AWR

Business Context and Reporting Period

This Form 10-K is a combined annual report for American States Water Company (AWR) and its wholly-owned subsidiary, Golden State Water Company (GSWC), for the fiscal year ended December 31, 2025. AWR operates three reportable segments: Water (GSWC), Electric (Bear Valley Electric Service, Inc. or BVES), and Contracted Services (American States Utility Services, Inc. or ASUS). The company serves approximately 290,000 customers in California and provides utility services at various U.S. military bases across ten states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenues increased by $62.6 million, driven by CPUC-approved rate increases for water and electric utilities and higher construction activity in the contracted services segment.
• Regulatory Mechanism Changes: Effective January 1, 2025, GSWC transitioned from the full revenue decoupling mechanism (WRAM) and full cost balancing account (MCBA) to a modified rate adjustment mechanism (M-WRAM) and an incremental cost balancing account (ICBA). This change exposes earnings to greater volatility from water consumption fluctuations and supply cost mix changes.
• Segment Performance:
  • Water: Revenues increased $46.7 million due to new rates and higher consumption, though consumption was nearly 4% lower than adopted levels.
  • Electric: Revenues increased $5.6 million due to third-year rate increases and advice letter projects.
  • Contracted Services: Revenues increased $10.3 million due to new operations at Joint Base Cape Cod and Naval Air Station Patuxent River, and increased construction activity.
• One-Time Tax Benefit: The 2024 results included a one-time tax benefit of $5.0 million ($0.13 per share) related to a change in estimate for excess deferred income tax balances. Adjusted 2024 diluted EPS was $3.04.

Guidance, Outlook, and Risks

• Capital Expenditures: Company-funded capital expenditures for 2026 are estimated between $185 million and $225 million, barring delays from weather or supply chain issues.
• Regulatory Outlook: GSWC received approval for full second-year rate increases effective January 1, 2026. BVES filed a new general rate case for 2027-2030 in January 2026.
• Environmental Compliance: The company faces increasing costs related to PFAS and Hexavalent Chromium regulations. GSWC received approximately $17 million in PFAS litigation proceeds in 2025, which are tracked in a memorandum account to offset future remediation costs.
• Key Risks:
  • Climate Change: Drought conditions and wildfire risks in California impact water supply and electric demand (snowmaking). Wildfire mitigation plans require significant capital investment.
  • Government Shutdowns: ASUS operations are "excepted services" and continued during the 2025 government shutdown, but prolonged shutdowns could delay funding and price adjustments.
  • Regulatory Decoupling: The loss of full revenue decoupling for water operations increases earnings volatility related to customer conservation and weather patterns.

Investor Verification Checklist

• Regulatory Asset Recovery: Verify the probability of recovering $132.3 million in regulatory assets, particularly those related to wildfire mitigation and PFAS remediation.
• Water Supply Mix: Monitor the actual vs. adopted water supply mix, as the new ICBA mechanism means unfavorable shifts in supply costs will directly impact earnings.
• Debt Covenants: Confirm continued compliance with debt covenants, specifically the 0.65-to-1.00 capitalization ratio for AWR and GSWC credit facilities.
• Construction Backlog: Review the $4.2 billion in remaining performance obligations for the contracted services segment and the timing of revenue recognition.
• Dividend Sustainability: Assess the $1.045 billion available for dividends under California law and the reliance on subsidiary cash flows to fund the 71-year consecutive dividend increase streak.