Edgar Filing: AMERICAN STATES WATER CO

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended September 30, 2008

or

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

for the transition period from to

Commission file number 001-14431

American States Water Company

(Exact Name of Registrant as Specified in Its Charter)

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

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

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

Commission file number 001-12008

Golden State Water Company

(Exact Name of Registrant as Specified in Its Charter)

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

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

(909) 394-3600

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

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

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

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

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

American States Water Company

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Golden State Water Company

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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

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

As of November 5, 2008, the number of Common Shares outstanding, of American States Water Company was 17,288,918 shares. As of November 5, 2008, all of the 134 outstanding Common Shares of Golden State Water Company were owned by American States Water Company.

Golden State Water Company meets the conditions set forth in General Instruction (H)(1)(a) and (b) of Form 10-Q and is therefore filing this Form, in part, with the reduced disclosure format for Golden State Water Company.

Table of Contents

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 September 30, 2008 and December 31, 2007	2

	Consolidated Statements of Income of American States Water Company for the Three Months Ended September 30, 2008 and 2007	4

	Consolidated Statements of Income of American States Water Company for the Nine Months Ended September 30, 2008 and 2007	5

	Consolidated Statements of Cash Flow of American States Water Company for the Nine Months Ended September 30, 2008 and 2007	6

	Balance Sheets of Golden State Water Company as of September 30, 2008 and December 31, 2007	7

	Statements of Income of Golden State Water Company for the Three Months Ended September 30, 2008 and 2007	9

	Statements of Income of Golden State Water Company for the Nine Months Ended September 30, 2008 and 2007	10

	Statements of Cash Flow of Golden State Water Company for the Nine Months Ended September 30, 2008 and 2007	11

	Notes to Consolidated Financial Statements	12

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

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	66

Item 4:	Controls and Procedures	66

Item 4T:	Controls and Procedures	66

Part II	Other Information

Item 1:	Legal Proceedings	67

Item 1A:	Risk Factors	67

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	67

Item 3:	Defaults Upon Senior Securities	67

Item 4:	Submission of Matters to a Vote of Security Holders	67

Item 5:	Other Information	67

Item 6:	Exhibits	68

	Signatures	69

Table of Contents

PART I

Item 1. Financial Statements

General

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

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

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

Filing Format

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

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

Forward-Looking Information

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

Table of Contents

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

(in thousands)	September 30, 2008			December 31, 2007
Utility Plant, at cost
Water	$	1,043,539		$	982,708
Electric	65,566			65,078
	1,109,105			1,047,786
Less - Accumulated depreciation	(340,591		)	(316,038		)
	768,514			731,748
Construction work in progress	46,945			44,631
Net utility plant	815,459			776,379

Other Property and Investments
Goodwill	12,393			11,354
Other property and investments	10,720			10,245
Total other property and investments	23,113			21,599

Current Assets
Cash and cash equivalents	1,241			1,698
Accounts receivable-customers (less allowance for doubtful accounts of $627 in 2008 and $539 in 2007)	19,345			16,095
Unbilled revenue	19,777			16,035
Receivable from the U.S. government (less allowance for doubtful accounts of $303 in 2008 and $496 in 2007)	7,964			7,556
Other accounts receivable (less allowance for doubtful accounts of $298 in 2008 and $629 in 2007)	2,943			4,154
Income taxes receivable	2,528			60
Materials and supplies, at average cost	1,817			1,576
Regulatory assets – current	11,023			5,187
Prepayments and other current assets	1,943			2,765
Costs and estimated earnings in excess of billings on uncompleted contracts	5,599			3,842
Deferred income taxes – current	2,212			4,047
Total current assets	76,392			63,015

Regulatory and Other Assets
Regulatory assets	77,385			82,539
Other accounts receivable	10,085			9,723
Costs and estimated earnings in excess of billings on uncompleted contracts	7,037			2,284
Deferred income taxes	209			28
Other	10,503			8,331
Total regulatory and other assets	105,219			102,905

Total Assets	$	1,020,183		$	963,898

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

Table of Contents

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

(in thousands)	September 30, 2008		December 31, 2007
Capitalization
Common shares, no par value, no stated value	$	184,520	$	181,796
Earnings reinvested in the business	126,481		120,333
Total common shareholders’ equity	311,001		302,129
Long-term debt	266,945		267,226
Total capitalization	577,946		569,355

Current Liabilities
Notes payable to banks	65,500		37,200
Long-term debt – current	618		609
Accounts payable	37,618		29,091
Income taxes payable	—		398
Accrued employee expenses	6,131		6,228
Accrued interest	5,230		2,467
Unrealized loss on purchased power contracts	788		1,554
Regulatory liabilities – current	—		173
Billings in excess of costs and estimated earnings on uncompleted contracts	5,280		2,641
Deferred income taxes – current	35		—
Other	13,771		13,890
Total current liabilities	134,971		94,251

Other Credits
Advances for construction	85,082		84,479
Contributions in aid of construction – net	100,865		98,657
Deferred income taxes	84,848		82,480
Unamortized investment tax credits	2,268		2,336
Accrued pension and other postretirement benefits	20,774		20,851
Regulatory liabilities	458		557
Billings in excess of costs and estimated earnings on uncompleted contracts	4,189		2,037
Other	8,782		8,895
Total other credits	307,266		300,292

Commitments and Contingencies (Note 7)	—		—

Total Capitalization and Liabilities	$	1,020,183	$	963,898

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

Table of Contents

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Three Months Ended September 30,
(in thousands, except per share amounts)	2008			2007
Operating Revenues
Water	$	69,365		$	65,445
Electric	6,743			6,289
Contracted services	9,153			4,108
Total operating revenues	85,261			75,842

Operating Expenses
Water purchased	15,087			14,740
Power purchased for pumping	3,484			3,517
Groundwater production assessment	2,791			2,666
Power purchased for resale	3,345			3,176
Unrealized loss on purchased power contracts	3,741			896
Supply cost balancing accounts	(490		)	(1,541		)
Other operating expenses	7,366			7,004
Administrative and general expenses	16,307			11,789
Depreciation and amortization	7,882			7,439
Maintenance	4,027			3,897
Property and other taxes	3,461			2,820
ASUS construction expenses	5,117			1,903
Net loss on sale of property	—			11
Total operating expenses	72,118			58,317

Operating Income	13,143			17,525

Other Income and Expenses
Interest expense	(5,428		)	(5,347		)
Interest income	293			590
Other	(30		)	102
Total other income and expenses	(5,165		)	(4,655		)

Income from operations before income tax expense	7,978			12,870

Income tax expense	3,426			5,241

Net Income	$	4,552		$	7,629

Weighted Average Number of Shares Outstanding	17,268			17,197
Basic Earnings Per Common Share	$	0.26		$	0.44

Weighted Average Number of Diluted Shares	17,404			17,239
Fully Diluted Earnings Per Share	$	0.26		$	0.44

Dividends Declared Per Common Share	$	0.250		$	0.235

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

Table of Contents

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended September 30,
(in thousands, except per share amounts)	2008			2007
Operating Revenues
Water	$	186,824		$	176,598
Electric	21,754			21,413
Contracted services	25,938			29,347
Total operating revenues	234,516			227,358

Operating Expenses
Water purchased	36,119			35,690
Power purchased for pumping	7,819			8,308
Groundwater production assessment	8,056			7,494
Power purchased for resale	10,179			10,372
Unrealized gain on purchased power contracts	(766		)	(1,578		)
Supply cost balancing accounts	(1,269		)	(3,451		)
Other operating expenses	22,415			20,160
Administrative and general expenses	46,077			38,460
Depreciation and amortization	23,485			21,616
Maintenance	12,569			11,223
Property and other taxes	9,220			8,593
ASUS construction expenses	13,426			19,232
Net gain on sale of property	—			(594		)
Total operating expenses	187,330			175,525

Operating Income	47,186			51,833

Other Income and Expenses
Interest expense	(16,100		)	(16,413		)
Interest income	1,429			1,742
Other	91			234
Total other income and expenses	(14,580		)	(14,437		)

Income from operations before income tax expense	32,606			37,396

Income tax expense	13,467			15,461

Net Income	$	19,139		$	21,935

Weighted Average Number of Shares Outstanding	17,252			17,091
Basic Earnings Per Common Share	$	1.10		$	1.26

Weighted Average Number of Diluted Shares	17,378			17,132
Fully Diluted Earnings Per Share	$	1.10		$	1.26

Dividends Declared Per Common Share	$	0.750		$	0.705

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

Table of Contents

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2008			2007
Cash Flows From Operating Activities:
Net income	$	19,139		$	21,935
Adjustments for non-cash items:
Depreciation and amortization	23,485			21,616
Provision for doubtful accounts	661			562
Deferred income taxes and investment tax credits	4,276			2,090
Unrealized gain on purchased power contracts	(766		)	(1,578		)
Stock-based compensation expense	1,097			674
Net gain on sale of property	—			(594		)
Other – net	401			303
Changes in assets and liabilities:
Accounts receivable – customers	(3,902		)	(5,036		)
Unbilled revenue	(3,742		)	(3,003		)
Other accounts receivable	855			428
Receivable from the U.S. government	(423		)	173
Materials and supplies	(241		)	(227		)
Prepayments and other current assets	822			1,016
Regulatory assets — supply cost balancing accounts	(1,269		)	(3,451		)
Costs and estimated earnings in excess of billings on uncompleted contracts	(6,510		)	(1,343		)
Other assets	(1,719		)	(1,572		)
Accounts payable	6,168			1,295
Income taxes receivable/payable	(2,866		)	1,342
Billings in excess of costs and estimated earnings on uncompleted contracts	4,791			383
Accrued pension and other postretirement benefits	(77		)	815
Other liabilities	3,162			6,395
Net cash provided	43,342			42,223
Cash Flows From Investing Activities:
Construction expenditures	(58,987		)	(32,832		)
Business acquisition	(2,298		)	—
Proceeds from sale of property	—			612
Net cash used	(61,285		)	(32,220		)
Cash Flows From Financing Activities:
Proceeds from issuance of Common Shares	708			690
Proceeds from stock option exercises	666			3,097
Receipt of advances for and contributions in aid of construction	4,339			5,655
Refunds on advances for construction	(3,339		)	(4,326		)
Repayments of long-term debt	(272		)	(273		)
Net change in notes payable to banks	28,300			(3,000		)
Dividends paid	(12,934		)	(12,040		)
Other	18			605
Net cash provided (used)	17,486			(9,592		)
Net (decrease) increase in cash and cash equivalents	(457		)	411
Cash and cash equivalents, beginning of period	1,698			3,223
Cash and cash equivalents, end of period	$	1,241		$	3,634

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

Table of Contents

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS
(Unaudited)

(in thousands)	September 30, 2008			December 31, 2007
Utility Plant, at cost

Water	$	979,292		$	922,459
Electric	65,566			65,078
	1,044,858			987,537
Less - Accumulated depreciation	(321,505		)	(298,856		)
	723,353			688,681
Construction work in progress	45,299			43,552
Net utility plant	768,652			732,233

Other Property and Investments	7,739			7,838

Current Assets
Cash and cash equivalents	532			1,389
Accounts receivable-customers (less allowance for doubtful accounts of $603 in 2008 and $519 in 2007)	18,929			15,741
Unbilled revenue	19,403			15,701
Inter-company receivable	148			563
Other accounts receivable (less allowance for doubtful accounts of $275 in 2008 and $442 in 2007)	2,044			3,195
Materials and supplies, at average cost	1,714			1,562
Regulatory assets – current	10,952			5,116
Prepayments and other current assets	1,746			2,595
Deferred income taxes - current	2,111			3,845
Total current assets	57,579			49,707

Regulatory and Other Assets
Regulatory assets	77,385			82,539
Other accounts receivable	10,085			9,723
Other	9,588			7,933
Total regulatory and other assets	97,058			100,195

Total Assets	$	931,028		$	889,973

The accompanying notes are an integral part of these financial statements

Table of Contents

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

(in thousands)	September 30, 2008		December 31, 2007
Capitalization
Common shares, no par value, no stated value	$	194,381	$	163,180
Earnings reinvested in the business	127,277		115,261
Total common shareholder’s equity	321,658		278,441
Long-term debt	260,660		260,941
Total capitalization	582,318		539,382

Current Liabilities
Long-term debt - current	318		309
Accounts payable	31,011		24,402
Inter-company payable	11,145		23,764
Income taxes payable to Parent	790		2,469
Accrued employee expenses	5,420		5,677
Accrued interest	5,065		2,424
Unrealized loss on purchased power contracts	788		1,554
Regulatory liabilities - current	—		173
Deferred income taxes - current	70		—
Other	13,353		13,459
Total current liabilities	67,960		74,231

Other Credits
Advances for construction	80,303		78,917
Contributions in aid of construction - net	88,462		87,323
Deferred income taxes	80,962		78,805
Unamortized investment tax credits	2,268		2,336
Accrued pension and other postretirement benefits	20,774		20,851
Other	7,981		8,128
Total other credits	280,750		276,360

Commitments and Contingencies (Note 7)	—		—

Total Capitalization and Liabilities	$	931,028	$	889,973

The accompanying notes are an integral part of these financial statements

Table of Contents

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Three Months Ended September 30,
(in thousands)	2008			2007
Operating Revenues
Water	$	67,316		$	63,180
Electric	6,743			6,289
Total operating revenues	74,059			69,469

Operating Expenses
Water purchased	14,889			14,472
Power purchased for pumping	3,293			3,319
Groundwater production assessment	2,791			2,666
Power purchased for resale	3,345			3,176
Unrealized loss on purchased power contracts	3,741			896
Supply cost balancing accounts	(490		)	(1,541		)
Other operating expenses	6,055			5,943
Administrative and general expenses	13,054			9,997
Depreciation and amortization	7,252			6,925
Maintenance	3,289			3,706
Property and other taxes	2,791			2,738
Net loss on sale of property	—			11
Total operating expenses	60,010			52,308

Operating Income	14,049			17,161

Other Income and Expenses
Interest expense	(5,018		)	(4,995		)
Interest income	284			570
Other	(22		)	77
	(4,756		)	(4,348		)

Income from operations before income tax expense	9,293			12,813

Income tax expense	3,945			5,205

Net Income	$	5,348		$	7,608

The accompanying notes are an integral part of these financial statements

Table of Contents

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2008			2007
Operating Revenues
Water	$	181,235		$	170,762
Electric	21,754			21,413
Total operating revenues	202,989			192,175

Operating Expenses
Water purchased	35,572			35,058
Power purchased for pumping	7,365			7,841
Groundwater production assessment	8,056			7,494
Power purchased for resale	10,179			10,372
Unrealized gain on purchased power contracts	(766		)	(1,578		)
Supply cost balancing accounts	(1,269		)	(3,451		)
Other operating expenses	17,799			17,274
Administrative and general expenses	36,655			33,168
Depreciation and amortization	21,746			20,214
Maintenance	10,408			10,513
Property and other taxes	8,200			8,300
Net gain on sale of property	—			(594		)
Total operating expenses	153,945			144,611

Operating Income	49,044			47,564

Other Income and Expenses
Interest expense	(15,035		)	(15,196		)
Interest income	1,370			1,631
Other	69			176
	(13,596		)	(13,389		)

Income from operations before income tax expense	35,448			34,175

Income tax expense	14,576			14,195

Net Income	$	20,872		$	19,980

The accompanying notes are an integral part of these financial statements

Table of Contents

GOLDEN STATE WATER COMPANY

STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2008			2007
Cash Flows From Operating Activities:
Net income	$	20,872		$	19,980
Adjustments for non-cash items:
Depreciation and amortization	21,746			20,214
Provision for doubtful accounts	628			383
Deferred income taxes and investment tax credits	4,180			2,214
Unrealized gain on purchased power contracts	(766		)	(1,578		)
Stock-based compensation expense	940			609
Net gain on sale of property	—			(594		)
Other — net	377			276
Changes in assets and liabilities:
Accounts receivable - customers	(3,810		)	(4,837		)
Unbilled revenue	(3,702		)	(2,874		)
Other accounts receivable	783			167
Materials and supplies	(152		)	(227		)
Prepayments and other current assets	849			1,029
Regulatory assets - supply cost balancing accounts	(1,269		)	(3,451		)
Other assets	(1,524		)	(1,643		)
Accounts payable	4,236			2,442
Inter-company receivable/payable	338			(1,012		)
Income taxes payable from Parent	(1,679		)	262
Accrued pension and other postretirement benefits	(77		)	815
Other liabilities	3,032			6,297
Net cash provided	45,002			38,472

Cash Flows From Investing Activities:
Construction expenditures	(55,455		)	(31,501		)
Proceeds from sale of property	—			612
Net cash used	(55,455		)	(30,889		)

Cash Flows From Financing Activities:
Proceeds from issuance of Common Shares to Parent	30,000			—
Receipt of advances for and contributions in aid of construction	4,197			5,303
Refunds on advances for construction	(3,047		)	(4,126		)
Repayments of long-term debt	(272		)	(273		)
Net change in inter-company borrowings	(12,510		)	4,400
Dividends paid	(8,800		)	(12,900		)
Other	28			549
Net cash provided (used)	9,596			(7,047		)

Net (decrease) increase in cash and cash equivalents	(857		)	536
Cash and cash equivalents, beginning of period	1,389			1,735
Cash and cash equivalents, end of period	$	532		$	2,271

The accompanying notes are an integral part of these financial statements

Table of Contents

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

(Unaudited)

Note 1 — Summary of Significant Accounting Policies:

General / Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), Chaparral City Water Company (“CCWC”) and American States Utility Services, Inc. (“ASUS”) and its subsidiaries, Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”), Old Dominion Utility Services, Inc. (“ODUS”), Palmetto State Utility Services, Inc. (“PSUS”) and Old North Utility Services, Inc. (“ONUS”). GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 255,000 water customers. GSWC also distributes electricity in several San Bernardino Mountain communities serving approximately 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric business, including properties, rates, services, facilities and other matters. CCWC is a public utility regulated by the Arizona Corporation Commission (“ACC”) serving over 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. ASUS performs water and wastewater related services and operations on a contract basis. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of the contracted services provided by ASUS and its wholly owned subsidiaries or by AWR. The consolidated financial statements include the accounts of AWR, GSWC, CCWC and ASUS and its subsidiaries. AWR’s assets, revenues and operations are primarily those of GSWC.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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Note 2 — Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future revenue associated with certain costs that will be recovered from customers through the ratemaking process, and regulatory liabilities, which represent probable future reductions in revenue associated with amounts that are to be credited to customers through the ratemaking process. At September 30, 2008, Registrant had approximately $13.4 million of regulatory assets not accruing carrying costs. Of this amount, $4.9 million relates to deferred income taxes representing accelerated tax benefits flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense, and a $5.9 million “non-yielding” regulatory asset related to general rate case memorandum accounts to be recovered over 12 - 24 months. The remainder relates to other expenses that do not provide for recovery of carrying costs that Registrant expects to recover in rates over a short period. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

(In thousands)	September 30, 2008			December 31, 2007
GSWC
Electric supply cost balancing account	$	16,193		$	18,318
Water supply cost balancing accounts	12,035			8,525
Costs deferred for future recovery on Aerojet case	20,822			21,244
Pensions and other postretirement obligations	10,542			11,443
Flow-through taxes, net	4,933			5,220
Electric transmission line abandonment costs	3,041			3,157
Asset retirement obligations	3,809			3,547
Low income rate assistance balancing accounts	4,948			4,147
General rate case memorandum accounts	5,933			7,162
Santa Maria adjudication memorandum accounts	4,039			4,005
Refund of water right lease revenues	(2,521		)	(2,945		)
Other regulatory assets, net	4,563			3,659
Total GSWC	$	88,337		$	87,482
CCWC
Asset retirement obligations	$	54		$	52
Other regulatory liabilities, net	(441		)	(538		)
Total AWR	$	87,950		$	86,996

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

Supply Cost Balancing Accounts:

Electric Supply Cost Balancing Account—Electric power costs incurred by GSWC’s Bear Valley Electric Service (“BVES”) division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is $16.2 million at September 30, 2008. Of this amount, approximately $3.7 million relates to the under-collection remaining as of September 30, 2008 that was incurred during the energy crisis in late 2000 and 2001, discussed below. The remaining $12.5 million in the electric supply cost balancing account relates to $3.3 million from the tariff charged to GSWC by Southern California Edison (“Edison”) for the abandonment of a transmission line upgrade discussed below, and $9.2 million for changes in purchased energy and power system delivery costs including interest, also discussed below.

The CPUC has authorized GSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable GSWC to recover an under-collection of approximately $23.1 million at the end of 2001 which had been incurred during the energy crisis in late 2000 and 2001. GSWC sold 31,939,690 and 31,294,179 kilowatt hours of electricity to its BVES customers for the three months ended September 30, 2008 and 2007, respectively, and sold 105,354,442 and 104,702,201 kilowatt hours of electricity to its customers for the nine months ended September 30, 2008 and 2007, respectively. As a result of the surcharge, the supply cost balancing account was reduced by approximately $720,000 and $684,000 for the three months September 30, 2008 and 2007, respectively, and $2,361,000 and $2,265,000 for the nine months ended September 30, 2008 and 2007, respectively.

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Approximately $19.4 million of the $23.1 million under-collection incurred during the energy crisis in late 2000 and 2001 has been recovered through this surcharge. GSWC anticipates the surcharge, based on projected electricity sales, to be sufficient for it to recover by August 2011 the amount of the under-collected balance incurred during the energy crisis. However, in 2011, if GSWC has not fully recovered the amount of this under collection, GSWC will seek regulatory approval of any amounts not recovered through this surcharge.

Changes in purchased energy and power system delivery costs also impact the electric supply cost balancing account. The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of a 2001 settlement which was subsequently approved in a CPUC decision. The BVES division of GSWC is allowed to include its actual recorded purchased energy costs up to a weighted annual average cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing account. To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed. There were no amounts expensed over the $77 per MWh cap during the three months ended September 30, 2008 and 2007 and the nine months ended September 30, 2008. During the nine months ended September 30, 2007, the amount expensed was $29,000.

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

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

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

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

For the three months ended September 30, 2008 and 2007, approximately $1.8 million and $1.7 million of under-collections (including interest), respectively, were recorded in the water supply cost balancing accounts. For the nine months ended September 30, 2008 and 2007, approximately $3.9 million and $4.3 million of under-collections (including interest), respectively, were recorded in the water supply cost balancing accounts. Amortization of surcharges that are in rates to recover under-collections from customers and surcredits that are in rates to refund over-collections to customers also increased or decreased the water supply cost balancing accounts, as applicable. During the three and nine months ended September 30, 2008, approximately $860,000 and $613,000, respectively, of net under-collection amortization decreased the water supply cost balancing accounts. During the three and nine months ended September 30, 2007, approximately $195,000 and $765,000, respectively, of net over-collection amortization increased the water supply cost balancing accounts.

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As of September 30, 2008, there is approximately $12.0 million net under-collection in the water supply cost balancing accounts. Of this amount, approximately $8.2 million relates to GSWC’s Region III customer service area. In May 2008, the CPUC approved a surcharge to begin recovering $7.0 million of this under-collection over 24 months. The remaining $1.2 million for Region III will be included for recovery in a future filing. Further, the remaining $3.8 million net under-collections in the water supply cost balancing accounts relate to GSWC’s Region I net under-collection of $1.9 million and Region II’s net under-collection of $1.9 million. Currently, there are surcharges in place in Region I expiring in 2009 and 2010 to recover this under-collection. A surcredit in Region II to refund a previous over-collection expired in August 2008. During the fourth quarter of 2008, GSWC intends to file for supply expense offsets in Regions II and III to reduce the level of under-collections being accumulated.

On August 21, 2008, the CPUC issued a final decision which approved a settlement agreement between GSWC and the CPUC’s Division of Ratepayer Advocates (“DRA”) regarding conservation rate design. As a result of this decision, GSWC is permitted to establish a modified cost balancing account that will permit GSWC to recover supply costs related to changes in water supply mix. GSWC intends to implement this modified supply cost balancing account in November 2008. This account will replace the current water supply cost balancing account procedure for costs incurred after the modified supply cost balancing account is implemented.

Costs Deferred for Future Recovery:

In 1999, GSWC sued Aerojet-General Corporation (“Aerojet”) for contaminating the Sacramento County Groundwater Basin, which affected certain GSWC wells. On a related matter, GSWC also filed a lawsuit against the State of California (the “State”). The CPUC authorized memorandum accounts to allow for recovery, from customers, of costs incurred by GSWC in prosecuting the cases against Aerojet and the State, less any recovery from the defendants or others. On July 21, 2005, the CPUC authorized GSWC to collect approximately $21.3 million of the Aerojet litigation memorandum account, through a rate surcharge, which will continue for no longer than 20 years. Beginning in October 2005, new rates went into effect to begin amortizing the memorandum account over a 20-year period. A rate surcharge generating approximately $299,000 and $309,000 was billed to customers during the three months ended September 30, 2008 and 2007, respectively, and $789,000 and $813,000 during the nine months ended September 30, 2008 and 2007, respectively. GSWC will keep the Aerojet memorandum account open until the earlier of full amortization of the balance or 20 years. However, no costs will be added to the memorandum account, other than on-going interest charges approved by the CPUC decision. Pursuant to the decision, additional interest of approximately $111,000 and $273,000 was added to the Aerojet litigation memorandum account during the three months ended September 30, 2008 and 2007, respectively, and $367,000 and $827,000 was added to this account during the nine months ended September 30, 2008 and 2007, respectively.

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

Santa Maria Adjudication Memorandum Accounts:

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

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

General Rate Case Memorandum Accounts:

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

Other Regulatory Matters:

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

GSWC’s BVES division has been regularly filing compliance reports with the CPUC regarding its purchases of energy from renewable energy resources. The filings indicated that BVES had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a potential penalty. GSWC has formally contested the potential penalty reflected in the compliance report. The CPUC has been considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like BVES. On May 30, 2008, the CPUC issued its final decision regarding the renewable responsibilities of small utilities (including BVES). The final decision affirmed the renewable obligation targets for the small utilities but also allowed for the small utilities to defer compliance under the CPUC’s flexible compliance rules. BVES is continuing its efforts to procure renewable resources each year going forward, and where that may prove difficult because the market for such resources is very constrained, then BVES will be required to describe in detail the problems that warrant further deferral, in accordance with the CPUC’s flexible compliance rules. Because the final decision deferred BVES’ interim target purchase levels for the years 2004 through 2007, management believes that the CPUC’s decision effectively forecloses any exposure to financial penalties for the year 2007 and earlier. For the 2008 year, BVES is not expecting to meet the interim targets and expects that the CPUC will waive any potential fines in accordance with the flexible compliance rules. Accordingly, no provision for loss has been recorded in the financial statements as of September 30, 2008.

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Note 3 — Earnings per Share/Capital Stock:

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

Basic	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
(in thousands, except per share amounts)	2008		2007		2008		2007
Net income	$	4,552	$	7,629	$	19,139	$	21,935
Less: (a) Distributed earnings to common shareholders	4,317		4,041		12,939		12,049
Distributed earnings to participating securities	24		61		67		179
Undistributed earnings	211		3,527		6,133		9,707

(b) Undistributed earnings allocated to common shareholders	210		3,475		6,102		9,565
Undistributed earnings allocated to participating securities	1		52		31		142

Total income available to common shareholders, basic (a)+(b)	$	4,527	$	7,516	$	19,041	$	21,614

Weighted average Common Shares outstanding, basic	17,268		17,197		17,252		17,091
Basic earnings per Common Share	$	0.26	$	0.44	$	1.10	$	1.26

Diluted EPS is based upon the weighted average number of common shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under Registrant’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. At September 30, 2008 and 2007, there were 544,778 and 499,145 stock options outstanding, respectively, under these Plans. At September 30, 2008 and 2007, there were also approximately 76,809 and 62,007 restricted stock units outstanding, respectively.

The following is a reconciliation of Registrant’s net income and weighted average common shares outstanding for calculating diluted net income per share:

Diluted	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
(in thousands, except per share amounts)	2008		2007		2008		2007
Common shareholders earnings, basic	$	4,527	$	7,516	$	19,041	$	21,614
Undistributed earnings for dilutive stock options (1)	1		—		31		—
Total common shareholders earnings, diluted	$	4,528	$	7,516	19,072		$	21,614

Weighted average common shares outstanding, basic	17,268		17,197		17,252		17,091
Stock-based compensation (2)	136		42		126		41
Weighted average common shares outstanding, diluted	17,404		17,239		17,378		17,132
Diluted earnings per Common Share	$	0.26	$	0.44	$	1.10	$	1.26

(1) Undistributed earnings allocated to participating securities were not included as of September 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, 544,778 and 210,971 stock options at September 30, 2008 and 2007, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share.” All of the 76,809 restricted stock units at September 30, 2008 were included in the calculation of diluted EPS for the three and nine months ended September 30, 2008.

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Stock options of 89,843 were outstanding at September 30, 2007, 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 nine months ended September 30, 2007. Stock options of 198,331 were outstanding at September 30, 2007, but not included in the computation of diluted EPS because they were antidilutive. Also not included in the calculation of EPS were 62,007 restricted stock units at September 30, 2007 because they were antidilutive.

During the nine months ended September 30, 2008 and 2007, Registrant issued 27,382 and 18,516 common shares, for approximately $708,000 and $690,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan, and the 401(k) Plan. In addition, during the nine months ended September 30, 2008 and 2007, Registrant issued 27,192 and 128,381 common shares for approximately $666,000 and $3,097,000, 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 2,729 and 1,104 common shares on the open market during the three months ended September 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 nine months ended September 30, 2008 and 2007, Registrant purchased 27,566 and 4,657 respectively, common shares on the open market under these plans for the same purpose.

During the three months ended September 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 nine months ended September 30, 2008 and 2007, AWR paid quarterly dividends to shareholders of approximately $12.9 million, or $0.750 per share, and $12.0 million, or $0.705 per share, respectively.

On August 21, 2008, the Board of Directors approved the issuance of 12 additional GSWC Common Shares to AWR for $30.0 million. GSWC used the proceeds to pay down debt owed to AWR.

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

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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 September 30, 2008.

(dollars in thousands)	Gains (Losses)
Balance, June 30, 2008	$	2,953
Unrealized loss on purchased power contracts included in operating expenses	(3,741		)
Balance, September 30, 2008	$	(788	)

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

(dollars in thousands)	Gains (Losses)
Balance, December 31, 2007	$	(1,554	)
Unrealized gain on purchased power contracts included in operating expenses	766
Balance, September 30, 2008	$	(788	)

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 $788,000 cumulative loss recognized on the balance sheet in current assets as of September 30, 2008 is expected to be recognized as an increase to income during the fourth quarter of 2008 as the contracts will expire on December 31, 2008.

In October 2008, GSWC executed a new purchased power contract that will provide power to BVES effective January 1, 2009 at a fixed cost over a five year term. The new contract is subject to CPUC approval. Once the contract is approved, BVES intends to file a separate application to incorporate the new costs, including energy purchases and delivery costs, into rates. The new contract will also be subject to SFAS No. 133 and will require mark-to-market derivative accounting. BVES expects to make another separate filing requesting the CPUC to authorize the establishment of regulatory asset and liability accounts to offset the entries required by SFAS No. 133. All unrealized gains and losses generated from the new purchased power contract would be deferred on a monthly basis into the non-interest bearing regulatory accounts that would track the changes in fair value of the derivative throughout the term of the contract. Upon approval of the new contract by the CPUC, changes in the fair value of the derivative throughout the term of the new contract will be included in the regulatory accounts established and would, as a result, no longer affect GSWC’s earnings.

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 to $3,848,000 at September 30, 2008. The amount of the unrecognized tax benefits that, if recognized, would affect the effective tax rate decreased from $118,000 at December 31, 2007 to zero at September 30, 2008. Associated with these changes, Registrant recognized $480,000 of interest income in the second quarter of 2008, with a corresponding increase in an 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.”

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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 nine months ended September 30, 2008 and 2007 are as follows:

	For The Three Months Ended September 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 Nine Months Ended September 30,
							Other Postretirement
	Pension Benefits						Benefits						SERP
(dollars in thousands)	2008			2007			2008			2007			2008			2007
Components of Net Periodic Benefits Cost:
Service cost	$	2,688		$	2,820		$	258		$	315		$	180		$	318
Interest cost	4,050			3,729			483			504			189			123
Expected return on plan assets	(3,705		)	(3,399		)	(189		)	(171		)	—			—
Amortization of transition	—			—			315			315			—			—
Amortization of prior service cost	90			123			(150		)	(150		)	690			120
Amortization of actuarial (gain) loss	—			462			—			75			(42		)	(18		)
Net periodic pension cost	$	3,123		$	3,735		$	717		$	888		$	1,017		$	543

Registrant made its annual contribution of $4,166,000 to the pension plan during the third quarter of 2008. No contributions were made to the postretirement medical plan during the nine months ended September 30, 2008. Registrant expects to contribute approximately $509,000 to the medical plan in the fourth quarter of 2008.