10-Q 1 awr-20130930x10q.htm 10-Q AWR-2013.09.30-10Q
 

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, 2013
or
¨
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 ¨
Golden State Water Company
 
Yes x No ¨
 
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 ¨
Golden State Water Company
 
Yes x No ¨

 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 x
 
Accelerated filer ¨
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
Golden State Water Company
Large accelerated filer ¨
 
Accelerated filer ¨
 
Non-accelerated filer x
 
Smaller reporting company ¨

 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 1, 2013, the number of Common Shares outstanding, of American States Water Company was 38,717,549 shares. As of November 1, 2013, 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.
 



AMERICAN STATES WATER COMPANY
and
GOLDEN STATE WATER COMPANY
FORM 10-Q
 
INDEX


 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



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 of 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 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 those 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 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 GSWC 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 and electric infrastructure
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

1


Changes in accounting valuations and estimates, including those 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 and wastewater 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 for GSWC’s Bear Valley Electric Service division 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’s 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 filing for or obtaining redetermination of prices or equitable adjustments to our prices on our contracts to provide water and/or wastewater services at military bases
Failure of the U.S. government to make timely payment to ASUS for water and/or wastewater services at military bases as a result of political disputes over the funding of the U.S. government
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 water and electric systems in California or operating and maintaining water and wastewater systems on military bases under varying geographic conditions

2


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
Potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption in connection with a cyber attack or other cyber incident
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 2012 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all of our forward-looking statements by these cautionary statements.

3

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)



(in thousands)
 
September 30,
2013
 
December 31, 2012
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,425,214

 
$
1,351,086

Non utility property, at cost
 
9,189

 
9,021

Total
 
1,434,403

 
1,360,107

Less - Accumulated depreciation
 
(465,944
)
 
(442,316
)
Net property, plant and equipment
 
968,459

 
917,791

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
15,343

 
13,755

Total other property and investments
 
16,459

 
14,871

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
26,162

 
23,486

Accounts receivable — customers (less allowance for doubtful accounts of $768 in 2013 and $797 in 2012)
 
30,303

 
19,491

Unbilled revenue
 
21,083

 
16,147

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and $8 in 2012)
 
19,869

 
12,905

Other accounts receivable (less allowance for doubtful accounts of $437 in 2013 and $423 in 2012)
 
7,576

 
7,062

Income taxes receivable
 
2,847

 
16,547

Materials and supplies, at average cost
 
5,186

 
5,348

Regulatory assets — current
 
34,635

 
32,336

Prepayments and other current assets
 
3,679

 
4,391

Costs and estimated earnings in excess of billings on uncompleted contracts
 
41,068

 
37,703

Deferred income taxes — current
 
10,157

 
8,617

Total current assets
 
202,565

 
184,033

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
138,863

 
143,679

Costs and estimated earnings in excess of billings on uncompleted contracts
 
6,458

 
436

Receivable from the U.S. government (less allowance for doubtful accounts of $0 in 2013 and 2012)
 
2,864

 
4,535

Deferred income taxes
 
13

 
11

Other
 
15,372

 
15,587

Total regulatory and other assets
 
163,570

 
164,248

 
 
 
 
 
Total Assets
 
$
1,351,053

 
$
1,280,943

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





4

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

(in thousands)
 
September 30,
2013
 
December 31,
2012
Capitalization
 
 

 
 

Common shares, no par value
 
$
252,351

 
$
249,322

Earnings reinvested in the business
 
234,536

 
205,257

Total common shareholders’ equity
 
486,887

 
454,579

Long-term debt
 
332,088

 
332,463

Total capitalization
 
818,975

 
787,042

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
3,398

 
3,328

Accounts payable
 
62,898

 
40,569

Income taxes payable
 
795

 
511

Accrued other taxes
 
8,255

 
8,167

Accrued employee expenses
 
10,611

 
9,919

Accrued interest
 
6,251

 
3,909

Unrealized loss on purchased power contracts
 
588

 
3,060

Billings in excess of costs and estimated earnings on uncompleted contracts
 
7,815

 
12,572

Other
 
15,062

 
11,662

Total current liabilities
 
115,673

 
93,697

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,933

 
70,781

Contributions in aid of construction - net
 
113,836

 
106,450

Deferred income taxes
 
154,309

 
142,597

Unamortized investment tax credits
 
1,813

 
1,881

Accrued pension and other postretirement benefits
 
70,945

 
71,618

Other
 
6,569

 
6,877

Total other credits
 
416,405

 
400,204

 
 
 
 
 
Commitments and Contingencies (Note 8)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,351,053

 
$
1,280,943

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

5

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)

 
 
Three Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
93,932

 
$
90,976

Electric
 
8,849

 
8,549

Contracted services
 
28,133

 
34,368

Total operating revenues
 
130,914

 
133,893

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
19,246

 
18,874

Power purchased for pumping
 
3,414

 
3,067

Groundwater production assessment
 
4,656

 
3,923

Power purchased for resale
 
3,386

 
2,854

Supply cost balancing accounts
 
(1,003
)
 
1,960

Other operation
 
7,185

 
7,394

Administrative and general
 
20,083

 
17,734

Depreciation and amortization
 
9,753

 
10,230

Maintenance
 
4,666

 
4,232

Property and other taxes
 
4,108

 
3,878

ASUS construction
 
19,256

 
23,332

Net gain on sale of property
 

 
(65
)
Total operating expenses
 
94,750

 
97,413

 
 
 
 
 
Operating Income
 
36,164

 
36,480

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,852
)
 
(6,018
)
Interest income
 
185

 
419

Other, net
 
247

 
219

Total other income and expenses
 
(5,420
)
 
(5,380
)
 
 
 
 
 
Income from operations before income tax expense
 
30,744

 
31,100

 
 
 
 
 
Income tax expense
 
9,905

 
12,436

 
 
 
 
 
Net Income
 
$
20,839

 
$
18,664

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
38,696

 
38,117

Basic Earnings Per Common Share
 
$
0.54

 
$
0.49

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
38,923

 
38,205

Fully Diluted Earnings Per Common Share
 
$
0.53

 
$
0.48

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.2025

 
$
0.1775


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



6

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)

 
 
Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
247,234

 
$
238,334

Electric
 
27,980

 
27,735

Contracted services
 
86,947

 
89,298

Total operating revenues
 
362,161

 
355,367

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
46,648

 
42,257

Power purchased for pumping
 
7,385

 
6,642

Groundwater production assessment
 
11,666

 
11,228

Power purchased for resale
 
9,894

 
8,725

Supply cost balancing accounts
 
(9
)
 
9,560

Other operation
 
19,158

 
21,671

Administrative and general
 
56,103

 
52,626

Depreciation and amortization
 
29,337

 
31,127

Maintenance
 
13,513

 
11,415

Property and other taxes
 
12,004

 
11,699

ASUS construction
 
59,053

 
58,513

Net gain on sale of property
 
(12
)
 
(68
)
Total operating expenses
 
264,740

 
265,395

 
 
 
 
 
Operating Income
 
97,421

 
89,972

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(17,398
)
 
(17,808
)
Interest income
 
512

 
1,129

Other, net
 
673

 
435

Total other income and expenses
 
(16,213
)
 
(16,244
)
 
 
 
 
 
Income from operations before income tax expense
 
81,208

 
73,728

 
 
 
 
 
Income tax expense
 
30,302

 
29,871

 
 
 
 
 
Net Income
 
$
50,906

 
$
43,857

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
38,613

 
37,849

Basic Earnings Per Common Share
 
$
1.31

 
$
1.15

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
38,835

 
38,077

Fully Diluted Earnings Per Common Share
 
$
1.31

 
$
1.15

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.5575

 
$
0.4575


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



7

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)

 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2013
 
2012
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
50,906

 
$
43,857

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
30,019

 
32,760

Provision for doubtful accounts
 
776

 
1,313

Deferred income taxes and investment tax credits
 
10,616

 
4,735

Stock-based compensation expense
 
1,711

 
1,477

Other — net
 
(31
)
 
(359
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(11,498
)
 
(9,731
)
Unbilled revenue
 
(4,936
)
 
(5,571
)
Other accounts receivable
 
(504
)
 
3,967

Receivable from the U.S. government
 
(5,293
)
 
5,530

Materials and supplies
 
162

 
(3,508
)
Prepayments and other current assets
 
712

 
(1,421
)
Regulatory assets — supply cost balancing accounts
 
(9
)
 
9,560

Costs and estimated earnings in excess of billings on uncompleted contracts
 
(9,387
)
 
(2,046
)
Other assets (including other regulatory assets)
 
(2,890
)
 
(19,331
)
Accounts payable
 
9,370

 
12,981

Income taxes receivable/payable
 
13,984

 
21,294

Billings in excess of costs and estimated earnings on uncompleted contracts
 
(4,757
)
 
(10,899
)
Accrued pension and other postretirement benefits
 
2,114

 
3,079

Other liabilities
 
6,214

 
3,892

Net cash provided
 
87,279

 
91,579

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(69,059
)
 
(48,169
)
Other investments
 
(1,423
)
 

Proceed from sale of property
 
12

 
69

Net cash used
 
(70,470
)
 
(48,100
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from issuance of common shares and stock option exercises
 
1,948

 
12,434

Receipt of advances for and contributions in aid of construction
 
10,051

 
5,101

Refunds on advances for construction
 
(3,328
)
 
(3,216
)
Repayments of long-term debt
 
(365
)
 
(294
)
Proceeds from issuance of long-term debt
 
60

 
4,034

Net change in notes payable to banks
 

 
(2,000
)
Dividends paid
 
(21,520
)
 
(17,307
)
Other — net
 
(979
)
 
(480
)
Net cash used
 
(14,133
)
 
(1,728
)
Net increase in cash and cash equivalents
 
2,676

 
41,751

Cash and cash equivalents, beginning of period
 
23,486

 
1,315

Cash and cash equivalents, end of period
 
$
26,162

 
$
43,066



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

8

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)


(in thousands)
 
September 30,
2013
 
December 31,
2012
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,425,214

 
$
1,351,086

Less - Accumulated depreciation
 
(460,789
)
 
(437,949
)
Net utility plant
 
964,425

 
913,137

 
 
 
 
 
Other Property and Investments
 
13,187

 
11,590

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
25,726

 
22,578

Accounts receivable-customers (less allowance for doubtful accounts of $768 in 2013 and $797 in 2012)
 
30,303

 
19,491

Unbilled revenue
 
21,083

 
16,147

Inter-company receivable
 
5,228

 
2,508

Other accounts receivable (less allowance for doubtful accounts of $364 in 2013 and $380 in 2012)
 
4,993

 
6,377

Income taxes receivable from Parent
 
3,550

 
16,442

Note receivable from Parent
 
3,836

 

Materials and supplies, at average cost
 
2,056

 
2,244

Regulatory assets — current
 
34,635

 
32,336

Prepayments and other current assets
 
3,234

 
4,162

Deferred income taxes — current
 
9,259

 
7,577

Total current assets
 
143,903

 
129,862

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
138,863

 
143,679

Other accounts receivable
 
1,345

 
1,445

Other
 
12,791

 
14,339

Total regulatory and other assets
 
152,999

 
159,463

 
 
 
 
 
Total Assets
 
$
1,274,514

 
$
1,214,052

 
The accompanying notes are an integral part of these financial statements

 

9

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

(in thousands)
 
September 30,
2013
 
December 31, 2012
Capitalization
 
 

 
 

Common shares, no par value
 
$
232,392

 
$
231,480

Earnings reinvested in the business
 
204,411

 
184,777

Total common shareholder’s equity
 
436,803

 
416,257

Long-term debt
 
332,088

 
332,463

Total capitalization
 
768,891

 
748,720

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
3,398

 
3,328

Accounts payable
 
47,266

 
27,292

Accrued other taxes
 
7,791

 
7,720

Accrued employee expenses
 
9,466

 
8,786

Accrued interest
 
6,251

 
3,909

Unrealized loss on purchased power contracts
 
588

 
3,060

Other
 
14,960

 
11,606

Total current liabilities
 
89,720

 
65,701

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
68,933

 
70,781

Contributions in aid of construction — net
 
113,836

 
106,450

Deferred income taxes
 
153,874

 
142,082

Unamortized investment tax credits
 
1,813

 
1,881

Accrued pension and other postretirement benefits
 
70,945

 
71,618

Other
 
6,502

 
6,819

Total other credits
 
415,903

 
399,631

 
 
 
 
 
Commitments and Contingencies (Note 8)
 

 

 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,274,514

 
$
1,214,052

 
The accompanying notes are an integral part of these financial statements

10

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)


 
 
Three Months Ended 
 September 30,
(in thousands)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
93,932

 
$
90,976

Electric
 
8,849

 
8,549

Total operating revenues
 
102,781

 
99,525

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
19,246

 
18,874

Power purchased for pumping
 
3,414

 
3,067

Groundwater production assessment
 
4,656

 
3,923

Power purchased for resale
 
3,386

 
2,854

Supply cost balancing accounts
 
(1,003
)
 
1,960

Other operation
 
6,506

 
6,859

Administrative and general
 
17,007

 
14,993

Depreciation and amortization
 
9,474

 
9,941

Maintenance
 
4,239

 
3,801

Property and other taxes
 
3,572

 
3,357

Net gain on sale of property
 

 
(65
)
Total operating expenses
 
70,497

 
69,564

 
 
 
 
 
Operating Income
 
32,284

 
29,961

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,815
)
 
(5,959
)
Interest income
 
148

 
384

Other, net
 
247

 
219

Total other income and expenses
 
(5,420
)
 
(5,356
)
 
 
 
 
 
Income from operations before income tax expense
 
26,864

 
24,605

 
 
 
 
 
Income tax expense
 
10,251

 
10,030

 
 
 
 
 
Net Income
 
$
16,613

 
$
14,575

 
The accompanying notes are an integral part of these financial statements





11

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)

 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2013
 
2012
Operating Revenues
 
 

 
 

Water
 
$
247,234

 
$
238,334

Electric
 
27,980

 
27,735

Total operating revenues
 
275,214

 
266,069

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
46,648

 
42,257

Power purchased for pumping
 
7,385

 
6,642

Groundwater production assessment
 
11,666

 
11,228

Power purchased for resale
 
9,894

 
8,725

Supply cost balancing accounts
 
(9
)
 
9,560

Other operation
 
17,145

 
19,710

Administrative and general
 
46,407

 
44,359

Depreciation and amortization
 
28,480

 
30,283

Maintenance
 
12,097

 
10,098

Property and other taxes
 
10,663

 
10,454

Net gain on sale of property
 

 
(65
)
Total operating expenses
 
190,376

 
193,251

 
 
 
 
 
Operating Income
 
84,838

 
72,818

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(17,289
)
 
(17,648
)
Interest income
 
466

 
1,063

Other, net
 
674

 
434

Total other income and expenses
 
(16,149
)
 
(16,151
)
 
 
 
 
 
Income from operations before income tax expense
 
68,689

 
56,667

 
 
 
 
 
Income tax expense
 
27,557

 
23,352

 
 
 
 
 
Net Income
 
$
41,132

 
$
33,315


The accompanying notes are an integral part of these financial statements


12

GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012
(Unaudited)

 
 
 
Nine Months Ended 
 September 30,
(in thousands)
 
2013
 
2012
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
41,132

 
$
33,315

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

 
 

Depreciation and amortization
 
29,162

 
31,916

Provision for doubtful accounts
 
687

 
1,271

Deferred income taxes and investment tax credits
 
10,556

 
4,725

Stock-based compensation expense
 
1,384

 
1,241

Other — net
 
103

 
(389
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(11,498
)
 
(9,731
)
Unbilled revenue
 
(4,936
)
 
(5,571
)
Other accounts receivable
 
1,483

 
1,222

Materials and supplies
 
188

 
(531
)
Prepayments and other current assets
 
928

 
(1,348
)
Regulatory assets — supply cost balancing accounts
 
(9
)
 
9,560

Other assets (including other regulatory assets)
 
(1,588
)
 
(19,245
)
Accounts payable
 
7,015

 
3,945

Inter-company receivable/payable
 
(2,720
)
 
(545
)
Income taxes receivable/payable from/to Parent
 
12,892

 
20,782

Accrued pension and other postretirement benefits
 
2,114

 
3,079

Other liabilities
 
6,130

 
3,985

Net cash provided
 
93,023

 
77,681

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Construction expenditures
 
(68,823
)
 
(47,230
)
Note receivable from AWR parent
 
(9,200
)
 

Receipt of payment of note receivable from AWR parent
 
5,364

 

Other investments and other investing activities
 
(1,423
)
 
65

Net cash used
 
(74,082
)
 
(47,165
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
10,051

 
5,101

Refunds on advances for construction
 
(3,328
)
 
(3,216
)
Proceeds from the issuance of long-term debt
 
60

 
4,034

Repayments of long-term debt
 
(365
)
 
(294
)
Dividends paid
 
(21,400
)
 
(10,200
)
Other — net
 
(811
)
 
(389
)
Net cash used
 
(15,793
)
 
(4,964
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
3,148

 
25,552

Cash and cash equivalents, beginning of period
 
22,578

 

Cash and cash equivalents, end of period
 
$
25,726

 
$
25,552

 
The accompanying notes are an integral part of these financial statements

13

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.”
 
GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately 256,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 23,000 customers through its Bear Valley Electric Service (“BVES”) division. 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 2013 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.
 
On May 20, 2013, AWR's Board of Directors approved a two-for-one stock split of the Company's common shares.   In September 2013, shareholders of record received one additional share for each AWR common share they owned. This two-for-one stock split has been retroactively applied to these financial statements, resulting in an increase in the number of shares outstanding for all periods presented.

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, 2012 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, 2012 filed with the SEC.
 
GSWC's Related Party Transactions: In May 2013, AWR issued an interest bearing promissory note (the "Note") to GSWC for $20.0 million which expires on May 23, 2018. Under the terms of the Note, AWR may borrow from GSWC amounts up to $20.0 million for working capital purposes. AWR agrees to pay any unpaid principal amounts outstanding under the Note, plus accrued interest. As of September 30, 2013, AWR has $3.8 million outstanding to GSWC under this Note, which GSWC has reflected as a current note receivable on its September 30, 2013 balance sheet. This Note is expected to be repaid by AWR within one year.


14


GSWC and ASUS provide and receive various services to and from their parent, AWR, and among themselves. 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.  The interest rate charged to GSWC and ASUS 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 approved by the CPUC.  Amounts owed to GSWC by its parent, AWR, or for allocated expenses are included in inter-company receivables as of September 30, 2013 and December 31, 2012.
 
Notes Payable to Banks: On May 23, 2013, AWR entered into a fourth amendment to its revolving credit agreement to, among other things, extend the expiration date of the syndicated credit facility to May 23, 2018, reduce the amount of interest and fees paid by the Company, and update certain representations and covenants in the credit agreement.  The aggregate amount that may be borrowed under this facility is unchanged at $100.0 million.  The Company may, under the terms of the fourth amendment, elect to increase the aggregate commitment by up to an additional $50.0 million. As of September 30, 2013, there were no outstanding borrowings under this credit facility.
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 $1.0 million and $966,000 for the three months ended September 30, 2013 and 2012, respectively, and $2.8 million and $2.6 million for the nine months ended September 30, 2013 and 2012, 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 $305,000 and $222,000 during the three months ended September 30, 2013 and 2012, respectively, and $636,000 and $563,000 for the nine months ended September 30, 2013 and 2012, respectively.
 
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.
 
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, 2013, Registrant had approximately $72.3 million of regulatory assets, net of regulatory liabilities not accruing carrying costs. Of this amount, $49.8 million relates to the underfunding of pension and other post-retirement obligations, $15.9 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 $588,000 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 represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determined that a portion of GSWC’s assets were not recoverable in customer rates, GSWC would be required to determine if it had suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:
 

15


(dollars in thousands)
 
September 30,
2013
 
December 31,
2012
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
29,223

 
$
42,574

Base Revenue Requirement Adjustment Mechanism
 
8,600

 
6,833

Costs deferred for future recovery on Aerojet case
 
15,106

 
16,030

Pensions and other post-retirement obligations (Note 7)
 
54,834

 
56,894

Flow-through taxes, net (Note 6)
 
15,901

 
16,415

General rate case memorandum accounts
 
17,381

 
4,495

Other regulatory assets
 
37,475

 
40,332

Various refunds to customers
 
(5,022
)
 
(7,558
)
Total
 
$
173,498

 
$
176,015

 
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, 2012 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2012.
 
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”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC.  GSWC has implemented surcharges to recover all of its WRAM, net of the MCBA balances through December 31, 2012.  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.  For the three months ended September 30, 2013 and 2012, surcharges of $9.1 million and $6.7 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM, net of MCBA accounts, and $19.8 million and $14.3 million were billed to customers during the nine months ended September 30, 2013 and 2012, respectively.  For the three and nine months ended September 30, 2013, the WRAM and MCBA accounts also reflect the effects of the authorized 2013 adopted revenue and supply cost amounts approved in the CPUC’s final decision issued in May 2013 on GSWC’s water general rate case.  In March 2013, the CPUC approved recovery of GSWC's 2012 WRAM under-collection of $23.8 million, to be collected over 12 to 18 months. As of September 30, 2013, GSWC has a net aggregated regulatory asset of $29.2 million which is comprised of a $36.6 million under-collection in the WRAM accounts and $7.4 million over-collection in the MCBA accounts.
 
Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months.  In April 2012, the CPUC issued a final decision which, among other things, set the recovery periods for under-collection balances that are up to 15% of adopted annual revenues at 18 months or less.  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. The cap is effective following the first test year of each applicant’s pending or next general rate case.  For GSWC, the cap will be applied to its 2013 WRAM balances to be filed in early 2014.  The cap requirement set forth in the final decision does not impact GSWC’s 2012 and prior year WRAM/MCBA balances.
 
For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”), which adjusts certain revenues to adopted levels.  In May 2013, the CPUC approved surcharges for recovery of BVES’ 2012 BRRAM balance. The CPUC approved a 36-month surcharge, with the amounts collected through December 2014 to be applied to the 2012 BRRAM under-collection balance of $2.3 million.  Surcharges collected during the remainder of the 36-month period will be for recovery of the $1.8 million difference between the allocated general office costs authorized by the CPUC in November 2010, and what was then in BVES’ rates for allocated general office costs.  As authorized by the CPUC, this difference was combined in the BRRAM for recovery through the surcharge; however, these costs are not considered an alternative revenue program. As of September 30, 2013, GSWC had a regulatory asset of $8.6 million under-collection in the BRRAM.
 
General Rate Case Memorandum Accounts:
 
The balance in the general rate case memorandum accounts represents the revenue differences between interim rates and final rates authorized by the CPUC due to delays in receiving decisions on various general rate case applications. As of September 30, 2013, there is an aggregate $17.4 million in the general rate case memorandum accounts, $13.3 million of which is for retroactive rate increases effective January 1, 2013 as a result of the final decision issued by the CPUC in May 2013 on GSWC’s water general rate case. Surcharges ranging from 12 to 24 months, with the majority being 12 months, have been implemented to recover the retroactive adopted revenues related to the May 2013 CPUC decision.

16


 


Other Regulatory Assets:
 
Among other things, the final CPUC decision issued in May 2013 approved the recovery of various memorandum accounts which tracked certain previously incurred costs.  As a result, during the first quarter of 2013, GSWC recorded $3.2 million in other regulatory assets, the majority of which was reflected as a decrease in certain operating expenses related to the approval of these memorandum accounts in the final decision. During the second quarter of 2013, surcharges were implemented to begin recovering these costs from customers.
 
Other Regulatory Matters:
 
CPUC Rehearing Matter
 
In July 2011, the CPUC issued an order granting the rehearing of certain issues from the Region II, Region III and general office rate case approved in November 2010.  Among the issues in the rehearing was the La Serena plant improvement project included in rate base totaling approximately $3.5 million.  As a result of the CPUC’s decision in November 2010, GSWC had recorded a pretax charge of $2.2 million during 2010, which included the disallowance of a portion of the La Serena capital costs and the related revenues earned on those capital costs to be refunded to customers.  In March 2013, GSWC and the Office of Ratepayer Advocates ("ORA") reached a settlement agreement, subject to CPUC approval, to resolve all the issues in the rehearing.  In March 2013, GSWC filed for CPUC approval of the settlement agreement. In anticipation of this settlement, GSWC recorded an additional pretax charge of $416,000 in 2012, representing disallowed plant improvement project costs and related revenues earned on those costs that it expects will be refunded to customers based upon the terms of the settlement being discussed. The settlement agreement, if approved, would resolve all issues arising from the rehearing.

Procurement Audits
In December 2011, the CPUC issued a final decision on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects. As part of the CPUC decision, 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 related to contracts with other contractors from 1994 forward and could result in disallowances of costs. The cost of the audits will be borne by shareholders and may not be recovered by GSWC in rates to customers. The first audit is expected to commence in early 2014. At this time, management cannot predict the outcome of these audits or determine an estimated loss or range of loss, if any, resulting from these audits.
 
BVES General Rate Case
 
In February 2012, BVES filed its general rate case (“GRC”) for new rates in years 2013 through 2016.  In August 2012, ORA issued its report on the GRC.  Included in ORA’s recommendations was 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 accordance with Generally Accepted Accounting Principles.  ORA also recommended that one-half of deferred rate case costs be borne by shareholders, rather than entirely by customers, as had been authorized by the CPUC in prior rate cases.  As of September 30, 2013, GSWC had a $1.9 million regulatory asset representing deferred rate case costs for the current BVES general rate case, which the CPUC has historically allowed utilities to recover. If ORA 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 ORA’s recommendations are without merit and intends to vigorously defend its positions.  At this time, GSWC does not believe a potential loss is probable, but is unable to predict the final outcome of these matters in the pending rate case.
 
Hearings on BVES’ GRC, including the matters discussed above, were held in September 2012.  In November 2012, GSWC filed a motion to introduce new information regarding the results of a study on mandatory testing of BVES’s transmission and distribution poles to help support BVES' request for approval of additional capital expenditures. The administrative law judge assigned to this GRC re-opened the record to receive additional testimony based on this study, and to conduct additional evidentiary hearings.  Alternative dispute resolution meetings for the GRC are scheduled to be held in December 2013. A proposed decision on this general rate case is expected in early 2014.

17



Renewables Portfolio Standard
 
In December 2011, a renewables portfolio standard (“RPS”) law went into effect which changed, among other things, annual procurement targets to multi-year procurement targets.  Under the RPS, 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 through 2013 compliance period by no later than December 31, 2013.  BVES’ latest RPS reports under the standards were submitted to the CPUC in August 2013, 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, 2013.
 
In December 2012, GSWC entered into a ten-year agreement with a third party to purchase renewable energy credits (“RECs”). Under the terms of the agreement, GSWC agreed to purchase approximately 582,000 RECs over a ten-year period which would be used towards meeting the CPUC’s RPS procurement requirements.  In July 2013, the CPUC approved the agreement. During the third quarter of 2013, BVES purchased approximately 116,000 RECs under this agreement, which will be included as part of the electric supply cost balancing account during the fourth quarter of 2013 when they are applied towards the RPS requirements.
 
In July 2012, the CPUC also approved the purchase of RECs from the Los Angeles County Sanitation District.  BVES applied these RECs towards its pre-2011 RPS requirements and 2011 through 2013 requirements.  The cost of these RECs have been included as part of the electric supply cost balancing account as of September 30, 2013.

In March 2013, BVES filed an application with the CPUC to recover $835,000 (including interest) in additional costs incurred from April 1, 2011 through December 31, 2012 in connection with its efforts to procure renewable energy resources.  In May 2013, the CPUC approved these costs and accordingly, BVES recorded a regulatory asset and a corresponding decrease to legal and outside services costs during the second quarter of 2013. This amount will be recovered through a 12-month surcharge. In March 2012, BVES also received approval for recovery of $1.2 million of costs in its efforts to procure renewable energy resources incurred during the period September 1, 2007 through March 31, 2011.

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 its stock-based awards that earn dividend equivalents on an equal basis with AWR’s Common Shares (the “Common Shares”).  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, reflecting the two-for-one stock split effective September 3, 2013, used 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)
 
2013
 
2012
 
2013
 
2012
Net income
 
$
20,839

 
18,664

 
50,906

 
43,857

Less: (a)
 
Distributed earnings to common shareholders
 
7,836

 
6,766

 
21,527

 
17,316

 
 
Distributed earnings to participating securities
 
48

 
52

 
123

 
119

Undistributed earnings
 
12,955

 
11,846

 
29,256

 
26,422

 
 
 
 
 
 
 
 
 
 
 
(b)
 
Undistributed earnings allocated to common shareholders
 
12,877

 
11,755

 
29,089

 
26,242

 
 
Undistributed earnings allocated to participating securities
 
78

 
91

 
167

 
180

 
 
 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
20,713

 
$
18,521

 
$
50,616

 
$
43,558

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
38,696

 
38,117

 
38,613

 
37,849

Basic earnings per Common Share
 
$
0.54

 
$
0.49

 
$
1.31

 
$
1.15

 

18


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, 2013 and 2012, there were 273,740 and 452,416 options outstanding, respectively, under these Plans. At September 30, 2013 and 2012, there were also 236,891 and 296,341 restricted stock units outstanding, respectively.
 
The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating diluted net income per share:
Diluted:
 
 For The Three Months Ended 
 September 30,
 
 For The Nine Months Ended 
 September 30,
(in thousands, except per share amounts)
 
2013
 
2012
 
2013
 
2012
Common shareholders earnings, basic
 
$
20,713

 
$
18,521

 
$
50,616

 
$
43,558

Undistributed earnings for dilutive stock options
 
78

 

 
167

 
180

Total common shareholders earnings, diluted
 
$
20,791

 
$
18,521

 
$
50,783

 
$
43,738

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
38,696

 
38,117

 
38,613

 
37,849

Stock-based compensation (1)
 
227

 
88

 
222

 
228

Weighted average common shares outstanding, diluted
 
38,923

 
38,205

 
38,835

 
38,077

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.53

 
$
0.48

 
$
1.31

 
$
1.15

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 273,740 and 365,864 stock options at September 30, 2013 and 2012, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 236,891 and 296,341 restricted stock units at September 30, 2013 and 2012, respectively, were included in the calculation of diluted EPS for the nine months ended September 30, 2013 and 2012.
 
No stock options outstanding at September 30, 2013 had an exercise price greater than the average market price of AWR’s Common Shares for the three and nine months ended September 30, 2013. There were 1,184 and 86,552 stock options outstanding at September 30, 2012 but not included in the computation of diluted EPS for the three and nine month ended September 30, 2012, respectively, because the related option exercise price was greater than the average market price of AWR’s Common Shares.  There were no stock options outstanding at September 30, 2013 or 2012 that were anti-dilutive.
 
During the nine months ended September 30, 2013 and 2012, Registrant issued 236,528 and 847,180 Common Shares, for approximately $1,948,000 and $12,434,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 401(k) Plan, the 2000 and 2008 Employee Plans, and the 2003 Directors Plan. In addition, Registrant purchased 553,067 and 1,143,304 Common Shares on the open market during the nine months ended September 30, 2013 and 2012, respectively, under Registrant’s 401(k) Plan and the DRP. The Common Shares purchased by Registrant were used to satisfy the requirements of these plans.
 
During the three months ended September 30, 2013 and 2012, AWR paid quarterly dividends of approximately $7.8 million, or $0.2025 per share, and $6.7 million, or $0.1775 per share, respectively. During the nine months ended September 30, 2013 and 2012, AWR paid quarterly dividends to shareholders of approximately $21.5 million, or $0.5575 per share, and $17.3 million, or $0.4575 per share, respectively.

On October 29, 2013, AWR's Board of Directors approved a fourth quarter dividend of $0.2025 per share on the common shares of the Company. Dividends on the common shares will be paid on December 2, 2013 to shareholders of record at the close of business on November 15, 2013.

Note 4 — Derivative Instruments:
 
GSWC purchases certain power at a fixed cost depending on the amount of power and the period during which the power is purchased under a purchased power contract.  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

19


earnings. Upon expiration of the purchased power contract, the balance in this regulatory memorandum account will be zero.  As of September 30, 2013, there was a $588,000 cumulative unrealized loss which has been included in the memorandum account.
 
GSWC executed a new purchased power master agreement which is subject to CPUC approval. 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. In June 2013, GSWC filed for approval of the agreement with the CPUC.  GSWC has requested 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.
 
The following table presents changes in the fair value of the derivative for the three and nine months ended September 30, 2013 and 2012:
 
 
 For The Three Months Ended 
 September 30,
 
 For The Nine Months Ended 
 September 30,
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
Balance, at beginning of the period
 
$
(1,147
)
 
$
(5,176
)
 
$
(3,060
)
 
$
(7,611
)
Unrealized gain on purchased power contracts
 
559

 
2,457

 
2,472

 
4,892

Balance, at end of the period
 
$
(588
)
 
$
(2,719
)
 
$
(588
)
 
$
(2,719
)
 
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. Investments held in a Rabbi Trust for the supplemental executive retirement plan are measured at fair value and totaled $6.5 million as of September 30, 2013. All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The investments held in the Rabbi trust are included in Other Property and Investments on Registrant's balance sheets.

The table below estimates the fair value of long-term debt held by GSWC. Rates available to GSWC at September 30, 2013 and December 31, 2012 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, 2013 valuation increased as compared to December 31, 2012, decreasing the fair value of long-term debt as of September 30, 2013. Changes in the assumptions will produce differing results.
 
 
September 30, 2013
 
December 31, 2012
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC
 
$
335,486

 
$
407,009

 
$
335,791

 
$
456,792



20


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. 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, 2013:
(dollars in thousands)
 
Level 1
 
Level 2
 
Level 3
 
Total
Long-term debt—GSWC
 

 
$
407,009

 

 
$
407,009

 

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 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 was 38.2% and 40.8% for the three months ended September 30, 2013 and 2012, respectively, and 40.1% and 41.2% for the nine months ended September 30, 2013 and 2012, respectively. The GSWC ETRs deviated 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 (primarily related to plant, rate-case and compensation items), as well as permanent items.

In addition, during the three months ended September 20, 2013, AWR (parent) recorded a cumulative tax benefit of $1.5 million related to an employee benefit plan, of which $1.4 million is out-of-period for deductions taken on recently filed tax returns and amounts expected to be taken on amended income tax returns. It is management's intention to amend tax returns for open years to reflect these deductions which cover a period of 5 years. As a result, AWR's consolidated ETR was 32.2% for the three months ended September 30, 2013 as compared to 40.0% in the same period of 2012, and 37.3% for the nine months ended September 30, 2013 as compared to 40.5% for the same period in 2012.
 
Changes in Tax Law:
 
In September 2013, the U.S. Treasury Department issued final regulations related to the tax treatment of tangible property, including guidance on expensing certain repair and maintenance expenditures.  The regulations are effective for tax years beginning on or after January 1, 2014. The Registrant’s current tax treatment of tangible property continues to be permitted; however, the Registrant is evaluating its water-pipeline tax repair-cost method, as well as other tax-method changes pursuant to these regulations, and, if the Registrant were to adopt such guidance, the impact to tax expense and the effective tax rate is not expected to be significant.

In January 2013, the American Taxpayer Relief Act of 2012 extended 50% bonus depreciation for qualifying property through 2013.  Although this change in law reduces AWR’s current taxes payable, it does not reduce its total income tax expense or ETR.
 


21


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, 2013 and 2012 are as follows:
 
 
For The Three Months Ended September 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,742

 
$
1,670

 
$
106

 
$
112

 
$
201

 
$
183

Interest cost
 
1,727

 
1,663

 
113

 
136

 
129

 
122

Expected return on plan assets
 
(1,894
)
 
(1,634
)
 
(95
)
 
(90
)
 

 

Amortization of transition
 

 

 
105

 
105

 

 

Amortization of prior service cost (benefit)
 
30

 
31

 
(50
)
 
(50
)
 
40

 
40

Amortization of actuarial loss
 
720

 
759

 

 

 
85

 
77

Net periodic pension cost under accounting standards
 
2,325

 
2,489

 
179

 
213

 
455

 
422

Regulatory adjustment — deferred
 
(521
)
 
(596
)
 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,804

 
$
1,893

 
$
179

 
$
213

 
$
455

 
$
422


 
 
For The Nine Months Ended September 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2013
 
2012
 
2013
 
2012
 
2013
 
2012
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
5,226

 
$
5,007

 
$
318

 
$
336

 
$
603

 
$
549

Interest cost
 
5,181

 
4,992

 
339

 
408

 
387

 
366

Expected return on plan assets
 
(5,682
)
 
(4,905
)
 
(285
)
 
(270
)
 

 

Amortization of transition
 

 

 
315

 
315

 

 

Amortization of prior service cost (benefit)
 
90

 
90

 
(150
)
 
(150
)
 
120

 
120

Amortization of actuarial loss
 
2,160

 
2,277

 

 

 
255

 
231

Net periodic pension cost under accounting standards
 
6,975

 
7,461

 
537

 
639

 
1,365

 
1,266

Regulatory adjustment — deferred
 
(1,440
)
 
(1,794
)
 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
5,535

 
$
5,667

 
$
537

 
$
639

 
$
1,365

 
$
1,266


Registrant expects to contribute approximately $150,000 to the postretirement medical plan in the fourth quarter of 2013.  During the three and nine months ended September 30, 2013, Registrant contributed $4.5 million and $6.6 million to the pension plan, respectively.
 
Regulatory Adjustment:
 
In May 2013, the CPUC issued a final decision that once again authorized GSWC to establish a two-way balancing account for its water regions and the general office to track differences between the forecasted annual pension expenses adopted in rates and the actual annual expense recorded by GSWC in accordance with the accounting guidance for pension costs.  As of September 30, 2013, GSWC has included a $5.1 million under-collection in the two-way pension balancing account recorded as a regulatory asset (Note 2). A surcharge is currently in place to begin recovering this under-collection.

    

22


Affordable Care Act:

In 2010, the Patient Protection and Affordable Care Act ("Affordable Care Act") was passed and was to become effective in 2014.  In July 2013, compliance with the employer mandate and certain reporting requirements under the Affordable Care Act were delayed until January 1, 2015. Registrant’s health care plan meets the current requirements of the Affordable Care Act. Registrant continues to assess the impact of the Affordable Care Act on its health care benefit costs, but does not expect it to have a material impact in the near future on the Company's consolidated financial position, results of operations or cash flows.

Note 8 — Contingencies:
 
GSWC Destruction of Well:

On September 12, 2013, GSWC contractors discovered methane gas and water flowing from one of GSWC's out-of-service wells which was in the process of being destroyed. The Los Angeles County Fire Department was contacted for their assistance and GSWC worked diligently with them to resolve this unusual well situation.  As a precaution, residents and businesses near the well site were evacuated. Experts from the oil and gas industry were also brought in to cap the well and stop the flow of water and methane gas. On September 25, 2013, residents were allowed to return to their homes. The costs incurred to cap the well and stop the flow of water and methane gas have been recorded as cost of removal. Disruption of business claims and costs incurred to relocate residents have not been significant, and have been expensed as incurred during the third quarter of 2013. Although GSWC believes the measures taken to stop the flow of water and gas have been effective and the capping of the well is substantially complete, at this time, management is unable to predict whether any other claims will be filed against GSWC as a result of this unusual well situation.

Barstow Perchlorate Contamination:
 
On March 8, 2013, GSWC was served with four toxic tort lawsuits arising out of the November 19, 2010 detection of perchlorate in one of GSWC’s active production wells in the Barstow service area. The plaintiffs asserted that they were affected by the perchlorate and sought punitive and compensatory damages. In August 2013, GSWC filed a motion for summary judgment on the basis that GSWC has complied with the rules and regulations of the CPUC regarding its compliance with the safe drinking water standards. On October 23, 2013, the judge granted GSWC's motion for summary judgment and dismissed the lawsuits. The plaintiffs may appeal this ruling within 60 days from when the summary judgment is entered into official court records which is expected to occur in November 2013.
 
Condemnation of Properties:
 
The laws of the State of California 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, these laws 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 City of Claremont (“Claremont”) located in GSWC’s Region III, has expressed various concerns to GSWC about rates charged by GSWC and the effectiveness of the CPUC’s rate-setting procedures. In November 2012 and again in September 2013, Claremont made an offer to acquire GSWC’s water system servicing Claremont. GSWC rejected both offers and informed the City that the system is not for sale.  Claremont continues to express a desire to potentially take the system by eminent domain. GSWC serves approximately 11,000 customers in Claremont.
 
In April 2011, an organization called Ojai FLOW ("Friends of Locally Owned Water") started a local campaign for the Casitas Municipal Water District (“CMWD”) to purchase GSWC’s Ojai water system.  In March 2013, the CMWD passed resolutions authorizing the establishment of a Community Facilities District. In August 2013, Ojai residents approved the levying of a special tax via the Mello-Roos Community Facilities District Act of 1982 (“Mello-Roos Act”) which would provide funding for the potential acquisition of GSWC’s Ojai system by eminent domain.  GSWC has filed a petition in the Superior Court, Ventura County which, among other things, challenges the CMWD’s ability to utilize the Mello-Roos Act to fund legal and expert costs to be incurred in a potential acquisition. At this time, GSWC is unable to predict the outcome of that petition. GSWC serves approximately 3,000 customers in Ojai.
 
 

23


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 and was approved by the courts in February 2008.  Among other things, the settlement, which was also approved by the CPUC in May 2013, preserves GSWC’s historical pumping rights and secures 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 plaintiff.
 
The court judgment also awarded GSWC prescriptive rights to groundwater against the non-stipulating parties and granted 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 retained jurisdiction over all of the parties to make supplemental orders or to amend the judgment as necessary.  In March 2008, the non-stipulating parties filed notices of appeal.  In November 2012, the Appellate Court upheld the Santa Maria judgment, with a remand to the trial court to clarify the narrow issue that non-stipulating parties retained their overlying rights.  There is no dispute on this clarification and the required filings will be made with the court in 2013.  In December 2012, the Appellate Court further modified the decision clarifying the basis for the overdraft finding that precipitated the prescriptive right finding.  In December 2012, the non-stipulating parties filed a request with the California Supreme Court for a review of the Appellate Court findings.   In February 2013, the California Supreme Court denied the parties’ request for review of the Appellate Court findings. In May 2013, the non-stipulating parties filed a request with the U.S. Supreme Court for a review of the Appellate Court findings, which the U.S. Supreme Court subsequently denied.
 
Environmental Clean-Up and Remediation:
 
Chadron Plant: GSWC has been involved in environmental remediation and clean-up at a plant site (“Chadron Plant”) that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.  Recent monitoring results show gasoline has been reduced to a sheen on top of the groundwater surface. Testing has recently been conducted to determine if alternative remediation will be effective in reducing the contamination further.  As of September 30, 2013, the total spent to clean-up and remediate GSWC’s plant facility was approximately $3.5 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 September 30, 2013, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.0 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.
 
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 p