Edgar Filing: Golden State Water CO

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

for the quarterly period ended September 30, 2012

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 x No o
Golden State Water Company		Yes x No o

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

American States Water Company

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

Smaller reporting company o

Golden State Water Company

Large accelerated filer o

Accelerated filer o

Non-accelerated filer x

Smaller reporting company o

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

American States Water Company		Yes ¨ Nox
Golden State Water Company		Yes ¨ Nox

As of November 2, 2012, the number of Common Shares outstanding, of American States Water Company was 19,216,427 shares. As of November 2, 2012, all of the 146 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.

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AMERICAN STATES WATER COMPANY

and

GOLDEN STATE WATER COMPANY

FORM 10-Q

INDEX

Part I	Financial Information

Item 1:	Financial Statements	1

	Consolidated Balance Sheets of American States Water Company as of September 30, 2012 and December 31, 2011	4

	Consolidated Statements of Income of American States Water Company for the Three Months Ended September 30, 2012 and 2011	6

	Consolidated Statements of Income of American States Water Company for the Nine Months Ended September 30, 2012 and 2011	7

	Consolidated Statements of Cash Flow of American States Water Company for the Nine Months Ended September 30, 2012 and 2011	8

	Balance Sheets of Golden State Water Company as of September 30, 2012 and December 31, 2011	9

	Statements of Income of Golden State Water Company for the Three Months Ended September 30, 2012 and 2011	11

	Statements of Income of Golden State Water Company for the Nine Months Ended September 30, 2012 and 2011	12

	Statements of Cash Flow of Golden State Water Company for the Nine Months Ended September 30, 2012 and 2011	13

	Notes to Consolidated Financial Statements	14

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

Item 3:	Quantitative and Qualitative Disclosures About Market Risk	57

Item 4:	Controls and Procedures	57

Part II	Other Information

Item 1:	Legal Proceedings	58

Item 1A:	Risk Factors	58

Item 2:	Unregistered Sales of Equity Securities and Use of Proceeds	58

Item 3:	Defaults Upon Senior Securities	58

Item 4:	Mine Safety Disclosure	58

Item 5:	Other Information	58

Item 6:	Exhibits	59

	Signatures	62

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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”) 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 Statements

This Form 10-Q and the documents incorporated 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 are based on current estimates, expectations and projections about future events and assumptions regarding these events and include statements regarding management’s 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 “anticipate,” “believe,” “plan,” “estimate,” “expect,” “intend,” “may” and other words that convey uncertainty of future events or outcomes, we are making forward-looking statements. We are not able to predict all the factors that may affect future results. 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 in our forward-looking statements. Some of the factors that could cause future results to differ materially from those expressed or implied by our forward-looking statements, or from historical results, include, but are not limited to:

· The outcome of pending and future regulatory, legislative or other proceedings, investigations or audits, including decisions in our general rate cases and the results of independent audits of our construction contracting procurement practices or other independent audits of our costs

· Changes in the policies and procedures of the California Public Utilities Commission (“CPUC”)

· Timeliness of CPUC action on rates

· Our ability to efficiently manage capital expenditures and operating and maintenance expenses within CPUC authorized levels and timely recovery of our costs through rates

· The impact of increasing opposition to rate increases on our ability to recover our costs through rates and on the size of our customer base

· Our ability to forecast the costs of maintaining GSWC’s aging water infrastructure

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· Our ability to recover increases in permitting costs and in costs associated with negotiating and complying with the terms of our franchise agreements with cities and counties and other demands made upon us by the cities and counties in which GSWC operates

· Changes in accounting valuations and estimates, including changes resulting from changes in our assessment of anticipated recovery of regulatory assets, liabilities and revenues subject to refund or regulatory disallowances

· Changes in environmental laws and water and wastewater quality requirements and increases in costs associated with complying with these laws and requirements

· Availability of water supplies, which may be adversely affected by changes in weather patterns, contamination and court decisions or other governmental actions restricting use of water from the Colorado River, transportation of water to GSWC’s service areas through the California State Water Project or pumping of groundwater

· Our ability to obtain adequate, reliable and cost-effective supplies of chemicals, electricity, fuel, water and other raw materials that are needed for our water operations

· Our ability to recover the costs associated with the contamination of GSWC’s groundwater supplies from parties responsible for the contamination or through the ratemaking process and the time and expense incurred by us in obtaining recovery of such costs

· Adequacy of our power supplies and the extent to which we can manage and respond to the volatility of electric and natural gas prices

· Our ability to comply with the CPUC’s renewable energy procurement requirements

· Changes in GSWC customer demand due to unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions, cost increases and conservation

· Changes in accounting treatment for regulated utilities

· Changes in estimates used in ASUS’ revenue recognition under the percentage of completion method of accounting for our construction activities at our contracted services business

· Termination, in whole or in part, of our contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default

· Delays in obtaining redetermination of prices or equitable adjustments to our prices on our contracts to provide water and/or wastewater services at military bases

· Disallowance of costs on our contracts to provide water and/or wastewater services at military bases as a result of audits, cost review or investigations by contracting agencies

· Inaccurate assumptions used in preparing bids in our contracted services business

· Failure of the collection or sewage systems that we operate on military bases resulting in untreated wastewater or contaminants spilling into nearby properties, streams or rivers

· Failure to comply with the terms of our military privatization contracts

· Failure of any of our subcontractors to perform services for us in accordance with the terms of our military privatization contracts

· Implementation, maintenance and upgrading of our information technology systems

· General economic conditions which may impact our ability to recover infrastructure investments and operating costs from customers

· Explosions, fires, accidents, mechanical breakdowns, the disruption of information technology and telecommunication systems, human error and similar events that may occur while operating and maintaining a water and electric system in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions

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· The impact of storms, earthquakes, floods, mudslides, drought, wildfires, disease and similar natural disasters, or acts of terrorism or vandalism, that affect customer demand or that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely

· Restrictive covenants in our debt instruments or changes to our credit ratings on current or future debt that may increase our financing costs or affect our ability to borrow or make payments on our debt

· Our ability to access capital markets and other sources of credit in a timely manner on acceptable terms

Please consider our forward-looking statements in light of these risks (which are more fully disclosed in our 2011 Annual Report on Form 10-K) as you read this Form 10-Q. We qualify all of our forward-looking statement by these cautionary statements.

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AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

ASSETS

(Unaudited)

(in thousands)	September 30, 2012			December 31, 2011
Property, Plant and Equipment
Regulated utility plant, at cost	$	1,346,064		$	1,302,589
Non utility property, at cost	8,687			7,747
Total	1,354,751			1,310,336
Less - Accumulated depreciation	(442,724		)	(413,836		)
Net property, plant and equipment	912,027			896,500

Other Property and Investments
Goodwill	1,116			1,116
Other property and investments	13,636			11,803
Total other property and investments	14,752			12,919

Current Assets
Cash and cash equivalents	43,066			1,315
Accounts receivable — customers (less allowance for doubtful accounts of $769 in 2012 and $715 in 2011)	28,792			20,399
Unbilled revenue	21,826			16,188
Receivable from the U.S. government (less allowance for doubtful accounts of $8 in 2012 and $0 in 2011)	4,287			7,584
Other accounts receivable (less allowance for doubtful accounts of $334 in 2012 and $333 in 2011)	7,920			12,181
Income taxes receivable	637			20,537
Materials and supplies, at average cost	6,578			3,070
Regulatory assets — current	25,525			36,362
Prepayments and other current assets	5,380			3,959
Costs and estimated earnings in excess of billings on uncompleted contracts	32,787			34,466
Deferred income taxes — current	10,292			9,540
Total current assets	187,090			165,601

Regulatory and Other Assets
Regulatory assets	151,195			143,595
Costs and estimated earnings in excess of billings on uncompleted contracts	4,323			598
Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2012 and 2011)	4,427			6,660
Deferred income taxes	11			15
Other	15,813			12,474
Total regulatory and other assets	175,769			163,342

Total Assets	$	1,289,638		$	1,238,362

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

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AMERICAN STATES WATER COMPANY

CONSOLIDATED BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

(in thousands)	September 30, 2012		December 31, 2011
Capitalization
Common shares, no par value	$	247,030	$	233,306
Earnings reinvested in the business	201,822		175,360
Total common shareholders’ equity	448,852		408,666
Long-term debt	344,248		340,395
Total capitalization	793,100		749,061

Current Liabilities
Notes payable to banks	—		2,000
Long-term debt — current	178		291
Accounts payable	52,081		37,873
Income taxes payable	1,726		332
Accrued employee expenses	9,710		8,659
Accrued interest	6,423		3,938
Unrealized loss on purchased power contracts	2,719		7,611
Billings in excess of costs and estimated earnings on uncompleted contracts	19,346		26,973
Other	17,062		16,693
Total current liabilities	109,245		104,370

Other Credits
Advances for construction	73,451		75,353
Contributions in aid of construction - net	102,719		100,037
Deferred income taxes	133,651		128,963
Unamortized investment tax credits	1,904		1,972
Accrued pension and other postretirement benefits	68,550		68,353
Billings in excess of costs and estimated earnings on uncompleted contracts	—		3,272
Other	7,018		6,981
Total other credits	387,293		384,931

Commitments and Contingencies (Note 8)	—		—

Total Capitalization and Liabilities	$	1,289,638	$	1,238,362

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

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AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

	Three Months Ended September 30,
(in thousands, except per share amounts)	2012			2011
Operating Revenues
Water	$	90,604		$	89,570
Electric	8,549			8,744
Contracted services	34,368			21,395
Total operating revenues	133,521			119,709

Operating Expenses
Water purchased	18,874			16,094
Power purchased for pumping	3,067			3,141
Groundwater production assessment	3,923			3,795
Power purchased for resale	2,854			3,038
Supply cost balancing accounts	1,960			5,050
Other operation expenses	7,394			7,398
Administrative and general expenses	17,362			18,022
Depreciation and amortization	10,230			9,554
Maintenance	4,232			4,346
Property and other taxes	3,878			3,682
ASUS construction expenses	23,332			13,169
Net gain on sale of property	(65		)	—
Total operating expenses	97,041			87,289

Operating Income	36,480			32,420

Other Income and Expenses
Interest expense	(6,018		)	(6,194		)
Interest income	419			202
Other	219			(170		)
Total other income and expenses	(5,380		)	(6,162		)

Income from continuing operations before income tax expense	31,100			26,258
Income tax expense	12,436			10,641
Income from continuing operations	18,664			15,617

Loss from discontinued operations, net of tax	—			(18		)

Net Income	$	18,664		$	15,599

Basic Earnings Per Common Share
Income from continuing operations	$	0.97		$	0.83
Income (loss) from discontinued operations	—			—
Net Income	$	0.97		$	0.83

Fully Diluted Earnings Per Share
Income from continuing operations	$	0.97		$	0.83
Income (loss) from discontinued operations	—			—
Net Income	$	0.97		$	0.83

Weighted Average Number of Shares Outstanding	19,059			18,701
Weighted Average Number of Diluted Shares	19,103			18,852

Dividends Declared Per Common Share	$	0.355		$	0.280

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

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AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

	Nine Months Ended September 30,
(in thousands, except per share amounts)	2012			2011
Operating Revenues
Water	$	237,447		$	234,047
Electric	27,735			27,178
Contracted services	89,298			62,620
Total operating revenues	354,480			323,845

Operating Expenses
Water purchased	42,257			37,679
Power purchased for pumping	6,642			6,842
Groundwater production assessment	11,228			10,307
Power purchased for resale	8,725			9,767
Supply cost balancing accounts	9,560			14,374
Other operation expenses	21,671			21,261
Administrative and general expenses	51,739			54,181
Depreciation and amortization	31,127			28,829
Maintenance	11,415			12,695
Property and other taxes	11,699			10,640
ASUS construction expenses	58,513			37,844
Net gain on sale of property	(68		)	(128		)
Total operating expenses	264,508			244,291

Operating Income	89,972			79,554

Other Income and Expenses
Interest expense	(17,808		)	(18,807		)
Interest income	1,129			500
Other	435			(379		)
Total other income and expenses	(16,244		)	(18,686		)

Income from continuing operations before income tax expense	73,728			60,868
Income tax expense	29,871			25,568
Income from continuing operations	43,857			35,300

Income from discontinued operations, net of tax	—			3,850

Net Income	$	43,857		$	39,150

Basic Earnings Per Common Share
Income from continuing operations	$	2.30		$	1.88
Income from discontinued operations	—			0.20
Net Income	$	2.30		$	2.08

Fully Diluted Earnings Per Share
Income from continuing operations	$	2.30		$	1.88
Income from discontinued operations	—			0.20
Net Income	$	2.30		$	2.08

Weighted Average Number of Shares Outstanding	18,924			18,672
Weighted Average Number of Diluted Shares	19,038			18,816

Dividends Declared Per Common Share	$	0.915		$	0.820

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

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AMERICAN STATES WATER COMPANY

CONSOLIDATED STATEMENTS OF CASH FLOW

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash Flows From Operating Activities:
Net income	$	43,857		$	39,150
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on sale of CCWC, net of taxes, included in discontinued operations	—			(2,454		)
Depreciation and amortization	31,127			28,829
Provision for doubtful accounts	1,313			776
Deferred income taxes and investment tax credits	4,735			4,317
Stock-based compensation expense	1,477			1,245
Other — net	(359		)	1,179
Changes in assets and liabilities:
Accounts receivable — customers	(9,664		)	(8,241		)
Unbilled revenue	(5,638		)	(1,844		)
Other accounts receivable	3,967			(3,354		)
Receivable from the U.S. government	5,530			(6,732		)
Materials and supplies	(3,508		)	(656		)
Prepayments and other current assets	(1,421		)	1,261
Regulatory assets — supply cost balancing accounts	9,560			14,374
Costs and estimated earnings in excess of billings on uncompleted contracts	(2,046		)	4,163
Other assets (including other regulatory assets)	(17,698		)	(16,545		)
Accounts payable	12,981			2,075
Income taxes receivable/payable	21,294			(2,816		)
Billings in excess of costs and estimated earnings on uncompleted contracts	(10,899		)	4,569
Accrued pension and other postretirement benefits	3,079			(2,351		)
Other liabilities	3,892			5,692
Net cash provided	91,579			62,637

Cash Flows From Investing Activities:
Construction expenditures	(48,169		)	(63,574		)
Proceeds from the sale of CCWC	—			29,603
Other	69			(72		)
Net cash used	(48,100		)	(34,043		)

Cash Flows From Financing Activities:
Proceeds from issuance of Common Shares and stock option exercises	12,434			2,350
Receipt of advances for and contributions in aid of construction	5,101			6,149
Refunds on advances for construction	(3,216		)	(3,843		)
Repayments of long-term debt	(294		)	(22,304		)
Proceeds from issuance of long-term debt, net of issuance costs	4,034			61,911
Net change in notes payable to banks	(2,000		)	(56,400		)
Dividends paid	(17,307		)	(15,306		)
Other — net	(480		)	(133		)
Net cash used	(1,728		)	(27,576		)

Net increase in cash and cash equivalents	41,751			1,018
Cash and cash equivalents, beginning of period	1,315			4,197
Cash and cash equivalents, end of period	$	43,066		$	5,215

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

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GOLDEN STATE WATER COMPANY

BALANCE SHEETS

ASSETS

(Unaudited)

(in thousands)	September 30, 2012			December 31, 2011
Utility Plant
Utility plant, at cost	$	1,346,064		$	1,302,589
Less - Accumulated depreciation	(438,697		)	(410,644		)
Net utility plant	907,367			891,945

Other Property and Investments	11,468			9,626

Current Assets
Cash and cash equivalents	25,552			—
Accounts receivable-customers (less allowance for doubtful accounts of $769 in 2012 and $715 in 2011)	28,792			20,399
Unbilled revenue	21,826			16,188
Inter-company receivable	1,330			785
Other accounts receivable (less allowance for doubtful accounts of $257 in 2012 and $290 in 2011)	6,281			7,755
Income taxes receivable from Parent	—			19,914
Materials and supplies, at average cost	2,457			1,926
Regulatory assets — current	25,525			36,362
Prepayments and other current assets	5,058			3,710
Deferred income taxes — current	9,255			8,497
Total current assets	126,076			115,536

Regulatory and Other Assets
Regulatory assets	151,195			143,595
Other accounts receivable	2,090			1,838
Other	13,877			10,843
Total regulatory and other assets	167,162			156,276

Total Assets	$	1,212,073		$	1,173,383

The accompanying notes are an integral part of these financial statements

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GOLDEN STATE WATER COMPANY

BALANCE SHEETS

CAPITALIZATION AND LIABILITIES

(Unaudited)

(in thousands)	September 30, 2012		December 31, 2011
Capitalization
Common shares, no par value	$	230,074	$	228,936
Earnings reinvested in the business	178,904		155,870
Total common shareholder’s equity	408,978		384,806
Long-term debt	344,248		340,395
Total capitalization	753,226		725,201

Current Liabilities
Long-term debt — current	178		291
Accounts payable	36,399		31,227
Income taxes payable to Parent	868		—
Accrued employee expenses	8,648		7,544
Accrued interest	6,423		3,938
Unrealized loss on purchased power contracts	2,719		7,611
Other	16,554		16,162
Total current liabilities	71,789		66,773

Other Credits
Advances for construction	73,451		75,353
Contributions in aid of construction — net	102,719		100,037
Deferred income taxes	133,503		128,815
Unamortized investment tax credits	1,904		1,972
Accrued pension and other postretirement benefits	68,550		68,353
Other	6,931		6,879
Total other credits	387,058		381,409

Commitments and Contingencies (Note 8)	—		—

Total Capitalization and Liabilities	$	1,212,073	$	1,173,383

The accompanying notes are an integral part of these financial statements

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GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE THREE MONTHS

ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

	Three Months Ended September 30,
(in thousands)	2012			2011
Operating Revenues
Water	$	90,604		$	89,570
Electric	8,549			8,744
Total operating revenues	99,153			98,314

Operating Expenses
Water purchased	18,874			16,094
Power purchased for pumping	3,067			3,141
Groundwater production assessment	3,923			3,795
Power purchased for resale	2,854			3,038
Supply cost balancing accounts	1,960			5,050
Other operation expenses	6,859			6,933
Administrative and general expenses	14,621			15,398
Depreciation and amortization	9,941			9,334
Maintenance	3,801			3,765
Property and other taxes	3,357			3,366
Net gain on sale of property	(65		)	—
Total operating expenses	69,192			69,914

Operating Income	29,961			28,400

Other Income and Expenses
Interest expense	(5,959		)	(6,138		)
Interest income	384			149
Other	219			(171		)
Total other income and expenses	(5,356		)	(6,160		)

Income from operations before income tax expense	24,605			22,240

Income tax expense	10,030			9,212

Net Income	$	14,575		$	13,028

The accompanying notes are an integral part of these financial statements

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GOLDEN STATE WATER COMPANY

STATEMENTS OF INCOME

FOR THE NINE MONTHS

ENDED SEPTEMBER 30, 2012 AND 2011
(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2012			2011
Operating Revenues
Water	$	237,447		$	234,047
Electric	27,735			27,178
Total operating revenues	265,182			261,225

Operating Expenses
Water purchased	42,257			37,679
Power purchased for pumping	6,642			6,842
Groundwater production assessment	11,228			10,307
Power purchased for resale	8,725			9,767
Supply cost balancing accounts	9,560			14,374
Other operation expenses	19,710			18,489
Administrative and general expenses	43,472			45,182
Depreciation and amortization	30,283			28,171
Maintenance	10,098			10,755
Property and other taxes	10,454			9,638
Net gain on sale of property	(65		)	(128		)
Total operating expenses	192,364			191,076

Operating Income	72,818			70,149

Other Income and Expenses
Interest expense	(17,648		)	(18,436		)
Interest income	1,063			439
Other	434			(570		)
Total other income and expenses	(16,151		)	(18,567		)

Income from operations before income tax expense	56,667			51,582

Income tax expense	23,352			22,147

Net Income	$	33,315		$	29,435

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 NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011

(Unaudited)

	Nine Months Ended September 30,
(in thousands)	2012			2011
Cash Flows From Operating Activities:
Net income	$	33,315		$	29,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	30,283			28,171
Provision for doubtful accounts	1,271			697
Deferred income taxes and investment tax credits	4,725			4,460
Stock-based compensation expense	1,241			1,099
Other — net	(389		)	800
Changes in assets and liabilities:
Accounts receivable — customers	(9,664		)	(8,241		)
Unbilled revenue	(5,638		)	(1,844		)
Other accounts receivable	1,222			111
Materials and supplies	(531		)	(197		)
Prepayments and other current assets	(1,348		)	995
Regulatory assets — supply cost balancing accounts	9,560			14,374
Other assets (including other regulatory assets)	(17,612		)	(16,571		)
Accounts payable	3,945			3,752
Inter-company receivable/payable	(545		)	452
Income taxes receivable/payable from/to Parent	20,782			(1,977		)
Accrued pension and other postretirement benefits	3,079			(2,351		)
Other liabilities	3,985			5,798
Net cash provided	77,681			58,963

Cash Flows From Investing Activities:
Construction expenditures	(47,230		)	(62,089		)
Proceeds from sale of property	65			144
Net cash used	(47,165		)	(61,945		)

Cash Flows From Financing Activities:
Receipt of advances for and contributions in aid of construction	5,101			6,149
Refunds on advances for construction	(3,216		)	(3,843		)
Proceeds from the issuance of long-term debt, net of issuance costs	4,034			61,911
Repayments of long-term debt	(294		)	(22,304		)
Net change in inter-company borrowings	—			(23,381		)
Dividends paid	(10,200		)	(15,000		)
Other — net	(389		)	(78		)
Net cash (used) provided	(4,964		)	3,454

Net increase in cash and cash equivalents	25,552			472
Cash and cash equivalents, beginning of period	—			1,541
Cash and cash equivalents, end of period	$	25,552		$	2,013

The accompanying notes are an integral part of these financial statements

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AMERICAN STATES WATER COMPANY AND SUBSIDIARIES

AND

GOLDEN STATE WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 — Summary of Significant Accounting Policies:

Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”) 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”)). The subsidiaries of ASUS may be collectively referred to herein as the “Military Utility Privatization Subsidiaries.” AWR was also the parent company of Chaparral City Water Company (“CCWC”) until the sale of CCWC on May 31, 2011.

GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 255,000 customers. GSWC also distributes electricity in several San Bernardino Mountain communities in California serving approximately 23,000 customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, including properties, rates, services, facilities and other matters, and transactions by GSWC with its affiliates. AWR’s assets and operating income are primarily those of GSWC.

ASUS performs water and wastewater services, including the operation, maintenance, renewal and replacement of water and/or wastewater systems on a contract basis. Through its wholly owned subsidiaries, ASUS operates and maintains the water and/or wastewater systems at various military bases pursuant to 50-year firm, fixed-price contracts, which are subject to periodic price redeterminations and modifications for changes in circumstances, and changes in laws and regulations. There is no direct regulatory oversight by the CPUC over AWR or the operation, rates or services provided by ASUS or any of its wholly owned subsidiaries.

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. Certain prior period amounts have been reclassified to conform to the 2012 financial statement presentation.

The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. The operational results of CCWC for the periods presented are reported in discontinued operations, net of transaction costs.

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”). The December 31, 2011 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by GAAP. 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, 2011 filed with the SEC.

GSWC’s Related Party Transactions: GSWC and ASUS provide and receive various services to and from their parent, AWR. Any transactions between GSWC and AWR or ASUS are governed by the CPUC’s affiliate transaction rules. In addition, AWR has a $100.0 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations. Any amounts owed to AWR for borrowings under this facility are included in inter-company payables on GSWC’s balance sheet. 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 affiliate, ASUS, using allocation factors mandated by the CPUC. Through May 31, 2011, GSWC also allocated costs to CCWC.

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Long-Term Debt: On October 1, 2012, GSWC redeemed its $8,000,000, 7.55% Medium-Term Notes, Series B. The Notes, which were due 2025, were redeemed at a price of 101.133% of the outstanding principal amount of the Notes, plus accrued and unpaid interest through October 1, 2012, for a total redemption price of $8.3 million.

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 $966,000 and $942,000 for the three months ended September 30, 2012 and 2011, respectively, and $2,600,000 and $2,423,000 for the nine months ended September 30, 2012 and 2011, 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 $222,000 and $168,000 during the three months ended September 30, 2012 and 2011, respectively, and $563,000 and $533,000 for the nine months ended September 30, 2012 and 2011, respectively.

Recently Adopted Accounting Pronouncements: The following accounting standards did not or are not expected to have any impact on Registrant’s consolidated financial statements:

Accounting Standards Update No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income (“ASU 2011-05”). Under ASU 2011-05, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. Under both options, an entity will be required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. ASU 2011-05 is effective for fiscal years beginning on or after December 15, 2011 and did not have a material impact on Registrant’s consolidated financial statements.

Accounting Standards Update No. 2011-08, Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment (“ASU 2011-08”). Under ASU 2011-08, an entity has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, performing the two-step impairment test is not required. The guidance does not change how an entity measures a goodwill impairment loss, and is therefore not expected to affect the information reported to users of an entity’s financial statements. The adoption of this update is not expected to have a significant impact on its results of operations, financial position or cash flows.

In December 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities (“ASU 2011-11”). The ASU 2011-11 amendments require companies to disclose information about offsetting and related arrangements to enable users of its financial statements to understand the effect of those arrangements on its financial position. ASU 2011-11 is required to be applied retrospectively for all prior periods presented and is effective for annual periods for fiscal years beginning on or after January 1, 2013, and interim periods within those annual fiscal years. Registrant does not expect adoption of this standard to have a material impact on its consolidated results of operations and financial condition.

Other accounting standards that have been issued 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 recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At September 30, 2012, Registrant had approximately $77.7 million of regulatory assets, net of regulatory liabilities not accruing carrying costs. Of this amount, $52.1 million relates to the underfunded positions of the pension and other post-retirement obligations, $16.2 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense, and $2.7 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC’s purchase power contract over the life of the contract. The remainder relates to other items that do not provide for or incur carrying costs. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

(dollars in thousands)	September 30, 2012			December 31, 2011
GSWC
Electric supply cost balancing account	$	5,937		$	8,347
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	43,638			39,112
Base Revenue Requirement Adjustment Mechanism	6,171			4,053
Costs deferred for future recovery on Aerojet case	16,310			17,173
Pensions and other post-retirement obligations	55,780			56,960
Derivative unrealized loss (Note 4)	2,719			7,611
Flow-through taxes, net (Note 6)	16,169			17,032
Electric transmission line abandonment costs	2,257			2,428
Asset retirement obligations	2,869			2,793
Low income rate assistance balancing accounts	8,305			6,194
General rate case memorandum accounts	6,610			12,922
Santa Maria adjudication memorandum accounts	3,561			3,662
Bay Point balancing accounts	5,242			5,752
Other regulatory assets, net	9,756			8,409
Various refunds to customers	(8,604		)	(12,491		)
Total	$	176,720		$	179,957

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, 2011 filed with the SEC. The discussion below focuses on significant matters and changes since December 31, 2011.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”). GSWC also records the difference between adopted and actual expense levels for purchased water, purchased power and pump taxes, as established by the CPUC, using the Modified Cost Balancing Accounts (“MCBA”). GSWC has implemented surcharges to recover its WRAM balances, net of the MCBA. For the three months ended September 30, 2012 and 2011, surcharges of $6.7 million and $5.2 million, respectively, were billed to customers to decrease previously incurred under-collections in the WRAM, net of MCBA accounts, and approximately $14.3 million and $10.8 million for the nine months ended September 30, 2012 and 2011, respectively. As of September 30, 2012, GSWC has a net aggregated regulatory asset of $43.6 million which is comprised of a $64.2 million under-collection in the WRAM accounts and $20.6 million over-collection in the MCBA accounts.

Based on CPUC guidelines, recovery periods relating to GSWC’s WRAM/MCBA balances range between 12 and 36 months, with the majority being 24 months. As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM, net of its MCBA, within 24 months following the year in which they are recorded. In September 2010, GSWC, along with other California water utilities, filed an application with the CPUC to modify the recovery period of its WRAM and MCBA to 18 months or less. In April 2012, the CPUC issued a final decision which, among other things, sets the recovery period for under-collection balances that are up to 15% of adopted annual revenues at 18 months or less. For under-collection balances greater than 15%, the recovery period is 19 to 36 months. GSWC does not currently have any balances over 15% of adopted annual revenues.

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In addition to adopting a new amortization schedule, the final decision sets a cap on total net WRAM/MCBA surcharges in any given calendar year of 10% of the last authorized revenue requirement. For GSWC, the cap will be applied to its 2013 WRAM balances to be filed for recovery in early 2014. The cap requirement set forth in the final decision will not impact GSWC’s 2012 and prior year WRAM/MCBA balances.

In June 2012, the CPUC approved surcharges for recovery of BVES’ 2011 Base Revenue Requirement Adjustment Mechanism (“BRRAM”) balance. The CPUC approved a 36-month surcharge, with the amounts collected through December 2013 to be applied to the 2011 BRRAM under-collection. Surcharges collected during the remainder of the 36-month period would be for recovery of a $1.6 million increase in the BVES revenue requirement representing the difference between the allocated general office costs authorized by the CPUC in its November 2010 decision on the Region II, Region III and general office rate case, and what is currently in BVES’ rates for allocated general office costs. As authorized by the CPUC, the $1.6 million was included in the BRRAM for recovery through the surcharge; however, these costs are not considered an alternative revenue program.

CPUC Pending Rehearing Matter:

In July 2011, the CPUC issued an order granting the Division of Ratepayer Advocates (“DRA”) request to rehear certain issues from the Region II, Region III and general office rate case approved in November 2010. Among the issues in the rehearing are the La Serena plant improvement project included in rate base totaling approximately $3.5 million and GSWC’s methodology for deferring rate case costs. Final resolution of these matters is expected in 2013. The regulatory issues associated with these matters are further discussed below.

La Serena Plant Improvement Project:

In November 2010, as part of GSWC’s Region II, Region III and general office rate case decision, the CPUC disallowed a portion of the La Serena plant improvement project costs from utility customer rates. As a result of the CPUC’s decision in 2010, GSWC recorded a charge of $2.2 million, which included the disallowance of these capital costs and the related revenues earned on those capital costs that will be refunded to customers.

In December 2010, DRA filed a motion for rehearing on this matter, contending that the CPUC erred in assigning a portion of the La Serena plant improvement costs to GSWC utility customers and requested that all of the capital costs related to the La Serena plant improvement project be disallowed. In July 2011, the CPUC granted DRA’s request for rehearing. Hearings on these matters are expected in the fourth quarter of 2012. A proposed decision is expected in June 2013. In addition to granting a rehearing, the CPUC also directed the Division of Water and Audits (“DWA”) to undertake an audit of the La Serena project costs and to provide a confidential report to the CPUC with recommendations on whether an investigation should be conducted to determine whether any laws were broken related to the La Serena project. Management does not believe it has violated any laws in regards to the La Serena project. DWA issued its independent audit report, which found cost overruns for the La Serena plant improvement project to be lower than the amount of costs for rate recovery previously disallowed by the CPUC.

In October 2012, DRA issued a report on this matter recommending further disallowances of costs and refund of revenues earned on those costs. DRA’s recommendation is inconsistent with the independent audit report issued by DWA. In addition, GSWC believes DRA’s recommendations are without merit and inconsistent with previous CPUC decisions on this matter. However, if DRA prevails, GSWC may be required to write-off additional capital costs and provide refunds to customers of the revenues earned on those costs. Based on DRA’s recommendation, additional disallowed costs and revenues earned on those costs through September 30, 2012 totaled approximately $2.5 million. GSWC intends to vigorously defend its position. However, at this time, management cannot predict the outcome of the rehearing, DWA’s and DRA’s recommendations, or determine the estimated additional loss or range of loss, if any.

Deferred rate case costs:

The rehearing is also re-addressing deferred rate case costs, which 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 rehearing proceeding, DRA is again 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 previous CPUC decisions on this matter and also with GSWC’s historical practice of deferring and recovering rate case expenses associated with the current general rate case, and continues to believe that the costs are probable for recovery. However, if DRA prevails, GSWC may be required to write-off deferred rate case costs related to its current pending rate case, which total approximately $1.9 million as of September 30, 2012. At this time, GSWC is unable to predict the outcome of this matter.

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BVES Regulatory Matters:

BVES General Rate Case

In February 2012, GSWC filed its BVES general rate case (“GRC”) for rates in years 2013 through 2016. In August 2012, DRA issued its report on the GRC. Included in DRA’s recommendations is a $2.0 million retroactive ratemaking proposal to increase BVES’ accumulated depreciation balance to reflect adopted depreciation expense for the years 2009 through 2012 rather than actual depreciation expense as recorded in compliance with Generally Accepted Accounting Principles. DRA also recommends that one-half of deferred rate case costs be borne by shareholders, rather than entirely by customers as has been authorized by the CPUC in prior rate cases. As of September 30, 2012, GSWC has a $2.2 million regulatory asset representing deferred rate case costs for the current BVES general rate case, which are considered probable of recovery. Hearings on the GRC, including these matters, were held in September 2012. If DRA prevails, GSWC may be required to record a charge to adjust accumulated depreciation and to write-off half of its deferred rate case costs. GSWC believes DRA’s recommendations are without merit and intends to vigorously defend its positions. However, at this time, GSWC is unable to predict the final outcome of these matters which are expected to be resolved in the pending rate case.

Renewables Portfolio Standard

GSWC’s BVES division has been regularly filing compliance reports with the CPUC regarding its purchases of energy from renewable energy resources to meet California’s renewables portfolio standards (“RPS”). Previous filings under prior RPS laws had indicated that BVES had not achieved annual target purchase levels of renewable energy resources and thus, on its face, might be subject to a potential penalty. However, a new RPS law went into effect in December 2011 which changed, among other things, the prior RPS requirement based upon annual procurement targets to multi-year procurement targets. Under the new RPS law, BVES must procure sufficient RPS-eligible resources to meet: (i) any RPS procurement requirement deficit for any year prior to 2011, and (ii) RPS procurement requirements for the 2011 — 2013 compliance period by no later than December 31, 2013. BVES’ first RPS reports under the new law were submitted to the CPUC in March 2012 and August 2012, and did not reflect any RPS procurement deficiencies nor any potential or actual penalties. Accordingly, no provision for loss has been recorded in the financial statements as of September 30, 2012.

In September 2009, GSWC negotiated a ten-year contract with the Los Angeles County Sanitation District (“LACSD”) to purchase renewable energy created from landfill gas. In February 2011, LACSD notified GSWC that it intended to shut down the landfill gas generator. In August 2011, GSWC and LACSD negotiated a settlement to resolve a dispute between the parties regarding certain terms of the contract. Under the terms of the settlement, GSWC agreed to waive its right to a 14 month termination notice and LACSD agreed to sell renewable energy credits (“RECs”) to GSWC.

In November 2011, GSWC filed for CPUC approval for the purchase of these RECs. In July 2012, the CPUC approved the purchase. BVES intends to apply these RECs towards either its pre-2011 renewable energy requirements or its 2011-2013 requirements. The REC’s were purchased for approximately $325,000 during the third quarter of 2012 as an asset and will be included as part of BVES’ electric supply cost balancing account when the RECs are applied towards the RPS requirements.

In June 2011, GSWC’s BVES filed an application with the CPUC to recover $1.2 million in legal and outside service costs incurred during the period September 1, 2007 through March 31, 2011 in connection with seeking to procure renewable energy resources. In March 2012, the CPUC approved the application. Accordingly, a regulatory asset of $1.3 million, including accrued interest, was recorded in March 2012. A 12-month surcharge was implemented in May 2012 for recovery of these costs.

Other Regulatory Matters:

Cost of Capital Proceeding for Water Regions:

In July 2012, the CPUC issued a final decision on GSWC’s water cost of capital proceeding filed in May 2011. The decision approves the settlement agreement entered into between GSWC, along with three other California water utilities, and DRA in November 2011. The approved settlement authorizes a Return on Equity (“ROE”) of 9.99% and a rate-making capital structure for GSWC of 55% equity and 45% debt. The weighted cost of capital (return on rate base), with an updated embedded debt cost and the settlement ROE, is 8.64%. The new rate of return authorized by the CPUC’s final decision was implemented into water rates retroactive to January 1, 2012.

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Among other things, the final decision required GSWC to refund to customers approximately $408,000, representing the settled amount included in the interest rate balancing account. During the three months ended September 30, 2012, GSWC refunded the majority of this to customers through a one-time surcredit.

The CPUC decision also authorized GSWC to continue the Water Cost of Capital Mechanism (“WCCM”). The WCCM adjusts ROE and rate of return on rate base between the three-year cost of capital proceedings only if there is a positive or negative change of more than 100 basis points in the average of Moody’s Aa utility bond rate as measured over the period October 1 through September 30. If the average Moody’s rate for this period changes by over 100 basis points from the benchmark, the ROE will be adjusted by one half of the difference. For the period October 1, 2011 through September 30, 2012, Moody’s rate declined by 112 basis points from the benchmark. As a result, in October 2012, GSWC filed an advice letter to lower its water ROE by 56 basis points, from 9.99% to 9.43%, which will be incorporated in the new 2013 water rates.

Changes in Tax Law

The Small Business Jobs Act of 2010 and the Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 (“Tax Relief Acts”) extended 50% bonus depreciation for qualifying property through 2012 and created 100% bonus depreciation for qualifying property placed in service between September 9, 2010 and December 31, 2011.

In June 2011, the CPUC adopted a resolution that requires water utilities to file advice letters implementing a one-way memorandum account to track the revenue effects associated with the Tax Relief Acts. This may result in a reduction in revenue requirements in future rate case proceedings. The effective date of the memorandum account established by the resolution was April 14, 2011. More specifically, the memorandum account established by the resolution tracks on a CPUC-jurisdictional, revenue-requirement basis: (a) decreases in each impacted utility’s revenue requirement resulting from increases in its deferred tax reserve; and (b) other direct changes in the revenue requirement resulting from taking advantage of the Tax Relief Acts. This resolution also authorizes impacted utilities to use savings from this new tax law to invest in certain additional, needed utility infrastructure, not otherwise funded in rates, within a time frame shorter than would be practicable through the formal application or advice letter processes. The establishment of a memorandum account does not change rates, nor guarantee that rates will be changed in the future. This mechanism simply allows the CPUC to determine at a future date whether rates should be changed. GSWC has evaluated the potential impact of this resolution and does not expect it to have a material impact on its consolidated financial statements. However, at this time, GSWC cannot predict the outcome of this resolution or determine its potential impact, if any, on future rates.

CPUC Subpoena

On December 15, 2011, the CPUC approved a settlement agreement reached between GSWC and DWA to resolve an investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects over a period of 14 years. The settlement provides for refunds to customers totaling $9.5 million to be made over a period of 12-36 months, as well as a reduction in rate-base and other rate adjustments totaling $3.0 million. As a result of the settlement, management does not expect future increases in the reserve related to this specific contractor. Refunds totaling $1.1 million and $2.2 million were made to customers during the three and nine months ended September 30, 2012, respectively.

As part of the settlement agreement, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of ten years from the date the settlement was approved by the CPUC. The audits will cover GSWC’s procurement practices from 1994 forward and could result in further disallowances of costs. The cost of the audits will be borne by shareholders and may not be recovered by GSWC in rates to customers. At this time, management cannot predict the outcome of these audits or determine the estimated loss or range of loss, if any, resulting from these audits.

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Note 3 — Earnings per Share/Capital Stock:

In accordance with the accounting guidance for participating securities and earnings per share (“EPS”), AWR 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 Stock Incentive Plan and 2008 Stock Incentive Plan (the “2000 and 2008 Employee Plans”) and the 2003 Non-Employee Directors Plan (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 AWR’s net income and weighted average Common Shares outstanding for calculating basic net income per share:

Basic		For The Three Months Ended September 30,					For The Nine Months Ended September 30,
(in thousands, except per share amounts)		2012		2011			2012		2011
Net income from continuing operations		$	18,664	$	15,617		$	43,857	$	35,300
Net income (loss) from discontinued operations		—		(18		)	—		3,850
Total net income		18,664		15,599			43,857		39,150
Less: (a) Distributed earnings to common shareholders		6,766		5,236			17,316		15,311
Distributed earnings to participating securities		52		38			119		102
Undistributed earnings		11,846		10,325			26,422		23,737

(b)	Undistributed earnings allocated to common shareholders	11,755		10,250			26,242		23,580
	Undistributed earnings allocated to participating securities	91		75			180		157

Total income available to common shareholders, basic (a)+(b)		$	18,521	$	15,486		$	43,558	$	38,891

Weighted average Common Shares outstanding, basic		19,059		18,701			18,924		18,672

Basic earnings per Common Share:
Income from continuing operations		$	0.97	$	0.83		$	2.30	$	1.88
Income from discontinued operations		—		—			—		0.20
Net Income		$	0.97	$	0.83		$	2.30	$	2.08

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 under Registrant’s 2000 and 2008 Employee Plans, and the 2003 Directors Plan, and net income. At September 30, 2012 and 2011, there were 226,208 and 668,360 options outstanding, respectively, under these Plans. At September 30, 2012 and 2011, there were also 148,176 and 136,703 restricted stock units outstanding, respectively.

The following is a reconciliation of AWR’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:

Diluted	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
(in thousands, except per share amounts)	2012		2011		2012		2011
Common shareholders earnings, basic	$	18,521	$	15,486	$	43,558	$	38,891
Undistributed earnings for dilutive stock options	—		75		180		157
Total common shareholders earnings, diluted	$	18,521	$	15,561	$	43,738	$	39,048

Weighted average common shares outstanding, basic	19,059		18,701		18,924		18,672
Stock-based compensation (1)	44		151		114		144
Weighted average common shares outstanding, diluted	19,103		18,852		19,038		18,816

Diluted earnings per Common Share:
Income from continuing operations	$	0.97	$	0.83	$	2.30	$	1.88
Income from discontinued operations	—		—		—		0.20
Net Income	$	0.97	$	0.83	$	2.30	$	2.08

(1) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 182,932 and 425,839 stock options at September 30, 2012 and 2011, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.

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All of the 148,176 and 136,703 restricted stock units at September 30, 2012 and 2011, respectively, were included in the calculation of diluted EPS for the nine months ended September 30, 2012 and 2011.

Stock options of 43,276 and 241,921 were outstanding at September 30, 2012 and 2011, 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 nine months ended September 30, 2012 and 2011. Stock options of 600 were outstanding at September 30, 2011, but not included in the computation of diluted EPS because they were anti-dilutive.

During the nine months ended September 30, 2012 and 2011, AWR issued 423,590 and 100,148 Common Shares, for approximately $12,434,000 and $2,350,000, respectively, under AWR’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, the 2000 and 2008 Employee Plans, and the 2003 Directors Plan. In addition, Registrant purchased 571,652 and 319,470 Common Shares on the open market during the nine months ended September 30, 2012 and 2011, 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 September 30, 2012 and 2011, AWR paid quarterly dividends of approximately $6.7 million, or $0.355 per share, and $5.2 million, or $0.28 per share, respectively. During the nine months ended September 30, 2012 and 2011, AWR paid quarterly dividends to shareholders of approximately $17.3 million, or $0.915 per share, and $15.3 million, or $0.82 per share, respectively.

Note 4 — Derivative Instruments:

GSWC purchases certain power at a fixed cost, under a purchased power contract, depending on the amount of power and the period during which the power is purchased. One of the products under this contract is an option to purchase energy of up to 15 megawatts per hour daily during winter peak months (November through March) and up to 5 megawatts per hour daily during nonpeak months (April through October). The contract is subject to the accounting guidance for derivatives and requires mark-to-market derivative accounting.

The CPUC has 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 purchased power contract are deferred on a monthly basis into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivative throughout the term of the contract, having no impact on GSWC’s earnings. Upon expiration of the purchased power contract, the balance in this regulatory memorandum account will be zero. As of September 30, 2012 there was a $2.7 million cumulative unrealized loss which has been included in the memorandum account.

On January 12, 2012, GSWC executed a new purchased power master agreement. The agreement is subject to CPUC approval, which GSWC plans to file for approval by the end of 2012. If approved, GSWC will be able to purchase 12 megawatts (“MWs”) of base load energy at a fixed price to be negotiated upon CPUC approval of the agreement. GSWC also intends to request CPUC approval of a regulatory asset and liability memorandum account for the new contract to offset the entries required by the accounting guidance on derivatives.

The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are being measured and reported on a fair value basis. Under the accounting guidance, GSWC makes fair value measurements that are 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 purchased power contract has been classified as Level 3 for all periods presented.

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The following table presents changes in the fair value of the derivative for the three and nine months ended September 30, 2012 and 2011:

	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
(dollars in thousands)	2012			2011			2012			2011
Balance, at beginning of the period	$	(5,176	)	$	(7,475	)	$	(7,611	)	$	(6,850	)
Unrealized gain (loss) on purchased power contracts	2,457			(101		)	4,892			(726		)
Balance, at end of the period	$	(2,719	)	$	(7,576	)	$	(2,719	)	$	(7,576	)

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 GSWC. Rates available to GSWC at September 30, 2012 and December 31, 2011 for debt with similar terms and remaining maturities were used to estimate fair value for long-term debt. The interest rates used for the September 30, 2012 valuation decreased as compared to December 31, 2011, increasing the fair value of long-term debt as of September 30, 2012. Changes in the assumptions will produce differing results.

	September 30, 2012				December 31, 2011
(dollars in thousands)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial liabilities:
Long-term debt—GSWC	$	344,426	$	469,065	$	340,686	$	437,275

As previously discussed in Note 4, the accounting guidance for fair value measurements establishes a framework for measuring fair value and requires fair value measurements to be classified and disclosed in one of three levels. Publicly issued notes are measured using current U.S. corporate bond yields available for similar financial instruments and are classified as Level 1. Private placement notes and other long-term debt are measured using current U.S. corporate bond yields for similar debt instruments and are classified as Level 2. The following tables set forth by level, within the fair value hierarchy, GSWC’s long-term debt measured at fair value as of September 30, 2012:

(dollars in thousands)	Level 1		Level 2		Level 3	Total
Long-term debt—GSWC	$	295,778	$	173,287	—	$	469,065

Note 6 — 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 decrease or increase occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective income tax rate 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. GSWC’s effective income tax rate deviates from the statutory rate primarily due to state taxes and differences 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).

Changes in Tax Law

The Tax Relief Acts extended bonus depreciation for qualifying property through 2012. As a result, Registrant’s current tax expense for 2011 and 2012 reflects benefits from the Tax Relief Acts. Although these law changes reduce AWR’s current taxes payable, they do not reduce its total income tax expense or effective income tax rate.

In December 2011, the U.S. Treasury Department issued temporary regulations related to the tax treatment of tangible property, including guidance on expensing certain repairs and maintenance expenditures for which separate guidance has not been issued. These regulations are effective for tax years beginning on or after January 1, 2012. The majority of GSWC’s assets consist of water pipelines. For these assets the regulations did not provide any new guidance. Registrant is evaluating its water-pipeline tax repair-cost method. Registrant is also evaluating other tax-method changes provided for under the regulations; however, the effects on its tax expense and tax balances are not anticipated to be significant. Although these temporary regulations are expected to reduce AWR’s current taxes payable, they do not reduce its total effective income tax rate.

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Note 7 — Employee Benefit Plans:

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and nine months ended September 30, 2012 and 2011 are as follows:

	For The Three Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits						SERP
(dollars in thousands)	2012			2011			2012			2011			2012		2011
Components of Net Periodic Benefits Cost:
Service cost	$	1,670		$	1,406		$	112		$	107		$	183	$	150
Interest cost	1,663			1,631			136			153			122		116
Expected return on plan assets	(1,634		)	(1,587		)	(90		)	(74		)	—		—
Amortization of transition	—			—			105			105			—		—
Amortization of prior service cost (benefit)	31			30			(50		)	(50		)	40		40
Amortization of actuarial loss	759			310			—			—			77		34
Net periodic pension cost under accounting standards	2,489			1,790			213			241			422		340
Regulatory adjustment — deferred (1)	(596		)	(127		)	—			—			—		—
Total expense recognized, before allocation to overhead pool	$	1,893		$	1,663		$	213		$	241		$	422	$	340

	For The Nine Months Ended September 30,
	Pension Benefits						Other Postretirement Benefits						SERP
(dollars in thousands)	2012			2011			2012			2011			2012		2011
Components of Net Periodic Benefits Cost:
Service cost	$	5,007		$	4,218		$	336		$	321		$	549	$	450
Interest cost	4,992			4,893			408			459			366		348
Expected return on plan assets	(4,905		)	(4,761		)	(270		)	(221		)	—		—
Amortization of transition	—			—			315			315			—		—
Amortization of prior service cost (benefit)	90			89			(150		)	(150		)	120		121
Amortization of actuarial loss	2,277			931			—			—			231		101
Net periodic pension cost under accounting standards	7,461			5,370			639			724			1,266		1,020
Regulatory adjustment — deferred (1)	(1,794		)	(380		)	—			—			—		—
Total expense recognized, before allocation to overhead pool	$	5,667