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 Water Services Company ("FBWS"), Terrapin Utility Services, Inc. ("TUS"), Old Dominion Utility Services, Inc. ("ODUS"), Palmetto State Utility Services, Inc. ("PSUS") and Old North Utility Services, Inc. ("ONUS")). AWR was incorporated as a California corporation in 1998 as a holding company. 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. FBWS, TUS, ODUS, PSUS and ONUS may be referred to herein collectively as the "Military Utility Privatization Subsidiaries".

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 operating within 75 communities in 10 counties in the State of California and provides water service in 21 customer service areas. 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 ("BVES") division.

GSWC served 254,451 water customers and 23,094 electric customers at March 31, 2009, or a total of 277,545 customers, compared with 254,364 water customers and 23,141 electric customers, or a total of 277,505 customers at March 31, 2008. 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 90% of total water revenues for the three months ended March 31, 2009 and 2008.

CCWC is an Arizona public utility company serving 13,405 customers at March 31, 2009, compared with 13,482 customers at March 31, 2008. 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, through its wholly-owned subsidiaries, has contracted with the U.S. government to provide water and/or wastewater services, including both the operation and maintenance and renewal and replacement of the water and/or wastewater systems pursuant to 50-year fixed price contracts, which are subject to periodic prospective price redeterminations and modifications for changes in circumstances. All of the contracts with the U.S. government 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 the subsidiary performing the contract. In either event, the Military Utility Privatization Subsidiary is entitled to recover the remaining amount of its capital investment pursuant to the terms of a termination settlement with the U.S. government at the time of termination as provided for in each of the contracts. The contract price for each of these contracts is subject to redetermination two years after commencement of operations and every three years thereafter under the terms of these contracts. Prices are subject to equitable adjustment based upon changes in circumstances, changes in laws and/or regulations, and changes in wages and fringe benefits to the extent provided in each of the contracts. Pursuant to the terms of these contracts, the Military Utility Privatization Subsidiaries operate, as of the effective date of their respective contracts, the following water and wastewater systems:

† FBWS - water and wastewater systems at Fort Bliss located near El Paso, Texas effective October 1, 2004;

† TUS - water and wastewater systems at Andrews Air Force Base in Maryland effective February 1, 2006;

† ODUS - wastewater systems at Fort Lee in Virginia effective February 23, 2006 and the water and wastewater systems at Fort Eustis, Fort Monroe and Fort Story in Virginia effective April 3, 2006 (collectively, the "TRADOC bases");

† PSUS - water and wastewater systems at Fort Jackson in South Carolina effective February 16, 2008; and

† ONUS - water and wastewater systems at Fort Bragg, Pope Air Force Base and Camp MacKall, North Carolina effective March 1, 2008.

ASUS and GSWC have also been pursuing opportunities to provide retail water services 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 and Natomas have entered into various agreements including the purchase of certain water and water rights that may allow GSWC the ability to serve portions of Sutter county in the future.

Overview

Registrant's revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses through approximately 2,900 miles of water distribution pipelines and the delivery of electricity in the Big Bear area of San Bernardino county. Rates charged to customers of GSWC and CCWC are determined by the CPUC and ACC, respectively. These rates are intended to allow recovery of operating costs and a reasonable rate of return on capital. Factors affecting financial performance of our regulated utilities include the process and timing of setting rates charged to customers; the ability to recover, and the process for recovering in rates, the costs of distributing water and electricity and our overhead costs; weather; the impact of increased water quality standards and environmental regulations 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 to protect its water supply.

Operating revenues and income from contracted services at ASUS and its subsidiaries are earned primarily from the operation and maintenance and renewal and replacement of the water and/or 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 firm, fixed-price contracts with prospective price redeterminations. ASUS 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. Additional revenues generated by contract operations are primarily dependent on these new construction activities. As a result, ASUS is subject to risks that are different than those of Registrant's regulated water and electric utilities. ASUS plans to continue seeking contracts for the operation and maintenance and renewal and replacement of water and/or wastewater services at military bases. Factors affecting the financial performance of our Military Utility Privatization Subsidiaries include delays in receiving payments from the U.S. government and the redetermination and equitable adjustment of prices under contracts with the U.S. government.

Registrant plans to continue to seek additional rate increases in future years to recover 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 needs for capital expenditures, dividends, investments in Registrant's contract business and other cash requirements. Registrant expects to fund a portion of these needs through common stock offerings over the next twelve months depending on market conditions. On August 25, 2008, AWR amended its $85 million syndicated credit facility, to increase its aggregate bank commitments by $30 million to $115 million. In addition, GSWC issued a senior note in the amount of $40.0 million on March 10, 2009, to CoBank, ACB ("CoBank"). The proceeds are being used to pay down GSWC's intercompany short-term borrowings and to fund capital expenditures.

For three months ended March 31, 2009, net income was $4.9 million compared to $5.3 million in the same period of 2008, a decrease of 7.0%. Diluted earnings per share for the three months ended March 31, 2009 were $0.28 compared to $0.30 in the same period of 2008. The decrease in earnings is due primarily to: (i) a $2.8 million pretax unrealized gain on purchased power contracts, or $0.10 per share, for the three months ended March 31, 2008 with no corresponding entry in 2009, as more fully discussed below; and (ii) higher operating expenses at GSWC of $2.5 million, or $0.08 per share. These decreases to earnings were partially offset by: (i) an increase of $0.03 per share in the dollar water margin due to higher customer rates approved by the CPUC and effective January 1, 2009;
(ii) the improved financial performance of the Military Utility Privatization Subsidiaries resulting in an increase in ASUS' pretax operating income of $1.6 million, or $0.05 per share, during the three months ended

March 31, 2009 when compared to 2008; and (ii) an overall decrease in the effective income tax rate due to changes in enacted state law as well as refining certain related estimates, and changes between book and taxable income that are treated as flow-through adjustments in accordance with regulatory requirements, all of which favorably impacted earnings by $0.08 per share during the first quarter of 2009.

Unrealized gains and losses on previous purchased power contracts impacted GSWC's earnings if the contracts qualified as derivative instruments under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." Power purchased contracts that qualified as derivative instruments terminated at December 31, 2008. GSWC filed an application with the CPUC to review its new purchased power contract, effective after December 31, 2008. This purchased power contract was subject to CPUC approval and is also subject to derivative accounting. In connection with the filing to review and approve the new contract, GSWC also requested that the CPUC authorize the establishment of a memorandum account to track the changes in the fair market value of the contracts resulting in unrealized gains and losses.

In 2009, the CPUC issued a proposed decision approving the new purchase power contract and authorizing GSWC to establish the memorandum account to track unrealized gains and losses on the new contract throughout the term of the contract. Accordingly, during the three months ended March 31, 2009, there was an $8.4 million unrealized loss which has been included in the memorandum account therefore not impacting GSWC's earnings. There was a $2.8 million pretax unrealized gain on purchased power contracts included in earnings for the three months ended March 31, 2008. Diluted earnings for the three months ended March 31, 2008 were $0.30 per share. Eliminating the effects of the unrealized derivative gains, adjusted diluted earnings per share for the three months ended March 31, 2008 would have decreased by $0.10 per share to $0.20 per share compared to recorded diluted earnings per share of $0.28 for the three months ended March 31, 2009, which did not contain any unrealized gains or losses on purchased power contracts in earnings.

Summary Results by Segment

AWR has three reportable segments: water, electric and contracts operation. 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 through ASUS and its subsidiaries. The tables below set forth summaries of the results by segment (amounts in thousands):

                                      Operating Revenues                               Pretax Operating Income
                          3 Months       3 Months                            3 Months       3 Months
                           Ended          Ended          $         %          Ended          Ended          $         %
                         3/31/2009      3/31/2008      CHANGE    CHANGE     3/31/2009      3/31/2008      CHANGE    CHANGE

Water                   $     56,794   $     52,089   $  4,705      9.0 %  $     10,944   $     11,695   $   (751 )   -6.4 %
Electric                       8,632          8,803       (171 )   -1.9 %          (544 )        3,410     (3,954 ) -116.0 %
Contracted services           14,183          8,050      6,133     76.2 %         1,068           (541 )    1,609    297.4 %
AWR parent                         -              -          -        -             (50 )         (102 )       52     51.0 %
Totals from operation   $     79,609   $     68,942   $ 10,667     15.5 %  $     11,418   $     14,462   $ (3,044 )  -21.0 %

Water - Pretax operating income for water decreased by 6.4% due to higher operating expenses of $1.5 million, as more fully described later. Higher operating expenses were partially offset by an increase in the dollar water margin of $755,000. Higher water rates approved by the CPUC effective January 1, 2009 increased water revenues by $1.8 million, partially offset by a 3.5% decrease in actual consumption, or $1.0 million, when compared to the first quarter of 2008, mostly due to the continued effects of statewide customer conservation efforts. However, as a result of the implementation of a Water Revenue Adjustment Mechanism ("WRAM") account for Regions II and Region III in late November of 2008, GSWC recorded $3.7 million in additional revenues in the WRAM account to adjust the first quarter 2009 revenues to consumption levels approved by the CPUC.

Although the recording of the WRAM added $3.7 million of water revenues, this favorable impact to earnings was reduced by $1.1 million of water supply over-collection costs tracked in the Modified Cost Balancing Account ("MCBA") account, also implemented in late November 2008. The over-collection in the MCBA account is due to: (i) lower consumption in the first quarter 2009 as compared to the consumption level approved by the CPUC, and (ii) a lower percentage of purchased water in the supply mix during 2009 when compared to the supply mix included in customer rates, partially offset by increases in rates charged by GSWC's suppliers. The

implementation of the WRAM and MCBA help mitigate fluctuations in the Company's earnings caused by changes in the volume of water sold and supply costs.

The CPUC also approved an advice letter filing in a separate proceeding to allow GSWC to create and implement a Water Conservation Memorandum Account ("WCMA") to track the extraordinary expenses and revenue shortfall associated with conservation measures in conjunction with the declared drought in California. The WCMA was effective August 18, 2008 and was used to track the revenue shortfall until the WRAM was implemented on November 25, 2008. At November 24, 2008, approximately $1.9 million of net under-collections was included in the WCMA for Regions II and III prior to the implementation of the WRAM.

Unlike the WRAM which is probable for recovery according to the August 2008 CPUC decision, the recovery of the WCMA was less certain and therefore GSWC did not record the under-collection as of March 31, 2009. On April 16, 2009, the CPUC approved the advice letter filed by GSWC to recover $1.9 million included in the WCMA and authorized GSWC to establish a 12-month surcharge to customers' bills. The surcharge went into effect on April 21, 2009. Accordingly, GSWC established a $1.9 million regulatory asset, which will result in a corresponding increase to income for the second quarter of 2009 of $0.07 per share.

Electric - For the three months ended March 31, 2009, pretax operating income from electric operations decreased by $4.0 million due in large part to a decrease of $2.8 million in the pretax unrealized gain on purchased power contracts. The unrealized gain on purchased power contracts increased operating income by approximately $2.8 million during the first quarter of 2008, or $0.10 per share, with no corresponding gain in 2009. As previously discussed, the purchased power contract that resulted in unrealized gains and losses to BVES' earnings terminated at December 31, 2008. The remainder of the decrease in pretax operating income was due to an increase in operating expenses including higher outside consulting and legal costs related to the general rate case, as well as an increase in the allocation of costs from the corporate headquarters' to BVES pursuant to CPUC requirements.

Contracted Services - For the three months ended March 31, 2009, pretax operating income for contracted services increased by $1.6 million, or $0.05 per share. This was primarily due to an increase in new construction projects at Fort Bliss and the TRADOC bases. Pretax operating income increased $1.6 million at these bases. 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 the future periods. There was also an increase of approximately $338,000 to pretax operating income related to TUS and ASUS' corporate office resulting from lower legal and consulting fees. Partially offsetting these increases were continued losses incurred at military bases under the PSUS and ONUS contracts. ASUS began operating and maintaining the water and wastewater systems under these contracts in North Carolina and South Carolina in March and January of 2008, respectively. Pretax operating losses at these two bases increased by $319,000 due to increased maintenance expenses at both bases coupled with the fact that expenses for ONUS in 2009 reflect a full quarter whereas in 2008 it reflected only one month. In September 2008, PSUS submitted a Request for Equitable Adjustment ("REA") for the water and wastewater systems at Fort Jackson, South Carolina requesting a contract modification for initial capital upgrades and emergency construction costs incurred during 2008 due to pre-existing conditions that were not anticipated at the time the contract was executed. The aggregate value of the REA relating to construction work is approximately $1.6 million. The REA has not yet been approved by the U.S. government.

The timely receipt of price redeterminations continues to be critical in order for ASUS to recover increasing costs for operating and maintaining the water and wastewater systems at the military bases. In addition, higher allocations of corporate headquarters' expenses to ASUS and its wholly-owned subsidiaries by the CPUC were not contemplated at the time the contracts with the U.S. government were negotiated and will be addressed in future price redeterminations. Under the terms of these contracts, the contract price is subject to price redetermination two years after commencement of operations and every three years thereafter. Redeterminations have been submitted and are under review by the U.S. government for operations of ODUS and TUS in Virginia and Maryland, respectively. The price redeterminations are expected to be completed in 2009. Pending redetermination of prices, ASUS has received interim inflation adjustments during 2008 to the management fees for operating and maintaining the water and wastewater systems at Fort Eustis, Fort Story and Fort Monroe in Virginia, and the wastewater system at Fort Lee also in Virginia effective on the second anniversary of the date when ASUS began operating these bases (February 23, 2008 for Fort Lee and April 3, 2008 for the other three bases). In March 2009, ONUS filed a REA related to a joint inventory report at Fort Bragg, North Carolina. The report indicated the quantity of the Fort Bragg infrastructure to be about 40% greater than what was assumed under the original 50-year contract. The REA is expected to be resolved by the third quarter of 2009.

FBWS has experienced delays in the redetermination of prices at Fort Bliss following completion of the first two years of operation in October 2006. At Fort Bliss, management fees for operation and maintenance of the water and wastewater systems are based on cost levels prevailing in 2003 when the contract with the U.S. government was bid. Further, the contract pricing was also based on assumptions about the size and age of the infrastructure to be operated and maintained over the 50-year contract. An REA has been filed as a claim with the U.S. government to adequately reflect the amount of assets included in the infrastructure at Fort Bliss, which is substantially more than originally estimated by the U.S. government as part of its solicitation for this contract. In December 2008, the U.S. government approved an interim adjustment at Fort Bliss which increased the monthly water and wastewater fees by 50% and 59%, respectively, related to operating and maintaining the Fort Bliss systems. The increase was retroactive to October 1, 2008 and expired on March 31, 2009. The U.S. government has prepared a modification extending the interim increases through September 30, 2009. FBWS is continuing negotiations with Fort Bliss to finalize the adjustment necessary due to the increased infrastructure. FBWS also intends to file a price redetermination request for Fort Bliss by mid-2009.

These price redeterminations and equitable adjustments, which include adjustments to reflect changes in operating conditions and infrastructure levels from that assumed at the time of the execution of the contracts, as well as inflation in costs, are expected to provide added revenues prospectively to help offset increased costs and provide Registrant the opportunity to generate positive operating income at its Military Utility Privatization Subsidiaries. As of March 31, 2009, ASUS has $1.1 million of goodwill, which may be at risk for potential impairment if requested price redeterminations and equitable adjustments that have not yet been approved, are not received.

The following discussion and analysis provides information on AWR's consolidated operations and assets and where necessary, includes specific references to AWR's individual segments and/or other subsidiaries: GSWC, CCWC, ASUS and its subsidiaries.

Consolidated Results of Operations - Three Months Ended March 31, 2009 and 2008 (amounts in thousands):