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

This quarterly report on Form 10-Q is a combined report being filed by two separate Registrants: American States Water Company (hereinafter “AWR”) and Golden State Water Company (hereinafter “GSWC”) ~~(formerly known as Southern California Water Company)~~. For more information, please see Note 1 to 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.~~Operations. References in this report to “Registrant” are to AWR and GSWC collectively, unless otherwise specified. GSWC makes no representations as to the information contained in this report relating to AWR and its subsidiaries, other than GSWC.

Forward-Looking Information

Certain matters discussed in this report (including the documents incorporated herein by reference) are forward-looking statements intended to qualify for the “safe harbor” from liability established by the Private Securities Litigation Reform Act of 1995. These forward-looking statements can generally be identified as such because the context of the statement will include words such as Registrant “believes,” “anticipates,” “expects” or words of similar import. Similarly, statements that describe Registrant’s future plans, objectives, estimates or goals are also forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, rates, water quality and other regulatory matters, adequacy of water supplies, ~~GSWC’s~~the ability to recover ~~electric, natural gas and water~~ supply costs from ratepayers, contract operations, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those currently anticipated in such statements, by reason of factors such as changes in utility regulation, including ongoing local, state and federal activities; recovery of regulatory assets not yet included in rates; future economic conditions, including changes in customer demand and changes in water and energy supply costs; future climatic conditions; and legislative, legal proceedings, regulatory and other circumstances affecting anticipated revenues and costs.

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
ASSETS
(Unaudited)

							June 30,			December 31,
*(in thousands)*	September 30, 2006			December 31, 2005			2007			2006
Utility Plant, at cost

Water	$	899,598		$	869,471		$	948,153		$	936,810
Electric	62,197			61,386			64,609			64,103
	961,795			930,857			1,012,762			1,000,913
Less - Accumulated depreciation	(280,906		)	(259,915		)	(302,053		)	(286,951		)
	680,889			670,942			710,709			713,962
Construction work in progress	61,480			42,283			46,416			36,639
Net utility plant	742,369			713,225			757,125			750,601

Other Property and Investments
Goodwill	11,778			11,841			11,593			11,614
Other property and investments	9,697			9,740			10,003			9,977
Total other property and investments	21,475			21,581			21,596			21,591

Current Assets
Cash and cash equivalents	6,591			13,032			5,274			3,223
Accounts receivable-customers (less allowance for doubtful accounts of $780 in 2006 and $789 in 2005)	17,802			13,341
Accounts receivable-customers (less allowance for doubtful accounts of $659 in 2007 and $796 in 2006)							15,714			14,816
Unbilled revenue	18,762			15,195			20,318			15,696
Other accounts receivable (less allowance for doubtful accounts of $144 in 2006 and $337 in 2005)	9,923			10,844
Receivable from the U.S. government							4,883			6,388
Other accounts receivable (less allowance for doubtful accounts of $420 in 2007 and $300 in 2006)							5,379			5,368
Income taxes receivable	30			822			247			1,100
Materials and supplies, at average cost	1,545			1,421			1,649			1,565
Regulatory assets – current	3,233			3,946
Regulatory assets - current							4,271			3,905
Prepayments and other current assets	1,395			2,998			2,628			2,787
Unrealized gain on purchased power contracts	—			3,417
Costs and estimated earnings in excess of billings on uncompleted contracts	2,231			—			5,865			4,495
Deferred income taxes – current	4,709			1,692
Deferred income taxes - current							3,982			5,093
Total current assets	66,221			66,708			70,210			64,436

Regulatory and Other Assets
Regulatory assets	61,288			54,382			88,819			84,686
Other accounts receivable	9,148			8,820			9,564			9,335
Deferred income taxes	34			—			2			16
Other	8,173			8,419			8,525			6,290
Total regulatory and other assets	78,643			71,621			106,910			100,327

Total Assets	$	908,708		$	873,135		$	955,841		$	936,955

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED BALANCE SHEETS
CAPITALIZATION AND LIABILITIES
(Unaudited)

							June 30,		December 31,
*(in thousands)*	September 30, 2006			December 31, 2005			2007		2006
Capitalization
Common shares, no par value, no stated value	$	174,330		$	166,529		$	177,442	$	175,135
Earnings reinvested in the business	107,311			101,121			114,996		108,599
Accumulated other comprehensive loss	(3,556		)	(3,556		)
Total common shareholders’ equity	278,085			264,094			292,438		283,734
Long-term debt	268,181			268,405			267,628		267,833
Total capitalization	546,266			532,499			560,066		551,567

Current Liabilities
Notes payable to banks	25,000			27,000			28,500		32,000
Long-term debt – current	575			635
Long-term debt - current							596		603
Accounts payable	23,284			19,653			25,020		23,984
Income taxes payable	4,392			1,534			2,208		103
Accrued employee expenses	4,428			5,879			5,564		5,320
Accrued interest	5,245			2,254			2,469		2,583
Regulatory liabilities – current	4,120			3,252
Deferred income taxes – current	—			86
Unrealized loss on purchased power contracts	2,468			—			1,180		3,654
Regulatory liabilities - current							3,919		3,546
Billings in excess of costs and estimated earnings on uncompleted contracts	1,910			—			1,739		2,038
Other	13,268			14,952			12,660		12,072
Total current liabilities	84,690			75,245			83,855		85,903

Other Credits
Advances for construction	86,961			85,168			83,169		83,203
Contributions in aid of construction – net	86,708			83,976
Contributions in aid of construction - net							98,302		91,702
Deferred income taxes	76,042			69,669			85,500		80,727
Unamortized investment tax credits	2,450			2,518			2,382		2,427
Accrued pension and other postretirement benefits	14,955			13,562			31,595		31,042
Regulatory liabilities	571			521			572		588
Billings in excess of costs and estimated earnings on uncompleted contracts	2,092			2,207			2,477		2,005
Other	7,973			7,770			7,923		7,791
Total other credits	277,752			265,391			311,920		299,485
Commitments and Contingencies (Note 8)	—			—

Commitments and Contingencies (Note 7)							—		—

Total Capitalization and Liabilities	$	908,708		$	873,135		$	955,841	$	936,955

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED ~~SEPTEMBER~~JUNE 30, ~~2006~~2007 AND ~~2005~~2006
(Unaudited)

							Three Months Ended
	Three Months Ended September 30,						June 30,
*(in thousands, except per share amounts)*	2006			2005			2007			2006
Operating Revenues
Water	$	64,962		$	60,539		$	60,826		$	53,444
Electric	6,444			6,544			6,255			7,027
Other	2,335			1,008
Contracted services							12,165			2,567
Total operating revenues	73,741			68,091			79,246			63,038

Operating Expenses
Water purchased	15,066			15,779			12,077			10,916
Power purchased for pumping	3,600			3,252			2,673			2,416
Groundwater production assessment	2,477			2,315			2,549			2,239
Power purchased for resale	2,659			3,075			2,915			3,248
Unrealized loss (gain) on purchased power contracts	2,807			(4,018		)
Unrealized loss on purchased power contracts							236			923
Supply cost balancing accounts	244			514			(1,190		)	(825		)
Other operating expenses	6,677			4,850			6,559			5,886
Administrative and general expenses	12,614			10,342			13,664			10,902
Depreciation and amortization	6,634			4,734			7,088			6,610
Maintenance	3,395			2,905			4,353			3,246
Property and other taxes	2,656			2,572			2,843			2,480
Construction expenses							8,260			809
Net gain on sale of property	(124		)	—			(238		)	—
Total operating expenses	58,705			46,320			61,789			48,850

Operating Income	15,036			21,771			17,457			14,188

Other Income and Expenses
Interest expense	(5,349		)	193			(5,570		)	(5,433		)
Interest income	695			745			586			963
Other							63			—
Total other income and expenses							(4,921		)	(4,470		)

Income from operations before income tax expense	10,382			22,709			12,536			9,718

Income tax expense	4,809			10,475			5,214			3,449

Net Income	$	5,573		$	12,234		$	7,322		$	6,269

Weighted Average Number of Shares Outstanding	17,003			16,782			17,094			16,881
Basic Earnings Per Common Share	$	0.32		$	0.72		$	0.42		$	0.36

Weighted Average Number of Diluted Shares	17,057			16,887			17,146			16,947
Fully Diluted Earnings Per Share	$	0.32		$	0.72		$	0.42		$	0.36

Dividends Declared Per Common Share	$	0.225		$	0.225		$	0.235		$	0.225

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE ~~NINE~~SIX MONTHS
ENDED ~~SEPTEMBER~~JUNE 30, ~~2006~~2007 AND ~~2005~~
2006

(Unaudited)

							Six Months Ended
	Nine Months Ended September 30,						June 30,
*(in thousands, except per share amounts)*	2006			2005			2007			2006
Operating Revenues
Water	$	166,233		$	155,611		$	111,153		$	104,199
Electric	21,816			20,105			15,124			15,372
Other	8,437			2,721
Contracted services							25,239			7,867
Total operating revenues	196,486			178,437			151,516			127,438

Operating Expenses
Water purchased	34,326			35,742			20,950			19,260
Power purchased for pumping	7,620			6,923			4,791			4,020
Groundwater production assessment	6,799			6,079			4,828			4,322
Power purchased for resale	10,470			9,922			7,196			7,811
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)
Unrealized (gain) loss on purchased power contracts							(2,474		)	3,078
Supply cost balancing accounts	(93		)	1,042			(1,910		)	(338		)
Other operating expenses	17,264			15,138			13,156			10,587
Administrative and general expenses	34,628			32,456			26,671			22,015
Depreciation and amortization	19,726			16,123			14,177			13,092
Maintenance	9,113			7,522			7,326			5,719
Property and other taxes	7,674			7,111			5,773			5,027
Construction expenses							17,329			4,511
Net gain on sale of property	(124		)	—			(605		)	—
Gain on settlement for removal of wells	—			(760		)
Total operating expenses	153,289			129,806			117,208			99,104

Operating Income	43,197			48,631			34,308			28,334

Other Income and Expenses
Interest expense	(16,037		)	(9,341		)	(11,066		)	(10,688		)
Interest income	2,643			801			1,152			1,776
Other							132			—
Total other income and expenses							(9,782		)	(8,912		)

Income from operations before income tax expense	29,803			40,091			24,526			19,422

Income tax expense	12,061			18,358			10,220			7,252

Net Income	$	17,742		$	21,733		$	14,306		$	12,170

Weighted Average Number of Shares Outstanding	16,898			16,773			17,066			16,844
Basic Earnings Per Common Share	$	1.03		$	1.29		$	0.83		$	0.71

Weighted Average Number of Diluted Shares	16,949			16,845			17,121			16,905
Fully Diluted Earnings Per Share	$	1.03		$	1.29		$	0.82		$	0.71

Dividends Declared Per Common Share	$	0.675		$	0.675		$	0.470		$	0.450

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

AMERICAN STATES WATER COMPANY
CONSOLIDATED STATEMENTS OF CASH FLOW
FOR THE ~~NINE~~SIX MONTHS ENDED ~~SEPTEMBER~~JUNE 30, ~~2006~~2007 AND ~~2005~~
2006

(Unaudited)

	Six Months Ended
	June 30,
(in thousands)	2007			2006
Cash Flows From Operating Activities:
Net income	$	14,306		$	12,170
Adjustments for non-cash items:
Depreciation and amortization	14,177			13,092
Provision for doubtful accounts	194			264
Deferred income taxes and investment tax credits	3,248			3,704
Unrealized (gain) loss on purchased power contracts	(2,474		)	3,078
Stock based compensation expense	530			325
Net gain on sale of property	(605		)	—
Other - net	520			421
Changes in assets and liabilities:
Accounts receivable - customers	(982		)	(130		)
Unbilled revenue	(4,622		)	(3,730		)
Other accounts receivable	(350		)	1,717
Receivable from the U.S. government	1,505			(1,434		)
Materials and supplies	(84		)	(129		)
Prepayments and other current assets	2,633			832
Regulatory assets — supply cost balancing accounts	(1,910		)	(338		)
Other assets	616			(6,227		)
Accounts payable	1,036			1,222
Income taxes receivable/payable	3,150			1,559
Other liabilities	(541		)	660
Net cash provided	30,347			27,056

Cash Flows From Investing Activities:
Construction expenditures	(19,880		)	(34,122		)
Proceeds from sale of property	623			—
Net cash used	(19,257		)	(34,122		)

Cash Flows From Financing Activities:
Proceeds from issuance of common shares	507			1,023
Proceeds from stock option exercises	1,127			3,421
Tax benefits from exercise of stock-based awards	122			897
Receipt of advances for and contributions in aid of construction	4,391			5,892
Refunds on advances for construction	(3,418		)	(2,196		)
Repayments of long-term debt	(212		)	(260		)
Net change in notes payable to banks	(3,500		)	1,000
Cash received on financing portion of purchased power contracts	—			1,333
Dividend equivalent rights	(67		)	(127		)
Tax benefits from payment of dividend equivalent rights	28			52
Dividends paid	(8,017		)	(7,567		)
Net cash (used) provided	(9,039		)	3,468

Net increase (decrease) in cash and cash equivalents	2,051			(3,598		)
Cash and cash equivalents, beginning of period	3,223			13,032
Cash and cash equivalents, end of period	$	5,274		$	9,434

Nine Months Ended
September 30,

(in thousands)

2006

2005

Cash Flows From Operating Activities:

Net income

$
17,742

$
21,733

Adjustments for non-cash items:

Depreciation and amortization

19,726

16,123

Provision for doubtful accounts

538

311

Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits

2,761

9,453

Unrealized loss (gain) on purchased power contracts

5,886

(7,492
)
Stock-based compensation expense

427

110

Other - net

585

(57
)
Changes in assets and liabilities:

Accounts receivable - customers

(4,849
)
(4,517
)
Unbilled revenue

(3,567
)
(3,657
)
Other accounts receivable

443

(576
)
Materials and supplies

(124
)
61

Prepayments and other current assets

1,603

1,884

Regulatory assets - supply cost balancing accounts

(93
)
1,042

Other assets

(6,906
)
(2,143
)
Accounts payable

3,631

265

Income taxes receivable/payable

3,650

8,741

Other liabilities

4,196

3,906

Net cash provided

45,649

45,187

Cash Flows From Investing Activities:

Construction expenditures

(51,069
)
(51,958
)
Net cash used

(51,069
)
(51,958
)

Cash Flows From Financing Activities:

Proceeds from issuance of common shares

1,625

830

Proceeds from stock option exercises

4,383

—

Tax benefits from exercise of stock-based awards

1,142

—

Receipt of advances for and contributions in aid of construction

6,718

10,350

Refunds on advances for construction

(3,072
)
(3,147
)
Repayments of long-term debt

(329
)
(560
)
Net change in notes payable to banks

(2,000
)
10,000

Cash received on financing portion of purchased power contracts

2,007

2,007

Dividend equivalent rights paid

(187
)
—

Tax benefits from payment of dividend equivalent rights

80

—

Dividends paid

(11,388
)
(11,321
)
Net cash (used) provided

(1,021
)
8,159

Net (decrease) increase in cash and cash equivalents

(6,441
)
1,388

Cash and cash equivalents, beginning of period

13,032

4,303

Cash and cash equivalents, end of period

$
6,591

$
5,691

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

GOLDEN STATE WATER COMPANY
BALANCE SHEETS
ASSETS
(Unaudited)

							June 30,			December 31,
*(in thousands)*	September 30, 2006			December 31, 2005			2007			2006
Utility Plant, at cost

Water	$	848,250		$	819,958		$	890,009		$	884,719
Electric	62,196			61,386			64,609			64,103
	910,446			881,344			954,618			948,822
Less - Accumulated depreciation	(266,178		)	(246,649		)	(285,847		)	(271,716		)
	644,268			634,695			668,771			677,106
Construction work in progress	58,735			38,334			45,111			34,438
Net utility plant	703,003			673,029			713,882			711,544

Other Property and Investments
Other property and investments	7,312			7,364			7,721			7,745
Total other property and investments	7,312			7,364			7,721			7,745

Current Assets
Cash and cash equivalents	2,657			8,788			3,135			1,735
Accounts receivable-customers (less allowance for doubtful accounts of $753 in 2006 and $765 in 2005)	17,323			12,919
Accounts receivable-customers (less allowance for doubtful accounts of $633 in 2007 and $771 in 2006)							15,296			14,465
Unbilled revenue	18,361			14,856			19,895			15,371
Inter-company receivable	258			226			22			111
Other accounts receivable (less allowance for doubtful accounts of $141 in 2006 and $334 in 2005)	2,869			6,106
Other accounts receivable (less allowance for doubtful accounts of $367 in 2007 and $283 in 2006)							4,448			4,066
Materials and supplies, at average cost	1,530			1,404			1,634			1,550
Regulatory assets - current	3,162			3,875			4,200			3,834
Prepayments and other current assets	1,238			2,795			2,411			2,575
Unrealized gain on purchased power contracts	—			3,417
Deferred income taxes - current	4,666			1,693			3,853			5,024
Total current assets	52,064			56,079			54,894			48,731

Regulatory and Other Assets
Regulatory assets	61,288			54,382			88,819			84,686
Other accounts receivable	9,148			8,820			9,564			9,335
Other	7,407			7,575			8,082			5,620
Total regulatory and other assets	77,843			70,777			106,465			99,641

Total Assets	$	840,222		$	807,249		$	882,962		$	867,661

The accompanying notes are an integral part of these financial statements

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

	June 30,		December 31,
(in thousands)	2007		2006
Capitalization
Common shares, no par value, no stated value	$	162,098	$	161,459
Earnings reinvested in the business	109,394		105,506
Total common shareholder’s equity	271,492		266,965
Long-term debt	261,043		261,248
Total capitalization	532,535		528,213

Current Liabilities
Long-term debt - current	316		323
Accounts payable	21,224		19,818
Inter-company payable	13,449		12,272
Income taxes payable to Parent	3,489		1,642
Accrued employee expenses	5,078		4,887
Accrued interest	2,427		2,445
Unrealized loss on purchased power contracts	1,180		3,654
Regulatory liabilities – current	3,919		3,546
Other	12,277		11,654
Total current liabilities	63,359		60,241

Other Credits
Advances for construction	77,033		76,646
Contributions in aid of construction – net	87,449		85,513
Deferred income taxes	81,635		76,678
Unamortized investment tax credits	2,382		2,427
Accrued pension and other postretirement benefits	31,595		31,042
Other	6,974		6,901
Total other credits	287,068		279,207

Commitments and Contingencies (Note 7)	—		—

Total Capitalization and Liabilities	$	882,962	$	867,661

(in thousands)

September 30,
2006

December 31,
2005

Capitalization

Common shares, no par value, no stated value

$
161,179

$
159,429

Earnings reinvested in the business

104,447

99,645

Accumulated other comprehensive loss

(3,556
)
(3,556
)
Total common shareholder’s equity

262,070

255,518

Long-term debt

261,316

261,540

Total capitalization

523,386

517,058

Current Liabilities

Long-term debt – current

305

295

Accounts payable

20,430

17,914

Inter-company payable

3,488

65

Income taxes payable to Parent

7,174

2,268

Accrued employee expenses

4,063

5,507

Accrued interest

5,179

2,218

Regulatory liabilities – current

4,120

3,252

Unrealized loss on purchased power contracts

2,468

—

Deferred income taxes – current

—

109

Other

12,772

12,390

Total current liabilities

59,999

44,018

Other Credits

Advances for construction

76,153

74,790

Contributions in aid of construction - net

84,917

83,055

Deferred income taxes

71,478

65,469

Unamortized investment tax credits

2,450

2,518

Accrued pension and other postretirement benefits

14,955

13,562

Other

6,884

6,779

Total other credits

256,837

246,173

Commitments and Contingencies (Note 8)

—

—

Total Capitalization and Liabilities

$
840,222

$
807,249

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE THREE MONTHS
ENDED JUNE 30, 2007 AND 2006

(Unaudited)

	Three Months Ended
	June 30,
(in thousands)	2007			2006
Operating Revenues
Water	$	58,894		$	51,396
Electric	6,255			7,027
Total operating revenues	65,149			58,423

Operating Expenses
Water purchased	11,877			10,702
Power purchased for pumping	2,506			2,218
Groundwater production assessment	2,549			2,239
Power purchased for resale	2,915			3,248
Unrealized loss on purchased power contracts	236			923
Supply cost balancing accounts	(1,190		)	(825		)
Other operating expenses	5,631			4,906
Administrative and general expenses	11,676			8,910
Depreciation and amortization	6,645			6,134
Maintenance	4,037			3,022
Property and other taxes	2,733			2,373
Net gain on sale of property	(238		)	—
Total operating expenses	49,377			43,850

Operating Income	15,772			14,573

Other Income and Expenses
Interest expense	(5,182		)	(4,875		)
Interest income	528			928
Other	47			—
Total other income and expenses	(4,607		)	(3,947		)

Income from operations before income tax expense	11,165			10,626

Income tax expense	4,695			3,867

Net Income	$	6,470		$	6,759

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
STATEMENTS OF INCOME
FOR THE ~~THREE~~SIX MONTHS
ENDED ~~SEPTEMBER~~JUNE 30, ~~2006~~2007 AND ~~2005~~
2006

(Unaudited)

							Six Months Ended
	Three Months Ended September 30,						June 30,
*(in thousands)*	2006			2005			2007			2006
Operating Revenues
Water	$	62,842		$	58,568		$	107,582		$	100,367
Electric	6,443			6,544			15,124			15,372
Other	325			21
Total operating revenues	69,610			65,133			122,706			115,739

Operating Expenses
Water purchased	14,696			15,446			20,586			18,877
Power purchased for pumping	3,394			3,080			4,522			3,733
Groundwater production assessment	2,477			2,316			4,828			4,322
Power purchased for resale	2,659			3,074			7,196			7,811
Unrealized loss (gain) on purchased power contracts	2,807			(4,018		)
Unrealized (gain) loss on purchased power contracts							(2,474		)	3,078
Supply cost balancing accounts	244			514			(1,910		)	(338		)
Other operating expenses	5,528			4,346			11,331			9,434
Administrative and general expenses	10,893			9,010			23,171			19,094
Depreciation and amortization	6,171			4,460			13,289			12,165
Maintenance	3,217			2,830			6,807			5,341
Property and other taxes	2,579			2,481			5,562			4,802
Net gain on sale of property	(132		)	—			(605		)	—
Total operating expenses	54,533			43,539			92,303			88,319

Operating Income	15,077			21,594			30,403			27,420

Other Income and Expenses
Interest expense	(4,861		)	519			(10,201		)	(9,678		)
Interest income	479			735			1,061			1,724
Other							99			—
Total other income and expenses							(9,041		)	(7,954		)

Income from operations before income tax expense	10,695			22,848			21,362			19,466

Income tax expense	4,943			10,475			8,990			7,362

Net Income	$	5,752		$	12,373		$	12,372		$	12,104

The accompanying notes are an integral part of these financial statements

GOLDEN STATE WATER COMPANY
STATEMENTS OF ~~INCOME~~CASH FLOW
FOR THE ~~NINE~~SIX MONTHS
ENDED ~~SEPTEMBER~~JUNE 30, ~~2006~~2007 AND ~~2005~~
2006

(Unaudited)

Nine Months Ended
September 30,

(in thousands)

2006

2005

Operating Revenues

Water

$
160,282

$
150,519

Electric

21,816

20,105

Other

3,244

76

Total operating revenues

185,342

170,700

Operating Expenses

Water purchased

33,573

35,116

Power purchased for pumping

7,127

6,537

Groundwater production assessment

6,799

6,115

Power purchased for resale

10,470

9,921

Unrealized loss (gain) on purchased power contracts

5,886

(7,492
)
Supply cost balancing accounts

(93
)
1,042

Other operating expenses

14,961

13,656

Administrative and general expenses

29,988

27,958

Depreciation and amortization

18,336

15,290

Maintenance

8,559

7,085

Property and other taxes

7,372

6,799

Net gain on sale of property

(132
)
—

Total operating expenses

142,846

122,027

Operating Income

42,496

48,673

Interest expense

(14,538
)
(8,381
)
Interest income

2,203

767

Income from operations before income tax expense

30,161

41,059

Income tax expense

12,305

18,710

Net Income

$
17,856

$
22,349

	Six Months Ended
	June 30,
(in thousands)	2007			2006
Cash Flows From Operating Activities:
Net income	$	12,372		$	12,104
Adjustments for non-cash items:
Depreciation and amortization	13,289			12,165
Provision for doubtful accounts	154			239
Deferred income taxes and investment tax credits	3,309			3,417
Unrealized (gain) loss on purchased power contracts	(2,474		)	3,078
Stock based compensation expense	492			310
Net gain on sale of property	(605		)	—
Other — net	467			346
Changes in assets and liabilities:
Accounts receivable - customers	(911		)	(74		)
Unbilled revenue	(4,524		)	(3,639		)
Other accounts receivable	(685		)	2,822
Materials and supplies	(84		)	(130		)
Prepayments and other current assets	2,638			874
Regulatory assets - supply cost balancing accounts	(1,910		)	(338		)
Other assets	1,937			(2,446		)
Accounts payable	1,406			857
Inter-company receivable/payable	266			(35		)
Income taxes receivable/payable from/to Parent	2,036			2,358
Other liabilities	(679		)	(200		)
Net cash provided	26,494			31,708

Cash Flows From Investing Activities:
Construction expenditures	(18,697		)	(33,116		)
Proceeds from sale of property	623			—
Net cash used	(18,074		)	(33,116		)

Cash Flows From Financing Activities:
Tax benefits from exercise of stock-based awards	121			897
Receipt of advances for and contributions in aid of construction	4,124			5,241
Refunds on advances for construction	(3,418		)	(2,173		)
Repayments of long-term debt	(212		)	(190		)
Net change in inter-company borrowings	1,000			2,500
Cash received on financing portion of purchased power contracts	—			1,333
Dividend equivalent rights	(61		)	(116		)
Tax benefits from payment of dividend equivalent rights	26			47
Dividends paid	(8,600		)	(8,600		)
Net cash used	(7,020		)	(1,061		)

Net increase (decrease) in cash and cash equivalents	1,400			(2,469		)
Cash and cash equivalents, beginning of period	1,735			8,788
Cash and cash equivalents, end of period	$	3,135		$	6,319

The accompanying notes are an integral part of these financial statements

~~GOLDEN STATE WATER COMPANY~~
~~CASH FLOW STATEMENTS~~
~~FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005~~
~~(Unaudited)~~

Nine Months Ended
September 30,

(in thousands)

2006

2005

Cash Flows From Operating Activities:

Net income

$
17,856

$
22,349

Adjustments for non-cash items:

Depreciation and amortization

18,336

15,290

Provision for doubtful accounts

528

280

Deferred income taxes, net regulatory asset for flow-through taxes, and investment tax credits

2,452

8,684

Unrealized loss (gain) on purchased power contracts

5,886

(7,492
)
Stock-based compensation expense

402

110

Other – net

401

162

Changes in assets and liabilities:

Accounts receivable – customers

(4,782
)
(4,397
)
Unbilled revenue

(3,505
)
(3,600
)
Other accounts receivable

2,759

615

Materials and supplies

(126
)
63

Prepayments and other current assets

1,557

1,770

Regulatory assets - supply cost balancing accounts

(93
)
1,042

Other assets

(4,764
)
(1,959
)
Accounts payable

2,516

465

Inter-company receivable/payable

891

3,182

Income taxes receivable/payable from/to Parent

4,906

7,867

Other liabilities

2,526

2,723

Net cash provided

47,746

47,154

Cash Flows From Investing Activities:

Construction expenditures

(49,465
)
(48,756
)
Net cash used

(49,465
)
(48,756
)

Cash Flows From Financing Activities:

Tax benefits from exercise of stock-based awards

1,131

—

Receipt of advances for and contributions in aid of construction

5,798

8,745

Refunds on advances for construction

(2,591
)
(2,801
)
Repayments of long-term debt

(259
)
(222
)
Net change in inter-company borrowings

2,500

7,300

Cash received on financing portion of purchased power contracts

2,007

2,007

Dividend equivalent rights paid

(171
)
—

Tax benefits from payment of dividend equivalent rights

73

—

Dividends paid

(12,900
)
(12,000
)
Net cash (used) provided

(4,412
)
3,029

Net (decrease) increase in cash and cash equivalents

(6,131
)
1,427

Cash and cash equivalents, beginning of period

8,788

2,702

Cash and cash equivalents, end of period

$
2,657

$
4,129

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

AMERICAN STATES WATER COMPANY
AND
GOLDEN STATE WATER COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
~~(Unaudited)~~

(Unaudited)

Note 1 — Summary of Significant Accounting Policies:

General / Nature of Operations: American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), Chaparral City Water Company (“CCWC”), and American States Utility Services, Inc. (“ASUS”) ~~(and~~and its subsidiaries: Fort Bliss Water Services Company (“FBWS”), Terrapin Utility Services, Inc. (“TUS”) and Old Dominion Utility Services, Inc. (“ODUS”)), and Chaparral City Water Company (“CCWC”).subsidiaries. More than 90% of AWR’s assets consist of the common stock of GSWC and its revenues and operations are primarily those of GSWC. GSWC is a public utility engaged principally in the purchase, production, distribution and sale of water in California serving approximately ~~254,000~~255,000 water customers. GSWC also distributes electricity in several California mountain communities serving ~~approximately~~over 23,000 electric customers. The California Public Utilities Commission (“CPUC”) regulates GSWC’s water and electric ~~businesses,~~business, including properties, rates, services, facilities and other matters. CCWC is a public utility regulated by thethe Arizona Corporation Commission (“ACC”) serving ~~approximately~~over 13,000 customers in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona. ASUS performs ~~water-related~~water related services and operations on a contract basis. There is no direct regulatory oversight by either the CPUC or the ACC of the operation or rates of the contracted services provided by ASUS and its ~~wholly owned~~wholly-owned subsidiaries or by AWR.

~~FBWS operates~~ASUS, through its wholly-owned subsidiaries, has entered into agreements with the U.S. government to operate and maintain the water and wastewater systems at various military bases pursuant to 50-year fixed price contracts. In December 2006, ASUS, through one of its wholly-owned subsidiaries, finalized an agreement with the U.S. government for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss ~~located near~~in El Paso, ~~Texas pursuant~~Texas. The $20.6 million project is a firm-fixed price contract and is an amendment to the ~~terms of a~~original 50-year contract with the U.S. ~~Government. FBWS holds a certificate of convenience and necessity from~~government to manage the Texas Commission on Environmental Quality (“TCEQ”). TUS took over the operation and maintenance of the water and wastewater systems at Andrews Air Force Base in Maryland on February 1, 2006 and commenced operation of these systems on that date pursuant to the terms of a 50-year contract with the U.S. Government. On December 14, 2005, the Maryland Public Service Commission determined it was in the public interest and consistent with public convenience and necessity to conditionally approve the right of TUS to operate in accordance with the terms and conditions of the contract with the U.S. Government. ODUS assumed the operation and maintenance of the wastewater systems at Fort Lee in Virginia on February 23, 2006 and theentire water and wastewater systems at Fort ~~Eustis, Fort Monroe~~Bliss. Construction on this project began in 2007 and ~~Fort Story in Virginia on April 3, 2006~~revenues from this agreement have been recognized under the percentage-of-completion method of accounting during the three and ~~commenced operation~~six months ended June 30, 2007. The project is scheduled to be completed by August 15, 2007 and ~~maintenance of these systems on those dates pursuant~~there will be no further construction revenues associated with this amendment after that date. Earnings and cash flows from amendments to the ~~terms of~~original 50-year contracts with the U.S. ~~Government. The Virginia State Corporation Commission exercises jurisdiction over ODUS as a public service company.~~

government are sporadic and may or may not continue in future periods.

Basis of Presentation: The consolidated financial statements of AWR include the accounts of AWR and its subsidiaries, all of which are wholly owned. These financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. Inter-company transactions and balances have been eliminated in the AWR consolidated financial statements. Investments in partially-owned affiliates are accounted for by the equity method when Registrant’s interest exceeds 20%. 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”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with ~~accounting~~acc ounting principles generally accepted in the United States of America for annual financial statements have been condensed or omitted ~~pursu ant~~pursuant to such rules and regulations. 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 revenue 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, ~~2005~~2006 filed with the SEC. Certain prior-period amounts were reclassified to conform to the ~~September~~June 30, ~~2006~~2007 financial statement ~~pre sentation.~~presentation.

GSWC’s Related Party Transactions: GSWC and other subsidiaries provide and receive various services to and from their parent, AWR, and among themselves. In addition, AWR has an $85 million syndicated credit facility. AWR borrows under this facility and provides funds to its subsidiaries, including GSWC, in support of their operations. Amounts owed to AWR for borrowings under this facility represent the majority of ~~GSWC’s~~the inter-company payables on GSWC’s balance sheets as of ~~September~~June 30, ~~2006~~2007 and December 31, ~~2005.~~2006. The interest rate charged to GSWC is equal to the amounts sufficient to cover AWR’s interest cost under the credit facility. GSWC also allocates certain corporate office administrative and general costs to its affiliates using agreed upon allocation factors.

Advances for Construction and Contributions in Aid of Construction

: For CCWC, advances for construction represent amounts advanced by developers which are refundable over 10 to 20 years. Refund amounts under the CCWC contracts are based on annual revenues from the extensions, as authorized by the ACC. After all refunds are made, any remaining balance is transferred to contributions-in-aid of construction. Contributions-in-aid of construction are similar to advances, but require no refunding and are amortized over the useful lives of the related property. During the second quarter of 2007, approximately $2.2 million of CCWC advances that expired were transferred to contributions-in-aid of construction.

New Accounting Pronouncements: ~~Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “~~~~Share-Based Payment~~~~,” which requires the recognition of compensation expense related to the fair value of stock-based compensation awards. See Note 6 for further details.~~

In March 2006, the ~~FASB~~Financial Accounting Standards Board (“FASB”) Emerging Issues Task Force (“EITF”) issued EITF No. 06-03, “How Sales Taxes Collected ~~fr om~~From Customers and Remitted to Governmental Authorities Should Be Presented in the Income ~~Statement (That Is, Gross Versus Net Presentation)~~Statement.”~~, which provides clarifying guidance on how to present~~ A consensus was reached that entities may adopt a policy of presenting sales taxes in the income ~~statement. This~~statement on either a gross or net basis, based on their accounting policy, which should be disclosed. If such taxes are significant, and are presented on a gross basis, an entity should also disclose the amounts of those taxes. Effective January 1, 2007, Registrant adopted the guidance ~~is effective for periods beginning after December 15, 2006, with early application~~of EITF No. 06-03. GSWC bills certain sales and use taxes levied by state or local governments to its customers. Included in these sales and use taxes are franchise fees, which GSWC pays to various municipalities (based on ordinances adopted by these municipalities) in order to operate within the limits of the ~~guidance permitted. Registrant~~municipality. GSWC bills these franchise fees to its customers based on a CPUC-authorized rate. These franchise fees, which are required to be paid regardless of GSWC’s ability to collect from the customer, are accounted for on a gross basis. GSWC’s franchise fees billed to customers and recorded as operating revenue were approximately $619,000 and $554,000 for the three months ended June 30, 2007 and 2006, respectively, and $1,352,000 and $1,132,000 for the six months ended June 30, 2007 and 2006, respectively. When GSWC acts as an agent, and the tax is ~~currently assessing~~not required to be remitted if it is not collected from the ~~impact of~~customer, the ~~EITF~~taxes are accounted for on ~~its financial statements.~~

a net basis.

In ~~June~~July 2006, the ~~Financial Accounting Standards Board (“FASB”)~~FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income ~~Taxes:~~Taxes, an interpretation of FASB Statement No. ~~109~~109” (“FIN 48”).~~” This~~ Effective January 1, 2007, Registrant adopted the provisions of FIN 48. In addition, in May 2007, the FASB Staff Position (“FSP”) issued FSP FIN 48-1, “Definition of Settlement in FASB Interpretation ~~prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of~~No. 48”, which amends FIN 48 to provide guidance on how an enterprise should determine whether a tax position ~~taken or expected to be taken in a~~is effectively settled for the purpose of recognizing previously unrecognized tax ~~return,~~benefits. See Note 5 for further details and ~~provides guidance~~information on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition. This Interpretation is effective for fiscal years beginning after December 31, 2006. Registrant will implement the new guidance effective January 1, 2007 and is currently assessing the impact of the ~~Interpretation~~adoption of FIN 48 and FSP FIN 48-1 on ~~its financial statements.~~Registrant.

In September 2006, the FASB issued ~~SFAS~~Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements”, which defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements. This statement is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. Early adoption is encouraged, provided that Registrant has not yet issued financial statements for that fiscal year, including any financial statements for an interim period within that fiscal year. Registrant will implement the new standard effective January 1, 2008. Registrant is currently evaluating the impact SFAS No. 157 may have on its financial statements and disclosures.

In ~~September 2006,~~February 2007, the FASB ~~also~~ issued SFAS No. ~~158,~~ 159, “~~Employer’s Accounting~~The Fair Value Option for ~~Defined Benefit Pension~~Financial Assets and ~~Other Postretirement Plans – an amendment~~Financial Liabilities”. SFAS No. 159 allows measurement at fair value of ~~FASB Statements No. 87, 88, 106,~~eligible financial assets and ~~132(R)~~.~~SFAS 158 requires~~liabilities that ~~Registrant recognize the overfunded or underfunded status of its defined benefit and retiree medical plans as an~~are not otherwise measured at fair value. The election to measure a financial asset or liability ~~in its 2006 year-end balance sheet, with~~at fair value can be made on an instrument-by-instrument basis and is irrevocable. The difference between carrying value and fair value at the election date is recorded as a transition adjustment to opening retained earnings. Subsequent changes in ~~the funded status~~fair value are recognized ~~through comprehensive income~~ in ~~the~~earnings. SFAS No. 159 also establishes additional disclosure requirements designed to facilitate comparison between companies that choose different measurement attributes for similar type assets and liabilities. SFAS No. 159 is effective for Registrant’s fiscal year ~~in which they occur.~~beginning January 1, 2008. Registrant is ~~currently~~ evaluating the potential impact ~~of adopting~~that SFAS No. ~~158~~159 may have on its financial ~~statements including the possible regulatory accounting treatment and will implement the new standard by December 31, 2006.~~ statements.

In ~~September 2006,~~March 2007, the ~~SEC~~FASB issued ~~Staff~~ EITF 06-11, “Accounting ~~Bulletin (“SAB”) No. 108,~~ ~~“Considering the Effects~~for Income Tax Benefits of ~~Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements”~~~~. This SAB provides guidance~~Dividends on ~~the consideration of the effects of prior year misstatements in quantifying current year misstatements for the purpose of~~Share-Based Payment”, which concludes that a ~~materiality assessment. SAB No. 108 establishes an approach~~realized income tax benefit from dividends or dividend equivalents that requires quantification of financial statement errors based on the effects of the error on each of the company’s financial statements and the related financial statement disclosures. SAB No. 108 is effective as of the end of Registrant’s 2006 fiscal year, allowing a one-time transitional cumulative effect adjustmentare charged to retained earnings and are paid to employees for equity classified nonvested equity shares, nonvested equity share units, and outstanding equity share options should be recognized as ofan increase in additional paid-in capital. Registrant will commence recognizing this tax benefit as an increase in additional paid- in capital commencing January 1, ~~2006 for errors that were not previously deemed material, but are material under the guidance in SAB 108. Registrant is currently evaluating the~~2008. The impact of ~~adopting SAB No. 108 on its~~this change is not expected to be material to Registrant’s financial ~~statements and will implement the new guidance by December 31, 2006. Registrant believes SAB No. 108 will not have a material impact on its results of operations or financial position.~~statements.

Note 2 — Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future ~~revenues~~revenue associated with certain costs that will be recovered from customers through the ratemaking process, and regulatory liabilities, which represent probable future reductions in ~~revenues~~revenue associated with amounts that are to be credited to customers through the ratemaking process. At SeptemberJune 30, 2006,2007, Registrant had $8.9$7.4 million of regulatory assets not accruing carrying costs. Of this amount, $7.3$6.6 million representsrelates to deferred income taxes due totax representing accelerated tax benefits previously flowed-through to ratepayers, which will be included in rates concurrently with recognition of the associated future tax expense. In addition, $1.6 million in deferred charges for rate case applications was recorded asthere are other regulatory assetsexpenses that Registrant recovers in rates over a short period andthat do not provide for which no recovery of carrying costs is earned.

costs. At June 30, 2007, $784,000 was recorded as other regulatory assets for such expenses to be recovered. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:

	June 30,			December 31,
(In thousands)	2007			2006
GSWC
Supply cost balancing accounts	$	18,585		$	17,321
Supply cost memorandum accounts net under-collections	8,132			7,429
Costs deferred for future recovery on Aerojet case	21,362			21,313
Pensions and other postretirement obligations	21,062			22,815
Flow-through taxes, net	6,591			7,243
Electric transmission line abandonment costs	3,230			3,288
Asset retirement obligations	3,372			3,197
Low income rate assistance balancing accounts	4,247			3,807
Refund of water right lease revenues	(3,293		)	(3,565		)
Santa Maria adjudication memorandum accounts	3,928			—
Other regulatory assets	1,884			2,126
Total GSWC	$	89,100		$	84,974
CCWC
Asset retirement obligations	$	50		$	48
Other regulatory liabilities, net	(551		)	(565		)
Total AWR	$	88,599		$	84,457

(In thousands)

September 30,
2006

December 31,
2005

GSWC

Supply cost balancing accounts

$
16,920

$
19,624

Supply cost memorandum accounts net under-collections

6,043

3,151

Costs deferred for future recovery on Aerojet case

21,334

21,109

Flow-through taxes, net

7,346

6,939

Electric transmission line abandonment costs

3,333

3,428

Asset retirement obligations

3,189

2,928

Low income balancing accounts

3,503

2,846

General rate case memorandum accounts

—

209

Refund of water rights lease revenues

(3,732
)
(6,474
)
Other regulatory assets

2,394

1,245

Total GSWC

$
60,330

$
55,005

CCWC

Asset retirement obligations

47

44

Other regulatory assets/liabilities, net

(547
)
(494
)
Total AWR

$
59,830

$
54,555

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, 2006 filed with the SEC. Discussion below focuses on significant matters and changes since December 31, 2006.

Supply Cost Balancing and Memorandum Accounts:

Electric Supply Cost Balancing Account –— Electric power costs incurred by GSWC’s Bear Valley Electric division continue to be charged to its electric supply cost balancing account. The under-collection in the electric supply cost balancing account is ~~$19.6~~$18.7 million at ~~September~~June 30, ~~2006.~~2007. The balance in the electric supply balancing account is primarily impacted byby: (i) a surcharge to decrease previously under-collected energy ~~costs;~~costs, (ii) changes in purchased energy ~~costs;~~costs, and (iii) changes in power system delivery costs.

The CPUC has authorized GSWC to collect a surcharge from its customers of 2.2¢ per kilowatt hour through August 2011, to enable GSWC to recover an under-collection of approximately $23.1 million at the end of 2001 which had been incurred during the energy crisis in late 2000 and 2001. GSWC sold ~~32,049,785~~30,724,243 and ~~31,123,833~~33,448,999 kilowatt hours of electricity to its Bear Valley Electric division customers for the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, respectively, and ~~109,125,050~~sold 73,408,022 and ~~101,438,647~~75,743,077 kilowatt hours of electricity to its customers for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, respectively. As a result, the supply cost balancing account was reduced by approximately ~~$710,000~~$663,000 and ~~$689,000~~$687,000 for the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, respectively, and ~~approximately $2,416,000~~$1,581,000 and ~~$2,246,000~~$1,567,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, respectively. Approximately ~~$14.3~~$15.6 million of the under-collection incurred during the energy crisis in late 2000 and 2001 has been recovered through this surcharge. GSWC anticipates the surcharge, based on electricity sales, to be sufficient for it to recover by August 2011 the amount of the under-collected balance incurred during the energy ~~crisis by August 2011.~~crisis. However, in 2011, if GSWC has not fully recovered the amount of this under collection, GSWC will seek recovery of any amounts not recovered through this surcharge.

The purchased energy costs that are recorded in the supply cost balancing account are subject to a price cap by terms of the 2001 ~~settlement with the CPUC.~~CPUC decision. The Bear Valley Electric division of GSWC is allowed to include up to a weighted average annual purchased energy ~~purchase~~ cost of $77 per megawatt-hour (“MWh”) through August 2011 in its electric supply cost balancing ~~account for purchased energy costs.~~account. To the extent that the actual weighted average annual cost for power purchased exceeds the $77 per MWh amount, GSWC will not be able to include these amounts in its balancing account and such amounts will be expensed. ~~During the three months ended September 30,~~

~~2006 and 2005,~~ ~~there was~~There were no ~~expense~~amounts expensed over the $77 per MWh cap ~~because of increases in GSWC’s sales of surplus energy into~~during the ~~spot market.~~three months ended June 30, 2007 and 2006. During the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005, GSWC~~2006, the amounts expensed ~~approximately $40,400~~were $29,000 and ~~$6,400 for costs over $77 per MWh,~~$40,000, respectively.

Charges to GSWC by Southern California Edison (“Edison”), a subsidiary of Edison International, associated with the transportation of energy over Edison’s power system and the abandonment of a transmission line upgrade have increased under Edison’s tariff to levels that exceed the amounts authorized by the CPUC in Bear Valley Electric’s retail power rates to its customers. The incremental cost increase to GSWC from ~~this~~the tariff ~~above~~for the ~~amounts~~abandonment of a transmission line upgrade, which is not included in rates, is $38,137 per month. These increases have been included in the balancing account for subsequent recovery from ~~customers.~~customers, subject to CPUC approval. The incoming power system delivery costs are not subject to ~~any~~the $77 per MWh price ~~caps.~~

~~In summary, f~~or the three months ended September 30, 2006 and 2005, approximately $867,000 and $355,000 of over-collections, respectively, were recorded in the electric supply cost balancing account, net of amortization of approximately $710,000 and $689,000, respectively. For the nine months ended September 30, 2006 and 2005, approximately $1.5 million and $1.6 million of over-collections were recorded in the electric supply cost balancing account, respectively, net of amortization of approximately $2.4 million and $2.2 million, respectively.

cap referenced above. Other components, such as interest accrued on the cumulative under-collected balance and power loss during transmission, also affect the balance of the electric supply cost balancing account.

In summary, for the three months ended June 30, 2007 and 2006, the under-collection decreased by approximately $406,000 and $367,000, respectively, and $1,189,000 and $586,000 for the six months ended June 30, 2007 and 2006, respectively.

Water Supply Cost Memorandum/Balancing Accounts –— ~~In a CPUC decision issued on June 19, 2003 related to memorandum supply cost accounts, all~~All water utilities regulated by the CPUC were required to seek review of supply cost under- and over- collections by filing an advice letter annually and to reduce the utility’s recovery of such expenses ~~has been reduced~~ by the amount exceeding the authorized rate of return. Upon approval by the CPUC, the memorandum accounts are transferred to water supply cost balancing accounts. On April 13, 2006, the CPUC approved a decision eliminating the earnings test ~~adopted~~that limited recovery of expenses recorded in ~~the June 2003 decision.~~these accounts. The ~~recent~~ decision also eliminated the need to make an annual filing. Pursuant to this order, GSWC recognized a cumulative under-collection of approximately $636,000 to the supply cost memorandum account provisions in the second quarter of 2006 for the under-collected balances not recognized at March 31, 2006 and began recording under- and over- collections on a monthly basis thereafter commencing with the second quarter of 2006. For the three months ended ~~September~~June 30, 2007 and 2006, approximately, $1.6 million and ~~2005, approximately $645,000~~$599,000 of under-collections, ~~and $130,000 of over-collections,~~ respectively, were recorded in the water supply cost memorandum/balancing accounts, ~~net of~~including amortization of approximately ~~$730,000~~$250,000 over-collection and ~~$75,000,~~$283,000 under-collection, respectively. For the ~~nine~~six months ended ~~September~~June 30, 2007 and 2006, ~~and 2005,~~ approximately, ~~$1.6~~$3.1 million and ~~$670,000~~$361,000 of under-collections, respectively, were recorded in the water supply cost memorandum/balancing accounts, ~~respectively, net of~~including amortization of approximately ~~$1.3~~$570,000 over-collection and $520,000 under-collection, respectively.

GSWC filed advice letters with the CPUC in October 2006 for review of $2.0 million net under-collections of Region I’s 2005 and ~~$367,000, respectively.~~

2006 water supply cost memorandum account balance as of August 31, 2006 and its net balance after amortization of the 2001-2003 balancing account. On January 3, 2007, the CPUC approved the advice letters as filed. As a result, the total $2.0 million net under-collection was transferred to the water supply cost balancing account in January 2007. There was no impact to earnings in 2007 as this net under-collection was recorded as a regulatory asset in prior periods.

Costs Deferred for Future Recovery:

In 1999, GSWC sued Aerojet-General Corporation (“Aerojet”) for contaminating the Sacramento County Groundwater Basin, which affected certain GSWC wells. On a related matter, GSWC also filed a lawsuit against the State of California (the “State”). The CPUC authorized memorandum accounts to allow for recovery, from customers, of costs incurred by GSWC in prosecuting the cases against Aerojet and the State, less any recovery from the defendants or others.

On July 21, 2005, the CPUC authorized GSWC to collect approximately $21.3 million of the Aerojet litigation memorandum account, through a rate surcharge, which will continue for no longer than 20 years. Beginning in October 2005, new rates went into effect to begin amortizing the memorandum account over a 20-year period.

A rate surcharge generating approximately ~~$328,000~~$285,000 and ~~$791,000~~$289,000 was billed to customers during the three ~~and nine~~ months ended ~~September~~June 30, 2007 and 2006, respectively, and $505,000 and $499,000 for the six months ended June 30, 2007 and 2006, respectively. GSWC will keep the Aerojet memorandum account open until ~~it is fully amortized, but no longer than~~the earlier of full amortization of the balance or 20 years. However, no costs will be added to the memorandum account, other than on-going interest charges approved by the decision. Pursuant to the decision, additional interest of approximately ~~$279,000~~$278,000 and ~~$1.1 million were~~$554,000 was added to the Aerojet litigation memorandum account during the three and ~~nine~~six months ended ~~September~~June 30, ~~2006,~~2007, respectively.

It is management’s intention to offset any settlement proceeds received from Aerojet ~~that may occur~~ pursuant to the settlement agreement against the balance in

the memorandum account, with the exception of an $8$8.0 million payment guaranteed by ~~Aerojet (for capital investments), with~~Aerojet. The $8.0 million plus interest ~~due GSWC,~~on the unpaid balance is scheduled to be paid in ~~full~~installments over 5five years beginning in ~~2009.~~2009 and is expected to be used to make certain capital investments useful in managing the contamination which was the basis of the suit against Aerojet. Pursuant to such settlement agreement, Aerojet has agreed to reimburse GSWC an additional $17.5 million, plus interest accruing from January 1, 2004, for ~~its~~GSWC’s past legal and expert costs. The recovery of the $17.5 million is contingent

upon the issuance of land use approvals for development in a defined area within Aerojet property in Eastern Sacramento County and the receipt of certain fees in connection with such development.

On April 7, 2006, GSWC filed an advice letter with the CPUC to incorporate the Westborough development, which represents a portion of the defined property, into ~~the Arden~~its Rancho Cordova service area and to provide water service to that new development. The City of Folsom (the “City”) filed a protest of GSWC’s advice letter on April 27, 2006. On January 30, 2007, the CPUC rejected the advice letter without prejudice, and invited GSWC to refile the advice letter once the City’s protest was resolved, or file an application for CPUC approval of the service territory expansion. In June 2007, GSWC signed an agreement with the City. Pursuant to the agreement, the City relinquishes all claims concerning GSWC’s providing water service to the Westborough area, and as compensation to the City to resolve its claim, GSWC has agreed to pay the City $550,000 as the settlement payment, of which Aerojet will reimburse GSWC for 50% or $275,000. Accordingly, as of and for the three and six months ended June 30, 2007, GSWC has recorded an obligation of $550,000 to the City, an additional receivable of $275,000 from Aerojet for the amount to be reimbursed, and a net charge to expense in the amount of $275,000 for GSWC’s share of the settlement payment. GSWC intends to refile the application for service territory expansion with the CPUC.

Santa Maria Adjudication Memorandum Accounts:

As more fully discussed in Note 7, GSWC has incurred costs of approximately $6.5 million as of June 30, 2007, including legal and expert witness fees, in defending its water supply from the Santa Maria Basin dedicated to customer service in Santa Barbara and San Luis Obispo Counties. Such costs had been recorded in utility plant for rate recovery. In February 2006, GSWC filed an application with the CPUC for recovery of $5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005. In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates authorizing recovery of the $5.5 million requested in GSWC’s application. The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit. In May 2007, the CPUC issued a decision that approved the settlement with the Division of Ratepayer Advocates. Pursuant to the decision, GSWC was ordered to place in rate base $2.7 million of the $5.5 million of previously incurred litigation costs in the Santa Maria groundwater basin adjudication. GSWC was also ordered to amortize, with interest, the remaining $2.8 million of the $5.5 million in rates over a ten-year period. This amount has been transferred into a separate memorandum account included within regulatory assets and a surcharge has been implemented in the third quarter of 2007 for recovery of these costs. All litigation costs that have been incurred since December 31, 2005, totaling approximately $1.1 million, have also been transferred from rate base to a separate new memorandum account, subject to a reasonableness review by the CPUC in a subsequent phase of this proceeding or in a new proceeding. Management believes that these additional costs will be approved and the recovery of these costs through rates is probable.

Other Regulatory Matters:

On February 15, 2007, the CPUC issued a subpoena to GSWC in connection with an investigation of certain work orders and charges paid to a specific contractor used by GSWC for numerous construction projects. The CPUC’s investigation focuses on whether these charges were approved in customer rates and whether they were just and reasonable. In June 2007, GSWC received notification from the CPUC instituting an audit. The purpose of the audit will be to examine for the period 1994 to the present, GSWC’s policies, procedures, and practices throughout all of its Regions regarding the granting or awarding of construction contracts or jobs. Management cannot predict the outcome of the ~~City’s protest nor the future development within Aerojet’s property.~~investigation or audit at this time.

~~Refund of Water Rights Lease Revenues~~:

~~In 1994, GSWC entered into~~On April 16, 2007, GSWC’s Bear Valley Electric division filed a contract to lease to the City of Folsom, 5,000 acre-feet per year of water rights from the American River. GSWC included all associated revenues in a nonoperating income account. In a decision issued on March 16, 2004,compliance report with the CPUC ~~ordered~~regarding its purchases of energy from renewable energy resources. The filing included an indication that Bear Valley Electric had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a possible penalty. GSWC ~~to refund 70 percent of~~has formally contested the ~~total amount of lease revenues received since 1994, plus interest, to customers. Pursuant to~~potential penalty reflected in the order, refunds of approximately $170,000 and $186,000 were provided to customers during the three months ended September 30, 2006 and 2005, respectively, and approximately $426,000 and $455,000 were provided to customers during the nine months ended September 30, 2006 and 2005, respectively. The refunds will be made over a 9-year period which commenced in June 2004.

~~Pursuant to the March 2004 CPUC order, the apportionment of any lease revenues~~compliance report. Management does not believe it is probable that GSWC ~~collects commencing in January 2004 was to~~will ultimately be ~~determined by a later decision. Pending that later decision~~assessed any penalty (which the form indicates would be as high as $592,000), and ~~beginning in the first quarter of 2004, all amounts billed to the City of Folsom had~~accordingly, no provision for loss has been included in a regulatory liability account and no amounts were recognized as revenue until uncertainties about this matter were resolved with the CPUC. On April 13, 2006, the CPUC authorized GSWC to reinvest all lease revenues received from the City of Folsom since January, 2004, inclusive of the balances in the regulatory liability accounts, in water system infrastructure and to include such investments in the rate base upon which GSWC earns a rate of return. As a result, GSWC transferred approximately $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005 from the regulatory liability account into other operating revenues in the first quarter of 2006. GSWC also recorded additional other operating revenues of approximately $311,000 and $909,000 reflecting water rights revenues for the three and nine months ended September 30, 2006, respectively.

~~Outside Services Memorandum Account:~~

~~In April 2006, the CPUC approved GSWC’s Region II advice letter which requested recovery of the expenses~~ recorded in the ~~Outside Services Memorandum Account (“OSMA”),~~financial statements. The CPUC is considering the future timing and applicability of renewable energy resource requirements as ~~of December 31, 2005. The decision authorized the recovery of this memorandum account~~they apply to ~~record costs incurred while working~~smaller energy utilities like Bear Valley Electric. It is GSWC’s objective to comply with the Water Replenishment District (“WRD”), WRD Technical Advisory Committee, Central and West Basin Municipal Water Districts, Metropolitan Water District, West Basin Water Association and Central Basin Water Association on water supply reliability and rate-related issues in Region II. GSWC incurred approximately $374,000 and $345,000 in20% renewable energy requirement by the OSMA in 2004 and 2005, respectively. GSWC sought and received authorization to amortize the cumulative total of approximately $719,000 over a 12-month period through customer rates. Accordingly, GSWC recorded a regulatory asset for this amount in April of 2006 with an offset and reduction to outside legal services recorded in administrative and general expenses during the second quarter of 2006. A surcharge went into effect in April of 2006 and accordingly, GSWC began amortizing the OSMA account. Revenues of approximately $200,000 and $304,000 were received from customers during the three and nine months ended September 30, 2006, respectively, relating to this surcharge. GSWC also booked the amortization for these amounts received to its OSMA memorandum account; therefore, there was no net impact on earnings. The surcharge will be in place for a 12-month period from the effective date.year 2010.

Note 3 — Earnings per Share/Capital Stock:

InRegistrant computes earnings per share (“EPS”) in accordance with ~~the Emerging Issues Task Force (“EITF”)~~EITF No. 03-06, “Participating Securities and the Two-Class Method under FASB Statement No. 128”. ~~, Registrant uses~~EITF No. 03-06 provides the accounting guidance for the effect of participating securities on EPS calculations and the use of the “two-class” method. The guidance requires the use of the “two-class” method of computing ~~earnings per share (“EPS”).~~EPS for companies with participating securities. The “two-class” method is an earnings ~~allocation~~allocations formula that determines EPS for each class of common stock and participating security. AWR has participating securities related to stock options and restricted stock units that earn dividend equivalents on an equal basis with ~~AWR’s~~ Common Shares ~~(the “Common Shares”)~~ that have been issued under AWR’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan. In applying the “two-class” method, undistributed earnings are allocated to both ~~common shares~~Common Shares and participating securities. The following is a reconciliation of Registrant’s net income and weighted average Common Shares outstanding for calculating basic ~~net income~~earnings per share:

*Basic*	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
											For The Three				For The Six Months
Basic EPS									Basic EPS		Months Ended June 30,				Ended June 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005		(in thousands, except per share amounts)		2007		2006		2007		2006
Net income	$	5,573	$	12,234	$	17,742	$	21,733	Net income		$	7,322	$	6,269	$	14,306	$	12,170
Less: (a) distributed earnings to common shareholders	3,826		3,776		11,406		11,322
distributed earnings to participating securities	80		—		234		—
Less:									(a)	Distributed earnings to common shareholders	4,017		3,798		8,021		7,580
										Distributed earnings to participating securities	64		79		128		154
Undistributed earnings	1,667		8,458		6,102		10,411		Undistributed earnings		3,241		2,392		6,157		4,436

(b) Undistributed earnings allocated to common	1,633		8,315		5,980		10,235
Undistributed earnings allocated to participating	34		143		122		176
(b)									Undistributed earnings allocated to common shareholders		3,190		2,345		6,061		4,348
									Undistributed earnings allocated to participating securities		51		48		96		88

Total income available to common shareholders, basic (a)+(b)	$	5,459	$	12,091	$	17,386	$	21,557	Total income available to common shareholders, basic (a)+(b)		$	7,207	$	6,143	$	14,082	$	11,928

Weighted average Common Shares outstanding, basic	17,003		16,782		16,898		16,773		Weighted average Common Shares outstanding, basic		17,094		16,881		17,066		16,844
Basic earnings per Common Share	$	0.32	$	0.72	$	1.03	$	1.29	Basic earnings per Common Share		$	0.42	$	0.36	$	0.83	$	0.71

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 Registrant’s 2000 Stock Incentive Plan and 2003 Non-Employee Directors Stock Plan, and net ~~income.~~income available to common shareholders. At ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006 there were ~~603,245~~580,215 and ~~686,600~~645,389 stock options outstanding, respectively, under these Plans. At ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, there were also ~~47,629~~approximately 61,081 and ~~30,800~~47,129 restricted stock units outstanding, respectively. The following is a reconciliation of Registrant’s net income available to common shareholders and weighted average Common Shares outstanding for calculating diluted ~~net income~~earnings per share:

	For The Three				For The Six Months
Diluted EPS	Months Ended June 30,				Ended June 30,
(in thousands, except per share amounts)	2007		2006		2007		2006
Common shareholders earnings, basic	$	7,207	$	6,143	$	14,082	$	11,928
Undistributed earnings for dilutive stock options (1)	—		—		—		—
Total common shareholders earnings, diluted	$	7,207	$	6,143	$	14,082	$	11,928

Weighted average common shares outstanding, basic	17,094		16,881		17,066		16,844
Stock-based compensation (2)	52		66		55		61
Weighted average common shares outstanding, diluted	17,146		16,947		17,121		16,905
Diluted earnings per Common Share	$	0.42	$	0.36	$	0.82	$	0.71

Diluted

For The Three Months
Ended September 30,

For The Nine Months
Ended September 30,

(in thousands, except per share amounts)

2006

2005

2006

2005

Common shareholders earnings, basic

$
5,459

$
12,091

$
17,386

$
21,557

Undistributed earnings for dilutive stock options (1)

—

—

—

—

Total common shareholders earnings, diluted

$
5,459

$
12,091

$
17,386

$
21,557

Weighted average Common Shares outstanding, basic

17,003

16,782

16,898

16,773

Stock-based compensation (2)

54

105

51

72

Weighted average Common Shares outstanding, diluted

17,057

16,887

16,949

16,845

Diluted earnings per Common Share

$
0.32

$
0.72

$
1.03

$
1.29

(1) Undistributed earnings allocated to participating securities were not included due to their antidilutive effect on diluted earnings per share.

(2) In applying the treasury stock method of reflecting the dilutive effect of outstanding stock-based compensation in the calculation of diluted EPS, ~~199,818~~276,574 and 241,962 stock options at ~~September~~June 30, 2007 and 2006, respectively, were deemed to be outstanding in accordance with SFAS No. 128, “Earnings Per Share”. ~~All~~

Stock options of ~~the stock options~~87,041 and ~~restricted stock units~~94,917 were outstanding at ~~September~~June 30, ~~2005 were~~2007 and 2006, respectively, but not included in the ~~calculation~~computation of diluted EPS because the related option exercise price was greater than the average market price of AWR’s Common Shares for the ~~three and nine~~six months ended ~~September~~June 30, ~~2005.~~

2007 and 2006. Stock options of ~~403,427~~216,600 and 308,510, and restricted stock units of ~~47,629~~61,081 and 47,129 were outstanding at ~~September~~June 30, 2007 and 2006, respectively, but not included in the computation of diluted EPS because they were antidilutive.

~~The Company~~Registrant has a Shareholder Rights Plan designed to protect the Company’s shareholders in the event of an unsolicited unfair offer to acquire the Company. The rights for Junior Participating Preferred Shares (the “Rights”) are exercisable based solely on “a non-market-based contingency”, and are not contingent upon the market price of ~~the Company’s~~AWR’s stock. Therefore, the shares that would be issued if the Rights are exercised are not included in the calculation of diluted earnings per share.

During the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, Registrant issued ~~16,168~~6,419 and ~~9,468~~13,245 Common Shares, for approximately ~~$602,000~~$235,000 and ~~$274,000,~~$494,000, respectively, under the Registrant’s Common Share Purchase and Dividend Reinvestment ~~Plan~~ (“DRP”), Plan and the 401(k) Plan. During the ~~nine~~six months ended ~~September~~June 30, 2007 and 2006, ~~and~~

~~2005,~~ Registrant issued ~~45,270~~13,494 and ~~30,153~~29,102 Common Shares, for approximately ~~$1,625,000~~$507,000 and ~~$830,000,~~$1,023,000, respectively, under the Registrant’s DRP Plan and the 401(k) Plan. In addition, during the ~~three and nine~~six months ended ~~September~~June 30, 2007 and 2006, Registrant issued ~~42,144~~46,787 and ~~190,976~~148,832 Common Shares for approximately ~~$962,000~~$1,127,000 and ~~$4,383,000,~~$3,421,000, respectively, as a result of the exercise of stock ~~options.~~options under the Company’s stock incentive plans. No cash proceeds received by AWR as a result of the exercise of these stock options have been distributed to any subsidiaries of AWR.

~~In addition, during~~During the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, Registrant purchased ~~1,028~~3,271 and ~~26,009,~~10,737, respectively, and 3,553 and 24,821 for the six months ended June 30, 2007 and 2006, respectively, Common Shares on the open market under the Registrant’s DRP and 401(k) ~~Plan,~~Plans, which were used to satisfy the requirements of these plans and programs. During the nine months ended September 30, 2006 and 2005, Registrant purchased 25,849 and 47,515, respectively, Common Shares on the open market under the Registrant’s DRP and 401(k) Plan, for the same reason.

plans.

During the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, AWR paid quarterly dividends to the shareholders ~~totaling~~of approximately $4.0 million, or $0.235 per share, and $3.8 million, or $0.225 per ~~share.~~share, respectively. During the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, AWR paid quarterly dividends to the shareholders ~~totaling~~of approximately ~~$11.4~~$8.0 million, or $0.470 per share, and ~~$11.3~~$7.6 million, ~~respectively,~~ or ~~$0.675~~$0.450 per ~~share.~~

share, respectively.

Note 4 — Derivative Instruments:

Registrant has certain block-forward purchase power contracts that are subject to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, as amended by SFAS Nos. 138 and 149. A derivative financial instrument or other contract derives its value from another investment or designated benchmark. SFAS No. 133 requires companies to record derivatives on the balance sheet as assets and liabilities, and to measure those instruments at their fair value. Certain of these contracts qualify as an exception provided under SFAS No. 133 for activities that are considered normal purchases and normal sales. These contracts are reflected in the statements of income at the time of contract settlement.

During 2002, GSWC became a party to block-forward purchase power contracts that qualified as derivative instruments under SFAS No. 133. Contracts with Pinnacle West Marketing & Trading Company, LLC (formerly Pinnacle West Capital ~~Corporation (“PWCC”)~~Corporation), which became effective in November 2002 have not been designated as normal purchases and normal sales. As a result, on a monthly basis, the related asset or liability is adjusted to reflect the fair market value at the end of the month. For the three months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, GSWC recognized a pretax unrealized loss of ~~approximately $2.8 million~~$236,000 and $923,000, respectively. For the six months ended June 30, 2007 and 2006, GSWC recognized a pretax unrealized gain of ~~approximately $4.0 million, respectively. For the nine months ended September 30, 2006~~$2,474,000 and ~~2005, GSWC recognized~~ a pretax unrealized loss of ~~approximately $5.9 million and a pretax unrealized gain of approximately $7.5 million,~~$3,078,000, respectively. As this contract is settled, the realized gains or losses are recorded in power purchased for resale, and the previously recorded unrealized gains or losses are reversed. These contracts have been recognized at fair market value on the balance sheets resulting in a cumulative unrealized loss of ~~approximately $2.5 million~~$1,180,000 as of ~~September~~June 30, ~~2006 since the inception of the contracts.~~

2007.

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. ~~Monthly, settlement~~Settlement of this contract ~~occurs~~occurred on a cash or net basis through 2006 and by physical delivery thereafter through 2008.Registrant has no other derivative financial instruments.

Note 5 — Income Taxes:

As a regulated utility, GSWC treats certain temporary differences as flow-through adjustments in computing its income tax provision consistent with the income tax approach approved by the CPUC for ratemaking purposes. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting ~~decrease~~increase or ~~increase~~decrease occurring in another period. Giving effect to these temporary differences as flow-through adjustments typically results in a greater variance between the effective tax rate (“ETR”) and the statutory federal and state income tax ~~rate~~rates in any given period than would otherwise exist if GSWC were not required to account for its income taxes as a regulated enterprise. ~~During~~

In July 2006, the ~~second quarter of 2005,~~FASB issued FIN 48. FIN 48 clarifies the accounting for uncertainty in income taxes by prescribing the recognition threshold a tax position is required to meet before being recognized in the financial statements. FIN 48 also provides guidance on derecognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition. Effective January 1, 2007, Registrant adopted FIN 48. As a result of adoption, Registrant increased retained earnings by $181,000. As of the ~~federal effect~~adoption date and at June 30, 2007, Registrant’s total amount of ~~state taxes~~unrecognized tax benefits was ~~adjusted to conform to~~$4.8 million, of which $118,000, if recognized, would affect the ~~flow-through method reflected in~~effective tax rate.

With the ~~tax calculation for ratemaking purposes, which partially defers the recognition~~adoption of ~~the effect to the subsequent tax year. This increased~~FIN 48, Registrant continued its policy of classifying interest on income tax over/underpayments in interest income/expense ~~by approximately $33,000~~and penalties in “other operating expenses.” At June 30, 2007, Registrant included $404,000 of net interest receivables from taxing authorities in other assets ($103,000 as current), of which $42,000 and $83,000 were included in interest income for the three and six months ended ~~September~~June 30, 2007, respectively. For the three and six months ended June 30, 2006, Registrant recognized $381,000 of income-tax-related interest income. At June 30, 2007, Registrant had no accruals for income-tax-related penalties and ~~decreased~~did not recognize any such penalty expense during the three and six months ended June 30, 2007 and 2006.

Registrant files federal and various state income tax ~~expense by approximately $171,000~~returns. The U.S. federal filings for the ~~nine months ended September 30, 2006. During~~years 1997 through 1999 and 2002 came under examination during the first quarter of 2007 as a result of Registrant having filed an amended 2002 return during the third quarter of ~~2005, AWR filed an amended tax return~~2006 for ~~2001 with the~~which Internal Revenue Service (“IRS”) ~~which was subject to IRS~~ and Congressional Joint Committee of Taxation (“JCT”) ~~review. During~~reviews are required. The 2002 return was amended primarily as a result of the ~~second quarter~~IRS consenting to Registrant’s request for approval to change a tax accounting method. In relation to this consent, Registrant’s total amount of ~~2006,~~unrecognized tax benefits could significantly increase or decrease within twelve months of June 30, 2007. An estimate of the range of the reasonably possible change cannot be made at June 30, 2007. Registrant is unable to anticipate when the IRS and JCT

reviews ~~were completed and AWR received~~will be concluded.

The California filing for 2001 also came under examination by the Franchise Tax Board during the first quarter of 2007 as a ~~refund~~result of Registrant having filed an amended 2001 return in the ~~amount of its original claim of $3.0 million, with interest. Consequently, in the second~~first quarter of ~~2006, AWR recorded a~~2006. The Franchise Tax Board completed its review during July 2007 without proposing any material changes to the amended return as filed by Registrant.

Registrant’s 2003 through 2005 tax ~~benefit of approximately $400,000, of which $351,000 was attributable~~years also remain subject to ~~GSWC.~~

~~Note 6 — Stock-Based Compensation:~~

~~Summary Description of Stock Incentive Plans~~

AWR currently has two primary stock incentive plans for employees and for non-employee directors: the 2000 Stock Incentive Plan (the “2000 Employee Stock Plan”) and the 2003 Non-Employee Directors Stock Plan (the “Directors Stock Plan”), more fully described below.

~~2000 Employee Stock Plan~~– AWR adopted the 2000 Employee Stock Plan at the annual meeting of shareholders in 2000 to provide stock-based incentive awards in the form of stock options, and restricted stock to employees as a means of promoting the success of the Company by attracting, retaining and aligning the interests of employees with those of shareholders generally. The 2000 Employee Stock Plan was amended in January 2006 to also permit the grant of restricted stock units. There are 1,050,000 Common Shares reserved for issuance under the 2000 Employee Stock Plan, approximately 277,400 of which remain available for issuance as of September 30, 2006. The 2000 Employee Stock Plan is administeredexamination by the Compensation Committee of the Board of Directors (the “Committee”). For stock options, the Committee determines, among other things, the date of grant, the form, term, option exercise price, vestingIRS and ~~exercise terms of each option. Stock options granted by AWR have been in the form of nonqualified stock options, expire ten~~its 2002 through 2005 tax years ~~from the date of grant, vest over a period of three years and are~~remain subject to ~~earlier termination as provided in the form of option agreement approved~~examination by ~~the Committee.~~

The option price per share is determined by the Committee at the time of grant, but may not be less than 100% of the fair market value of Common Shares on the date of grant. In addition, AWR may grant employees receiving a grant of stock options the right to receive cash dividends pursuant to the terms of a dividend equivalent rights agreement for a period of up to three years from the date of the option grant. For restricted stock, the Committee determines, among other things, the dividend, voting and other rights prior to vesting and the restrictions (which may be based on performance criteria, passage of time or other factors) imposed on the shares. For restricted stock units, the Committee determines, among other things, the vesting terms and form of pay-out. Each employee who receives a grant of a restricted stock unit is also generally entitled to dividend equivalents rights in the form of additional restricted stock units until vesting of the restricted stock units. The restricted stock units are a non-voting unit of measurement relative to one Common Share.

~~Directors Stock Plan~~– On May 20, 2003, the Board of Directors adopted the Directors Stock Plan, subject to shareholder approval. The shareholders approved the Directors Stock Plan at the May 2004 Annual Meeting. The Directors Stock Plan provides the non-employee directors with supplemental stock-based compensation and encourages them to increase their stock ownership in AWR. There are 250,000 Common Shares reserved for issuance under the Directors Stock Plan, approximately 168,900 of which remain available for issuance as of September 30, 2006. Pursuant to the Directors Stock Plan, non-employee directors are entitled to receive options to purchase 3,000 Common Shares at each annual meeting of shareholders commencing with the 2005 annual meeting of shareholders. AWR also granted options to each non-employee director to purchase 1,000 Common Shares at its annual shareholder meetings in 2003 and 2004. In addition, each non-employee director with no more than ten years of service with AWR is entitled to receive restricted stock units at each annual meeting in an amount equal to the then current annual retainer payable by AWR to each non-employee director divided by the fair market value of Common Shares on the last trading day prior to the annual meeting. All grants of stock options and restricted stock units are entitled to dividend equivalent rights payable in the form of additional restricted stock units under the terms of the Directors Stock Plan.

The stock options granted under the Directors Stock Plan are 10-year nonqualified stock options. The exercise price of the stock options must be 100% of the fair market value of Common Shares on the date of grant. Stock options granted under the Directors Stock Plan are fully vested and exercisable upon the date of grant. The restricted stock units are a non-voting unit of measurement relative to one Common Share. Restricted stock units with respect to dividend equivalent rights on stock options credited to the non-employee director are payable in Common Shares on the earlier of the date on which the stock option is exercised and three years from the date of grant of the stock option. Restricted stock units granted at each annual meeting of shareholders and restricted stock units with respect to dividend equivalent rights with respect thereto are payable solely in Common Shares on the

~~date that the participant terminates service as a director. Restricted stock units credited to each non-employee director’s account are at all times fully vested and non-forfeitable.~~

~~Change in Accounting Principle~~

~~Prior to January 1, 2006, Registrant accounted for share-based compensation to employees in accordance with Accounting Principles Board Opinion (“APB”) No. 25, “~~~~Accounting for Stock Issued to Employees~~~~,” and related interpretations. Registrant also followed the disclosure requirements of SFAS No. 123, “~~~~Accounting for Stock-Based Compensation~~~~”, as amended by SFAS No. 148, “~~~~Accounting for Stock-Based Compensation—Transition and Disclosure~~~~”. Except for costs related to restricted stock units and restricted stock granted to directors and employees, no stock-based compensation cost was recognized in net income.~~

~~Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123(R), “~~~~Share-Based Payment~~,” which requires the recognition of compensation expense related to the fair value of stock-based compensation awards. Under the provisions of SFAS No. 123(R), share-based compensation cost is measured by the Registrant at the grant date, based on the calculated fair value of the award, and is recognized as an expense over the employee’s requisite service period (generally the vesting period of the equity grant). Registrant elected to adopt the modified prospective transition method as provided by SFAS No. 123(R). Accordingly, financial statement amounts for the prior periods presented in this Form 10-Q have not been restated to reflect the fair value method of expensing share-based compensation.

~~Effect of Stock-Based Compensation on Net Income~~

Prior to January 1, 2006, Registrant had previously adopted the “disclosure-only” provisions of SFAS No. 123, as amended by SFAS No. 148. Had Registrant accounted for stock-based compensation plans using the fair value based accounting method described by SFAS No. 123 for the periods prior to fiscal year 2006, Registrant’s net income and earnings per share for the three and nine months ended September 30, 2005 would have been changed to the pro forma amounts indicated below:

(dollars in thousands, except EPS)

Three Months
Ended
September 30,
2005

Nine Months
Ended
September 30,
2005

Net income, as reported

$
12,234

$
21,733

Add: Stock-based compensation expense included in reported net income, net of tax

7

64

Less: Stock-based compensation expense determined under the fair-value accounting method, net of tax

(10
)
(682
)
Pro forma

$
12,231

$
21,115

Basic earnings per share:

As reported

$
0.72

$
1.29

Pro forma

$
0.72

$
1.25

Diluted earnings per share:

As reported

$
0.72

$
1.29

Pro forma

$
0.72

$
1.25

state taxing authorities.

There were no material differences between ~~the consolidated 2005 pro forma disclosures for AWR and the 2005 pro forma disclosures for GSWC.~~

The following table presents share-based compensation expenses for the three and nine months ended September 30, 2006 and 2005 and included in administrative and general expenses in AWR and GSWC’s statements of income resulting from stock options, restricted stock and restricted stock units:

AWR

GSWC

Three Months Ended September 30,

Nine Months Ended September 30,

Three Months Ended September 30,

Nine Months Ended September 30,

(in thousands)

2006

2005

2006

2005

2006

2005

2006

2005

Stock-based compensation related to:

Stock options granted to employees and directors

$
60

$
—

$
279

$
—

$
54

$
—

$
263

$
—

Restricted stock units granted to employees

42

—

120

—

38

—

111

—

Restricted stock units granted to directors

—

12

28

110

—

12

28

110

Stock-based compensation recognized in the income statement, before taxes

$
102

$
12

$
427

$
110

$
92

$
12

$
402

$
110

Income tax benefit

(41
)
(5
)
(171
)
(46
)
(37
)
(5
)
(161
)
(46
)
Total stock-based compensation after income taxes

$
61

$
7

$
256

$
64

$
55

$
7

$
241

$
64

Compensation cost capitalized as part of utility plant for the three and nine months ended September 30, 2006 was approximately $38,000 and $166,000, respectively. In addition, pursuant to SFAS No. 123(R), dividend equivalent rights paid in cash in the amount of approximately $187,000 and $171,000 for AWR and GSWC ~~respectively,~~with respect to their accounting for ~~the nine months ended September 30, 2006 were recognized as a reduction to retained earnings, net of tax benefit of approximately $80,000 and $73,000, respectively.~~

With the adoption of SFAS No. 123(R), Registrant elected to amortize stock-based compensation for awards granted on or after the adoption of SFAS No. 123(R) on January 1, 2006 on a straight-line basis over the requisite (vesting) period for the entire award. Registrant did not recognize compensation expense for employee share-based awards for the three and nine months ended September 30, 2005, when the exercise price of Registrant’s employee stock awards equaled the market price of the underlying stock on the date of grant. Registrant did recognize compensation expense under APB No. 25 relating to restricted stock units granted to directors. Non-vested stock options granted to employees prior to January 1, 2006 have terms that provide for the continuation of vesting upon termination of employment. Accordingly, these awards were deemed to be granted for past services from an accounting standpoint and any measured compensation cost was recognized in full in the pro forma disclosures at the date of grant. Therefore, upon implementation of SFAS No. 123(R), there was no remaining compensation cost to be recognized for these options granted prior to, but not yet vested as of January 1, 2006.

~~Valuation of Stock Options~~

Registrant estimated the fair value of stock options granted during the three and nine months ended September 30, 2006 and 2005 using the Black-Scholes valuation model. Key input assumptions used to estimate the fair value of stock options include the exercise price of the award, the expected option term, the expected volatility of the Registrant’s stock over the option’s expected term, the risk-free interest rate over the option’s expected term, and the Registrant’s expected annual dividend yield. Registrant believes that the valuation technique and the approach utilized to develop the underlying assumptions are appropriate in calculating the fair values of Registrant’s stock options granted during the three and nine months ended September 30, 2006 and 2005. Estimates of fair value are not intended to predict actual future events or the value ultimately realized by persons who receive equity awards. The fair value of stock units and restricted stock was determined based on the closing trading price of Common Shares on the grant date.

The fair value of each option grant during the three and nine months ended September 30, 2006 and 2005 was estimated on the grant date using the Black-Scholes option-pricing model with the following assumptions:

2006

2005

Weighted-average fair value of option granted

$
8.01 - $10.46

$5.63

Risk-free interest rate

4.40% - 5.02%

3.93%

Expected annual dividend yield

2.77% - 3.08%

3.68%

Expected volatility factor

24.90% - 26.43%

26.23%

Expected option term (in years)

6

7

��

~~Summary of key assumptions~~ – The risk-free interest rate for periods equal to the expected term of the share option was based on the U.S. Treasury yield curve in effect at the time of grant. Dividend yield reflects the current dividend rate at the date of grant. The stock volatility for each grant is measured using the weighted average of historical monthly and daily price changes of the Common Shares over the most recent period equal to the expected option life of the grant. For the three and nine months ended September 30, 2006, the option term was determined using the simplified method for estimating expected option life, which qualify as “plain-vanilla” options and is derived from the average midpoint between vesting and the contractual term, as described in SEC’s SAB No. 107, “~~Share-Based Payment~~~~.” As permitted by SFAS No. 123(R), underlying assumptions used for stock options granted prior to January 1, 2005 were retained.~~

SFAS No. 123(R) requires entities to estimate the number of forfeitures expected to occur and record expense based upon the number of awards expected to vest. Prior to adoption, the Company accounted for forfeitures as they occurred as permitted under previous accounting standards. The cumulative effect of adopting the change in estimating forfeitures was not material to the Company’s financial statements for the nine months ended September 30, 2006.

~~Stock Options~~– ~~A summary of stock option activity as of September 30, 2006, and changes during the nine months ended September 30, 2006, is presented below:~~

Number of
Options

Weighted
Average
Exercise Price

Weighted Average
Remaining
Contractual Term

Aggregate
Intrinsic Value

Options outstanding at January 1, 2006

684,304

$
24.31

Granted

109,917

34.85

Exercised

(190,976
)
22.95

Forfeited or expired

—

—

Options outstanding at September 30, 2006

603,245

$
26.66

7.45

$
6,993,336

Options exercisable at September 30, 2006

345,296

$
25.15

6.66

$
4,523,945

The weighted-average grant-date fair value of options granted by Registrant during the nine months ended September 30, 2006 was $8.34. There were no options granted during the three months ended September 30, 2006. The aggregate intrinsic value in the table above represents the total pretax intrinsic value (i.e., the difference between the closing price of the Common Shares on the last trading day of the third quarter of 2006 and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their option on September 30, 2006. This amount changes if the fair market value of the Common Shares changes. The total intrinsic value of options exercised during the three and nine months ended September 30, 2006 was approximately $602,000 and $2,803,000, respectively. During the three and nine months ended September 30, 2006, Registrant received approximately $962,000 and $4,383,000, respectively, in cash proceeds from the exercise of its stock options and realized approximately $245,000 and $1,142,000, respectively, of tax benefit for the tax deduction from awards exercised. As of September 30, 2006, approximately $530,000 of total unrecognized compensation cost related to outstanding stock options is expected to be recognized over a remaining period of 2.34 years.

~~Restricted Stock and Stock Units~~–A summary of the status of Registrant’s outstanding restricted stock units to employees and directors as of September 30, 2006, and changes during the nine months ended September 30, 2006, is presented below:

Number of
Restricted Share
Units

Weighted Average
Grant-Date Value

Restricted share units at January 1, 2006

31,166

$
25.02

Granted

17,065

34.37

Vested

(602
)
26.68

Forfeited

—

—

Restricted share units at September 30, 2006

47,629

$
28.34

As of September 30, 2006, there was approximately $330,000 of total unrecognized compensation cost related to restricted stock units granted under Registrant’s employee and director’s stock plans. That cost is expected to be recognized over a remaining period of 2.34 years.

~~AWR has no restricted stock outstanding as of September 30, 2006.~~

income taxes.

Note 76 — Employee Benefit Plans:

The components of net periodic benefit costs, before allocation to the overhead pool, for Registrant’s pension plan, postretirement ~~benefits~~ plan, and Supplemental Executive Retirement Plan (“SERP”) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006 are as follows:

	For The Three Months Ended June 30,
							Other
							Postretirement
	Pension Benefits						Benefits						SERP
(dollars in thousands)	2007			2006			2007			2006			2007			2006
Components of Net Periodic Benefits Cost:
Service cost	$	940		$	991		$	105		$	107		$	106		$	32
Interest cost	1,243			1,175			168			155			41			35
Expected return on plan assets	(1,133		)	(984		)	(57		)	(50		)	—			—
Amortization of transition	—			—			105			105			—			—
Amortization of prior service cost	41			41			(50		)	(50		)	40			37
Amortization of actuarial (gain) loss	154			292			25			37			(6		)	(3		)
Net periodic pension cost	$	1,245		$	1,515		$	296		$	304		$	181		$	101

For The Three Months Ended September 30, 2006 and 2005

Pension Benefits

Other
Postretirement
Benefits

SERP

(dollars in thousands)

2006

2005

2006

2005

2006

2005

Components of Net Periodic Benefits Cost:

Service Cost

$
963

$
933

$
107

$
109

$
55

$
32

Interest Cost

1,170

1,088

155

151

36

28

Expected Return on Plan Assets

(990
)
(922
)
(50
)
(74
)
—

—

Amortization of Transition

—

—

105

105

—

—

Amortization of Prior Service Cost

41

41

(50
)
(50
)
39

38

Amortization of Actuarial Loss (Gain)

291

313

37

41

(5
)
(10
)
Net Periodic Pension Cost

$
1,475

$
1,453

$
304

$
282

$
125

$
88

For The Nine Months Ended September 30, 2006 and 2005

Pension
Benefits

Other
Postretirement
Benefits

SERP

(dollars in thousands)

2006

2005

2006

2005

2006

2005

Components of Net Periodic Benefits Cost:

Service Cost

$
2,889

$
2,799

$
321

$
327

$
165

$
96

Interest Cost

3,510

3,264

465

453

108

84

Expected Return on Plan Assets

(2,970
)
(2,766
)
(150
)
(222
)
—

—

Amortization of Transition

—

—

315

315

—

—

Amortization of Prior Service Cost

123

123

(150
)
(150
)
117

114

Amortization of Actuarial Loss (Gain)

873

939

111

123

(15
)
(30
)
Net Periodic Pension Cost

$
4,425

$
4,359

$
912

$
846

$
375

$
264

	For The Six Months Ended June 30,
							Other
							Postretirement
	Pension Benefits						Benefits						SERP
(dollars in thousands)	2007			2006			2007			2006			2007			2006
Components of Net Periodic Benefits Cost:
Service cost	$	1,880		$	1,982		$	210		$	214		$	212		$	64
Interest cost	2,486			2,350			336			310			82			70
Expected return on plan assets	(2,266		)	(1,968		)	(114		)	(100		)	—			—
Amortization of transition	—			—			210			210			—			—
Amortization of prior service cost	82			82			(100		)	(100		)	80			74
Amortization of actuarial (gain) loss	308			584			50			74			(12		)	(6		)
Net periodic pension cost	$	2,490		$	3,030		$	592		$	608		$	362		$	202

Registrant expects to contribute a minimum of approximately $4,974,000 and $800,000 to the pension and postretirement medical plans in 2007, respectively. Registrant contributed ~~approximately $4,414,000~~its first payment of $1,125,000 to the pension plan during the ~~third~~second quarter of ~~2006. Registrant expects to contribute approximately $795,000~~2007. A second payment of $695,000 was made in July 2007. No contributions to the postretirement ~~benefit~~ plan were made during the three and six months ended June 30, 2007.

As of December 31, 2006, Registrant’s pension obligation was determined by an actuarial valuation using actual beginning -of-year (January 1, 2006) census data. During the ~~end~~second quarter of ~~2006.~~

~~In August 2006, the Board~~2007, Registrant’s actuaries completed a revised valuation with updated census data as of ~~Directors approved an amendment~~December 31, 2006. As a result of using updated data, Registrant recorded a $1.1 million reduction to the ~~SERP for executive officers of the Company. Under the SERP, the formula for calculating benefits was revised to provide that the~~projected benefit ~~is calculated based on 2% of compensation per year of credited service before 2006 and 3% of compensation per year of credited service after 2005 up to~~obligation with a combined maximum of 60% of compensation, except that participants who were employed with the Company on January 1, 2006 are entitled to receive the greater of the benefit calculated under the new formula or the benefit calculated under the previous formula. The Board’s approval of the new SERP formula is subjectcorresponding decrease to the ~~receipt~~regulatory asset during the second quarter of ~~a confirming example, showing the effect of the change on an executive officer. The effect of this change on the 2006 net periodic benefit cost is not material.~~2007.

Note 87 — Contingencies:

Water Quality-Related Litigation:

In 1997, GSWC was named as a defendant in nineteen lawsuits that alleged that GSWC and other water utilities delivered unsafe water to their customers in the San Gabriel Valley and Pomona Valley areas of Los Angeles County. Plaintiffs in these actions sought damages, including general, special, and punitive damages, as well as attorney’s fees on certain causes of action, costs of suit, and other unspecified relief. On August 4, 2004, GSWC was dismissed from all nineteen Los Angeles County cases. The Court found GSWC did not violate established water quality standards and dismissed the cases after allowing reasonable time and opportunity for the plaintiffs to prove otherwise. GSWC has long asserted that it provides water within the standards established by the CPUC in cooperation with the health authorities. On September 21, 2004, GSWC received notice that ~~several~~all of the plaintiffs filed an appeal to the trial court’s order ~~to dismiss~~dismissing GSWC. Briefs and reply briefs onwere filed in the ~~appeal have been filed.~~appeal. On February 7, 2006, the Second Appellate District in which the briefs were filed, moved the California Supreme Court to transfer the appeal to the First Appellate District, the District in which prior appeals regarding these cases had been heard. The Supreme Court granted the transfer. Argument in the court of appeal was held before the First Appellate District on June 20, 2007, and a ruling is expected by September 20, 2007. GSWC is unable to predict the outcome of this appeal.

GSWC is subject to self-insured retention (deductible) provisions in its applicable insurance policies and has either expensed the self-insured amounts or has reserved against payment of these amounts as appropriate. GSWC’s various insurance carriers have, to date, provided reimbursement for much of the costs incurred above the self-insured amounts for defense against these lawsuits, subject to a reservation of rights. In addition, the CPUC has issued certain decisions, which authorize GSWC to establish a memorandum account to accumulate costs for future recovery.

Perchlorate and/or Volatile Organic Compounds (“VOC”) have been detected in five wells servicing GSWC’s South San Gabriel System. GSWC filed suit in federal court, along with two other affected water purveyors and the San Gabriel Basin Water Quality Authority (“WQA”), against some of those allegedly responsible for the ~~contamination.~~contamination of two of these wells. Some of the other potential defendants settled with GSWC, other water purveyors and the WQA (the “Water Entities”) on VOC related issues prior to the filing of the lawsuit. In response to the filing of the ~~Federal~~ lawsuit, the Potentially Responsible Party (“PRP”) defendants filed motions to dismiss the suit or strike certain portions of the suit. The judge issued a ruling on April 1, 2003 granting in part and denying in part the ~~potentially responsible party’s~~PRP’s motions.

A key ruling of the court was that the water purveyors, including GSWC, by virtue of their ownership of wells contaminated with hazardous chemicals are themselves PRPs under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”).

Registrant has, pursuant to permission of the court, amended its suit to claim certain affirmative defenses as an “innocent” party under CERCLA. Registrant is presently unable to predict the outcome of this ruling on its ability to fully recover from the PRPs future costs associated with the treatment of these wells. In this same suit, the PRPs have filed cross-complaints against the Water Entities, the Metropolitan Water District, the Main San Gabriel Basin Watermaster and others on the theory that they arranged for and did transport contaminated water into the Main San Gabriel Basin for use by Registrant and the other two affected water purveyors and for other related claims.

On August 29, 2003, the US Environmental Protection Agency (“EPA”) issued Unilateral Administrative Orders (“UAO”) against 41 parties deemed responsible for polluting the groundwater in that portion of the San Gabriel Valley from which two of GSWC’s impacted wells draw water. GSWC was not named as a party to the UAO. The UAO requires that these parties remediate the contamination. The judge in the ~~Federal~~ lawsuit has appointed a special master to oversee mandatory settlement discussions between the PRPs and the Water Entities. EPA is also conducting settlement discussions with several PRPs regarding the UAO. The Water Entities and EPA

are working to coordinate their settlement discussions under the special master in order to arrive at a complete resolution of all issues affecting the ~~Federal lawsuits~~lawsuit and the UAO. Settlements with a number of the PRPs are being finalized; however, Registrant is presently unable to predict the ultimate outcome of these settlement discussions.

Registrant is unable to predict an estimate of the loss, if any, resulting from any of these ~~litigations~~suits or administrative proceedings.

Condemnation of Properties:

The laws of the State of California and the State of Arizona provide for the acquisition of public utility property by governmental agencies through their power of eminent domain, also known as condemnation, where doing so is necessary and in the public interest. In addition, however, the laws of the State of California ~~also~~ provide: (i) that the owner of utility property may contest whether the condemnation is actually necessary and in the public ~~interest;~~interest, and (ii) that the owner is entitled to receive the fair market value of its property if the property is ultimately taken.

Although the City of Claremont, California located in GSWC’s Region III, has not initiated the formal condemnation process pursuant to California law, the City has expressed various concerns to GSWC about the rates charged by GSWC and the effectiveness of the CPUC’s rate setting procedures. The City hired a consultant to perform an appraisal of the value of ~~Registrant’s~~GSWC’s water system serving the City. The value was estimated in 2004 by the City’s consultant at $40 - $45 million. GSWC disagrees with the ~~City’s~~consultant’s valuation assessment. As of ~~September~~June 30, ~~2006,~~2007, management believes that the fair market value of the Claremont water system exceeds the ~~$37.0~~$38.3 million recorded net book value and also exceeds the consultant’s estimates of its value. The Claremont City Council held a project priorities workshop in April 2007. The council members agreed that the ~~Claremont~~acquisition of GSWC’s water ~~system.~~

~~On April 12, 2005,~~system was to remain a priority and authorized staff to obtain updated appraisals for the ~~Town Council~~value of the water systems. Requests for proposals have been sent to consulting firms.

The Town of Apple Valley is located in GSWC’s Region III ~~voted 5-0 to authorize Town staff to prepare a Request for Proposal for an evaluation of the feasibility~~ and ~~estimated cost of and a timeframe for~~was evaluating the potential takeover of GSWC’s Apple Valley water systems as well as the water systems of another utility serving the Town. On ~~April 11, 2006 the Town Council unanimously decided to move forward with efforts to acquire all the water systems serving the Town, based on a study authorized by the Town Council. On July 25, 2006,~~March 13, 2007, the Town Council voted ~~4-0~~ to ~~defer any further consideration~~formally abandon its review of the potential acquisitions. GSWC was notified of the Town Council’s action by a takeover pending preparation by Town staff of financing options and costs to residents of any acquisition. No time frame was set for staff to report back to the Council. GSWC has not received any formal noticeletter from the Town of its intention to condemn the Registrant’s Apple Valley water systems. Management will vigorously represent Registrant’s interests in any condemnation proceeding to ensure that the Company receives full value for assets that become subject to condemnation. As of September 30, 2006, management believes that the fair market value of GSWC’s system exceeds the recorded net book value of the Apple Valley water systems.

Manager dated April 3, 2007.

Except for the City of Claremont and the Town of Apple Valley, Registrant has not been, within the last three years, involved in activities related to the potential condemnation of any of its other water customer service areas or in its Bear Valley Electric customer service area.

No formal condemnation proceedings have been filed against any of the Registrant’s service areas during the past three years.

Santa Maria Groundwater Basin Adjudication:

In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit seeks an adjudication of the Santa Maria Groundwater Basin. A stipulated settlement of the lawsuit has been reached, subject to CPUC approval. The settlement, among other things, if approved by the CPUC, would preserve GSWC’s historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the Basin. There are also a ~~small number of~~few nonsettling parties, and the case is going forward as to these parties. The ~~stipulation,~~settlement, if approved, would preserve GSWC’s position with the settling parties independent of the outcome of the case as it moves forward with the nonsettling parties. ~~GSWC cannot predict the outcome of the case as to the nonsettling parties.~~

As of September 30, 2006, GSWC has incurred costs of approximately $6.3 million in defending its rights in the Santa Maria Basin, including legal and expert witness fees, which have been recorded in Utility Plant for rate recovery. However, as stated earlier, the stipulation between the parties requires GSWC to go to the CPUC to seek recovery of these costs that have been incurred by GSWC in this lawsuit. In February 2006, GSWC filed with the CPUC for recovery of these costs. Management believes that the recovery of these costs through rates is probable.

Air Quality Management District:

In 1998, the South Coast Air Quality Management District (“AQMD”) issued a permit to GSWC for the installation and use of air stripping equipment at one of GSWC’s groundwater treatment systems in its Region II service area. In 2005, the AQMD conducted an inspection of this facility and issued a Notice of Violation (“NOV”) for exceeding the amount of groundwater permitted to be treated by the treatment system during calendar year 2004. Since receiving the NOV, changes in GSWC procedures have ~~prevented~~avoided additional violations at the facility. The AQMD could ~~assess~~have assessed penalties associated with an NOV that can range from $10,000 up to $75,000 per day of violation. GSWC estimates that it was in violation approximately 180 days in 2004. GSWC ~~has~~ met with AQMD on numerous occasions to resolve the NOV and to ensure future ~~compliance and resolve the NOV.~~compliance. As part of this process, GSWC also ~~promptly~~ submitted an application to amend the permit, asbecause an amendment may have been necessary for continued operation of the subject air stripping equipment.

~~The~~GSWC finalized a settlement of the NOV with the AQMD ~~has recently recommended that~~in June 2007. As part of the settlement, GSWC ~~be allowed~~agreed to ~~pursue~~withdraw its application for an amended air discharge permit and perform a Supplemental Environmental Program (“SEP”) ~~as part of the settlement of the NOV.~~. A SEP typically involves capital expenditures resulting in a change of process, equipment, material, or indirect source reduction for the purposes of eliminating or reducing air contaminant emissions. ~~As part of going forward with its permit amendment application, GSWS would amend its current application to also include the addition of additional controls to the facility to reduce emissions.~~ The ~~penalties which~~SEP prepared by GSWC has been informed might be assessed, could likely be reduced or avoided through the settlement of this matter based on the possible funding of a SEP. In October 2006, GSWC submitted initial capital cost estimates to the AQMD for theinvolves installation and operation of granular activated carbon filters at the ~~facility as a proposed SEP which would~~facility. Installation of the filters will eliminate the use of the air stripping ~~equipment. Initial discussions indicate that~~equipment at the facilities involved with the NOV and thus improve air quality. The AQMD ~~staff has favorably received GSWC’s proposal~~accepted the SEP and ~~if approved, it could result in the imposition of only~~assessed a nominal ~~monetary penalty. However, until further notice~~penalty of $25,000. During the six months ended June 30, 2007, GSWC paid the penalty of $25,000 and agreed to perform its obligations under the SEP. It is estimated that the total capital cost of the SEP will be approximately $1.8 million with a required estimated completion date of April 30, 2009. Upon timely performance of all its obligations under the SEP, GSWC shall be deemed released from any and all claims or penalties arising from the ~~AQMD on~~NOV. Management believes that GSWC will be able to timely fulfill its obligations under the ~~proposed~~ SEP ~~GSWC cannot reasonably estimate the amount of~~and no further penalties ~~which might~~are expected to be assessed.

Management also believes it is probable that the capital costs of the SEP will be approved in rate base by the CPUC.

Other Litigation:

AnA former officer of the Company has asserted a potential claim against the Company for retaliation against the former officer and others in connection with alleged discriminatory conduct by the Company and its Board of Directors. Although management believes that the allegations are without merit and intends to vigorously defend against them, the Company retained an independent investigator to review the allegations and investigate the facts. Based upon the results of such investigation, the Company does not believe ~~but can give no assurance,~~ that the ultimate resolution of this matter will have a material adverse effect on its financial position, results of operations, or cash flows.

Registrant is also subject to other ordinary routine litigation incidental to its business. ~~Other than those disclosed above, no other legal proceedings are pending, which are believed to be material.~~ Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business.

Note 98 — Business Segments:

AWR has three reportable segments, water, electric and ~~contracts operations,~~contracted services, whereas GSWC has two segments, water and electric. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water-service utility operation conducted through CCWC, and a contracted services unit conducted through ASUS and its subsidiaries. All activities of GSWC are geographically located within California. All activities of CCWC are located in the state of Arizona. ~~All activities~~Activities of ASUS and its subsidiaries are conducted in ~~Arizona,~~ California, Maryland, New Mexico, Texas and Virginia. Both GSWC and CCWC are regulated utilities. On a stand-alone basis, AWR has no material assets other than its investments in its subsidiaries. The tables below set forth information relating to GSWC’s operating segments, CCWC, ~~and other matters which includes~~ ASUS and its ~~subsidiaries.~~subsidiaries, and other matters. Certain assets, revenues and expenses have been allocated in the amounts set forth. The identifiable assets are net of respective accumulated provisions for depreciation. Capital additions reflect capital expenditures paid in cash and exclude property installed by developers and conveyed to GSWC or CCWC.

	As Of And For The Three Months Ended June 30, 2007
	GSWC					CCWC		ASUS		AWR			Consolidated
(dollars in thousands)	Water		Electric			Water		Contracts		Parent			AWR
Operating revenues	$	58,894	$	6,255		$	1,932	$	12,165	$	—		$	79,246
Pretax operating income (loss)	15,812		(40		)(1)	169		1,527		(11		)	17,457
Interest expense, net	4,284		370			97		272		(39		)	4,984
Identifiable assets	674,361		39,521			42,179		1,064		—			757,125
Depreciation and amortization expense	6,111		534			395		48		—			7,088
Capital additions	8,524		634			444		313		—			9,915

	As of and for The Three Months Ended September 30, 2006													As Of And For The Three Months Ended June 30, 2006
	GSWC						CCWC					Consolidated		GSWC					CCWC		ASUS			AWR			Consolidated
*(dollars in thousands)*	Water			Electric			Water		Other*			AWR		Water		Electric			Water		Contracts			Parent			AWR
Operating revenues	$	63,166	(1)	$	6,444		$	2,120	$	2,011		$	73,741	$	51,396	$	7,027		$	2,048	$	2,567		$	—		$	63,038
Operating income (loss)	17,780			(2,703		)(2)	301		(342		)	15,036
Pretax operating income (loss)														14,669		(96		)(1)	393		(765		)	(13		)	14,188
Interest expense, net	3,975			407			113		159			4,654		3,655		292			154		264			105			4,470
Identifiable assets	661,847			41,156			38,521		845			742,369		651,440		41,439			37,603		920			—			731,402
Depreciation and amortization expense	5,717			454			420		43			6,634		5,593		541			423		53			—			6,610
Capital additions	16,044			305			509		89			16,947		13,765		543			486		—			—			14,794

	As of and for The Three Months Ended September 30, 2005														As Of And For The Six Months Ended June 30, 2007
	GSWC						CCWC					Consolidated			GSWC					CCWC		ASUS		AWR			Consolidated
*(dollars in thousands)*	Water			Electric			Water		Other*			AWR			Water		Electric			Water		Contracts		Parent			AWR
Operating revenues	$	58,589	(1)	$	6,544		$	1,971	$	987		$	68,091		$	107,582	$	15,124		$	3,571	$	25,239	$	—		$	151,516
Operating income (loss)	16,700			4,894		(2)	322		(145		)	21,771
Pretax operating income (loss)															26,791		3,612		(2)	320		3,691		(106		)	34,308
Interest expense, net	(1,587		)	333			114		202			(938		)	8,422		718			215		557		2			9,914
Identifiable assets	620,844			39,680			37,028		678			698,230			674,361		39,521			42,179		1,064		—			757,125
Depreciation and amortization expense	3,948			512			263		11			4,734			12,222		1,067			792		96		—			14,177
Capital additions	15,031			288			805					16,124			17,502		1,195			839		344		—			19,880

	As Of And For The Six Months Ended June 30, 2006
	GSWC					CCWC		ASUS		AWR			Consolidated
(dollars in thousands)	Water		Electric			Water		Contracts		Parent			AWR
Operating revenues	$	100,367	$	15,372		$	3,832	$	7,867	$	—		$	127,438
Pretax operating income (loss)	28,601		(1,181		)(2)	725		251		(62		)	28,334
Interest expense, net	7,365		589			264		476		218			8,912
Identifiable assets	651,440		41,439			37,603		920		—			731,402
Depreciation and amortization expense	11,089		1,076			838		89		—			13,092
Capital additions	31,740		1,376			804		202		—			34,122

*Includes amounts from AWR and ASUS and its subsidiaries’ contracted operations (including FBWS, ODUS and TUS for the three months ended September 30, 2006 and FBWS for the three months ended September 30, 2005.)

(1) For the three months ended September 30, 2006, it includes $325,000 of GSWC other operating revenues, $311,000 of which reflects water rights lease revenues received from the City of Folsom (Note 2). For the three months ended September 30, 2005, it also includes $21,000 of GSWC other operating revenues.

~~(2)~~ Includes ~~$2,807,000~~$236,000 and ~~($4,018,000)~~$923,000 unrealized loss ~~(gain)~~ on purchased power contracts for the three months ended ~~September~~June 30, 2007 and 2006, ~~and 2005,~~ respectively.

As of and for The Nine Months Ended September 30, 2006

GSWC

CCWC

Consolidated

(dollars in thousands)

Water

Electric

Water

Other*

AWR

Operating revenues

$
163,526
(3)
$
21,816

$
5,951

$
5,193

$
196,486

Operating income (loss)

46,380

(3,884
)(4)
1,026

(325
)
43,197

Interest expense, net

11,339

996

377

682

13,394

Identifiable assets

661,847

41,156

38,521

845

742,369

Depreciation and amortization expense

16,806

1,530

1,258

132

19,726

Capital additions

47,784

1,681

1,313

291

51,069

As of and for The Nine Months Ended September 30, 2005

GSCW

CCWC

Consolidated

(dollars in thousands)

Water

Electric

Water

Other*

Eliminations

AWR

Operating revenues

$
150,595
(3)
$
20,105

$
5,068

$
2,704

$
(35
)
$
178,437

Operating income (loss)

39,439

9,234
(4)
1,586

(1,628
)

48,631

Interest expense, net

6,632

982

325

601

8,540

Identifiable assets

620,844

39,680

37,028

678

698,230

Depreciation and amortization expense

13,771

1,519

788

45

16,123

Capital additions

47,108

1,648

2,843

359

51,958

*Includes amounts from AWR and ASUS and its subsidiaries’ contracted operations (including FBWS, ODUS and TUS for the nine months ended September 30, 2006 and FBWS for the nine months ended September 30, 2005.)

~~(3)~~ For the nine months ended September 30, 2006, it also includes $3,244,000 of GSWC other operating revenues, $3,190,000 of which reflects water rights lease revenues received from the City of Folsom (Note 2). For the nine months ended September 30, 2005, it also includes $76,000 of GSWC other operating revenues.

~~(4)~~(2) Includes ~~$5,886,000~~$2,474,000 unrealized gain on purchased power contracts and ~~($7,492,000)~~$3,078,000 unrealized loss ~~(gain)~~ on purchased power contracts for the ~~nine~~six months ended ~~September~~June 30, 2007 and 2006, ~~and 2005,~~ respectively.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

General

American States Water Company (“AWR”) is the parent company of Golden State Water Company (“GSWC”), ~~Chaparral City Water Company (“CCWC”) and~~ American States Utility Services, Inc. (“ASUS”) and its subsidiaries, ~~Fort Bliss~~and Chaparral City Water ~~Services~~ Company (“~~FBWS”), Terrapin Utility Services, Inc. (“TUS”) and Old Dominion Utility Services, Inc. (“ODUS”~~CCWC”). AWR was incorporated as a California corporation in 1998 as a holding ~~company for its subsidiaries.~~company.

GSWC is a California public utility company engaged principally in the purchase, production and distribution of water. GSWC also distributes electricity in one customer service area. GSWC is regulated by the California Public Utilities Commission (“CPUC”) and was incorporated as a California corporation on December 31, 1929. GSWC is organized into one electric customer service area and three water service regions consisting of 21 customer service areas operating within 75 communities in 10 counties in the State of ~~California and provides water service in 21 customer service areas.~~California. Region I consists of 7 customer service areas in northern and central California; Region II consists of 4 customer service areas located in Los Angeles County; and Region III consists of 10 customer service areas in eastern Los Angeles County, and in Orange, San Bernardino and Imperial counties. GSWC also provides electric service to the City of Big Bear Lake and surrounding areas in San Bernardino County through its Bear Valley Electric ~~Service~~service division.

GSWC served ~~254,063~~254,880 water customers and ~~23,177~~23,213 electric customers at ~~September~~June 30, ~~2006,~~2007, or a total of ~~277,240~~278,093 customers, compared with ~~275,706~~276,841 total customers at ~~September~~June 30, ~~2005.~~2006. GSWC’s utility operations exhibit seasonal trends. Although GSWC’s water utility operations have a diversified customer base, residential and commercial customers account for the majority of GSWC’s water sales and revenues. Revenues derived from commercial and residential water customers accounted for approximately ~~89.6%~~82.7% of total water revenues for the three months ended ~~September~~June 30, ~~2006,~~ 2007, as compared to ~~90.2%~~87.4% for the three months ended ~~September~~June 30, ~~2005.~~ 2006. Revenues derived from commercial and residential water customers accounted for approximately ~~88.5%~~ 86.1% of total water revenues for the ~~nine~~six months ended ~~September~~June 30, ~~2006,~~ 2007, as compared to 88.8% for the ~~nine~~six months ended ~~September~~June 30, ~~2005.~~

2006. In addition, effective January 1, 2007, ASUS assigned service contracts with various municipalities to provide billing and meter reading services to GSWC.

CCWC is an Arizona public utility company serving ~~13,294~~13,444 customers as of ~~September~~June 30, ~~2006,~~2007, compared with ~~12,959~~13,219 customers at ~~September~~June 30, ~~2005.~~2006. Located in the town of Fountain Hills, Arizona and a portion of the City of Scottsdale, Arizona, the majority of CCWC’s customers are residential. The Arizona Corporation Commission (“ACC”) regulates CCWC.

ASUS contracts, either directly or through wholly-owned subsidiaries, with ~~various municipalities,~~ the U.S. ~~Government~~government and various municipalities and private entities to provide water and wastewater services, including ~~billing and meter reading, water marketing and~~ the operation and maintenance of water and wastewater ~~systems. On October 1, 2004,~~systems and water marketing. ASUS commenced operation and maintenance of ~~the~~water and wastewater systems through a wholly-owned subsidiary at its first military base in Texas in October 2004. Since that date, ASUS commenced operation and maintenance of water and wastewater systems at ~~Fort Bliss located near El Paso, Texas,~~military bases through ~~FBWS,~~wholly-owned subsidiaries in Maryland and Virginia in February 2006. All of these contracts may be terminated, in whole or in part, prior to the end of the 50-year term for convenience of the U.S. government or as a result of default or nonperformance by ASUS or through its wholly-owned subsidiaries. In either event, ASUS would be made whole and shall be entitled to recover the remaining amount of its capital investment pursuant to the terms of a ~~50 year contract~~termination settlement with the U.S. ~~Government. ASUS commenced operation and maintenance~~government at the time of termination as provided in each of the water and wastewater systems at Andrews Air Force Base in Maryland on February 1, 2006 through TUS pursuant to the terms of a 50 year contract. ASUS commenced operation and maintenance of the wastewater systems at Fort Lee in Virginia through ODUS on February 23, 2006 pursuant to the terms of a 50 year contract. ASUS also commenced operation of the water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe in Virginia through ODUS on April 3, 2006 pursuant to the terms of a 50 year contract. These contracts are each subject to termination for convenience by the U.S. Government.contracts. The contract price for each of these contracts is subject to ~~re-determination~~redetermination two years after commencement of operations and every three years thereafter to the extent provided in each of the contracts. However, ASUS has experienced delays in the redetermination of prices at Fort Bliss following completion of the first two years of operation in October 2006. Prices are also subject to equitable adjustment based upon changes in circumstances and changes in wages and fringe benefits to the extent provided in each of the contracts.

In addition, a subsidiary of ASUS has executed a contract for the construction of infrastructure improvements at the military base in Texas. This contract is a fixed-price contract. Prices may be increased by the execution of change orders if significant unforeseen issues are encountered during construction that would increase overall costs. Revenues are recognized under the percentage-of-completion method of accounting for this contract.

ASUS and GSWC have been pursuing an opportunity to provide contract services for wastewater treatment and retail water services respectively, within the service area of the Natomas Central Mutual Water Company (“Natomas”). Natomas is a California mutual water company which currently provides water service to its shareholders, primarily for agricultural irrigation in portions of Sacramento and Sutter counties in northern California. ~~GSWC filed a Certificate of Public Convenience and Necessity application in May 2006, as mentioned below.~~

In August 2004, Natomas ~~granted~~and ASUS entered into a contract under which ASUS acts as the exclusive ~~right to market~~agent for marketing water that has become ~~“temporarily surplus”~~temporarily surplus to the internal needs of Natomas, and that ~~may arise~~arises under water rights permits and contracts owned or controlled by ~~it,~~Natomas, to third parties outside the Natomas service area. On January 31, 2006, ASUS and Natomas entered into a water purchase and sale agreement tounder which ASUS will acquire 5,000 acre-feet of permanent Sacramento River water diversion

rights from Natomas. Pursuant to the terms of this agreement, Natomas will sell, transfer and convey to ASUS, in perpetuity, water rights and entitlements to divert from the Sacramento River up to 5,000 acre-feet of water per year, subject to certain regulatory approvals. Terms of the acquisition, among other things, include a base price of $2,500 per acre-foot of water, with payments contingent on ~~meeting~~achievement of specific milestones and events over a 10-year period. Pursuant to the marketing services agreement described above, Natomas will pay to ASUS a commission of 16% of the sale price over the same 10-year period ~~under an existing agreement between the two companies.~~for any temporary surplus water successfully marketed by ASUS. At the same time that the water purchase agreement was completed, Natomas and ASUS also entered into a settlement agreement that released Natomas from previously established reimbursement obligations under ~~existing~~prior agreements. ASUS may use ~~this 5,000 acre-feet of~~the water rights acquired from Natomas to ~~engage in transactional opportunities with developers~~serve existing customers, to re-sell to other beneficial users, or ~~water purveyors.~~

to pursue and serve expanded service territories.

GSWC ~~has~~and Natomas have also entered into a water transfer agreement ~~with~~under which GSWC agreed to purchase and Natomas ~~for~~agreed to sell up to 30,000 acre-feet of water to be used exclusively by GSWC to serve customers in Sutter County, California. Additionally, GSWC filed for a Certificate of Public Convenience and Necessity with the CPUC on May 31, 2006 to provide retail water service in a portion of Sutter County, ~~California.~~California within the Natomas service area. CPUC review of the application ishas been deferred pending ~~subject to~~ completion of an environmental ~~assessment. In addition, both~~assessment for the proposed new water service. All of the agreements with Natomas are subject to ~~and become effective upon~~receipt of various regulatory ~~approvals.~~

approvals required for their full implementation.

Overview

~~Registrant’s~~Our revenues, operating income, and cash flows are earned primarily through delivering ~~potable~~drinking water to homes and ~~businesses.~~businesses over 2,900 miles of water distribution pipelines. Rates charged to customers of GSWC and CCWC are determined by either the CPUC or ACC. These rates are intended to allow recovery of operating costs and a ~~fair~~reasonable rate of return on capital. Factors recently affecting our financial performance include the process and timing of setting rates charged to customers; our ability to recover, and the process for recovering in rates, the costs of distributing water and ~~electricity in rates;~~electricity; weather; the impact of increased water quality standards on the cost of operations and capital expenditures; pressures on water supply caused by population growth, more stringent water quality standards, deterioration in water quality and water supply from a variety of causes; capital expenditures needed to upgrade water systems and increased costs and risks associated with litigation relating to water quality and water supply, including suits initiated by ~~Registrant~~the Company to protect its water supply.

For the three months ended September 30, 2006, net income was $5.6 million compared to $12.2 million for the same period in 2005, a decrease of 54.4%. Basic and diluted earnings per share for the third quarter of 2006 were $0.32 when compared to the $0.72 for the third quarter of 2005. Two factors contributed to the significant decrease in net income: first there was the favorable CPUC decision on July 21, 2005 regarding the Aerojet matter which added about $4.3 million to net income in July 2005 or approximately $0.25 per share with no similar gain in 2006; and second, due to decreasing energy prices, the pretax unrealized loss on purchased power contracts of $2.8 million decreased net income by $0.10 per share during the third quarter of 2006 in contrast to a pretax unrealized gain of $4.0 million which increased net income by $0.14 per share for the same period of 2005. Offsetting these decreases were higher revenues due to increases in customer rates and consumption, partially offset by higher operating expenses.

For the nine months ended September 30, 2006, net income was $17.7 million compared to $21.7 million for the same period in 2005, a decrease of 18.4%. Basic and diluted earnings per share for the nine months ended September 30, 2006 were $1.03, compared to $1.29 for the same period of 2005. Similar to the quarterly results, the decrease in earnings per share was primarily due to decreasing energy prices which resulted in a pretax unrealized loss on purchased power contracts of $5.9 million or a $0.21 per share decrease to net income during the third quarter of 2006, in contrast to a pretax unrealized gain of $7.5 million which increased net income by $0.26 per share for the same period of 2005. In addition, there was the favorable CPUC decision on July 21, 2005 regarding the Aerojet matter which added about $4.3 million to net income in July 2005 or approximately $0.25 per share. Offsetting these 2006 decreases was another favorable decision issued by the CPUC in April 2006 regarding GSWC’s water rights lease revenues received from the City of Folsom, increased rates approved by the CPUC and ACC, and an increase in water consumption over the prior period, partially offset by higher operating expenses.

~~Registrant plans~~We plan to continue to seek additional rate increases in future years to recover our operating and supply costs and receive reasonable returns on invested capital. Capital expenditures in future years are expected to remain

at much higher levels than depreciation expense. Cash solely from operations is not expected to be sufficient to fund ~~Registrant’s~~our needs for capital expenditures, dividends, investments in ~~the~~our contract business and other cash ~~needs. Registrant expects~~requirements. We expect to fund these needs through a combination of debt and common ~~share~~stock offerings in the ~~next five~~ensuing years. AWR expects to issue equity in late 2007 or early 2008.

Operating revenues and income from our contracted services are earned primarily from the operation and maintenance of water and wastewater systems for the U.S. government at various military bases. All of the operations and maintenance contracts with the U.S. government are 50-year fixed-price redetermination-prospective contracts. We also may generate revenues from the construction of infrastructure improvements at these bases pursuant to the terms of these 50-year contracts or pursuant to supplemental contracts. Revenues generated by our contract operations are primarily dependent on these new business activities, including military base operations and the construction of new and/or replacement infrastructure at these military bases. As a result, we are subject to risks that are different than those of our regulated water and electric activities. We plan to continue seeking opportunities to bid on other contracts for the privatization of water and wastewater services at military bases.

Summary Results by Segment

AWR has three reportable segments: water, electric and contracted services. Within the segments, AWR has three principal business units: water and electric service utility operations conducted through GSWC, a water-service utility operation conducted through CCWC, and a contracted services unit conducted through ASUS and its subsidiaries.

Second Quarter Results

The tables below set forth summaries of the results by segment (in thousands) for the three months ended June 30, 2007 and 2006:

	Operating Revenues									Pretax Operating Income
	3 Mos.		3 Mos.							3 Mos.			3 Mos.
	Ended		Ended		$			%		Ended			Ended			$		%
	6/30/2007		6/30/2006		CHANGE			CHANGE		6/30/2007			6/30/2006			CHANGE		CHANGE

Water	$	60,826	$	53,444	$	7,382		13.8	%	$	15,981		$	15,062		$	919	6.1	%
Electric	6,255		7,027		(772		)	-11.0	%	(40		)	(96		)	56		58.3	%
Contracted services	12,165		2,567		9,598			373.9	%	1,527			(765		)	2,292		299.6	%
AWR parent	—		—		—			—		(11		)	(13		)	2		15.4	%
Totals from operation	$	79,246	$	63,038	$	16,208		25.7	%	$	17,457		$	14,188		$	3,269	23.0	%

~~Unless specifically noted,~~Water - For the three months ended June 30, 2007, pretax operating income for water increased by $919,000, or 6.1%, as a result of a $6.1 million increase in water margin as compared to the same period of 2006 due to increased water rates approved by the CPUC that were effective January 1, 2007, an increase in water consumption over that in the prior period, and a favorable change in the water supply mix. This increase in margin was partially offset by higher operating, maintenance, administrative and general, and other expenses, which decreased operating income by $5.1 million, as more fully described below.

Electric - - For the three months ended June 30, 2007, pretax operating income for electric increased 58.3% primarily due to a $687,000 decrease in the pretax unrealized loss on purchased power contracts. Partially offsetting this was an 11% decrease in revenues primarily due to warmer weather during the second quarter of 2007 as compared to the same period in 2006. During the second quarter of 2006, cooler weather allowed for snow-making at the ski resorts to continue beyond the first quarter as well as provided for higher residential usage associated with heating needs. In 2007, temperatures began to warm up in February resulting in a cessation of snow-making operations along with a reduction in residential energy demand. There was also an increase in operating expenses that contributed to lower pretax operating income.

Contracted Services - For the three months ended June 30, 2007, pretax operating income for contracted services increased by $2.3 million. This was primarily due to a new construction contract with the U.S. government. In December 2006, a subsidiary of ASUS finalized an agreement with the U.S. government for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas. The $20.6 million project is a firm-fixed price contract, subject to change orders if significant issues are encountered during construction that would increase the overall cost of the project. This construction project is an amendment and supplement to the 50-year contract with the U.S. government to manage the entire water and wastewater systems at Fort Bliss. Revenues from this agreement are being recognized under the percentage-of-completion method of accounting. As a result of this new project, operating income increased by $2.1 million during the second quarter of 2007. The project is scheduled to be completed by August 15, 2007 and there will be no further construction revenues associated with this amendment after that date. Earnings and cash flows from amendments to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in future periods.

Year-to-Date Results

The tables below set forth summaries of the results by segment (in thousands) for the six months ended June 30, 2007 and 2006:

	Operating Revenues									Pretax Operating Income
	6 Mos.		6 Mos.							6 Mos.			6 Mos.
	Ended		Ended		$			%		Ended			Ended			$			%
	6/30/2007		6/30/2006		CHANGE			CHANGE		6/30/2007			6/30/2006			CHANGE			CHANGE

Water	$	111,153	$	104,199	$	6,954		6.7	%	$	27,111		$	29,326		$	(2,215	)	-7.6	%
Electric	15,124		15,372		(248		)	-1.6	%	3,612			(1,181		)	4,793			405.8	%
Contracted services	25,239		7,867		17,372			220.8	%	3,691			251			3,440			1370.5	%
AWR parent	—		—		—			—		(106		)	(62		)	(44		)	-71.0	%
Totals from operation	$	151,516	$	127,438	$	24,078		18.9	%	$	34,308		$	28,334		$	5,974		21.1	%

Water - For the six months ended June 30, 2007, pretax operating income for water decreased compared to the same period in 2006 by $2.2 million, or 7.6%, primarily due to a favorable decision issued by the CPUC on April 13, 2006 regarding GSWC’s water rights lease revenues received from the City of Folsom, which generated a one-time revenue increase in 2006. This decision added about $2.3 million of additional revenues in the first quarter of 2006 for amounts that had been received from the City of Folsom in 2004 and 2005. Prior to the decision, these amounts had been recorded as regulatory liabilities. The 2006 decision resulted in GSWC recognizing $2.3 million of lease revenues in the first quarter of 2006, but there was no corresponding revenue recognition amount in 2007. Instead, GSWC will record in 2007 the on-going annual Folsom lease revenues of approximately $1.3 million. Higher operating expenses as described below also contributed to the decrease in operating income for the water segment, offset by increased water rates approved by the CPUC that were effective January 1, 2007, an increase in water consumption over that in the prior period, and a favorable change in the water supply mix.

Electric - For the six months ended June 30, 2007, pretax operating income for electric increased by $4.8 million, due in large part to an unrealized gain on Bear Valley Electric’s purchased power contracts during the six months ended June 30, 2007 as a result of increasing energy prices versus an unrealized loss on purchased power contracts in the same period of 2006. The gain for the first six months of 2007 increased operating income by approximately $2.5 million as compared to a loss decreasing operating income by $3.1 million for the same period in 2006. The net effect was an increase in electric operating income by $5.6 between the two periods. This increase was partially offset by a decrease in consumption and an increase in operating expenses.

Contracted Services - For the six months ended June 30, 2007, pretax operating income for contracted services increased by $3.4 million. This was primarily due to a new contract with the U.S. government previously discussed in the second quarter results. As a result of this new construction project, operating income increased by $4.3 million during the first six months of 2007. The project is scheduled to be completed by August 15, 2007 and there will be no further construction revenues associated with this amendment after that date. As previously mentioned, earnings and cash flows from amendments to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in future periods. Partially offsetting this increase was the recovery and reimbursement in 2006 of transition period operating expenses of about $672,000 as a result of operating and maintaining the water and wastewater systems at military bases in Virginia and Maryland pursuant to the contracts with the U.S. government commencing during the six months ended June 30, 2006. We took over the operation and maintenance of the water and wastewater systems at Andrews Air Force Base in Maryland on February 1, 2006 and commenced operation of these systems on that date. In addition, we assumed the operation and maintenance of the wastewater systems at Fort Lee in Virginia on February 23, 2006 and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginia on April 3, 2006 and commenced operation and maintenance of these systems on those dates. Therefore, we operated these bases partially during the first six months of 2006 and entirely during same period of 2007.

The following discussion and analysis provides information on AWR’s consolidated operations and assets. For the three and nine months ended September 30, 2006 and 2005, there is generally no material difference between the consolidated operations and assets of AWR and the operations and assets of GSWC. However, whereWhere necessary, the following discussion and analysis includes specific references ~~specifically~~ to AWR’s individual segments and/or other subsidiaries — CCWC, ~~and~~ ASUS and its subsidiaries.

Consolidated Results of Operations — Three Months Ended ~~September~~June 30, 2007 and 2006 ~~and 2005 (dollars in thousand)~~(in thousands):

3 MOS
ENDED
9/30/2006

3 MOS
ENDED
9/30/2005

$
CHANGE

%
CHANGE

OPERATING REVENUES

Water

$
64,962

$
60,539

$
4,423

7.3
%
Electric

6,444

6,544

(100
)
-1.5
%
Other

2,335

1,008

1,327

131.6
%
Total operating revenues

73,741

68,091

5,650

8.3
%
OPERATING EXPENSES

Water purchased

15,066

15,779

(713
)
-4.5
%
Power purchased for pumping

3,600

3,252

348

10.7
%
Groundwater production assessment

2,477

2,315

162

7.0
%
Power purchased for resale

2,659

3,075

(416
)
-13.5
%
Unrealized loss (gain) on purchased power contracts

2,807

(4,018
)
6,825

-169.9
%
Supply cost balancing accounts

244

514

(270
)
-52.5
%
Other operating expenses

6,677

4,850

1,827

37.7
%
Administrative and general expenses

12,614

10,342

2,272

22.0
%
Depreciation and amortization

6,634

4,734

1,900

40.1
%
Maintenance

3,395

2,905

490

16.9
%
Property and other taxes

2,656

2,572

84

3.3
%
Net gain on sale of property

(124
)
-

124

100.0
%
Total operating expenses

58,705

46,320

12,385

26.7
%
OPERATING INCOME

15,036

21,771

(6,735
)
-30.9
%
Interest expense

(5,349
)
193

5,542

2871.5
%
Interest income

695

745

(50
)
-6.7
%
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE

10,382

22,709

(12,327
)
-54.3
%
Income tax expense

4,809

10,475

(5,666
)
-54.1
%
NET INCOME

$
5,573

$
12,234

$
(6,661
)
-54.4
%

	3 Mos.			3 Mos.
	Ended			Ended			$			%
	6/30/2007			6/30/2006			CHANGE			CHANGE
OPERATING REVENUES
Water	$	60,826		$	53,444		$	7,382		13.8	%
Electric	6,255			7,027			(772		)	-11.0	%
Contracted services	12,165			2,567			9,598			373.9	%
Total operating revenues	79,246			63,038			16,208			25.7	%

OPERATING EXPENSES
Water purchased	12,077			10,916			1,161			10.6	%
Power purchased for pumping	2,673			2,416			257			10.6	%
Groundwater production assessment	2,549			2,239			310			13.8	%
Power purchased for resale	2,915			3,248			(333		)	-10.3	%
Unrealized loss on purchased power contracts	236			923			(687		)	-74.4	%
Supply cost balancing accounts	(1,190		)	(825		)	(365		)	44.2	%
Other operating expenses	6,559			5,886			673			11.4	%
Administrative and general expenses	13,664			10,902			2,762			25.3	%
Depreciation and amortization	7,088			6,610			478			7.2	%
Maintenance	4,353			3,246			1,107			34.1	%
Property and other taxes	2,843			2,480			363			14.6	%
Construction expenses	8,260			809			7,451			921.0	%
Net gain on sale of property	(238		)	—			238			100.0	%
Total operating expenses	61,789			48,850			12,939			26.5	%

OPERATING INCOME	17,457			14,188			3,269			23.0	%

OTHER INCOME AND EXPENSES
Interest expense	(5,570		)	(5,433		)	137			2.5	%
Interest income	586			963			(377		)	-39.1	%
Other	63			—			63			100.0	%

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE	12,536			9,718			2,818			29.0	%

Income tax expense	5,214			3,449			1,765			51.2	%

NET INCOME	$	7,322		$	6,269		$	1,053		16.8	%

Net income for the ~~third~~second quarter ended ~~September~~June 30, ~~2006 decreased~~2007 increased by ~~54.4%~~16.8% to ~~$5.6~~$7.3 million, equivalent to ~~$0.32~~$0.42 per common share on both a basic and fully diluted basis, compared to ~~$12.2~~$6.3 million or ~~$0.72~~$0.36 per share on both a basic and diluted basis for the three months ended ~~September~~June 30, ~~2005. Significantly impacting~~2006. Impacting the comparability in the results of the two periods are the following ~~two items:~~

significant items, which are also discussed in greater detail below:

· ~~A favorable decision issued by~~An increase in the CPUC on July 21, 2005 regarding the Aerojet memorandum account which added about $4.3 million to net income in July 2005 or approximately $0.25 per share. GSWC was authorized to collect the balance of the Aerojet litigation memorandum account of approximately $21.3 million, through a rate surcharge, which will continue for no longer than 20 years. As a result of this decision, in July 2005 GSWC recorded an increase of approximately $6.2 million to the Aerojet regulatory asset to include previously expensed carrying and other costs, and recorded a corresponding pre-tax gain. In addition, GSWC was ordered to restore to the appropriate plant accounts, those amounts that have been reimbursed by Aerojet pursuant to the settlement. This resulted in GSWC recording an approximate $1.0 million decrease to depreciation expense during the third quarter of 2005. There were no similar entries during the third quarter of 2006. The following is a summary of the impact on the results of operationsmargin for the ~~three months ended September 30, 2005 resulting from this decision:~~

Operating Expenses

Amount

Increase / (Decrease)

Power purchased for resale

($31,230
)
Other operating expenses

(459,415
)
Administrative and general expenses

(16,963
)
Depreciation and amortization

(992,232
)
Total pre-tax impact to operating expenses

(1,499,840
)

Interest

Interest expense

(5,084,551
)
Interest income

(607,083
)
Total net interest charges

(5,691,634
)

Total pre-tax impact to results of operations

$
7,191,474

Impact to taxes on income

2,930,238

Total impact to net income

$
4,261,236

Impact to Basic Earnings per Share

$
0.25

Impact to Diluted Earnings per Share

$
0.25

· ~~There was a~~water segment’s pretax unrealized loss on purchased power contracts in 2006 due to decreasing energy prices versus a pretax unrealized gain on purchased power contracts in 2005. The cumulative unrealized loss on purchased power contracts decreased pretax income by approximately $2.8operations of $6.1 million, or $0.10 per share, for the three months ended September 30, 2006, as compared to a cumulative unrealized gain on purchased power contracts that increased pretax income by $4.0 million, or $0.14 per share, for the same period in 2005.

~~Eliminating the effects of the two items discussed above, basic and diluted earnings per share for the third quarter of 2006 would have actually increased by $0.09~~$0.21 per share, as compared to the same period ~~last year, resulting primarily from higher water revenues~~of 2006, due to increased ~~customer~~water rates approved by the CPUC that were effective January 1, 2007, an increase in water consumption over that in the prior period, and ~~consumption due~~a favorable change in the supply mix.

· An unrealized loss on purchased power contracts which decreased pretax income by $236,000, or approximately $0.01 per share for the three months ended June 30, 2007, as compared to ~~warmer weather conditions, offset partially by higher~~a $923,000 unrealized loss, or $0.03 per share, for the three months ended June 30, 2006.

· An increase in contracted services’ pretax operating income of $2.3 million, or $0.08 per share, as compared to the same period of 2006 for operating, maintaining and improving the water and wastewater systems at military bases for the U.S. government including a special wastewater expansion project. The increases include revenue recognized for certain special projects under the percentage-of-completion method of accounting.

· Higher operating expenses, ~~as further discussed below.~~

a change in the effective tax rate, and other items described below, resulting in a decrease of $0.25 per share compared to the results of operations from 2006.

Operating Revenues

For the three months ended ~~September~~June 30, ~~2006,~~2007, revenues from water operations increased by ~~7.3%~~13.8% to ~~$65.0~~$60.8 million, compared to ~~$60.5~~$53.4 million for the three months ended ~~September~~June 30, ~~2005. An~~2006. This increase was due primarily to an increase of ~~1.5%~~about 17.1% in billed water consumption resulting from ~~changes~~warmer weather in ~~weather conditions~~2007, which increased revenues by approximately $524,000. In addition, higher water revenues reflecting rate increases since the third quarter of 2005 covering almost all water customers contributed $3.6 million in increased revenues for the third quarter of 2006.$6.3 million. Differences in temperature and rainfall in Registrant’s service areas impact sales of water to customers, causing fluctuations in Registrant’s revenues and earnings between comparable periods. There were also rate increases approved by the CPUC, effective January 1, 2007, which contributed approximately $1.1 million in increased water revenues. Included in these rate increases in 2007 was an interim rate increase effective January 1, 2007, subject to refund, totaling approximately $260,000 for the second quarter ($1.2 million for the entire 2007 year) due to the CPUC’s delays in processing GSWC’s general rate applications for rate increases in Region II and for general office expenses at the corporate headquarters. A proposed decision and an alternate decision were issued on July 24, 2007, which recommend rate increases in 2007 for Region II ranging from $6.3 million to $6.7 million. In addition, GSWC’s Region III received an interim annual rate increase of $135,000 effective January 1, 2007 to cover general office expenses. The proposed decision issued by the Administrative Law Judge on July 24, 2007 also recommends rate increases of $3.0 million for 2007 to recover the rate increases for general office expenses allocated to Region III. The amounts ultimately decided by the CPUC will be retroactive to January 1, 2007. Once the CPUC issues its final decisions, GSWC will implement a temporary surcharge to recover the revenue difference between the interim rates implemented on January 1, 2007 and the final rates authorized by the CPUC for the period from January 1 to the implementation of the new final rates. The final decisions are expected in the third quarter of this year.

For the three months ended ~~September~~June 30, ~~2006,~~2007, revenues from electric operations decreased by ~~1.5%~~11.0% to ~~$6.4~~$6.3 million compared to ~~$6.5~~$7.0 million for the three months ended ~~September~~June 30, ~~2005.~~2006. The decrease ~~primarily~~

reflects ~~lower new connection, reconnection~~a 10.6% decrease in kilowatt-hour usage by residential and ~~miscellaneous fees charged~~commercial customers due to ~~customers~~warmer weather conditions during the ~~three months ended September 30, 2006~~second quarter of 2007 as compared to the same period in ~~2005. This decrease was partially offset by a slight increase~~2006. Cooler weather in ~~kilowatt-hour (“KWh”) usage, due~~the 2006 period allowed for snow-making into early second quarter along with higher residential demand related to ~~changes~~heating requirements. Warmer weather in ~~weather conditions. During~~ the ~~third~~second quarter of ~~2006,~~2007 eliminated the ~~Big Bear area experienced a heat wave. Temperatures ran above normal~~ability for snow-making and reduced energy demands for residential ~~customers used more power for fans and central air, as well as the commercial customers which required more power for air cooling and freezers compared to the third quarter of 2005~~heating purposes.

Registrant relies upon rate approvals by state regulatory agencies in California and Arizona in order to recover operating expenses and provide for a ~~fair~~ return on invested and borrowed capital used to fund utility plant. Without such adequate rate relief granted in a timely manner, revenues and earnings can be negatively impacted. As noted above, interim rates were implemented due to delays by the CPUC.

Revenues from contracted services are comprised of construction revenues and management fees for operating and maintaining the water and wastewater systems at military bases. For the three months ended ~~September~~June 30, ~~2006, other operating~~2007, revenues from contracted services increased by ~~131.6%~~$9.6 million, or 373.9%, to ~~$2.3~~$12.2 million compared to ~~$1.0~~$2.6 million for the three months ended ~~September~~June 30, ~~2005~~ 2006 due primarily to ~~$954,000~~an increase of ~~additional~~approximately $9.7 million related to construction revenues ~~generated by~~earned from the U.S. government recognized on the percentage-of completion method. The revenues earned were for the construction of certain improvements, renewals and replacements to the existing water and wastewater infrastructure at Fort Bliss and at other military bases located in Virginia and Maryland pursuant to new operation and maintenance contracts entered into in early 2006. Certain of the construction projects are fixed-price contracts and are a supplement to ASUS’s 50-year contracts with the U.S. government. In particular, ASUS ~~from operating~~entered into a $20.6 million project for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas. The $20.6 million project is a firm-fixed price contract and was an amendment and supplement to the 50-year contract with the U.S. government to manage the entire water and wastewater systems ~~pursuant~~at Fort Bliss. Revenues from this agreement have been recognized under the percentage-of-completion method of accounting. As a result of this new project, which began in 2007, revenues for contracted services increased by $9.1 million during the second quarter of 2007. The project is scheduled to ~~new~~be completed by August 15, 2007, and there will be no further construction revenues associated with this amendment after that date. Earnings and cash flows from amendments and modifications to the original 50-year contracts ~~at military bases. In addition, revenues increased due to a decision issued by~~with the CPUC on April 13, 2006 enabling GSWC to record water rights lease revenues from the City of Folsom subsequent to January 2004, as income. Prior to this decision, the apportionment of any lease revenues that GSWC collectedU.S. government are sporadic and may or may not continue in 2004 and 2005 had been included in a regulatory liability account and no amounts were recognized as revenues until uncertainties about this matter were resolved. For the third quarter 2006, Registrant recorded additional water lease revenues of $311,000.future periods.

Operating ~~Expenses~~Expenses:

Supply Costs

~~For~~Supply costs for the ~~three months ended September 30, 2006,~~water segment consist of purchased water, purchased power for pumping, groundwater production assessments and water supply cost balancing accounts. Supply costs ~~decreased~~included in electric supply costs consist of purchased power for resale and the electric supply cost balancing account. Water and electric margins are computed by ~~4.5%~~taking total revenues, less total supply costs. Registrant uses these margins and related percentages as an important measure in evaluating its operating results. Registrant believes this non-GAAP measure to ~~$15.1 million compared~~be a useful internal benchmark in evaluating the utility business performance within its water and electric segments. Registrant reviews these measurements regularly and compares them to ~~$15.8 million~~historical periods and to our operating budget as approved. However, this non-GAAP measure may not be comparable to similarly titled measures used by other entities and should not be considered as an alternative to operating income, which is determined in accordance with GAAP, as an indicator of operating performance.

Total supply costs comprise the largest segment of total operating expenses. Supply costs accounted for approximately 30.8% and 36.8% of total operating expenses for the three months ended ~~September~~June 30, ~~2005.~~2007 and 2006, respectively. The ~~decrease is due primarily to a favorable change~~table below provides the amount of increases (decreases), percent changes in ~~the~~ supply ~~mix caused by less purchased water needed to replace contaminated groundwater supply or wells temporarily out of service in 2005. For~~costs, and margins during the three months ended ~~September~~June 30, 2007 and 2006 ~~46.3%~~(amounts in thousands):

	3 Mos.			3 Mos.
	Ended			Ended			$			%
	6/30/2007			6/30/2006			CHANGE			CHANGE
WATER OPERATING REVENUES (1)	$	60,826		$	53,444		$	7,382		13.8	%
WATER SUPPLY COSTS:
Water purchased (1)	12,077			10,916			1,161			10.6	%
Power purchased for pumping (1)	2,673			2,416			257			10.6	%
Groundwater production assessment (1)	2,549			2,239			310			13.8	%
Water supply cost balancing accounts (1)	(1,631		)	(1,235		)	(396		)	32.1	%
	$	15,668		$	14,336		$	1,332		9.3	%
WATER MARGIN (2)	$	45,158		$	39,108		$	6,050		15.5	%
PERCENT MARGIN - WATER	74.2		%	73.2		%

ELECTRIC OPERATING REVENUES (1)	$	6,255		$	7,027		$	(772	)	-11.0	%
ELECTRIC SUPPLY COSTS:
Power purchased for resale (1)	2,915			3,248			(333		)	-10.3	%
Electric supply cost balancing accounts (1)	441			410			31			7.6	%
	$	3,356		$	3,658		$	(302	)	-8.3	%
ELECTRIC MARGIN (2)	$	2,899		$	3,369		$	(470	)	-14.0	%
PERCENT MARGIN - ELECTRIC	46.3		%	47.9		%

(1) As reported on AWR’s Consolidated Statements of ~~Registrant’s~~Income, except for supply ~~mix was purchased~~cost balancing accounts. The sum of water ~~as compared to 49.8% purchased water~~and electric supply cost balancing accounts in the table above are shown on AWR’s Consolidated Statements of Income and totaled ($1,190,000) and ($825,000) for the three months ended ~~September~~June 30, ~~2005. During~~2007 and 2006, respectively.

(2) Water and electric margins do not include any depreciation and amortization, maintenance expense, or other operating expenses.

Two of the ~~same period last year, there were additional purchases~~principal factors affecting water supply costs and gross margin are the amount of water ~~needed to replace contaminated groundwater supply lost due to wells being removed from service resulting from water quality issues~~produced and ~~mechanical problems, particularly in GSWC’s Foothill district. The cost~~the source of ~~purchased water in this district decreased by approximately $616,000 for~~ the ~~three months ended September 30, 2006 when compared to the three months ended September 30, 2005 as a result of certain wells being returned to operation in 2006.~~

~~For the three months ended September 30, 2006,~~water. Generally, the cost of ~~power~~producing water from wells costs less than water purchased from wholesale suppliers. In addition, GSWC is authorized to establish water and electric supply cost balancing/memorandum accounts for ~~pumping increased by 10.7% to $3.6 million compared to $3.3 million for the three months ended September 30, 2005~~increases and/or decreases in costs due to ~~an increase~~changes in ~~KWh usage~~rates charged by ~~Registrant caused~~its suppliers providing our purchased water and purchased power, and by ~~higher pumping volume due to the favorable supply mix change discussed above.~~

~~For the three months ended September 30, 2006,~~agencies assessing groundwater ~~production assessments increased by 7.0% to $2.5 million~~related pump taxes for our water service areas in California. Higher or lower actual costs as compared to ~~$2.3 million for~~costs authorized by the ~~three months ended September 30, 2005 due~~CPUC will either be recovered from or refunded to ~~increases~~customers in ~~well production resulting from~~ the supply mix change and increased consumption. There were also increases in assessment rates levied against groundwater production, effective July 2006. Average pump tax rates increased in GSWC’s Regions II and III by approximately 2% and 4%, respectively.

~~Changes~~future. However, changes in the water resource mix between water supplied from purchased sources and that supplied from Registrant’s own wells can increase/decrease actual supply-related costs relative to that approved for recovery through rates, thereby impacting earnings either negatively or positively. ~~Registrant~~GSWC has the opportunity to change the supply-related costs recovered through rates by application to the appropriate regulatory body. ~~Registrant~~GSWC believes that its applications for recovery of supply-related costs accurately reflect the water supply situation as it is known at the time. ~~However, without additional regulatory mechanisms,~~Without a “full-cost” balancing account authorized by the CPUC, it is ~~not possible~~impossible to ~~wholly~~adequately protect earnings from adverse changes in supply costs related to unforeseen contamination or other loss of water supply.

For the three months ended ~~September~~June 30, 2007, 41.5% of the Company’s water supply mix was purchased as compared to 43.9% purchased for the three months ended June 30, 2006. This change in mix resulted in improved margins in 2007 compared to same period in 2006.

Purchased water costs increased by 10.6% to $12.1 million compared to $10.9 million for the three months ended June 30, 2006. The increase is due primarily to an increase in water supply demand resulting from higher customer consumption and increased water rates charged by wholesale water suppliers. In general, the supply cost memorandum account as discussed above allows GSWC to track incremental rate changes from suppliers, for future recovery in water rates. These increases were offset by a favorable change in the supply mix discussed above. Certain wells that had been removed from service in 2006 as a result of water quality issues and mechanical problems were either returned to service or otherwise supplemented in 2007.

For the three months ended June 30, 2007, the increases in power purchased for pumping and groundwater production assessments were due to higher water supply demand and an increase in pumping volume resulting from the favorable supply mix change as discussed. There were also increases in assessment rates levied against groundwater production, effective July 2006. Average pump tax rates increased in Regions II and III by approximately 2% and 4%, respectively. Again, the supply cost memorandum account tracks the increases in pump tax rates for future recovery in water rates.

The supply cost balancing account tracks differences between the current cost for supply items (water, power, and pump taxes) charged by GSWC’s suppliers and the cost for those items incorporated into GSWC’s rates. Overcollections occur when the current cost of these items is less than the amount in rates and have the effect of increasing the supply cost balancing account in the Statements of Income. Undercollections occur when the current cost exceeds the amount in rates for these items and, conversely have the effect of decreasing the supply cost balancing account in the Statements of Income. Typically, overcollections or undercollections, when they occur, are tracked in the supply cost memorandum/balancing accounts for future refund or recovery through a surcredit (in the event of an overcollection) or surcharge (in the event of an undercollection) on customers’ bills. Once in rates, the amortization of surcharges that are in place to recover under-collections from customers have the effect of increasing the supply cost balancing account in the Statements of Income. Conversely, the amortization of surcredits that are in rates to refund over-collections to customers have the effect of decreasing the supply cost balancing account. A decrease of $396,000 during the three months ended June 30, 2007 in the water supply cost balancing account as compared to the three months ended June 30, 2006 was primarily caused by a $533,000 decrease in the amortization of the water supply cost balancing accounts due to the expiration in October 2006 of the surcharge that was in rates to recover Region III’s under-collection. This was partially offset by the recording of $181,000 net under-collection adjustment relating to 2005 due to the CPUC’s earning test requirement, which was eliminated in April 2006 by a CPUC decision. Under-collections and over-collections are now recorded on a monthly basis.

For the three months ended June 30, 2007, the cost of power purchased for resale to customers in GSWC’s Bear Valley Electric division decreased by ~~13.5%~~10.3% to ~~$2.7~~$2.9 million compared to ~~$3.1~~$3.2 million for the three months ended ~~September~~June 30, ~~2005,~~2006, reflecting primarily lower costs of energy in the third quarter of 2006 as compared to the same period of 2005 in the spot market. The third quarter of 2005 was characterized by high energy costs due to the effects of hurricanes and uncertainty in the energy markets. The same period in 2006, with no significant hurricane activity, saw spot market costs decline from 2005 levels. ~~This decrease to the cost of power purchased for resale was offset partially by higher~~ customer demand during the ~~third~~second quarter of ~~2006.~~2007, because of a lack of snowfall in this ski resort community.

Unrealized (Gain) Loss on Purchased Power Contracts

Unrealized gain and loss ~~(gain)~~ on purchased power contracts ~~represents~~represent gains and losses ~~and gains~~ recorded for GSWC’s purchased power agreements with Pinnacle West Marketing & Trading Company, LLC (“PWMT”) (formerly Pinnacle West Capital ~~Corporation (“PWCC”)~~Corporation), which qualify as derivative instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The ~~$2.8 million~~$236,000 pretax unrealized loss on purchased power contracts for the three months ended ~~September~~June 30, ~~2006~~2007 is due to a decrease in the current forward market prices since ~~June 30, 2006. There was~~March 31, 2007, compared to a ~~$4.0 million~~$923,000 pretax unrealized ~~gain~~loss on purchased power contracts for the three months ended ~~September~~June 30, ~~2005.~~2006. Unrealized gains and losses at Bear Valley Electric will continue to impact earnings during the life of the contract with ~~PWCC,~~PWMT, which terminates inat the end of 2008.

A decrease of $270,000 during the three months ended September 30, 2006 in the provision for supply cost balancing accounts as compared to the three months ended September 30, 2005 was primarily due to the recording in 2006 of a $1.4 million under-collection related to the 2006 year-to-date supply cost memorandum account resulting from the elimination of the earnings test. This change was authorized by the CPUC in April 2006. This decrease was offset by: (i) an increase of $654,000 in the third quarter of 2006 related to the amortization of the water supply cost balancing accounts approved by the CPUC in August and September of 2005, and (ii) a net increase of $504,000 in the electric supply cost balancing account resulting from the lower offset cost of power.

Other Operating Expenses

The components of other operating expenses include primarily payroll, material and supplies, chemicals and water treatment, and contract service costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices. For the three months ended ~~September~~June 30, 2007 and 2006, other operating expenses ~~increased~~ by ~~37.7% to $6.7 million compared to $4.9 million for the three months ended September 30, 2005 due primarily to: (i) higher operating expenses of $519,000 at ODUS and TUS due to the commencement~~segment consisted of the ~~operations of the water and wastewater systems pursuant to new military contracts~~following (amounts in ~~Maryland and Virginia in early 2006; (ii)~~ a $459,000 downward adjustment in July of 2005 reflecting the approval from the CPUC of previously incurred operating expenses in the Aerojet matter, previously discussed; (iii) higher chemicals and water treatment costs of $266,000 at GSWC; (iv) higher labor costs as a result of higher wages which increased by approximately $164,000 at GSWC; (v) an increase of $226,000 in bad debt expense at GSWC relating to miscellaneous accounts receivable balances, and (vi) a net increase of $193,000 in various other miscellaneous operating expenses.thousands):

For the three months ended September 30, 2006, administrative and general expenses increased by 22.0% to $12.6 million compared to $10.3 million for the three months ended September 30, 2005 due to: (i) administrative and general expenses of $446,000 at ODUS and TUS due to the commencement of the operations of the water and wastewater systems pursuant to new military contracts in Maryland and Virginia; (ii) an increase of approximately $683,000 in various employee benefit costs including stock-based compensation expense of $102,000 due to the adoption of SFAS No. 123(R) effective January 1, 2006; (iii) an increase of $994,000 in outside services relating primarily to tax and legal services at GSWC, and ~~(iv) higher labor costs as a result of higher wages which increased by approximately $118,000 at GSWC.~~

	3 Mos.		3 Mos.
	Ended		Ended		$			%
	6/30/2007		6/30/2006		CHANGE			CHANGE
Water Services	$	5,375	$	4,666	$	709		15.2	%
Electric Services	433		408		25			6.1	%
Contracted Services	751		812		(61		)	-7.5	%
Total other operating expenses	$	6,559	$	5,886	$	673		11.4	%

For the three months ended ~~September~~June 30, 2007, other operating expenses for water services increased by $709,000 due primarily to higher chemical and water treatment costs, including supplies and materials at GSWC’s Region II and III services areas. In addition, these costs are being incurred throughout the year whereas in prior years they were generally deferred to the latter part of the year.

Administrative and General Expenses

Administrative and general expenses include payroll related to administrative and general functions, all employee benefits charged to expense accounts, insurance expenses, outside legal and consulting fees, regulatory utility commissions’ expenses, expenses associated with being a public company, and general corporate expenses. For the three months ended June 30, 2007 and 2006, administrative and general expenses by segment consisted of the following (amounts in thousands):

	3 Mos.		3 Mos.
	Ended		Ended		$			%
	6/30/2007		6/30/2006		CHANGE			CHANGE
Water Services	$	10,694	$	8,249	$	2,445		29.6	%
Electric Services	1,531		1,168		363			31.1	%
Contracted Services	1,439		1,485		(46		)	-3.1	%
Total administratvive and general expenses	$	13,664	$	10,902	$	2,762		25.3	%

For the three months ended June 30, 2007, administrative and general expenses increased by $2.8 million in water and electric services compared to the three months ended June 30, 2006 due to: (i) an increase of approximately $907,000 in outside services relating primarily to additional tax, audit and legal services in 2007; (ii) the CPUC’s approval in April 2006 of Region II’s outside services memorandum account totaling approximately $709,000; upon approval by the CPUC, these legal costs,

which were incurred in prior periods, were reversed in the second quarter of 2006 and recorded as a regulatory asset; there was no such adjustment in 2007; (iii) an approximate $577,000 increase in labor costs due to higher wages largely related to Registrant’s annual performance-based salary review program; (iv) a $225,000 increase in rent expense for office space and the telephone system; (v) an agreement with the City of Folsom to dismiss all opposition to service the Westborough development; the agreement requires GSWC to pay the City of Folsom $550,000 with Aerojet reimbursing GSWC for 50% or $275,000 of the settlement payment; as of and for the three months ended June 30, 2007, GSWC has recorded an obligation to the City of Folsom for $550,000, an additional receivable of $275,000 from Aerojet for the amount to be reimbursed and a net charge to administrative and general expenses in the amount of $275,000 for its share of the settlement payment, and (vi) an increase of $115,000 in miscellaneous expenses.

A proposed decision and an alternate decision on GSWC’s Region II rate case were issued on July 24, 2007. The final decision may result in increased administrative and general expenses being allocated to contracted services. However, management is unable to predict the final outcome of this rate case.

Depreciation and Amortization

For the three months ended June 30, 2007, depreciation and amortization expense increased by ~~40.1%~~7.2% to ~~$6.6~~$7.1 million compared to ~~$4.7~~$6.6 million for the three months ended ~~September~~June 30, ~~2005~~2006 reflecting, among other things, the effects of closing approximately ~~$100~~$73 million of additions to utility plant during ~~2005,~~2006, depreciation on which began in January 2006. In addition, there was a decrease in depreciation expense in 2005 resulting from the favorable CPUC decision on the Aerojet matter, discussed previously, which ordered GSWC in July of 2005 to restore approximately $1.0 million to the appropriate plant accounts and decrease depreciation expense. There was no such adjustment in 2006.2007. Registrant anticipates that depreciation expense will continue to increase due to Registrant’s on-going construction program at its regulated subsidiaries. Registrant believes that depreciation expense related to property additions approved by the appropriate regulatory agency will be recovered through water and electric rates.

Maintenance

For the three months ended ~~September~~June 30, ~~2006,~~2007, maintenance expense increased by ~~16.9%~~34.1% to ~~$3.4~~$4.4 million compared to ~~$2.9~~$3.2 million for the three months ended ~~September~~June 30, ~~2005~~2006 due principally to an increase in required and emergency maintenance on GSWC’s wells and water supply ~~sources. There were also increases~~sources, primarily in ~~well treatment~~its Region II and ~~emergency repair costs. Furthermore, there was an increase of $61,000 at ODUS~~III service areas.

Property and ~~TUS due to the commencement of the operations of the water and wastewater systems pursuant to new military contracts in Maryland and Virginia.~~

Other Taxes

For the three months ended ~~September~~June 30, ~~2006,~~2007, property and other taxes increased by ~~3.3%~~14.6% to ~~$2.7~~$2.8 million compared to ~~$2.6~~$2.5 million for the three months ended ~~September~~June 30, ~~2005~~2006 reflecting additional property taxes resulting from higher assessed values, and increases in payroll taxes based on increased labor costs.

Construction Expenses

For the three months ended June 30, 2007, ASUS construction expenses increased to $8.3 million compared to $809,000 for the same period in 2006 reflecting the costs incurred for the construction of various improvements, renewals and replacements to the existing water and wastewater infrastructure at Fort Bliss and at the military bases located in Virginia and Maryland pursuant to new contracts entered into in early 2006. The increase in construction activity resulted from amendments to the original 50-year contracts with the U.S. government which required the construction of additional improvements at the various military bases. As previously mentioned, ASUS entered into a $20.6 million project for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas. As a result of this new project, construction expenses increased by $7.0 million during the second quarter of 2007. The project is scheduled to be completed by August 15, 2007.

Net Gain on Sale of Property

For the three months ended ~~September~~June 30, ~~2005,~~2007, Registrant recorded a net ~~pre-tax~~pretax gain of ~~$124,000~~$238,000 on the sale of ~~non-utility property.~~property it owned in the City of Claremont. There was no similar gain in the same period of ~~2005.~~

2006. Earnings and cash flows from property sales are sporadic and may or may not continue in future periods.

Interest Expense

For the three months ended ~~September~~June 30, ~~2006,~~2007, interest expense increased by ~~$5.5~~2.5% to $5.6 million ~~during~~compared to $5.4 million for the three months ended ~~September~~June 30, 2006 ~~as compared to the same period in 2005~~ primarily reflecting ~~primarily the approval from the CPUC in July of 2005 for the recovery of previously incurred and expensed~~higher short-term interest ~~costs totaling $5.1 million in the Aerojet memorandum account, discussed previously.~~ ~~In addition, the~~rates. There was also an increase also reflects increases in long-term debt interest expense of $585,000 due to $40.0 million of additional private placement notes issued at GSWC in October 2005. Partially offsetting this increase was a decrease in short-term cash borrowings. Average bank loan balances outstanding under an AWR credit facility for the ~~third~~second quarter of ~~2006~~2007 were approximately ~~$26.5~~$33.4 million, as compared to an average of ~~$50.8~~$31.0 million during the same period of ~~2005. However, the decrease in short-term bank loan balances was also partially offset by higher interest rates.~~2006.

Interest Income

Interest income decreased by ~~6.7% during~~$377,000 for the three months ended ~~September~~June 30, ~~2006 as compared~~2007 due primarily to the ~~same period in 2005~~ ~~reflecting primarily the decision from the CPUC in 2005 on the Aerojet matter, which resulted in the recognition~~receipt of interest ~~income totaling approximately $607,000 earned on the $8.0~~amounting to $381,000 related to a $3.0 million ~~Aerojet long-term note receivable. The recording of the interest income had been deferred pending this final CPUC decision. This decrease was offset by increases due primarily to:~~ Internal Revenue Service (“IRS”) refund in May 2006.(i) interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized by the CPUC of $279,000; (ii) interest income totaling $173,000 earned from the U.S. Government for costs incurred on capital upgrade projects at Andrews Air Force Base, and (iii) interest earned on short-term cash surplus.

Income Tax Expense

For the three months ended ~~September~~June 30, ~~2006,~~2007, income tax expense ~~decreased~~increased by ~~54.1%~~51.2% to ~~$4.8~~$5.2 million compared to ~~$10.5~~$3.4 million for the three months ended ~~September~~June 30, ~~2005~~2006 due, ~~primarily~~in part, to ~~a decrease~~an increase in pretax income of ~~54.3%~~29.0%. ~~The~~In addition, the effective tax rate (“ETR”) for the three months ended ~~September~~June 30, ~~2006 increased slightly to 46.3%~~2007 was 41.6% as compared to a ~~46.1%~~35.5% ETR applicable to the three months ended ~~September~~June 30, ~~2005.~~2006. The variance between the ETR and the statutory tax rate is primarily the result of differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. During the second quarter of 2005, the recognition of the federal effect of state taxes was adjusted to conform to the flow-through method reflected in the tax calculation for ratemaking purposes, which partially defers the recognition of the effect to the subsequent tax year. This increased income tax expense by $33,000 for the three months ended September 30, 2006.

~~Consolidated Results of Operations — Nine Months Ended September 30, 2006 and 2005 (dollars in thousand)~~

9 MOS
ENDED
9/30/2006

9 MOS
ENDED
9/30/2005

$
CHANGE

%
CHANGE

OPERATING REVENUES

Water

$
166,233

$
155,611

$
10,622

6.8
%
Electric

21,816

20,105

1,711

8.5
%
Other

8,437

2,721

5,716

210.1
%
Total operating revenues

196,486

178,437

18,049

10.1
%
OPERATING EXPENSES

Water purchased

34,326

35,742

(1,416
)
-4.0
%
Power purchased for pumping

7,620

6,923

697

10.1
%
Groundwater production assessment

6,799

6,079

720

11.8
%
Power purchased for resale

10,470

9,922

548

5.5
%
Unrealized loss (gain) on purchased power contracts

5,886

(7,492
)
13,378

-178.6
%
Supply cost balancing accounts

(93
)
1,042

(1,135
)
-108.9
%
Other operating expenses

17,264

15,138

2,126

14.0
%
Administrative and general expenses

34,628

32,456

2,172

6.7
%
Depreciation and amortization

19,726

16,123

3,603

22.3
%
Maintenance

9,113

7,522

1,591

21.2
%
Property and other taxes

7,674

7,111

563

7.9
%
Net gain on sale of property

(124
)
-

124

100.0
%
Gain on settlement for removal of wells

-

(760
)
(760
)
-100.0
%
Total operating expenses

153,289

129,806

23,483

18.1
%
OPERATING INCOME

43,197

48,631

(5,434
)
-11.2
%
Interest expense

(16,037
)
(9,341
)
6,696

71.7
%
Interest income

2,643

801

1,842

230.0
%
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE

29,803

40,091

(10,288
)
-25.7
%
Income tax expense

12,061

18,358

(6,297
)
-34.3
%
NET INCOME

$
17,742

$
21,733

$
(3,991
)
-18.4
%

Net income decreased by 18.4% for the nine months ended September 30, 2006, to $17.7 million, which is equivalent to $1.03 per common share on both a basic and fully diluted basis, compared to $21.7 million or $1.29 per share on a basic and fully diluted basis, respectively, for the nine months ended September 30, 2005. Impacting the comparability in the results of the two periods are the following significant items:

· There was an unrealized loss on purchased power contracts in 2006 due to decreasing energy prices versus an unrealized gain on purchased power contracts in 2005. The cumulative unrealized loss on purchased power contracts decreased pretax income by approximately $5.9 million, or $0.21 per share, for the nine months ended September 30, 2006, as compared to a cumulative unrealized gain on purchased power contracts that increased pretax income by $7.5 million, or $0.26 per share increase to income, for the same period in 2005.

·~~As discussed in the quarterly results, the 2005 nine months recorded results reflects a favorable decision issued by the CPUC on July 21, 2005 regarding the Aerojet matter which added about $4.3~~

million to net income in July of 2005 or approximately $0.25 per share. The impact to pretax income resulted in reduced interest charges, depreciation expense and other operating expenses as discussed below.

·A decision issued by the CPUC on April 13, 2006 regarding the treatment of GSWC’s water rights lease revenues added about $3.2 million to pretax income for the nine months ended September 30, 2006 or approximately $0.11 per share. In this decision, the CPUC authorized GSWC to reinvest all lease revenues since January 2004, inclusive of the balances in the regulatory liability accounts established by GSWC for this matter, in water system infrastructure. These investments will be included in the rate base upon which GSWC earns a rate of return. In accordance with California law, GSWC will have 8 years in which to reinvest the proceeds. As a result, GSWC transferred about $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005 from the regulatory liability account into other operating revenues. GSWC also recorded pretax income of $909,000 reflecting water rights lease revenues for the first, second and third quarters of 2006.

· Water rate increases contributed approximately $8.8 million to revenues, or $0.31 per share for the nine months ended September 30, 2006. This was partially offset by higher expenses as described below.

· An increase in ASUS’s pretax operating income of $1.4 million, or $0.05 per share, as compared to the same period of 2005 by operating and maintaining the water and wastewater systems for the U.S. Government. The increases included revenue recognized for certain special projects and reimbursement of various operating costs incurred during the period of transition of the operation and maintenance of the water and wastewater systems at military bases in Maryland and Virginia formerly owned and operated by the U.S. Government.

· A $2.4 million increase in other interest income, excluding the impact of the Aerojet decision in July 2005 mentioned above, or $0.09 per share, resulting primarily from interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized by the CPUC, interest income related to a $3.0 million Internal Revenue Service refund received in May 2006, and interest income from the U.S. Government for costs incurred on capital upgrade projects at Andrews Air Force Base

· A lower effective tax rate increased earnings by $0.09 per share resulting primarily from: (i) a $400,000 tax benefit relating to a $3.0 million IRS refund received in May 2006; and (ii) differences between book and taxable income, which are treated as flow-through adjustments in accordance with regulatory requirements.

· ~~Higher operating expenses, other than those described above, which lowered 2006 net income by an additional $0.19 per share, as more fully described below.~~

~~Operating Revenues~~

For the nine months ended September 30, 2006, revenues from water operations increased by 6.8% to $166.2 million, compared to $155.6 million for the nine months ended September 30, 2005. Higher water revenues reflect rate increases since the second quarter of 2005 covering almost all water customers, which contributed $8.8 million in increased revenues. In addition, an increase of about 2.0% in billed water consumption resulting from changes in weather conditions also increased revenues by approximately $1.8 million. Differences in temperature and rainfall in Registrant’s service areas impact sales of water to customers, causing fluctuations in Registrant’s revenues and earnings between comparable periods.

For the nine months ended September 30, 2006, revenues from electric operations increased by 8.5% to $21.8 million compared to $20.1 million for the nine months ended September 30, 2005. The increase reflects primarily a 7.4% increase in KWh usage, due to changes in weather conditions which caused the usage of snow-making machines to increase in 2006. The cooler 2006 winter weather as compared to same period last year allowed the ski resorts (industrial customers) to remain open well into May, operating their lifts and some snow-making in the evening hours. New rates authorized by the CPUC for the 8.4 megawatt (“MW”) natural gas-fueled generation facility also contributed to the increase. The new rates went into effect on April 15, 2005 and generate approximately $2.7 million in additional annual revenues, subject to refund pending the CPUC’s final cost review.

~~The new Bear Valley Electric rates have been recognized in 2006 revenues and management believes it is probable that the final CPUC cost review will not result in refunds to the customer.~~

Registrant relies upon rate approvals by state regulatory agencies in California and Arizona, in order to recover operating expenses and provide for a fair return on invested and borrowed capital used to fund utility plant. Without adequate rate relief granted in a timely manner, revenues and earnings can be negatively impacted.

For the nine months ended September 30, 2006, other operating revenues increased by 210.1% to $8.4 million compared to $2.7 million for the nine months ended September 30, 2005 due primarily to a decision issued by the CPUC on April 13, 2006 enabling GSWC to record $3.2 million of water rights lease revenues from the City of Folsom from January 2004 to September 2006. Prior to this decision, the apportionment of any lease revenues that GSWC collected in 2004 and 2005, totaling $2.3 million, had been included in a regulatory liability account and no amounts were recognized as revenues until regulatory uncertainties about this matter were resolved. Registrant also recorded additional revenue of $909,000, reflecting the first, second and third quarters of the 2006 water rights lease revenues. In addition, an increase of $2.8 million in revenues as compared to the first nine months of 2005 reflects: (i) the recording of FBWS revenue of approximately $768,000 during the nine months ended September 30, 2006 based on the percentage of completion method of accounting for contract revenue recognition for several projects at Fort Bliss; and (ii) additional revenues totaling $2.0 million generated from operating the water and wastewater systems at Andrews Air Force Base which began operation on February 1, 2005, at Fort Eustis, Fort Monroe and Fort Story all of which began operation on April 3, 2006, and the wastewater systems at Fort Lee which began operation on February 23, 2006.

~~Operating Expenses~~

For the nine months ended September 30, 2006, purchased water costs decreased by 4.0% to $34.3 million compared to $35.7 million for the nine months ended September 30, 2005. The decrease is due primarily to a change in the supply mix caused by less purchased water needed to replace groundwater supply lost in 2005. For the nine months ended September 30, 2006, 44.8% of Registrant’s supply mix was purchased water as compared to 47.2% purchased water for the nine months ended September 30, 2005. During the same period last year, there were additional purchases of water needed to replace groundwater supply, due to wells being removed from service. The wells were removed from service in 2005 as a result of water quality issues and mechanical problems, particularly in GSWC’s Foothill district. The cost of purchased water in this district decreased by approximately $1.7 million as a result of the wells being returned to operation in 2006. This decrease was partially offset by an increase in customer demand resulting from higher consumption and increased water rates by purchased water suppliers.

For the nine months ended September 30, 2006, the cost of power purchased for pumping increased by 10.1% to $7.6 million compared to $6.9 million for the nine months ended September 30, 2005 due to an increase in KWh usage by Registrant caused by higher customer water demand and an increase in pumping volume due to the supply mix change discussed above.

For the nine months ended September 30, 2006, groundwater production assessments increased by 11.8% to $6.8 million as compared to $6.1 million for the nine months ended September 30, 2005 due to increases in well production to meet higher customer demand. There were also increases in assessment rates levied against groundwater production, effective July 2005 and 2006. Average pump tax rates increased in Regions II and III in July 2006 by approximately 2% and 4%, respectively, and 5% and 20% in July 2005, respectively.

Changes in the water resource mix between water supplied from purchased sources and that supplied from Registrant’s own wells can increase/decrease actual supply-related costs relative to that approved for recovery through rates, thereby impacting earnings either negatively or positively.

For the nine months ended September 30, 2006, cost of power purchased for resale to customers in GSWC’s Bear Valley Electric division increased by 5.5% to $10.5 million compared to $9.9 million for the nine months ended September 30, 2005, primarily reflecting higher customer demand during the nine months ended September 30, 2006.

~~Unrealized loss (gain) on purchased power contracts represents losses and gains recorded for GSWC’s purchased power agreements with PWCC, which qualify as derivative instruments under SFAS No. 133,~~ ~~“Accounting for Derivative Instruments and Hedging Activities”~~~~. The $5.9 million pretax unrealized loss on purchased power contracts for the nine months ended September 30, 2006 is due to a decrease in the current forward~~

market prices since December 31, 2005. There was a $7.5 million pretax unrealized gain on purchased power contracts for the nine months ended September 30, 2005. Unrealized gains and losses at Bear Valley Electric will continue to impact earnings during the life of the contract with PWCC, which terminates in 2008.

A decrease of $1.1 million during the nine months ended September 30, 2006 in the provision for supply cost balancing accounts as compared to the nine months ended September 30, 2005 was primarily due to: (i) the recording of a $247,000 refund received in May 2005 from Mirant with no corresponding amount booked in the same period of 2006; (ii) the recording of a $2.7 million under-collection in the second and third quarter of 2006 related to the 2006 year-to-date supply cost memorandum account resulting from the elimination of the earnings test by the CPUC in April 2006, and (iii) the recording in April 2006 of an additional $181,000 under-collection for 2005’s supply cost memorandum account due to the elimination by the CPUC of the earnings test. These decreases were offset by: (i) the approval by the CPUC and recording in September 2005 of $1.3 million under-collection related to Region III’s 2004 supply cost memorandum account, and (ii) an increase of $884,000 in the amortization of water supply cost balancing accounts approved by the CPUC in June, August and September of 2005.

For the nine months ended September 30, 2006, other operating expenses increased by 14.0% to $17.3 million compared to $15.1 million for the nine months ended September 30, 2005 due primarily to higher operating expenses of $1.2 million at ODUS and TUS due to the commencement of operation of the water and wastewater systems at military bases in Maryland and Virginia. There was also a net increase of $1.3 million at GSWC primarily due to: (i) a $459,000 downward adjustment in July of 2005 reflecting the approval from the CPUC of previously incurred operating expenses in the Aerojet matter, previously discussed; (ii) higher chemicals and water treatment costs of $386,000 at GSWC; (iii) approximately $292,000 of higher labor costs as a result of higher wages at GSWC, and (iv) an increase of $248,000 in bad debt expense at GSWC relating to miscellaneous accounts receivable balances. These increases were partially offset by the increase in reimbursement of $560,000 from the U.S. Government and a contractor, for operating expenses incurred at Fort Bliss. FBWS was separately hired by the U.S. Government as a subcontractor for certain related projects at the same base.

For the nine months ended September 30, 2006, administrative and general expenses increased by 6.7% to $34.6 million compared to $32.5 million for the nine months ended September 30, 2005 caused primarily by higher administrative and general expenses of $804,000 at ODUS and TUS due to the commencement of operation of the water and wastewater systems at military bases in Maryland and Virginia in early 2006. This increase at ODUS and TUS is net of the recovery of transition period operating expenses of about $672,000 at these military bases. Other changes at ASUS include decreases due to: (i) an increase of $284,000 in reimbursements by the U.S. Government of indirect costs incurred by FBWS, and (ii) lower outside services and other expenses at ASUS totaling $380,000. General and administrative expenses also increased by $2.0 million at GSWC primarily due to increases in: (i) pensions and benefits of $170,000 caused by actuarial assumption changes in the mortality tables, and increases of approximately $378,000 in various other benefit costs due primarily to increases in medical and labor costs; (ii) stock-based compensation expense of $402,000 due to the adoption of SFAS No. 123(R) effective January 1, 2006; (iii) labor cost increases of $762,000 due to higher wages, and (iv) various other office, supplies and rent expenses of $314,000.

For the nine months ended September 30, 2006, depreciation and amortization expense increased by 22.3% to $19.7 million compared to $16.1 million for the nine months ended September 30, 2005 reflecting, among other things, the effects of closing approximately $100 million of additions to utility plant during 2005, depreciation on which began in January 2006. In addition, there was a decrease in depreciation expense in 2005 resulting from the favorable CPUC decision on the Aerojet matter, discussed previously, which ordered GSWC to restore approximately $1 million to the appropriate plant accounts and decrease depreciation expense in July of 2005. There was no such adjustment in 2006. Registrant anticipates that depreciation expense will continue to increase due to Registrant’s on-going construction program at its regulated subsidiaries. Registrant believes that depreciation expense related to property additions approved by the appropriate regulatory agency will be recovered through water and electric rates.

For the nine months ended September 30, 2006, maintenance expense increased by 21.2% to $9.1 million compared to $7.5 million for the nine months ended September 30, 2005 due principally to an increase in required maintenance on GSWC’s wells and water supply sources at all Regions. There were also increases in well treatment and emergency repair costs. Furthermore, there was an increase of: (i) $451,000 at GSWC’s electric division due to the new 8.4 MW natural gas-fueled generation facility, and (ii) $175,000 at ODUS and TUS due to the commencement of the operations of the water and wastewater systems pursuant to new military contracts in Maryland and Virginia.

For the nine months ended September 30, 2006, property and other taxes increased by 7.9% to $7.7 million compared to $7.1 million for the nine months ended September 30, 2005 reflecting additional property taxes resulting from higher assessed values, and increases in payroll taxes based on increased labor costs.

~~For the nine months ended September 30, 2005, Registrant recorded a net pretax gain of $124,000 on the sale of non-utility property. There was no similar gain in the same period of 2005.~~

For the nine months ended September 30, 2005, Registrant also recorded a net pre-tax gain of $760,000 on a settlement reached with the Fountain Hills Sanitary District (“FHSD”) in February 2005 for the capping of two CCWC wells in order to facilitate FHSD’s ability to secure certain permits. Pursuant to the settlement agreement, CCWC agreed to permanently remove from service and cap one of its wells, and cap another well which had never been used as a potable source of supply. There was no similar gain in the same period of 2006.

~~Interest Expense~~

~~For the nine months ended September 30, 2006, interest expense increased $6.7 million during the nine months ended September 30, 2006 as compared to the same period in 2005~~ reflecting primarily the approval from the CPUC in 2005 for the recovery of previously incurred and expensed interest costs totaling $5.1 million in the Aerojet memorandum account, discussed previously. In addition, the increase also reflects increases in long-term debt interest expense of $1.8 million primarily due to the placement of $40.0 million of notes in October 2005 coupled with increases in short-term bank loan interest rates. Partially offsetting this increase was a decrease in short-term cash borrowings. Average bank loan balances outstanding under an AWR credit facility for the nine months ended September 30, 2006 were approximately $28.2 million, as compared to an average of $48.6 million during the same period of 2005.

~~Interest Income~~

~~For the nine months ended September 30, 2006, interest income increased by 230% to $2.6 million compared to $801,000 for the nine months ended September 30, 2005~~ ~~due primarily to:~~ (i) interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized by the CPUC of $1.1 million; (ii) interest income of $381,000 related to a $3.0 million Internal Revenue Service refund received in May 2006; (iii) interest income totaling $345,000 earned from the U.S. Government for costs incurred on capital upgrade projects at Andrews Air Force Base, and (iv) interest earned on short-term cash surplus. These increases were partially offset by the recognition in July 2005 of approximately $607,000 in interest income earned on the $8.0 million Aerojet long-term note receivable. The recording of the interest income had been deferred pending the final CPUC decision on the Aerojet matter. Registrant has since been recording the interest income on the $8.0 million Aerojet long-term note receivable on a monthly basis.

~~Income Tax Expense~~

For the nine months ended September 30, 2006, income tax expense decreased by 34.3% to $12.1 million compared to $18.4 million for the nine months ended September 30, 2005 due, in part, to a decrease in pretax income of 25.7%. In addition, the decrease was as a result of flow-through adjustments and a refund claim, as discussed further, below. The ETR for the nine months ended September 30, 2006 decreased by approximately 5.3 percentage points to 40.5% as compared to a 45.8% ETR applicable to the nine months ended September 30, 2005. The variance between the ETR and the statutory tax rate is primarily the result of differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. During the second quarter of 2005, the recognition of the federal effect of state taxes was adjusted to conform to the flow-through method reflected in the tax calculation for ratemaking purposes, which partially defers the recognition of the effect to the subsequent tax year. This reduced income tax expense by $171,000 for the nine months ended September 30, 2006. During the third quarter of 2005, AWR filed an amended tax return for 2001 with the ~~Internal Revenue Service (“IRS”)~~IRS which was subject to IRS and Congressional Joint Committee of Taxation (“JCT”) review. During the second quarter of 2006, the IRS and JCT reviews were completed and AWR received a refund in the amount of its original claim of $3.0 million, with interest. Consequently, in the second quarter of 2006, AWR recorded a tax benefit of $400,000, of which $351,000 was attributable to GSWC. The refund-claim benefit contributed ~~to 1.3~~4.1 of the ~~5.3~~6.1 percentage point ETR ~~reduction~~change referred to, above.

Consolidated Results of Operations — Six Months Ended June 30, 2007 and 2006 (in thousands):

	6 Mos.			6 Mos.
	Ended			Ended			$			%
	6/30/2007			6/30/2006			CHANGE			CHANGE
OPERATING REVENUES
Water	$	111,153		$	104,199		$	6,954		6.7	%
Electric	15,124			15,372			(248		)	-1.6	%
Contracted services	25,239			7,867			17,372			220.8	%
Total operating revenues	151,516			127,438			24,078			18.9	%

OPERATING EXPENSES
Water purchased	20,950			19,260			1,690			8.8	%
Power purchased for pumping	4,791			4,020			771			19.2	%
Groundwater production assessment	4,828			4,322			506			11.7	%
Power purchased for resale	7,196			7,811			(615		)	-7.9	%
Unrealized (gain) loss on purchased power contracts	(2,474		)	3,078			(5,552		)	-180.4	%
Supply cost balancing accounts	(1,910		)	(338		)	(1,572		)	465.1	%
Other operating expenses	13,156			10,587			2,569			24.3	%
Administrative and general expenses	26,671			22,015			4,656			21.1	%
Depreciation and amortization	14,177			13,092			1,085			8.3	%
Maintenance	7,326			5,719			1,607			28.1	%
Property and other taxes	5,773			5,027			746			14.8	%
Construction expenses	17,329			4,511			12,818			284.1	%
Net gain on sale of property	(605		)	—			605			100.0	%
Total operating expenses	117,208			99,104			18,104			18.3	%

OPERATING INCOME	34,308			28,334			5,974			21.1	%

OTHER INCOME AND EXPENSES
Interest expense	(11,066		)	(10,688		)	378			3.5	%
Interest income	1,152			1,776			(624		)	-35.1	%
Other	132			—			132			100.0	%

INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE	24,526			19,422			5,104			26.3	%

Income tax expense	10,220			7,252			2,968			40.9	%

NET INCOME	$	14,306		$	12,170		$	2,136		17.6	%

Net income for the six months ended June 30, 2007 increased by 17.6% to $14.3 million, equivalent to $0.83 and $0.82 per common share on a basic and fully diluted basis, respectively, compared to $12.2 million or $0.71 per basic and diluted common shares for the six months ended June 30, 2006. Impacting the comparability in the results of the two periods are the following significant items:

· There was an unrealized gain on purchased power contracts in 2007 due to increasing energy prices versus an unrealized loss on purchased power contracts in 2006. The cumulative unrealized gain on purchased power contracts increased pretax income by approximately $2.5 million, or $0.09 per share, for the six months ended June 30, 2007, as compared to a cumulative unrealized loss on purchased power contracts that decreased pretax

income by $3.1 million, or $0.11 per share, for the same period in 2006.

· A decision issued by the CPUC on April 13, 2006 regarding the accounting treatment of GSWC’s water rights lease revenues, increased pretax operating income by about $2.3 million in March 2006, or approximately $0.08 per share, when compared to the same period in 2007. Pursuant to a March 2004 CPUC order, the apportionment of any Folsom lease revenues that GSWC may collect commencing in January 2004 was to be determined by a later decision. Pending that later decision and beginning in the first quarter of 2004, all amounts billed to the City of Folsom had been included in a regulatory liability account and no amounts were recognized as revenue until uncertainties about this matter were resolved with the CPUC. On April 13, 2006, the CPUC authorized GSWC to reinvest all lease revenues since January 2004, inclusive of the balances in the regulatory liability accounts established by GSWC for this matter, in water system infrastructure. These investments will be included in the rate base upon which GSWC earns a rate of return. In accordance with California law, GSWC has eight years in which to reinvest the proceeds, after which any amount remaining would inure to the customer’s benefit. As a result, in the second quarter of 2006, GSWC transferred about $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005 from the regulatory liability account, into water revenues.

· An increase, excluding the $2.3 million of water right lease revenues as discussed above, in the margin for the water segment of $3.8 million, or $0.13 per share, as compared to the same period of 2006 due to increased water rates approved by the CPUC that were effective January 1, 2007, an increase in water consumption over that in the prior period, and a favorable supply mix change.

· An increase in ASUS’s pretax operating income of $3.4 million, or $0.12 per share, as compared to the same period of 2006 for operating, maintaining and improving the water and wastewater systems at military bases for the U.S. government. The increases include revenue recognized for certain special projects under the percentage-of-completion method of accounting.

· Higher operating expenses, a change in the effective income tax rate, as well as other items described below, contributed to an overall decrease of $0.26 per basic share to the results of operations.

Operating Revenues

For the six months ended June 30, 2007, revenues from water operations increased by 6.7% to $111.2 million, compared to $104.2 million for the six months ended June 30, 2006. Contributing to this increase were rate increases approved by the CPUC effective January 1, 2007, which contributed approximately $2.6 million in increased water revenues. As more fully discussed in the quarterly results, included in the rate increases in 2007 was an interim rate increase effective January 1, 2007, subject to refund, totaling approximately $520,000 for the six months ended June 30, 2007 ($1.2 million for the entire 2007 year) due to the CPUC’s delays in processing GSWC’s general rate applications for rate increases in Region II and for general office expenses at the corporate headquarters. Region III also received an interim rate increase of $135,000 effective January 1, 2007. In addition, an increase of about 9.1% in billed water consumption resulting from much warmer and drier weather conditions increased revenues by approximately $6.6 million. Differences in temperature and rainfall in Registrant’s service areas impact sales of water to customers, causing fluctuations in Registrant’s revenues and earnings between comparable periods. Partially offsetting these increases was the fact that operating revenues for the first six months of 2006 were positively impacted by a CPUC decision issued on April 13, 2006 enabling GSWC to record $2.3 million of water rights lease revenues from the City of Folsom for the period from January 2004 to December 2005. Prior to this decision, the apportionment of any lease revenues that GSWC collected in 2004 and 2005 had been included in a regulatory liability account and no amounts were recognized as revenues until regulatory uncertainties about this matter were resolved. There was no such adjustment in 2007.

For the six months ended June 30, 2007, revenues from electric operations decreased by 1.6% to $15.1 million compared to $15.4 million for the six months ended June 30, 2006. The decrease reflects lower kilowatt-hour usage by residential and commercial customers due warmer and drier weather conditions this spring.

Registrant relies upon rate approvals by state regulatory agencies in California and Arizona in order to recover operating expenses and provide for a return on invested and borrowed capital used to fund utility plant. Without such adequate rate relief granted in a timely manner, revenues and earnings can be negatively impacted.

Revenues from contracted services are comprised of construction revenues and management fees for operating and maintaining the water and wastewater systems at military bases. For the six months ended June 30, 2007, revenues from contracted services increased by $17.4 million, or 220.8%, to $25.2 million compared to $7.9 million for the six months ended June 30, 2006 due primarily to an increase of approximately $17.0 million related to construction revenues earned from

the U.S. government and recognized on the percentage-of completion method. The revenues earned were for the construction of certain improvements, renewals and replacements to the existing water and wastewater infrastructure at Fort Bliss and at the military bases located in Virginia and Maryland pursuant to new contracts entered into in early 2006. Certain of the construction projects are firm, fixed-price contracts and are supplemental to ASUS’s 50-year contracts with the U.S. government. As discussed in the quarterly results, ASUS entered into a $20.6 million project for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas, which was an amendment to the 50-year contract with the U.S. government. Revenues from this project have been recognized under the percentage-of-completion method of accounting. As a result of this new project which began in 2007, revenues for contracted services increased by $19.5 million during the six months ended June 30, 2007. The project is scheduled to be completed by August 15, 2007 and there will be no further construction revenues associated with this amendment after that date. The increase on this project was partially offset by other non-recurring construction projects that were completed in 2006. Earnings and cash flows from amendments and modifications to the original 50-year contracts with the U.S. government are sporadic and may or may not continue in future periods. There were also additional management fee revenues totaling $776,000 during the six months ended June 30, 2007 generated from operating and maintaining the water and wastewater systems under the new contracts in Virginia and Maryland.

Operating Expenses:

Supply Costs

For general discussion on supply costs, see quarterly results. Supply costs accounted for approximately 30.6% and 35.4% of total operating expenses for the six months ended June 30, 2007 and 2006, respectively.

The table below provides the amount of increases (decreases), percent changes in supply costs, and margins during the six months ended June 30, 2007 and 2006 (amounts in thousands):

	6 Mos.			6 Mos.
	Ended			Ended			$			%
	6/30/2007			6/30/2006			CHANGE			CHANGE
WATER OPERATING REVENUES (1)	$	111,153		$	104,199		$	6,954		6.7	%
WATER SUPPLY COSTS:
Water purchased (1)	20,950			19,260			1,690			8.8	%
Power purchased for pumping (1)	4,791			4,020			771			19.2	%
Groundwater production assessment (1)	4,828			4,322			506			11.7	%
Water supply cost balancing accounts (1)	(3,157		)	(998		)	(2,159		)	216.3	%
	$	27,412		$	26,604		$	808		3.0	%
WATER MARGIN (2)	$	83,741		$	77,595		$	6,146		7.9	%
PERCENT MARGIN - WATER	75.3		%	74.5		%

ELECTRIC OPERATING REVENUES (1)	$	15,124		$	15,372		$	(248	)	-1.6	%
ELECTRIC SUPPLY COSTS:
Power purchased for resale (1)	7,196			7,811			(615		)	-7.9	%
Electric supply cost balancing accounts (1)	1,247			660			587			88.9	%
	$	8,443		$	8,471		$	(28	)	-0.3	%
ELECTRIC MARGIN (2)	$	6,681		$	6,901		$	(220	)	-3.2	%
PERCENT MARGIN - ELECTRIC	44.2		%	44.9		%

(1) As reported on AWR’s Consolidated Statements of Income, except for supply cost balancing accounts. The sum of water and electric supply cost balancing accounts in the table above are shown on AWR’s Consolidated Statements of Income and totaled ($1,910,000) and ($338,000) for the six months ended June 30, 2007 and 2006, respectively.

(2) Water and electric margins do not include any depreciation and amortization, maintenance expense, or other operating expenses.

For the six months ended June 30, 2007, 40.4% of the Company’s water supply mix was purchased as compared to 43.6% purchased for the six months ended June 30, 2006. This change in mix resulted in improved margins in 2007 compared to same period in 2006. Water gross margin for the six months ended June 30, 2006 included the $2.3 million water rights lease revenues from the City of Folsom.

Purchased water costs for the six months ended June 30, 2007 increased by 8.8% to $21.0 million compared to $19.3 million for the six months ended June 30, 2006. The increase is due primarily to an increase in water supply demand resulting from higher customer consumption and increased water rates charged by suppliers. In general, the supply cost memorandum account as discussed above allows GSWC to track incremental rate changes from suppliers, for future recovery in water rates. In addition, GSWC entered into a one-time lease of pumped water rights with the City of Pomona in order to allow GSWC to pump more water. The price of this lease paid by GSWC totaled $226,000 and was for 1,000 acre-feet of stored water in eastern Los Angeles County. There were no water rights leased by GSWC from others in the same period of 2006. These increases were offset by a favorable change in the supply mix discussed above, caused by less purchased water needed to replace groundwater supply not pumped in the prior year. Certain wells had been removed from service in 2006 as a result of water quality issues and mechanical problems.

For the six months ended June 30, 2007, the increases in power purchased for pumping and groundwater production assessments were due to higher water supply demand and an increase in pumping volume resulting from the favorable supply mix change as discussed. There were also increases in assessment rates levied against groundwater production, effective July 2006. Average pump tax rates increased in Regions II and III by approximately 2% and 4%, respectively. Again, the supply cost memorandum account tracks the increases in pump tax rates for future recovery in water rates.

For general discussion on increases and decreases to the supply cost balancing accounts in the Statements of Income, see quarterly results. A decrease of $2.2 million during the six months ended June 30, 2007 in the water supply cost balancing account provision as compared to the six months ended June 30, 2006 was primarily due to a net increase of $1.3 million of net under-collections in 2007 compared to same period in 2006 relating to memorandum accounts, caused by increased rates in purchased water and purchased power for pumping charged by GSWC’s suppliers and increased pump tax rates. Under-collections in the memorandum accounts were not recorded in the first quarter of 2006 due to the CPUC’s earning test requirement, which was eliminated in April 2006 by a CPUC decision. Under-collections are now recorded on a monthly basis. There was also a $1.1 million decrease in amortization due to the expiration in October 2006 of the surcharge that was in rates to recover Region III’s under-collection.

For the six months ended June 30, 2007, the cost of power purchased for resale to customers in GSWC’s Bear Valley Electric division decreased by 7.9% to $7.2 million compared to $7.8 million for the six months ended June 30, 2006, reflecting an increase in sales to the spot market at higher energy prices. GSWC has a 15MW purchased power agreement with PWMT. Purchased power in excess of demand is sold into the spot market at the market price. There was an energy price increase of about $13/MWh, resulting in higher income from sales in the spot market. Income from the spot market sales for the six months ended June 30, 2007 decreased the cost of power purchased for resale and increased the electric supply cost balancing account provision, respectively, as compared to the same period of 2006. The decrease in the cost of power purchased for resale was also due to lower customer demand during the six months ended June 30, 2007 compared to same period of 2006.

Unrealized (Gain) Loss on Purchased Power Contracts

Unrealized gain and loss on purchased power contracts represent gains and losses recorded for GSWC’s purchased power agreements with PWMT, which qualify as derivative instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. The $2.5 million pretax unrealized gain on purchased power contracts for the six months ended June 30, 2007 is due to an increase in the current forward market prices since December 31, 2006. There was a $3.1 million pretax unrealized loss on purchased power contracts for the six months ended June 30, 2006. Unrealized gains and losses at Bear Valley Electric will continue to impact earnings positively or negatively during the life of the contract with PWMT, which terminates at the end of 2008.

Other Operating Expenses

For the six months ended June 30, 2007 and 2006, other operating expenses by segment consisted of the following (amounts in thousands):

	6 Mos.		6 Mos.
	Ended		Ended		$			%
	6/30/2007		6/30/2006		CHANGE			CHANGE
Water Services	$	10,827	$	8,927	$	1,900		21.3	%
Electric Services	823		837		(14		)	-1.7	%
Contracted Services	1,506		823		683			83.0	%
Total other operating expenses	$	13,156	$	10,587	$	2,569		24.3	%

For the six months ended June 30, 2007, other operating expenses for water services increased by $1.9 million due primarily to higher chemicals and water treatment costs, including supplies and materials, of $1.1 million in particular at GSWC’s Region II and III services areas. Region II incurred additional costs primarily for the removal of arsenic and Volatile Organic Compounds at six of its well sites, while Region III incurred additional costs primarily for two of its treatment plants. There was also an increase in labor costs of $103,000 due to higher wages and related benefits, an increase of $80,000 in equipment rental, an increase in outside fees of $310,000 for services from an outside party to remove nitrate and perchlorate at treatment plants, and an increase of $307,000 in various other operating expenses.

There was also an increase in other operating expenses of $683,000 for contracted services primarily due to the commencement of the operation of water and wastewater systems at military bases in Maryland and Virginia that began in the first four months of 2006. ASUS fully operated these bases during the six months ended June 30, 2007, whereas they were only operated by ASUS during part of the same period in 2006.

Administrative and General Expenses

For the six months ended June 30, 2007 and 2006, administrative and general expenses by segment consisted of the following (amounts in thousands):

	6 Mos.		6 Mos.
	Ended		Ended		$		%
	6/30/2007		6/30/2006		CHANGE		CHANGE
Water Services	$	21,358	$	17,635	$	3,723	21.1	%
Electric Services	2,972		2,468		504		20.4	%
Contracted Services	2,341		1,912		429		22.4	%
Total administratvive and general expenses	$	26,671	$	22,015	$	4,656	21.1	%

For the six months ended June 30, 2007, administrative and general expenses increased by $4.2 million in water and electric services compared to the six months ended June 30, 2006 due primarily to: (i) an increase of $1.9 million in outside services relating primarily to additional tax, audit and legal services; (ii) the CPUC’s approval in April 2006 of Region II’s outside services memorandum account totaling approximately $709,000 (upon approval by the CPUC, these legal costs, which were incurred in prior periods, were reversed in the second quarter of 2006 and recorded as a regulatory asset; there was no such adjustment in 2007); (iii) an approximate $955,000 increase in labor costs due to higher wages largely related to Registrant’s annual performance-based salary review program; (iv) an agreement with the City of Folsom to dismiss all opposition to service the Westborough development; the agreement requires GSWC to pay the City of Folsom $550,000 with Aerojet reimbursing GSWC for 50% or $275,000 of the settlement payment; as of and for the three months ended June 30, 2007, GSWC has recorded an obligation to the City of Folsom for $550,000, an additional receivable of $275,000 from Aerojet for the amount to be reimbursed and a net charge to administrative and general expenses in the amount of $275,000 for its share of the settlement payment, and (v) a $422,000 increase in rent expense for office space and the telephone system.

There was also an increase of $429,000 in contracted services administrative and general expenses due primarily to the recovery in 2006 of transition period operating expenses of about $672,000 at the various military bases pursuant to the contracts with the U.S. government. There was no such recovery in 2007. This was offset by a decrease of $265,000 in outside legal and consulting services. A proposed decision and an alternate decision on GSWC’s Region II rate case were issued on July 24, 2007. The final decision may result in increased administrative and general expenses being allocated to contracted services. However, management is unable to predict the final outcome of this rate case.

Depreciation and Amortization

For the six months ended June 30, 2007, depreciation and amortization expense increased by 8.3% to $14.2 million compared to $13.1 million for the six months ended June 30, 2006 reflecting, among other things, the effects of closing approximately $73 million of additions to utility plant during 2006, depreciation on which began in January 2007. Registrant anticipates that depreciation expense will continue to increase due to Registrant’s on-going construction program at its regulated subsidiaries. Registrant believes that depreciation expense related to property additions approved by the appropriate regulatory agency will be recovered through water and electric rates.

Maintenance

For the six months ended June 30, 2007, maintenance expense increased by 28.1% to $7.3 million compared to $5.7 million for the six months ended June 30, 2006 due principally to an increase in required and emergency maintenance on GSWC’s wells and water supply sources.

Property and Other Taxes

For the six months ended June 30, 2007, property and other taxes increased by 14.8% to $5.8 million compared to $5.0 million for the six months ended June 30, 2006 reflecting additional property taxes resulting from higher assessed values, and increases in payroll taxes based on increased labor costs.

Construction Expenses

For the six months ended June 30, 2007, ASUS construction expenses increased to $17.3 million compared to $4.5 million for the same period in 2006 reflecting the costs incurred for the construction of various improvements, renewals and replacements to the existing water and wastewater infrastructures at Fort Bliss and at the military bases located in Virginia and Maryland pursuant to new contracts entered into in early 2006. The increase in construction activity resulted from amendments to the original 50-year contracts with the U.S. government which required the construction of additional improvements at the various military bases. As previously mentioned, ASUS entered into a $20.6 million project for the construction of certain improvements to the existing wastewater infrastructure located at Fort Bliss in El Paso, Texas. As a result of this new project, construction expenses increased by $15.2 million during the six months ended June 30, 2007. The project is scheduled to be completed by August 15, 2007. The increase in construction expenses because of this project was partially offset by other non-recurring construction projects that were completed in 2006.

Net Gain on Sale of Property

For the six months ended June 30, 2007, Registrant recorded a net pretax gain of $605,000 on the sale of property. This gain includes a settlement of $325,000 reached with the Los Angeles Unified School District in connection with the condemnation of a parcel of land for the purpose of constructing a high school. This parcel of land had not been used for a number of years in GSWC’s public utility operations. In addition, there was a gain of $238,000 related to the sale of property in the City of Claremont. There were no similar gains in the same period of 2006. Earnings and cash flows from these transactions are sporadic and may or may not continue in future periods.

Interest Expense

For the six months ended June 30, 2007, interest expense increased by 3.5% to $11.1 million compared to $10.7 million for the six months ended June 30, 2006 primarily reflecting higher interest rates. There was also an increase in short-term cash borrowings. Average bank loan balances outstanding under an AWR credit facility for the six months ended June 30, 2007 were approximately $33.9 million, as compared to an average of $30.0 million during the same period of 2006.

Interest Income

Interest income decreased by $624,000 for the six months ended June 30, 2007 due primarily to the initial recording in the first quarter of 2006 of interest accrued on the uncollected balance of the Aerojet litigation memorandum account authorized by the CPUC. As a result, the interest income accrued on the memorandum account decreased by $309,000 between the two periods. In addition, interest income decreased reflecting the receipt of interest amounting to $381,000 related to a $3.0 million Internal Revenue Service refund received in May 2006.

Income Tax Expense

For the six months ended June 30, 2007, income tax expense increased by 40.9% to $10.2 million compared to $7.3 million for the six months ended June 30, 2006 due, in part, to an increase in pretax income of 26.3%. In addition, the effective tax rate (“ETR”) for the six months ended June 30, 2007 was 41.7% as compared to a 37.3% ETR applicable to the six months ended June 30, 2006. The variance between the ETR and the statutory tax rate is primarily the result of differences between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements. Flow-through adjustments increase or decrease tax expense in one period, with an offsetting increase or decrease occurring in another period. In addition, during the third quarter of 2005, AWR filed an amended tax return for 2001 with the IRS which was subject to IRS and Congressional Joint Committee of Taxation (“JCT”) review. During the second quarter of 2006, the IRS and JCT reviews were completed and AWR received a refund in the amount of its original claim of $3.0 million, with interest. Consequently, in the second quarter of 2006, AWR recorded a tax benefit of $400,000, of which $351,000 was attributable to GSWC. The refund-claim benefit contributed 2.1 of the 4.4 percentage point ETR change referred to above.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are important to the portrayal of AWR’s financial condition, results of operations and cash flows, and require the most difficult, subjective or complex judgments of AWR’s management. The need to make estimates about the effect of items that are uncertain is what makes these judgments difficult, subjective and/or complex. Management makes subjective judgments about the accounting and regulatory treatment of many items. These judgments are based on AWR’s historical experience, terms of existing contracts, and AWR’s observance of trends in the industry, information provided by customers and information available from other outside sources, as appropriate. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies used in the preparation of the Registrant’s financial statements that we believe affect the more significant judgments and estimates used in the preparation of our consolidated financial statements presented in this report are described in “Management’s Discussion and Analysis of Financial Condition and Results of ~~Operations”~~Operation” included in our Annual Report on Form 10-K for the year ended December 31, ~~2005.~~2006. Except for the adoption of ~~SFAS~~FASB Interpretation No. ~~123(R),~~48, “~~Share-Based Payment”~~Accounting for Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”), there have been no material changes to the critical accounting policies. Effective January 1, ~~2006,~~2007, Registrant ~~began accounting for employee and directors stock-based compensation costs in accordance with SFAS No. 123(R) which requires the recognition~~adopted FIN 48. As a result of ~~compensation expense in the financial statements based on fair values~~adoption, Registrant increased retained earnings by approximately $181,000. As of the ~~stock awards. Registrant elected to adopt the modified prospective transition method as provided by SFAS No. 123(R)~~adop tion date and ~~accordingly, financial statement amounts for the prior periods presented in the Form 10-Q have not been restated to reflect the fair value method~~at June 30, 2007, Registrant’s total amount of ~~expensing share-based compensation. Registrant utilized the Black-Scholes option pricing model to estimate the fair value~~unrecognized tax benefits was $4.8 million, of ~~employee stock based compensation at the date of grant,~~ which requires the input of highly subjective assumptions, including expected volatility and expected life. Further, as required under SFAS No. 123(R), Registrant now estimates forfeitures for options granted, which are not expected to vest. The cumulative effect of adopting the change in estimating forfeitures is not material to Registrant’s financial statements for the nine months ended September 30, 2006. Changes in these inputs and assumptions can materially$118,000, if recognized, would affect the ~~measure~~effective tax rate. See Note 5 (Income Taxes) of estimated fair value of Registrants share-based compensation. The adoption of SFAS No. 123(R) did not have a material affect on Registrant’s consolidated financial position, results of operations and cash flows for the three and nine months ended September 30, 2006.Notes to Consolidated Financial Statements.

Liquidity and Capital Resources

AWR

AWR funds its operating expenses and pays dividends on its outstanding Common Shares primarily through dividends from GSWC. The ability of GSWC to pay dividends to AWR is restricted by California law. Under restrictions of the California tests, at June 30, 2007, approximately $109.4 million was available from the retained earnings of GSWC to pay dividends to AWR. GSWC is also subject to contractual restrictions on its ability to pay dividends. GSWC’s maximum ability to pay dividends is restricted by certain Note Agreements to the sum of $21 million plus 100% of consolidated net income from various dates plus the aggregate net cash proceeds received from capital stock offerings or other instruments convertible into capital stock from various dates. Under the most restrictive of the Note Agreements, $216.8 million was available to pay dividends to AWR as of June 30, 2007. GSWC is also prohibited from paying dividends if, after giving effect to the dividend, its total indebtedness to capitalization ratio (as defined) would be more than ..6667 to 1. Dividends in the amount of $8.6 million were paid to AWR by GSWC during each of the six months ended June 30, 2007 and 2006.

Net cash provided by operating activities was ~~$45.6~~$30.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to ~~$45.2~~$27.1 million for the same period ended ~~September~~June 30, ~~2005.~~2006. The ~~slight~~overall increase of ~~$0.4~~$3.2 million was primarily attributable to ~~higher net income after adjustments~~an increase in cash collected from the U.S. government on projects, primarily at Fort Bliss. Increases in 2007 operating revenues for ~~non-cash items, which~~GSWC due to increased ~~cash flows from operating activities by $7.5 million. This increase was~~rates and consumption were offset by higher operating costs paid during the period and the timing of cash receipts and billings from/to customers, resulting in an increase in receivables and unbilled revenue. The timing of cash receipts and disbursements related to other working capital items also affected the changes in ~~particular the decrease in~~net cash ~~flows from~~provided by operating activities of $5.1 million in income taxes receivable/payable resulting from the receipt of a $3.0 million federal tax refund received in May 2006 as compared to a $5.0 million federal tax refund in April 2005 as well as differences in the timing of remitting taxes which resulted in additional taxes paid during the nine months ended September 30, 2006 as compared to same period in 2005.

activities.

Net cash used in investing activities, which consists primarily of construction expenditures, decreased ~~slightly~~ to ~~$51.1~~$19.3 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to ~~$52.0~~$34.1 million for the ~~same period~~six months ended ~~September~~June 30, ~~2005.~~

2006. This decrease was primarily due to several water treatment, well and security construction projects that were completed in 2006 in GSWC’s Los Angeles County, Santa Maria and Barstow areas for which significant capital expenditures were incurred during the six months ended June 30, 2006. Also, in 2007, the capital expenditures were offset by $623,000 in proceeds received on the sale of property.

Net cash used in financing activities was ~~$1.0~~$9.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to ~~net~~ cash provided ~~by financing activities~~ of ~~$8.2~~$3.5 million for the same period in ~~2005.~~2006. The decrease of $12.5 million in net cash provided by financing activities was primarily caused byby: (i) a decrease of about ~~$3.6~~$2.7 million in advances for and contributions in aid of construction, ~~and~~net of refunds made; (ii) a ~~$12.0~~decrease of $1.3 million in the cash flows associated with the PWMT purchased power contracts; (iii) a net decrease of $4.5 million in notes payable to ~~banks. These decreases were offset by~~banks; (iv) a ~~$5.2~~$3.6 million ~~increase~~decrease in proceeds from stock option exercises and related tax benefit, and the issuance of Common Shares under the Registrant’s Common Share Purchase and Dividend Reinvestment Plan and 401(k) ~~Plan. Cash flows from financing activities also increased by $1.1 million from the tax benefits associated with the exercise~~Plan, and (v) an increase of ~~stock options.~~

~~Registrant has~~$450,000 in dividends paid ~~common dividends for 75 consecutive years. On October 27, 2006, AWR declared a~~ ~~regular quarterly dividend of $0.235 per Common Share. The dividend, totaling approximately $4.0 million, will be paid on December 1, 2006~~ to ~~common shareholders of record at the close of business on November 10, 2006.~~ shareholders.

During the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 and ~~2005,~~2006, AWR paid quarterly dividends to shareholders, totaling approximately ~~$11.4~~$8.0 million ~~or $0.675 per share~~ and ~~$11.3~~$7.6 million, ~~or $0.675 per share,~~ respectively. AWR’s ability to pay cash dividends on its Common Shares outstanding depends primarily upon cash flows from GSWC. AWR presently intends to continue paying quarterly cash dividends in ~~the~~ future years, on or about March 1, June 1, September 1 and December 1, subject to earnings and financial condition, regulatory requirements and such other factors as the Board of Directors may deem relevant.

In June 2005, AWR amended and restated its credit agreement which increased its borrowing limit under this facility to $85 million and extended the maturity date to June 2010. Up to $20 million of this facility may be used for letters of credit. As of ~~September~~June 30, ~~2006,~~2007, an aggregate of ~~$25.0~~$28.5 million in cash borrowings were included in current liabilities and approximately $11.2 million of letters of credit were outstanding under this facility. ~~In August 2006,~~Average bank loan balances outstanding under an AWR ~~filed~~credit facility for the six months ended June 30, 2007 were approximately $33.9 million, as compared to an average of $30.0 million during the same period of 2006. AWR also has a Registration Statement on file with the Securities and Exchange Commission for the sale from time to time of debt and equity securities. As of ~~September~~June 30, ~~2006, approximately~~2007, $156.5 million was available for issuance under this Registration Statement.

Registrant anticipates that interest costs will increase in future periods due to ~~potential market interest rate increases and~~ the need for additional external capital to fund its construction ~~program.~~ program, and potential market interest rate increases. Registrant believes that costs associated with capital used to fund construction at its regulated subsidiaries will continue to be recovered in water and electric rates charged to customers.

In ~~December of 2005,~~ February 2007, Standard & Poor’s (“S&P&P”) revised AWR’s rating outlook from stable to positive and affirmed the A- ~~negative to A- stable.~~ rating. S&P debt ratings range from AAA (highest rating possible) to D (obligation is in default). Securities ratings are not recommendations to buy, sell or hold a security and are subject to change or withdrawal at any time by the rating agency. ~~Registrant believes that costs associated with capital used to fund construction at its regulated subsidiaries will continue to be recovered in water and electric rates charged to customers.~~

GSWC

Net cash provided by operating activities was ~~$47.7~~$26.5 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to ~~$47.2~~$31.7 million for the same period in ~~2005.~~2006. The ~~slight increase~~decrease of ~~$0.5~~$5.2 million was primarily attributable to higher net income after adjustments for non-cash items, which increased cash flows from operating activities by approximately $6.5 million. This increase was offset by higher general rate case costs, lower tax refunds received in 2006 as compared to the same period in 2005 as well as differences in the timing of remitting taxes, and the timing of cash receipts and ~~disbursements related~~ billings from/to ~~other working capital items.~~

customers resulting in an increase in receivables and unbilled revenue. Increases in 2007 water revenues mainly due to an increase in cash collected from GSWC’s customers resulting from increased rates were offset by higher operating costs paid during the period.

Net cash used in investing activities ~~increased slightly~~decreased to ~~$49.5~~$18.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to ~~$48.8~~$33.1 million for the same period in ~~2005.~~

2006. This decrease was primarily due to several water treatment, well and security construction projects that were completed in 2006 in GSWC’s Los Angeles County, Santa Maria and Barstow areas for which significant capital expenditures were incurred in the six months ended June 30, 2006. GSWC anticipates that its capital expenditures for calendar 2007 will approximate $60 million. Also, in 2007, the capital expenditures were offset by $623,000 proceeds received on the sale of property.

Net cash used by financing activities was ~~$4.4~~$7.0 million for the ~~nine~~six months ended ~~September~~June 30, ~~2006~~2007 as compared to $1.1 million for the same period in 2006. The decrease in net cash provided by financing activities was primarily caused by: (i) a decrease of ~~$3.0~~about $2.4 million ~~for the same period~~ in ~~2005. The decrease reflects a $2.9 million decrease in the receipt of~~ advances for and contributions in aid of construction, ~~and~~net of refunds; (ii) a ~~net~~ decrease of ~~$4.8~~$1.3 million in ~~intercompany~~the cash flows associated from the PWMT purchased power contracts; (iii) a $776,000 decrease in proceeds from stock option exercises and the related tax benefit, and (iv) a $1.5 million decrease in the net change in inter-company borrowings.

GSWC funds the majority of its operating expenses, payments on its debt, and dividends on its outstanding common shares through internal sources. Internal sources of cash flow are provided primarily by retention of a portion of earnings from operating activities. Internal cash generation is influenced by factors such as weather patterns, environmental regulation, litigation, changes in supply costs and regulatory decisions affecting GSWC’s ability to recover these supply costs, and the timing of rate relief.

GSWC also relies on external sources, including equity investments and short-term borrowings from AWR, long-term debt, ~~contributions in aid of construction,~~contributions-in-aid-of-construction, advances for construction and install-and-convey advances to fund the majority of its construction expenditures. GSWC has a Registration Statement on file with the SEC for issuance from time to time, of up to ~~$100.0~~$100 million of debt securities. As of ~~September~~June 30, ~~2006, $50.0~~2007, $50 million remained for issuance under this Registration ~~Statement, subject to regulatory approval from the CPUC for issuance of additional debt.~~

On October 11, 2005, CoBank, ACB purchased a 5.87% Senior Note due December 20, 2028 in the aggregate principal amount of $40.0 million from GSWC. The proceeds were used to pay down GSWC’s intercompany short-term borrowings.

Statement.

In February 2005, Moody’s Investor Services (“Moody’s”) changed the rating outlook for $175 million of senior unsecured debt at GSWC from A2 negative to A2 stable. Moody’s debt ratings range from Aaa (best quality) to C (lowest quality). ~~In December 2005,~~ S&P changed its debt rating for GSWC from A- ~~negative~~stable to A- ~~stable.~~positive in February 2007. Securities ratings are not recommendations to buy, sell or hold a security and are subject to change or withdrawal at any time by the rating agency.

CCWC

CCWC funds the majority of its operating expenses, payments on its debt and dividends, if any, through internal operating sources or short-term borrowings from AWR. CCWC also relies on external sources, including long-term debt, ~~contributions in aid of construction,~~contributions-in-aid-of-construction, advances for construction and install-and-convey advances, to fund the majority of its construction expenditures.

ASUS

ASUS funds its operating expenses primarily through ~~management~~contracted services fees from the U.S. government and investments by or loans from AWR. ASUS, in turn, provides funding to its subsidiaries.

Contractual Obligations and Other Commitments

Registrant has various contractual obligations which are recorded as liabilities in the consolidated financial statements. Other items, such as certain purchase commitments and operating leases are not recognized as liabilities in the consolidated financial statements, but are required to be disclosed. During the first quarter of 2007, GSWC entered into a new operating lease for a facility located in San Dimas, California that will house certain departments. The term of the lease is for seven years. The minimum base rent will total approximately $2.0 million over the seven years.

In addition, during the second quarter of 2007, GSWC finalized a settlement with the South Coast Air Quality Management District that approved a Supplemental Environmental Program (“SEP”) which obligates GSWC to install and operate a granular activated carbon filters at one of GSWC’s groundwater treatment facilities in Region II. It is estimated that the total capital cost of the SEP will be approximately $1.8 million with a required estimated completion date of April 30, 2009. Upon timely performance of all its obligations under the SEP, GSWC shall be deemed released from any and all claims or penalties arising from the Notice of Violation. Management believes that GSWC will be able to timely fulfill its obligations under the SEP and no further penalties are expected to be assessed. Management also believes it is probable that the capital costs of the SEP will be approved in rate base by the CPUC.

In addition to contractual maturities, Registrant has certain debt instruments that contain annual sinking fund or other principal payments. Registrant believes that it will be able to refinance debt instruments at their maturity through public issuance, or private placement, of debt or equity. Annual principal and interest payments are generally made from cash flow from operations.

There have been no other material changes to AWR’s contractual obligations and other commitments since December 31, ~~2005.~~2006. See ~~“Managements’~~“Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Contractual Obligations, Commitments and ~~Other Commitments”~~Off Balance Sheet Arrangements” section of the Registrant’s Form 10-K for the year-ended December 31, ~~2005~~2006 for a detailed discussion of contractual obligations and other commitments.

Regulatory Matters

GSWC is subject to regulation by the CPUC, which has broad powers with respect to service and facilities, rates, classification of accounts, valuation of properties, the purchase, disposition and mortgaging of properties necessary or useful in rendering public utility service, the issuance of securities, the granting of certificates of public convenience and necessity as to the extension of services and facilities and various other matters. CCWC is subject to regulation by the ACC.

Rates that GSWC and CCWC are authorized to charge are determined by the CPUC and the ACC, respectively, in general rate cases and are derived using rate base, cost of service and cost of capital, as projected for a future test year in California and using an historical test year, as adjusted, in Arizona. Rates charged to customers vary according to customer class and rate jurisdiction and are generally set at levels allowing for recovery of prudently incurred costs, including a fair return on rate base. Rate base generally consists of the original cost of utility plant in service, plus certain other assets, such as working capital and inventory, less accumulated depreciation on utility plant in service, deferred income tax liabilities and certain other deductions.

GSWC is required to file a general rate case (“GRC”) application every three years for each of its water rate-making areas according to a schedule established by the CPUC. ~~GRCs~~GRC’s typically include an increase in year one and ~~step increases~~rate changes for the second and third years. Rates are based on a forecast of expenses and capital ~~investments. GRCs~~costs, and GRC’s have a typical regulatory processing time of one year. According to the new rate case plan just adopted in May 2007, GSWC rate cases, starting with the filing in July 2008, will have an 18 month processing schedule. In California, rates may be increased by offsets for certain expense increases, including but not limited to supply cost offset and balancing account amortization, and advice letter filings related to certain plant additions and other operating cost increases. Offset rate increases and advice letter filings typically have a two to four month regulatory lag.

Neither the operations nor rates of AWR and ASUS are directly regulated by the CPUC or the ACC. The CPUC and the ACC do however regulate certain transactions between GSWC and ~~CCWC and their~~its affiliates.

The amounts charged by the subsidiaries of ASUS for water and wastewater services at military bases are based upon the terms of 50-year contracts with the U.S. ~~Government. Prices~~government and supplemental fixed price construction contracts. The operations and maintenance contracts provide that prices will be ~~re-determined~~redetermined at the end of two years after commencement of operations at each military base and ~~generally~~ every three years thereafter. However, ASUS has experienced delays in the redetermination of prices at Fort Bliss following completion of the first two years of operation in October 2006. In addition, prices may be equitably adjusted for changes in law, wage and benefit increases and other circumstances. The construction projects are fixed price. Prices may be changed through the execution of change orders if significant unforeseen issues arise during the construction process.

Recent Changes in Rates

On January 12, 2006, the CPUC approved GSWC’s Region III rate case. The authorized rate increase for 2006 was made effective January 19, 2006 and ~~is expected to provide~~provided GSWC additional annual revenue approximating $5.4 million in 2006 based on a return on equity of 9.8%. ~~For~~The CPUC also approved the second year increases for Region III in an estimated amount of approximately $2.3 million, effective January 1, 2007. In connection with this GRC, GSWC also filed an Application for Rehearing of the Region III GRC. GSWC was granted limited re-hearing of that decision and was ordered to file a report. GSWC filed that report in January 2007. According to GSWC’s calculations, the adopted revenues in 2006 should have been increased by approximately $326,000, and the ~~third years of this three-year GRC,~~rates in 2007 should be approximately $285,000 higher than adopted. DRA has submitted a response to our report and now the CPUC’s water division will make a final ruling.

In October 2006, GSWC filed advice letters with the CPUC ~~approved an annual increase~~for the third year increases (the attrition increases) for Region I of approximately ~~$1.9~~$0.6 million, which were approved and ~~$2.3 million, respectively, subject to certain earnings tests.~~

became effective on January 1, 2007.

On November 14, 2005, GSWC filed advice letters with the CPUC for step increases for Region I in an amount of approximately $0.6 million and an attrition increase of approximately $5.2 million for Region II, both of which were approved and became effective on January 1, 2006.

Pending Rate Changes in ~~2006~~2007

In January 2007, GSWC filed an application with the CPUC for rate increases in Region I. In the filing, GSWC requested rate increases which are expected to generate approximately $10.6 million in annual revenues starting in 2008, with additional increases of $0.5 million in 2009 and $1.0 million in 2010. A decision on this application is expected in late 2007.

In February 2006, GSWC filed an application with the CPUC for rate increases in Region II and to cover general office expenses at the Corporate Headquarters. InDue to delays on this application, the ~~filing, GSWC requested~~CPUC approved an interim rate increase, subject to refund, totaling $1.2 million that became effective January 1, 2007. A proposed decision issued by the Administrative Law Judge on July 24, 2007 recommends rate increases ~~which are expected to generate approximately $14.9~~of $6.3 million, ~~in annual revenues starting in~~$4.5 million and $4.7 million, respectively, for 2007, ~~with additional~~2008 and 2009. An alternate decision was also issued on the same day recommending GSWC rate increases of ~~$4.7~~$6.7 million, in$4.6 million and $4.3 million, respectively, for 2007, 2008, and ~~$6.9~~2009. The amounts ultimately decided by the CPUC will be retroactive to January 1, 2007. Once the CPUC issues its final decision, GSWC will implement a temporary surcharge to recover the revenue difference between the interim rates implemented on January 1, 2007 and the final rates authorized by the CPUC for the period from January 1 to the implementation of the new final rates. The proposed decisions also changes the revenue requirements related to the adopted rates for the supply cost memorandum accounts that will also be retroactive to January 1, 2007. Accordingly, GSWC will re-calculate, among other items, the amount recorded in Region II’s supply cost memorandum account based on the new rates. For the six months ended June 30, 2007, an amount of $1.3 million ~~in 2009.~~was recorded as an under-collection of supply costs which positively impacted earnings and increased regulatory assets for the period. If either decision is approved, we expect most of the under-collected amount as recorded to be reversed, partially offsetting the retroactive revenues upon a final decision. A final decision on this application is expected in ~~late 2006.~~the third quarter of this year. The final decision may also result in increased administrative and general expenses being allocated to ASUS, a subsidiary of AWR. Management is unable to predict the ~~ultimate~~final outcome of this rate case.

The application for rate increases to cover general office expenses at the Corporate Headquarters was previously filed in 2005 with the Region III rate case and was deferred for one year to be combined with the Region II case as discussed. GSWC and DRA agreed that when GSWC receives rate increases for general office expenses, still pending, that the increases could be applied immediately to Region III. Region III received an interim annual rate increase of $135,000 effective January 1, 2007 to cover general office expenses. The proposed decision issued by the Administrative Law Judge on July 24, 2007 also recommends rate increases of $3.0 million for 2007 to recover the rate increases for general office expenses allocated to Region III. The amounts ultimately decided by the CPUC will also be retroactive to January 1, 2007. Similar to Region II, once the CPUC issues its final decision, GSWC will implement a temporary surcharge to recover the revenue difference between the interim rates implemented on January 1, 2007 and the final rates authorized by the CPUC for the period from January 1 to the implementation of the new final rates. A final decision is expected in the third quarter of this year.

CCWC plans to file its next general rate case with the ACC during the third quarter of 2007, for its water system in Fountain Hills, Arizona. The processing of this case is expected to take approximately 18 months. CCWC filed its last rate case with the ACC in August 2004. In September 2005, the ACC approved a rate increase for CCWC. The rate increase was effective on October 1, 2005 and generated additional annual revenues of approximately $1.1 million, an 18% increase over 2004 revenues. During this GRC, CCWC sought to have its rates determined using a fair value rate base. The ACC elected not to use fair value in setting the rates. CCWC appealed ACC’s use of only original cost less depreciation rate base to determine the revenue requirement. Because CCWC’s fair value rate base was higher, the use of original cost exclusively to determine the revenue requirement deprived CCWC of a substantial amount of operating income. Following the approval of this rate case, CCWC filed an appeal with the Arizona Court of Appeals. On February 13, 2007, the Arizona Court of Appeals upheld CCWC’s challenge to the ACC’s failure to use fair value rate base in the determination of operating income. The process the ACC utilized resulted in a lower revenue requirement and was found to be in violation of the Arizona Constitution. However, the Court also held that ACC’s determination of the return on equity, while not well-explained, was made based on the evidence, was a matter within the agency’s substantial discretion and was lawful. The ACC sought and received an extension of the deadline to seek review by the Arizona Supreme Court until May 14, 2007. If the ACC seeks and obtains review, a final decision will take approximately 9-12 months. If review is not sought or is denied, the matter will return to the ACC on remand for modification of the original ACC decision consistent with the decision of the Court of Appeals. Remand proceedings would be expected to take at least another 6 months. The matter is officially on remand back to the ACC for modification of the decision in accordance with the Court’s ruling.

~~Other Regulatory Matters~~New Service Territory Application

~~New Service Territiory Application~~

GSWC has entered into a water transfer agreement with Natomas for 30,000 acre-feet of water to be used exclusively by GSWC to serve Sutter County, California. GSWC filed for a Certificate of Public Convenience and Necessity with the CPUC on May 31, 2006 to provide retail water service in a portion of Sutter County, California. CPUC review of the application is pending, subject to completion of an environmental assessment.

~~Finance Application~~

~~In October of 2006, GSWC filed with the CPUC an application requesting authorization for it to~~ issue, sell and deliver by public offering or private placement securities not exceeding $200.0 million in aggregate offering amount, said securities consisting of, but not limited to, common shares and preferred shares, bonds, debentures, medium-term notes, loans and tax exempt debt. GSWC will use the net proceeds to first pay down all or a portion of its then outstanding short-term debt, fund its construction expenditures, and acquire utility properties.

~~State-Wide Rate Application~~

~~In September~~On April 7, 2006, GSWC filed an ~~application~~advice letter with the CPUC to incorporate the Westborough development in Sacramento county into the Rancho Cordova service area and to provide water service to that new development. The City of Folsom filed a protest of GSWC’s advice letter on April 27, 2006. On January 30, 2007, the CPUC rejected the advice letter without prejudice, and invited GSWC to re-file the advice letter once the City of Folsom protest was resolved, or file an application for ~~authority to implement changes in certain ratemaking mechanisms and reallocation~~CPUC approval of ~~rates within its entire~~the service territory ~~in California. The application requests authority~~expansion. In June 2007, GSWC signed an agreement with the City of Folsom and the City agreed not to contest GSWC’s providing water service to Westborough and relinquished all claims concerning GSWC’s providing water service to the area. As compensation to the City of Folsom to resolve its claim, GSWC has agreed to pay the City of Folsom $550,000. Aerojet will reimburse GSWC for 50% or $275,000 of the settlement payment. As of and for the six months ended June 30, 2007, GSWC has recorded an obligation of $550,000 to the City of Folsom, an additional receivable of $275,000 from ~~the CPUC to implement certain rate setting mechanisms, including the following:~~

·~~Establishment of a Water Quality Memorandum Account or Water Quality Compliance Offset Account to, among other things, permit full recovery of costs relating to water quality compliance.~~

·~~Measures to encourage and support water supply planning and investment.~~

·~~Changes to existing GSWC water shortage or emergency procedures and mandatory conservation and rationing penalties.~~

·~~Establishment of an Infrastructure System Replacement Surcharge to encourage and support infrastructure replacement needs.~~

·~~To eliminate disincentives to conserve water and eliminate fluctuations in revenues due to weather, the establishment of a Water Revenue Adjustment Mechanism to decouple sales from revenues.~~

·~~Consolidation of GSWC’s existing offset balancing accounts, allowance~~Aerojet for ~~full cost recovery of supply offset costs, and elimination of a related earnings test.~~

·~~Establishment of an increasing block rate structure to promote water conservation and rates that more accurately reflect the value of service.~~

·~~Consolidation of GSWC’s existing ratemaking districts into a state-wide, single tariff price rate structure to encourage and support long-term rate stability and affordability.~~

·~~Measures to provide appropriate incentives and procedures to carry out the Commission's objective of consolidation of non-viable water companies.~~

~~GSWC’s overall revenues are not intended to increase or decrease as a result of this Application.~~

~~Memorandum Supply Cost Accounts~~

In a CPUC decision issued on June 19, 2003 related to memorandum supply cost accounts, all water utilities regulated by the CPUC were required to seek review of under- and over- collections by filing an advice letter annually. In addition, the utility’s recovery of such expenses was reduced by the amount ~~exceeding the authorized rate-of return (earnings test). On April 13, 2006, the CPUC issued~~to be reimbursed, and a ~~decision~~net charge to ~~remove these requirements. Pursuant to this order, GSWC recognized a cumulative under-collection of approximately $636,000 to the supply cost memorandum account provisions~~expense in the ~~second quarter~~amount of ~~2006~~$275,000 for ~~the under-collected balances not recognized at March 31, 2006 and began recording under- and over- collections on a monthly basis thereafter.~~

~~GSWC intends to file for recovery~~GSWC’s share of the net under-collected supply costs with the CPUC in 2006 or in subsequent general rate case proceedings. GSWC filed advice letters in October 2006 for a $1.7 million increase in supply cost and recovery of $2.0 million of previously under-collected supply cost for GSWC’s Region I, for a total revenue increase of $3.7 million. Management believes that it is probable that the CPUC will permit GSWC to recover in rates the net under-collections in supply costs.settlement payment.

Santa Maria Groundwater Basin Adjudication

In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit seeks an adjudication of the Santa Maria Groundwater Basin. A settlement of the lawsuit has been reached, subject to CPUC approval. The settlement, among other things, if approved, ~~by the CPUC,~~ would preserve GSWC’s historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the ~~Santa Maria~~ Basin. There are also a ~~small number of~~few nonsettling parties, and the case is going forward as to ~~their claims.~~these parties. The stipulation, if approved, would preserve GSWC’s position with the settling parties independent of the outcome of the case as it moves forward with the nonsettling parties. ~~GSWC can not predict the outcome of the case as to the nonsettling parties.~~

~~As of September~~From 1997 through June 30, ~~2006,~~2007, GSWC has incurred costs of approximately ~~$6.3~~$6.5 million in defending its groundwater rights in the Santa Maria Basin, including legal and expert witness fees, which ~~have~~had been recorded in ~~Utility Plant~~utility plant for rate recovery. In February 2006, GSWC filed an application with the CPUC for recovery of $5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005. In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates authorizing recovery of the $5.5 million requested in GSWC’s application. The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit. In May 2007, the CPUC issued a decision that approved the settlement with the Division of Ratepayer Advocates. Pursuant to the decision, GSWC was ordered to place in rate base $2.7 million of the $5.5 million of previously incurred litigation costs in the Santa Maria groundwater basin adjudication. GSWC was also ordered to amortize, with interest, the remaining $2.8 million of the $5.5 million in rates over a ten-year period. This amount has been transferred into a separate memorandum account included within regulatory assets and a surcharge has been implemented in the third quarter for recovery of these costs. All litigation costs ~~with~~that have been incurred after December 31, 2005, totaling approximately $1.1 million, have also been transferred from rate base to a separate new memorandum account, subject to a reasonableness review by the ~~CPUC.~~CPUC in a subsequent phase of this proceeding or in a new proceeding. Management believes that these additional costs will be approved and the recovery of these costs through rates is probable.

Other Regulatory Matters

On April 16, 2007, GSWC’s Bear Valley Electric division filed a compliance report with the CPUC regarding its purchases of energy from renewable energy resources. The filing included an indication that Bear Valley Electric had not achieved interim target purchase levels of renewable energy resources and thus, on its face, might be subject to a possible penalty. GSWC has formally contested the potential penalty reflected in the compliance report. Management does not believe it is probable that GSWC will ultimately be assessed any penalty (which the form indicates would be as high as $592,000), and accordingly, no provision for loss has been recorded in the financial statements. The CPUC is considering the future timing and applicability of renewable energy resource requirements as they apply to smaller energy utilities like Bear Valley Electric.

Except for the items discussed above, there have been no other material changes to AWR’s other regulatory matters since December 31, 2006. See “Managements’ Discussion and Analysis of Financial Condition and Results of Operation—Regulatory Matters” section of the Registrant’s Form 10-K for the year-ended December 31, 2006 for a detailed discussion of other regulatory matters. Other regulatory matters included: New Service Territory Application, Finance Application, State-Wide Rate Application, Memorandum Supply Cost Accounts, Low Income Balancing Accounts, Santa Maria Groundwater Basin Adjudication, Refund of Water Rights Lease Revenues,

In 1994, GSWC entered into a contract to lease to the City of Folsom 5,000 acre-feet per year of water rights from the American River. GSWC included all associated revenues in a nonoperating income account. In a decision issued on March 16, 2004, the CPUC ordered GSWC to refund 70 percent of the total amount of lease revenues received since 1994, plus interest, to customers. On April 13, 2006, the CPUC authorized GSWC to reinvest all lease revenues received from the City of Folsom since January, 2004, inclusive of the balances in the regulatory liability accounts, in water system infrastructure and to include such investments in the rate base upon which GSWC earns a rate of return. As a result, GSWC transferred about $2.3 million of water rights lease revenues received from the City of Folsom in 2004 and 2005 from the regulatory liability account into income and recorded an additional pretax income of $311,000 and $909,000 reflecting the three and nine months ended September 30, 2006, respectively, water rights lease revenues.

Recovery of ~~cost~~Cost of ~~tree removal~~Tree Removal and ~~mitigation~~Mitigation for Bark Beetle Infestation,

~~In a Proclamation issued on March 7, 2003 former Governor Gray Davis declared a State of Emergency with respect to a severe fire risk caused by dead~~ and dying trees plagued by drought and a major bark beetle infestation in the counties of Riverside, San Bernardino, and San Diego. On April 3, 2003, the CPUC issued an order requiring Southern California Edison Company, San Diego Gas & Electric Company and Bear Valley Electric to take all reasonable and necessary actions to mitigate the increased fire hazard by removing dead, dying or diseased trees from falling or contacting distribution and transmission lines within their rights of way and to ensure compliance with existing vegetation clearance statutes and regulations. The utilities, including Bear Valley Electric, are authorized to make annual advice letter filings requesting recovery of the costs of complying with this order. On April 13, 2006, the CPUC approved GSWC’s request for the amortization of about $351,000 for costs incurred through June 30, 2005 plus interest in the Bark Beetle Catastrophic Event Memorandum Account. At September 30, 2006, approximately $596,000, which includes the $351,000, has been incurred and is recorded as a regulatory asset on the balance sheets.

Outside Services Memorandum ~~Account~~Account.

In April 2006, the CPUC approved GSWC’s Region II advice letter which requested recovery of the expenses recorded in the Outside Services Memorandum Account (“OSMA”), as of December 31, 2005. The decision authorized the recovery of this memorandum account to record costs incurred while working with the Water Replenishment District (“WRD”), WRD Technical Advisory Committee, Central and West Basin Municipal Water Districts, Metropolitan Water District, West Basin Water Association and Central Basin Water Association on water supply reliability and rate-related issues in Region II. GSWC incurred approximately $374,000 and $345,000 in the OSMA in 2004 and 2005, respectively. GSWC sought and received authorization to amortize the cumulative total of approximately $719,000 over a 12-month period through customer rates. Accordingly, GSWC recorded a regulatory asset for this amount in April of 2006 with an offset and reduction to outside legal services during the second quarter of 2006. A surcharge went into effect in April of 2006 and accordingly, GSWC began amortizing the OSMA account. Revenues of approximately $200,000 and $304,000 were received from customers during the three and nine months ended September 30, 2006, respectively, relating to this surcharge. The surcharge will be in effect over a 12-month period.

Environmental Matters

~~Registrant’s~~AWR’s subsidiaries are subject to increasingly stringent environmental regulations including the 1996 amendments to the Federal Safe Drinking Water Act; enhanced surface water treatment rules; regulation of disinfectant/disinfection by-products; the long-term enhanced surface water treatment rules; ~~ground water~~groundwater treatment ~~rule;~~rules; contaminant regulation of radon and arsenic; and unregulated contaminants monitoring ~~rule.~~

~~Additional information on these requirements and other significant environmental matters are described in~~ ~~“Management’s Discussion and Analysis of~~~~Financial Condition and Results of Operation”~~ ~~included in our 2005 Annual Report on Form 10-K for the year ended December 31, 2005.~~

rules.

~~penalties which~~ SEP prepared by GSWC has been informed might be assessed, could likely be reduced or avoided through the settlement of this matter based on the possible funding of a SEP. In October 2006, GSWC submitted initial capital cost estimates to the AQMD for theinvolves installation and operation of granular activated carbon filters at the ~~facility as a proposed SEP which would~~facility. Installation of the filters will eliminate the use of the air stripping ~~equipment. Initial discussions indicate that~~equipment at the facilities involved with the NOV and thus improve air quality. The AQMD ~~staff has favorably received GSWC’s proposal~~accepted the SEP and ~~if approved, it could result in the imposition of only~~assessed a nominal ~~monetary penalty. However, until further notice~~penalty of $25,000. During the six months ended June 30, 2007, GSWC paid the penalty of $25,000 and agreed to perform its obligations under the SEP. It is estimated that the total capital cost of the SEP will be approximately $1.8 million with a required estimated completion date of April 30, 2009. Upon timely performance of all its obligations under the SEP, GSWC shall be deemed released from any and all claims or penalties arising from the ~~AQMD on~~NOV. Management believes that GSWC will be able to timely fulfill its obligations under the ~~proposed~~ SEP ~~GSWC cannot reasonably estimate the amount of~~and no further penalties ~~which might~~are expected to be assessed. Management also believes it is probable that the capital costs of the SEP will be approved in rate base by the CPUC.

Additional information on these requirements and other significant environmental matters is described in “Management’s Discussion and Analysis ofFinancial Condition and Results of Operation” included in Registrant’s 2006 Annual Report on Form 10-K for the year ended December 31, 2006. There have been no other material changes in any of the environmental matters discussed in the Form 10-K since December 31, ~~2005.~~2006.

Water Supply

Water supply and revenues are significantly affected, both in the short-run and long-run, by changes in weather conditions. Both California and Arizona have been experiencing lower-than-normal precipitation. Severe drought conditions continue to grip California and Arizona. Over the last 12 months from July 2006 to June 2007, Los Angeles, State of California as a whole and Phoenix have experienced the 1st , 5th, and 20th driest years on record, respectively. Phoenix had the 3rd driest year on record in 2006.

Even with the low precipitation, California reservoirs at the end of June 2007 were at 88% of average level for this time of year resulting from the above average precipitation in 2005 and 2006. The Colorado River storage (Lake Powell and Lake Mead) was at 65% of average. Inflow into Lake Powell for the water year has been 72% of average which is slightly better than the total season prediction of 70% of average. The Salt River system is 11% above average and the Verde River system is only at 65% of average. These are the two closest water storage systems to Chaparral City Water Company.

Over the next three months, the National Weather Service’s Climate Prediction Center (“CPC”) expects the severe drought conditions to continue or worsen in California while Arizona should have some relief due to the summer thunderstorm season. According to the CPC outlook for the rest of the year, after reviewing several weather forecasting models, it is reasonable to expect either a slower evolution towards La Nina conditions or the continuation of ENSO-neutral conditions. Either way, above average rainfall is not in the forecast for the rest of 2007.

Registrant serves its customers’ demands for water in naturally arid parts of the country. Recognizing this, Registrant encourages conservation of water and energy resources. Registrant also manages its portfolio of water resources with the goal of reliably and affordably meeting its customers’ demand for high quality water service.

The ~~adequacy~~productivity of ~~Registrant’s~~the water supplies ~~vary~~managed by Registrant varies from year to year depending upon a variety of factors, including the amount and location of rainfall, the availability of imported water from the Colorado River ~~water~~ and ~~imported water~~ from northern California, the amount of water stored in reservoirs and groundwater basins accessible by the Registrant, the amount of water used by ~~Registrant’s~~our customers and others, evolving challenges to water quality, and a variety of legal limitations on use.

GSWC and CCWC own facilities and water rights that allow us to produce locally available groundwater to serve nearly half of our customers’ demand in an average year. Population growth in the regions we serve and increases in the amount of ~~water~~groundwater used have resulted in both cooperative and judicially-enforced regimes for managing groundwater basins for long-term sustainability. Registrant actively participates in efforts to protect groundwater basins from over-use and from contamination and to protect its water rights. In some periods, such efforts require reductions in groundwater pumping and increased ~~limitations~~reliance on ~~use in order to prevent over-drafting~~alternative water resources. However, because sustainable groundwater only meets a portion of ~~groundwater basins. The importation~~customer demand, Registrant also manages a portfolio of water supply arrangements including purchasing water from water supply wholesalers to insure the reliability, quality and affordability of water.

State Water Project

To augment local groundwater, Registrant relies on supplemental supplies imported from distant watersheds either naturally through river systems or artificially through integrated systems of reservoirs and conveyance facilities. GSWC contracts, either directly or through intermediate wholesalers, for imported supplemental water supplies with a variety of governmental agencies which manage water projects, including the California Department of Water Resources (State Water Project). GSWC contracts for supplemental water supplies from the ~~Colorado River, one of GSWC’s important sources of supply, is expected to decrease in future years due to the requirements of the Central Arizona~~State Water Project (“~~CAP”~~SWP”) ~~and other limitations on the amount~~through several member agencies of ~~water that~~ the Metropolitan Water District of Southern California (“MWD”) ~~is entitled~~which act as sub-wholesalers. To receive such supplies, Registrant maintains physical connections to ~~take from~~ the ~~Colorado River.~~ MWD ~~is expected~~imported water distribution system throughout the six-county area encompassing most of metropolitan southern California. In addition to ~~increase~~the more generalized challenges facing all Western water projects, the SWP faces particular challenges to the operation of its ~~efforts~~pumping plant located at the southern end of the San Joaquin/Sacramento River Delta which naturally drains to ~~secure additional supplies from conservation, desalination~~the Pacific Ocean through San Francisco Bay. Because of its diversion of water for export to central, coastal and ~~water exchanges with the agricultural water users.~~

~~CCWC obtains its water supply from operating wells and from the Colorado River~~southern California through the CAP. CCWC’s water supply may be subject to interruption or reduction if there is an interruption or reduction in CAP water. In addition, CCWC’s ability to provide water service to new real estate developments is dependent upon its ability to meetpumping plant, the ~~requirements of the Arizona Department of Water Resources regarding its assured water supply account.~~

~~The U.S. Government is responsible for supplying water on military bases under the terms of contracts of the subsidiaries of ASUS with the U.S. Government.~~

~~New Accounting Pronouncements~~

~~Registrant~~SWP is subject to ~~newly issued~~a variety of operating limitations and permitting processes designed, collectively, to balance the need for water exports with the need to restore and protect the Bay/Delta environment. In the first quarter of 2007, the SWP received a court order to comply with certain endangered species permitting requirements or cease pumping operations. The SWP is currently attempting to comply with the court order. However, because SWP operations in the Delta threatened fish protected under state and federal Endangered Species Acts, pumping operations were severely curtailed at the end of May and beginning of June. Adequate levels of stored water south of the Delta as well as ~~changes~~locally available groundwater have prevented immediate curtailments of water for distribution to GSWC customers. Significant additional restrictions on SWP operations, however, would pose a substantial challenge to the water use patterns throughout California. Registrant is monitoring developments and working with MWD and its member agencies to safeguard the supply and evaluate potential emergency responses to prolonged reduction in ~~existing requirements issued~~SWP deliveries.

Conservation

In light of supply variability and the general scarcity and value of water supplies available in the Western U.S., Registrant promotes active conservation by all customer classes. However, customer conservation can result in lower water sales than would otherwise occur, and lower volumes of water sold can have a negative impact on Registrant’s earnings. In order to remedy the financial disincentive associated with water conservation, Registrant has worked collaboratively with the CPUC and the ACC to address rate structure issues. Currently, Registrant is actively participating in the CPUC’s Conservation Order Initiating Investigation (“OII”). Through the Conservation OII, the CPUC proposes to eliminate disincentives to promote conservation. Among other potential solutions being considered by the CPUC are revisions to tariff structures to create increasing rate blocks, so that greater consumption will be tempered by higher unit pricing to consumers, and sales adjustment mechanisms, to essentially de-couple volume of sales from Registrant’s revenue.

Additional information on water supply issues are described in “Management’s Discussion and Analysis ofFinancial ~~Accounting Standards Board. See Note 1~~Condition and Results of Operation” included in our 2006 Annual Report on Form 10-K for the ~~Notes to Consolidated Financial Statements~~ ~~for disclosure on new accounting pronouncements.~~year ended December 31, 2006.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Registrant is exposed to certain market risks, including fluctuations in interest rates, and commodity price risk primarily relating to changes in the market price of electricity. Market risk is the potential loss arising from adverse changes in prevailing market rates and prices. There have been no material changes regarding Registrant’s market risk position from the information provided in its Annual Report on Form 10-K for the year ended December 31, ~~2005.~~2006. The quantitative and qualitative disclosures about market risk are discussed in Item 7A-Quantitative and Qualitative Disclosures About Market Risk, contained in Registrant’s Annual Report on Form 10-K.

Item 4. Controls and Procedures

(a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities and Exchange Act of 1934 (the “Exchange Act”), we have carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (“CEO”) and our Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the fiscal quarter covered by this report, of the design and operation of our “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) promulgated by the Securities and Exchange Commission (SEC) under the Exchange Act. Based upon that evaluation, the CEO and the CFO concluded that disclosure controls and procedures, as of the end of such fiscal quarter, were adequate and effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls over Financial Reporting

There has been no change in our internal control over financial reporting during the quarter ended ~~September~~June 30, ~~2006,~~2007, that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II

Item 1. Legal Proceedings

Santa Maria Groundwater Basin Adjudication:

~~An officer~~In 1997, the Santa Maria Valley Water Conservation District (“plaintiff”) filed a lawsuit against multiple defendants, including GSWC, the City of Santa Maria, and several other public water purveyors. The plaintiff’s lawsuit seeks an adjudication of the ~~Company~~Santa Maria Groundwater Basin. A settlement of the lawsuit has ~~asserted a potential claim against the Company for retaliation against the officer and others in connection with alleged discriminatory conduct~~been reached, subject to CPUC approval. The settlement, among other things, if approved by the ~~Company~~CPUC, would preserve GSWC’s historical pumping rights and secure supplemental water rights for use in case of drought or other reductions in the natural yield of the Basin. There are also a few nonsettling parties, and the case is going forward as to these parties. The stipulation, if approved, would preserve GSWC’s position with the settling parties independent of the outcome of the case as it moves forward with the nonsettling parties.

From 1997 through June 30, 2007, GSWC has incurred costs of approximately $6.5 million in defending its ~~Board~~groundwater rights in the Santa Maria Basin, including legal and expert witness fees, which have been recorded in utility plant for rate recovery. In February 2006, GSWC filed an application with the CPUC for recovery of ~~Directors. Although management~~$5.5 million of these costs, representing the amount of the costs that had been incurred as of December 31, 2005. In February 2007, GSWC reached a settlement with the CPUC’s Division of Ratepayer Advocates authorizing recovery of the $5.5 million requested in GSWC’s application. The settlement deferred review of the remaining legal costs pending final resolution of the lawsuit. In May 2007, the CPUC issued a decision that approved the settlement. Management believes that all of the ~~allegations are without merit~~legal costs will be approved and ~~intends to vigorously defend against them,~~ the ~~Company retained an independent investigator to review the allegations and investigate the facts. Based upon the results~~recovery of such investigation, the Company does not believe, but can give no assurance, that the ultimate resolution of this mater will have a material adverse effect on its financial position, results of operations, or cash flows.

additional future costs through rates is probable.

There have been no other material developments in any of the legal proceedings described in our ~~2005~~2006 Annual Report on Form 10-K.

Registrant is subject to ordinary routine litigation incidental to its business. Other than those disclosed in ~~this section and in the Notes to the Consolidated Financial Statements in~~ Registrant’s Form 10-K for the year ended December 31, ~~2005,~~2006, no other legal proceedings are pending, which are believed to be material. Management believes that rate recovery, proper insurance coverage and reserves are in place to insure against property, general liability and workers’ compensation claims incurred in the ordinary course of business.

Item 1A. Risk Factors

We commenced the operation and maintenance of our water and wastewater systems for the U.S. government at a first military base in October 2004. We began the operation and maintenance of additional water and wastewater systems at military bases in Virginia and Maryland in 2006. All of these contracts are fixed price contracts. We also commenced the construction of infrastructure improvements at these bases in 2006 pursuant to fixed price contracts. Revenues generated by our contract operations are primarily dependent on these new business activities. As a result, we are subject to risks that are different than those we previously faced as a regulated utility.

Our operations and maintenance contracts on military bases create certain risks that are different from that of our regulated utility operations.

We have entered into contracts to provide water and wastewater services at military bases pursuant to 50-year contracts, subject to termination, in whole or in part, for the convenience of the U.S. government. In addition, the U.S. government may stop work under the terms of the contracts, delay performance of our obligations under the contracts or modify the contracts at its convenience.

Our contract pricing was based on a number of assumptions, including assumptions about prices and availability of labor, equipment and materials. We may be unable to recover all of our costs if any of these assumptions are inaccurate or we failed to consider all costs that we may incur in connection with performing the work. Our operations and maintenance contracts are also subject to periodic price adjustments at the time of price redetermination or in connection with requests for equitable adjustments or other changes permitted by terms of the contracts.

We are subject to audits, cost review and investigations by contracting oversight agencies. During the course of an audit, the oversight agency may disallow costs. Such cost disallowances may result in adjustments to previously reported revenues.

Payment under these contracts is subject to appropriations by Congress. We may experience delays in receiving payment or delays in redetermination of prices or other price adjustments due to cancelled or delayed appropriations specific to our projects or reductions in government spending for the military or generally. Appropriations and the timing of payment, may be influenced by, among other things, the state of the economy, competing political priorities, budget constraints, the timing and amount of tax receipts and the overall level of government expenditures for the military.

In addition, we must maintain the proper management of water and wastewater facilities and find state-certified and other qualified employees to support the operation of these facilities. Failure to do so could put us at risk of, among other things, operations errors at the military bases and for improper billing and collection procedures as well as loss of contracts, assessment of penalties for operational failures and loss of revenues.

Our contracts for the construction of infrastructure improvements on military bases create risks that are different, in some respects, from that of our operations and maintenance contracts.

We have entered into contracts for the construction of infrastructure improvements to water and wastewater systems at military bases. Many of these contracts are fixed-price contracts. Under fixed-price contracts, we benefit from cost savings and earnings from approved contract change orders, but are generally unable to recover any cost overruns to the approved contract price.

Revenues from these types of contracts are recognized using the percentage-of-completion method of accounting. This accounting practice that we use results in our recognizing contract revenues and earnings ratably over the contract term in proportion to our incurrence of contract costs. The earnings or losses recognized on individual contracts are based on periodic estimates of contract revenues, costs and profitability as the construction projects progress.

We establish prices for these types of fixed-price contracts, in part, on cost estimates that are subject to a number of assumptions, including assumptions regarding future economic conditions. If these estimates prove inaccurate or circumstances change, cost overruns could have a material adverse effect on our contract business operations and results of operations for contracted services.

We may be adversely affected by disputes with the U.S. government regarding our performance of contract services on military bases or by failure to properly perform the contract services.

If there is a dispute with the U.S. government regarding performance under these contracts or the amounts owed to us, the U.S. government may delay, reject or withhold payment to us. If we are ultimately unable to collect these payments on a timely basis, our profits and cash flows will be adversely affected.

If we fail to comply with the terms of one or more of our U.S. government contracts, other agreements with the U.S. government or U.S. government regulations and statutes, we could be suspended or barred from future U.S. government contracts for a period of time and be subject to possible civil or criminal fines and penalties and damage to our reputation in the water and wastewater industry.

We are dependent upon subcontractors for the performance of contracted services on military bases.

We primarily rely on a single subcontractor for the operation and maintenance of wastewater systems at military bases pursuant to our existing contracts with the U.S. government. The failure of this subcontractor to perform services for us in accordance with the terms of our contracts with the U.S. government could result in the termination of contracts to provide wastewater services at these bases, a loss of revenues and increases in costs to correct the subcontractor’s performance failures.

We also rely on third-party manufacturers as well as third-party subcontractors to complete our construction projects. To the extent that we cannot engage subcontractors or acquire equipment or materials, our ability to complete a project in a timely fashion or at a profit may be impaired. If the amount we are required to pay for these goods and services exceeds the amount we have estimated in bidding for fixed-price work, we could experience losses in the performance of these contracts. In addition, if a subcontractor or manufacturer is unable to deliver its services, equipment or materials according to the negotiated terms for any reason, including the deterioration of its financial condition, we may be required to purchase the services, equipment of materials from another source at a higher price. This may reduce the profit to be realized or result in a loss on a project for which the services, equipment or materials were needed.

If these subcontractors fail to perform services to be provided to us or fail to provide us with the proper equipment or materials, we may be penalized for their failure to perform.

We continue to incur costs associated with the expansion of our contract activities.

We continue to incur additional costs in connection with the expansion of our contract operations associated with the preparation of bids and the negotiation of the terms of new contracts. Our ability to recover these costs and to earn a profit on our contract operations will depend upon the extent to which we are successful in obtaining new contracts and our ability to recover those costs and other costs from revenues from new contracts.

There have been no other significant changes in the risk factors disclosed in our ~~2005~~2006 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The shareholders of AWR have approved the material features of all equity compensation plans under which AWR directly issues equity securities. AWR did not directly issue any unregistered equity securities during the ~~third~~first quarter of ~~2006.~~

2007. The following table provides information about repurchases of Common Shares by AWR during the ~~third~~second quarter of ~~2006:~~2007:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Number of Shares That May Yet Be Purchased under the Plans or Programs
April 1 – 30, 2007	32		$	36.88	—	NA	(3)
May 1 – 31, 2007	54		$	36.67	—	NA	(3)
June 1 - 30, 2007	3,185		$	34.82	—	NA	(3)
Total	3,271	(2)	$	34.87	—	NA	(3)

Period

Total Number of
Shares Purchased

Average Price
Paid per Share

Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)

Maximum Number
of Shares That May
Yet Be Purchased
under the Plans or
Programs

July 1 – 31, 2006

891
(2)
$
36.64

—

NA(3)

August 1 - 31, 2006

80
(2)
$
37.50

—

NA(3)

September 1 - 30, 2006

57
(2)
$
38.07

—

NA(3)

Total

1,028

$
36.79

—

NA(3)

(1) None of the Common Shares were purchased pursuant to any publicly announced stock repurchase program.

(2) ~~All of these~~ Of this amount, 3,000 Common Shares were acquired on the open market for ~~new~~employees pursuant to the Company’s 401(k) Plan. The remainder of the Common Shares were acquired on the open market for participants in the Company’s Common Share Purchase and Dividend Reinvestment Plan.

(3) None of these plans contain a maximum number of Common Shares that may be purchased in the open market under the plans.

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Security Holders

The annual meeting of shareholders was held on May 22, 2007. The following table presents the voting results of the election of Class I directors at this meeting:

Name	“Votes For”	“Votes Withheld”
James L. Anderson	15,295,715	364,357
Diana M. Bontá	15,290,483	369,589
Anne M. Holloway	15,293,248	366,825
Floyd E. Wicks	15,245,580	414,492

~~No items were submitted during~~Registrant has one other class of directors, which include N.P. Dodge, Jr., Robert F. Kathol, Gary F. King and Lloyd E. Ross, whose terms will expire at the ~~third quarter~~annual meeting in 2008.

Registrant’s shareholders also ratified the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm, with 15,617,047 voting in favor of the ~~2006 fiscal year covered by this report to a vote of security holders through~~appointment, 103,556 opposing the ~~solicitation of proxies or otherwise.~~ appointment, and 212,468 abstaining from voting on the appointment.

Item 5. Other Information

(a) On ~~October 27, 2006,~~July 31, 2007, the Board of Directors of ~~Registrant~~AWR declared a regular quarterly dividend of $0.235 per ~~common share.~~Common Share. The dividend will be paid ~~December~~September 1, ~~2006~~2007 to shareholders of record as of the close of business on ~~November~~August 10, ~~2006.~~2007.

Mr. Gary King was elected as a Class II director of the Company, effective November 7, 2006 with a term expiring at the annual meeting of the Company in 2008 and as a director of two of its subsidiaries, Golden State Water Company and Chaparral City Water Company, with a term expiring on the date of the annual meeting of each of these subsidiaries in 2007. There is no arrangement or understanding pursuant to which Mr. King was elected a director. Mr. King was also named as a member of the Audit and Finance Committee of the Board of Directors of the Company.

Under the terms of the Company’s Amended 2003 Non-Employee Directors Stock Plan, Mr. King was automatically granted an option to purchase 3,000 of the Common Shares of the Company at an exercise price of $36.63 per share, effective on the date of his appointment as a director. Each option is exercisable upon the date of grant and will expire ten years after the date of grant, unless Mr. King’s services as a director are terminated for cause. Mr. King will be entitled to receive director and committee fees on the same basis as other directors, except that Mr. King’s retainer for service as a director for the remainder of 2006, will be reduced to $3,333.33. The Board also approved the execution of an Indemnification Agreement with Mr. King in the same form executed by the Company with its other directors.

~~The Company amended its bylaws on November 7, 2006 to increase the size of its Board of Directors from six to seven.~~

(b) There have been no material changes during the ~~third~~second quarter of ~~2006~~2007 to the procedures by which shareholders may nominate persons to the Board of Directors of AWR.

Item 6. Exhibits

(a) The following documents are filed as Exhibits to this report:

~~3.1~~		~~Bylaws of American States Water Company, as amended~~ ~~(1)~~

~~3.2~~		~~Bylaws of Golden State Water Company, as amended~~ ~~(1)~~

10.1		Form of ~~Non-Employee Director Stock Option Agreement~~ ~~(1)~~ American States Water Company Three-Year Dividend Equivalent Right Certificate(1)(3)

10.2		~~Form of Indemnification Agreement for Directors~~ Golden State Water Company Pension Restoration Plan, as amended (1)(3)

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)

31.1.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1)

31.2		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for AWR (1)

31.2.1		Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 for GSWC (1)

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (2)

(1) Filed concurrently herewith

(2) Furnished concurrently herewith

(3) ~~Compensatory benefit agreement~~Management or compensatory contract

SIGNATURE

Pursuant to the requirements of Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and as its principal financial officer.

		AMERICAN STATES WATER COMPANY
and its subsidiary
GOLDEN STATE WATER COMPANY


	By:		/s/ Robert J. Sprowls
			Robert J. Sprowls
			Senior Vice President-Finance, Chief Financial
	Officer,
	Treasurer and Corporate Secretary

Dated: ~~November 8, 2006~~August 9, 2007

5254

x		Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the quarterly period ended ~~September~~June 30, ~~2006 or~~2007

oor

o	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
for the transition period from to

California		95-4676679
(State or Other Jurisdiction of Incorporation or Organization)		(IRS Employer Identification No.)

~~630 E. Foothill Blvd, San Dimas, CA~~		~~91773-1207~~
~~(Address of Principal Executive Offices)~~		~~(Zip Code)~~

~~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)

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)

American States Water Company		Large accelerated filer o		Accelerated filer x		Nonaccelerated filer o
Golden State Water Company		Large accelerated filer o		Accelerated filer o		Nonaccelerated filer x

American States Water Company		Yes x No o
Golden State Water Company		Yes x No o

American States Water Company		Yes o¨ No x
Golden State Water Company		Yes o¨ No x

				~~Page(s)~~
Part I		Financial Information

Item 1:		Financial Statements

	Consolidated Balance Sheets of American States Water Company as of ~~September~~June 30, ~~2006~~2007 and December 31, ~~2005~~2006		~~3-4~~

		Consolidated Statements of Income of American States Water Company for the Three Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		5

		Consolidated Statements of Income of American States Water Company for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		6

		Consolidated Statements of Cash Flow of American States Water Company for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		7

		Balance Sheets of Golden State Water Company as of ~~September~~June 30, ~~2006~~2007 and December 31, ~~2005~~2006		~~8-9~~

		Statements of Income of Golden State Water Company for the Three Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		10

		Statements of Income of Golden State Water Company for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		11

		Statements of Cash Flow of Golden State Water Company for the ~~Nine~~Six Months Ended ~~September~~June 30, ~~2006~~2007 and ~~2005~~2006		12

		Notes to Consolidated Financial Statements		13

Item 2:		Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3:		Quantitative and Qualitative Disclosures About Market Risk		48

Item 4:		Controls and Procedures		49

Part II	Other Information	~~Other Information~~


Item 1:		Legal Proceedings		50

Item 1A:		Risk Factors		50

Item 2:		Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3:		Defaults Upon Senior Securities		50

Item 4:		Submission of Matters to a Vote of Security Holders		50

Item 5:		Other Information		51

Item 6:		Exhibits		51

		Signatures		52

Diluted	For The Three Months Ended September 30,				For The Nine Months Ended September 30,
*(in thousands, except per share amounts)*	2006		2005		2006		2005
Common shareholders earnings, basic	$	5,459	$	12,091	$	17,386	$	21,557
Undistributed earnings for dilutive stock options (1)	—		—		—		—
Total common shareholders earnings, diluted	$	5,459	$	12,091	$	17,386	$	21,557

Weighted average Common Shares outstanding, basic	17,003		16,782		16,898		16,773
Stock-based compensation (2)	54		105		51		72
Weighted average Common Shares outstanding, diluted	17,057		16,887		16,949		16,845
Diluted earnings per Common Share	$	0.32	$	0.72	$	1.03	$	1.29

*(dollars in thousands, except EPS)*	Three Months Ended September 30, 2005			Nine Months Ended September 30, 2005
Net income, as reported	$	12,234		$	21,733
Add: Stock-based compensation expense included in reported net income, net of tax	7			64
Less: Stock-based compensation expense determined under the fair-value accounting method, net of tax	(10		)	(682		)
Pro forma	$	12,231		$	21,115

Basic earnings per share:
As reported	$	0.72		$	1.29
Pro forma	$	0.72		$	1.25

Diluted earnings per share:
As reported	$	0.72		$	1.29
Pro forma	$	0.72		$	1.25

	AWR												GSWC
	Three Months Ended September 30,						Nine Months Ended September 30,						Three Months Ended September 30,						Nine Months Ended September 30,
*(in thousands)*	2006			2005			2006			2005			2006			2005			2006			2005
Stock-based compensation related to:
Stock options granted to employees and directors	$	60		$	—		$	279		$	—		$	54		$	—		$	263		$	—
Restricted stock units granted to employees	42			—			120			—			38			—			111			—
Restricted stock units granted to directors	—			12			28			110			—			12			28			110
Stock-based compensation recognized in the income statement, before taxes	$	102		$	12		$	427		$	110		$	92		$	12		$	402		$	110
Income tax benefit	(41		)	(5		)	(171		)	(46		)	(37		)	(5		)	(161		)	(46		)
Total stock-based compensation after income taxes	$	61		$	7		$	256		$	64		$	55		$	7		$	241		$	64

	2006		2005
Weighted-average fair value of option granted	$	8.01 - $10.46	$5.63
Risk-free interest rate	4.40% - 5.02%		3.93%
Expected annual dividend yield	2.77% - 3.08%		3.68%
Expected volatility factor	24.90% - 26.43%		26.23%
Expected option term (in years)	6		7

	Number of Options		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Options outstanding at January 1, 2006	684,304		$	24.31
Granted	109,917		34.85
Exercised	(190,976	)	22.95
Forfeited or expired	—		—
Options outstanding at September 30, 2006	603,245		$	26.66	7.45	$	6,993,336
Options exercisable at September 30, 2006	345,296		$	25.15	6.66	$	4,523,945

	Number of Restricted Share Units		Weighted Average Grant-Date Value
Restricted share units at January 1, 2006	31,166		$	25.02
Granted	17,065		34.37
Vested	(602	)	26.68
Forfeited	—		—
Restricted share units at September 30, 2006	47,629		$	28.34

	For The Three Months Ended September 30, 2006 and 2005
	Pension Benefits						Other Postretirement Benefits						SERP
*(dollars in thousands)*	2006			2005			2006			2005			2006			2005
Components of Net Periodic Benefits Cost:
Service Cost	$	963		$	933		$	107		$	109		$	55		$	32
Interest Cost	1,170			1,088			155			151			36			28
Expected Return on Plan Assets	(990		)	(922		)	(50		)	(74		)	—			—
Amortization of Transition	—			—			105			105			—			—
Amortization of Prior Service Cost	41			41			(50		)	(50		)	39			38
Amortization of Actuarial Loss (Gain)	291			313			37			41			(5		)	(10		)
Net Periodic Pension Cost	$	1,475		$	1,453		$	304		$	282		$	125		$	88

	For The Nine Months Ended September 30, 2006 and 2005
	Pension Benefits						Other Postretirement Benefits						SERP
*(dollars in thousands)*	2006			2005			2006			2005			2006			2005
Components of Net Periodic Benefits Cost:
Service Cost	$	2,889		$	2,799		$	321		$	327		$	165		$	96
Interest Cost	3,510			3,264			465			453			108			84
Expected Return on Plan Assets	(2,970		)	(2,766		)	(150		)	(222		)	—			—
Amortization of Transition	—			—			315			315			—			—
Amortization of Prior Service Cost	123			123			(150		)	(150		)	117			114
Amortization of Actuarial Loss (Gain)	873			939			111			123			(15		)	(30		)
Net Periodic Pension Cost	$	4,425		$	4,359		$	912		$	846		$	375		$	264

	As of and for The Nine Months Ended September 30, 2005
	GSCW						CCWC								Consolidated
*(dollars in thousands)*	Water			Electric			Water		Other*			Eliminations			AWR
Operating revenues	$	150,595	(3)	$	20,105		$	5,068	$	2,704		$	(35	)	$	178,437
Operating income (loss)	39,439			9,234		(4)	1,586		(1,628		)				48,631
Interest expense, net	6,632			982			325		601						8,540
Identifiable assets	620,844			39,680			37,028		678						698,230
Depreciation and amortization expense	13,771			1,519			788		45						16,123
Capital additions	47,108			1,648			2,843		359						51,958

	3 MOS ENDED 9/30/2006			3 MOS ENDED 9/30/2005			$ CHANGE			% CHANGE
OPERATING REVENUES
Water	$	64,962		$	60,539		$	4,423		7.3	%
Electric	6,444			6,544			(100		)	-1.5	%
Other	2,335			1,008			1,327			131.6	%
Total operating revenues	73,741			68,091			5,650			8.3	%
OPERATING EXPENSES
Water purchased	15,066			15,779			(713		)	-4.5	%
Power purchased for pumping	3,600			3,252			348			10.7	%
Groundwater production assessment	2,477			2,315			162			7.0	%
Power purchased for resale	2,659			3,075			(416		)	-13.5	%
Unrealized loss (gain) on purchased power contracts	2,807			(4,018		)	6,825			-169.9	%
Supply cost balancing accounts	244			514			(270		)	-52.5	%
Other operating expenses	6,677			4,850			1,827			37.7	%
Administrative and general expenses	12,614			10,342			2,272			22.0	%
Depreciation and amortization	6,634			4,734			1,900			40.1	%
Maintenance	3,395			2,905			490			16.9	%
Property and other taxes	2,656			2,572			84			3.3	%
Net gain on sale of property	(124		)	-			124			100.0	%
Total operating expenses	58,705			46,320			12,385			26.7	%
OPERATING INCOME	15,036			21,771			(6,735		)	-30.9	%
Interest expense	(5,349		)	193			5,542			2871.5	%
Interest income	695			745			(50		)	-6.7	%
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE	10,382			22,709			(12,327		)	-54.3	%
Income tax expense	4,809			10,475			(5,666		)	-54.1	%
NET INCOME	$	5,573		$	12,234		$	(6,661	)	-54.4	%

Operating Expenses	Amount
	Increase / (Decrease)
Power purchased for resale	($31,230		)
Other operating expenses	(459,415		)
Administrative and general expenses	(16,963		)
Depreciation and amortization	(992,232		)
Total pre-tax impact to operating expenses	(1,499,840		)

Interest
Interest expense	(5,084,551		)
Interest income	(607,083		)
Total net interest charges	(5,691,634		)

Total pre-tax impact to results of operations	$	7,191,474
Impact to taxes on income	2,930,238
Total impact to net income	$	4,261,236

Impact to Basic Earnings per Share	$	0.25
Impact to Diluted Earnings per Share	$	0.25

	9 MOS ENDED 9/30/2006			9 MOS ENDED 9/30/2005			$ CHANGE			% CHANGE
OPERATING REVENUES
Water	$	166,233		$	155,611		$	10,622		6.8	%
Electric	21,816			20,105			1,711			8.5	%
Other	8,437			2,721			5,716			210.1	%
Total operating revenues	196,486			178,437			18,049			10.1	%
OPERATING EXPENSES
Water purchased	34,326			35,742			(1,416		)	-4.0	%
Power purchased for pumping	7,620			6,923			697			10.1	%
Groundwater production assessment	6,799			6,079			720			11.8	%
Power purchased for resale	10,470			9,922			548			5.5	%
Unrealized loss (gain) on purchased power contracts	5,886			(7,492		)	13,378			-178.6	%
Supply cost balancing accounts	(93		)	1,042			(1,135		)	-108.9	%
Other operating expenses	17,264			15,138			2,126			14.0	%
Administrative and general expenses	34,628			32,456			2,172			6.7	%
Depreciation and amortization	19,726			16,123			3,603			22.3	%
Maintenance	9,113			7,522			1,591			21.2	%
Property and other taxes	7,674			7,111			563			7.9	%
Net gain on sale of property	(124		)	-			124			100.0	%
Gain on settlement for removal of wells	-			(760		)	(760		)	-100.0	%
Total operating expenses	153,289			129,806			23,483			18.1	%
OPERATING INCOME	43,197			48,631			(5,434		)	-11.2	%
Interest expense	(16,037		)	(9,341		)	6,696			71.7	%
Interest income	2,643			801			1,842			230.0	%
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE	29,803			40,091			(10,288		)	-25.7	%
Income tax expense	12,061			18,358			(6,297		)	-34.3	%
NET INCOME	$	17,742		$	21,733		$	(3,991	)	-18.4	%

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)	Maximum Number of Shares That May Yet Be Purchased under the Plans or Programs
July 1 – 31, 2006	891	(2)	$	36.64	—	NA(3)
August 1 - 31, 2006	80	(2)	$	37.50	—	NA(3)
September 1 - 30, 2006	57	(2)	$	38.07	—	NA(3)
Total	1,028		$	36.79	—	NA(3)

INDEX

PART I

General

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Item 6. Exhibits

SIGNATURE