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 September 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)

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

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

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

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, 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 November 8, 2006, the number of Common Shares outstanding, of American States Water Company was 17,038,477 shares.

As of November 8, 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(s)
Part I	Financial Information

Item 1:	Financial Statements
	Consolidated Balance Sheets of American States Water Company as of September 30, 2006 and December 31, 2005	3-4

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

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

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

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

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

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

	Statements of Cash Flow of Golden State Water Company for the Nine Months Ended September 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	30

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4:	Controls and Procedures	49

Part II	Other Information

Item 1:	Legal Proceedings	50

Item 1A:	Risk Factors	50

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3:	Defaults Upon Senior Securities	50

Item 4:	Submission of Matters to a Vote of Security Holders	50

Item 5:	Other Information	51

Item 6:	Exhibits	51

	Signatures	52

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)

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

Water	$	899,598		$	869,471
Electric	62,197			61,386
	961,795			930,857
Less - Accumulated depreciation	(280,906		)	(259,915		)
	680,889			670,942
Construction work in progress	61,480			42,283
Net utility plant	742,369			713,225

Other Property and Investments
Goodwill	11,778			11,841
Other property and investments	9,697			9,740
Total other property and investments	21,475			21,581

Current Assets
Cash and cash equivalents	6,591			13,032
Accounts receivable-customers (less allowance for doubtful accounts of $780 in 2006 and $789 in 2005)	17,802			13,341
Unbilled revenue	18,762			15,195
Other accounts receivable (less allowance for doubtful accounts of $144 in 2006 and $337 in 2005)	9,923			10,844
Income taxes receivable	30			822
Materials and supplies, at average cost	1,545			1,421
Regulatory assets – current	3,233			3,946
Prepayments and other current assets	1,395			2,998
Unrealized gain on purchased power contracts	—			3,417
Costs and estimated earnings in excess of billings on uncompleted contracts	2,231			—
Deferred income taxes – current	4,709			1,692
Total current assets	66,221			66,708

Regulatory and Other Assets
Regulatory assets	61,288			54,382
Other accounts receivable	9,148			8,820
Deferred income taxes	34			—
Other	8,173			8,419
Total regulatory and other assets	78,643			71,621
Total Assets	$	908,708		$	873,135

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

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

*(in thousands)*	September 30, 2006			December 31, 2005
Capitalization
Common shares, no par value, no stated value	$	174,330		$	166,529
Earnings reinvested in the business	107,311			101,121
Accumulated other comprehensive loss	(3,556		)	(3,556		)
Total common shareholders’ equity	278,085			264,094
Long-term debt	268,181			268,405
Total capitalization	546,266			532,499

Current Liabilities
Notes payable to banks	25,000			27,000
Long-term debt – current	575			635
Accounts payable	23,284			19,653
Income taxes payable	4,392			1,534
Accrued employee expenses	4,428			5,879
Accrued interest	5,245			2,254
Regulatory liabilities – current	4,120			3,252
Deferred income taxes – current	—			86
Unrealized loss on purchased power contracts	2,468			—
Billings in excess of costs and estimated earnings on uncompleted contracts	1,910			—
Other	13,268			14,952
Total current liabilities	84,690			75,245

Other Credits
Advances for construction	86,961			85,168
Contributions in aid of construction – net	86,708			83,976
Deferred income taxes	76,042			69,669
Unamortized investment tax credits	2,450			2,518
Accrued pension and other postretirement benefits	14,955			13,562
Regulatory liabilities	571			521
Billings in excess of costs and estimated earnings on uncompleted contracts	2,092			2,207
Other	7,973			7,770
Total other credits	277,752			265,391
Commitments and Contingencies (Note 8)	—			—
Total Capitalization and Liabilities	$	908,708		$	873,135

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 SEPTEMBER 30, 2006 AND 2005
(Unaudited)

	Three Months Ended September 30,
*(in thousands, except per share amounts)*	2006			2005
Operating Revenues
Water	$	64,962		$	60,539
Electric	6,444			6,544
Other	2,335			1,008
Total operating revenues	73,741			68,091

Operating Expenses
Water purchased	15,066			15,779
Power purchased for pumping	3,600			3,252
Groundwater production assessment	2,477			2,315
Power purchased for resale	2,659			3,075
Unrealized loss (gain) on purchased power contracts	2,807			(4,018		)
Supply cost balancing accounts	244			514
Other operating expenses	6,677			4,850
Administrative and general expenses	12,614			10,342
Depreciation and amortization	6,634			4,734
Maintenance	3,395			2,905
Property and other taxes	2,656			2,572
Net gain on sale of property	(124		)	—
Total operating expenses	58,705			46,320
Operating Income	15,036			21,771

Interest expense	(5,349		)	193
Interest income	695			745

Income from operations before income tax expense	10,382			22,709

Income tax expense	4,809			10,475

Net Income	$	5,573		$	12,234

Weighted Average Number of Shares Outstanding	17,003			16,782
Basic Earnings Per Common Share	$	0.32		$	0.72

Weighted Average Number of Diluted Shares	17,057			16,887
Fully Diluted Earnings Per Share	$	0.32		$	0.72

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 NINE MONTHS
ENDED SEPTEMBER 30, 2006 AND 2005
(Unaudited)

	Nine Months Ended September 30,
*(in thousands, except per share amounts)*	2006			2005
Operating Revenues
Water	$	166,233		$	155,611
Electric	21,816			20,105
Other	8,437			2,721
Total operating revenues	196,486			178,437

Operating Expenses
Water purchased	34,326			35,742
Power purchased for pumping	7,620			6,923
Groundwater production assessment	6,799			6,079
Power purchased for resale	10,470			9,922
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)
Supply cost balancing accounts	(93		)	1,042
Other operating expenses	17,264			15,138
Administrative and general expenses	34,628			32,456
Depreciation and amortization	19,726			16,123
Maintenance	9,113			7,522
Property and other taxes	7,674			7,111
Net gain on sale of property	(124		)	—
Gain on settlement for removal of wells	—			(760		)
Total operating expenses	153,289			129,806

Operating Income	43,197			48,631

Interest expense	(16,037		)	(9,341		)
Interest income	2,643			801

Income from operations before income tax expense	29,803			40,091

Income tax expense	12,061			18,358

Net Income	$	17,742		$	21,733

Weighted Average Number of Shares Outstanding	16,898			16,773
Basic Earnings Per Common Share	$	1.03		$	1.29

Weighted Average Number of Diluted Shares	16,949			16,845
Fully Diluted Earnings Per Share	$	1.03		$	1.29

Dividends Declared Per Common Share	$	0.675		$	0.675

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

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

	Nine Months Ended September 30,
*(in thousands)*	2006			2005
Cash Flows From Operating Activities:
Net income	$	17,742		$	21,733
Adjustments for non-cash items:
Depreciation and amortization	19,726			16,123
Provision for doubtful accounts	538			311
Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits	2,761			9,453
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)
Stock-based compensation expense	427			110
Other - net	585			(57		)
Changes in assets and liabilities:
Accounts receivable - customers	(4,849		)	(4,517		)
Unbilled revenue	(3,567		)	(3,657		)
Other accounts receivable	443			(576		)
Materials and supplies	(124		)	61
Prepayments and other current assets	1,603			1,884
Regulatory assets - supply cost balancing accounts	(93		)	1,042
Other assets	(6,906		)	(2,143		)
Accounts payable	3,631			265
Income taxes receivable/payable	3,650			8,741
Other liabilities	4,196			3,906
Net cash provided	45,649			45,187

Cash Flows From Investing Activities:
Construction expenditures	(51,069		)	(51,958		)
Net cash used	(51,069		)	(51,958		)

Cash Flows From Financing Activities:
Proceeds from issuance of common shares	1,625			830
Proceeds from stock option exercises	4,383			—
Tax benefits from exercise of stock-based awards	1,142			—
Receipt of advances for and contributions in aid of construction	6,718			10,350
Refunds on advances for construction	(3,072		)	(3,147		)
Repayments of long-term debt	(329		)	(560		)
Net change in notes payable to banks	(2,000		)	10,000
Cash received on financing portion of purchased power contracts	2,007			2,007
Dividend equivalent rights paid	(187		)	—
Tax benefits from payment of dividend equivalent rights	80			—
Dividends paid	(11,388		)	(11,321		)
Net cash (used) provided	(1,021		)	8,159

Net (decrease) increase in cash and cash equivalents	(6,441		)	1,388
Cash and cash equivalents, beginning of period	13,032			4,303
Cash and cash equivalents, end of period	$	6,591		$	5,691

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

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

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

Water	$	848,250		$	819,958
Electric	62,196			61,386
	910,446			881,344
Less - Accumulated depreciation	(266,178		)	(246,649		)
	644,268			634,695
Construction work in progress	58,735			38,334
Net utility plant	703,003			673,029

Other Property and Investments
Other property and investments	7,312			7,364
Total other property and investments	7,312			7,364

Current Assets
Cash and cash equivalents	2,657			8,788
Accounts receivable-customers (less allowance for doubtful accounts of $753 in 2006 and $765 in 2005)	17,323			12,919
Unbilled revenue	18,361			14,856
Inter-company receivable	258			226
Other accounts receivable (less allowance for doubtful accounts of $141 in 2006 and $334 in 2005)	2,869			6,106
Materials and supplies, at average cost	1,530			1,404
Regulatory assets - current	3,162			3,875
Prepayments and other current assets	1,238			2,795
Unrealized gain on purchased power contracts	—			3,417
Deferred income taxes - current	4,666			1,693
Total current assets	52,064			56,079

Regulatory and Other Assets
Regulatory assets	61,288			54,382
Other accounts receivable	9,148			8,820
Other	7,407			7,575
Total regulatory and other assets	77,843			70,777

Total Assets	$	840,222		$	807,249

The accompanying notes are an integral part of these financial statements

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

*(in thousands)*	September 30, 2006			December 31, 2005
Capitalization
Common shares, no par value, no stated value	$	161,179		$	159,429
Earnings reinvested in the business	104,447			99,645
Accumulated other comprehensive loss	(3,556		)	(3,556		)
Total common shareholder’s equity	262,070			255,518
Long-term debt	261,316			261,540
Total capitalization	523,386			517,058

Current Liabilities
Long-term debt – current	305			295
Accounts payable	20,430			17,914
Inter-company payable	3,488			65
Income taxes payable to Parent	7,174			2,268
Accrued employee expenses	4,063			5,507
Accrued interest	5,179			2,218
Regulatory liabilities – current	4,120			3,252
Unrealized loss on purchased power contracts	2,468			—
Deferred income taxes – current	—			109
Other	12,772			12,390
Total current liabilities	59,999			44,018

Other Credits
Advances for construction	76,153			74,790
Contributions in aid of construction - net	84,917			83,055
Deferred income taxes	71,478			65,469
Unamortized investment tax credits	2,450			2,518
Accrued pension and other postretirement benefits	14,955			13,562
Other	6,884			6,779
Total other credits	256,837			246,173

Commitments and Contingencies (Note 8)	—			—

Total Capitalization and Liabilities	$	840,222		$	807,249

The accompanying notes are an integral part of these financial statements

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

	Three Months Ended September 30,
*(in thousands)*	2006			2005
Operating Revenues
Water	$	62,842		$	58,568
Electric	6,443			6,544
Other	325			21
Total operating revenues	69,610			65,133

Operating Expenses
Water purchased	14,696			15,446
Power purchased for pumping	3,394			3,080
Groundwater production assessment	2,477			2,316
Power purchased for resale	2,659			3,074
Unrealized loss (gain) on purchased power contracts	2,807			(4,018		)
Supply cost balancing accounts	244			514
Other operating expenses	5,528			4,346
Administrative and general expenses	10,893			9,010
Depreciation and amortization	6,171			4,460
Maintenance	3,217			2,830
Property and other taxes	2,579			2,481
Net gain on sale of property	(132		)	—
Total operating expenses	54,533			43,539

Operating Income	15,077			21,594

Interest expense	(4,861		)	519
Interest income	479			735

Income from operations before income tax expense	10,695			22,848

Income tax expense	4,943			10,475

Net Income	$	5,752		$	12,373

The accompanying notes are an integral part of these financial statements

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

	Nine Months Ended September 30,
*(in thousands)*	2006			2005
Operating Revenues
Water	$	160,282		$	150,519
Electric	21,816			20,105
Other	3,244			76
Total operating revenues	185,342			170,700

Operating Expenses
Water purchased	33,573			35,116
Power purchased for pumping	7,127			6,537
Groundwater production assessment	6,799			6,115
Power purchased for resale	10,470			9,921
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)
Supply cost balancing accounts	(93		)	1,042
Other operating expenses	14,961			13,656
Administrative and general expenses	29,988			27,958
Depreciation and amortization	18,336			15,290
Maintenance	8,559			7,085
Property and other taxes	7,372			6,799
Net gain on sale of property	(132		)	—
Total operating expenses	142,846			122,027

Operating Income	42,496			48,673

Interest expense	(14,538		)	(8,381		)
Interest income	2,203			767

Income from operations before income tax expense	30,161			41,059

Income tax expense	12,305			18,710
Net Income	$	17,856		$	22,349

The accompanying notes are an integral part of these financial statements

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

	Nine Months Ended September 30,
*(in thousands)*	2006			2005
Cash Flows From Operating Activities:
Net income	$	17,856		$	22,349
Adjustments for non-cash items:
Depreciation and amortization	18,336			15,290
Provision for doubtful accounts	528			280
Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits	2,452			8,684
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)
Stock-based compensation expense	402			110
Other – net	401			162
Changes in assets and liabilities:
Accounts receivable – customers	(4,782		)	(4,397		)
Unbilled revenue	(3,505		)	(3,600		)
Other accounts receivable	2,759			615
Materials and supplies	(126		)	63
Prepayments and other current assets	1,557			1,770
Regulatory assets - supply cost balancing accounts	(93		)	1,042
Other assets	(4,764		)	(1,959		)
Accounts payable	2,516			465
Inter-company receivable/payable	891			3,182
Income taxes receivable/payable from/to Parent	4,906			7,867
Other liabilities	2,526			2,723
Net cash provided	47,746			47,154

Cash Flows From Investing Activities:
Construction expenditures	(49,465		)	(48,756		)
Net cash used	(49,465		)	(48,756		)

Cash Flows From Financing Activities:
Tax benefits from exercise of stock-based awards	1,131			—
Receipt of advances for and contributions in aid of construction	5,798			8,745
Refunds on advances for construction	(2,591		)	(2,801		)
Repayments of long-term debt	(259		)	(222		)
Net change in inter-company borrowings	2,500			7,300
Cash received on financing portion of purchased power contracts	2,007			2,007
Dividend equivalent rights paid	(171		)	—
Tax benefits from payment of dividend equivalent rights	73			—
Dividends paid	(12,900		)	(12,000		)
Net cash (used) provided	(4,412		)	3,029

Net (decrease) increase in cash and cash equivalents	(6,131		)	1,427
Cash and cash equivalents, beginning of period	8,788			2,702
Cash and cash equivalents, end of period	$	2,657		$	4,129

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. ODUS assumed 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 50-year contracts 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 September 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 September 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.

New Accounting Pronouncements: Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment,” which requires the recognition of compensation expense related to the fair value of stock-based compensation awards. See Note 6 for further details.

In March 2006, the FASB Emerging Issues Task Force (“EITF”) 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 EITF on its financial statements.

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 will implement the new guidance effective January 1, 2007 and is currently assessing the impact of the Interpretation on its financial statements.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that Registrant has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. Registrant will implement the new standard effective January 1, 2008. Registrant is currently evaluating the impact SFAS No. 157 may have on its financial statements and disclosures.

In September 2006, the FASB also issued SFAS No. 158, Employer’s Accounting for Defined Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements No. 87, 88, 106, and 132(R). SFAS 158 requires that Registrant recognize the overfunded or underfunded status of its defined benefit and retiree medical plans as an asset or liability in its 2006 year-end balance sheet, with changes in the funded status recognized through comprehensive income in the year in which they occur. Registrant is currently evaluating the impact of adopting SFAS No. 158 on its financial statements including the possible regulatory accounting treatment and will implement the new standard by December 31, 2006.

In September 2006, the SEC issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”. This SAB provides guidance on the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of a materiality assessment. SAB No. 108 establishes an approach that requires quantification of financial statement errors based on the effects of the error on each of the company’s financial statements and the related financial statement disclosures. SAB No. 108 is effective as of the end of Registrant’s 2006 fiscal year, allowing a one-time transitional cumulative effect adjustment to retained earnings as of January 1, 2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Registrant is currently evaluating the impact of adopting SAB No. 108 on its financial statements and will implement the new guidance by December 31, 2006. Registrant believes SAB No. 108 will not have a material impact on its results of operations or financial position.

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 September 30, 2006, Registrant had $8.9 million of regulatory assets not accruing carrying costs. Of this amount, $7.3 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, $1.6 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:

*(In thousands)*	September 30, 2006			December 31, 2005
GSWC
Supply cost balancing accounts	$	16,920		$	19,624
Supply cost memorandum accounts net under-collections	6,043			3,151
Costs deferred for future recovery on Aerojet case	21,334			21,109
Flow-through taxes, net	7,346			6,939
Electric transmission line abandonment costs	3,333			3,428
Asset retirement obligations	3,189			2,928
Low income balancing accounts	3,503			2,846
General rate case memorandum accounts	—			209
Refund of water rights lease revenues	(3,732		)	(6,474		)
Other regulatory assets	2,394			1,245
Total GSWC	$	60,330		$	55,005
CCWC
Asset retirement obligations	47			44
Other regulatory assets/liabilities, net	(547		)	(494		)
Total AWR	$	59,830		$	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 $19.6 million at September 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 32,049,785 and 31,123,833 kilowatt hours of electricity to its Bear Valley Electric division customers for the three months ended September 30, 2006 and 2005, respectively, and 109,125,050 and 101,438,647 kilowatt hours for the nine months ended September 30, 2006 and 2005, respectively. As a result, the supply cost balancing account was reduced by approximately $710,000 and $689,000 for the three months ended September 30, 2006 and 2005, respectively, and approximately $2,416,000 and $2,246,000 for the nine months ended September 30, 2006 and 2005, respectively. Approximately $14.3 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. The Bear Valley Electric division of 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 September 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 nine months ended September 30, 2006 and 2005, GSWC expensed approximately $40,400 and $6,400 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. 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.

In summary, for the three months ended September 30, 2006 and 2005, approximately $867,000 and $355,000 of over-collections, respectively, were recorded in the electric supply cost balancing account, net of amortization of approximately $710,000 and $689,000, respectively. For the nine months ended September 30, 2006 and 2005, approximately $1.5 million and $1.6 million of over-collections were recorded in the electric supply cost balancing account, respectively, net of amortization of approximately $2.4 million and $2.2 million, respectively.

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. For the three months ended September 30, 2006 and 2005, approximately $645,000 of under-collections and $130,000 of over-collections, respectively, were recorded in the water supply cost memorandum/balancing accounts, net of amortization of approximately $730,000 and $75,000, respectively. For the nine months ended September 30, 2006 and 2005, approximately $1.6 million and $670,000 of under-collections were recorded in the memorandum/balancing accounts, respectively, net of amortization of approximately $1.3 million and $367,000, 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 $328,000 and $791,000 was billed to customers during the three and nine months ended September 30, 2006, respectively. GSWC will keep the Aerojet memorandum account open until it is fully amortized, but no longer than 20 years. However, no costs will be added to the memorandum account, other than on-going interest charges approved by the decision. Pursuant to the decision, additional interest of approximately $279,000 and $1.1 million were added to the Aerojet litigation memorandum account during the three and nine months ended September 30, 2006, respectively.

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 guaranteed by Aerojet (for capital investments), with interest due GSWC, 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 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 $170,000 and $186,000 were provided to customers during the three months ended September 30, 2006 and 2005, respectively, and approximately $426,000 and $455,000 were provided to customers during the nine months ended September 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 $311,000 and $909,000 reflecting water rights revenues for the three and nine months ended September 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 during the second quarter of 2006. A surcharge went into effect in April of 2006 and accordingly, GSWC began amortizing the OSMA account. Revenues of approximately $200,000 and $304,000 were received from customers during the three and nine months ended September 30, 2006, respectively, 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 September 30,				For The Nine Months Ended September 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005
Net income	$	5,573	$	12,234	$	17,742	$	21,733
Less: (a) distributed earnings to common shareholders	3,826		3,776		11,406		11,322
distributed earnings to participating securities	80		—		234		—
Undistributed earnings	1,667		8,458		6,102		10,411

(b) Undistributed earnings allocated to common	1,633		8,315		5,980		10,235
Undistributed earnings allocated to participating	34		143		122		176

Total income available to common shareholders, basic (a)+(b)	$	5,459	$	12,091	$	17,386	$	21,557

Weighted average Common Shares outstanding, basic	17,003		16,782		16,898		16,773
Basic earnings per Common Share	$	0.32	$	0.72	$	1.03	$	1.29

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 September 30, 2006 and 2005 there were 603,245 and 686,600 options outstanding, respectively, under these Plans. At September 30, 2006 and 2005, there were also 47,629 and 30,800 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 September 30,				For The Nine Months Ended September 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005
Common shareholders earnings, basic	$	5,459	$	12,091	$	17,386	$	21,557
Undistributed earnings for dilutive stock options (1)	—		—		—		—
Total common shareholders earnings, diluted	$	5,459	$	12,091	$	17,386	$	21,557

Weighted average Common Shares outstanding, basic	17,003		16,782		16,898		16,773
Stock-based compensation (2)	54		105		51		72
Weighted average Common Shares outstanding, diluted	17,057		16,887		16,949		16,845
Diluted earnings per Common Share	$	0.32	$	0.72	$	1.03	$	1.29

(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, 199,818 stock options at September 30, 2006 were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”. All of the stock options and restricted stock units at September 30, 2005 were included in the calculation of diluted EPS for the three and nine months ended September 30, 2005.

Stock options of 403,427 and restricted stock units of 47,629 were outstanding at September 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 September 30, 2006 and 2005, Registrant issued 16,168 and 9,468 Common Shares, for approximately $602,000 and $274,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), and the 401(k) Plan. During the nine months ended September 30, 2006 and

2005, Registrant issued 45,270 and 30,153 Common Shares, for approximately $1,625,000 and $830,000, respectively, under the Registrant’s DRP and 401(k) Plan. In addition, during the three and nine months ended September 30, 2006, Registrant issued 42,144 and 190,976 Common Shares for approximately $962,000 and $4,383,000, respectively, as a result of the exercise of stock options. No 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 September 30, 2006 and 2005, Registrant purchased 1,028 and 26,009, 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 nine months ended September 30, 2006 and 2005, Registrant purchased 25,849 and 47,515, 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 September 30, 2006 and 2005, AWR paid quarterly dividends to shareholders, totaling approximately $3.8 million or $0.225 per share. During the nine months ended September 30, 2006 and 2005, AWR paid quarterly dividends to shareholders, totaling approximately $11.4 million and $11.3 million, respectively, or $0.675 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 September 30, 2006 and 2005, GSWC recognized a pretax unrealized loss of approximately $2.8 million and a pretax unrealized gain of approximately $4.0 million, respectively. For the nine months ended September 30, 2006 and 2005, GSWC recognized a pretax unrealized loss of approximately $5.9 million and a pretax unrealized gain of approximately $7.5 million, 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 loss of approximately $2.5 million as of September 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. Monthly, 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 decrease or increase 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 increased income tax expense by approximately $33,000 for the three months ended September 30, 2006 and decreased income tax expense by approximately $171,000 for the nine months ended September 30, 2006. 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.

Note 6 — Stock-Based Compensation:

Summary Description of Stock Incentive Plans

AWR currently has two primary stock incentive plans for employees and for 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, approximately 277,400 of which remain available for issuance as of September 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, approximately 168,900 of which remain available for issuance as of September 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 equivalent rights 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 nine months ended September 30, 2005 would have been changed to the pro forma amounts indicated below:

*(dollars in thousands, except EPS)*	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income, as reported	$	12,234		$	21,733
Add: Stock-based compensation expense included in reported net income, net of tax	7			64
Less: Stock-based compensation expense determined under the fair-value accounting method, net of tax	(10		)	(682		)
Pro forma	$	12,231		$	21,115

Basic earnings per share:
As reported	$	0.72		$	1.29
Pro forma	$	0.72		$	1.25

Diluted earnings per share:
As reported	$	0.72		$	1.29
Pro forma	$	0.72		$	1.25

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 nine months ended September 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 September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
*(in thousands)*	2006			2005			2006			2005			2006			2005			2006			2005
Stock-based compensation related to:
Stock options granted to employees and directors	$	60		$	—		$	279		$	—		$	54		$	—		$	263		$	—
Restricted stock units granted to employees	42			—			120			—			38			—			111			—
Restricted stock units granted to directors	—			12			28			110			—			12			28			110
Stock-based compensation recognized in the income statement, before taxes	$	102		$	12		$	427		$	110		$	92		$	12		$	402		$	110
Income tax benefit	(41		)	(5		)	(171		)	(46		)	(37		)	(5		)	(161		)	(46		)
Total stock-based compensation after income taxes	$	61		$	7		$	256		$	64		$	55		$	7		$	241		$	64

Compensation cost capitalized as part of utility plant for the three and nine months ended September 30, 2006 was approximately $38,000 and $166,000, respectively. In addition, pursuant to SFAS No. 123(R), dividend equivalent rights paid in cash in the amount of approximately $187,000 and $171,000 for AWR and GSWC, respectively, for the nine months ended September 30, 2006 were recognized as a reduction to retained earnings, net of tax benefit of approximately $80,000 and $73,000, 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 nine months ended September 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 - $10.46	$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	24.90% - 26.43%		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 rate at the date of grant. 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 nine months ended September 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 SAB 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 nine months ended September 30, 2006.

Stock Options – A summary of stock option activity as of September 30, 2006, and changes during the nine months ended September 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		$	24.31
Granted	109,917		34.85
Exercised	(190,976	)	22.95
Forfeited or expired	—		—
Options outstanding at September 30, 2006	603,245		$	26.66	7.45	$	6,993,336
Options exercisable at September 30, 2006	345,296		$	25.15	6.66	$	4,523,945

The weighted-average grant-date fair value of options granted by Registrant during the nine months ended September 30, 2006 was $8.34. There were no options granted during the three months ended September 30, 2006. 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 third 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 September 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 nine months ended September 30, 2006 was approximately $602,000 and $2,803,000, respectively. During the three and nine months ended September 30, 2006, Registrant received approximately $962,000 and $4,383,000, respectively, in cash proceeds from the exercise of its stock options and realized approximately $245,000 and $1,142,000, respectively, of tax benefit for the tax deduction from awards exercised. As of September 30, 2006, approximately $530,000 of total unrecognized compensation cost related to outstanding stock options is expected to be recognized over a remaining period of 2.34 years.

Restricted Stock and Stock Units – A summary of the status of Registrant’s outstanding restricted stock units to employees and directors as of September 30, 2006, and changes during the nine months ended September 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	17,065		34.37
Vested	(602	)	26.68
Forfeited	—		—
Restricted share units at September 30, 2006	47,629		$	28.34

As of September 30, 2006, there was approximately $330,000 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 remaining period of 2.34 years.

AWR has no restricted stock outstanding as of September 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 benefits plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and nine months ended September 30, 2006 and 2005 are as follows:

	For The Three Months Ended September 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	$	963		$	933		$	107		$	109		$	55		$	32
Interest Cost	1,170			1,088			155			151			36			28
Expected Return on Plan Assets	(990		)	(922		)	(50		)	(74		)	—			—
Amortization of Transition	—			—			105			105			—			—
Amortization of Prior Service Cost	41			41			(50		)	(50		)	39			38
Amortization of Actuarial Loss (Gain)	291			313			37			41			(5		)	(10		)
Net Periodic Pension Cost	$	1,475		$	1,453		$	304		$	282		$	125		$	88

For The Nine Months Ended September 30, 2006 and 2005

Pension
Benefits