Regulatory Matters:

In accordance with accounting principles for rate-regulated enterprises, Registrant records regulatory assets, which represent probable future recovery of costs from customers through the ratemaking process, and regulatory liabilities, which represent probable future refunds that are to be credited to customers through the ratemaking process. At June 30, 2015, Registrant had approximately $67.9 million of regulatory assets, net of regulatory liabilities, not accruing carrying costs. Of this amount, $39.7 million relates to the underfunded position in Registrant's pension and other post-retirement obligations, $5.7 million relates to a memorandum account authorized by the CPUC to track unrealized gains and losses on GSWC's purchase power contracts over the term of the contracts, and $16.7 million relates to deferred income taxes representing accelerated tax benefits flowed through to customers, which will be included in rates concurrently with recognition of the associated future tax expense. The remainder relates to other items that do not provide for or incur carrying costs.

Regulatory assets represent costs incurred by GSWC for which it has received or expects to receive rate recovery in the future. In determining the probability of costs being recognized in other periods, GSWC considers regulatory rules and decisions, past practices, and other facts or circumstances that would indicate if recovery is probable. If the CPUC determines that a portion of GSWC’s assets are not recoverable in customer rates, GSWC must determine if it has suffered an asset impairment that would require a write-down in the assets’ valuation. Regulatory assets are offset against regulatory liabilities within each rate-making area. Amounts expected to be collected or refunded in the next 12-months have been classified as current assets and current liabilities by rate-making area. As of June 30, 2015, GSWC has a total of $139.2 million in net regulatory assets, of which $3.8 million of regulatory liabilities have been included in “Other Current Liabilities”. Regulatory assets, less regulatory liabilities, included in the consolidated balance sheets are as follows:



(dollars in thousands)	June 30, 2015			December 31, 2014
GSWC
Water Revenue Adjustment Mechanism, net of Modified Cost Balancing Account	$	28,542		$	9,369
Base Revenue Requirement Adjustment Mechanism	5,668			7,761
Costs deferred for future recovery on Aerojet case	13,220			13,629
Pensions and other post-retirement obligations (Note 7)	42,145			43,426
Derivative unrealized loss (Note 4)	5,662			3,339
Flow-through taxes, net (Note 6)	16,745			17,612
Low income rate assistance balancing accounts	8,990			9,109
Other regulatory assets	18,888			22,218
Various refunds to customers	(620		)	(759		)
Total	$	139,240		$	125,704

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, 2014 filed with the SEC. The discussion below focuses on significant matters and developments since December 31, 2014.

Alternative-Revenue Programs:

GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC using the Water Revenue Adjustment Mechanism (“WRAM”) and Modified Cost Balancing Account (“MCBA”) accounts approved by the CPUC. The recovery or refund of the WRAM is netted against the MCBA over- or under-collection for the corresponding rate-making area and is interest bearing at the current 90-day commercial paper rate. Based on CPUC guidelines, recovery periods relating to the majority of GSWC’s WRAM/MCBA balances range between 18 and 24 months.

GSWC has implemented surcharges to recover all of its WRAM/MCBA balances, as of December 31, 2014. For the six months ended June 30, 2015, surcharges (net of surcredits) of approximately $96,000 were billed to customers to recover previously incurred under-collections in the WRAM/MCBA accounts. During the six months ended June 30, 2015, GSWC recorded additional under-collections in the WRAM/MCBA accounts of $19.3 million. The increase in the WRAM balance in 2015 is largely due to water conservation by our customers in response to the ongoing drought conditions in California. Lower water usage results in an increase in under-collections recorded in the WRAM accounts. As of June 30, 2015, GSWC has a net aggregated regulatory asset of $28.5 million which is comprised of a $26.0 million under-collection in the WRAM accounts and $2.5 million under-collection in the MCBA accounts.

For BVES, the CPUC approved the Base Revenue Requirement Adjustment Mechanism (“BRRAM”) which adjusts base revenues to adopted levels. In November 2014, the CPUC issued a final decision on BVES's general rate case, setting rates and adopted revenues for years 2013 through 2016. In March 2015, surcharges were implemented to collect the 2014 BRRAM under-collection of $3.1 million over 24 months. As of June 30, 2015, GSWC had a regulatory asset of $5.7 million under-collection in the BRRAM.

Other Regulatory Matters:

Procurement Audits:

In December 2011, the CPUC issued a final decision adopting a settlement between GSWC and the CPUC on its investigation of certain work orders and charges paid to a specific contractor used previously for numerous construction projects primarily in one of GSWC's three main geographic water regions. As part of the settlement reached with the CPUC on this matter, GSWC agreed to be subject to three separate independent audits of its procurement practices over a period of ten years from the date the settlement was approved by the CPUC. The audits cover GSWC’s procurement practices for contracts with other contractors from 1994 forward. The first audit started in 2014 and covers almost a 20-year period from January 1, 1994 through September 30, 2013.

In December 2014, the accounting firm engaged by the CPUC to conduct the first independent audit provided its draft report to GSWC for comments. The report asserted that GSWC had not complied, in all material respects, with the CPUC’s requirements and GSWC's procurement policies during the period from 1994 to 2006. Subsequent to 2006, except for specific instances of alleged noncompliance, GSWC was found to be in compliance, in all material respects, with the CPUC’s requirements and GSWC’s procurement policies. The findings and corresponding recommendations in the draft report included, among other things, instances of inadequate documentation to support competitive bidding procedures, change orders, and sole source justifications. In February 2015, management provided its responses to the draft report and each of the findings noted by the accounting firm. GSWC informed the accounting firm of certain inaccuracies in their report, asserted that GSWC complied, in all material respects, with the CPUC’s requirements throughout the entire audit period and, has been in material compliance with its own procurement policies throughout the audit period.

In March 2015, the accounting firm issued its final report to the CPUC’s Division of Water and Audits (“DWA”). The final report, which was issued on a confidential basis, included GSWC's responses to the accounting firm’s findings, as well as the firm’s responses to GSWC's comments. DWA informed GSWC that it does not intend to pursue further investigation, refunds, or penalties in respect of past procurement activities as a result of the final report. Also in March, the CPUC’s Office of Ratepayer Advocates (“ORA”), in anticipation of receiving the final report, requested that the assigned administrative law judges in the ongoing general rate case convene a second phase of the rate case to consider the findings and recommendations in the final audit report. In June 2015, ORA notified the administrative law judges that, having reviewed the final audit report, its potential concerns with the audit report were satisfied and, as such, ORA no longer wished to pursue a second phase in the general rate case to address the final audit report. On August 3, 2015, the presiding administrative law judge issued a ruling that a second phase to the general rate case regarding this issue is not necessary. At this time, GSWC does not believe that a loss associated with any disallowances and/or penalties from this first audit is likely.

Rural Acquisition

In June 2013, GSWC entered into an Asset Purchase Agreement (the "Agreement") to acquire all of the operating water assets of Rural Water Company (“Rural”) for an aggregate purchase price of approximately $1.7 million. This transaction was subject to CPUC approval. In June 2015, the CPUC approved the acquisition of Rural, including GSWC's recovery of the purchase price through customer rates. The consummation of the transaction contemplated by the Agreement is subject to customary conditions, including among other things, adjustments to the purchase price for changes in utility plant since entering into the agreement in 2013. Upon completion of this transaction, GSWC will serve approximately 960 customers in the City of Arroyo Grande in the county of San Luis Obispo, California, which is near GSWC's Santa Maria customer service area in Coastal California. Under the terms of the Agreement, GSWC will take over operations thirty days after the remaining conditions to closing are satisfied. This acquisition is not considered to be material to Registrant’s financial position or results of operations.