Note 11 — Employee Benefit Plans

Pension and Post-Retirement Medical Plans:

Registrant maintains a defined benefit pension plan (the “Pension Plan”) that provides eligible employees (those aged 21 and older, hired before January 1, 2011) monthly benefits upon retirement based on average salaries and length of service. The eligibility requirement to begin receiving these benefits is 5 years of vested service. The normal retirement benefit is equal to 2% of the five highest consecutive years’ average earnings multiplied by the number of years of credited service, up to a maximum of 40 years, reduced by a percentage of primary social security benefits. There is also an early retirement option. Annual contributions are made to the Pension Plan, which comply with the funding requirements of the Employee Retirement Income Security Act (“ERISA”).

At December 31, 2012, Registrant had 1,005 participants in the Pension Plan.

In January 2011, the Board of Directors approved an amendment to the Pension Plan, closing the plan to new employees hired after December 31, 2010. Employees hired or rehired after December 31, 2010 are eligible to participate in a defined contribution plan. Under this plan, Registrant will provide a contribution of 5.25% of eligible pay each pay period into investment vehicles offered by the plan’s trustee. Participants will be fully vested in this plan once the employee attains three years of service. Employees hired before January 1, 2011 continue to participate in and accrue benefits under the terms of the defined benefit plan. For the years ended December 31, 2012 and 2011, Registrant contributed $254,000 and $85,000, respectively, to the defined contribution plan.

Registrant also provides post-retirement medical benefits for all active employees hired before February of 1995, through a medical insurance plan. Eligible employees, who retire prior to age 65, and/or their spouses, are able to retain the benefits under the plan for active employees until reaching age 65. Eligible employees upon reaching age 65, and those eligible employees retiring at or after age 65, and/or their spouses, receive coverage through a Medicare supplement insurance policy paid for by Registrant subject to an annual cap limit. Registrant’s post-retirement medical plan does not provide prescription drug benefits to Medicare-eligible employees and is not affected by the Medicare Prescription Drug Improvement and Modernization Act of 2003. At December 31, 2012, Registrant had 307 participants in the post-retirement medical plan.

In accordance with the accounting guidance for the effects of certain types of regulation, Registrant has established a regulatory asset for its underfunded position in its pension and post-retirement medical plans that is expected to be recovered through rates in future periods. The changes in actuarial gains and losses, prior service costs and transition assets or obligations pertaining to the regulatory asset are recognized as an adjustment to the regulatory asset account as these amounts are recognized as components of net periodic pension costs each year.

The following table sets forth the Pension Plan’s and post-retirement medical plan’s funded status and amounts recognized in Registrant’s balance sheets and the components of net pension cost and accrued liability at December 31, 2012 and 2011:

	Pension Benefits						Post-Retirement Medical Benefits
(dollars in thousands)	2012			2011			2012			2011
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	146,127		$	118,766		$	12,448		$	12,057
Service cost	6,675			5,624			419			391
Interest cost	6,657			6,524			534			549
Actuarial loss (gain)	7,759			18,719			(657		)	(236		)
Benefits/expenses paid	(3,988		)	(3,506		)	(448		)	(313		)
Projected benefit obligation at end of year	$	163,230		$	146,127		$	12,296		$	12,448

Changes in Plan Assets:
Fair value of plan assets at beginning of year	$	92,910		$	90,179		$	7,916		$	6,959
Actual return on plan assets	12,599			(326		)	736			319
Employer contributions	6,117			6,563			155			951
Benefits/expenses paid	(3,988		)	(3,506		)	(448		)	(313		)
Fair value of plan assets at end of year	$	107,638		$	92,910		$	8,359		$	7,916

Funded Status:
Net amount recognized as accrued pension cost	$	(55,592	)	$	(53,217	)	$	(3,937	)	$	(4,532	)

	Pension Benefits						Post-Retirement Medical Benefits
(in thousands)	2012			2011			2012			2011
Amounts recognized on the balance sheets:
Current liabilities	$	—		$	—		$	—		$	—
Non-current liabilities	(55,592		)	(53,217		)	(3,937		)	(4,532		)
Net amount recognized	$	(55,592	)	$	(53,217	)	$	(3,937	)	$	(4,532	)
Amounts recognized in regulatory assets consist of:
Initial net obligation	$	—		$	—		$	837		$	1,256
Prior service cost (credit)	404			522			(633		)	(833		)
Net (gain) loss	48,648			49,983			(889		)	147
Regulatory assets (liabilities)	49,052			50,505			(685		)	570
Unfunded accrued pension cost	6,540			2,712			4,622			3,962
Net liability recognized	$	55,592		$	53,217		$	3,937		$	4,532

Changes in plan assets and benefit obligations recognized in regulatory assets:
Regulatory asset at beginning of year	$	50,505		$	26,471		$	570		$	1,045
Net loss (gain)	1,700			25,394			(1,036		)	(256		)
Amortization of initial net obligation	—			—			(419		)	(419		)
Amortization of prior service (cost) credit	(118		)	(118		)	200			200
Amortization of net loss	(3,035		)	(1,242		)	—			—
Total change in regulatory asset	(1,453		)	24,034			(1,255		)	(475		)
Regulatory asset (liability) at end of year	$	49,052		$	50,505		$	(685	)	$	570

Net periodic pension costs	$	9,945		$	7,159		$	815		$	861
Change in regulatory asset	(1,453		)	24,034			(1,255		)	(475		)
Total recognized in net periodic pension cost and regulatory asset (liability)	$	8,492		$	31,193		$	(440	)	$	386

Estimated amounts that will be amortized from regulatory asset over the next fiscal year:
Initial net obligation	$	—		$	—		$	(419	)	$	(419	)
Prior service cost	(118		)	(118		)	200			200
Net loss	(2,846		)	(3,114		)	—			—

Additional year-end information for plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	163,230		$	146,127		$	12,296		$	12,448
Accumulated benefit obligation	138,230			122,399			N/A			N/A
Fair value of plan assets	107,638			92,910			8,359			7,916

Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate	4.30		%	4.65		%	3.75		%	4.45		%
Rate of compensation increase	4.00		%	4.00		%	N/A			N/A

Consistent with decisions from the CPUC and in accordance with regulatory accounting principles, Registrant capitalizes a portion of its pension and other post-retirement costs in the overhead pool included in Utility Plant. The components of net periodic pension and post-retirement benefits cost, before allocation to the overhead pool, for 2012, 2011 and 2010 are as follows:

	Pension Benefits									Post-Retirement Medical Benefits
(dollars in thousands, except percent)	2012			2011			2010			2012			2011			2010
Components of Net Periodic Benefits Cost:
Service cost	$	6,675		$	5,624		$	4,795		$	419		$	391		$	390
Interest cost	6,657			6,524			6,104			534			549			626
Expected return on plan assets	(6,540		)	(6,349		)	(5,253		)	(357		)	(298		)	(255		)
Amortization of transition	—			—			—			419			419			419
Amortization of prior service cost (credit)	118			118			118			(200		)	(200		)	(200		)
Amortization of actuarial loss	3,035			1,242			1,170			—			—			—
Net periodic pension cost under accounting standards	$	9,945		$	7,159		$	6,934		$	815		$	861		$	980
Regulatory adjustment - deferred	(2,305		)	(209		)	(1,823		)	—			—			—
Total expense recognized, before allocation to overhead pool	$	7,640		$	6,950		$	5,111		$	815		$	861		$	980

Weighted-average assumptions used to determine net periodic cost:
Discount rate	4.65		%	5.55		%	6.05		%	4.45		%	5.20		%	5.85		%
Expected long-term return on plan assets	7.00		%	7.00		%	7.00		%	*			*			*
Rate of compensation increase	4.00		%	4.00		%	4.00		%	N/A			N/A			N/A

*7.0% for union plan, 4.2% for non-union, net of income taxes in 2012, 2011 and 2010.

Regulatory Adjustment:

On November 19, 2010, the CPUC issued a final decision on the Region II, Region III and general office rate case. Among other things, the decision authorized GSWC to establish a two-way balancing account, effective January 1, 2010, for its water regions and the general office to track differences between the forecasted annual pension expenses adopted in rates for 2010, 2011 and 2012 and the actual annual expense to be recorded by GSWC in accordance with the accounting guidance for pension costs. During the years ended December 31, 2012, 2011, and 2010, GSWC’s actual expense under the accounting standard was greater than the amounts included in customer rates by $2.3 million, $209,000 and $1.8 million, respectively. This undercollection has been recorded in the two-way pension balancing account included in regulatory assets (Note 2).

Plan Funded Status:

Registrant’s pension and post-retirement plans were underfunded at December 31, 2012 and 2011. Registrant’s market related value of plan assets is equal to the fair value of plan assets. Past volatile market conditions have affected the value of GSWC’s trust established to fund its future long-term pension benefits. These benefit plan assets and related obligations are remeasured annually using a December 31 measurement date. Changes in the plan’s funded status will affect the assets and liabilities recorded on the balance sheet in accordance with accounting guidance on employers’ accounting for defined benefit pension and other post-retirement plans. Due to Registrant’s regulatory recovery treatment, the recognition of the funded status is offset by a regulatory asset pursuant to guidance on accounting for the effects of certain types of regulation.

Plan Assets:

The assets of the pension and post-retirement medical plans are managed by a third party trustee. The investment policy allocation of the assets in the trust was approved by Registrant’s Administrative Committee (the “Committee”) for the pension and post-retirement medical funds, which has oversight responsibility for all retirement plans. The primary objectives underlying the investment of the pension and post-retirement plan assets are: (i) attempt to maintain a fully funded status with a cushion for unexpected developments, possible future increases in expense levels, and/or a reduction in the expected return on investments; (ii) seek to earn long-term returns that compare favorably to appropriate market indexes, peer group universes and the policy asset allocation index; (iii) seek to provide sufficient liquidity to pay current benefits and expenses; (iv) attempt to limit risk exposure through prudent diversification, and (v) seek to limit costs of administering and managing the plans.

The Committee recognizes that risk and volatility are present to some degree with all types of investments. High levels of risk may be avoided through diversification by asset class, style of each investment manager, and sector and industry limits. Investment managers are retained to manage a pool of assets and allocate funds in order to achieve an appropriate, diversified, and balanced asset mix. The Committee’s strategy balances the requirement to maximize returns using potentially higher return generating assets, such as equity securities, with the need to control the risk versus the benefit obligations with less volatile assets, such as fixed income securities.

The Committee approves the target asset allocations. Registrant’s pension and post-retirement plan weighted-average asset allocations at December 31, 2012 and 2011, by asset category are as follows:

	Pension Benefits				Post-Retirement Medical Benefits
Asset Category	2012		2011		2012		2011
Actual Asset Allocations:
Equity securities	60	%	56	%	61	%	60	%
Debt securities	39	%	42	%	38	%	39	%
Cash equivalents	1	%	2	%	1	%	1	%
Total	100	%	100	%	100	%	100	%

Equity securities did not include AWR’s stock as of December 31, 2012 and 2011.

Target Asset Allocations for 2013:	Pension Benefits		Post-retirement Medical Benefits
Equity securities	60	%	60	%
Debt securities	40	%	40	%
Total	100	%	100	%

As previously discussed in Note 4, 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. As required by the accounting guidance, assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. All equity investments in the pension and post-retirement plans are Level 1 investments in mutual funds. The fixed income category includes corporate bonds and notes. The majority of fixed income investments range in maturities from less than one to twenty years. The fair values of these investments are based on quoted market prices in active markets.

The following tables set forth by level, within the fair value hierarchy, the pension and post-retirement plans’ investment assets measured at fair value as of December 31, 2012 and 2011.

	Fair Value as of December 31, 2012
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Pension Plan Assets:
Cash equivalents	$	1,721	—	—	$	1,721
Fixed income securities	41,590		—	—	41,590
Equity securities:
U.S. small cap stocks	5,396		—	—	5,396
U.S. mid cap stocks	10,722		—	—	10,722
U.S. large cap stocks	31,966		—	—	31,966
International funds	10,797		—	—	10,797
Real estate funds	5,446		—	—	5,446
Total equity securities	64,327		—	—	64,327
Total investments measured at fair value	$	107,638	—	—	$	107,638

Fair Value of Post-Retirement Plan Assets:
Cash equivalents	$	65	—	—	$	65
Fixed income	3,192		—	—	3,192
U.S. equity securities (large cap stocks)	5,102		—	—	5,102
Total investments measured at fair value	$	8,359	—	—	$	8,359

	Fair Value as of December 31, 2011
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Pension Plan Assets:
Cash equivalents	$	1,682	—	—	$	1,682
Fixed income securities	38,900		—	—	38,900
Equity securities:
U.S. small cap stocks	4,288		—	—	4,288
U.S. mid cap stocks	8,616		—	—	8,616
U.S. large cap stocks	26,803		—	—	26,803
International funds	7,997		—	—	7,997
Real estate funds	4,624		—	—	4,624
Total equity securities	52,328		—	—	52,328
Total investments measured at fair value	$	92,910	—	—	$	92,910

Fair Value of Post-Retirement Plan Assets:
Cash equivalents	$	100	—	—	$	100
Fixed income	3,064		—	—	3,064
U.S. equity securities (large cap stocks)	4,752		—	—	4,752
Total investments measured at fair value	$	7,916	—	—	$	7,916

Plan Contributions:

During 2012, Registrant contributed $6.1 million and $155,000 to its pension and post-retirement medical plans, respectively. Registrant currently expects to contribute at least $6.6 million and $150,000 to its pension and post-retirement medical plans in 2013, respectively. Registrant’s policy is to fund the plans annually at a level which is deductible for income tax purposes and is consistent with amounts recovered in customer rates.

Benefit Payments:

Registrant’s estimated future benefit payments at December 31, 2012 for the next five years and thereafter are as follows (in thousands):

	Pension Benefits		Post-Retirement Medical Benefits
2013	$	4,336	$	477
2014	4,811		509
2015	5,325		578
2016	5,892		652
2017	6,503		728
Thereafter	42,491		4,690
Total	$	69,358	$	7,634

Assumptions:

Certain actuarial assumptions, such as the discount rate, long-term rate of return on plan assets and the healthcare cost trend rate have a significant effect on the amounts reported for net periodic benefit cost as well as the related benefit obligation amounts.

Discount Rate — The assumed discount rate for pension and post-retirement medical plans reflects the market rates for high-quality corporate bonds currently available. Registrant’s discount rates were determined by considering the average of pension yield curves constructed of a large population of high quality corporate bonds. The resulting discount rate reflects the matching of plan liability cash flows to the yield curves.

Expected Long-Term Rate of Return on Assets — The long-term rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income, and other investments. To develop the expected long-term rate of return on assets assumption for the pension plan, Registrant considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. Registrant’s policy is to fund the medical benefit trusts based on actuarially determined amounts as allowed in rates approved by the CPUC. Registrant has invested the funds in the post-retirement trusts that will achieve a desired return and minimize amounts necessary to recover through rates. The mix is expected to provide for a return on assets similar to the Pension Plan and to achieve Registrant’s targeted allocation. This resulted in the selection of the 7.0% long-term rate of return on assets assumption for the union plan and 4.20% (net of income taxes) for the non-union plan of the post retirement plan.

Healthcare Cost Trend Rate — A sliding scale for assumed health care cost increases was used for the periods presented. In 2012, health care cost increases started at 8.0% grading down to 7.2% in 10 years for those under age 65, and at 7.0% grading down to 5.8% in 10 years for those 65 and over. In 2011, health care cost increases started at 8.0% grading down to 6.5% in 10 years for those under age 65, and at 7.0% grading down to 5.8% in 10 years for those 65 and over. In 2010, health care cost increases started at 8.0% grading down to 6.0% in 10 years for those under age 65, and at 7.0% grading down to 6.0% in 10 years for those 65 and over. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the post-retirement medical plan:

(dollars in thousands)	1-Percentage-Point Increase		1-Percentage-Point Decrease
Effect on total of service and interest cost components	$	102	$	(88	)
Effect on post-retirement benefit obligation	$	1,464	$	(1,263	)

Supplemental Executive Retirement Plan:

Registrant has a supplemental executive retirement plan (“SERP”) that provides additional retirement benefits to certain key employees and officers of Registrant by making up benefits, which are limited by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended, and certain additional benefits. The Board of Directors approved the establishment of a Rabbi Trust created for the SERP Plan. Assets in a Rabbi Trust can be subject to the claims of creditors; therefore, they are not considered as an asset for purposes of computing the SERP’s funded status. As of December 31, 2012, the balance in the Rabbi Trust totals $4.8 million and is included in Registrant’s other property and investments.

All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The fixed income category includes corporate bonds and notes. The fair values of these investments are based on quoted market prices in active markets. The following tables set forth by level, within the fair value hierarchy, the Rabbi Trust investment assets measured at fair value as of December 31, 2012 and 2011.

	Fair Value as of December 31, 2012
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Assets held in Rabbi Trust:
Cash equivalents	$	116	—	—	$	116
Fixed income securities	1,878		—	—	1,878
Equity securities	2,822		—	—	2,822
Total investments measured at fair value	$	4,816	—	—	$	4,816

	Fair Value as of December 31, 2011
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Assets held in Rabbi Trust:
Cash equivalents	$	9	—	—	$	9
Fixed income securities	1,081		—	—	1,081
Equity securities	1,739		—	—	1,739
Total investments measured at fair value	$	2,829	—	—	$	2,829

The following provides a reconciliation of benefit obligations, funded status of the SERP, as well as a summary of significant estimates at December 31, 2012 and 2011:

(dollars in thousands)	2012			2011
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	10,604		$	8,468
Service cost	731			600
Interest cost	488			464
Actuarial loss	803			1,292
Benefits paid	(220		)	(220		)
Benefit obligation at end of year	$	12,406		$	10,604
Changes in Plan Assets:
Fair value of plan assets at beginning of year	—			—
Fair value of plan assets at end of year	—			—

Funded Status:
Net amount recognized as accrued pension cost	$	(12,406	)	$	(10,604	)

(in thousands)	2012			2011
Amounts recognized on the balance sheets:
Current liabilities	$	(317	)	$	(231	)
Non-current liabilities	(12,089		)	(10,373		)
Net amount recognized	$	(12,406	)	$	(10,604	)
Amounts recognized in regulatory assets consist of:
Prior service cost	$	475		$	636
Net loss	3,709			3,212
Regulatory assets	4,184			3,848
Unfunded accrued pension cost	8,222			6,756
Net liability recognized	$	12,406		$	10,604

Changes in plan assets and benefit obligations recognized in regulatory assets consist of:
Regulatory asset at beginning of year	$	3,848		$	2,852
Net loss	805			1,291
Amortization of prior service credit	(161		)	(161		)
Amortization of net loss	(308		)	(134		)
Total change in regulatory asset	336			996
Regulatory asset at end of year	$	4,184		$	3,848

Net periodic pension cost	$	1,687		$	1,359
Change in regulatory asset	336			996
Total recognized in net periodic pension and net income	$	2,023		$	2,355

Estimated amounts that will be amortized from regulatory asset over the next fiscal year:
Initial net asset (obligation)	—			—
Prior service cost	$	(161	)	$	(161	)
Net loss	(339		)	(307		)
Additional year-end information for plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	12,406		$	10,604
Accumulated benefit obligation	9,601			7,639
Fair value of plan assets	—			—
Weighted-average assumptions used to determine benefit obligations:
Discount rate	4.20		%	4.65		%
Rate of compensation increase	4.00		%	4.00		%

The components of SERP expense, before allocation to the overhead pool, for 2012, 2011 and 2010 are as follows:

(dollars in thousands, except percent)	2012			2011			2010
Components of Net Periodic Benefits Cost:
Service cost	$	731		$	600		$	433
Interest cost	488			464			354
Amortization of prior service cost	161			161			161
Amortization of net loss	307			134			—
Net periodic pension cost	$	1,687		$	1,359		$	948

Weighted-average assumptions used to determine net periodic cost:
Discount rate	4.65		%	5.55		%	6.05		%
Rate of compensation increase	4.00		%	4.00		%	4.00		%

Benefit Payments: Registrant’s estimated future benefit payments for the SERP at December 31, 2012 for the next ten years are as follows (in thousands):

2013	$	318
2014	317
2015	316
2016	337
2017	406
Thereafter	3,581
Total	$	5,275

401(k) Investment Incentive Program:

Registrant has a 401(k) Investment Incentive Program under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Registrant’s cash contributions to the 401(k) are based upon a percentage of individual employee contributions and totaled $1.9 million, $1.9 million and $1.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.