Derivative Instruments

12 Months Ended

Dec. 31, 2012

Derivative Instruments

Derivative Instruments

Note 4 — Derivative Instruments

GSWC’s BVES division purchases power at a fixed cost, under a purchased power contract, depending on the amount of power and the period during which the power is purchased under the contract.  The contract is subject to the accounting guidance for derivatives and requires mark-to-market derivative accounting.   The CPUC has authorized GSWC to establish a regulatory asset and liability memorandum account to offset the entries required by the accounting guidance.  Accordingly, all unrealized gains and losses generated from the purchased power contract are deferred on a monthly basis into a non-interest bearing regulatory memorandum account that will track the changes in fair value of the derivative throughout the term of the contract.

As of December 31, 2012 there was a $3.1 million cumulative unrealized loss which has been included in the memorandum account.  The unrealized loss did not impact GSWC’s earnings. In January 2012, GSWC executed a new purchase power master agreement. The agreement is subject to CPUC approval and, if approved, would enable GSWC to purchase 12 megawatts (“MWs”) of base load energy at a fixed-price which will be negotiated upon CPUC approval of the agreement. GSWC plans to file for approval of the agreement with the CPUC in 2013 and will also request a regulatory asset and liability memorandum account for the new contract to offset the entries required by the accounting guidance on derivatives.

As previously discussed in Note 1, the accounting guidance for fair value measurements establishes a framework for measuring fair value and requires fair value measurements to be classified and disclosed in one of three levels. Registrant’s valuation model utilizes various inputs that include quoted market prices for energy over the duration of the contract. The market prices used to determine the fair value for this derivative instrument were estimated based on independent sources such as broker quotes and publications that are not observable in or corroborated by the market.  Registrant receives one broker quote to determine the fair value of its derivative instrument.  When such inputs have a significant impact on the measurement of fair value, the instrument is categorized in Level 3. Accordingly, the valuation of the derivative on Registrant’s purchased power contract has been classified as Level 3 for all periods presented.

The following table presents changes in the fair value of GSWC’s derivatives for the years ended December 31, 2012 and 2011.

(dollars in thousands)	2012			2011
Balance, at beginning of the period	$	(7,611	)	$	(6,850	)
Unrealized gain (loss) on purchased power contracts	4,551			(761		)
Balance, at end of the period	$	(3,060	)	$	(7,611	)