10-Q 1 awr-20180630x10q.htm 10-Q Document

 

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, 2018
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 ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨
 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 1, 2018, the number of Common Shares outstanding of American States Water Company was 36,733,506 shares. As of August 1, 2018, 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 (“AWR”) is the parent company of Golden State Water Company (“GSWC”) and American States Utility Services, Inc. and its subsidiaries ("ASUS").
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 other than with respect to itself.
 
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 the 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 GSWC's general rate cases and the results of independent audits of GSWC's 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 GSWC rates;

availability of GSWC's water supplies, which may be adversely affected by drought, changes in weather patterns, 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;

wildfires in GSWC's electric division's service territory, as well as court decisions and regulatory actions that may affect our ability to recover the costs associated with such events or the defense or payment of resulting claims;

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

the impact of opposition to GSWC rate increases on our ability to recover our costs through rates, including costs associated with construction;


1


the impact of opposition by GSWC customers to conservation rate design as well as potential future restrictions on water use mandated in California, which decreases adopted usage and increases customer rates;

the impact of condemnation actions on future GSWC revenues and other aspects of our business if we do not receive adequate compensation for the assets taken, or recovery of all charges associated with the condemnation of such assets, as well as the impact on future revenues if we are no longer entitled to any portion of the revenues generated from such assets;

liabilities of GSWC associated with the inherent risks of damage to private property and injuries to employees and the public if our or their property should come into contact with electrical current or equipment, including through downed power lines or equipment malfunctions;

our ability to forecast the costs of maintaining GSWC’s aging water and electric infrastructure;

our ability to recover increases in permitting costs and 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 GSWC's regulatory assets, settlement of liabilities and revenues subject to refund or regulatory disallowances and the timing of such recovery, and the amounts set aside for uncollectible accounts receivable, inventory obsolescence, pensions and post-retirement liabilities, taxes and uninsured losses and claims, including general liability and workers' compensation claims;

changes in environmental laws, health and safety laws and water and recycled water quality requirements and increases in costs associated with complying with these laws and requirements, including costs associated with GSWC's upgrading and building new water treatment plants, GSWC's disposing of residuals from our water treatment plants, handling and storing hazardous chemicals, compliance monitoring activities and GSWC's securing alternative water supplies when necessary;

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 attract, retain, train, motivate, develop and transition key employees;

our ability to recover the costs associated with any 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;

the breakdown or failure of equipment at GSWC's electric division that can cause fires and unplanned electric outages, and whether GSWC will be subject to investigations, penalties, liabilities to customers or other third parties or other costs in connection with such events;
 
adequacy of GSWC's electric division's power supplies and the extent to which we can manage and respond to the volatility of electricity and natural gas prices;
 
GSWC's electric division's ability to comply with the CPUC’s renewable energy procurement requirements;
 
changes in GSWC's 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 customers 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, which may impact our long-term operating revenues if we are unable to secure rate increases in an amount sufficient to offset reduced demand;

changes in accounting treatment for regulated utilities;

effects of changes in or interpretations of tax laws, rates or policies;

changes in estimates used in ASUS’s cost-to-cost method for revenue recognition of certain construction activities;

2


 
termination, in whole or in part, of one or more of ASUS's military utility privatization contracts to provide water and/or wastewater services at military bases for the convenience of the U.S. government or for default;

suspension or debarment of ASUS for a period of time from contracting with the government due to violations of laws or regulations in connection with military utility privatization activities;

delays by the U.S. government in making timely payments to ASUS for water and/or wastewater services or construction activities at military bases because of fiscal uncertainties over the funding of the U.S. government or otherwise;
 
delays in ASUS obtaining economic price 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 ASUS's contracts to provide water and/or wastewater services at military bases because of audits, cost reviews or investigations by contracting agencies;
 
inaccurate assumptions used by ASUS in preparing bids in our contracted services business;

failure of wastewater systems that ASUS operates 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 ASUS in accordance with the terms of our military privatization contracts;

competition for new military privatization contracts;
 
issues with the implementation, maintenance 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, that damage or disrupt facilities, operations or information technology systems owned by us, our customers or third parties on whom we rely or that damage the property of our customers or other third parties or cause bodily injury resulting in liabilities that we may be unable to recover from insurance, other third parties and/or the U.S. government or that the CPUC or the courts do not permit us to recover from ratepayers;
 
potential costs, lost revenues, or other consequences resulting from misappropriation of assets or sensitive information, corruption of data, or operational disruption due to a cyber-attack or other cyber incident;

increases in the cost of obtaining insurance or in uninsured losses that may not be recovered in rates, or under our contracts with the U.S. government, including increases due to difficulties in obtaining insurance for certain risks, such as wildfires and earthquakes in California;
 
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; and

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 2017 Annual Report on Form 10-K) as you read this Form 10-Q.  We qualify all our forward-looking statements by these cautionary statements.

3

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)


(in thousands)
 
June 30,
2018
 
December 31, 2017
Property, Plant and Equipment
 
 

 
 

Regulated utility plant, at cost
 
$
1,766,543

 
$
1,722,421

Non-utility property, at cost
 
21,113

 
15,941

Total
 
1,787,656

 
1,738,362

Less - Accumulated depreciation
 
(548,867
)
 
(533,370
)
Net property, plant and equipment
 
1,238,789

 
1,204,992

 
 
 
 
 
Other Property and Investments
 
 

 
 

Goodwill
 
1,116

 
1,116

Other property and investments
 
24,073

 
24,070

Total other property and investments
 
25,189

 
25,186

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
5,557

 
214

Accounts receivable — customers (less allowance for doubtful accounts of $751 in 2018 and $806 in 2017)
 
26,631

 
26,127

Unbilled receivable
 
24,681

 
26,411

Receivable from the U.S. government
 
25,977

 
3,725

Other accounts receivable (less allowance for doubtful accounts of $59 in 2018 and $235 in 2017)
 
4,648

 
8,251

Income taxes receivable
 
178

 
4,737

Materials and supplies, at average cost
 
5,364

 
4,795

Regulatory assets — current
 
25,209

 
34,220

Prepayments and other current assets
 
6,769

 
5,596

Contract assets
 
16,153

 

Costs and estimated earnings in excess of billings on contracts
 

 
41,387

Total current assets
 
141,167

 
155,463

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Receivable from the U.S. government
 
30,284

 

Costs and estimated earnings in excess of billings on contracts
 

 
25,426

Other
 
5,693

 
5,667

Total regulatory and other assets
 
35,977

 
31,093

 
 
 
 
 
Total Assets
 
$
1,441,122

 
$
1,416,734

 
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,
2018
 
December 31,
2017
Capitalization
 
 

 
 

Common shares, no par value
 
 
 
 
Authorized: 60,000,000 shares
 
 
 
 
Outstanding: 36,733,506 shares in 2018 and 36,680,794 shares in 2017
 
$
251,092

 
$
250,124

Earnings reinvested in the business
 
288,118

 
279,821

Total common shareholders’ equity
 
539,210

 
529,945

Long-term debt
 
281,031

 
321,039

Total capitalization
 
820,241

 
850,984

 
 
 
 
 
Current Liabilities
 
 

 
 

Notes payable to bank
 

 
59,000

Long-term debt — current
 
40,313

 
324

Accounts payable
 
43,391

 
50,978

Income taxes payable
 
486

 
225

Accrued other taxes
 
7,904

 
7,344

Accrued employee expenses
 
11,897

 
12,969

Accrued interest
 
3,834

 
3,861

Unrealized loss on purchased power contracts
 
1,710

 
2,941

Contract liabilities
 
7,043

 
3,911

Other
 
13,262

 
15,109

Total current liabilities
 
129,840

 
156,662

 
 
 
 
 
Other Credits
 
 

 
 

Notes payable to bank
 
77,000

 

Advances for construction
 
66,761

 
67,465

Contributions in aid of construction - net
 
123,950

 
123,602

Deferred income taxes
 
115,374

 
115,703

Regulatory liabilities
 
36,008

 
32,178

Unamortized investment tax credits
 
1,402

 
1,436

Accrued pension and other postretirement benefits
 
59,402

 
57,695

Other
 
11,144

 
11,009

Total other credits
 
491,041

 
409,088

 
 
 
 
 
Commitments and Contingencies (Note 9)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,441,122

 
$
1,416,734

 
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, 2018 AND 2017
(Unaudited)


 
 
Three Months Ended June 30,
(in thousands, except per share amounts)
 
2018
 
2017
Operating Revenues
 
 

 
 

Water
 
$
76,733

 
$
80,734

Electric
 
7,841

 
7,612

Contracted services
 
22,327

 
24,849

Total operating revenues
 
106,901

 
113,195

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
16,608

 
17,937

Power purchased for pumping
 
2,231

 
2,157

Groundwater production assessment
 
4,534

 
4,931

Power purchased for resale
 
2,384

 
2,308

Supply cost balancing accounts
 
(2,029
)
 
(5,293
)
Other operation
 
7,782

 
8,172

Administrative and general
 
20,213

 
20,248

Depreciation and amortization
 
10,010

 
9,647

Maintenance
 
3,670

 
3,606

Property and other taxes
 
4,372

 
4,345

ASUS construction
 
11,576

 
11,412

Gain on sale of assets
 
(18
)
 
(8,301
)
Total operating expenses
 
81,333

 
71,169

 
 
 
 
 
Operating Income
 
25,568

 
42,026

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(6,048
)
 
(5,926
)
Interest income
 
636

 
620

Other, net
 
579

 
379

Total other income and expenses, net
 
(4,833
)
 
(4,927
)
 
 
 
 
 
Income before income tax expense
 
20,735

 
37,099

 
 
 
 
 
Income tax expense
 
4,387

 
14,307

 
 
 
 
 
Net Income
 
$
16,348

 
$
22,792

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,733

 
36,624

Basic Earnings Per Common Share
 
$
0.44

 
$
0.62

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,912

 
36,825

Fully Diluted Earnings Per Common Share
 
$
0.44

 
$
0.62

 
 
 
 
 
Dividends Declared Per Common Share
 
$
0.255

 
$
0.242

 
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, 2018 AND 2017
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands, except per share amounts)
 
2018
 
2017
Operating Revenues
 
 

 
 

Water
 
$
141,145

 
$
147,138

Electric
 
17,673

 
18,114

Contracted services
 
42,811

 
46,753

Total operating revenues
 
201,629

 
212,005

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
30,215

 
30,043

Power purchased for pumping
 
3,924

 
3,754

Groundwater production assessment
 
9,185

 
8,306

Power purchased for resale
 
5,792

 
5,408

Supply cost balancing accounts
 
(5,898
)
 
(7,042
)
Other operation
 
15,770

 
14,332

Administrative and general
 
40,506

 
40,696

Depreciation and amortization
 
19,676

 
19,330

Maintenance
 
7,499

 
7,070

Property and other taxes
 
9,171

 
8,911

ASUS construction
 
21,548

 
22,896

Gain on sale of assets
 
(18
)
 
(8,301
)
Total operating expenses
 
157,370

 
145,403

 
 
 
 
 
Operating Income
 
44,259

 
66,602

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,971
)
 
(11,831
)
Interest income
 
1,172

 
879

Other, net
 
621

 
1,005

Total other income and expenses, net
 
(10,178
)
 
(9,947
)
 
 
 
 
 
Income before income tax expense
 
34,081

 
56,655

 
 
 
 
 
Income tax expense
 
6,951

 
21,162

 
 
 
 
 
Net Income
 
$
27,130

 
$
35,493

 
 
 
 
 
Weighted Average Number of Common Shares Outstanding
 
36,723

 
36,607

Basic Earnings Per Common Share
 
$
0.74

 
$
0.96

 
 
 
 
 
Weighted Average Number of Diluted Shares
 
36,896

 
36,799

Fully Diluted Earnings Per Common Share
 
$
0.73

 
$
0.96

 
 
 
 
 
Dividends Declared Per Common Share
 
$
0.510

 
$
0.484


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

7

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)

 
 
Six Months Ended 
 June 30,
(in thousands)
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
27,130

 
$
35,493

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

 
 

Depreciation and amortization
 
19,797

 
19,450

Provision for doubtful accounts
 
322

 
339

Deferred income taxes and investment tax credits
 
(1,565
)
 
5,948

Stock-based compensation expense
 
1,637

 
1,634

Gain on sale of assets
 
(18
)
 
(8,301
)
Other — net
 
39

 
(523
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(835
)
 
(6,408
)
Unbilled receivable
 
1,730

 
41

Other accounts receivable
 
3,612

 
489

Receivables from the U.S. government
 
(14,507
)
 
(2,433
)
Materials and supplies
 
(569
)
 
(854
)
Prepayments and other assets
 
(1,171
)
 
(1,102
)
Contract assets
 
12,631

 

Costs and estimated earnings in excess of billings on contracts
 

 
7,752

Regulatory assets
 
12,240

 
(3,855
)
Accounts payable
 
(3,473
)
 
948

Income taxes receivable/payable
 
4,820

 
29,089

Contract liabilities / Billings in excess of costs and estimated earnings on contracts
 
3,132

 
(1,849
)
Accrued pension and other post-retirement benefits
 
2,495

 
2,864

Other liabilities
 
(2,376
)
 
(3,283
)
Net cash provided
 
65,071

 
75,439

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(58,782
)
 
(45,896
)
Proceeds from sale of assets
 
29

 
34,324

Other investing activities
 
98

 
232

Net cash used
 
(58,655
)
 
(11,340
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Proceeds from stock option exercises
 
340

 
524

Receipt of advances for and contributions in aid of construction
 
3,343

 
5,144

Refunds on advances for construction
 
(2,616
)
 
(2,868
)
Retirement or repayments of long-term debt
 
(197
)
 
(191
)
Net change in notes payable to banks
 
18,000

 
(46,000
)
Dividends paid
 
(18,729
)
 
(17,715
)
Other financing activities
 
(1,214
)
 
(1,305
)
Net cash used provided
 
(1,073
)
 
(62,411
)
Net increase in cash and cash equivalents
 
5,343

 
1,688

Cash and cash equivalents, beginning of period
 
214

 
436

Cash and cash equivalents, end of period
 
$
5,557

 
$
2,124

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
16,016

 
$
17,777

Property installed by developers and conveyed
 
$
929

 
$
1,025



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,
2018
 
December 31,
2017
Utility Plant
 
 

 
 

Utility plant, at cost
 
$
1,766,543

 
$
1,722,421

Less - Accumulated depreciation
 
(539,172
)
 
(524,481
)
Net utility plant
 
1,227,371

 
1,197,940

 
 
 
 
 
Other Property and Investments
 
21,974

 
21,956

 
 
 
 
 
Current Assets
 
 

 
 

Cash and cash equivalents
 
3,123

 
214

Accounts receivable-customers (less allowance for doubtful accounts of $751 in 2018 and $806 in 2017)
 
26,631

 
26,127

Unbilled receivable
 
18,107

 
18,852

Other accounts receivable (less allowance for doubtful accounts of $59 in 2018 and 2017)
 
3,275

 
6,105

Income taxes receivable from Parent
 

 
6,590

Materials and supplies, at average cost
 
4,153

 
4,046

Regulatory assets — current
 
25,209

 
34,220

Prepayments and other current assets
 
5,551

 
5,090

Total current assets
 
86,049

 
101,244

 
 
 
 
 
Regulatory and Other Assets
 
 

 
 

Other
 
5,681

 
5,683

Total regulatory and other assets
 
5,681

 
5,683

 
 
 
 
 
Total Assets
 
$
1,341,075

 
$
1,326,823

 
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,
2018
 
December 31, 2017
Capitalization
 
 

 
 

Common Shares, no par value:
 
 
 
 
 Authorized: 1,000 shares
 
 
 
 
 Outstanding: 146 shares in 2018 and 2017
 
$
242,645

 
$
242,181

Earnings reinvested in the business
 
235,891

 
232,193

Total common shareholder’s equity
 
478,536

 
474,374

Long-term debt
 
281,031

 
321,039

Total capitalization
 
759,567

 
795,413

 
 
 
 
 
Current Liabilities
 
 

 
 

Intercompany payable
 
49,862

 
34,836

Long-term debt — current
 
40,313

 
324

Accounts payable
 
36,075

 
42,497

Income taxes payable to Parent
 
1,016

 

Accrued other taxes
 
7,724

 
7,108

Accrued employee expenses
 
10,450

 
11,338

Accrued interest
 
3,570

 
3,585

Unrealized loss on purchased power contracts
 
1,710

 
2,941

Other
 
12,383

 
14,705

Total current liabilities
 
163,103

 
117,334

 
 
 
 
 
Other Credits
 
 

 
 

Advances for construction
 
66,761

 
67,465

Contributions in aid of construction — net
 
123,950

 
123,602

Deferred income taxes
 
119,830

 
120,780

Regulatory liabilities
 
36,008

 
32,178

Unamortized investment tax credits
 
1,402

 
1,436

Accrued pension and other postretirement benefits
 
59,402

 
57,695

Other
 
11,052

 
10,920

Total other credits
 
418,405

 
414,076

 
 
 
 
 
Commitments and Contingencies (Note 9)
 


 


 
 
 
 
 
Total Capitalization and Liabilities
 
$
1,341,075

 
$
1,326,823

 
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, 2018 AND 2017
(Unaudited)

 
 
Three Months Ended June 30,
(in thousands)
 
2018
 
2017
Operating Revenues
 
 
 
 
Water
 
$
76,733

 
$
80,734

Electric
 
7,841

 
7,612

Total operating revenues
 
84,574

 
88,346

 
 
 
 
 
Operating Expenses
 
 
 
 
Water purchased
 
16,608

 
17,937

Power purchased for pumping
 
2,231

 
2,157

Groundwater production assessment
 
4,534

 
4,931

Power purchased for resale
 
2,384

 
2,308

Supply cost balancing accounts
 
(2,029
)
 
(5,293
)
Other operation
 
6,419

 
7,096

Administrative and general
 
15,178

 
15,857

Depreciation and amortization
 
9,430

 
9,394

Maintenance
 
3,170

 
3,049

Property and other taxes
 
4,004

 
3,982

Gain on sale of assets
 

 
(8,301
)
Total operating expenses
 
61,929

 
53,117

 
 
 
 
 
Operating Income
 
22,645

 
35,229

 
 
 
 
 
Other Income and Expenses
 
 
 
 
Interest expense
 
(5,857
)
 
(5,775
)
Interest income
 
457

 
620

Other, net
 
617

 
438

Total other income and expenses, net
 
(4,783
)
 
(4,717
)
 
 
 
 
 
Income before income tax expense
 
17,862

 
30,512

 
 
 
 
 
Income tax expense
 
4,214

 
12,149

 
 
 
 
 
Net Income
 
$
13,648

 
$
18,363

 
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, 2018 AND 2017
(Unaudited)


 
 
Six Months Ended 
 June 30,
(in thousands)
 
2018
 
2017
Operating Revenues
 
 

 
 

Water
 
$
141,145

 
$
147,138

Electric
 
17,673

 
18,114

Total operating revenues
 
158,818

 
165,252

 
 
 
 
 
Operating Expenses
 
 

 
 

Water purchased
 
30,215

 
30,043

Power purchased for pumping
 
3,924

 
3,754

Groundwater production assessment
 
9,185

 
8,306

Power purchased for resale
 
5,792

 
5,408

Supply cost balancing accounts
 
(5,898
)
 
(7,042
)
Other operation
 
12,853

 
11,649

Administrative and general
 
30,326

 
31,356

Depreciation and amortization
 
18,764

 
18,832

Maintenance
 
6,325

 
5,970

Property and other taxes
 
8,390

 
8,172

Gain on sale of assets
 

 
(8,301
)
Total operating expenses
 
119,876

 
108,147

 
 
 
 
 
Operating Income
 
38,942

 
57,105

 
 
 
 
 
Other Income and Expenses
 
 

 
 

Interest expense
 
(11,616
)
 
(11,532
)
Interest income
 
837

 
857

Other, net
 
704

 
1,104

Total other income and expenses, net
 
(10,075
)
 
(9,571
)
 
 
 
 
 
Income before income tax expense
 
28,867

 
47,534

 
 
 
 
 
Income tax expense
 
6,329

 
18,422

 
 
 
 
 
Net Income
 
$
22,538

 
$
29,112

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


12

GOLDEN STATE WATER COMPANY
STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2018 AND 2017
(Unaudited)

 
 
 
Six Months Ended 
 June 30,
(in thousands)
 
2018
 
2017
Cash Flows From Operating Activities:
 
 

 
 

Net income
 
$
22,538

 
$
29,112

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

 
 

Depreciation and amortization
 
18,885

 
18,952

Provision for doubtful accounts
 
331

 
342

Deferred income taxes and investment tax credits
 
(2,192
)
 
6,234

Stock-based compensation expense
 
1,326

 
1,356

Gain on sale of assets
 

 
(8,301
)
Other — net
 
79

 
(566
)
Changes in assets and liabilities:
 
 

 
 

Accounts receivable — customers
 
(835
)
 
(6,408
)
Unbilled receivable
 
745

 
(559
)
Other accounts receivable
 
2,830

 
(29
)
Materials and supplies
 
(107
)
 
(713
)
Prepayments and other assets
 
(460
)
 
(625
)
Regulatory assets
 
12,240

 
(3,855
)
Accounts payable
 
(2,310
)
 
3,290

Intercompany receivable/payable
 
26

 
(643
)
Income taxes receivable/payable from/to Parent
 
7,606

 
25,125

Accrued pension and other post-retirement benefits
 
2,495

 
2,864

Other liabilities
 
(2,603
)
 
(3,000
)
Net cash provided
 
60,594

 
62,576

 
 
 
 
 
Cash Flows From Investing Activities:
 
 

 
 

Capital expenditures
 
(53,510
)
 
(45,278
)
Proceeds from sale of assets
 

 
34,324

Other investing activities
 
98

 
232

Net cash used
 
(53,412
)
 
(10,722
)
 
 
 
 
 
Cash Flows From Financing Activities:
 
 

 
 

Receipt of advances for and contributions in aid of construction
 
3,343

 
5,144

Refunds on advances for construction
 
(2,616
)
 
(2,868
)
Retirement or repayments of long-term debt
 
(197
)
 
(191
)
Net change in intercompany borrowings
 
15,000

 
(51,500
)
Dividends paid
 
(18,750
)
 

Other financing activities
 
(1,053
)
 
(1,104
)
Net cash used
 
(4,273
)
 
(50,519
)
 
 
 
 
 
Net increase in cash and cash equivalents
 
2,909

 
1,335

Cash and cash equivalents, beginning of period
 
214

 
209

Cash and cash equivalents, end of period
 
$
3,123

 
$
1,544

 
 
 
 
 
Non-cash transactions:
 
 
 
 
Accrued payables for investment in utility plant
 
$
16,016

 
$
17,759

Property installed by developers and conveyed
 
$
929

 
$
1,025

 
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”), Old North Utility Services, Inc. (“ONUS”), Emerald Coast Utility Services, Inc. ("ECUS"), and Fort Riley Utility Services, Inc. ("FRUS")).  The subsidiaries of ASUS are collectively referred to 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 260,000 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. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric businesses in matters including properties, rates, services, facilities and transactions by GSWC with its affiliates. 
 
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 U.S. military bases pursuant to 50-year firm fixed-price contracts. These contracts are subject to economic price adjustments 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. In September 2017, ASUS was awarded a new 50-year contract by the U.S. government to operate, maintain, and provide construction management services for the water distribution and wastewater collection and treatment facilities at Fort Riley, a United States Army installation located in Kansas. The contract over the 50-year period is subject to annual economic price adjustments. ASUS began operations at Fort Riley in July 2018.
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 presented in a combined report filed by two separate Registrants: AWR and GSWC. References in this report to “Registrant” are to AWR and GSWC, collectively, unless otherwise specified.
 
AWR owns all of the outstanding Common Shares of GSWC and ASUS. ASUS owns all of the outstanding Common Shares of the Military Utility Privatization Subsidiaries. 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. Intercompany 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, 2017 condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles ("GAAP") in the United States of America. 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, 2017 filed with the SEC.
 
GSWC's Related Party Transactions: GSWC and ASUS provide and/or 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 $1.0 million during the three months ended June 30, 2018 and 2017, and approximately $2.0 million during the six months ended June 30, 2018 and 2017.

14


AWR has a $150.0 million syndicated credit facility, which was renewed in May 2018. As of June 30, 2018, AWR had $77.0 million outstanding under this facility. All amounts borrowed under the renewed facility are contractually due in May 2023 pursuant to the new terms and are generally priced off a spread to LIBOR. AWR borrows under this facility and provides funds to its subsidiaries, GSWC and ASUS, in support of their operations.  The interest rate charged to GSWC and ASUS is sufficient to cover AWR’s interest expense under the credit facility. Amounts owed to AWR by GSWC, including for allocated expenses, are included in GSWC's intercompany payable under "Current Liabilities" as of June 30, 2018 and December 31, 2017.
 
GSWC Long-Term Debt: In March of 2019, $40 million of GSWC's 6.70% senior note will mature. This note has been included in "Current Liabilities" in Registrant's balance sheets as of June 30, 2018. GSWC intends to borrow under its intercompany borrowing arrangement with AWR and/or issue additional long-term debt to fund the repayment of this note.

Recently Issued Accounting Pronouncements: In May 2014, the FASB issued Accounting Standard Update 2014-09, Revenue from Contracts with Customers (Topic 606). Under this guidance, an entity recognizes revenue when it transfers goods or services to customers in an amount that reflects what the entity expects in exchange for the goods or services. Registrant adopted this guidance under the modified retrospective approach beginning January 1, 2018. The adoption of this guidance did not have a material impact on its measurement or timing of revenue recognition but requires additional disclosures (see Note 2).

In March 2017, the FASB issued Accounting Standards Update 2017-07, Compensation-Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost, which changes the financial statement presentation for the costs of defined benefit pension plans and other retirement benefits. Prior to this guidance, the components of net benefit cost for retirement plans (such as service cost, interest cost, expected return on assets, and the amortization of prior service costs and actuarial gains and losses) were aggregated as operating costs for financial statement presentation purposes. Under the new guidance, the service cost component continues to be presented as operating costs, while all other components of net benefit cost are presented outside of operating income. The new guidance also limits any capitalization of net periodic benefits cost to the service cost component. Registrant adopted the new guidance beginning January 1, 2018, which did not have a material impact on its financial statements. Registrant used its prior year's disclosure of its pension and other employee benefit plans as an estimation for applying the retrospective presentation requirements of this guidance. The components of net periodic benefits cost, other than the service cost component, have been included in the line item “Other, net” in Registrant's income statements.

In November of 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230) - Restricted Cash. The guidance requires restricted cash to be combined with cash and cash equivalents when reconciling the beginning and end of period cash balances in the statement of cash flows. The adoption of this new guidance in 2018 did not have an impact on Registrant's cash flow statements.

In August 2016, the FASB issued Accounting Standards Update 2016-15, Statement of Cash Flows (Topic 230)
Classification of Certain Cash Receipts and Cash Payments, which is intended to reduce diversity in practice in how certain transactions are classified in the statement of cash flows. The adoption of this new guidance in 2018 did not have an impact on Registrant's cash flow statements.
        
In February 2016, the FASB issued a new lease accounting standard, Leases (ASC 842). Under the new standard, lessees will recognize a right-of-use asset and a lease liability for virtually all leases (other than leases that meet the definition of a short-term lease). For income statement purposes, leases will be classified as either operating or finance. Operating leases will result in straight-line expense while finance leases will result in a front-loaded expense pattern. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Registrant will use the practical expedients available under this standard and will not reassess: (i) whether any expired or existing contracts are or contain leases, (ii) the lease classification for any expired or existing leases, or (iii) any initial direct costs for existing leases, if any. Management has not yet determined the effect of this standard on Registrant's financial statements, which will depend on Registrant’s lease portfolio as of the adoption date.

Note 2 — Revenues from Contracts with Customers
 
Most of Registrant's revenues are accounted for under the revenue recognition accounting standard, "Revenue from Contracts with Customers - (Topic 606)." The adoption of this accounting standard effective January 1, 2018 did not have a material impact on Registrant's measurement or timing of revenue recognition.

GSWC provides water and electric utility services to customers as specified by the CPUC. The transaction prices for water and electric revenues are based on tariff rates authorized by the CPUC, which include both quantity-based and flat charges. Tariff revenues represent the adopted revenue requirement authorized by the CPUC intended to provide GSWC with an opportunity to recover its costs and earn a reasonable return on its net capital investment. The annual revenue requirements are

15


comprised of operation and maintenance costs, administrative and general costs, depreciation and taxes in amounts authorized by the CPUC and a return on rate base consistent with the capital structure authorized by the CPUC.

Water and electric revenues are recognized over time as customers simultaneously receive and use the utility services provided. Water and electric revenues include amounts billed to customers on a cyclical basis based on meter readings for services provided. Customer bills also include surcharges for cost-recovery activities, which represent CPUC-authorized balancing and memorandum accounts that allow for the recovery of previously incurred operating costs. Revenues from these surcharges result in no impact to earnings as they are offset by corresponding increases in operating expenses to reflect the recovery of the associated costs. Customer payment terms are approximately 20 business days from the billing date. Unbilled revenues are amounts estimated to be billed for usage since the last meter-reading date to the end of the accounting period. Historical customer usage forms the basis for estimating unbilled revenue.

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 their ordinances) in order to use public rights of way for utility purposes. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate for each ratemaking area as applicable. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect them from its customers, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $894,000 and $937,000 for the three months ended June 30, 2018 and 2017, respectively, and $1.7 million and $1.8 million for the six months ended June 30, 2018 and 2017, respectively. When GSWC acts as an agent, and a tax is not required to be remitted if it is not collected from customers, the tax is accounted for on a net basis.

GSWC revenues tracked under the Water Revenue Adjustment Mechanism (“WRAM”) regulatory accounts for its water segment, and the Base Revenue Requirement Adjustment Mechanism ("BRRAM") regulatory account for its electric segment, are alternative revenue programs accounted for under Accounting Standards Codification ("ASC") Topic 980, Regulated Operations.

For ASUS, performance obligations consist of: (i) performing ongoing operation and maintenance of the water and/or wastewater systems and treatment plants for each military base served, and (ii) performing construction activities (including renewal and replacement capital work) on each military base served. The transaction price for each performance obligation is either delineated in, or initially derived from, the applicable 50-year contract and/or any subsequent contract modifications. Depending on the state in which operations are conducted, the Military Utility Privatization Subsidiaries are also subject to certain state non-income tax assessments, which are accounted for on a gross basis and have been immaterial to date.

The ongoing performance of operation and maintenance of the water and/or wastewater systems and treatment plants is viewed as a single performance obligation for each 50-year contract with the U.S. government. Registrant recognizes revenue for operations and maintenance fees monthly using the "right to invoice" practical expedient under ASC Topic 606. ASUS has a right to consideration from the U.S. government in an amount that corresponds directly to the value to the U.S. government of ASUS’s performance completed to date. The contractual operations and maintenance fees are firm-fixed, and the level of effort or resources expended in the performance of the operations-and-maintenance-fees performance obligation is largely consistent over the 50-year term. Therefore, Registrant has determined that the monthly amounts invoiced for operations and maintenance performance are a fair reflection of the value transferred to the U.S. government. Invoices to the U.S. government for operations and maintenance service, as well as construction activities, are due upon receipt.
ASUS's construction activities consist of various projects to be performed. Each of these projects' transaction prices is delineated either in the 50-year contract or through a specific contract modification for each construction project, which includes the transaction price for that project. Each construction project is viewed as a separate, single performance obligation. Therefore, it is generally not necessary to allocate a construction transaction price to more than one construction performance obligation. Revenues for construction activities are recognized over time, with progress toward completion measured based on the input method using costs incurred relative to the total estimated costs (cost-to-cost method). Due to the nature of these construction projects, Registrant has determined cost-to-cost input measurement to be the best method to measure progress towards satisfying its construction contract performance obligations, as compared to using an output measurement such as units produced. Changes in job performance, job site conditions, change orders and/or estimated profitability may result in revisions to costs and income for ASUS, and are recognized in the period in which any such revisions are determined. Pre-contract costs for ASUS, which consist of design and engineering labor costs, are deferred if recovery is probable, and are expensed as incurred if recovery is not probable.  Deferred pre-contract costs have been immaterial to date.
Contracted services revenues recognized during the three and six months ended June 30, 2018 from performance obligations satisfied in previous periods were not material.

Although GSWC has a diversified base of residential, commercial, industrial and other customers, revenues derived from residential and commercial customers account for approximately 90% and 85% of total water and electric revenues, respectively.     

16


For the three and six months ended June 30, 2018, disaggregated revenues from contracts with customers by segment are as follows:
(dollar in thousands)
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
Water:
 
 
 
 
Tariff-based revenues
 
$
70,251

 
$
136,026

CPUC-approved surcharges (cost-recovery activities)
 
728

 
1,521

Other
 
453

 
895

Water revenues from contracts with customers
 
71,432

 
138,442

WRAM under-collection (alternative revenue program)
 
5,301

 
2,703

Total water revenues
 
76,733

 
141,145

 
 
 
 
 
Electric:
 
 
 
 
Tariff-based revenues
 
7,795

 
17,814

CPUC-approved surcharges (cost-recovery activities)
 
63

 
110

Electric revenues from contracts with customers
 
7,858

 
17,924

BRRAM over-collection (alternative revenue program)
 
(17
)
 
(251
)
Total electric revenues
 
7,841

 
17,673

 
 
 
 
 
Contracted services:
 
 
 
 
Water
 
14,233

 
27,233

Wastewater
 
8,094

 
15,578

Contracted services revenues from contracts with customers
 
22,327

 
42,811

 
 
 
 
 
Total revenues
 
$
106,901

 
$
201,629

The opening and closing balances of the receivable from the U.S. government, contract assets and contract liabilities from contracts with customers, which related entirely to ASUS, are as follows:    
(dollar in thousands)
 
June 30, 2018
 
January 1, 2018
 
 
 
 
 
Receivable from the U.S. government
 
$
56,261

 
$
40,150

Contract assets
 
$
16,153

 
$
30,388

Contract liabilities
 
$
7,043

 
$
3,911

As a result of the adoption of ASC Topic 606, amounts previously reported under "Costs and estimated earnings in excess of billings on contracts" are now reflected as either "Receivable from U.S. government" or "Contract assets," depending on whether receipt of these amounts is conditional on something other than the passage of time. Amounts previously reported under "Billings in excess of costs and estimated earnings on contracts" are now reflected as "Contract liabilities."
Contract Assets - Contract assets are those of ASUS and consist of unbilled revenues recognized from work-in-progress construction projects where the right to payment is conditional on something other than the passage of time. The classification of this asset as current or noncurrent is based on the timing of when ASUS expects to bill these amounts.
Contract Liabilities - Contract liabilities are those of ASUS and consist of billings in excess of revenue recognized. The classification of this liability as current or noncurrent is based on the timing of when ASUS expects to recognize revenue.
Revenue for the three and six months ended June 30, 2018 that were included in contract liabilities at the beginning of the period were $2.6 million and $1.9 million, respectively.
As of June 30, 2018, Registrant's aggregate remaining performance obligations, all of which are for the contracted services segment, was $3.1 billion. Registrant expects to recognize revenue on these remaining performance obligations over the remaining terms from each of the 50-year contracts, which range from 36 to 50 years. Each of the contracts with the U.S. government is subject to termination, in whole or in part, prior to the end of its 50-year term for the convenience of the U.S. government.

17


Note 3 — 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, 2018, Registrant had approximately $59.4 million of regulatory liabilities, net of regulatory assets not accruing carrying costs. Of this amount, (i) $82.1 million of regulatory liabilities are excess deferred income taxes arising from the lower federal income tax rate due to the Tax Cuts and Jobs Act ("Tax Act") enacted in December 2017 that are expected to be refunded to customers, (ii) $16.5 million of regulatory liabilities are from flowed-through deferred income taxes, (iii) $33.9 million of regulatory assets relates to the underfunded position in Registrant's pension and other post-retirement obligations (not including the two-way pension balancing accounts), and (iv) $1.7 million of regulatory assets relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on BVES's purchase power contracts over the term of the contracts. 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 requiring it to write down the asset's value. Regulatory assets are offset against regulatory liabilities within each ratemaking area. Amounts expected to be collected or refunded in the next 12 months have been classified as current assets and current liabilities by ratemaking area. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows: 
(dollars in thousands)
 
June 30,
2018
 
December 31,
2017
GSWC
 
 
 
 
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account
 
$
29,604

 
$
29,556

Costs deferred for future recovery on Aerojet case
 
10,272

 
10,656

Pensions and other post-retirement obligations (Note 8)
 
31,705

 
33,019

Derivative unrealized loss (Note 5)
 
1,710

 
2,941

Low income rate assistance balancing accounts
 
4,982

 
5,972

General rate case memorandum accounts
 
8,241

 
10,522

Excess deferred income taxes (Note 7)
 
(82,128
)
 
(83,231
)
Flow-through taxes, net (Note 7)
 
(16,508
)
 
(17,716
)
Other regulatory assets
 
15,677

 
14,875

Various refunds to customers
 
(14,354
)
 
(4,552
)
Total
 
$
(10,799
)
 
$
2,042

 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, 2017 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2017.

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 over- or under-collection of the WRAM is aggregated with the MCBA over- or under-collection for the corresponding ratemaking area and bears interest at the current 90-day commercial paper rate. 
As required by the accounting guidance for alternative revenue programs, GSWC is required to collect its WRAM balances, net of its MCBA, within 24 months following the year in which an under-collection is recorded in order to recognize such amounts as revenue.  The recovery periods for the majority of GSWC's WRAM/MCBA balances are primarily within 12 to 24 months. GSWC has implemented surcharges to recover its WRAM/MCBA balances as of December 31, 2017. For the three months ended June 30, 2018 and 2017, surcharges (net of surcredits) of approximately $5.6 million and $9.5 million, respectively, were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. For the six months ended June 30, 2018 and 2017, surcharges (net of surcredits) of approximately $9.8 million and $13.4 million, respectively, were billed to customers. During the six months ended June 30, 2018, GSWC recorded additional net under-collections in the WRAM/MCBA accounts of $9.9 million due to higher than adopted supply costs as well as lower than adopted customer water usage. As of June 30, 2018, GSWC had an aggregated regulatory asset of $29.6 million, which is comprised of a $6.6 million under-collection in the WRAM accounts and a $23.0 million under-collection in the MCBA accounts.

18


Other Regulatory Matters:
Tax Cuts and Jobs Act ("Tax Act"):
On December 22, 2017, the Tax Act was signed into federal law. The provisions of this major tax reform were generally effective January 1, 2018. The most significant provisions of the Tax Act impacting GSWC are the reduction of the federal corporate income tax rate from 35% to 21% and the elimination of bonus depreciation for regulated utilities. Pursuant to a CPUC directive, the 2018 impact of the Tax Act on the water segment’s adopted revenue requirement is being captured in a memorandum account effective January 1, 2018. For the three and six months ended June 30, 2018, approximately $3.7 million and $6.4 million, respectively, of reduced water-revenue requirements were tracked and recorded as a regulatory liability, which were offset by decreases in income tax expense. In March 2018, GSWC filed updated testimony revising the revenue requirements to reflect the impacts of the Tax Act in its pending water general rate case that will set new rates for the years 2019 - 2021. On July 1, 2018, new lower water rates, which incorporate the new federal income tax rate, were implemented for all water ratemaking areas.
The CPUC also ordered GSWC to update its pending electric general rate case filing, which will determine new electric rates for the years 2018 - 2021, to reflect the lower corporate tax rate. As a result, for the three and six months ended June 30, 2018, GSWC reduced electric revenues by approximately $356,000 and $723,000, respectively, and recorded a corresponding regulatory liability that will be satisfied as part of implementing overall new rates from the general rate case retroactive to January 1, 2018.
Reductions in the water and electric revenue requirements resulting from the impacts of the Tax Act are offset by decreases in GSWC's income tax expense, resulting in no material impact to earnings (see Note 7).
Cost of Capital Proceeding:    
In March 2018, the CPUC issued a final decision in the cost of capital proceeding for GSWC and three other water utilities for the years 2018 - 2020. Among other things, the final decision adopted for GSWC's water segment a return on equity of 8.90%, with a return on rate base of 7.91%. The previously authorized return on equity for GSWC’s water segment was 9.43%, with a return on rate base of 8.34%. Including the effects of the Tax Act, the lower return on equity and rate base is expected to decrease GSWC’s annual adopted revenue requirement beginning in 2018 by approximately $3.6 million million. In April 2018, GSWC implemented new water rates to incorporate the cost of capital decision. For the six months ended June 30, 2018, GSWC recorded a regulatory liability with a corresponding decrease in water revenues of approximately $952,000 representing the revenue difference between the old and new cost of capital rates through April 2018.

19


Note 4 — 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 stock incentive plans for employees and the 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)
 
2018
 
2017
 
2018
 
2017
Net income
 
$
16,348

 
$
22,792

 
27,130

 
35,493

Less: (a) Distributed earnings to common shareholders
 
9,367

 
8,861

 
18,729

 
17,715

Distributed earnings to participating securities
 
51

 
48

 
96

 
91

Undistributed earnings
 
6,930

 
13,883

 
8,305

 
17,687

 
 
 
 
 
 
 
 
 
          (b) Undistributed earnings allocated to common shareholders
 
6,894

 
13,807

 
8,263

 
17,597

Undistributed earnings allocated to participating securities
 
36

 
76

 
42

 
90

 
 
 
 
 
 
 
 
 
Total income available to common shareholders, basic (a) + (b)
 
$
16,261

 
$
22,668

 
$
26,992

 
$
35,312

 
 
 
 
 
 
 
 
 
Weighted average Common Shares outstanding, basic
 
36,733

 
36,624

 
36,723

 
36,607

 
 
 
 
 
 
 
 
 
Basic earnings per Common Share
 
$
0.44

 
$
0.62

 
$
0.74

 
$
0.96

 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 stock incentive plans for employees and the non-employee directors stock plans, and net income. At June 30, 2018 and 2017, there were 47,792 and 91,634 options outstanding, respectively, under these plans. At June 30, 2018 and 2017, there were also 204,909 and 208,059 restricted stock units outstanding, respectively, including performance shares awarded to officers of the Registrant.
 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)
 
2018
 
2017
 
2018
 
2017
Common shareholders earnings, basic
 
$
16,261

 
$
22,668

 
$
26,992

 
$
35,312

Undistributed earnings for dilutive stock-based awards
 
36

 
76

 
42

 
90

Total common shareholders earnings, diluted
 
$
16,297

 
$
22,744

 
$
27,034

 
$
35,402

 
 
 
 
 
 
 
 
 
Weighted average common shares outstanding, basic
 
36,733

 
36,624

 
36,723

 
36,607

Stock-based compensation (1)
 
179

 
201

 
173

 
192

Weighted average common shares outstanding, diluted
 
36,912

 
36,825

 
36,896

 
36,799

 
 
 
 
 
 
 
 
 
Diluted earnings per Common Share
 
$
0.44

 
$
0.62

 
$
0.73

 
$
0.96

 
(1)     In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, 47,792 and 91,634 stock options at June 30, 2018 and 2017, respectively, were deemed to be outstanding in accordance with the accounting guidance on earnings per share.  All of the 204,909 and 208,059 restricted stock units at June 30, 2018 and 2017, respectively, were included in the calculation of diluted EPS for the three and six months ended June 30, 2018 and 2017.
 

20


No stock options outstanding at June 30, 2018 had an exercise price greater than the average market price of AWR’s Common Shares for the three and six months ended June 30, 2018. There were no stock options outstanding at June 30, 2018 or 2017 that were anti-dilutive.
 
During the six months ended June 30, 2018 and 2017, AWR issued 52,712 and 73,398 Common Shares, for approximately $340,000 and $524,000, respectively, under Registrant’s Common Share Purchase and Dividend Reinvestment Plan, the 401(k) Plan, the 2000 and 2008 Stock Incentive Plans and the 2003 and 2013 Non-Employee Directors Stock Plans.

During the three months ended June 30, 2018 and 2017, AWR paid quarterly dividends of approximately $9.4 million, or $0.255 per share, and $8.9 million, or $0.242 per share, respectively. During the six months ended June 30, 2018 and 2017, AWR paid quarterly dividends to shareholders of approximately $18.7 million, or $0.51 per share, and $17.7 million, or $0.484 per share, respectively.
Note 5 — 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 commodity. 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.  In December 2014, the CPUC approved an application that allowed BVES to immediately execute new long-term purchased power contracts with energy providers. BVES 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 the period during which the power is purchased under the contracts.
BVES's long-term contracts are subject to the accounting guidance for derivatives and require mark-to-market derivative accounting. Among other things, the CPUC 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 purchased power contracts are deferred monthly into a non-interest bearing regulatory memorandum account that tracks the changes in fair value of the derivatives throughout the term of the contracts. As a result, these unrealized gains and losses do not impact GSWC’s earnings. As of June 30, 2018, there was a $1.7 million unrealized loss in the memorandum account for the purchased power contracts as a result of the drop in energy prices. The notional volume of derivatives remaining under these long-term contracts as of June 30, 2018 was approximately 149,000 megawatt hours.
The accounting guidance for fair value measurements applies to all financial assets and financial liabilities that are 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 contracts, Registrant applies the Black-76 model, utilizing various inputs that include quoted market prices for energy over the duration of the contracts. The market prices used to determine the fair value for these derivative instruments 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 instruments.  When such inputs have a significant impact on the measurement of fair value, the instruments are categorized as Level 3. Accordingly, the valuation of the derivatives 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, 2018 and 2017:
 
 
For The Three Months Ended June 30,
 
 For The Six Months Ended 
 June 30,
(dollars in thousands)
 
2018
 
2017
 
2018
 
2017
Fair value at beginning of the period
 
$
(2,625
)
 
$
(5,460
)
 
$
(2,941
)
 
$
(4,901
)
Unrealized gain on purchased power contracts
 
915

 
967

 
1,231

 
408

Fair value at end of the period
 
$
(1,710
)
 
$
(4,493
)
 
$
(1,710
)
 
$
(4,493
)


21


Note 6 — 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 ("SERP") are measured at fair value and totaled $15.3 million as of June 30, 2018. 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, 2018 and December 31, 2017 were 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, 2018 valuation increased as compared to December 31, 2017, decreasing the fair value of long-term debt as of June 30, 2018. Changes in the assumptions will produce different results.
 
 
June 30, 2018
 
December 31, 2017
(dollars in thousands)
 
Carrying Amount
 
Fair Value
 
Carrying Amount
 
Fair Value
Financial liabilities:
 
 

 
 

 
 

 
 

Long-term debt—GSWC (1)
 
$
325,069

 
$
393,172

 
$
325,265

 
$
424,042

___________________
(1) Excludes debt issuance costs and redemption premiums.
Note 7 — Income Taxes:
On December 22, 2017, the Tax Act was signed into federal law. The provisions of this major tax reform were generally effective January 1, 2018. Among its significant provisions, the Tax Act reduced the federal corporate income tax rate from 35% to 21% and eliminated bonus depreciation for regulated utilities. AWR's effective tax rate (“ETR”) was 21.2% and 38.6% for the three months ended June 30, 2018 and 2017, respectively, and was 20.4% and 37.4% for the six months ended June 30, 2018 and 2017, respectively. GSWC's ETR was 23.6% and 39.8% for the three months ended June 30, 2018 and 2017, respectively, and was 21.9% and 38.8% for the six months ended June 30, 2018 and 2017, respectively. Both decreases were due primarily to the reduction in the federal corporate income tax rate.
AWR's ETR differed from the new federal statutory rate primarily as a result of the differences between GSWC's ETR and the new federal statutory rate. These differences resulted primarily from: (i) state taxes, (ii) permanent differences including the excess tax benefits from share-based payments, which were reflected in the income statements and resulted in a reduction to income tax expense during the three and six months ended June 30, 2018 and 2017, (iii) differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements (principally from plant, rate-case, and compensation expenses), and (iv) commencement of the amortization of the excess deferred income tax liability brought about by the lower federal corporate income tax rate. There were no material updates to the excess deferred income tax liability balance during the three and six months ended June 30, 2018 in accordance with Staff Accounting Bulletin 118.

22


Note 8 — Employee Benefit Plans:
     The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement plan and the supplemental executive retirement plan ("SERP") for the three and six months ended June 30, 2018 and 2017 are as follows:
 
 
For The Three Months Ended June 30,
 
 
Pension Benefits
 
Other Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
1,269

 
$
1,249

 
$
57

 
$
59

 
$
274

 
$
232

Interest cost
 
1,903

 
1,985

 
72

 
85

 
222

 
223

Expected return on plan assets
 
(2,795
)
 
(2,240
)
 
(123
)
 
(122
)
 

 

Amortization of prior service cost (benefit)
 

 

 

 

 

 
3

Amortization of actuarial (gain) loss
 
283

 
253

 
(182
)
 
(170
)
 
262

 
194

Net periodic pension cost under accounting standards
 
660

 
1,247

 
(176
)
 
(148
)
 
758

 
652

Regulatory adjustment — deferred
 

 
92

 

 

 

 

Total expense recognized, before surcharges and allocation to overhead pool
 
$
660

 
$
1,339

 
$
(176
)
 
$
(148
)
 
$
758

 
$
652


 
 
For The Six Months Ended June 30,
 
 
Pension Benefits
 
Other Postretirement
Benefits
 
SERP
(dollars in thousands)
 
2018
 
2017
 
2018
 
2017
 
2018
 
2017
Components of Net Periodic Benefits Cost:
 
 

 
 

 
 

 
 

 
 

 
 

Service cost
 
$
2,670

 
$
2,500

 
$
114