trading price of Common Shares on the grant date.

The fair value of each option grant during the three and six months ended June 30, 2006 and 2005 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

	2006	2005
Weighted-average fair value of option granted	$8.01 - $10.60	$5.63
Risk-free interest rate	4.40% - 5.02%	3.93%
Expected annual dividend yield	2.77% - 3.08%	3.68%
Expected volatility factor	25.09% - 26.40%	26.23%
Expected option term (in years)	6	7

Summary of key assumptions — The risk-free interest rate for periods equal to the expected term of the share option was based on the U.S. Treasury yield curve in effect at the time of grant. Dividend yield reflects the current dividend of $0.225 per share per quarter. The stock volatility for each grant is measured using the weighted average of historical monthly and daily price changes of the Common Shares over the most recent period equal to the expected option life of the grant. For the three and six months ended June 30, 2006, the option term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options and is derived from the average midpoint between vesting and the contractual term, as described in SEC’s Staff Accounting Bulletin No. 107, “Share-Based Payment.” As permitted by SFAS No. 123(R), underlying assumptions used for stock options granted prior to January 1, 2005 were retained.

SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to adoption, the Company accounted for forfeitures as they occurred as permitted under previous accounting standards. The cumulative effect of adopting the change in estimating forfeitures was not material to the Company’s financial statements for the six months ended June 30, 2006.

Stock Options —A summary of stock option activity as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at January 1, 2006	684,304		$	24.32
Granted	109,917		34.85
Exercised	(148,832	)	22.99
Forfeited or expired	—		—
Options outstanding at June 30, 2006	645,389		$	26.41	7.58	$	5,965,622
Options exercisable at June 30, 2006	387,105		$	24.89	6.80	$	4,163,579

The weighted-average grant-date fair value of options granted by Registrant during the three and six months ended June 30, 2006 was $10.60 and $9.31, respectively. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the closing price of the Common Shares on the last trading day of the second quarter of 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their option on June 30, 2006. This amount changes if the fair market value of the Common Shares changes. The total intrinsic value of options exercised during the three and six months ended June 30, 2006 was approximately $2,091,000 and $2,201,000, respectively. During the three and six months ended June 30, 2006, Registrant received approximately $3,231,000 and $3,421,000, respectively, in cash proceeds from the exercise of its stock options and realized approximately $852,000 and $897,000, respectively, of tax benefit for the tax deduction from awards exercised. As of June 30, 2006, approximately $623,000 of total unrecognized compensation cost related to stock options is expected to be recognized over a weighted-average period of 2.59 years.

Restricted Stock and Stock Units - A summary of the status of Registrant’s outstanding restricted stock units to employees and directors as of June 30, 2006, and changes during the six months ended June 30, 2006, is presented below:

	Number of Restricted Share Units		Weighted Average Grant-Date Value
Restricted share units at January 1, 2006	31,166		$	25.02
Granted	16,565		34.31
Vested	(602	)	26.68
Forfeited	—		—
Restricted share units at June 30, 2006	47,129		$	28.26

As of June 30, 2006, there was approximately $396,000 of total unrecognized compensation cost related to restricted stock units granted under Registrant’s employee and director’s stock plans. That cost is expected to be recognized over a weighted-average period of 2.59 years.

AWR has no restricted stock outstanding as of June 30, 2006.

Note 7 — Employee Benefit Plans:

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and six months ended June 30, 2006 and 2005 are as follows:

	For The Three Months Ended June 30, 2006 and 2005
	Pension Benefits						Other Postretirement Benefits						SERP
*(dollars in thousands*)	2006			2005			2006			2005			2006			2005
Components of Net Periodic Benefits Cost:
Service Cost	$	991		$	933		$	107		$	109		$	32		$	32
Interest Cost	1,175			1,088			155			151			35			28
Expected Return on Plan Assets	(984		)	(922		)	(50		)	(74		)	—			—
Amortization of Transition	—			—			105			105			—			—
Amortization of Prior Service Cost	41			41			(50		)	(50		)	37			38
Amortization of Actuarial Loss (Gain)	292			313			37			41			(3		)	(10		)
Net Periodic Pension Cost	$	1,515		$	1,453		$	304		$	282		$	101		$	88

	For The Six Months Ended June 30, 2006 and 2005
	Pension Benefits						Other Postretirement Benefits						SERP
*(dollars in thousands)*	2006			2005			2006			2005			2006		2005
Components of Net Periodic Benefits Cost:
Service Cost	$	1,982		$	1,866		$	214		$	218		$	64	$	64
Interest Cost	2,350			2,176			310			302			70		56
Expected Return on Plan Assets	(1,968		)	(1,844		)	(100		)	(148		)	—