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 March 31, 2010

 

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 Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or such shorter period that the Registrant was required to submit and post such files).

 

American States Water Company

 

Yes o

No o

Golden State Water Company

 

Yes o

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 o

No x

Golden State Water Company

 

Yes o

No x

 

As of May 5, 2010, the number of Common Shares outstanding, of American States Water Company was 18,569,352 shares. As of May 5, 2010, 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 March 31, 2010 and December 31, 2009

2

 

 

 

 

Consolidated Statements of Income of American States Water Company for the Three Months Ended March 31, 2010 and 2009

4

 

 

 

 

Consolidated Statements of Cash Flow of American States Water Company for the Three Months Ended March 31, 2010 and 2009

5

 

 

 

 

Balance Sheets of Golden State Water Company as of March 31, 2010 and December 31, 2009

6

 

 

 

 

Statements of Income of Golden State Water Company for the Three Months Ended March 31, 2010 and 2009

8

 

 

 

 

Statements of Cash Flow of Golden State Water Company for the Three Months Ended March 31, 2010 and 2009

9

 

 

 

 

Notes to Consolidated Financial Statements

10

 

 

 

Item 2:

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

26

 

 

 

Item 3:

Quantitative and Qualitative Disclosures About Market Risk

50

 

 

 

Item 4:

Controls and Procedures

50

 

 

 

Item 4T:

Controls and Procedures

50

 

 

 

Part II

Other Information

 

 

 

 

Item 1:

Legal Proceedings

51

 

 

 

Item 1A:

Risk Factors

51

 

 

 

Item 2:

Unregistered Sales of Equity Securities and Use of Proceeds

51

 

 

 

Item 3:

Defaults Upon Senior Securities

51

 

 

 

Item 4:

Other Information

51

 

 

 

Item 5:

Exhibits

52

 

 

 

 

Signatures

53

 



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

 

This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995.  Forward-looking statements include statements regarding our goals, beliefs, plans or current expectations, taking into account the information currently available to management.  Forward-looking statements are not statements of historical facts.   For example, when we use words such as “believes,” “anticipates,” “expects, “ “plans”, “estimates,” “intends,” “may” and other words that convey uncertainty of future events or outcome, we are making forward-looking statements. Such statements address future events and conditions concerning such matters as our ability to raise capital, capital expenditures, earnings, litigation, rates, water sales, water quality and other regulatory matters, adequacy of water supplies, our ability to recover electric, natural gas and water supply costs from ratepayers, contract operations, liquidity and capital resources, and accounting matters.

 

We caution you that any forward-looking statements made by us are not guarantees of future performance and that actual results  may differ materially from those currently anticipated in such statements, by reason of factors such as: changes in utility regulation; recovery of regulatory assets not yet included in rates; future economic conditions which affect changes in customer demand and changes in water and energy supply costs; changes in pension and post-retirement benefit plan costs; future climatic conditions; delays in customer payments or price redeterminations and/or equitable adjustments on contracts executed by ASUS and its subsidiaries; potential assessments for failure to meet interim targets for the purchase of renewable energy; 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)

 

March 31,
2010

 

December 31,
2009

 

Property, Plant and Equipment

 

 

 

 

 

Regulated utility plant, at cost

 

$

1,250,145

 

$

1,235,187

 

Non utility property, at cost

 

4,676

 

4,532

 

Total

 

1,254,821

 

1,239,719

 

Less - Accumulated depreciation

 

(381,567

)

(373,301

)

Net property, plant and equipment

 

873,254

 

866,418

 

 

 

 

 

 

 

Other Property and Investments

 

 

 

 

 

Goodwill

 

4,437

 

4,437

 

Other property and investments

 

11,723

 

11,720

 

Total other property and investments

 

16,160

 

16,157

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

5,080

 

1,685

 

Accounts receivable — customers (less allowance for doubtful accounts of $683 in 2010 and $687 in 2009)

 

12,824

 

16,611

 

Unbilled revenue

 

18,804

 

18,199

 

Receivable from the U.S. government (less allowance for doubtful accounts of $67 in 2010 and 2009)

 

9,898

 

4,245

 

Other accounts receivable (less allowance for doubtful accounts of $258 in 2010 and $441 in 2009)

 

7,704

 

8,424

 

Income taxes receivable

 

56

 

4,190

 

Materials and supplies, at average cost

 

2,090

 

1,900

 

Regulatory assets — current

 

16,479

 

12,286

 

Prepayments and other current assets

 

2,492

 

3,355

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

26,965

 

19,766

 

Deferred income taxes — current

 

4,985

 

5,354

 

Total current assets

 

107,377

 

96,015

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

112,407

 

110,420

 

Other accounts receivable

 

5,817

 

5,717

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

7,283

 

7,933

 

Deferred income taxes

 

238

 

313

 

Other

 

10,318

 

10,320

 

Total regulatory and other assets

 

136,063

 

134,703

 

 

 

 

 

 

 

Total Assets

 

$

1,132,854

 

$

1,113,293

 

 

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)

 

March 31,
2010

 

December 31,
2009

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

223,953

 

$

223,066

 

Earnings reinvested in the business

 

140,013

 

136,364

 

Total common shareholders’ equity

 

363,966

 

359,430

 

Long-term debt

 

305,794

 

305,866

 

Total capitalization

 

669,760

 

665,296

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Notes payable to banks

 

21,000

 

17,400

 

Long-term debt — current

 

699

 

695

 

Accounts payable

 

33,967

 

33,903

 

Income taxes payable

 

2,640

 

72

 

Accrued employee expenses

 

9,031

 

7,326

 

Accrued interest

 

5,356

 

3,290

 

Regulatory liabilities - current

 

 

113

 

Unrealized loss on purchased power contracts

 

10,038

 

7,338

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

5,896

 

6,315

 

Other

 

17,466

 

23,254

 

Total current liabilities

 

106,093

 

99,706

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

84,544

 

84,653

 

Contributions in aid of construction - net

 

104,303

 

104,344

 

Deferred income taxes

 

93,986

 

95,235

 

Unamortized investment tax credits

 

2,132

 

2,154

 

Accrued pension and other postretirement benefits

 

41,930

 

40,158

 

Regulatory liabilities

 

1,177

 

1,173

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

19,988

 

11,580

 

Other

 

8,941

 

8,994

 

Total other credits

 

357,001

 

348,291

 

 

 

 

 

 

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,132,854

 

$

1,113,293

 

 

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 MARCH 31, 2010 AND 2009

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands, except per share amounts)

 

2010

 

2009

 

Operating Revenues

 

 

 

 

 

Water

 

$

57,874

 

$

56,794

 

Electric

 

10,979

 

8,632

 

Contracted services

 

21,430

 

14,183

 

Total operating revenues

 

90,283

 

79,609

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

8,257

 

8,214

 

Power purchased for pumping

 

1,655

 

1,688

 

Groundwater production assessment

 

2,622

 

2,517

 

Power purchased for resale

 

3,669

 

3,962

 

Supply cost balancing accounts

 

3,815

 

3,528

 

Other operation expenses

 

6,839

 

7,153

 

Administrative and general expenses

 

18,863

 

16,865

 

Depreciation and amortization

 

8,842

 

8,361

 

Maintenance

 

4,296

 

4,073

 

Property and other taxes

 

3,683

 

3,400

 

Construction expenses

 

8,168

 

8,445

 

Net gain on sale of property

 

(3

)

(15

)

Total operating expenses

 

70,706

 

68,191

 

 

 

 

 

 

 

Operating Income

 

19,577

 

11,418

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,749

)

(5,294

)

Interest income

 

661

 

202

 

Other — net

 

64

 

(30

)

Total other income and expenses

 

(5,024

)

(5,122

)

 

 

 

 

 

 

Income from operations before income tax expense

 

14,553

 

6,296

 

 

 

 

 

 

 

Income tax expense

 

6,063

 

1,364

 

 

 

 

 

 

 

Net Income

 

$

8,490

 

$

4,932

 

 

 

 

 

 

 

Weighted Average Number of Shares Outstanding

 

18,546

 

17,312

 

Basic Earnings Per Common Share

 

$

0.46

 

$

0.28

 

 

 

 

 

 

 

Weighted Average Number of Diluted Shares

 

18,666

 

17,440

 

Fully Diluted Earnings Per Share

 

$

0.45

 

$

0.28

 

 

 

 

 

 

 

Dividends Declared Per Common Share

 

$

0.260

 

$

0.250

 

 

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

 

4



Table of Contents

 

AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2010

 

2009

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

8,490

 

$

4,932

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

8,842

 

8,361

 

Net gain on sale of property

 

(3

)

(15

)

Provision for doubtful accounts

 

347

 

358

 

Deferred income taxes and investment tax credits

 

(572

)

(1,194

)

Stock-based compensation expense

 

459

 

383

 

Other — net

 

88

 

(606

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable — customers

 

3,533

 

324

 

Unbilled revenue

 

(605

)

(13

)

Other accounts receivable

 

527

 

1,241

 

Receivable from the U.S. government

 

(5,653

)

2,123

 

Materials and supplies

 

(190

)

252

 

Prepayments and other current assets

 

863

 

607

 

Regulatory assets — supply cost balancing accounts

 

3,815

 

3,528

 

Costs and estimated earnings in excess of billings on uncompleted contracts

 

(6,549

)

(3,930

)

Other assets (including other regulatory assets)

 

(10,613

)

(2,760

)

Accounts payable

 

(444

)

(2,406

)

Income taxes receivable/payable

 

6,702

 

1,542

 

Billings in excess of costs and estimated earnings on uncompleted contracts

 

7,989

 

1,298

 

Accrued pension and other postretirement benefits

 

1,772

 

1,887

 

Other liabilities

 

1,063

 

3,861

 

Net cash provided

 

19,861

 

19,773

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(15,976

)

(17,682

)

Proceeds from sale of property

 

17

 

16

 

Net cash used

 

(15,959

)

(17,666

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Proceeds from issuance of common shares

 

515

 

462

 

Proceeds from stock option exercises

 

51

 

10

 

Receipt of advances for and contributions in aid of construction

 

889

 

332

 

Refunds on advances for construction

 

(445

)

(422

)

Repayments of long-term debt

 

(68

)

(63

)

Proceeds from issuance of long-term debt, net of issuance cost

 

 

39,777

 

Net change in notes payable to banks

 

3,600

 

(20,330

)

Dividends paid

 

(4,822

)

(4,328

)

Other — net

 

(227

)

65

 

Net cash (used) provided

 

(507

)

15,503

 

Net increase in cash and cash equivalents

 

3,395

 

17,610

 

Cash and cash equivalents, beginning of period

 

1,685

 

7,283

 

Cash and cash equivalents, end of period

 

$

5,080

 

$

24,893

 

 

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

 

5



Table of Contents

 

GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS
(Unaudited)

 

(in thousands)

 

March 31,
2010

 

December 31,
2009

 

Utility Plant

 

 

 

 

 

Utility plant, at cost

 

$

1,186,478

 

$

1,171,618

 

Less - Accumulated depreciation

 

(360,087

)

(352,574

)

Net utility plant

 

826,391

 

819,044

 

 

 

 

 

 

 

Other Property and Investments

 

8,737

 

8,738

 

 

 

 

 

 

 

Current Assets

 

 

 

 

 

Cash and cash equivalents

 

 

1,096

 

Accounts receivable-customers (less allowance for doubtful accounts of $646 in 2010 and $657 in 2009)

 

12,551

 

16,193

 

Unbilled revenue

 

18,412

 

17,835

 

Inter-company receivable

 

245

 

372

 

Other accounts receivable (less allowance for doubtful accounts of $248 in 2010 and $431 2009)

 

6,799

 

8,044

 

Income taxes receivable from Parent

 

 

2,496

 

Materials and supplies, at average cost

 

1,755

 

1,679

 

Regulatory assets — current

 

16,460

 

12,267

 

Prepayments and other current assets

 

2,312

 

3,144

 

Deferred income taxes — current

 

4,778

 

5,146

 

Total current assets

 

63,312

 

68,272

 

 

 

 

 

 

 

Regulatory and Other Assets

 

 

 

 

 

Regulatory assets

 

112,407

 

110,420

 

Other accounts receivable

 

5,817

 

5,717

 

Other

 

9,715

 

9,654

 

Total regulatory and other assets

 

127,939

 

125,791

 

 

 

 

 

 

 

Total Assets

 

$

1,026,379

 

$

1,021,845

 

 

The accompanying notes are an integral part of these financial statements

 

6



Table of Contents

 

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

 

(in thousands)

 

March 31,
2010

 

December 31,
2009

 

Capitalization

 

 

 

 

 

Common shares, no par value, no stated value

 

$

195,972

 

$

195,821

 

Earnings reinvested in the business

 

134,456

 

135,709

 

Total common shareholder’s equity

 

330,428

 

331,530

 

Long-term debt

 

300,149

 

300,221

 

Total capitalization

 

630,577

 

631,751

 

 

 

 

 

 

 

Current Liabilities

 

 

 

 

 

Long-term debt — current

 

369

 

365

 

Accounts payable

 

24,729

 

26,829

 

Inter-company payable

 

14,317

 

7,551

 

Income taxes payable to Parent

 

819

 

 

Accrued employee expenses

 

7,816

 

6,338

 

Accrued interest

 

5,244

 

3,256

 

Regulatory liabilities - current

 

 

113

 

Unrealized loss on purchased power contracts

 

10,038

 

7,338

 

Other

 

15,893

 

22,136

 

Total current liabilities

 

79,225

 

73,926

 

 

 

 

 

 

 

Other Credits

 

 

 

 

 

Advances for construction

 

79,334

 

79,443

 

Contributions in aid of construction - net

 

91,560

 

91,519

 

Deferred income taxes

 

93,213

 

94,418

 

Unamortized investment tax credits

 

2,132

 

2,154

 

Accrued pension and other postretirement benefits

 

41,930

 

40,158

 

Other

 

8,408

 

8,476

 

Total other credits

 

316,577

 

316,168

 

 

 

 

 

 

 

Commitments and Contingencies (Note 9)

 

 

 

 

 

 

 

 

 

Total Capitalization and Liabilities

 

$

1,026,379

 

$

1,021,845

 

 

The accompanying notes are an integral part of these financial statements

 

7



Table of Contents

 

GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED MARCH 31, 2010 AND 2009

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2010

 

2009

 

Operating Revenues

 

 

 

 

 

Water

 

$

56,057

 

$

55,178

 

Electric

 

10,979

 

8,632

 

Total operating revenues

 

67,036

 

63,810

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

Water purchased

 

8,002

 

7,987

 

Power purchased for pumping

 

1,556

 

1,567

 

Groundwater production assessment

 

2,622

 

2,517

 

Power purchased for resale

 

3,669

 

3,962

 

Supply cost balancing accounts

 

3,815

 

3,528

 

Other operation expenses

 

5,889

 

6,069

 

Administrative and general expenses

 

14,897

 

13,809

 

Depreciation and amortization

 

8,182

 

7,713

 

Maintenance

 

3,598

 

3,041

 

Property and other taxes

 

3,147

 

3,009

 

Net gain on sale of property

 

 

(15

)

Total operating expenses

 

55,377

 

53,187

 

 

 

 

 

 

 

Operating Income

 

11,659

 

10,623

 

 

 

 

 

 

 

Other Income and Expenses

 

 

 

 

 

Interest expense

 

(5,580

)

(4,996

)

Interest income

 

150

 

199

 

Other — net

 

57

 

(22

)

Total other income and expenses

 

(5,373

)

(4,819

)

 

 

 

 

 

 

Income from operations before income tax expense

 

6,286

 

5,804

 

 

 

 

 

 

 

Income tax expense

 

2,722

 

2,111

 

 

 

 

 

 

 

Net Income

 

$

3,564

 

$

3,693

 

 

The accompanying notes are an integral part of these financial statements

 

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GOLDEN STATE WATER COMPANY

STATEMENTS OF CASH FLOW

FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

(Unaudited)

 

 

 

Three Months Ended
March 31,

 

(in thousands)

 

2010

 

2009

 

Cash Flows From Operating Activities:

 

 

 

 

 

Net income

 

$

3,564

 

$

3,693

 

Adjustments for non-cash items:

 

 

 

 

 

Depreciation and amortization

 

8,182

 

7,713

 

Provision for doubtful accounts

 

335

 

347

 

Deferred income taxes and investment tax credits

 

(604

)

(731

)

Stock-based compensation expense

 

242

 

232

 

Other — net

 

(3

)

(614

)

Changes in assets and liabilities:

 

 

 

 

 

Accounts receivable — customers

 

3,401

 

281

 

Unbilled revenue

 

(577

)

14

 

Other accounts receivable

 

1,052

 

3

 

Materials and supplies

 

(76

)

(110

)

Prepayments and other current assets

 

832

 

569

 

Regulatory assets — supply cost balancing accounts

 

3,815

 

3,528

 

Other assets (including other regulatory assets)

 

(10,602

)

(2,768

)

Accounts payable

 

(2,580

)

(569

)

Inter-company receivable/payable

 

2,193

 

(42

)

Income taxes receivable/payable from/to Parent

 

3,315

 

1,843

 

Accrued pension and other postretirement benefits

 

1,772

 

1,887

 

Other liabilities

 

287

 

3,423

 

Net cash provided

 

14,548

 

18,699

 

 

 

 

 

 

 

Cash Flows From Investing Activities:

 

 

 

 

 

Construction expenditures

 

(15,738

)

(17,176

)

Proceeds from sale of property

 

14

 

16

 

Net cash used

 

(15,724

)

(17,160

)

 

 

 

 

 

 

Cash Flows From Financing Activities:

 

 

 

 

 

Receipt of advances for and contributions in aid of construction

 

871

 

317

 

Refunds on advances for construction

 

(445

)

(395

)

Proceeds from the issuance of long-term debt, net of issuance cost

 

 

39,777

 

Repayments of long-term debt

 

(68

)

(63

)

Net change in inter-company borrowings

 

4,700

 

(18,200

)

Dividends paid

 

(4,800

)

(4,400

)

Other — net

 

(178

)

90

 

Net cash provided

 

80

 

17,126

 

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(1,096

)

18,665

 

Cash and cash equivalents, beginning of period

 

1,096

 

3,812

 

Cash and cash equivalents, end of period

 

$

 

$

22,477

 

 

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”)).  AWR and its subsidiaries may be collectively referred to herein as “Registrant” or the Company.  The subsidiaries of ASUS may be collectively referred to herein as the “Military Utility Privatization Subsidiaries.”

 

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 services and operations on a contract basis. Through its wholly-owned subsidiaries, ASUS 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, changes in laws and regulations and changes in wages and fringe benefits to the extent provided in each of the contracts. There is no direct regulatory oversight by either the CPUC or the ACC of AWR or the operation or rates of the contracted services provided by ASUS or any of its wholly owned subsidiaries.  AWR’s assets, revenues and operations are primarily those of GSWC.

 

Basis of Presentation: The consolidated financial statements and notes thereto are being presented in a combined report being filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified.

 

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, 2009 filed with the SEC.  Certain prior-period amounts were reclassified to conform to the March 31, 2010 financial statement presentation.

 

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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 a $115 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 are included in inter-company payables on GSWC’s balance sheets as of March 31, 2010 and December 31, 2009. The interest rate charged to GSWC and other affiliates 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 mandated by the CPUC.

 

Long-Term Debt:  A senior note was issued on March 10, 2009, to CoBank, ACB (“Co-Bank”). Under the terms of this senior note, CoBank purchased a 6.7% Senior Note due March 10, 2019 in the aggregate principal amount of $40.0 million from GSWC. This note also provides for patronage, where GSWC shares in the profits of CoBank.  If the current amount of patronage continues to be paid, the annual cost of the note is at about 6.0%. The proceeds were used to pay down short-term borrowings, and fund capital expenditures.  The terms of the agreement are substantially the same as the terms of a previous note agreement with CoBank executed in October 2005.

 

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 $685,000 and $626,000 for the three months ended March 31, 2010 and 2009, 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.

 

Depending on the state in which the operations are conducted, ASUS and its subsidiaries are also subject to certain state non-income tax assessments generally computed on a “gross receipts” or “gross revenues” basis.  These non-income tax assessments are required to be paid regardless of whether the subsidiary is reimbursed by the U.S. government for these assessments under its 50-year contracts with the U.S. government.  The non-income tax assessments are accounted for on a gross basis and totaled $295,000 and $170,000 during the three months ended March 31, 2010 and 2009, respectively.

 

Recently Adopted Accounting Pronouncements:  In June 2009, the Financial Accounting Standards Board (“FASB”) issued revised guidance which enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets and a company’s continuing involvement in transferred assets. Generally accepted accounting principles no longer include the concept of qualifying special purpose entity.  The revised guidance also changes the requirements for derecognizing financial assets and requires additional disclosures about a transferor’s continuing involvement in transferred financial assets. This revised guidance was effective for the Company beginning January 1, 2010 and did not have any impact on Registrant’s consolidated results of operations, financial position or cash flows.

 

In June 2009, the FASB amended the guidance on consolidation for variable interest entities. The new guidance requires a company to perform a qualitative analysis when determining whether it must consolidate a variable interest entity.  This guidance also amends how to determine whether an entity is a variable interest entity. A company must now disclose how its involvement with a variable interest entity affects the company’s financial statements and disclose any significant judgments and assumptions made in determining whether it must consolidate a variable interest entity. This guidance was effective for the Company beginning January 1, 2010 and did not have any impact on the Registrant’s consolidated results of operations, financial position or cash flows.

 

In October 2009, the FASB issued an update to the accounting standards and provided amendments to the criteria of Accounting Standards Codification Topic 605, “Revenue Recognition”, for separately recognizing consideration in multiple-deliverable arrangements. The amendments establish a selling price hierarchy for determining the selling price of a deliverable.  This guidance is effective for financial statements issued for fiscal years beginning on or after June 15, 2010.  Registrant is currently evaluating the effects the adoption will have on its consolidated financial statements, but does not expect the adoption will have a material impact on its consolidated financial statements.

 

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In January 2010, the FASB issued an update to the accounting standards and amended the disclosure guidance with respect to fair value measurements.  Specifically, the new guidance requires disclosure of amounts transferred in and out of Levels 1 and 2 fair value measurements, a reconciliation presented on a gross basis rather than a net basis of activity in Level 3 fair value measurements, greater disaggregation of the assets and liabilities for which fair value measurements are presented and more robust disclosure of the valuation techniques and inputs used to measure Level 2 and 3 fair value measurements. This guidance is currently effective, with the exception of the new guidance around the Level 3 activity reconciliations.  The adoption of the effective portion of the guidance had no impact on Registrant’s consolidated financial statements.  Certain Level 3 activities disclosure requirements of this guidance will be effective for fiscal years beginning after December 15, 2010.  Registrant is currently evaluating the impact of Level 3 disclosure of this guidance, but does not expect the adoption will have a material impact on its consolidated financial statements.

 

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 March 31, 2010, Registrant had approximately $48.2 million of regulatory assets not accruing carrying costs. Of this amount, $27.4 million relates to the underfunded positions of the pension and other post-retirement obligations, $6.4 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 $10.0 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchase power contracts over the life of the contract.  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)

 

March 31,
2010

 

December 31,
2009

 

GSWC

 

 

 

 

 

Electric supply cost balancing account

 

$

11,856

 

$

13,111

 

Water supply cost balancing accounts

 

4,156

 

4,717

 

Water revenue adjustment mechanism, net of modified cost balancing accounts

 

26,225

 

21,168

 

Aerojet litigation memorandum account

 

19,503

 

19,676

 

Pensions and other postretirement obligations

 

27,401

 

27,833

 

Derivative unrealized loss

 

10,038

 

7,338

 

Flow-through taxes, net

 

6,406

 

6,661

 

Electric transmission line abandonment costs

 

2,782

 

2,828

 

Asset retirement obligations

 

3,910

 

3,826

 

Low income rate assistance balancing accounts

 

5,183

 

4,764

 

Santa Maria adjudication memorandum accounts

 

3,888

 

3,895

 

Deferred rate case costs

 

3,474

 

3,642

 

Refund of water right lease revenues

 

(1,707

)

(1,806

)

Other regulatory assets, net

 

5,752

 

4,921

 

Total GSWC

 

$

128,867

 

$

122,574

 

CCWC

 

 

 

 

 

Asset retirement obligations

 

$

60

 

$

59

 

Other regulatory liabilities, net

 

(1,218

)

(1,213

)

Total AWR

 

$

127,709

 

$

121,420

 

 

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, 2009 filed with the SEC.  The discussion below focuses on significant matters and changes since December 31, 2009.

 

Electric Supply Cost Balancing Accounts:

 

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 $11.9 million at March 31, 2010.  For the three months ended March 31, 2010 and 2009, the under-collection decreased by approximately $1.3 million and $1.1 million, respectively, primarily as a result of a payment of a surcharge by its customers of 2.2¢ per kilowatt hour through August 2011.  In addition, BVES 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.  BVES began receiving power under a new purchased power contract in January 1, 2009.   The main product under the new contract provides for 13 megawatts (“MW”) of electric energy at a fixed price of $67.85 per MWh during 2010 as compared to the $77 per MWh included in rates.  The reduction in the actual price of purchased power helps decrease the under-collection balance in the 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

 

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balancing account and such amounts will be expensed.  There were no amounts expensed over the $77 per MWh cap during the three months ended March 31, 2010 and 2009.

 

As of March 31, 2010, the electric supply cost balancing account consists of $4.0 million for costs of abandonment of a transmission line upgrade and $7.9 million for changes in purchased energy and power system delivery costs.

 

Water Supply Cost Balancing Accounts:

 

Prior to the implementation of the Modified Cost Balancing Account (“MCBA”) further discussed below,  Registrant maintained water supply cost balancing accounts for GSWC to account for under-collections and over-collections of revenues designed to recover such costs.  These supply cost balancing accounts tracked 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) occurred when the current cost exceeded the amount in rates for these items and, conversely, over-collections (recorded as regulatory liabilities) occurred when the current cost of these items were less than the amount in rates.  Typically, under-collections or over-collections, when they occur, were 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 accrued 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.

 

As of March 31, 2010, there is a $4.2 million net under-collection remaining in the water supply cost balancing accounts.  Of this amount, approximately $1.6 million relates to GSWC’s Region III customer service area and $2.6 million relates primarily to GSWC’s Region I.  Currently, there are surcharges in place in Region I and Region III to recover these under-collections including the approval in January 2010 by the CPUC of a 36-month surcharge in one of Region I’s ratemaking areas to begin recovering the under-collection prospectively.  When these surcharges expire, any unrecovered balances will be included in the MCBA for recovery in a future filing.

 

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 established an MCBA that permits GSWC to recover supply costs related to changes in water supply mix in addition to rate changes by GSWC’s suppliers. GSWC implemented this MCBA in November 2008 for Regions II and III and in September 2009 for Region I.  This account replaces the water supply cost balancing account procedure for costs incurred after the modified supply cost balancing account was implemented.

 

Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”):

 

With the adoption of the WRAM and the MCBA effective November 25, 2008 for Regions II and III and September 1, 2009 for Region I’s ratemaking areas, GSWC began recording the difference between what is billed to its regulated water customers and that which is authorized by the CPUC. Under the WRAM, GSWC records the adopted level of volumetric revenues as authorized by the CPUC for metered accounts (adopted volumetric revenues).  While the WRAM tracks volumetric-based revenues, the revenue requirements approved by the CPUC include service charges, flat rate charges, and other items that are not subject to the WRAM. The adopted volumetric revenues consider the seasonality of consumption of water based upon historical averages. The variance between adopted volumetric revenues and actual billed volumetric revenues for metered accounts is recorded as a component of revenue with an offsetting entry to a current asset or liability balancing account (tracked individually for each rate- making area). The variance amount may be positive or negative and represents amounts that will be billed or refunded to customers in the future.  The WRAM only applies to customer classes with conservation rates/tiered rates in place.

 

Under the MCBA, GSWC began tracking adopted expense levels for purchased water, purchased power and pump taxes, as established by the CPUC. Variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power, and pump tax expenses are recorded as a component of the supply cost balancing account provision, as the amount of such variances will be recovered from or refunded to GSWC’s customers at a later date. This is reflected with an offsetting entry to a current asset or liability balancing account (tracked individually for each water region).  Unlike the WRAM, the MCBA applies to all customer classes.

 

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The balances in the WRAM and MCBA assets and liabilities accounts will fluctuate on a monthly basis depending upon the variance between adopted and actual results. The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90 day commercial paper rate. When the net amount for Regions II, III or any of the Region I ratemaking areas achieves a pre-determined level (i.e., at least 2.5 percent over- or under-recovery of the approved revenue requirement), GSWC will seek approval from the CPUC to refund or collect the balance in the accounts. Account balances less than those levels may be refunded or collected in GSWC’s general rate case proceedings or aggregated with future calendar year balances for comparison with the pre-determined recovery level of 2.5 percent of adopted revenues.

 

In March 2010, GSWC filed an advice letter with the CPUC for recovery of the Region II and III WRAM, net of the MCBA and supply cost balancing accounts, of $18.3 million.  A surcharge was put in place in March 2010 which is expected to recover the amounts accumulated in Regions II and III’s WRAM, net of MCBA and supply cost balancing accounts, as of December 31, 2009.  As of March 31, 2010, Region I has a net regulatory asset of $3.8 million.  In April 2010, GSWC filed advice letters with the CPUC for recovery of $2.8 million of this amount which represented the net regulatory asset balance as of December 31, 2009.  Going forward, GSWC will seek recovery of its WRAM, net of MCBA, on an annual basis.  As of March 31, 2010, GSWC has a net aggregated regulatory asset of $26.2 million which is comprised of a $30.9 million under-collection in the WRAM accounts and $4.7 million over-collection in the MCBA accounts.

 

Aerojet Litigation Memorandum Account:

 

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 $181,000 and $211,000 was billed to customers during the three months ended March 31, 2010 and 2009, 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 $8,000 and $20,000 was added to the Aerojet litigation memorandum account during the three months ended March 31, 2010 and 2009, respectively.

 

Aerojet has also agreed to reimburse GSWC $17.5 million, plus interest accruing from January 1, 2004, for GSWC’s past legal and expert costs, which is included in the Aerojet litigation memorandum account. The reimbursement 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. The Westborough development is within the defined area in the settlement agreement.  It is management’s intention to offset certain proceeds from the housing development by Aerojet in the Westborough areas, pursuant to the settlement agreement, against the balance in this litigation memorandum account.  At this time, management believes the full balance of the Aerojet litigation memorandum account will be collected by 2025.

 

Derivative Gains and Losses on Purchased Power Contracts Memorandum Account:

 

As described in Note 4, in October 2008 GSWC executed a new purchased power contract.  GSWC’s BVES division began receiving power under this contract on January 1, 2009 at a fixed cost over three and five year terms depending on the amount of power and period during which the power will be purchased under the contract.  The new contract is also subject to accounting guidance as amended for derivative instruments and hedging activities and requires mark-to-market derivative accounting.  In May 2009, the CPUC authorized GSWC to establish a non-interest bearing regulatory memorandum account to track unrealized gains and losses on the new contract, which the CPUC also approved, throughout the term of the contract.  Accordingly, all unrealized gains and losses generated from the new purchased power contract will be deferred on a monthly basis into the memorandum account and, as a result, do not impact GSWC’s earnings. As of March 31, 2010, $10.0 million of unrealized losses have been included in this memorandum account. This unrealized loss increased since December 31, 2009 as a result of decreasing quoted market prices for energy over the duration of the contract.

 

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Deferred Rate Case Costs:

 

As of March 31, 2010, GSWC has deferred rate case costs totaling $3.5 million. These are direct costs consisting primarily of outside consulting services, which have been incurred in connection with the preparation and processing of a general rate case.  Historically, GSWC has deferred these costs as a regulatory asset which are then recovered in rates and amortized over the term of a rate case cycle once the new rates go into effect.  In the current general rate case for Regions II and III and the general office, the DRA is challenging GSWC’s historical practice of deferring these costs with subsequent recovery upon the effective date of the new rates.  Instead, DRA believes that rate case costs should be projected for future periods and recovered prospectively.   Management believes that DRA’s rationale and recommendations are inconsistent with GSWC’s historical practice of deferring and recovering rate case expenses associated with the current general rate case (“GRC”).  This practice has not been challenged by the CPUC in prior rate cases.  GSWC will vigorously defend its position.  However, if DRA prevails, GSWC may be required to write-off approximately $2.2 million of costs deferred as of March 31, 2010 related to the current water rate case.  The final resolution of this issue is expected in September 2010 as part of the CPUC’s final decision in the Region II and III general rate case.  At this time, GSWC is unable to predict the outcome of this matter.

 

Other Regulatory Assets:

 

As part of the CPUC’s final decision in October 2009 on the BVES general rate case, GSWC was authorized to establish a Base Revenue Requirement Adjustment Mechanism (“BRRAM”) account effective November 2, 2009. With the adoption of the BRRAM account, GSWC began recording the difference between what is billed to its electric customers and that which is authorized by the CPUC.  The variance between adopted electric revenue and actual billed revenue will be recorded as a component of electric revenue with an offsetting entry to a current asset or liability balancing account.  The variance amount may be positive or negative and represents amounts that will be billed or refunded to electric customers in the future and is interest bearing at the current 90-day commercial paper rate.  When the amount of the under- or over-collection is equal to or greater than 5 percent of the revenue requirement established for the previous twelve months, GSWC intends to seek approval from the CPUC to refund or collect the balance in the account.  As of March 31, 2010, GSWC has included in other regulatory assets $426,000 related to the BRRAM. Management will evaluate the anticipated recovery of this under-collection and will provide for allowances and/or reserves as deemed necessary.

 

Included in other regulatory assets is a memorandum account totaling $958,000 recorded in the first quarter of 2010.  In June 2009, the CPUC had authorized BVES to track the difference between the 2007 adopted general office cost allocation to BVES and the 1996 adopted general office cost allocation to BVES, effective and retroactive from June 4, 2009 to October 31, 2009.  The amount in this memorandum account totaled approximately $958,000.  However, the decision issued on October 15, 2009 did not address the disposition of this memorandum account.   In November 2009, GSWC filed a petition for modification to seek clarification from the CPUC on the treatment and recovery of this memorandum account.   In March 2010, the CPUC approved for recovery this memorandum account through a surcharge over a 24-month period effective May 1, 2010.  Accordingly, during the first quarter of 2010, GSWC recorded a regulatory asset and a corresponding increase to earnings for amounts included in this memorandum account.  The October 2009 decision in the general rate case for BVES also allows for an update to BVES’ rates in 2010 for the corporate headquarters’ costs based on the CPUC’s adoption of new rates for GSWC’s current Regions II and III general rate case including the recovery of expenses associated with its corporate headquarters.

 

In January 2010, the City of Big Bear and surrounding areas of San Bernardino County experienced a series of snow storms, which damaged many BVES power lines, poles, transformers, and other facilities and caused temporary interruption of service to many BVES customers.  As a result of these storms, BVES has incurred additional operating costs to repair equipment and restore electric service to its customers.  While service has been restored to BVES customers, costs are still being incurred to repair equipment affected by the storms.  In February 2010, GSWC informed the CPUC that it will track these costs in a Catastrophic Event Memorandum Account (“CEMA”).  Once all work resulting from these storms is completed, GSWC intends to file an advice letter with the CPUC for recovery of these costs through a surcharge.  The incremental costs include BVES labor, outside services assistance, equipment, materials, facilities damages and related snow removal services.  Management believes these incremental costs will be approved by the CPUC for recovery through the CEMA .  As of March 31, 2010, approximately $403,000 has been incurred as a result of the storms and has been included in the CEMA account within other regulatory assets.  Management believes this amount is probable of future recovery.

 

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Other Regulatory Liabilities at CCWC:

 

Fountain Hills Sanitary District (“FHSD”) is a political subdivision of the State of Arizona that provides sanitary sewer service to customers residing within CCWC’s water service area. In connection with its sanitary system, FHSD constructed a recharge system whereby it recharges treated effluent through multiple injection wells. In order for FHSD to secure an Aquifer Protection Permit for its recharge system, FHSD requested CCWC to permanently cease using one of its wells. As a possible replacement for this well, FHSD constructed a new well adjacent to the community center (“Community Center Well”).  However, this well was not able to produce an equivalent amount of water to CCWC’s well that was taken out of production.  Accordingly, in February 2005, CCWC entered into an agreement with FHSD whereby CCWC agreed to permanently remove from service this well and in return CCWC received a settlement fee of $1,520,000 from FHSD.

 

In 2005, CCWC recognized a net gain of $760,000 related to this settlement agreement and established a regulatory liability for the remaining $760,000 pending ACC review of this matter.  On October 8, 2009, the ACC made a final ruling ordering CCWC to treat the entire gain of $1,520,000 from the settlement agreement with FHSD as a reduction to rate base. As a result, CCWC recorded a loss of $760,000 during the third quarter of 2009.  This effectively reversed the original gain recorded in 2005.  In November 2009, CCWC filed an application for rehearing on several issues including the sharing of this gain from the settlement proceeds.  The ACC granted CCWC’s request to hold a rehearing on the issues.  In January 2010, a procedural conference was held with the judge and the staff of the ACC involved in the rate case to address a schedule for the rehearing. The rehearing was held in April 2010 and a final decision by the ACC is expected in the third quarter of 2010.  At this time, management cannot predict the final outcome of this matter.

 

Other Regulatory Matters:

 

La Serena Plant Improvement Project:

 

In January 2008, the CPUC approved Region I’s general rate case effective for years 2008, 2009, and 2010.  On March 3, 2008, the DRA filed an application for rehearing of this decision on various legal grounds.  As permitted by the CPUC, GSWC filed a response to DRA’s application.  In September 2008, the CPUC granted a limited rehearing in order to consider whether it is reasonable to include in Region I’s rate base approximately $3.5 million of costs incurred in connection with the La Serena Plant Improvement Project.  The project is currently in rate base and the earnings have been included in rates since January 1, 2008.  If DRA prevails, GSWC may be required to write-off the costs incurred to date and also refund amounts collected from customers since January 1, 2008.  At this time, management believes it is probable that the costs of this project will be allowed to remain in rate base.  The final resolution of this issue is expected in September 2010 as part of the CPUC’s final decision in the Region II and III general rate case.

 

CPUC Subpoena:

 

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 totaling approximately $24.0 million. The CPUC’s investigation focuses on whether GSWC was overcharged for these construction projects and whether these overcharges were approved in customer rates.  The construction projects completed by this specific contractor related primarily to work on water treatment and pumping plants which have been placed in service and are used and useful.  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 including recent data requests which asked for information prior to 1994.  Should the CPUC investigation result in a proposed disallowance of certain previously capitalized costs, such costs, and potentially any return earned on such costs, may be required to be refunded to the customers upon settlement of the proposed disallowance, if any, resulting in a charge to operating income.  GSWC believes that the costs incurred related to the aforementioned construction projects were prudent and appropriately capitalized.  Management cannot predict the outcome of the investigation or audit at this time and is unable to reasonably estimate a potential loss related to items under the aforementioned investigation, as no formal claim has been made against GSWC to date.

 

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In January 2009, the ACC staff requested information regarding the CPUC subpoena and on-going audit.  GSWC has been working with the ACC staff and has provided responsive materials, including but not limited to, materials that are relevant to CCWC. Although the ACC has issued a decision in the CCWC general rate case, they have held the docket open pending resolution of the staff’s review of the CPUC subpoena documents.  In the first quarter of 2010, the ACC staff issued a report recommending that proper controls be established in CCWC’s procurement policies and procedures, and that status reports of the CPUC’s investigation and resolution be filed with the ACC periodically. The staff’s report did not result in any financial impact to CCWC.  The ACC will still need to act on the staff’s recommendations.  Management cannot predict the outcome of the ACC’s final decision on this matter.

 

Bear Valley Electric Service

 

GSWC’s BVES division has been regularly filing compliance reports with the CPUC regarding its purchases of energy from renewable energy resources. The filings have indicated that BVES has not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a potential penalty. However, BVES 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 March 31, 2010.  At this time, management cannot determine if interim targets for the 2010 year will be met.  BVES is continuing its efforts to procure renewable resources. In November 2009, GSWC entered into a ten-year contract to purchase renewable energy created from landfill gas.  The contract is subject to CPUC approval.  If approved, the contract will provide up to 3 megawatts for ten years at a fixed price of $110.0 per MWh.  In November 2009, GSWC also entered into a ten-year contract to purchase biogas to power BVES’s gas-fueled 8.4 MW generation facility.  This contract is also subject to CPUC approval.

 

Note 3 — Earnings per Share/Capital Stock:

 

In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), Registrant uses the “two-class” method of computing EPS. The “two-class” method is an earnings allocation formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”) that have been issued under AWR’s 2000 and 2008 Employee Plans and the 2003 Directors 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 March 31,

 

(in thousands, except per share amounts)

 

2010

 

2009

 

Net income

 

$

8,490

 

$

4,932

 

Less: (a)

Distributed earnings to common shareholders

 

4,822

 

4,328

 

 

Distributed earnings to participating securities

 

23

 

25

 

Undistributed earnings

 

3,645

 

579

 

 

 

 

 

 

 

(b)

Undistributed earnings allocated to common shareholders

 

3,627

 

576

 

 

Undistributed earnings allocated to participating securities

 

18

 

3

 

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

 

$

8,449

 

$

4,904

 

 

 

 

 

 

 

Weighted average Common Shares outstanding, basic

 

18,546

 

17,312

 

Basic earnings per Common Share

 

$

0.46

 

$

0.28

 

 

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 granted in 2006 under Registrant’s 2003 Non-Employee Directors Stock Plan and restricted stock units issued under Registrant’s 2000 Stock Incentive Plan, 2008 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net income. At March 31, 2010 and 2009, there were 760,372 and 680,008 options outstanding, respectively, under these Plans. At March 31, 2010 and 2009, there were also 100,469 and 87,373 restricted stock units outstanding, respectively.

 

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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 March 31,

 

(in thousands, except per share amounts)

 

2010

 

2009

 

Common shareholders earnings, basic

 

$

8,449

 

$

4,904

 

Undistributed earnings for dilutive stock options

 

18

 

3

 

Total common shareholders earnings, diluted

 

$

8,467

 

$

4,907

 

 

 

 

 

 

 

Weighted average common shares outstanding, basic

 

18,546

 

17,312

 

Stock-based compensation (1)

 

120

 

128

 

Weighted average common shares outstanding, diluted

 

18,666

 

17,440

 

Diluted earnings per Common Share

 

$

0.45

 

$

0.28

 

 


(1)  In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 248,565 and 425,053 stock options at March 31, 2010 and 2009, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 100,469 and 87,373 restricted stock units at March 31, 2010 and 2009, respectively, were included in the calculation of diluted EPS for the three months ended March 31, 2010 and 2009.

 

Stock options of 415,504 and 254,271 were outstanding at March 31, 2010 and 2009, 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 three months ended March 31, 2010 and 2009.  Stock options of 96,303 and 684 were outstanding at March 31, 2010 and 2009, respectively, but not included in the computation of diluted EPS because they were antidilutive.

 

During the three months ended March 31, 2010 and 2009, Registrant issued 26,117 and 19,957 Common Shares, for approximately $566,000 and $472,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, and the stock incentive plans. In addition, Registrant purchased 31,805 and 304 Common Shares on the open market during the three months ended March 31, 2010 and 2009, respectively, under Registrant’s 401(k) Plan and the Common Share Purchase and Dividend Reinvestment Plan. The Common Shares purchased by Registrant were used to satisfy the requirements of these plans.

 

During the three months ended March 31, 2010, AWR paid quarterly dividends of approximately $4.8 million, or $0.260 per share.  During the three months ended March 31, 2009, AWR paid quarterly dividends to shareholders of approximately $4.3 million, or $0.250 per share.

 

Note 4 — Derivative Instruments:

 

Most of the electric energy sold by BVES to its customers is purchased from others.  To mitigate exposure to spot-market prices, Registrant has entered into purchased power contracts, which are subject to derivative accounting, to serve its BVES customer service area.  By entering into these fixed-priced purchased power contracts, Registrant has been able to limit the amount of risk and uncertainty due to spot-market price variability.  Changes in electricity costs are outside of management’s control, therefore, the purpose of entering into these fixed price contracts is to stabilize purchased power costs.  Except for the resale of small amounts of power in the spot market that are in excess of BVES’ customers’ then immediate needs, the power purchased under the contracts is only used to service BVES customers’ demand.

 

Registrant has a block-forward purchase power contract that has been and is subject to the accounting guidance for derivative instruments and hedging activities, as amended.  A derivative financial instrument or other contract derives its value from another investment or designated benchmark.  Accounting guidance requires companies to record derivatives on the balance sheet as assets and liabilities, and to measure those instruments at their fair value.

 

In October 2008, GSWC executed a purchased power contract that permits GSWC to purchase power at a fixed cost over three and five year terms depending on the amount of power and period during which the power is purchased under the contract.  The contract is subject to the accounting guidance for derivatives and requires mark-to-market derivative accounting.   GSWC began receiving power under this contract on January 1, 2009.  In May 

 

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2009, the CPUC issued a final decision approving the contract and authorized GSWC to establish a regulatory asset and liability memorandum account to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the new purchased power contract will be deferred on a monthly basis into a non-interest bearing regulatory memorandum account that will track the changes in fair value of the derivative throughout the term of the contract.   As of March 31, 2010 there was a $10.0 million cumulative unrealized loss which has been included in the memorandum account.  This memorandum account does not impact GSWC’s earnings.

 

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 accounting guidance for fair value measurements effective January 1, 2008 for financial assets and liabilities measured on a recurring basis.  This guidance 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 this accounting guidance to the consolidated financial statements. However, the accounting guidance requires disclosure that establishes a framework for measuring fair value and expands disclosure about fair value measurements. The guidance 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 contract. 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.  Registrant receives one broker quote to determine the fair value of its derivative instrument.  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 new purchased power contract has been classified as Level 3 for all periods presented.

 

The following table presents changes in the fair value of the derivative for the three months ended March 31, 2010 and 2009.

 

 

 

For The Three Months Ended March 31,

 

(dollars in thousands)

 

2010

 

2009

 

Balance, at beginning of the period

 

$

(7,338

)

$

 

Unrealized loss on purchased power contracts

 

(2,700

)

(8,428

)

Balance, at end of the period

 

$

(10,038

)

$

(8,428

)

 

For the three months ended March 31, 2010 and 2009, the unrealized losses were included in regulatory assets due to regulatory mechanisms in place effective January 1, 2009.

 

Note 5 — Fair Value of Financial Instruments:

 

For cash and cash equivalents, accounts receivable, accounts payable and short-term debt, the carrying amount is assumed to approximate fair value due to the short-term nature of the amounts. The table below estimates the fair value of long-term debt held by the utility subsidiaries. Rates available to the utility subsidiaries at March 31, 2010 and December 31, 2009 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. Changes in the assumptions will produce differing results.

 

 

 

March 31, 2010

 

December 31, 2009

 

(dollars in thousands)

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

Financial liabilities:

 

 

 

 

 

 

 

 

 

Long-term debt—GSWC

 

$

300,518

 

$

321,727

 

$

300,586

 

$

335,217

 

Long-term debt—CCWC

 

5,975

 

5,454

 

5,975

 

5,623

 

Total AWR

 

$

306,493

 

$

327,181

 

$

306,561

 

$

340,840

 

 

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Note 6 — Military Privatization:

 

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, subject to periodic prospective price redeterminations and modifications for changes in circumstances.

 

The amounts charged by the Military Utility Privatization Subsidiaries for water and/or wastewater services at the respective military bases are based upon the terms of the 50-year contracts between ASUS or its subsidiaries and the U.S. government. Under the terms of these agreements, the Military Utility Privatization Subsidiaries agreed to operate and maintain the water and/or wastewater systems at the respective bases for a monthly net fixed price for operation and maintenance, and for an amount to cover renewals and replacements for the first two years of the contract.  Under the terms of each of these contracts, prices are to be redetermined at the end of the initial two year period and every three years thereafter, unless otherwise agreed to by the parties to a contract. In addition, prices may be equitably adjusted for changes in law and other circumstances.  These adjustments can be retrospective and/or prospective.  The Military Utility Privatization Subsidiaries have experienced delays in obtaining readjustment of prices and equitable adjustments as required by the terms of these contracts.

 

In March 2009, ONUS filed a request for equitable adjustment related to a joint inventory report which indicated the quantity of the Fort Bragg infrastructure to be greater than what was estimated by the U.S. government as part of its solicitation for this contract.  On January 22, 2010, the U.S. government approved a $6.5 million equitable adjustment regarding this inventory. As a result of this contract modification, ASUS recorded $3.1 million of revenues and operating income during the first quarter of 2010 (approximately $2.8 million of which is retroactive from the commencement of the contract in March 2008 to December 31, 2009).  The remaining $3.4 million, related to renewal and replacement funds, was recorded as deferred revenue in the first quarter of 2010. The deferred revenue will be recognized in construction revenues (along with the related construction costs) when the work is performed.

 

In March 2008, FBWS filed a request for equitable adjustment as a claim with the U.S. government seeking an adjustment in the contract after it was determined that the infrastructure at Fort Bliss was substantially more than originally estimated by the U.S. government as part of its solicitation for this contract.  In January 2010, FBWS and the U.S. government entered into a settlement agreement pursuant to which the U.S. government agreed to pay FBWS retroactive operation and maintenance management fees and retroactive renewal and replacement fees from the contract commencement date, October 1, 2004.  In March 2010, the U.S. government issued a $6 million contract modification funding a majority of the settlement agreement.  As a result, ASUS recorded $2.5 million in revenues and pretax operating income and $510,000 in interest income during the first quarter of 2010.  The remaining $3.0 million, related to renewal and replacement funds, was recorded as deferred revenue for the three months ended March 31, 2010. The deferred revenue will be recognized in construction revenues (along with the related construction costs) as the work is performed.  An additional modification funding the balance of the settlement amount (approximately $373,000) is pending and will not be recorded until such modification is received.

 

Note 7 — 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.  The GSWC ETR for the three months ended March 31, 2010 was 43.3% as compared to 36.4% applicable to the three months ended March 31, 2009.  The GSWC ETR deviated from the federal statutory rate primarily due to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally plant-, rate-case- and compensation-related items).

 

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

 

AWR (parent) records the tax effects of the members of the AWR group joining in filing federal consolidated and state combined returns.  For the three months ended March 31, 2010, the state taxes, net of federal

 

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benefit, recorded at AWR (parent) include an expense of approximately $146,000 as a result of applying the California state unitary tax principles (“unitary effect”).  The unitary effect may be beneficial or detrimental depending on a combination of the profitability of AWR’s non-California activities as well as the relative proportion of the factor(s) applied by its apportionment method.  The net unfavorable unitary effect for the three months ended March 31, 2010 was primarily attributable to the increased profitability of contracted services outside of California.  Management continues to intend to elect, commencing with the 2011 tax year, an alternative apportionment method made available by tax law changes in 2009.

 

For the three months ended March 31, 2009, the taxes recorded at AWR (parent) also include the effect of management’s intention to apply an alternative method made available by a change in California law during the first quarter of 2009.  The change in law permits most taxpayers to compute the portion of their income derived from multiple jurisdictions that is subject to California taxation by applying an alternative apportionment method  commencing with the 2011 tax year.  As a result of management’s intention to apply the alternative method, AWR adjusted its deferred tax balances in the first quarter of 2009 to reflect the expected amount at which it will realize its California deferred taxes consistent with the change in tax law, and refined certain related estimates.  This resulted in the recording of a benefit of approximately $918,000 during the first quarter of 2009. While the effect of the tax law change will continue to affect AWR’s state taxes, the future effects may be beneficial or detrimental depending on a combination of the profitability of AWR’s non-California activities as well as the relative proportion of the factor(s) applied by its apportionment method.  Periodically, management will assess its intention to apply the alternative method and will adjust its deferred tax balances accordingly.

 

GSWC continues to compute its state tax provision as if it were autonomous and not a member of AWR’s unitary group.  This approach is consistent with the methodology used for ratemaking purposes.  Given that 100 percent of GSWC’s activities are conducted within California, GSWC’s state tax provision does not reflect apportionment of its income; consequently, the change in California law has had no effect upon GSWC’s state taxes.

 

Note 8 — 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 months ended March 31, 2010 and 2009 are as follows:

 

 

 

Pension Benefits

 

Other
Postretirement
Benefits

 

SERP

 

(dollars in thousands)

 

2010

 

2009

 

2010

 

2009

 

2010

 

2009

 

Components of Net Periodic Benefits Cost:

 

 

 

 

 

 

 

 

 

 

 

 

 

Service cost

 

$

1,158

 

$

1,044

 

$

101

 

$

86

 

$

108

 

$

93

 

Interest cost

 

1,534

 

1,444

 

159

 

160

 

89

 

86

 

Expected return on plan assets

 

(1,312

)

(971

)

(63

)

(52

)

 

 

Amortization of transition

 

 

 

105

 

105

 

 

 

Amortization of prior service cost (benefit)

 

30

 

30

 

(50

)

(50

)

40

 

40

 

Amortization of actuarial loss

 

308

 

572

 

 

 

 

 

 

Net periodic pension cost

 

$

1,718

 

$

2,119

 

$

252

 

$

249

 

$

237

 

$

219

 

 

Registrant expects to contribute approximately $8,583,000 and $575,000 to the pension and postretirement medical plans in 2010, respectively.  No contributions were made during the three months ended March 31, 2010.

 

Note 9 — 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

 

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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 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 the two impacted GSWC 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 have been reached between WQA and some PRPs. Settlements with a number of other PRPs are being finalized; however, Registrant is presently unable to predict the ultimate outcome of these settlement discussions.

 

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.

 

The Town of Apple Valley (the “Town”) abandoned its activities related to a potential condemnation of GSWC’s water system serving the Town in 2007. However, in April 2009, the Town announced that it will again consider a potential takeover of GSWC’s Apple Valley water systems as well as those of another privately-owned utility.  The Town Council has directed staff to research the costs associated with updating the previously prepared financial feasibility study for the acquisition of GSWC’s water system.

 

The Stanton City Council recently decided to solicit proposals to identify the process, potential costs and legal issues for acquiring the water system owned by GSWC.

 

Except for the City of Stanton and the Town of Apple Valley, Registrant is currently not 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.  Over the last five years, GSWC’s average groundwater production has been 10,140 acre-feet per year.

 

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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.

 

Aerojet Note Receivable:

 

Pursuant to the settlement agreement with Aerojet discussed in Note 2, GSWC has a note receivable, plus accrued interest, guaranteed by Aerojet.  This note, plus interest on the unpaid balance, is scheduled to be paid by Aerojet in installments over five years beginning in December 2009.    GenCorp Inc. is the parent of Aerojet.  In January 2010, Standard & Poor’s (“S&P”) upgraded GenCorp Inc’s credit rating to B- from CCC+ with a stable outlook.  This is a non-investment grade rating assigned by S&P to companies whose financial situation varies.

 

In December 2009, the Company received from Aerojet $2.6 million, including interest, as payment of the first annual installment under the terms of the 2004 settlement agreement.  As of March 31, 2010, the unpaid portion of the note receivable is $8.3 million, comprised of $6.4 million in principal and $1.9 million in accrued interest.  At this time, management believes the note receivable from Aerojet is fully collectible and has not provided a reserve for uncollectible amounts as of March 31, 2010.  GSWC will continue to assess recoverability of this note receivable.

 

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 in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.  Recent site assessments have been conducted which showed that there was more gasoline at higher concentrations spread over a larger area than previously measured. Remediation is estimated to take two more years, followed by at least one year of monitoring and reporting.  As of March 31, 2010, the total spent to clean-up and remediate GSWC’s plant facility is approximately $2.4 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate-base and approved by the CPUC for recovery.

 

As of March 31, 2010, GSWC has an accrued liability for the estimated additional cost of $1.2 million 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.

 

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.  An initial investigation and characterization of the contaminated area has been conducted.  The investigation report indicates that contamination levels are below normal cleanup goals.  GSWC submitted a clean-up action plan to the local Certified Unified Program Agency (“CUPA”), which approved the clean-up plan.  The clean-up was completed during the first quarter of 2010.  All contaminated soil was removed and replaced with clean soil.  Currently, the contractor is preparing a closure report.  The report requires the approval of Los Angeles County Fire Authority which serves as the local CUPA.  Although GSWC cannot predict the final decision by the CUPA, based on the clean-up test results, the closure report is expected to be approved.  Clean-up costs incurred through March 31, 2010 totaled approximately $200,000.  Historically, the costs for this type of cleanup have been included in rates as approved by the CPUC.

 

Other Litigation:

 

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

 

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Note 10 — 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. Both GSWC and CCWC are rate-regulated utilities.

 

Activities of ASUS and its subsidiaries have been conducted in California, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  ASUS’s wholly-owned subsidiaries are regulated by the state in which the subsidiary primarily conducts water and/or wastewater operations.  Fees charged for operation and maintenance and renewal and replacement services 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’s subsidiaries are incorporated.  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 March 31, 2010

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

56,057

 

$

10,979

 

$

1,817

 

$

21,430

 

$

 

$

90,283

 

Operating income (loss)

 

9,176

 

2,483

 

144

 

7,824

 

(50

)

19,577

 

Interest expense, net

 

5,054

 

376

 

91

 

(441

)

8

 

5,088

 

Identifiable assets

 

789,387

 

37,004

 

43,883

 

2,980

 

 

873,254

 

Depreciation and amortization expense

 

7,622

 

560

 

483

 

177

 

 

8,842

 

Capital additions

 

15,291

 

447

 

66

 

172

 

 

15,976

 

 

 

 

As Of And For The Three Months Ended March 31, 2009

 

 

 

GSWC

 

CCWC

 

ASUS

 

AWR

 

Consolidated

 

(dollars in thousands)

 

Water

 

Electric

 

Water

 

Contracts

 

Parent

 

AWR

 

Operating revenues

 

$

55,178

 

$

8,632

 

$

1,616

 

$

14,183

 

$

 

$

79,609

 

Operating income (loss)

 

11,167

 

(544

)

(223

)

1,068

 

(50

)

11,418

 

Interest expense, net

 

4,286

 

511

 

105

 

99

 

91

 

5,092

 

Identifiable assets

 

751,745

 

37,466

 

45,127

 

2,164

 

 

836,502

 

Depreciation and amortization expense

 

7,148

 

565

 

486

 

162

 

 

8,361

 

Capital additions

 

16,865

 

311

 

488

 

18

 

 

17,682

 

 

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Table of Contents

 

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

 

General

 

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”)). AWR was incorporated as a California corporation in 1998 as a holding company.  AWR has three reportable segments: water, electric and contracted services. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water service utility operation conducted through CCWC, and contracted services conducted through ASUS and its subsidiaries. FBWS, TUS, ODUS, PSUS and ONUS may be referred to herein collectively as the “Military Utility Privatization Subsidiaries.”

 

GSWC is a California public utility company engaged principally in the purchase, production and distribution of water. GSWC also distributes electricity in one customer service area. GSWC is regulated by the California Public Utilities Commission (“CPUC”) and was incorporated as a California corporation on December 31, 1929. GSWC is organized into one electric customer service area and three water service regions operating within 75 communities in 10 counties in the State of California and provides water service in 21 customer service areas. Region I consists of 7 customer service areas in northern and central California; Region II consists of 4 customer service areas located in Los Angeles County; and Region III consists of 10 customer service areas in eastern Los Angeles County, and in Orange, San Bernardino and Imperial counties. GSWC also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County through its Bear Valley Electric Service (“BVES”) division.

 

GSWC served 255,117 water customers and 23,223 electric customers at March 31, 2010, or a total of 278,340 customers, compared with 254,451 water customers and 23,094 electric customers, or a total of 277,545 customers at March 31, 2009. GSWC’s utility operations exhibit seasonal trends. Although GSWC’s water utility operations have a diversified customer base, residential and commercial customers account for the majority of GSWC’s water sales and revenues. Revenues derived from commercial and residential water customers accounted for approximately 94% and 90% of total water revenues for the three months ended March 31, 2010 and 2009, respectively.

 

GSWC has also been pursuing opportunities to provide retail water services within the service area of the Natomas Central Mutual Water Company (“Natomas”).  Natomas is a California mutual water company which currently provides water service to its shareholders, primarily for agricultural irrigation in portions of Sacramento and Sutter counties in northern California. GSWC and Natomas have entered into various agreements including the purchase of certain water and water rights that may allow GSWC the ability to serve portions of Sutter County in the future.

 

CCWC is an Arizona public utility company serving 13,457 customers as of March 31, 2010, compared with 13,405 customers at March 31, 2009. Located in the Town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona, the majority of CCWC’s customers are residential. The Arizona Corporation Commission (“ACC”) regulates CCWC.

 

ASUS, through its wholly-owned subsidiaries, has contracted with the U.S. government to provide water and/or wastewater services, including the operation, maintenance, renewal and replacement of the water and/or wastewater systems, pursuant to 50-year fixed price contracts.  Each of the contracts with the U.S. government may be subject to termination, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government or as a result of default or nonperformance by the subsidiary performing the contract.  In either event, each Military Utility Privatization Subsidiary so impacted should be entitled to recover the remaining amount of its capital investment pursuant to the terms of a termination settlement with the U.S. government at the time of termination as provided in the contract. The contract price for each of these contracts is subject to redetermination two years after commencement of operations and every three years thereafter under the terms of the contract. Prices are subject to equitable adjustment based upon changes in circumstances, changes in laws and/or regulations, and changes in wages and fringe benefits to the extent provided in each of the contracts.  AWR guarantees performance of ASUS’ military privatization contracts.  Pursuant to the terms of these contracts, the Military Utility Privatization Subsidiaries operate, as of the effective date of their respective contracts, the following water and wastewater systems:

 

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·                  FBWS - water and wastewater systems at Fort Bliss located near El Paso, Texas and extending into southeastern New Mexico effective October 1, 2004;

 

·                  TUS - water and wastewater systems at Andrews Air Force Base in Maryland effective February 1, 2006;

 

·                  ODUS - wastewater system at Fort Lee in Virginia effective February 23, 2006 and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginia effective April 3, 2006;

 

·                  PSUS - water and wastewater systems at Fort Jackson in South Carolina effective February 16, 2008; and

 

·                  ONUS - water and wastewater systems at Fort Bragg, Pope Air Force Base and Camp MacKall, North Carolina effective March 1, 2008.

 

Overview

 

Included in the following analysis is a discussion of water and electric margins.  Water and electric margins are computed by taking total revenues, less total supply costs.  Registrant uses these margins and related percentages as an important measure in evaluating its operating results.  Registrant believes this measure is a useful internal benchmark in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to historical periods and to our operating budget as approved. However, this measure, which is not presented in accordance with Generally Accepted Accounting Principles (“GAAP”), may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income, which is determined in accordance with GAAP, as an indicator of operating performance. A reconciliation of water and electric margins to the most directly comparable GAAP measures are included in the table on page 33.

 

Registrant’s revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses through approximately 2,900 miles of water distribution pipelines and the delivery of electricity in the Big Bear area of San Bernardino County.  Rates charged to customers of GSWC and CCWC are determined by the CPUC and ACC, respectively. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital.  Factors affecting financial performance of our regulated utilities include the process and timing of setting rates charged to customers; the ability to recover, and the process for recovering in rates the costs of distributing water and electricity and our overhead costs; weather; the impact of increased water quality standards and environmental regulations on the cost of operations and capital expenditures; water supply shortages caused by a variety of factors; capital expenditures needed to upgrade water systems; and risks associated with litigation relating to water quality and water supply, including suits initiated by Registrant to protect its water supply.

 

Operating revenues and income from contracted services at ASUS and its subsidiaries are earned primarily from the operation,  maintenance, renewal and replacement of water and/or wastewater systems at various military bases. All of these contracts with the U.S. government are 50-year firm, fixed-price contracts with prospective price redeterminations. ASUS also may generate revenues from the construction of new infrastructure pursuant to contract modifications.  Additional revenues generated by contract operations are primarily dependent on these additional construction activities.  As a result, ASUS is subject to risks that are different than those of Registrant’s regulated water and electric utilities.  ASUS plans to continue seeking contracts for the operation, maintenance, renewal and replacement of water and/or wastewater services at military bases.  Factors affecting the financial performance of our Military Utility Privatization Subsidiaries include delays in receiving payments from the U.S. government and the timing of implementation by the U.S. government of redeterminations and/or equitable adjustments of prices under contracts with the U.S. government.

 

Registrant plans to continue to seek additional rate increases in future years to recover operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years are expected to remain at much higher levels than depreciation expense. When necessary, Registrant obtains funds from external sources in the capital markets and through bank borrowings.  In May 2009, AWR completed a public offering of 1,150,000 shares of its Common Shares, including 150,000 shares issued upon exercise of an option granted to the underwriters to cover over-allotments, at a price to the public of $31 per share. The net proceeds from the offering were $34.0 million, after deductions for underwriting commissions and discounts, and direct legal and accounting fees. The Company used the proceeds of the offering to repay short-term debt.  In addition, a senior note was issued by GSWC on March 10, 2009, to CoBank, ACB (“CoBank”). Under the terms of this senior note, CoBank

 

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purchased a 6.7% Senior Note due March 10, 2019 in the aggregate principal amount of $40.0 million from GSWC. The proceeds from the sale of the note to CoBank have been used to pay down short-term borrowings and to fund capital expenditures.

 

For three months ended March 31, 2010, net income was $8.5 million compared to $4.9 million in the same period of 2009, an increase of 72.1%. Diluted earnings per share for the three months ended March 31, 2010 were $0.45 compared to $0.28 in the same period of 2009.  The increase in earnings is due primarily to: (i) an increase in the water and electric margins of $3.3 million or $0.11 per share due to higher customer rates approved by the CPUC and ACC, the implementation of the Water Revenue Adjustment Mechanism (“WRAM”) for Region I, and the CPUC’s authorization of additional revenues to cover increased general office allocation to BVES, and (ii) an increase in pretax operating income for contracted services of $6.8 million, or $0.23 per share, during the three months ended March 31, 2010 when compared to 2009.

 

These increases to earnings were partially offset by: (i) higher operating expenses at the Company’s utility businesses of $1.9 million, or $0.06 per share; (ii) a change in enacted state tax law during the first quarter of 2009 which resulted in a tax benefit of $918,000, or $0.05 per share and did not recur in first quarter of 2010; (iii) an overall increase in the effective income tax rate (excluding the tax benefit mentioned previously) decreasing earnings by approximately $0.03 per share, due primarily to changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, and (iv) a decrease of $0.03 per share due to an increase in the weighted average number of common shares outstanding resulting from the issuance of 1.15 million shares of AWR’s Common Shares in a public offering completed in May 2009.

 

Summary Results by Segment

 

AWR has three reportable segments: water, electric and contracted services . 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 through ASUS and its subsidiaries.  The tables below set forth summaries of the results by segment (amounts in thousands):

 

 

 

Operating Revenues

 

Pretax Operating Income

 

 

 

3 Months

 

3 Months

 

 

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2010

 

3/31/2009

 

CHANGE

 

CHANGE

 

3/31/2010

 

3/31/2009

 

CHANGE

 

CHANGE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Water

 

$

57,874

 

$

56,794

 

$

1,080

 

1.9

%

$

9,320

 

$

10,944

 

$

(1,624

)

-14.8

%

Electric

 

10,979

 

8,632

 

2,347

 

27.2

%

2,483

 

(544

)

3,027

 

-556.4

%

Contracted services

 

21,430

 

14,183

 

7,247

 

51.1

%

7,824

 

1,068

 

6,756

 

632.6

%

AWR parent

 

 

 

 

 

(50

)

(50

)

0

 

0.0

%

Totals from operation

 

$

90,283

 

$

79,609

 

$

10,674

 

13.4

%

$

19,577

 

$

11,418

 

$

8,159

 

71.5

%

 

Water —Pretax operating income for water decreased by $1.6 million, or 14.8%, due to higher operating expenses of $2.5 million, as more fully described later.  Higher operating expenses were partially offset by an increase in the dollar water margin of $828,000 as a result of rate increases at CCWC approved by the ACC in October 2009 and as a result of the WRAM account implemented for Region I in September 2009.  Due to the delay in GSWC’s Regions II and III and general office rate case (discussed further in Regulatory Matters), GSWC’s revenues and supply costs for Regions II and III for the first quarter of 2010 have been recorded using 2009 adopted levels pending resolution of this general rate case, which is expected in September 2010.

 

Electric — For the three months ended March 31, 2010, pretax operating income from electric operations increased by $3.0 million due to an increase in rates which went into effect in November 2009.  In addition, as a result of the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which also went into effect in November 2009,  BVES recorded $320,000 in additional revenues due to lower customer usage.  Also, in March 2010, the CPUC approved for recovery a memorandum account which tracked the difference between the 2007 adopted general office cost allocation to BVES and the 1996 adopted general office cost allocation, effective and retroactive from June 4, 2009 to October 31, 2009.  As a result, during the first quarter of 2010, BVES recorded a regulatory asset of $958,000 and a corresponding increase to revenues for amounts included in this memorandum account.  Finally, other operating expenses decreased due to lower outside services costs.  Costs for outside services

 

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were higher during the first three months of 2009 as a result of legal costs associated with the new purchased power contract and the general rate case which was decided in October 2009.

 

Contracted Services - For the three months ended March 31, 2010, pretax operating income for contracted services increased by $6.8 million, or $0.23 per share.  This was primarily due to contract modifications approved by the U.S. government during the first quarter of 2010 in connection with two separate requests for equitable adjustment previously filed for inventory price adjustments at Fort Bliss in Texas and Fort Bragg in North Carolina.  These two contract modifications increased revenues and pretax operating income by a combined $5.6 million.  There was also an increase in construction revenues of $1.5 million, partially offset by increases in other operating expenses due to increased labor and related benefits and outside service costs. Earnings and cash flows from amendments and modifications to the original 50-year contracts with the U.S. government may or may not continue in future periods.

 

The timely receipt of price redeterminations continues to be critical in order for ASUS to recover increasing costs for operating and maintaining the water and wastewater systems at the military bases.  In addition, higher allocations of corporate headquarters’ expenses to ASUS and its wholly-owned subsidiaries by the CPUC were not contemplated at the time the contracts with the U.S. government were negotiated and will need to be addressed in future price redeterminations.

 

Under the terms of these contracts, the contract price is subject to price redetermination two years after commencement of operations and every three years thereafter, unless otherwise agreed to by the parties to a contract.  Redeterminations have been submitted and are under review by the U.S. government for operations of ODUS and TUS in Virginia and Maryland, respectively.   The price redeterminations for ODUS are expected to be completed in 2010.  The price redetermination for TUS is being reviewed by the Defense Contract Audit Agency; however, TUS has received preliminary information indicating that DCAA has deemed TUS’ submission to be “inadequate” for audit purposes.  Resolution of this matter will be based upon discussions with the U.S. government  to be held during the second quarter of 2010.  Pending redetermination of prices, ASUS has received interim inflation adjustments during 2008 to the management fees at ODUS for operating and maintaining the water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe in Virginia, and the wastewater system at Fort Lee also in Virginia effective on the second anniversary of the date when ODUS began operating these bases (February 23, 2008 for Fort Lee and April 3, 2008 for the other three bases).   In connection with the FBWS inventory adjustment discussed above, we agreed to waive the first and second price redetermination of prices required by the original 50-year contract at Fort Bliss.

 

These price redeterminations and equitable adjustments, which include adjustments to reflect changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts, as well as inflation in costs, are expected to provide added revenues prospectively to help offset increased costs and provide Registrant the opportunity to generate positive operating income at its Military Utility Privatization Subsidiaries.  As of March 31, 2010, ASUS has $1.1 million of goodwill, which may be at risk for potential impairment if requested price redeterminations and equitable adjustments that have not yet been approved, are not received.

 

The following discussion and analysis provides information on AWR’s consolidated operations and assets and where necessary, includes specific references to AWR’s individual segments and/or other subsidiaries: GSWC, CCWC, ASUS and its subsidiaries.

 

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Table of Contents

 

Consolidated Results of Operations — Three Months Ended March 31, 2010 and 2009 (amounts in thousands):

 

 

 

3 Months

 

3 Months

 

 

 

 

 

 

 

Ended

 

Ended

 

$

 

%

 

 

 

3/31/2010

 

3/31/2009

 

CHANGE

 

CHANGE

 

OPERATING REVENUES

 

 

 

 

 

 

 

 

 

Water

 

$

57,874

 

$

56,794

 

$

1,080

 

1.9

%

Electric

 

10,979

 

8,632

 

2,347

 

27.2

%

Contracted services

 

21,430

 

14,183

 

7,247

 

51.1

%

Total operating revenues

 

90,283

 

79,609

 

10,674

 

13.4

%

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Water purchased

 

8,257

 

8,214

 

43

 

0.5

%

Power purchased for pumping

 

1,655

 

1,688

 

(33

)

-2.0

%

Groundwater production assessment

 

2,622

 

2,517

 

105

 

4.2

%

Power purchased for resale

 

3,669

 

3,962

 

(293

)

-7.4

%

Supply cost balancing accounts

 

3,815

 

3,528

 

287

 

8.1

%

Other operation expenses

 

6,839

 

7,153

 

(314

)

-4.4

%

Administrative and general expenses

 

18,863

 

16,865

 

1,998

 

11.8

%

Depreciation and amortization

 

8,842

 

8,361

 

481

 

5.8

%

Maintenance

 

4,296

 

4,073

 

223

 

5.5

%

Property and other taxes

 

3,683

 

3,400

 

283

 

8.3

%

ASUS construction expenses

 

8,168

 

8,445

 

(277

)

-3.3

%

Net gain on sale of property

 

(3

)

(15

)

12

 

-80.0

%

Total operating expenses

 

70,706

 

68,191

 

2,515

 

3.7

%

 

 

 

 

 

 

 

 

 

 

OPERATING INCOME

 

19,577

 

11,418

 

8,159

 

71.5

%

 

 

 

 

 

 

 

 

 

 

OTHER INCOME AND EXPENSES

 

 

 

 

 

 

 

 

 

Interest expense

 

(5,749

)

(5,294

)

(455

)

8.6

%

Interest income