INCOME TAXES

12 Months Ended

Dec. 31, 2011

INCOME TAXES.

INCOME TAXES

10 INCOME TAXES

        Income tax expense consisted of the following:

	Federal		State		Total
2011
Current	$	7,413	$	2,629	$	10,042
Deferred		12,982		142		13,124
Total	$	20,395	$	2,771	$	23,166
2010
Current	$	4,027	$	3,020	$	7,047
Deferred		15,730		1,779		17,509
Total	$	19,757	$	4,799	$	24,556
2009
Current	$	10,105	$	4,382	$	14,487
Deferred		12,056		819		12,875
Total	$	22,161	$	5,201	$	27,362

        The Company filed an application for a change in accounting method (Section 481 adjustment) with the State of California to change its plant-in-service state tax depreciation method from the double-declining method to the straight line method at the respective assets mid-life. The Company's application was approved by the State of California during the first quarter of 2011. California uses the flow-through method of accounting for income tax depreciation. As a result, the Company reduced its income tax obligation $1.6 million, net of federal income taxes in 2011. Income tax expense was computed by applying the current federal 35% tax rate to pretax book income differs from the amount shown in the Consolidated Statements of Income. The difference is reconciled in the table below:

	2011			2010			2009
Computed "expected" tax expense	$	21,308		$	21,774		$	23,771
Increase (reduction) in taxes due to:
State income taxes net of federal tax benefit		3,500			3,577			3,903
Investment tax credits		(74	)		(74	)		(32	)
Other		(1,568	)		(721	)		(280	)
Total income tax	$	23,166		$	24,556		$	27,362

        Included in Other in the above table is the recognition of the flow-through accounting for Federal depreciation expense on assets acquired prior to 1982 and retirement costs of such assets. For assets acquired prior to 1982, the benefit of excess tax depreciation was previously passed through to the ratepayers. The tax benefit is now reversing and a higher tax expense is being recognized and is included in customer rates. Offsetting the flow-through depreciation in 2011, 2010, and 2009 was the impact of cost to remove pre-1982 assets. Also included is the federal income tax deduction from qualified U.S. production activities, which started in 2006. Qualified production activities include production of potable water, but exclude the transmission and distribution of the potable water. The impact of the deduction is being reported in the year in which the deduction is claimed on the Company's tax return. The qualified U.S. production activities deduction (QPAD) is limited to the lesser of 9% of taxable income, or 50% of taxable gross wages in 2011, the lesser of 9% of taxable income, or 50% of taxable gross wages in 2010, and 6% of taxable income, or 50% of taxable wages in 2009. The QPAD lowered the income tax provision by $490, $420, and $560 in 2011, 2010, and 2009, respectively.

        The Tax Relief, Unemployment Insurance Reauthorization and Job Creation Act of 2010 will provide the Company with additional federal income tax deductions for assets placed in service after September 8, 2010 and before December 31, 2011. As of December 31, 2011 and 2010 the deferred income tax liability for bonus depreciation was $10,500 and $6,601, respectively.

        The tax effects of differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2011 and 2010 are presented in the following table:

	2011		2010
Deferred tax assets:
Developer deposits for extension agreements and contributions in aid of construction	$	45,587	$	46,421
Other		4,464		4,378
Total deferred tax assets		50,051		50,799
Deferred tax liabilities:
Utility plant, principally due to depreciation differences		155,916		143,165
WRAM/MCBA balancing accounts		17,393		13,463
Other		3,645		5,977
Total deferred tax liabilities		176,954		162,605
Net deferred tax liabilities	$	126,903	$	111,806

        The current portion of our deferred income tax liability is $10,535 and $4,722 for years 2011 and 2010, respectively, which includes prepaid expenses and billed WRAM/MCBA surcharge, expected to reverse in the following 12 months.

        A valuation allowance was not required at December 31, 2011 and 2010. Based on historical taxable income and future taxable income projections over the period in which the deferred assets are deductible, management believes it is more likely than not that the Company will realize the benefits of the deductible differences.

        The following table reconciles the changes in unrecognized tax benefits (gross):

	December 31, 2011
Balance at beginning of year	$	2,040
Additions for tax positions taken during prior year		—
Additions for tax positions taken during current year		—
Reductions for tax positions taken during a prior year		—
Lapse of statute of limitations		—
Balance at end of year	$	2,040

        As of December 31, 2011 and 2010, the total amount of net unrecognized tax benefits was $2,040 none of which, if recognized, would affect the Company's effective tax rate. The Company accrues interest and penalties related to unrecognized tax benefits in its provision for income taxes. The total amount of penalties and interest was $114 as of December 31, 2011 and 2010. For 2009, there were no balances or activities in unrecognized tax benefits. Additionally, the Company does not expect a material change in its unrecognized tax benefits within the next 12 months.

        Tax years of 2008, 2009, 2010, and 2011 are subject to examination by the federal and state taxing authorities, respectively. The California Franchise Tax Board (FTB) is auditing the Company's 2008 and 2009 California income tax returns. It is uncertain when the FTB will complete its audit. The Company believes that the final resolution of the FTB audit will not have a material impact on its financial condition or results of operations. The Company is not under audit by any other jurisdiction.