10-Q 1 awr-20150630x10q.htm 10-Q AWR-2015.06.30-10Q
 

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 June 30, 2015
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 August 3, 2015, the number of Common Shares outstanding, of American States Water Company was 37,240,678 shares. As of August 3, 2015, 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 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

Availability of water supplies, which may be adversely affected by the California drought, changes in weather patterns in the West, contamination and court decisions or other governmental actions restricting the use of water from the Colorado River, the California State Water Project, and/or pumping of groundwater

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

The impact of opposition to GSWC rate increases on our ability to recover our costs through rates

The impact of condemnation actions on the size of our customer base

1



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

Changes in accounting valuations and estimates, including changes resulting from 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

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 electric division's power supplies and the extent to which we can manage and respond to the volatility of electric and natural gas prices
 
Our electric operation's ability to comply with the CPUC’s renewable energy procurement requirements
 
Changes in GSWC long-term customer demand due to changes in customer usage patterns as a result of conservation efforts, regulatory changes affecting demand such as mandatory restrictions on water use, new landscaping or irrigation requirements, recycling of water by the customer or purchase of recycled water supplied by other parties, unanticipated population growth or decline, changes in climate conditions, general economic and financial market conditions and cost increases
 
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 construction activities at our contracted services business
 
Termination, in whole or in part, of one or more of our Military Utility Privatization Subsidiaries' contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default

Termination of contracts and suspension or debarment for a period of time from contracting with the government due to violations of federal law or regulations in connection with military utility privatization activities

Failure of the U.S. government to make timely payments to ASUS for water and/or wastewater services at military bases as a result of fiscal uncertainties over the funding of the U.S. government
 
Delays in obtaining redetermination of prices or equitable adjustments to our prices on one or more of our contracts to provide water and/or wastewater services at military bases

Disallowance of costs on any of our contracts to provide water and/or wastewater services at military bases as a result of audits, cost reviews or investigations by contracting agencies
 
Inaccurate assumptions used in preparing bids in our contracted services business

Failure of the wastewater 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

2


 
Issues with the implementation, maintenance and/or 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
 
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 2014 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)
 
June 30,
2015
 
December 31, 2014
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,523,161

 
$
1,492,880

Non-utility property, at cost
 
11,067

 
10,879

Total
 
1,534,228

 
1,503,759

Less - Accumulated depreciation
 
(518,721
)
 
(500,239
)
Net property, plant and equipment
 
1,015,507

 
1,003,520

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
18,728

 
17,536

Total other property and investments
 
19,844

 
18,652

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
43,862

 
75,988

Accounts receivable — customers (less allowance for doubtful accounts of $763 in 2015 and $803 in 2014)
 
19,247

 
18,814

Unbilled receivable
 
17,949

 
21,422

Receivable from the U.S. government
 
7,288

 
6,709

Other accounts receivable (less allowance for doubtful accounts of $111 in 2015 and $89 in 2014)
 
3,566

 
4,843

Income taxes receivable
 
2,820

 
20,993

Materials and supplies, at average cost
 
4,152

 
3,588

Regulatory assets — current
 
11,187

 
12,379

Prepayments and other current assets
 
4,134

 
2,745

Costs and estimated earnings in excess of billings on contracts
 
28,422

 
34,535

Deferred income taxes — current
 
7,601

 
7,435

Total current assets
 
150,228

 
209,451

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
131,869

 
118,829

Costs and estimated earnings in excess of billings on contracts
 
16,308

 
15,741

Other
 
9,599

 
12,105

Total regulatory and other assets
 
157,776

 
146,675

 
 
 
 
 
Total Assets
 
$
1,343,355

 
$
1,378,298

 
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)
 
June 30,
2015
 
December 31,
2014
Capitalization
 
 

 
 

Common shares, no par value
 
$
247,034

 
$
253,199

Earnings reinvested in the business
 
230,544

 
253,602

Total common shareholders’ equity
 
477,578

 
506,801

Long-term debt
 
325,613

 
325,798

Total capitalization
 
803,191

 
832,599

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
308

 
292

Accounts payable
 
42,336

 
41,855

Income taxes payable
 
120

 
638

Accrued other taxes
 
6,235

 
8,602

Accrued employee expenses
 
10,056

 
10,519

Accrued interest
 
3,546

 
3,549

Unrealized loss on purchased power contracts
 
5,662

 
3,339

Billings in excess of costs and estimated earnings on contracts
 
9,453

 
11,736

Other
 
17,451

 
18,760

Total current liabilities
 
95,167

 
99,290

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
66,700

 
68,328

Contributions in aid of construction - net
 
116,156

 
116,629

Deferred income taxes
 
190,121

 
191,209

Unamortized investment tax credits
 
1,654

 
1,699

Accrued pension and other postretirement benefits
 
63,658

 
61,773

Other
 
6,708

 
6,771

Total other credits
 
444,997

 
446,409

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,343,355

 
$
1,378,298

 
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 JUNE 30, 2015 AND 2014
(Unaudited)


 
 
Three Months Ended June 30,
(in thousands, except per share amounts)
 
2015
 
2014
Operating Revenues
 
 

 
 

Water
 
$
87,581

 
$
86,232

Electric
 
7,889

 
8,328

Contracted services
 
19,148

 
21,081

Total operating revenues
 
114,618

 
115,641

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
16,415

 
16,263

Power purchased for pumping
 
2,123

 
2,570

Groundwater production assessment
 
4,122

 
4,853

Power purchased for resale
 
2,566

 
1,988

Supply cost balancing accounts
 
1,816

 
(106
)
Other operation
 
7,362

 
7,085

Administrative and general
 
20,471

 
19,407

Depreciation and amortization
 
10,536

 
10,525

Maintenance
 
4,205

 
4,327

Property and other taxes
 
4,060

 
3,965

ASUS construction
 
10,412

 
13,764

Total operating expenses
 
84,088

 
84,641

 
 
 
 
 
Operating Income
 
30,530

 
31,000

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(5,527
)
 
(5,778
)
Interest income
 
102

 
123

Other, net
 
77

 
271

Total other income and expenses
 
(5,348
)
 
(5,384
)
 
 
 
 
 
Income from operations before income tax expense
 
25,182

 
25,616

 
 
 
 
 
Income tax expense
 
9,534

 
10,262

 
 
 
 
 
Net Income
 
$
15,648

 
$
15,354

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
37,702

 
38,781

Basic Earnings Per Common Share
 
$
0.41

 
$
0.39

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
37,909

 
39,001

Fully Diluted Earnings Per Common Share
 
$
0.41

 
$
0.39

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.2130

 
$
0.2025

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

6

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2015 AND 2014
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2015
 
2014
Operating Revenues
 
 

 
 

Water
 
$
159,085

 
$
156,989

Electric
 
18,858

 
18,784

Contracted services
 
37,608

 
41,813

Total operating revenues
 
215,551

 
217,586

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
28,706

 
27,487

Power purchased for pumping
 
4,140

 
4,534

Groundwater production assessment
 
7,511

 
8,393

Power purchased for resale
 
5,065

 
4,687

Supply cost balancing accounts
 
3,629

 
712

Other operation
 
13,522

 
14,032

Administrative and general
 
39,998

 
39,591

Depreciation and amortization
 
21,084

 
21,055

Maintenance
 
7,682

 
7,816

Property and other taxes
 
8,336

 
8,290

ASUS construction
 
20,458

 
27,221

Total operating expenses
 
160,131

 
163,818

 
 
 
 
 
Operating Income
 
55,420

 
53,768

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(10,755
)
 
(11,405
)
Interest income
 
214

 
235

Other, net
 
350

 
396

Total other income and expenses
 
(10,191
)
 
(10,774
)
 
 
 
 
 
Income from operations before income tax expense
 
45,229

 
42,994

 
 
 
 
 
Income tax expense
 
17,432

 
16,619

 
 
 
 
 
Net Income
 
$
27,797

 
$
26,375

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
37,952

 
38,764

Basic Earnings Per Common Share
 
$
0.73

 
$
0.68

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
38,153

 
38,974

Fully Diluted Earnings Per Common Share
 
$
0.73

 
$
0.67

 
 
 
 
 
Dividends Paid Per Common Share
 
$
0.426

 
$
0.405


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

7

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2015
 
2014
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
27,797

 
$
26,375

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

 
 

Depreciation and amortization
 
21,458

 
21,552

Provision for doubtful accounts
 
370

 
604

Deferred income taxes and investment tax credits
 
(432
)
 
(1,653
)
Stock-based compensation expense
 
1,321

 
1,399

Other — net
 
426

 
69

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(774
)
 
(1,907
)
Unbilled receivable
 
3,473

 
(1,599
)
Other accounts receivable
 
1,248

 
1,543

Receivables from the U.S. government
 
(579
)
 
3,491

Materials and supplies
 
(564
)
 
887

Prepayments and other assets
 
932

 
(1,997
)
Costs and estimated earnings in excess of billings on contracts
 
5,546

 
12,437

Regulatory assets
 
(13,493
)
 
8,768

Accounts payable
 
511

 
1,019

Income taxes receivable/payable
 
17,655

 
10,994

Billings in excess of costs and estimated earnings on contracts
 
(2,283
)
 
7,701

Accrued pension and other post-retirement benefits
 
2,907

 
3,125

Other liabilities
 
(2,517
)
 
(1,928
)
Net cash provided
 
63,002

 
90,880

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(34,207
)
 
(35,620
)
Other investing activities
 
(1,401
)
 
(195
)
Net cash used
 
(35,608
)
 
(35,815
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
512

 
219

Repurchase of Common Shares
 
(41,847
)
 
(306
)
Receipt of advances for and contributions in aid of construction
 
1,751

 
4,174

Refunds on advances for construction
 
(2,571
)
 
(2,518
)
Retirement or repayments of long-term debt
 
(169
)
 
(174
)
Dividends paid
 
(16,171
)
 
(15,699
)
Other financing activities
 
(1,025
)
 
(1,138
)
Net cash used
 
(59,520
)
 
(15,442
)
Net change in cash and cash equivalents
 
(32,126
)
 
39,623

Cash and cash equivalents, beginning of period
 
75,988

 
38,226

Cash and cash equivalents, end of period
 
$
43,862

 
$
77,849

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
13,110

 
$
14,125

Property installed by developers and conveyed
 
$
784

 
$
206



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

8

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

(in thousands)
 
June 30,
2015
 
December 31,
2014
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,523,161

 
$
1,492,880

Less - Accumulated depreciation
 
(512,053
)
 
(494,000
)
Net utility plant
 
1,011,108

 
998,880

 
 
 
 
 
Other Property and Investments
 
16,593

 
15,395

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
39,936

 
44,005

Accounts receivable-customers (less allowance for doubtful accounts of $763 in 2015 and $803 in 2014)
 
19,247

 
18,814

Unbilled receivable
 
17,813

 
17,733

Inter-company receivable
 
303

 
499

Other accounts receivable (less allowance for doubtful accounts of $111 in 2015 and $89 in 2014)
 
3,102

 
3,795

Income taxes receivable from Parent
 
4,394

 
29,580

Note receivable from Parent
 
3,000

 

Materials and supplies, at average cost
 
3,420

 
2,791

Regulatory assets — current
 
11,187

 
12,379

Prepayments and other current assets
 
3,441

 
2,507

Deferred income taxes — current
 
7,161

 
6,500

Total current assets
 
113,004

 
138,603

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Regulatory assets
 
131,869

 
118,829

Other
 
9,798

 
10,667

Total regulatory and other assets
 
141,667

 
129,496

 
 
 
 
 
Total Assets
 
$
1,282,372

 
$
1,282,374

 
The accompanying notes are an integral part of these financial statements

9

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

(in thousands)
 
June 30,
2015
 
December 31, 2014
Capitalization
 
 

 
 

Common shares, no par value
 
$
236,239

 
$
235,607

Earnings reinvested in the business
 
196,833

 
199,583

Total common shareholder’s equity
 
433,072

 
435,190

Long-term debt
 
325,613

 
325,798

Total capitalization
 
758,685

 
760,988

 
 
 
 
 
Current Liabilities
 
 

 
 

Long-term debt — current
 
308

 
292

Accounts payable
 
34,995

 
29,619

Accrued other taxes
 
6,151

 
8,442

Accrued employee expenses
 
9,255

 
9,591

Accrued interest
 
3,546

 
3,593

Unrealized loss on purchased power contracts
 
5,662

 
3,339

Other
 
17,223

 
18,659

Total current liabilities
 
77,140

 
73,535

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
66,700

 
68,328

Contributions in aid of construction — net
 
116,156

 
116,629

Deferred income taxes
 
191,799

 
192,787

Unamortized investment tax credits
 
1,654

 
1,699

Accrued pension and other postretirement benefits
 
63,658

 
61,773

Other
 
6,580

 
6,635

Total other credits
 
446,547

 
447,851

 
 
 
 
 
Commitments and Contingencies (Note 8)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,282,372

 
$
1,282,374

 
The accompanying notes are an integral part of these financial statements

10

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2015 AND 2014
(Unaudited)

 
 
Three Months Ended June 30,
(in thousands)
 
2015
 
2014
Operating Revenues
 
 
 
 
Water
 
$
87,581

 
$
86,232

Electric
 
7,889

 
8,328

Total operating revenues
 
95,470

 
94,560

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
16,415

 
16,263

Power purchased for pumping
 
2,123

 
2,570

Groundwater production assessment
 
4,122

 
4,853

Power purchased for resale
 
2,566

 
1,988

Supply cost balancing accounts
 
1,816

 
(106
)
Other operation
 
6,540

 
6,448

Administrative and general
 
17,003

 
16,424

Depreciation and amortization
 
10,235

 
10,232

Maintenance
 
3,667

 
3,783

Property and other taxes
 
3,748

 
3,530

Total operating expenses
 
68,235

 
65,985

 
 
 
 
 
Operating Income
 
27,235

 
28,575

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,516
)
 
(5,721
)
Interest income
 
97

 
113

Other, net
 
(67
)
 
272

Total other income and expenses
 
(5,486
)
 
(5,336
)
 
 
 
 
 
Income from operations before income tax expense
 
21,749

 
23,239

 
 
 
 
 
Income tax expense
 
8,800

 
9,783

 
 
 
 
 
Net Income
 
$
12,949

 
$
13,456

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


11

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE SIX MONTHS
ENDED JUNE 30, 2015 AND 2014
(Unaudited)


 
 
Six Months Ended 
 June 30,
(in thousands)
 
2015
 
2014
Operating Revenues
 
 

 
 

Water
 
$
159,085

 
$
156,989

Electric
 
18,858

 
18,784

Total operating revenues
 
177,943

 
175,773

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
28,706

 
27,487

Power purchased for pumping
 
4,140

 
4,534

Groundwater production assessment
 
7,511

 
8,393

Power purchased for resale
 
5,065

 
4,687

Supply cost balancing accounts
 
3,629

 
712

Other operation
 
11,998

 
12,804

Administrative and general
 
32,560

 
33,409

Depreciation and amortization
 
20,476

 
20,472

Maintenance
 
6,484

 
6,844

Property and other taxes
 
7,666

 
7,426

Total operating expenses
 
128,235

 
126,768

 
 
 
 
 
Operating Income
 
49,708

 
49,005

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(10,734
)
 
(11,332
)
Interest income
 
201

 
222

Other, net
 
206

 
396

Total other income and expenses
 
(10,327
)
 
(10,714
)
 
 
 
 
 
Income from operations before income tax expense
 
39,381

 
38,291

 
 
 
 
 
Income tax expense
 
16,047

 
15,488

 
 
 
 
 
Net Income
 
$
23,334

 
$
22,803

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


12

GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014
(Unaudited)

 
 
 
Six Months Ended 
 June 30,
(in thousands)
 
2015
 
2014
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
23,334

 
$
22,803

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

 
 

Depreciation and amortization
 
20,850

 
20,969

Provision for doubtful accounts
 
370

 
667

Deferred income taxes and investment tax credits
 
(827
)
 
(1,219
)
Stock-based compensation expense
 
1,062

 
973

Other — net
 
409

 
34

Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(774
)
 
(1,907
)
Unbilled receivable
 
(80
)
 
(1,599
)
Other accounts receivable
 
664

 
2,145

Materials and supplies
 
(629
)
 
(613
)
Prepayments and other assets
 
(216
)
 
(1,515
)
Regulatory assets
 
(13,493
)
 
8,836

Accounts payable
 
5,408

 
2,968

Inter-company receivable/payable
 
196

 
336

Income taxes receivable/payable from/to Parent
 
25,186

 
10,617

Accrued pension and other post-retirement benefits
 
2,907

 
3,125

Other liabilities
 
(2,477
)
 
(1,756
)
Net cash provided
 
61,890

 
64,864

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(33,841
)
 
(34,331
)
Note receivable from AWR parent
 
(3,000
)
 
(8,300
)
Receipt of payment of note receivable from AWR parent
 

 
8,800

Other investing activities
 
(1,427
)
 
(195
)
Net cash used
 
(38,268
)
 
(34,026
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
1,751

 
4,174

Refunds on advances for construction
 
(2,571
)
 
(2,518
)
Retirement or repayments of long-term debt
 
(169
)
 
(174
)
Dividends paid
 
(26,000
)
 
(26,000
)
Other financing activities
 
(702
)
 
(956
)
Net cash used
 
(27,691
)
 
(25,474
)
 
 
 
 
 
Net change in cash and cash equivalents
 
(4,069
)
 
5,364

Cash and cash equivalents, beginning of period
 
44,005

 
37,875

Cash and cash equivalents, end of period
 
$
39,936

 
$
43,239

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
13,108

 
$
14,039

Property installed by developers and conveyed
 
$
784

 
$
206

 
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 258,000 customers. GSWC also distributes electricity in several San Bernardino County mountain communities in California serving approximately 24,000 customers through its Bear Valley Electric Service (“BVES”) division. Although Registrant has a diversified base of residential, industrial and other customers, revenues derived from commercial and residential water customers accounted for approximately 90% of total water revenues during the three and six months ended June 30, 2015 and 2014. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses, in matters 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, through its wholly owned subsidiaries, operates, maintains and performs construction activities (including renewal and replacement capital work) on water and/or wastewater systems at various United States military bases pursuant to 50-year firm fixed-price contracts. These contracts are subject to periodic price redeterminations and modifications for changes in circumstances, changes in laws and regulations and additions to the contract value for new construction of facilities at the military bases.

There is no direct regulatory oversight by the CPUC over AWR or the operations, 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 in the consolidated and GSWC Statements of Cash Flow have been reclassified to conform to the 2015 presentation of "Regulatory assets" as a separate line item.
 
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 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, 2014 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("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, 2014 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 agreed to pay any unpaid principal amounts outstanding under the Note, plus accrued interest. As of June 30, 2015, AWR had $3.0 million outstanding and owed to GSWC under this Note.


14


GSWC and ASUS provide and receive various support services to and from their parent, AWR, and among themselves. GSWC also allocates certain corporate office administrative and general costs to its affiliate, ASUS, using allocation factors approved by the CPUC. GSWC allocated corporate office administrative and general costs to ASUS of approximately $609,000 and $677,000 during the three months ended June 30, 2015 and 2014, respectively, and approximately $1,316,000 and $1,373,000 during the six months ended June 30, 2015 and 2014, respectively. 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. Amounts owed to GSWC by its parent, AWR, or for allocated expenses are included in GSWC's inter-company receivables as of June 30, 2015 and December 31, 2014.
 
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 for each rate-making area as applicable. 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 $996,000 and $975,000 for the three months ended June 30, 2015 and 2014, respectively, and $1.9 million and $1.8 million for the six months ended June 30, 2015 and 2014, 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.  The non-income tax assessments are accounted for on a gross basis and totaled $53,000 and $157,000 during the three months ended June 30, 2015 and 2014, respectively, and $86,000 and $306,000 for the six months ended June 30, 2015 and 2014, respectively.
 
Recently Issued Accounting Pronouncements: In May 2014, the Financial Accounting Standards Board ("FASB") issued updated accounting guidance on revenue recognition. The guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. Under this guidance, an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects what the entity expects in exchange for the goods or services. This guidance also requires more detailed disclosures to enable users of the financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. On July 9, 2015, the FASB decided to delay the effective date of the new revenue standard by one year. The guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017, and adoption is not permitted earlier than the original effective date, that is, no earlier than 2017. The guidance allows entities to select one of two methods of adoption, either the full retrospective approach, meaning the guidance would be applied to all periods presented, or modified retrospective approach, meaning the cumulative effect of applying the guidance would be recognized as an adjustment to opening retained earnings at January 1, 2018, along with providing certain additional disclosures. Registrant will adopt this guidance in the fiscal year beginning January 1, 2018. Management has not yet selected a transition method nor has it determined the effect of the standard on the Company's ongoing financial reporting.

In April 2015, the FASB issued Accounting Standard Update 2015-03, Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying value of the associated debt liability, rather than as an asset. The standard does not affect the recognition and measurement of debt issuance costs. This guidance is effective January 1, 2016. As of June 30, 2015, Registrant had $5.0 million in debt issuance costs reflected under "Other Noncurrent Assets."

Also in April 2015, the FASB issued Accounting Standard Update 2015-05, Intangibles - Goodwill and Other - Internal-Use Software (Subtopic 350-40): Customer's Accounting for Fees Paid in a Cloud Computing Arrangement,  ASU 2015-05 requires a customer in a cloud computing arrangement to follow internal-use software guidance if both of the following criteria are met: (a) the customer has the contractual right to take possession of the software at any time during the cloud computing arrangement and (b) it can feasibly run the software on its own hardware. If the customer does not meet both criteria, the cloud computing arrangement is considered a service contract and separate accounting for a license would not be permitted. This guidance is effective beginning January 1, 2016 and is not expected to have a material impact on Registrant's consolidated financial statements.  

 


15


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 June 30, 2015, Registrant had approximately $67.9 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $39.7 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $5.7 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC's purchase power contracts over the term of the contracts, and $16.7 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. 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 determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next 12-months have been classified as current assets and current liabilities by rate-making area. As of June 30, 2015, GSWC has a total of $139.2 million in net regulatory assets, of which $3.8 million of regulatory liabilities have been included in “Other Current Liabilities”. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows: 
(dollars in thousands)
 
June 30,
2015
 
December 31,
2014
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
28,542

 
$
9,369

Base Revenue Requirement Adjustment Mechanism
 
5,668

 
7,761

Costs deferred for future recovery on Aerojet case
 
13,220

 
13,629

Pensions and other post-retirement obligations (Note 7)
 
42,145

 
43,426

Derivative unrealized loss (Note 4)
 
5,662

 
3,339

Flow-through taxes, net (Note 6)
 
16,745

 
17,612

Low income rate assistance balancing accounts
 
8,990

 
9,109

Other regulatory assets
 
18,888

 
22,218

Various refunds to customers
 
(620
)
 
(759
)
Total
 
$
139,240

 
$
125,704

 
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, 2014 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2014.
 
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.   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.  Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months

GSWC has implemented surcharges to recover all of its WRAM/MCBA balances, as of December 31, 2014. For the six months ended June 30, 2015, surcharges (net of surcredits) of approximately $96,000 were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the six months ended June 30, 2015, GSWC recorded additional under-collections in the WRAM/MCBA accounts of $19.3 million. The increase in the WRAM balance in 2015 is largely due to water conservation by our customers in response to the ongoing drought conditions in California. Lower water usage results in an increase in under-collections recorded in the WRAM accounts. As of June 30, 2015, GSWC has a net aggregated regulatory asset of $28.5 million which is comprised of a $26.0 million under-collection in the WRAM accounts and $2.5 million under-collection in the MCBA accounts.
 

16


For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which adjusts base revenues to adopted levels.  In November 2014, the CPUC issued a final decision on BVES's general rate case, setting rates and adopted revenues for years 2013 through 2016. In March 2015, surcharges were implemented to collect the 2014 BRRAM under-collection of $3.1 million over 24 months. As of June 30, 2015, GSWC had a regulatory asset of $5.7 million under-collection in the BRRAM.
 
Other Regulatory Matters:
 
Procurement Audits:
In December 2011, the CPUC issued a final decision adopting a settlement between GSWC and the CPUC on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects primarily in one of GSWC's three main geographic water regions. As part of the settlement reached with the CPUC on this matter, 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 cover GSWC’s procurement practices for contracts with other contractors from 1994 forward. The first audit started in 2014 and covers almost a 20-year period from January 1, 1994 through September 30, 2013.
In December 2014, the accounting firm engaged by the CPUC to conduct the first independent audit provided its draft report to GSWC for comments. The report asserted that GSWC had not complied, in all material respects, with the CPUC’s requirements and GSWC's procurement policies during the period from 1994 to 2006. Subsequent to 2006, except for specific instances of alleged noncompliance, GSWC was found to be in compliance, in all material respects, with the CPUC’s requirements and GSWC’s procurement policies. The findings and corresponding recommendations in the draft report included, among other things, instances of inadequate documentation to support competitive bidding procedures, change orders, and sole source justifications. In February 2015, management provided its responses to the draft report and each of the findings noted by the accounting firm. GSWC informed the accounting firm of certain inaccuracies in their report, asserted that GSWC complied, in all material respects, with the CPUC’s requirements throughout the entire audit period and, has been in material compliance with its own procurement policies throughout the audit period.
In March 2015, the accounting firm issued its final report to the CPUC’s Division of Water and Audits (“DWA”). The final report, which was issued on a confidential basis, included GSWC's responses to the accounting firm’s findings, as well as the firm’s responses to GSWC's comments. DWA informed GSWC that it does not intend to pursue further investigation, refunds, or penalties in respect of past procurement activities as a result of the final report. Also in March, the CPUC’s Office of Ratepayer Advocates (“ORA”), in anticipation of receiving the final report, requested that the assigned administrative law judges in the ongoing general rate case convene a second phase of the rate case to consider the findings and recommendations in the final audit report. In June 2015, ORA notified the administrative law judges that, having reviewed the final audit report, its potential concerns with the audit report were satisfied and, as such, ORA no longer wished to pursue a second phase in the general rate case to address the final audit report. On August 3, 2015, the presiding administrative law judge issued a ruling that a second phase to the general rate case regarding this issue is not necessary. At this time, GSWC does not believe that a loss associated with any disallowances and/or penalties from this first audit is likely.
Rural Acquisition
In June 2013, GSWC entered into an Asset Purchase Agreement (the "Agreement") to acquire all of the operating water assets of Rural Water Company (“Rural”) for an aggregate purchase price of approximately $1.7 million. This transaction was subject to CPUC approval.  In June 2015, the CPUC approved the acquisition of Rural, including GSWC's recovery of the purchase price through customer rates. The consummation of the transaction contemplated by the Agreement is subject to customary conditions, including among other things, adjustments to the purchase price for changes in utility plant since entering into the agreement in 2013. Upon completion of this transaction, GSWC will serve approximately 960 customers in the City of Arroyo Grande in the county of San Luis Obispo, California, which is near GSWC's Santa Maria customer service area in Coastal California. Under the terms of the Agreement, GSWC will take over operations thirty days after the remaining conditions to closing are satisfied. This acquisition is not considered to be material to Registrant’s financial position or results of operations.


17


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 restricted stock units that earn dividend equivalents on an equal basis with AWR’s Common Shares that have been issued under AWR's 2000 and 2008 Stock Incentive Plans and the 2003 and 2013 Non-Employee Directors Stock Plans.  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 used for calculating basic net income per share:
Basic:
 
For The Three Months Ended June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Net income
 
$
15,648

 
$
15,354

 
27,797

 
26,375

Less: (a) Distributed earnings to common shareholders
 
8,016

 
7,853

 
16,171

 
15,699

Distributed earnings to participating securities
 
47

 
47

 
89

 
87

Undistributed earnings
 
7,585

 
7,454

 
11,537

 
10,589

 
 
 
 
 
 
 
 
 
(b) Undistributed earnings allocated to common shareholders
 
7,541

 
7,411

 
11,474

 
10,530

Undistributed earnings allocated to participating securities
 
44

 
43

 
63

 
59

 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a)+(b)
 
$
15,557

 
$
15,264

 
$
27,645

 
$
26,229

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
37,702

 
38,781

 
37,952

 
38,764

 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.41

 
$
0.39

 
$
0.73

 
$
0.68

 
Diluted EPS is based upon the weighted average number of Common Shares, including both outstanding shares and shares potentially issuable in connection with stock options and restricted stock units granted under AWR’s 2000 and 2008 Stock Incentive Plans, and the 2003 and 2013 Non-Employee Directors Stock Plans, and net income. At June 30, 2015 and 2014, there were 187,152 and 245,784 options outstanding, respectively, under these Plans. At June 30, 2015 and 2014, there were also 225,074 and 239,226 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.

18


 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 June 30,
 
 For The Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2015
 
2014
 
2015
 
2014
Common shareholders earnings, basic
 
$
15,557

 
$
15,264

 
$
27,645

 
$
26,229

Undistributed earnings for dilutive stock-based awards
 
44

 
43

 
63

 
59

Total common shareholders earnings, diluted
 
$
15,601

 
$
15,307

 
$
27,708

 
$
26,288

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
37,702

 
38,781

 
37,952

 
38,764

Stock-based compensation (1)
 
207

 
220

 
201

 
210

Weighted average common shares outstanding, diluted
 
37,909

 
39,001

 
38,153

 
38,974

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.41

 
$
0.39

 
$
0.73

 
$
0.67

 
(1)       In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 187,152 and 245,784 stock options at June 30, 2015 and 2014, respectively, were deemed to be outstanding in accordance with accounting guidance on earnings per share.  All of the 225,074 and 239,226 restricted stock units at June 30, 2015 and 2014, respectively, were included in the calculation of diluted EPS for the six months ended June 30, 2015 and 2014.
 
No stock options outstanding at June 30, 2015 had an exercise price greater than the average market price of AWR’s Common Shares for the six months ended June 30, 2015. There were no stock options outstanding at June 30, 2015 or 2014 that were anti-dilutive.
 
During the six months ended June 30, 2015 and 2014, AWR issued 69,617 and 70,573 common shares, for approximately $512,000 and $219,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan (“DRP”), the 401(k) Plan, the 2000 and 2008 Stock Incentive Plans and the 2003 and 2013 Non-Employee Directors Stock Plans.

On March 27, 2014, AWR's Board of Directors approved a stock repurchase program, authorizing AWR to repurchase up to 1.25 million shares of its Common Shares from time to time through June 30, 2016. Pursuant to this program, Registrant repurchased 704,782 Common Shares on the open market during the six months ended June 30, 2015. The 2014 stock repurchase program was completed in May 2015. On May 19, 2015, AWR's Board of Directors approved a new stock repurchase program, authorizing AWR to repurchase up to 1.2 million shares of its Common Shares from time to time through June 30, 2017. Pursuant to this program, Registrant repurchased 387,021 Common Shares on the open market during the six months ended June 30, 2015. The repurchase of Common Shares is restricted by California law under the same standards which apply to dividend distributions.
 
During the three months ended June 30, 2015 and 2014, AWR paid quarterly dividends of approximately $8.0 million, or $0.213 per share, and $7.9 million, or $0.2025 per share, respectively. During the six months ended June 30, 2015 and 2014, AWR paid quarterly dividends to shareholders of approximately $16.2 million, or $0.426 per share, and $15.7 million, or $0.405 per share, respectively.

Note 4 — Derivative Instruments:

Derivative financial instruments are used to manage exposure to commodity price risk. Commodity price risk represents the potential impact that can be caused by a change in the market value of a particular commodity. GSWC’s electric division, BVES, purchases power under long-term contracts at a fixed cost depending on the amount of power and the period during which the power is purchased under such contracts.  These contracts are generally subject to the accounting guidance for derivatives and require mark-to-market derivative accounting.  In December 2014, the CPUC approved an application that allowed GSWC to immediately execute new long-term purchased power contracts with energy providers on December 9, 2014. GSWC began taking power under these long-term contracts effective January 1, 2015 at a fixed cost over three and five year terms depending on the amount of power and period during which the power is purchased under the contracts.

19


The new long-term contracts executed in December 2014 are subject to the accounting guidance for derivatives and require mark-to-market derivative accounting. Among other things, the CPUC approval in December 2014 also authorized GSWC to establish a regulatory asset and liability memorandum account to offset the mark-to-market entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the new purchased power contracts executed in December 2014 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. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of June 30, 2015, there was a $5.7 million unrealized loss in the memorandum account for the new purchased power contracts as a result of the recent decrease in energy prices. There were no derivatives as of June 30, 2014.  The notional volume of derivatives remaining under these long-term contracts as of June 30, 2015 was approximately 526,000 megawatt hours.
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).

To value the contract, Registrant applies the Black-76 model, utilizing 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 received 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 as 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 GSWC’s Level 3 derivatives for the three and six months ended June 30, 2015 and 2014:
 
 
For The Three Months Ended June 30,
 
 For The Six Months Ended 
 June 30,
(dollars in thousands)
 
2015
 
2014
 
2015
 
2014
Fair value at beginning of the period
 
$
(6,176
)
 
$

 
$
(3,339
)
 
$

Unrealized gain (loss) on purchased power contracts
 
514

 

 
(2,323
)
 

Fair value at end of the period
 
$
(5,662
)
 
$

 
$
(5,662
)
 
$


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 $10.1 million as of June 30, 2015. 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. The fair values as of June 30, 2015 and December 31, 2014 have been determined using rates for similar financial instruments of the same duration utilizing Level 2 methods and assumptions. The interest rates used for the June 30, 2015 valuation increased as compared to December 31, 2014, decreasing the fair value of long-term debt as of June 30, 2015. Changes in the assumptions will produce differing results.
 
 
June 30, 2015
 
December 31, 2014
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC
 
$
325,921

 
$
388,236

 
$
326,090

 
$
417,057



20


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.  GSWC's ETR was 40.5% and 42.1% for the three months ended June 30, 2015 and 2014, respectively, and 40.7% and 40.4% for the six months ended June 30, 2015 and 2014, respectively. GSWC's 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.
AWR's consolidated ETR was 37.9% for the three months ended June 30, 2015 as compared to 40.1% for the three months ended June 30, 2014, and was 38.5% for the six months ended June 30, 2015 as compared to 38.7% for the six months ended June 30, 2014. The ETR at the AWR consolidated level also fluctuated primarily as a result of a reduction in ASUS's state income taxes, which vary among the jurisdictions in which it operates.
 Changes in Tax Law:
During the fourth quarter of 2014, the Company reflected a change in its tax method of accounting for certain repair and maintenance expenditures pursuant to regulations issued by the U.S. Treasury Department in September 2013.  In connection with filing the 2014 tax returns on or before September 15, 2015, the Company will file an application for an automatic change in tax accounting method with the Internal Revenue Service ("IRS") for the 2014 tax year to implement the new method effective January 1, 2014. The tax accounting method change will also include a cumulative adjustment for 2013 and prior years, and will permit the expensing of certain utility asset replacement costs that were previously being capitalized and depreciated for book and tax purposes. As a result of the change, the Company will deduct a significant amount of asset costs, which consist primarily of water mains and connections.

During the fourth quarter of 2014, GSWC recorded a cumulative adjustment for 2013 and prior years as well as the 2014 estimated deduction, and recognized a total deferred income tax liability of $30.8 million for federal and state repair-and-maintenance deductions as of December 31, 2014. Although this change reduces AWR’s current taxes payable, it did not reduce 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 six months ended June 30, 2015 and 2014 are as follows:
 
 
For The Three Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,452

 
$
1,335

 
$
95

 
$
99

 
$
204

 
$
192

Interest cost
 
1,905

 
1,845

 
114

 
130

 
163

 
154

Expected return on plan assets
 
(2,452
)
 
(2,235
)
 
(123
)
 
(113
)
 

 

Amortization of transition
 

 

 

 
104

 

 

Amortization of prior service cost (benefit)
 
30

 
29

 
(50
)
 
(50
)
 
29

 
40

Amortization of actuarial (gain) loss
 
427

 
(7
)
 
(53
)
 
(66
)
 
108

 
35

Net periodic pension cost under accounting standards
 
1,362

 
967

 
(17
)
 
104

 
504

 
421

Regulatory adjustment — deferred
 
251

 
449

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
1,613

 
$
1,416

 
$
(17
)
 
$
104

 
$
504

 
$
421


 
 
For The Six Months Ended June 30,
 
 
Pension Benefits
 
Other
Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
3,138

 
$
2,822

 
$
190

 
$
198

 
$
408

 
$
384

Interest cost
 
3,844

 
3,760

 
228

 
260

 
326

 
308

Expected return on plan assets
 
(4,898
)
 
(4,450
)
 
(246
)
 
(226
)
 

 

Amortization of transition
 

 

 

 
208

 

 

Amortization of prior service cost (benefit)
 
60

 
59

 
(100
)
 
(100
)
 
58

 
80

Amortization of actuarial (gain) loss
 
896

 

 
(106
)
 
(132
)
 
216

 
70

Net periodic pension cost under accounting standards
 
3,040

 
2,191

 
(34
)
 
208

 
1,008

 
842

Regulatory adjustment — deferred
 
262

 
749

 

 

 

 

Total expense recognized, before allocation to overhead pool
 
$
3,302

 
$
2,940

 
$
(34
)
 
$
208

 
$
1,008

 
$
842


In April 2015, Registrant contributed $919,000 to the pension plan. In total, Registrant expects to contribute $6.7 million to the pension plan during 2015.
Regulatory Adjustment:
As authorized by the CPUC in the most recent water and electric general rate case decisions, GSWC utilizes two-way balancing accounts for its water and electric 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 June 30, 2015, GSWC has a total $2.4 million net under-collection in the two-way pension balancing accounts included as part of the pension regulatory asset (Note 2).


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Note 8 — Contingencies:

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.
Claremont System:
On November 4, 2014, voters in the City of Claremont ("Claremont" or "the City") approved a measure authorizing the issuance of $135 million in water revenue bonds by the City to finance the acquisition of the Claremont water system. On December 9, 2014, the City filed an eminent domain lawsuit against GSWC. GSWC has the ability to legally challenge the government's right to take its property. GSWC does not believe the seizure is necessary and intends to vigorously defend against the potential condemnation. In June 2015, the City amended and refiled its eminent domain lawsuit against GSWC. At this time, management cannot predict the outcome of the eminent domain proceeding. The Claremont water system has a net book value of approximately $49.8 million. GSWC serves approximately 11,000 customers in Claremont. 
Ojai System:
In March 2013, Casitas Municipal Water District ("CMWD") passed resolutions under the Mello-Roos Community Facilities District Act of 1982 ("Mello-Roos Act") authorizing the establishment of a Community Facilities District, and the issuance of bonds to finance the potential acquisition of GSWC’s Ojai system by eminent domain. GSWC filed a petition in the Superior Court and eventually the Court of Appeals in Ventura County, which, among other things, challenged the legality of CMWD’s effort to utilize the Mello-Roos Act to acquire property by eminent domain and to fund legal and expert costs of the planned condemnation. On April 14, 2015, the California Court of Appeals affirmed a prior court's ruling allowing the use of Mello-Roos funding. In May 2015, GSWC filed a petition for review at the Supreme Court of California, which the Supreme Court subsequently denied. Ojai FLOW ("Friends of Locally Owned Water") members were also granted class status by the Superior Court to later file action against GSWC should they be able to prove GSWC’s motions delayed the condemnation action and resulted in higher costs for Ojai residents should the system be ultimately taken. GSWC serves approximately 3,000 customers in Ojai.
 
Artesia System:
On October 13, 2014, the City of Artesia's City Council approved a request for a feasibility study on the potential acquisition of GSWC's water system in Artesia. GSWC serves approximately 3,300 customers in Artesia.

Environmental Clean-Up and Remediation:
     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.  Analysis indicates that offsite monitoring wells may also be necessary to document effectiveness of remediation.
  As of June 30, 2015, the total spent to clean-up and remediate GSWC’s plant facility was approximately $4.8 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 June 30, 2015, GSWC has a regulatory asset and an accrued liability for the estimated additional cost of $1.4 million to complete the clean-up at the site. The estimate includes costs for two years of continued activities of groundwater cleanup and monitoring, future soil treatment and site closure related activities. 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 pending suits or administrative proceedings.


23


Note 9 — Business Segments:
 
AWR has three reportable segments, water, electric and contracted services, whereas GSWC has two segments, water and electric. On a stand-alone basis, AWR has no material assets other than cash and its investments in its subsidiaries. 
 
All activities of GSWC, a rate-regulated utility, are geographically located within California. Activities of ASUS and its subsidiaries are conducted in California, Georgia, Maryland, New Mexico, North Carolina, South Carolina, Texas and Virginia.  Each of ASUS’s wholly-owned subsidiaries is regulated by the state in which the subsidiary primarily conducts water and/or wastewater operations.  Fees charged for operations and maintenance and renewal and replacement services are based upon the terms of the contracts with the U.S. government, which have been filed as necessary with the regulatory commissions in the states in which ASUS’s subsidiaries are incorporated.
 
The tables below set forth information relating to GSWC’s operating segments, ASUS and its subsidiaries and other matters. Total assets by segment are not presented below, as certain of Registrant’s assets are not tracked by segment.  The utility plant amounts are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude government-funded capital expenditures for ASUS and property installed by developers and conveyed to GSWC.
 
 
As Of And For The Three Months Ended June 30, 2015
 
 
GSWC
 
 
 
AWR
 
Consolidated
(dollars in thousands)
 
Water
 
Electric
 
ASUS
 
Parent
 
AWR
Operating revenues
 
$
87,581

 
$
7,889

 
$
19,148

 
$

 
$
114,618

Operating income (loss)
 
26,472

 
763

 
3,297

 
(2
)
 
30,530

Interest expense, net
 
5,108

 
311

 
8

 
(2
)
 
5,425

Utility plant
 
963,147

 
47,961

 
4,399

 

 
1,015,507

Depreciation and amortization expense (1)
 
9,768