Table of Contents

 

 

 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x

 

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

 

 

 

for the quarterly period ended June 30, 2008

 

 

 

or

 

 

 

o

 

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

 

for the transition period from                      to

 

Commission file number   001-14431

 

American States Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-4676679

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

Commission file number   001-12008

 

Golden State Water Company

(Exact Name of Registrant as Specified in Its Charter)

 

California

 

95-1243678

(State or Other Jurisdiction of Incorporation or Organization)

 

(IRS Employer Identification No.)

 

 

 

630 E. Foothill Blvd, San Dimas, CA

 

91773-1212

(Address of Principal Executive Offices)

 

(Zip Code)

 

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

 

Not Applicable

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

 

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

 

American States Water Company

 

Yes x

No o

Golden State Water Company

 

Yes x

No o

 

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

 

American States Water Company

 

Large accelerated filer o

 

Accelerated filer x

 

Non-accelerated filer o

 

Smaller reporting company o

 

Golden State Water Company

 

Large accelerated filer o

 

Accelerated filer o

 

Non-accelerated filer x

 

Smaller reporting company o

 

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

 

American States Water Company

 

Yes ¨

No x

Golden State Water Company

 

Yes ¨

No x

 

As of August 6, 2008, the number of Common Shares outstanding, of American States Water Company was 17,253,910 shares.

 

As of August 6, 2008, all of the 122 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

 

 

 



Table of Contents

 

AMERICAN STATES WATER COMPANY

and

GOLDEN STATE WATER COMPANY

FORM 10-Q - INDEX

 

Part I

Financial Information

 

 

 

 

Item 1:

Financial Statements

1

 

 

 

 

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

2

 

 

 

 

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

4

 

 

 

 

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

5

 

 

 

 

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

6

 

 

 

 

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

7

 

 

 

 

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

9

 

 

 

 

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

10

 

 

 

 

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

11

 

 

 

 

Notes to Consolidated Financial Statements

12

 

 

 

Item 2:

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

27

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

62

 

 

 

Item 4:

Controls and Procedures

62

 

 

 

Item 4T:

Controls and Procedures

62

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

63

 

 

 

Item 1A:

Risk Factors

63

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

63

 

 

 

Item 3:

Defaults Upon Senior Securities

63

 

 

 

Item 4:

Submission of Matters to a Vote of Security Holders

63

 

 

 

Item 5:

Other Information

64

 

 

 

Item 6:

Exhibits

64

 

 

 

 

Signatures

65

 



Table of Contents

 

PART I

 

Item 1. Financial Statements

 

General

 

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

 

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

 

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

 

Filing Format

 

American States Water Company (hereinafter “AWR”) is the parent company of Golden State Water Company (hereinafter “GSWC”), Chaparral City Water Company (hereinafter “CCWC”) and American States Utility Services, Inc. (hereinafter “ASUS”) and its subsidiaries.

 

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

 

Forward-Looking Information

 

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

 

1



Table of Contents

 

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS

ASSETS
(Unaudited)

 

(in thousands)

 

June 30,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

Water

 

$

1,005,495

 

$

982,708

 

Electric

 

65,453

 

65,078

 

 

 

1,070,948

 

1,047,786

 

Less - Accumulated depreciation

 

(332,319

)

(316,038

)

 

 

738,629

 

731,748

 

Construction work in progress

 

62,822

 

44,631

 

Net utility plant

 

801,451

 

776,379

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

12,393

 

11,354

 

Other property and investments

 

10,813

 

10,245

 

Total other property and investments

 

23,206

 

21,599

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

371

 

1,698

 

Accounts receivable-customers (less allowance for doubtful accounts of $572 in 2008 and $539 in 2007)

 

17,552

 

16,095

 

Unbilled revenue

 

21,681

 

16,035

 

Receivable from the U.S. government (less allowance for doubtful accounts of $332 in 2008 and $496 in 2007)

 

5,015

 

7,556

 

Other accounts receivable (less allowance for doubtful accounts of $324 in 2008 and $629 in 2007)

 

3,566

 

4,154

 

Income taxes receivable

 

1,538

 

60

 

Materials and supplies, at average cost

 

1,683

 

1,576

 

Regulatory assets – current

 

7,723

 

5,187

 

Prepayments and other current assets

 

2,042

 

2,765

 

Unrealized gain on purchased power contracts

 

2,953

 

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

5,185

 

3,842

 

Deferred income taxes – current

 

675

 

4,047

 

Total current assets

 

69,984

 

63,015

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

80,418

 

82,539

 

Other accounts receivable

 

9,963

 

9,723

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

7,022

 

2,284

 

Deferred income taxes

 

112

 

28

 

Other

 

10,385

 

8,331

 

Total regulatory and other assets

 

107,900

 

102,905

 

 

 

 

 

 

 

Total Assets

 

$

1,002,541

 

$

963,898

 

 

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

 

2



Table of Contents

 

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

 

(in thousands)

 

June 30,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

182,922

 

$

181,796

 

Earnings reinvested in the business

 

126,259

 

120,333

 

Total common shareholders’ equity

 

309,181

 

302,129

 

Long-term debt

 

267,114

 

267,226

 

Total capitalization

 

576,295

 

569,355

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

56,750

 

37,200

 

Long-term debt – current

 

523

 

609

 

Accounts payable

 

34,902

 

29,091

 

Income taxes payable

 

 

398

 

Accrued employee expenses

 

7,321

 

6,228

 

Accrued interest

 

2,466

 

2,467

 

Unrealized loss on purchased power contracts

 

 

1,554

 

Regulatory liabilities – current

 

 

173

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

4,405

 

2,641

 

Deferred income taxes – current

 

435

 

 

Other

 

12,489

 

13,890

 

Total current liabilities

 

119,291

 

94,251

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

85,737

 

84,479

 

Contributions in aid of construction – net

 

99,664

 

98,657

 

Deferred income taxes

 

83,151

 

82,480

 

Unamortized investment tax credits

 

2,291

 

2,336

 

Accrued pension and other postretirement benefits

 

23,480

 

20,851

 

Regulatory liabilities

 

531

 

557

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

3,172

 

2,037

 

Other

 

8,929

 

8,895

 

Total other credits

 

306,955

 

300,292

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,002,541

 

$

963,898

 

 

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

 

3



Table of Contents

 

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS
ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

65,370

 

$

60,826

 

Electric

 

6,208

 

6,255

 

Contracted services

 

8,735

 

12,165

 

Total operating revenues

 

80,313

 

79,246

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

13,079

 

12,077

 

Power purchased for pumping

 

2,655

 

2,673

 

Groundwater production assessment

 

2,890

 

2,549

 

Power purchased for resale

 

2,595

 

2,915

 

Unrealized (gain) loss on purchased power contracts

 

(1,664

)

236

 

Supply cost balancing accounts

 

(672

)

(1,190

)

Other operating expenses

 

7,053

 

6,559

 

Administrative and general expenses

 

14,943

 

13,664

 

Depreciation and amortization

 

7,810

 

7,088

 

Maintenance

 

4,770

 

4,353

 

Property and other taxes

 

2,839

 

2,843

 

ASUS construction expenses

 

4,434

 

8,260

 

Net gain on sale of property

 

 

(238

)

Total operating expenses

 

60,732

 

61,789

 

 

 

 

 

 

 

Operating Income

 

19,581

 

17,457

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,294

)

(5,570

)

Interest income

 

775

 

586

 

Other

 

7

 

63

 

Total other income and expenses

 

(4,512

)

(4,921

)

 

 

 

 

 

 

Income from operations before income tax expense

 

15,069

 

12,536

 

 

 

 

 

 

 

Income tax expense

 

5,786

 

5,214

 

 

 

 

 

 

 

Net Income

 

$

9,283

 

$

7,322

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,248

 

17,094

 

Basic Earnings Per Common Share

 

$

0.54

 

$

0.42

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,325

 

17,146

 

Fully Diluted Earnings Per Share

 

$

0.53

 

$

0.42

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.250

 

$

0.235

 

 

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

 

4



Table of Contents

 

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME

FOR THE SIX MONTHS
ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

117,459

 

$

111,153

 

Electric

 

15,011

 

15,124

 

Contracted services

 

16,785

 

25,239

 

Total operating revenues

 

149,255

 

151,516

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

21,032

 

20,950

 

Power purchased for pumping

 

4,335

 

4,791

 

Groundwater production assessment

 

5,265

 

4,828

 

Power purchased for resale

 

6,834

 

7,196

 

Unrealized gain on purchased power contracts

 

(4,507

)

(2,474

)

Supply cost balancing accounts

 

(779

)

(1,910

)

Other operating expenses

 

15,049

 

13,156

 

Administrative and general expenses

 

29,770

 

26,671

 

Depreciation and amortization

 

15,603

 

14,177

 

Maintenance

 

8,542

 

7,326

 

Property and other taxes

 

5,759

 

5,773

 

ASUS construction expenses

 

8,309

 

17,329

 

Net gain on sale of property

 

 

(605

)

Total operating expenses

 

115,212

 

117,208

 

 

 

 

 

 

 

Operating Income

 

34,043

 

34,308

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(10,672

)

(11,066

)

Interest income

 

1,136

 

1,152

 

Other

 

121

 

132

 

Total other income and expenses

 

(9,415

)

(9,782

)

 

 

 

 

 

 

Income from operations before income tax expense

 

24,628

 

24,526

 

 

 

 

 

 

 

Income tax expense

 

10,041

 

10,220

 

 

 

 

 

 

 

Net Income

 

$

14,587

 

$

14,306

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

17,243

 

17,066

 

Basic Earnings Per Common Share

 

$

0.84

 

$

0.83

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

17,362

 

17,121

 

Fully Diluted Earnings Per Share

 

$

0.84

 

$

0.82

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.500

 

$

0.470

 

 

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

 

5



Table of Contents

 

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

14,587

 

$

14,306

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

15,603

 

14,177

 

Provision for doubtful accounts

 

406

 

194

 

Deferred income taxes and investment tax credits

 

4,415

 

3,248

 

Unrealized gain on purchased power contracts

 

(4,507

)

(2,474

)

Stock-based compensation expense

 

618

 

530

 

Net gain on sale of property

 

 

(605

)

Other – net

 

279

 

520

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable – customers

 

(1,854

)

(982

)

Unbilled revenue

 

(5,646

)

(4,622

)

Other accounts receivable

 

354

 

(350

)

Receivable from the U.S. government

 

2,526

 

1,505

 

Materials and supplies

 

(107

)

(84

)

Prepayments and other current assets

 

723

 

159

 

Regulatory assets — supply cost balancing accounts

 

(779

)

(1,910

)

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(6,081

)

(1,370

)

Other assets

 

(1,790

)

233

 

Accounts payable

 

5,102

 

1,036

 

Income taxes receivable/payable

 

(1,876

)

3,150

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

2,899

 

173

 

Accrued pension and other postretirement benefits

 

2,629

 

2,306

 

Other liabilities

 

153

 

1,207

 

Net cash provided

 

27,654

 

30,347

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(38,822

)

(19,880

)

Business acquisition

 

(2,298

)

 

Proceeds from sale of property

 

 

623

 

Net cash used

 

(41,120

)

(19,257

)

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

424

 

507

 

Proceeds from stock option exercises

 

53

 

1,127

 

Receipt of advances for and contributions in aid of construction

 

3,776

 

4,391

 

Refunds on advances for construction

 

(2,709

)

(3,418

)

Repayments of long-term debt

 

(198

)

(212

)

Net change in notes payable to banks

 

19,550

 

(3,500

)

Dividends paid

 

(8,621

)

(8,017

)

Other

 

(136

)

83

 

Net cash provided (used)

 

12,139

 

(9,039

)

Net (decrease) increase in cash and cash equivalents

 

(1,327

)

2,051

 

Cash and cash equivalents, beginning of period

 

1,698

 

3,223

 

Cash and cash equivalents, end of period

 

$

371

 

$

5,274

 

 

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

 

6



Table of Contents

 

GOLDEN STATE WATER COMPANY
BALANCE SHEETS

ASSETS
(Unaudited)

 

(in thousands)

 

June 30,
2008

 

December 31,
2007

 

Utility Plant, at cost

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

943,859

 

$

922,459

 

Electric

 

65,453

 

65,078

 

 

 

1,009,312

 

987,537

 

Less - Accumulated depreciation

 

(313,907

)

(298,856

)

 

 

695,405

 

688,681

 

Construction work in progress

 

59,610

 

43,552

 

Net utility plant

 

755,015

 

732,233

 

 

 

 

 

 

 

Other Property and Investments

 

7,825

 

7,838

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

365

 

1,389

 

Accounts receivable-customers (less allowance for doubtful accounts of $538 in 2008 and $519 in 2007)

 

17,177

 

15,741

 

Unbilled revenue

 

21,263

 

15,701

 

Inter-company receivable

 

713

 

563

 

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

 

3,161

 

3,195

 

Materials and supplies, at average cost

 

1,597

 

1,562

 

Regulatory assets – current

 

7,652

 

5,116

 

Prepayments and other current assets

 

1,804

 

2,595

 

Unrealized gain on purchased power contracts

 

2,953

 

 

Deferred income taxes - current

 

707

 

3,845

 

Total current assets

 

57,392

 

49,707

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

80,418

 

82,539

 

Other accounts receivable

 

9,963

 

9,723

 

Other

 

9,723

 

7,933

 

Total regulatory and other assets

 

100,104

 

100,195

 

 

 

 

 

 

 

Total Assets

 

$

920,336

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

7



Table of Contents

 

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

 

(in thousands)

 

June 30,
2008

 

December 31,
2007

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

163,736

 

$

163,180

 

Earnings reinvested in the business

 

126,346

 

115,261

 

Total common shareholder’s equity

 

290,082

 

278,441

 

Long-term debt

 

260,829

 

260,941

 

Total capitalization

 

550,911

 

539,382

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt - current

 

223

 

309

 

Accounts payable

 

31,076

 

24,402

 

Inter-company payable

 

33,389

 

23,764

 

Income taxes payable to Parent

 

1,189

 

2,469

 

Accrued employee expenses

 

6,522

 

5,677

 

Accrued interest

 

2,406

 

2,424

 

Unrealized loss on purchased power contracts

 

 

1,554

 

Regulatory liabilities - current

 

 

173

 

Deferred income taxes - current

 

436

 

 

Other

 

12,106

 

13,459

 

Total current liabilities

 

87,347

 

74,231

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

80,074

 

78,917

 

Contributions in aid of construction - net

 

88,485

 

87,323

 

Deferred income taxes

 

79,605

 

78,805

 

Unamortized investment tax credits

 

2,291

 

2,336

 

Accrued pension and other postretirement benefits

 

23,480

 

20,851

 

Other

 

8,143

 

8,128

 

Total other credits

 

282,078

 

276,360

 

 

 

 

 

 

 

Commitments and Contingencies (Note 7)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

920,336

 

$

889,973

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME

FOR THE THREE MONTHS
ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Three Months Ended
June 30,

 

(in thousands)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

63,413

 

$

58,894

 

Electric

 

6,208

 

6,255

 

Total operating revenues

 

69,621

 

65,149

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

12,896

 

11,877

 

Power purchased for pumping

 

2,497

 

2,506

 

Groundwater production assessment

 

2,890

 

2,549

 

Power purchased for resale

 

2,595

 

2,915

 

Unrealized (gain) loss on purchased power contracts

 

(1,664

)

236

 

Supply cost balancing accounts

 

(672

)

(1,190

)

Other operating expenses

 

5,628

 

5,631

 

Administrative and general expenses

 

11,934

 

11,676

 

Depreciation and amortization

 

7,252

 

6,645

 

Maintenance

 

3,795

 

4,037

 

Property and other taxes

 

2,648

 

2,733

 

Net gain on sale of property

 

 

(238

)

Total operating expenses

 

49,799

 

49,377

 

 

 

 

 

 

 

Operating Income

 

19,822

 

15,772

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(4,965

)

(5,182

)

Interest income

 

729

 

528

 

Other

 

5

 

47

 

 

 

(4,231

)

(4,607

)

 

 

 

 

 

 

Income from operations before income tax expense

 

15,591

 

11,165

 

 

 

 

 

 

 

Income tax expense

 

5,985

 

4,695

 

 

 

 

 

 

 

Net Income

 

$

9,606

 

$

6,470

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME

FOR THE SIX MONTHS
ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

(in thousands)

 

2008

 

2007

 

Operating Revenues

 

 

 

 

 

Water

 

$

113,919

 

$

107,582

 

Electric

 

15,011

 

15,124

 

Total operating revenues

 

128,930

 

122,706

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

20,683

 

20,586

 

Power purchased for pumping

 

4,072

 

4,522

 

Groundwater production assessment

 

5,265

 

4,828

 

Power purchased for resale

 

6,834

 

7,196

 

Unrealized gain on purchased power contracts

 

(4,507

)

(2,474

)

Supply cost balancing accounts

 

(779

)

(1,910

)

Other operating expenses

 

11,744

 

11,331

 

Administrative and general expenses

 

23,601

 

23,171

 

Depreciation and amortization

 

14,494

 

13,289

 

Maintenance

 

7,119

 

6,807

 

Property and other taxes

 

5,409

 

5,562

 

Net gain on sale of property

 

 

(605

)

Total operating expenses

 

93,935

 

92,303

 

 

 

 

 

 

 

Operating Income

 

34,995

 

30,403

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(10,017

)

(10,201

)

Interest income

 

1,086

 

1,061

 

Other

 

91

 

99

 

 

 

(8,840

)

(9,041

)

 

 

 

 

 

 

Income from operations before income tax expense

 

26,155

 

21,362

 

 

 

 

 

 

 

Income tax expense

 

10,631

 

8,990

 

 

 

 

 

 

 

Net Income

 

$

15,524

 

$

12,372

 

 

The accompanying notes are an integral part of these financial statements

 

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Table of Contents

 

GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW

FOR THE SIX MONTHS ENDED JUNE 30, 2008 AND 2007
(Unaudited)

 

 

 

Six Months Ended
June 30,

 

(in thousands)

 

2008

 

2007

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

15,524

 

$

12,372

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

14,494

 

13,289

 

Provision for doubtful accounts

 

367

 

154

 

Deferred income taxes and investment tax credits

 

4,395

 

3,309

 

Unrealized gain on purchased power contracts

 

(4,507

)

(2,474

)

Stock-based compensation expense

 

515

 

492

 

Net gain on sale of property

 

 

(605

)

Other — net

 

175

 

467

 

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable - customers

 

(1,809

)

(911

)

Unbilled revenue

 

(5,562

)

(4,524

)

Other accounts receivable

 

(200

)

(685

)

Materials and supplies

 

(35

)

(84

)

Prepayments and other current assets

 

791

 

164

 

Regulatory assets - supply cost balancing accounts

 

(779

)

(1,910

)

Other assets

 

(1,642

)

184

 

Accounts payable

 

6,093

 

1,406

 

Inter-company receivable/payable

 

115

 

266

 

Income taxes payable from Parent

 

(1,280

)

2,036

 

Accrued pension and other postretirement benefits

 

2,629

 

2,306

 

Other liabilities

 

90

 

1,242

 

Net cash provided

 

29,374

 

26,494

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(36,004

)

(18,697

)

Proceeds from sale of property

 

 

623

 

Net cash used

 

(36,004

)

(18,074

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Receipt of advances for and contributions in aid of construction

 

3,585

 

4,124

 

Refunds on advances for construction

 

(2,614

)

(3,418

)

Repayments of long-term debt

 

(198

)

(212

)

Net change in inter-company borrowings

 

9,360

 

1,000

 

Dividends paid

 

(4,400

)

(8,600

)

Other

 

(127

)

86

 

Net cash provided (used)

 

5,606

 

(7,020

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,024

)

1,400

 

Cash and cash equivalents, beginning of period

 

1,389

 

1,735

 

Cash and cash equivalents, end of period

 

$

365

 

$

3,135

 

 

The accompanying notes are an integral part of these financial statements

 

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

 

Note 1 — Summary of Significant Accounting Policies:

 

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

 

ASUS, through its wholly-owned subsidiaries, has entered into agreements with the U.S. government to operate and maintain the water and/or wastewater systems at various military bases pursuant to 50-year fixed price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances.  In September and October of 2007, ASUS was awarded contracts to operate and maintain the water and wastewater systems at Fort Jackson, South Carolina and at Fort Bragg/Pope AFB, North Carolina, respectively. These contracts have substantially similar terms as the agreements previously executed by ASUS with the U.S. government.  PSUS commenced operations at Fort Jackson on January 2, 2008 and ONUS commenced operations at Fort Bragg on March 1, 2008, both following the expiration of transition periods.

 

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

 

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GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves. 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, 2008 and December 31, 2007. The interest rate charged to GSWC is sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliates using allocation factors agreed upon by the CPUC.

 

Sales and Use Taxes:  GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to use public right of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $635,000 and $619,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,333,000 and $1,352,000 for the six months ended June 30, 2008 and 2007, respectively. When GSWC acts as an agent, and the tax is not required to be remitted if it is not collected from the customer, the taxes are accounted for on a net basis.

 

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

 

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

 

In March 2007, the FASB Emerging Issues Task Force (“EITF”) issued EITF No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment”, which concludes that a realized income tax benefit from dividends or dividend equivalents that are charged to retained earnings and are paid to employees and directors for equity classified as nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as an increase in additional paid-in capital. Registrant has commenced recognizing this tax benefit as an increase in additional paid-in capital beginning January 1, 2008. The impact of this change was not material to Registrant’s consolidated financial statements.

 

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

 

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

 

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

 

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

 

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

 

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

 

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Note 2 — Regulatory Matters:

 

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future revenue associated with certain costs that will be recovered from customers through the ratemaking process, and regulatory liabilities, which represent probable future reductions in revenue associated with amounts that are to be credited to customers through the ratemaking process. At June 30, 2008, Registrant had approximately $13.1 million of regulatory assets not accruing carrying costs. Of this amount, $5.2 million relates to deferred income taxes representing accelerated tax benefits flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense, and a $6.2 million “non-yielding” regulatory asset related to general rate case memorandum accounts to be recovered over 24 months.  The remainder relates to other expenses that do not provide for recovery of carrying costs that Registrant expects to recover in rates over a short period.  Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

 

(In thousands)

 

June 30, 2008

 

December 31, 2007

 

GSWC

 

 

 

 

 

Electric supply cost balancing account

 

$

16,570

 

$

18,318

 

Water supply cost balancing accounts

 

11,128

 

8,525

 

Costs deferred for future recovery on Aerojet case

 

21,009

 

21,244

 

Pensions and other postretirement obligations

 

10,842

 

11,443

 

Flow-through taxes, net

 

5,154

 

5,220

 

Electric transmission line abandonment costs

 

3,081

 

3,157

 

Asset retirement obligations

 

3,722

 

3,547

 

Low income rate assistance balancing accounts

 

4,792

 

4,147

 

General rate case memorandum accounts

 

6,212

 

7,162

 

Santa Maria adjudication memorandum accounts

 

4,075

 

4,005

 

Refund of water right lease revenues

 

(2,691

)

(2,945

)

Other regulatory assets, net

 

4,176

 

3,659

 

Total GSWC

 

$

88,070

 

$

87,482

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

53

 

$

52

 

Other regulatory liabilities, net

 

(513

)

(538

)

Total AWR

 

$

87,610

 

$

86,996

 

 

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

 

Supply Cost Balancing Accounts:

 

Electric Supply Cost Balancing Account—Electric power costs incurred by GSWC’s Bear Valley Electric Service (“BVES”) division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $16.6 million at June 30, 2008.  Of this amount, approximately $4.4 million relates to the under-collection remaining as of June 30, 2008 that was incurred during the energy crisis in late 2000 and 2001, discussed below.  The remaining $12.2 million in the electric supply cost balancing account relates to $3.2 million from the tariff charged to GSWC by Southern California Edison (“Edison”) for the abandonment of a transmission line upgrade discussed below, and $9.0 million for changes in purchased energy and power system delivery costs including interest, also discussed below.

 

The CPUC has authorized GSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable GSWC to recover an under-collection of approximately $23.1 million at the end of 2001 which had been incurred during the energy crisis in late 2000 and 2001. GSWC sold 29,717,109 and 30,724,243 kilowatt hours of electricity to its BVES’ customers for the three months ended June 30, 2008 and 2007, respectively, and sold 73,414,752 and 73,408,022 kilowatt hours of electricity to its customers for the six months ended June 30, 2008 and 2007, respectively. As a result of the surcharge, the supply cost balancing account was reduced by approximately $667,000 and $663,000 for the three months ended June 30, 2008 and 2007, respectively, and $1,641,000 and $1,581,000 for the six months ended June 30, 2008 and 2007, respectively.  Approximately $18.7  million of the $23.1 million under-collection incurred during the energy crisis in late 2000 and 2001 has been

 

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recovered through this surcharge. GSWC anticipates the surcharge, based on electricity sales, to be sufficient for it to recover by August 2011 the amount of the under-collected balance incurred during the energy crisis. However, in 2011, if GSWC has not fully recovered the amount of this under collection, GSWC will seek regulatory approval of any amounts not recovered through this surcharge.

 

Changes in purchased energy and power system delivery costs also impact the electric supply cost balancing account. The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of a 2001 CPUC decision. The BVES division of GSWC is allowed to include up to a weighted average annual purchased energy cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing account. To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed unless a subsequent order is issued by the CPUC.  GSWC intends to seek such an order in connection with BVES’ general rate case proceedings.  During the three and six months ended June 30, 2008 there were no amounts expensed over the $77 per MWh cap. During the three and six months ended June 30, 2007, the amount expensed was $29,000.

 

Charges to GSWC by Edison associated with the transportation of energy over Edison’s power system and the abandonment of a transmission line upgrade have increased under Edison’s tariff to levels that exceed the amounts authorized by the CPUC in BVES’s retail power rates to its customers. The incremental cost increase to GSWC from the tariff for the abandonment of a transmission line upgrade, which is not currently included in rates, is $38,137 per month.  The incremental costs not included in rates have been included in the balancing account at June 30, 2008 for subsequent recovery from customers, subject to CPUC approval.

 

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

 

In summary, for the three months ended June 30, 2008 and 2007, the under-collection decreased by approximately $730,000 and $406,000, respectively, and $1,748,000 and $1,189,000 for the six months ended June 30, 2008 and 2007, respectively.

 

Water Supply Cost Balancing Accounts—As permitted by the CPUC, Registrant maintains water supply cost balancing accounts for GSWC to account for under-collections and over-collections of revenues designed to recover such costs.  The supply cost balancing accounts track differences between the current cost for supply items (water, power, and pump taxes) charged by GSWC’s suppliers and the cost for those items incorporated into GSWC’s rates. Under-collections (recorded as regulatory assets) occur when the current cost exceeds the amount in rates for these items and, conversely, over-collections (recorded as regulatory liabilities) occur when the current cost of these items is less than the amount in rates.  Typically, under-collections or over-collections, when they occur, are tracked in the supply cost balancing accounts for future recovery or refund through a surcharge (in the event of an under-collection) or through a surcredit (in the event of an over-collection) on customers’ bills.  Registrant accrues interest on its supply cost balancing accounts at the rate prevailing for 90-day commercial paper.  Registrant does not maintain a supply cost balancing account for CCWC.

 

For the three months ended June 30, 2008 and 2007, approximately $1.4 million and $1.6 million of under-collections, respectively, were recorded in the water supply cost balancing accounts.  For the six months ended June 30, 2008 and 2007, approximately $2.6 million and $3.1 million of under-collections, respectively, were recorded in the water supply cost balancing accounts. Amortization of surcharges that are in rates to recover under-collections from customers and surcredits that are in rates to refund over-collections to customers also increased or decreased the water supply cost balancing accounts, as applicable.  During the three months ended June 30, 2008 and 2007, approximately $49,000 of over-collection and $250,000 of under-collection amortization affected the water supply cost balancing accounts, respectively.  During the six months ended June 30, 2008 and 2007, approximately $247,000 and $570,000 of under-collection amortization decreased the water supply cost balancing accounts, respectively.

 

As of June 30, 2008, there is approximately $11.1 million net under-collection in the water supply cost balancing accounts.  Of this amount, approximately $8.1 million relates to GSWC’s Region III customer service area.  In May 2008, the CPUC approved a surcharge to begin recovering $7.0 million of this under-collection over 24 months.   The remaining $1.1 million for Region III will be included in future filings for recovery.  Further, the remaining $3.0 million net under-collections in the water supply cost balancing accounts relate to GSWC’s Region I

 

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net under-collection of $2.0 million and Region II’s net under-collection of $970,000.  Currently, there is a surcharge in place in Region I expiring in January 2009 to recover this under-collection, and a surcredit at Region II to refund a previous over-collection expiring in August 2008.

 

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 $277,000 and $285,000 was billed to customers during the three months ended June 30, 2008 and 2007, respectively, and $490,000 and $505,000 during the six months ended June 30, 2008 and 2007, respectively.  GSWC will keep the Aerojet memorandum account open until the earlier of full amortization of the balance or 20 years. However, no costs will be added to the memorandum account, other than on-going interest charges approved by the CPUC decision. Pursuant to the decision, additional interest of approximately $109,000 and $278,000 was added to the Aerojet litigation memorandum account during the three months ended June 30, 2008 and 2007, respectively, and $256,000 and $554,000 during the six months ended June 30, 2008 and 2007, respectively.

 

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

 

Santa Maria Adjudication Memorandum Accounts:

 

As more fully discussed in Note 7, GSWC has incurred costs of approximately $6.9 million as of June 30, 2008, including legal and expert witness fees, in defending its rights to the groundwater supply in the Santa Maria Basin for use by its customers in Santa Barbara and San Luis Obispo Counties. Such costs had been recorded in utility plant for future rate recovery. In February 2006, GSWC filed an application with the CPUC for recovery of $5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005. In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates (“DRA”) authorizing recovery of the $5.5 million requested in GSWC’s application. The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit. In May 2007, the CPUC issued a decision that approved the settlement with the DRA. Pursuant to the decision, GSWC was authorized to place in rate base $2.7 million of the $5.5 million of previously incurred litigation costs in the Santa Maria groundwater basin adjudication.

 

GSWC was also authorized to amortize, with interest, the remaining $2.8 million of the $5.5 million in rates over a ten-year period, plus interest. This amount has been transferred into a separate memorandum account included within regulatory assets and a surcharge has been implemented in the third quarter of 2007 for recovery of these costs. A rate surcharge generating approximately $84,000 and $133,000 was billed to customers during the three and six months ended June 30, 2008, respectively.  All litigation costs, including interest, that have been incurred since December 31, 2005, totaling approximately $1.4 million, have also been transferred from rate base to a separate new memorandum account, subject to a reasonableness review by the CPUC in a subsequent phase of this proceeding or in a new proceeding.  In April 2008, the Administrative Law Judge closed the proceeding without ruling on the stipulation or authorizing recovery of the remaining costs. The ruling directed GSWC to file a new application. In accordance with this ruling, GSWC intends to file a new application.  Management believes that these additional costs will be approved and that recovery of these costs through rates is probable.

 

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Other Regulatory Matters:

 

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

 

GSWC’s BVES division has been regularly filing compliance reports with the CPUC regarding its purchases of energy from renewable energy resources. The filings indicated that BVES had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a potential penalty. GSWC has formally contested the potential penalty reflected in the compliance report. The CPUC has been considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like BVES.   On May 30, 2008, the CPUC issued its final decision regarding the renewable responsibilities of small utilities (including BVES).  The final decision affirmed the renewable obligation targets for the small utilities but also allowed for the small utilities to defer compliance under the CPUC’s flexible compliance rules.  BVES will need to continue its efforts to procure renewable resources each year going forward, and where that may prove difficult because the market for such resources is very constrained, then BVES will be required to describe in detail the problems that warrant further deferral, in accordance with the CPUC’s flexible compliance rules. Because the final decision deferred BVES’ interim target purchase levels for the years 2004 through 2007, management believes that the CPUC’s decision effectively forecloses any exposure to financial penalties for the year 2007 and earlier.

 

Note 3 — Earnings per Share/Capital Stock:

 

Registrant computes earnings per share (“EPS”) in accordance with EITF No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”.  EITF No. 03-06 provides the accounting guidance for the effect of participating securities on EPS calculations and the use of the “two-class” method. The guidance requires the use of the “two-class” method of computing EPS for companies with participating securities. The “two-class” method is an earnings allocations formula that determines EPS for each class of common stock and participating security.  AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with common shares that have been issued under AWR’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan.  In applying the “two-class” method, undistributed earnings are allocated to both common shares and participating securities. The following is a reconciliation of Registrant’s net income and weighted average common shares outstanding for calculating basic net income per share:

 

Basic

 

For The Three Months
Ended June 30,

 

For The Six Months
Ended June 30,

 

(in thousands, except per share amounts)

 

2008

 

2007

 

2008

 

2007

 

Net income

 

$

9,283

 

$

7,322

 

$

14,587

 

$

14,306

 

Less: (a)

Distributed earnings to common shareholders

 

4,312

 

4,017

 

8,622

 

8,021

 

 

Distributed earnings to participating securities

 

23

 

64

 

43

 

128

 

Undistributed earnings

 

4,948

 

3,241

 

5,922

 

6,157

 

 

 

 

 

 

 

 

 

 

 

(b)

Undistributed earnings allocated to common shareholders

 

4,922

 

3,190

 

5,893

 

6,061

 

 

Undistributed earnings allocated to participating securities

 

26

 

51

 

29

 

96

 

 

 

 

 

 

 

 

 

 

 

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

 

$

9,234

 

$

7,207

 

$

14,515

 

$

14,082

 

 

 

 

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

17,248

 

17,094

 

17,243

 

17,066

 

Basic earnings per Common Share

 

$

0.54

 

$

0.42

 

$

0.84

 

$

0.83

 

 

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

 

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Registrant’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. At June 30, 2008 and 2007 there were 569,155 and 580,215 options outstanding, respectively, under these Plans. At June 30, 2008 and 2007, there were also approximately 76,373 and 61,081 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)

 

2008

 

2007

 

2008

 

2007

 

Common shareholders earnings, basic

 

$

9,234

 

$

7,207

 

$

14,515

 

$

14,082

 

Undistributed earnings for dilutive stock options (1)

 

 

 

29

 

 

Total common shareholders earnings, diluted

 

$

9,234

 

$

7,207

 

$

14,544

 

$

14,082

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

17,248

 

17,094

 

17,243

 

17,066

 

Stock-based compensation (2)

 

77

 

52

 

119

 

55

 

Weighted average common shares outstanding, diluted

 

17,325

 

17,146

 

17,362

 

17,121

 

Diluted earnings per Common Share

 

$

0.53

 

$

0.42

 

$

0.84

 

$

0.82

 

 


(1)          Undistributed earnings allocated to participating securities were not included as of June 30, 2007 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 the calculation of diluted EPS, 356,923 and 276,574 stock options at June 30, 2008 and 2007, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”.  All of the 76,373 restricted stock units at June 30, 2008 were included in the calculation of diluted EPS for the three and six months ended June 30, 2008.

 

Stock options of 194,232 and 87,041 were outstanding at June 30, 2008 and 2007, respectively, but not included in the computation of diluted EPS because the related option exercise price was greater than the average market price of AWR’s common shares for the six months ended June 30, 2008 and 2007.  Stock options of 18,000 and 216,600 were outstanding at June 30, 2008 and 2007, respectively, but not included in the computation of diluted EPS because they were antidilutive. Also not included in the calculation of EPS were 61,081 restricted stock units at June 30, 2007 because they were antidilutive.

 

Registrant 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 AWR’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 six months ended June 30, 2008 and 2007, Registrant issued 19,896 and 13,494 common shares, for approximately $424,000 and $507,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan, and the 401(k) Plan.  In addition, during the six months ended June 30, 2008 and 2007, Registrant issued 2,002 and 46,787 common shares for approximately $53,000 and $1,127,000, respectively, as a result of the exercise of stock options under the Company’s stock incentive plans.  No cash proceeds received by AWR as a result of the exercise of these stock options have been distributed to any subsidiaries of AWR.

 

Registrant purchased 10,477 and 3,271 common shares on the open market during the three months ended June 30, 2008 and 2007, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan and 401(k) Plan.  The common shares purchased by Registrant were used to satisfy the requirements of these plans.  During the six months ended June 30, 2008 and 2007, Registrant purchased 24,837 and 3,553, respectively, common shares on the open market under these plans for the same purpose.

 

During the three months ended June 30, 2008 and 2007, AWR paid quarterly dividends to shareholders of approximately $4.3 million, or $0.250 per share, and $4.0 million, or $0.235 per share, respectively.  During the six months ended June 30, 2008 and 2007, AWR paid quarterly dividends to shareholders of approximately $8.6 million, or $0.500 per share, and $8.0 million, or $0.470 per share, respectively.

 

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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. 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.  In June 2007, PWCC sold the contracts between PWCC and GSWC to Morgan Stanley Capital Group, Inc. (“MSCG”) effective November 1, 2007.   Settlement of these contracts occurred on a cash or net basis through 2006 and occurs by physical delivery thereafter through the expiration of the contracts on December 31, 2008. Registrant has no other derivative financial instruments.

 

As a result of the contracts with MSCG, on a monthly basis, the related asset or liability is adjusted to reflect the fair market value at the end of the month.  Registrant adopted SFAS No. 157 effective January 1, 2008 for financial assets and liabilities measured on a recurring basis.  SFAS No. 157 applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. There was no impact in the adoption of SFAS No. 157 to the consolidated financial statements. However, SFAS No. 157 requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The statement requires fair value measurements to be classified and disclosed in one of the following three categories:

 

Level 1: Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities;

 

Level 2: Quoted prices in markets that are not active, or inputs which are observable, either directly or indirectly, for substantially the full term of the asset or liability, or

 

Level 3: Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (i.e., supported by little or no market activity).

 

Registrant’s valuation model utilizes various inputs that include quoted market prices for energy over the duration of the contracts. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market. When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3.  Accordingly, the valuation of the derivative on Registrant’s purchased power contract with MSCG has been classified as Level 3.

 

The following table presents changes in the fair value of the derivative for the three months ended June 30, 2008.

 

(dollars in thousands)

 

Gains (Losses)

 

Balance, March 31, 2008

 

$

1,289

 

Unrealized gain on purchased power contracts included in operating expenses

 

1,664

 

Balance, June 30, 2008

 

$

2,953

 

 

The following table presents changes in the fair value of the derivative for the six months ended June 30, 2008.

 

(dollars in thousands)

 

Gains (Losses)

 

Balance, December 31, 2007

 

$

(1,554

)

Unrealized gain on purchased power contracts included in operating expenses

 

4,507

 

Balance, June 30, 2008

 

$

2,953

 

 

As these contracts are settled, the realized gains or losses are recorded in power purchased for resale, and the previously recorded unrealized gains or losses are reversed. The fair market value of $3.0 million recognized on the balance sheet in current assets as of June 30, 2008 is expected to be recognized as a reduction to income by the end of the contracts which expire on December 31, 2008.

 

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Note 5 — Income Taxes:

 

As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal income tax rate in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise.

 

During the second quarter of 2008, the Internal Revenue Service (“IRS”) issued a Revenue Agent’s Report (“RAR”) in connection with its examination of the 2002 tax year which resulted in Registrant recognizing certain tax benefits in accordance with FIN 48.  Consequently, Registrant’s total unrecognized tax benefit decreased by $1,265,000 from $5,113,000 at December 31, 2007 and March 31, 2008 to $3,848,000 at June 30, 2008.  The amount of the unrecognized tax benefits that, if recognized, would affect the effective tax rate decreased by $118,000 from $118,000 at December 31, 2007 and March 31, 2008 to no amount at June 30, 2008.  Associated with these changes, Registrant recognized $480,000 of interest income, with a corresponding increase in interest receivable included in noncurrent assets. Upon receiving the RAR, Registrant filed a protest with the IRS’s office of Appeals in which it requested a conference to address Registrant’s disagreement with certain of the Agent’s adjustments.

 

Registrant’s policy is to classify interest on income tax over/underpayments in interest income/expense and penalties in “other operating expenses.”

 

Note 6 — Employee Benefit Plans:

 

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and six months ended June 30, 2008 and 2007 are as follows:

 

 

 

For The Three Months Ended June 30,

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

Pension Benefits

 

Benefits

 

SERP

 

(dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

896

 

$

940

 

$

86

 

$

105

 

$

60

 

$

106

 

Interest cost

 

1,350

 

1,243

 

161

 

168

 

63

 

41

 

Expected return on plan assets

 

(1,235

)

(1,133

)

(63

)

(57

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost

 

30

 

41

 

(50

)

(50

)

230

 

40

 

Amortization of actuarial (gain) loss

 

 

154

 

 

25

 

(14

)

(6

)

Net periodic pension cost

 

$

1,041

 

$

1,245

 

$

239

 

$

296

 

$

339

 

$

181

 

 

 

 

For The Six Months Ended June 30,

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

Postretirement

 

 

 

 

 

 

 

Pension Benefits

 

Benefits

 

SERP

 

(dollars in thousands)

 

2008

 

2007

 

2008

 

2007

 

2008

 

2007

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,792

 

$

1,880

 

$

172

 

$

210

 

$

120

 

$

212

 

Interest cost

 

2,700

 

2,486

 

322

 

336

 

126

 

82

 

Expected return on plan assets

 

(2,470

)

(2,266

)

(126

)

(114

)

 

 

Amortization of transition

 

 

 

210

 

210

 

 

 

Amortization of prior service cost

 

60

 

82

 

(100

)

(100

)

460

 

80

 

Amortization of actuarial (gain) loss

 

 

308

 

 

50

 

(28

)

(12

)

Net periodic pension cost

 

$

2,082

 

$

2,490

 

$

478

 

$

592

 

$

678

 

$

362

 

 

Registrant expects to contribute approximately $4,166,000 and $659,000 to pension and postretirement medical plans in 2008, respectively.  No contributions were made during the three and six months ended June 30, 2008.

 

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Note 7 — Contingencies:

 

Water Quality-Related Litigation:

 

Perchlorate and/or Volatile Organic Compounds (“VOC”) have been detected in five wells servicing GSWC’s South San Gabriel System. GSWC filed suit in federal court, along with two other affected water purveyors and the San Gabriel Basin Water Quality Authority (“WQA”), against some of those allegedly responsible for the contamination of two of these wells. Some of the other potential defendants settled with GSWC, other water purveyors and the WQA (the “Water Entities”), on VOC related issues prior to the filing of the lawsuit. In response to the filing of the lawsuit, the Potentially Responsible Party (“PRP”) defendants filed motions to dismiss the suit or strike certain portions of the suit. The judge issued a ruling on April 1, 2003 granting in part and denying in part the PRP’s motions. A key ruling of the court was that the water purveyors, including GSWC, by virtue of their ownership of wells contaminated with hazardous chemicals are themselves PRPs under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

 

GSWC has, pursuant to permission of the court, amended its suit to claim certain affirmative defenses as an “innocent” party under CERCLA. Registrant is presently unable to predict the outcome of this ruling on its ability to fully recover from the PRPs future costs associated with the treatment of these wells. In this same suit, the PRPs have filed cross-complaints against the Water Entities, the Metropolitan Water District (“MWD”), the Main San Gabriel Basin Watermaster and others on the theory that they arranged for and did transport contaminated water into the Main San Gabriel Basin for use by GSWC and the other two affected water purveyors and for other related claims.

 

On August 29, 2003, the US Environmental Protection Agency (“EPA”) issued Unilateral Administrative Orders (“UAO”) against 41 parties deemed responsible for polluting the groundwater in that portion of the San Gabriel Valley from which two of GSWC’s impacted wells draw water. GSWC was not named as a party to the UAO. The UAO requires that these parties remediate the contamination. The judge in the lawsuit has appointed a special master to oversee mandatory settlement discussions between the PRPs and the Water Entities. EPA is also conducting settlement discussions with several PRPs regarding the UAO. The Water Entities and EPA are working to coordinate their settlement discussions under the special master in order to arrive at a complete resolution of all issues affecting the lawsuit and the UAO. Settlements with a number of the PRPs are being finalized; however, Registrant is presently unable to predict the ultimate outcome of these settlement discussions.

 

Registrant is unable to predict an estimate of the loss, if any, resulting from any pending suits or administrative proceedings.

 

Condemnation of Properties:

 

The laws of the State of California and the State of Arizona provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation, where doing so is necessary and in the public interest. In addition, however, the laws of California provide: (i) that the owner of utility property may contest whether the condemnation is actually necessary and in the public interest, and (ii) that the owner is entitled to receive the fair market value of its property if the property is ultimately taken.

 

Although the City of Claremont, California (the “City”) located in GSWC’s Region III, has not initiated the formal condemnation process pursuant to California law, the City has expressed various concerns to GSWC about the rates charged by GSWC and the effectiveness of the CPUC’s rate-setting procedures. The City hired a consultant to perform an appraisal of the value of GSWC’s water system serving the City. The value was estimated in 2004 by the City’s consultant at $40—$45 million. GSWC disagrees with the consultant’s valuation assessment. As of June 30, 2008, management believes that the fair market value of the Claremont water system exceeds the $37.8 million recorded net book value and also exceeds the consultant’s estimates of its value. The Claremont City Council held a project priorities workshop in April 2007. The council members agreed that the acquisition of GSWC’s water system was to remain a priority and authorized staff to obtain updated appraisals for the value of the water systems. Requests for proposals have been sent to consulting firms by the City.  In recent meetings held in February and June  of 2008, the Claremont City Council stated that they had decided to authorize additional studies of the acquisition of GSWC’s water system and plans to move forward on this matter.

 

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The Town of Apple Valley abandoned its activities related to a potential condemnation of GSWC’s water system serving the Town in 2007.  Except for the City of Claremont and the Town of Apple Valley, Registrant has not been, within the last three years, involved in activities related to the potential condemnation of any of its water customer service areas or in its BVES customer service area. No formal condemnation proceedings have been filed against any of the Registrant’s service areas during the past three years.

 

Santa Maria Groundwater Basin Adjudication:

 

In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit sought an adjudication of the Santa Maria Groundwater Basin (the “Basin”). A stipulated settlement of the lawsuit has been reached, subject to CPUC approval.  The settlement, among other things, if approved by the CPUC, would preserve GSWC’s historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the Basin. GSWC, under the stipulation, has a right to 10,000 acre-feet of groundwater replenishment provided by the Twitchell Project, a storage and flood control reservoir project operated by the Santa Maria Valley Conservation District.  A monitoring and annual reporting program has been established to allow the parties to responsibly manage the Basin and to respond to shortage conditions.  If severe water shortage conditions are found over a period of five years, the management area engineer will make findings and recommendations to alleviate such shortages.  In the unlikely case that the Basin experiences severe shortage conditions, the court has the authority to limit GSWC’s groundwater production to 10,248 acre-feet per year, based on developed water in the Basin.

 

On February 11, 2008, the court issued its final judgment, which approves and incorporates the stipulation.  The judgment awards GSWC prescriptive rights to groundwater against the non-stipulating parties.  In addition, the judgment grants GSWC the right to use the Basin for temporary storage and to recapture 45 percent of the return flows that are generated from its importation of State Water Project water.  Pursuant to this judgment, the court retains jurisdiction over all of the parties to make supplemental orders or to amend the judgment as necessary.  On March 20, 2008, the non-stipulating parties filed notices of appeal.  Registrant is unable to predict the outcome of the appeal.

 

Air Quality Management District:

 

In 1998, the South Coast Air Quality Management District (“AQMD”) issued a permit to GSWC for the installation and use of air stripping equipment at one of GSWC’s groundwater treatment systems in its Region II service area. In 2005, the AQMD conducted an inspection of this facility (“Watson Well”) and issued a Notice of Violation (“NOV”) for exceeding the amount of groundwater permitted to be treated by the treatment system during calendar year 2004. Since receiving the NOV, changes in GSWC’s procedures have helped to avoid additional violations at the facility. The AQMD could have assessed penalties associated with an NOV; however, GSWC finalized a settlement of the NOV with the AQMD in June 2007.  As part of the settlement, GSWC agreed to perform a Supplemental Environmental Program (“SEP”). A SEP typically involves capital expenditures resulting in a change of process, equipment, material, or indirect source reduction for the purposes of eliminating or reducing air contaminant emissions. The SEP prepared by GSWC involves installation and operation of granular activated carbon (“GAC”) filters at the facility. Installation of the filters will eliminate the use of the air stripping equipment at the facilities involved with the NOV and thus improve air quality. The AQMD accepted the SEP and assessed a nominal penalty of $25,000. During 2007, GSWC paid the penalty of $25,000 and agreed to perform its obligations under the SEP. It is estimated that the total capital cost of the SEP will be approximately $1.8 million with a required estimated completion date of April 30, 2009. Upon timely performance of all its obligations under the SEP, GSWC will be released from any and all claims or penalties arising from the NOV. Management believes that GSWC will be able to timely fulfill its obligations under the SEP and no further penalties are expected to be assessed. Management also believes it is probable that the capital costs of the SEP will be approved in rate base by the CPUC. GSWC began execution of the SEP and has spent approximately $244,000 as of June 30, 2008.

 

In January 2008, GSWC removed the air stripper from the Watson Plant.  An AQMD inspector visited the Watson Plant and confirmed the removal of the air stripping equipment.  GSWC submitted a request to deactivate the air quality permit in February 2008.  As a requirement of the SEP, GSWC installed a temporary GAC treatment system.  The temporary treatment system was put in service in March 2008.  The return to service of the Watson Well will improve local groundwater supply reliability.  GSWC also completed the design of a permanent GAC treatment system.

 

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Environmental Clean-Up and Remediation:

 

Chadron Plant: GSWC has been involved in environmental remediation and clean-up at a plant site (“Chadron Plant”) that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. As required at the time, a tank removal report was submitted to the Los Angeles Department of Public Works (“DPW”). At the request of DPW, soil samples were collected beneath the tank and the results indicated gasoline impacted soil in the northern portion of the former tank pit. Quarterly monitoring began in July 1994. Between July 1994 and November 1995, additional monitoring wells were installed and pilot remediation tests were conducted. A site assessment report was completed in April 1996.

 

In January 1998, a plan for the underground storage tank site remediation and closure was prepared. The remediation system plan was installed and fully operational by October 1998 with an estimated two years thereafter  for site closure. This plan was approved by the Los Angeles Regional Water Quality Control Board of the California Environmental Protection Agency (“LARWQCB”). In November 2002, the LARWQCB commented on the methodology selected for cleanup of dissolved contaminants in the shallow groundwater. Data from operation of the technology implemented at the subject site has indicated that the technology did not work as expected. Other remedial alternatives have been considered and evaluated to mitigate dissolved contaminants in the groundwater at the site.  In October 2007, an interim remedial action plan was approved by the LARWQCB and all appropriate permits have been acquired to begin remediation.  In March 2008, construction began on Phase 1 of the new remediation system.

 

Based on recent estimates, the total project may take 3-5 more years and cost approximately $1.2 million. Remediation should be completed in two more years, followed by at least one year of monitoring and reporting. The estimate also includes quarterly monitoring and reporting costs. As of June 30, 2008, the total amount spent to clean-up and remediate GSWC’s plant facility is approximately $2.6 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund (the “Fund”).  Amounts paid by GSWC not reimbursed from the Fund have been included in rate-base and approved by the CPUC for recovery. During the six months ended June 30, 2008, GSWC spent approximately $234,000 to clean-up and remediate this site and as of June 30, 2008, GSWC has an accrued liability of $1.0 million for the estimated additional cost to complete the clean-up at the site. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will be approved in rate-base by the CPUC. Therefore, GSWC has recorded the additional estimated cost as a regulatory asset as of June 30, 2008 and December 31, 2007.

 

Ballona Plant: During the first quarter of 2008, hydrocarbon contaminated soil was found at a plant site (“Ballona Plant”)  located in GSWC’s Southwest customer service area where an abandoned water tank was demolished.  The contamination appears to be shallow and is likely the result of past corrosion control practices. An initial investigation and characterization will be completed to determine the extent of contamination before any soil extraction is initiated. At this time, GSWC is unable to reasonably estimate the cost of clean-up.  Historically, the cost for this type of clean-up has been included in rates as approved by the CPUC.

 

Contracted Services:

 

On March 4, 2008, ASUS received a letter from the U.S. Army demanding payment of approximately $7.5 million in liquidated damages for alleged failure at FBWS to make a good faith effort to achieve its small business subcontracting goals. FBWS has filed a Notice of Appeal stating its disagreement with the position taken by the U.S. Army.  The U.S. Army has responded to the appeal and has disagreed with all of FBWS’ assertions.  On July 1, 2008, FBWS served written discovery on the government (interrogatories and requests for production of documents).  The government has 45 days to respond.  In addition, on July 15, 2008, the government filed a motion for partial summary judgment.  The motion asks the Armed Services Board of Contract Appeals to rule that the liquidated damages assessed against FBWS are not barred by cases finding that liquidated damages which far exceed actual damages are a “penalty” and, therefore, are unenforceable.   At this time, management believes that the probability of loss is remote and; therefore, no provision for loss has been recorded.  The U.S. Army has the right to offset the claimed damages against amounts owed to this subsidiary, but has not exercised this right and has continued to make payments on outstanding invoices.

 

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Other Litigation:

 

Two former officers of GSWC filed a lawsuit against both AWR and GSWC alleging among other things, wrongful termination and retaliation against the former officers. Management believes that the allegations are without merit and intends to vigorously defend against them. Based on management’s  understanding of all the claims, management does not believe that the ultimate resolution of this matter will have a material adverse effect on GSWC’s financial position, results of operations, or cash flows.

 

Registrant is also subject to other ordinary routine litigation incidental to its business. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business.

 

Note 8 — Business Segments:

 

AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water-service utility operation conducted through CCWC, and a contracted services unit conducted through ASUS and its subsidiaries. All activities of GSWC are geographically located within California. All activities of CCWC are located in the state of Arizona. Activities of ASUS and its subsidiaries have been conducted in California, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Both GSWC and CCWC are rate-regulated utilities.  ASUS’ wholly-owned subsidiaries are regulated by the  state in which  the subsidiary conducts water and/or wastewater operations.  Rates are based upon the terms of the contracts with the U.S. government which have been filed with the commissions in the states in which ASUS’ subsidiaries operate.  On a stand-alone basis, AWR has no material assets other than its investments in its subsidiaries. The tables below set forth information relating to GSWC’s operating segments, CCWC, ASUS and its subsidiaries, and other matters. Certain assets, revenues and expenses have been allocated in the amounts set forth. The identifiable assets are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property installed by developers and conveyed to GSWC or CCWC.

 

 

 

As Of And For The Three Months Ended June 30, 2008

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

63,413

 

$

6,208

 

$

1,957

 

$

8,735

 

$

 

$

80,313

 

Operating income (loss)

 

18,149

 

1,673

(1)

380

 

(608

)

(13

)

19,581

 

Interest expense, net

 

3,894

 

342

 

116

 

206

 

(39

)

4,519

 

Identifiable assets

 

716,964

 

38,051

 

43,736

 

2,700

 

 

801,451

 

Depreciation and amortization expense

 

6,699

 

553

 

461

 

97

 

 

7,810

 

Capital additions

 

19,615

 

350

 

547

 

1,091

 

 

21,603

 

 


(1)      Includes $1,664,000 unrealized gain on purchased power contracts.