Employee Benefit Plans

Pension and Post-Retirement Medical Plans:

Registrant maintains a defined benefit pension plan (the “Pension Plan”) that provides eligible employees (those aged 21 and older, hired before January 1, 2011) monthly benefits upon retirement based on average salaries and length of service. The eligibility requirement to begin receiving these benefits is 5 years of vested service. The normal retirement benefit is equal to 2% of the five highest consecutive years’ average earnings multiplied by the number of years of credited service, up to a maximum of 40, reduced by a percentage of primary social security benefits. There is also an early retirement option. Annual contributions are made to the Pension Plan, which comply with the funding requirements of the Employee Retirement Income Security Act (“ERISA”). At December 31, 2014, Registrant had 977 participants in the Pension Plan.

In January 2011, the Board of Directors approved an amendment to the Pension Plan, closing the plan to new employees hired after December 31, 2010. Employees hired or rehired after December 31, 2010 are eligible to participate in a defined contribution plan. Registrant's existing 401(k) Investment Incentive Program was amended to include this defined contribution plan. Under this plan, Registrant provides a contribution of 5.25% of eligible pay each pay period into investment vehicles offered by the plan’s trustee. Participants will be fully vested in this plan once the employee attains three years of service. Employees hired before January 1, 2011 continue to participate in and accrue benefits under the terms of the defined benefit plan.

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

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

The following table sets forth the Pension Plan’s and post-retirement medical plan’s funded status and amounts recognized in Registrant’s balance sheets and the components of net pension cost and accrued liability at December 31, 2014 and 2013:



	Pension Benefits						Post-Retirement Medical Benefits
(dollars in thousands)	2014			2013			2014			2013
Change in Projected Benefit Obligation:
Projected benefit obligation at beginning of year	$	152,680		$	163,230		$	11,388		$	12,296
Service cost	5,643			6,967			348			407
Interest cost	7,520			6,907			495			439
Actuarial loss (gain)	24,339			(19,918		)	437			(1,340		)
Benefits/expenses paid	(4,998		)	(4,506		)	(342		)	(414		)
Projected benefit obligation at end of year	$	185,184		$	152,680		$	12,326		$	11,388

Changes in Plan Assets:
Fair value of plan assets at beginning of year	$	127,534		$	107,638		$	9,873		$	8,359
Actual return on plan assets	9,816			17,846			951			1,320
Employer contributions	8,209			6,556			241			608
Benefits/expenses paid	(4,998		)	(4,506		)	(342		)	(414		)
Fair value of plan assets at end of year	$	140,561		$	127,534		$	10,723		$	9,873

Funded Status:
Net amount recognized as accrued pension cost	$	(44,623	)	$	(25,146	)	$	(1,603	)	$	(1,515	)



	Pension Benefits						Post-Retirement Medical Benefits
(in thousands)	2014			2013			2014			2013
Amounts recognized on the balance sheets:
Current liabilities	$	—		$	—		$	—		$	—
Non-current liabilities	(44,623		)	(25,146		)	(1,603		)	(1,515		)
Net amount recognized	$	(44,623	)	$	(25,146	)	$	(1,603	)	$	(1,515	)
Amounts recognized in regulatory assets consist of:
Initial net obligation	$	—		$	—		$	—		$	417
Prior service cost (credit)	167			285			(234		)	(433		)
Net (gain) loss	39,003			15,581			(2,891		)	(3,159		)
Regulatory assets (liabilities)	39,170			15,866			(3,125		)	(3,175		)
Unfunded accrued pension cost	5,453			9,280			4,728			4,690
Net liability recognized	$	44,623		$	25,146		$	1,603		$	1,515

Changes in plan assets and benefit obligations recognized in regulatory assets:
Regulatory asset at beginning of year	$	15,866		$	49,052		$	(3,175	)	$	(685	)
Net loss (gain)	23,422			(30,190		)	(61		)	(2,278		)
Amortization of initial net obligation	—			—			(419		)	(419		)
Amortization of prior service (cost) credit	(118		)	(118		)	200			200
Amortization of net gain (loss)	—			(2,878		)	330			7
Total change in regulatory asset	23,304			(33,186		)	50			(2,490		)
Regulatory asset (liability) at end of year	$	39,170		$	15,866		$	(3,125	)	$	(3,175	)

Net periodic pension costs	$	4,383		$	9,296		$	278		$	676
Change in regulatory asset	23,304			(33,186		)	50			(2,490		)
Total recognized in net periodic pension cost and regulatory asset (liability)	$	27,687		$	(23,890	)	$	328		$	(1,814	)

Estimated amounts that will be amortized from regulatory asset over the next fiscal year:
Initial net obligation	$	—		$	—		$	—		$	(418	)
Prior service (cost) credit	$	(118	)	$	(118	)	$	200		$	200
Net gain (loss)	$	(1,878	)	$	(29	)	$	213		$	262

Additional year-end information for plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	185,184		$	152,680		$	12,326		$	11,388
Accumulated benefit obligation	$	160,510		$	131,580		N/A			N/A
Fair value of plan assets	$	140,561		$	127,534		$	10,723		$	9,873

Weighted-average assumptions used to determine benefit obligations at December 31:
Discount rate	4.25		%	5.10		%	3.80		%	4.65		%
Rate of compensation increase	4.00		%	4.00		%	N/A			N/A

Consistent with decisions from the CPUC and in accordance with regulatory accounting principles, Registrant capitalizes a portion of its pension and other post-retirement costs in the overhead pool included in Utility Plant. The components of net periodic pension and post-retirement benefits cost, before allocation to the overhead pool, for 2014, 2013 and 2012 are as follows:



	Pension Benefits									Post-Retirement Medical Benefits
(dollars in thousands, except percent)	2014			2013			2012			2014			2013			2012
Components of Net Periodic Benefits Cost:
Service cost	$	5,643		$	6,967		$	6,675		$	348		$	407		$	419
Interest cost	7,520			6,907			6,657			495			439			534
Expected return on plan assets	(8,898		)	(7,574		)	(6,540		)	(453		)	(382		)	(357		)
Amortization of transition	—			—			—			418			419			419
Amortization of prior service cost (credit)	118			118			118			(200		)	(200		)	(200		)
Amortization of actuarial (gain) loss	—			2,878			3,035			(330		)	(7		)	—
Net periodic pension cost under accounting standards	$	4,383		$	9,296		$	9,945		$	278		$	676		$	815
Regulatory adjustment - over/(under) collection	1,622			(1,920		)	(2,305		)	—			—			—
Total expense recognized, before allocation to overhead pool	$	6,005		$	7,376		$	7,640		$	278		$	676		$	815

Weighted-average assumptions used to determine net periodic cost:
Discount rate	5.10		%	4.30		%	4.65		%	4.65		%	3.75		%	4.45		%
Expected long-term return on plan assets	7.00		%	7.00		%	7.00		%	*			*			*
Rate of compensation increase	4.00		%	4.00		%	4.00		%	N/A			N/A			N/A

*7.0% for union plan, 4.2% for non-union, net of income taxes in 2014, 2013 and 2012.

Regulatory Adjustment:

As previously discussed in Note 2, the CPUC authorized GSWC to track differences between the forecasted annual pension expenses adopted in rates for its water regions and the general office and the actual annual expense to be recorded by GSWC in accordance with the accounting guidance for pension costs. During the year ended December 31, 2014, GSWC's actual expense was $1.6 million lower than the amounts included in water and electric customer rates. During the years ended December 31, 2013 and 2012, GSWC’s actual expense under the accounting standard was greater than the amounts included in customer rates by $1.9 million and $2.3 million, respectively. These over and under-collections have been recorded in the two-way pension balancing accounts included in regulatory assets. As of December 31, 2014, the pension balancing account had a $2.7 million net under-collection included in regulatory assets.

Plan Funded Status:

Registrant’s pension and post-retirement plans were underfunded at December 31, 2014 and 2013. Registrant’s market related value of plan assets is equal to the fair value of plan assets. Past volatile market conditions have affected the value of GSWC’s trust established to fund its future long-term pension benefits. These benefit plan assets and related obligations are measured annually using a December 31 measurement date. Changes in the plan’s funded status will affect the assets and liabilities recorded on the balance sheet in accordance with accounting guidance on employers’ accounting for defined benefit pension and other post-retirement plans. Due to Registrant’s regulatory recovery treatment, the recognition of the funded status is offset by a regulatory asset pursuant to guidance on accounting for the effects of certain types of regulation.

Plan Assets:

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

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

The Committee approves the target asset allocations. Registrant’s pension and post-retirement plan weighted-average asset allocations at December 31, 2014 and 2013, by asset category are as follows:



	Pension Benefits				Post-Retirement Medical Benefits
Asset Category	2014		2013		2014		2013
Actual Asset Allocations:
Equity securities	61	%	61	%	60	%	61	%
Debt securities	39	%	37	%	38	%	38	%
Cash equivalents	—	%	2	%	2	%	1	%
Total	100	%	100	%	100	%	100	%

Equity securities did not include AWR’s stock as of December 31, 2014 and 2013.



Target Asset Allocations for 2015:	Pension Benefits		Post-retirement Medical Benefits
Equity securities	60	%	60	%
Debt securities	40	%	40	%
Total	100	%	100	%

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

The following tables set forth by level, within the fair value hierarchy, the pension and post-retirement plans’ investment assets measured at fair value as of December 31, 2014 and 2013:



	Fair Value as of December 31, 2014
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Pension Plan Assets:
Cash equivalents	$	497	—	—	$	497
Fixed income securities	54,865		—	—	54,865
Equity securities:
U.S. small cap stocks	7,546		—	—	7,546
U.S. mid cap stocks	14,779		—	—	14,779
U.S. large cap stocks	42,886		—	—	42,886
International funds	11,318		—	—	11,318
Real estate funds	8,670		—	—	8,670
Total equity securities	85,199		—	—	85,199
Total investments measured at fair value	$	140,561	—	—	$	140,561

Fair Value of Post-Retirement Plan Assets:
Cash equivalents	$	185	—	—	$	185
Fixed income	4,105		—	—	4,105
U.S. equity securities (large cap stocks)	6,433		—	—	6,433
Total investments measured at fair value	$	10,723	—	—	$	10,723



	Fair Value as of December 31, 2013
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Pension Plan Assets:
Cash equivalents	$	2,096	—	—	$	2,096
Fixed income securities	47,627		—	—	47,627
Equity securities:
U.S. small cap stocks	6,576		—	—	6,576
U.S. mid cap stocks	13,119		—	—	13,119
U.S. large cap stocks	39,280		—	—	39,280
International funds	12,501		—	—	12,501
Real estate funds	6,335		—	—	6,335
Total equity securities	77,811		—	—	77,811
Total investments measured at fair value	$	127,534	—	—	$	127,534

Fair Value of Post-Retirement Plan Assets:
Cash equivalents	$	142	—	—	$	142
Fixed income	3,731		—	—	3,731
U.S. equity securities (large cap stocks)	6,000		—	—	6,000
Total investments measured at fair value	$	9,873	—	—	$	9,873

Plan Contributions:

During 2014, Registrant contributed $8.2 million and $241,000 to its pension and post-retirement medical plans, respectively. Registrant currently expects to contribute at least $6.0 million to its pension in 2015. Registrant’s policy is to fund the plans annually at a level which is deductible for income tax purposes and is consistent with amounts recovered in customer rates.

Benefit Payments:

Registrant’s estimated future benefit payments at December 31, 2014 for the next five years and thereafter are as follows (in thousands):



	Pension Benefits		Post-Retirement Medical Benefits
2015	$	5,468	$	566
2016	5,938		601
2017	6,489		680
2018	7,030		774
2019	7,569		866
Thereafter	48,446		5,247
Total	$	80,940	$	8,734

Assumptions:

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

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

Expected Long-Term Rate of Return on Assets — The long-term rate of return on plan assets represents an estimate of long-term returns on an investment portfolio consisting of a mixture of equities, fixed income and other investments. To develop the expected long-term rate of return on assets assumption for the pension plan, Registrant considered the historical returns and the future expectations for returns for each asset class, as well as the target asset allocation of the pension portfolio. Registrant’s policy is to fund the medical benefit trusts based on actuarially determined amounts as allowed in rates approved by the CPUC. Registrant has invested the funds in the post-retirement trusts that will achieve a desired return and minimize amounts necessary to recover through rates. The mix is expected to provide for a return on assets similar to the Pension Plan and to achieve Registrant’s targeted allocation. This resulted in the selection of the 7.0% long-term rate of return on assets assumption for the union plan and 4.2% (net of income taxes) for the non-union plan portion of the post retirement plan.

Mortality — Mortality assumptions are a critical component of benefit obligation amounts and a key factor in determining the expected length of time for annuity payments. In 2014, the Society of Actuaries released new mortality tables for pension plans. The benefit obligation amounts as of December 31, 2014 assumed a longer life expectancy of participants as a result of the actuarial update to mortality tables, resulting in an increase of approximately 3% in the related benefit obligation amounts.

Healthcare Cost Trend Rate — A sliding scale for assumed health care cost increases was used for the periods presented. In 2014, health care cost increases started at 6.8% grading down to 5.6% in 10 years for those under age 65, and at 7.0% grading down to 5.1% in 10 years for those 65 and over. In 2013, health care cost increases started at 7.8% grading down to 6.3% in 10 years for those under age 65, and at 7.0% grading down to 5.7% in 10 years for those 65 and over. In 2012, health care cost increases started at 8.0% grading down to 7.2% in 10 years for those under age 65, and at 7.0% grading down to 5.8% in 10 years for those 65 and over. Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. A one-percentage-point change in assumed health care cost trend rates would have the following effects on the post-retirement medical plan:



(dollars in thousands)	1-Percentage-Point Increase		1-Percentage-Point Decrease
Effect on total of service and interest cost components	$	80	$	(70	)
Effect on post-retirement benefit obligation	$	1,438	$	(1,232	)

Supplemental Executive Retirement Plan:

Registrant has a supplemental executive retirement plan (“SERP”) that provides additional retirement benefits to certain key employees and officers of Registrant by making up benefits, which are limited by Sections 415 and 401(a)(17) of the Internal Revenue Code of 1986, as amended, and certain additional benefits. The Board of Directors approved the establishment of a Rabbi Trust created for the SERP. Assets in a Rabbi Trust can be subject to the claims of creditors; therefore, they are not considered as an asset for purposes of computing the SERP’s funded status. As of December 31, 2014, the balance in the Rabbi Trust totaled $8.8 million and is included in Registrant’s other property and investments.

All equity investments in the Rabbi Trust are Level 1 investments in mutual funds. The fixed income category includes corporate bonds and notes. The fair values of these investments are based on quoted market prices in active markets. The following tables set forth by level, within the fair value hierarchy, the Rabbi Trust investment assets measured at fair value as of December 31, 2014 and 2013.



	Fair Value as of December 31, 2014
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Assets held in Rabbi Trust:
Cash equivalents	$	29	—	—	$	29
Fixed income securities	3,454		—	—	3,454
Equity securities	5,282		—	—	5,282
Total investments measured at fair value	$	8,765	—	—	$	8,765



	Fair Value as of December 31, 2013
(dollars in thousands)	Level 1		Level 2	Level 3	Total
Fair Value of Assets held in Rabbi Trust:
Cash equivalents	$	27	—	—	$	27
Fixed income securities	2,587		—	—	2,587
Equity securities	4,202		—	—	4,202
Total investments measured at fair value	$	6,816	—	—	$	6,816

The following provides a reconciliation of benefit obligations, funded status of the SERP, as well as a summary of significant estimates at December 31, 2014 and 2013:



(dollars in thousands)	2014			2013
Change in Benefit Obligation:
Benefit obligation at beginning of year	$	12,296		$	12,406
Service cost	768			803
Interest cost	615			514
Actuarial (gain) loss	2,497			(1,198		)
Benefits paid	(250		)	(229		)
Benefit obligation at end of year	$	15,926		$	12,296
Changes in Plan Assets:
Fair value of plan assets at beginning of year	—			—
Fair value of plan assets at end of year	—			—

Funded Status:
Net amount recognized as accrued cost	$	(15,926	)	$	(12,296	)



(in thousands)	2014			2013
Amounts recognized on the balance sheets:
Current liabilities	$	(379	)	$	(230	)
Non-current liabilities	(15,547		)	(12,066		)
Net amount recognized	$	(15,926	)	$	(12,296	)
Amounts recognized in regulatory assets consist of:
Prior service cost	$	153		$	314
Net loss	4,530			2,172
Regulatory assets	4,683			2,486
Unfunded accrued cost	11,243			9,810
Net liability recognized	$	15,926		$	12,296

Changes in plan assets and benefit obligations recognized in regulatory assets consist of:
Regulatory asset at beginning of year	$	2,486		$	4,184
Net (gain) loss	2,497			(1,199		)
Amortization of prior service credit	(161		)	(161		)
Amortization of net loss	(139		)	(338		)
Total change in regulatory asset	2,197			(1,698		)
Regulatory asset at end of year	$	4,683		$	2,486

Net periodic pension cost	$	1,683		$	1,817
Change in regulatory asset	2,197			(1,698		)
Total recognized in net periodic pension and net income	$	3,880		$	119

Estimated amounts that will be amortized from regulatory asset over the next fiscal year:
Initial net asset (obligation)	—			—
Prior service cost	$	(117	)	$	(161	)
Net loss	(431		)	(139		)
Additional year-end information for plans with an accumulated benefit obligation in excess of plan assets:
Projected benefit obligation	$	15,926		$	12,296
Accumulated benefit obligation	13,992			10,116
Fair value of plan assets	—			—
Weighted-average assumptions used to determine benefit obligations:
Discount rate	4.15		%	5.05		%
Rate of compensation increase	4.00		%	4.00		%

The components of SERP expense, before allocation to the overhead pool, for 2014, 2013 and 2012 are as follows:



(dollars in thousands, except percent)	2014			2013			2012
Components of Net Periodic Benefits Cost:
Service cost	$	768		$	803		$	731
Interest cost	615			514			488
Amortization of prior service cost	161			161			161
Amortization of net loss	139			339			307
Net periodic pension cost	$	1,683		$	1,817		$	1,687

Weighted-average assumptions used to determine net periodic cost:
Discount rate	5.05		%	4.20		%	4.65		%
Rate of compensation increase	4.00		%	4.00		%	4.00		%

Benefit Payments: Registrant’s estimated future benefit payments for the SERP at December 31, 2014 for the next ten years are as follows (in thousands):



2015	$	379
2016	391
2017	472
2018	614
2019	712
Thereafter	5,402
Total	$	7,970

401(k) Investment Incentive Program:

Registrant has a 401(k) Investment Incentive Program under which employees may invest a percentage of their pay, up to a maximum investment prescribed by law, in an investment program managed by an outside investment manager. Registrant’s cash contributions to the 401(k) are based upon a percentage of individual employee contributions and totaled $1.9 million for each of the years ended December 31, 2014, 2013 and 2012. In 2011, this program was amended to incorporate the defined contribution plan previously discussed. Contributions to the defined contribution plan for the years ended December 31, 2014, 2013 and 2012 were $568,000, $394,000 and $254,000, respectively.

Affordable Care Act:

In 2010, the Patient Protection and Affordable Care Act ("Affordable Care Act") was passed and was to become effective in 2014. In July 2013, compliance with the employer mandate and certain reporting requirements under the Affordable Care Act were delayed until 2015. Registrant's health care plan meets the current requirements of the Affordable Care Act. Registrant continues to assess the impact of the Affordable Care Act on its health care benefit costs, but does not expect it to have a material impact in the near future on the Registrant's consolidated financial position, results of operations or cash flows.