Discontinued Operations:

6 Months Ended

Jun. 30, 2011

Discontinued Operations:

Discontinued Operations:

Note 10 — Discontinued Operations:

On June 7, 2010, Registrant entered into a stock purchase agreement with EPCOR Water (USA) Inc. to sell all of the common shares of CCWC for a total purchase price of $34.7 million, including the assumption of approximately $5.6 million of long-term debt.  Regulatory approval of the transaction was received from the Arizona Corporation Commission (“ACC”) on April 7, 2011.  On May 26, 2011, CCWC’s Board of Directors declared a $1.5 million cash dividend to AWR, which was also paid on May 26, 2011. The sale closed on May 31, 2011 and AWR received approximately $29.0 million in cash which was used primarily to pay down short-term borrowings.    In addition, the purchase price was subject to certain adjustments for changes in retained earnings based on a final audit, which resulted in an increase of $578,000 to the purchase price.  This purchase price adjustment has been recorded as a receivable as of June 30, 2011 and is expected to be collected in the third quarter of 2011.  The completion of the sale generated a gain (net of taxes and transaction costs) of approximately $2.3 million during the second quarter of 2011.

The assets and liabilities of CCWC have been classified as current assets and liabilities held for sale as of December 31, 2010.  The operational results for the periods presented and the gain on disposal of CCWC are reported in discontinued operations.

The carrying amounts of the major classes of assets and liabilities of CCWC included in discontinued operations are as follows:

	June 30,		December 31,
(dollars in thousands)	2011		2010
Assets:
Utility Plant, net	$	—	$	44,085
Goodwill, net	—		3,321
Other assets	—		3,477
Total assets of discontinued operations	$	—	$	50,883
Liabilities:
Advances and contributions in aid of construction, net	$	—	$	17,867
Long term debt	—		5,645
Other liabilities	—		3,519
Total liabilities of discontinued operations	$	—	$	27,031

Regulatory Matters - Gain on Settlement for Removal of a Well:

In 2005, in an agreement with the Fountain Hills Sanitary District (“FHSD”), CCWC agreed to permanently cease using one of its wells in order for the FHSD to secure an Aquifer Protection Permit for its recharge system.  Based on previous decisions of the ACC on similar gains, CCWC recognized a net gain of $760,000 in 2005 related to the settlement agreement and established a regulatory liability for the remaining $760,000 pending the ACC’s review of this matter.  On October 8, 2009, the ACC ordered CCWC to treat the entire settlement proceeds of $1,520,000 as a reduction to rate base.  As a result, CCWC recognized a loss of $760,000 during the third quarter of 2009 and established a regulatory liability for this amount.  This effectively reversed the original gain recorded in 2005.

In November 2009, CCWC filed an application for rehearing on several issues including the sharing of this gain from the settlement proceeds.  On April 7, 2011, the ACC issued a decision that reversed its October 2009 decision and allowed CCWC to retain 50% of the $1,520,000 settlement proceeds.  Accordingly, in the second quarter of 2011, CCWC recorded a gain on settlement on removal of a well of $760,000.  As part of the April 7, 2011 ACC decision, CCWC was authorized to recover the difference in revenues between what would have been collected to-date had the April 7, 2011 decision been in place effective October 2009, and revenues actually collected to-date under rates approved from the original 2009 decision. Accordingly, in May 2011 CCWC recorded a regulatory asset for retroactive revenues of $149,000 to be collected by CCWC, with interest at 6% per annum, through a six month surcharge.

A summary of discontinued operations presented in the consolidated statements of income for the three and six months ended June 30, 2011 and 2010 are as follows:

	Three Months Ended June 30,						Six Months Ended June 30,
(dollars in thousands)	2011			2010			2011			2010
Operating revenues	$	1,571		$	2,272		$	3,492		$	4,089
Supply costs	250			411			584			764
Other operating expenses (1)	379			941			836			1,979
Gain on settlement for removal of a well	(760		)	—			(760		)	—
Total operating expenses	(131		)	1,352			660			2,743
Operating income	1,702			920			2,832			1,346
Interest expense, net	(59		)	(89		)	(142		)	(180		)
Income before income taxes	1,643			831			2,690			1,166
Income tax expense (2)	670			331			1,078			466
Income from the operations of discontinued operations, net of tax	973			500			1,612			700
Gain on sale of business, net of tax	2,454			—			2,454			—
Transaction costs, net of tax (3)	(193		)	(395		)	(198		)	(395		)
Net gain on sale	2,261			(395		)	2,256			(395		)
Income from discontinued operations, net of tax (4)	$	3,234		$	105		$	3,868		$	305

(1)	In accordance with the accounting guidance relating to assets held for sale, Registrant ceased recording depreciation expense for CCWC as of June 2010.
(2)	Income tax expense does not include the effects of CCWC’s inclusion in the AWR combined California unitary return, which are included in, and do not materially affect, the income tax expense of continuing operations.
(3)	Included in discontinued operations for the three and six months ended June 30, 2011 are direct transaction costs of $405,000 and $413,000, respectively, for legal and consulting services in connection with the sale of CCWC. Transaction costs for the three and six months ended June 30, 2010 amounted to $659,000.
(4)	Corporate overhead costs allocated to CCWC have been excluded from discontinued operations. The majority of these costs are expected to continue primarily at GSWC. Accordingly, these corporate overhead costs have been included in other operating expenses and administrative and general expenses as part of continuing operations in the consolidated statements of income. Such costs allocated to CCWC that have been reflected as part of continuing operations amounted to $106,000 and $233,000 for the three months ended June 30, 2011 and 2010, respectively, and $356,000 and $514,000 for the six months ended June 30, 2011 and 2010, respectively.