AMERICAN STATES WATER CO (AWR)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information on AWR’s consolidated operations and assets, and includes specific references to (i) GSWC, AWR’s regulated water utility segment, (ii) BVES, AWR’s regulated electric utility segment, (iii) ASUS and its subsidiaries, collectively, AWR’s contracted services segment, and (iv) AWR (parent) where applicable.

Included in the following analysis is a discussion of Registrant’s operations in terms of earnings per share by business segment and AWR (parent), which equals each business segment’s earnings divided by AWR’s weighted average number of diluted Common Shares.  The impact of retroactive rates related to the full year of 2022 recorded during the year ended December 31, 2023 resulting from the final decision in the water general rate case approved in June 2023 and the impact from the reversal of revenues subject to refund recorded in 2022 due to a change in estimates recorded in 2023 following the receipt of a final cost of capital decision in June 2023 have been excluded in this analysis when communicating AWR’s consolidated and water segment results for the years ended December 31, 2024 and 2023 to help facilitate comparisons of Registrant’s performance from period to period.

All of the measures discussed above are derived from consolidated financial information of Registrant, but are not presented in our financial statements that are prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). These items constitute “non-GAAP financial measures” under Securities and Exchange Commission rules, which supplement our GAAP disclosures but should not be considered as an alternative to the respective GAAP measures. Furthermore, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of other registrants.

AWR uses earnings per share by business segment, a non-GAAP financial measure, as an important measure in evaluating its operating results and believes it provides investors with clarity surrounding the performance of its segments.  AWR reviews this measurement regularly and compares it to historical periods and to its operating budget. A reconciliation to AWR’s consolidated diluted earnings per share prepared in accordance with GAAP is included in the discussion under the section titled “Summary Results by Segment.”

Overview

Factors affecting our financial performance are summarized under the Overview section in Item 1. Business and Item 1A. Risk Factors.

Water and Electric Segments:

GSWC’s revenues, operating income and cash flows are earned primarily through delivering potable water to homes and businesses in California. BVES’s revenues, operating income and cash flows are primarily earned through delivering electricity in the Big Bear area of San Bernardino County, California. Rates charged to GSWC and BVES customers are authorized by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on invested capital.  GSWC and BVES plan to continue seeking additional rate increases in future years from the CPUC to recover operating and supply costs, and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC and BVES are expected to remain at substantially higher levels than depreciation expense. When necessary, GSWC and BVES may obtain funds from external sources in the capital markets and through bank borrowings.

General Rate Case Filings and Other Matters:

Water General Rate Case for the years 2025–2027

On August 14, 2023, GSWC filed a general rate case application for all its water regions and the general office. This general rate case will determine new water rates for the years 2025 – 2027. On July 12, 2024, GSWC and the Public Advocates Office (“Cal Advocates”) of the CPUC filed a joint motion to adopt a settlement agreement between GSWC and Cal Advocates in connection with the water utility general rate case. A proposed decision in the water general rate case was issued on November 15, 2024 and an alternate proposed decision was subsequently issued on December 27, 2024. The proposed decision adopted the settlement agreement and also addressed various unresolved issues related to GSWC’s requests for certain regulatory mechanisms. Among other things, the proposed decision rejected GSWC’s request for the continuation of a sales reconciliation mechanism, which would allow GSWC to adjust its sales forecast throughout the general rate case cycle to address significant fluctuations in consumption. An alternate decision issued by the assigned Commissioner on December 27, 2024, approved GSWC’s request to continue this mechanism. No other material changes were made to the proposed decision. On January 30, 2025, the CPUC issued a final decision in this proceeding that approved the alternate proposed decision, which adopted the settlement agreement. GSWC continued to bill its customers based on the existing adopted 2024 rates until the new 2025 rates were approved and implemented effective February 1, 2025. GSWC had filed with the CPUC to establish memorandum accounts to track interim rates, which made the new 2025 rates retroactive to January 1, 2025.

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The settlement agreement approved in the final decision resolved most of the issues related to the calculation of the 2025 annual revenue requirement in the general rate case application leaving only two unresolved issues. Among other things, the approved settlement authorizes GSWC to invest approximately $573.1 million in capital infrastructure over the three-year capital cycle. The $573.1 million of infrastructure investment includes $17.7 million of advice letter capital investments to be filed for revenue recovery during the second and third year attrition increases when those projects are completed. In addition, the approved settlement agreement includes $58.2 million of advice letter capital investments that began construction in 2023 that we expect to file for revenue recovery during the second and third year attrition increases when those projects are completed. For all of the advice letter projects, GSWC will be allowed to accrue interest during construction at the adopted cost of debt and recover the full rate of return, including all applicable components of the revenue requirement after the assets are placed in service up until the assets are placed in customer rates.

Excluding revenues for all of the advice letter capital projects discussed above, under the terms of the approved settlement agreement (i) GSWC’s adopted operating revenues less water supply costs for 2025 will increase by approximately $23 million as compared to the 2024 adopted operating revenues less water supply costs, and (ii) there are potential additional revenue increases of approximately $20 million for each of the years 2026 and 2027 based on inflation factors used at the time of the application filing in August 2023. The increases in 2026 and 2027 are subject to the results of an earnings test and changes to the forecasted inflationary index values. Actual increases for 2026 and 2027 will be determined when the CPUC approves the filings to implement the new rate increases, using inflationary index values applicable at that time.

The two remaining 2025 revenue requirement issues that were not resolved in the approved settlement agreement were related to the sales forecast and supply mix. The final decision adopts GSWC’s recommended sales forecast and adopts a supply mix that splits the difference between GSWC’s and Cal Advocates’ forecasts. In addition, certain items related to GSWC’s request for various regulatory mechanisms were litigated that were also addressed in the final decision. With regards to these requests, the final decision (i) rejects GSWC’s request for the continuation of a full sales and revenue decoupling mechanism such as the WRAM and a full cost balancing account for water supply such as the MCBA, and instead orders GSWC to transition to a modified rate adjustment mechanism (a Monterey-style WRAM or “M-WRAM”) and an incremental cost balancing account (“ICBA”) for supply costs, (ii) accepts GSWC’s sales reconciliation mechanism, (iii) rejects GSWC’s supply mix adjustment mechanism, and (iv) rejects GSWC’s request to modify the existing per- and polyfluoroalkyl substances (“PFAS”) memorandum account to track carrying costs on capital investments needed to comply with the new PFAS maximum contaminant levels established by the U.S. EPA (with monitoring and reporting required effective 2027), and instead orders GSWC to file for recovery of PFAS-related capital projects through a separate application or future general rate case. The final decision also adopted GSWC’s M-WRAM rate design proposal, authorizing GSWC to increase the revenue requirement in its fixed service charges to between 45-48% depending on the ratemaking area representing approximately 65% of GSWC’s fixed costs in aggregate. The M-WRAM tracks the difference between the revenue based on actual metered sales through a tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a blended tier standard quantity rate had been in effect. The ICBA for supply costs tracks differences between the authorized per-unit prices of water production costs and actual per-unit prices of water production costs. The M-WRAM and ICBA are effective January 1, 2025.

As noted above, GSWC litigated its request for the continued use of the WRAM and MCBA. In August 2020, the CPUC had issued a decision that mandated the discontinuation of the existing WRAM used by investor-owned water utilities since 2008 that, in conjunction with tiered rates, incentivizes water conservation, and also ordered the discontinued use of the MCBA. In response to the CPUC’s order, GSWC, three other investor-owned water utilities and the California Water Association each separately filed a petition in 2021 with the California Supreme Court (the “Court”) to review the CPUC’s decision-making processes that resulted in discontinuing the use of the WRAM and MCBA. On July 8, 2024, the Court issued a ruling that set aside the previously issued order by the CPUC and vacated the portions of the CPUC’s August 2020 decision related to the discontinued use of the WRAM and MCBA used by water utilities and its accompanying findings and conclusions. Furthermore, in September 2022, the governor of California signed Senate Bill (“SB”) 1469, which allowed Class A water utilities, including GSWC, to continue requesting the use of a revenue decoupling mechanism in their next general rate case. However, despite the Court’s ruling and SB 1469, GSWC’s request to continue using the WRAM and MCBA was rejected by the CPUC and as a result, GSWC will not be able to recognize under-collections of revenue caused by fluctuations in consumption or changes in water supply cost mix beginning in 2025. However, the final decision did approve GSWC’s request for the continuation of a sales reconciliation mechanism, which would allow GSWC to adjust its sales forecast throughout the general rate case cycle to address significant fluctuations in consumption.

Finally, included in the consolidated results for 2024 is a tax benefit of $5 million, or $0.13 per share, resulting from the final decision that adopted a settlement agreement, which excluded from customer rates certain excess deferred income tax balances generated by activities outside of ratemaking that were previously recorded as regulatory liabilities as a result of the 2017 Tax Cuts and Jobs Act that reduced the corporate income tax rate from 35% to 21%. Because of the final CPUC decision, and the alternate proposed decision received in December 2024, both of which approved the settlement agreement in its entirety, GSWC recorded the tax benefit in 2024 to reflect a change in estimate that decreased its regulatory liabilities associated with excess deferred income tax balances as of December 31, 2024.

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Water General Rate Case for years 2022 - 2024

In June 2023, the CPUC adopted a final decision in GSWC’s general rate case application for all its water regions and its general office that determined new water rates for the years 2022–2024 retroactive to January 1, 2022. The impact of retroactive rates for the full year of 2022 as well as the 2023 estimated second-year rate increases have been reflected in the results of operations for the year ended December 31, 2023.

The third-year rate increases for 2024, which were effective January 1, 2024, have been reflected in the year ended December 31, 2024 results. There was an increase in recorded water operating revenues of $22.3 million when compared to 2023, largely as a result of the third-year rate increases for 2024 that reflects, among other things, a higher revenue requirement for increases in recorded supply costs of $3.6 million, which combined is an increase of $0.36 per share, when compared to 2023, and excludes the impact of (i) retroactive rates for the full year of 2022 resulting from the final general rate case decision, and (ii) reversing the revenues subject to refund liability previously recorded in 2022 resulting from the final cost of capital decision, with both decisions received and recorded in 2023. Actual water supply costs are tracked against adopted costs in the revenue requirement, and passed through to customers on a dollar-for-dollar basis by way of the CPUC-approved water supply cost balancing accounts. The increase in water supply costs results in a corresponding increase in water operating revenues and has no net impact on the water segment’s profitability. Due to the delay in finalizing the previous water general rate case, water revenues billed to customers for the year ended December 31, 2022 and for the period from January 1, 2023 to July 30, 2023 were based on 2021 adopted rates and new 2023 rate increases went into effect on July 31, 2023. In October 2023, surcharges were implemented to recover all retroactive rate differences accumulated in memorandum accounts for the full year of 2022 and for 2023 through July 30, 2023 over 36 months. As of December 31, 2024, there is an aggregate cumulative balance of $37.7 million in CPUC-approved general rate case memorandum accounts that have been recognized as regulatory assets with a corresponding increase in water revenues.

Cost of Capital (“COC”) Proceedings

2026 COC Application

Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis. After receiving an extension in February 2024, GSWC’s next cost of capital application was scheduled to be filed on May 1, 2025 effective for the years 2026 - 2028. On January 14, 2025, the CPUC approved a request to defer the cost of capital application by another year. In December 2024, GSWC, along with three other investor-owned California water utilities, requested a further extension of the date by which each of them must file their cost of capital applications. The CPUC’s approval postponed this filing date by one year until May 1, 2026, with a corresponding effective date of January 1, 2027. The CPUC also approved the joint parties’ request to leave the current WCCM in place through the one-year deferral period. GSWC’s current authorized rate of return on rate base is 7.93%, based on its weighted cost of capital, which will continue in effect through December 31, 2026. The 7.93% return on rate base includes a return on equity of 10.06%, an embedded cost of debt of 5.1%, and a capital structure with 57% equity and 43% debt.

2021 COC Application

On June 29, 2023, the CPUC adopted a final decision in the cost of capital proceeding effective July 31, 2023 that, among other things, allowed for the continuation of the WCCM. The WCCM adjusts the return on equity and rate of return on rate base between the three-year cost of capital proceedings only if there is a positive or negative change of more than 100 basis points in the average of the Moody’s Aa utility bond rate as measured over the period October 1 through September 30. If there is a positive or negative change of more than 100 basis points, the return on equity is adjusted by one half of the difference. Based on the final decision, all adjustments to rates were effective July 31, 2023. Accordingly, GSWC billed its water customers and recognized revenues for the period from January 1 through July 30, 2023 based on the previously authorized return on equity of 8.9%. After receiving the final cost of capital decision, GSWC filed an advice letter to establish the WCCM and related adjustment for 2023, which increased GSWC’s 8.85% adopted return on equity in the decision to 9.36% effective July 31, 2023. For the period from October 1, 2022 through September 30, 2023, the Moody’s Aa utility bond rate increased by 139.7 basis points from the benchmark, which again triggered a WCCM adjustment and increased GSWC’s 9.36% adopted return on equity to 10.06% effective January 1, 2024.

Based on the final decision in the cost of capital proceeding issued in June 2023, all adjustments to rates were prospective and not retroactive. Following the receipt of the final decision that became effective July 31, 2023, management updated its analysis and reassessed the accounting estimates recorded to date related to GSWC’s lower cost of debt. Accordingly, during the second quarter of 2023, GSWC recorded a change in estimate that resulted in an increase to water revenues in the amount of $6.4 million, or approximately $0.13 per share, as a result of reversing its regulatory liability for revenues subject to refund that it had recorded during 2022.

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Electric General Rate Case for the years 2023–2026

On August 30, 2022, BVES filed a general rate case application that determines new electric rates for the years 2023 – 2026. On November 1, 2024, BVES, Cal Advocates, and the other intervenor in the proceeding filed a joint motion to adopt a settlement agreement between the parties resolving all issues in connection with the pending general rate case. On January 16, 2025, the CPUC adopted a final decision in BVES’s general rate case proceeding that set the new electric rates retroactive to January 1, 2023 and approves the settlement agreement in its entirety.

Among other things, the settlement agreement, (i) settles and adopts the revenue requirements for each of the four years 2023 through 2026, (ii) authorizes BVES to invest approximately $52.5 million in capital infrastructure included in base rates over the four-year rate cycle and at least an additional $23.1 million (plus an allowance for funds used during construction, or “AFUDC”) to be filed for revenue recovery through advice letters when the projects are completed; (iii) adopts a cost of capital that increases BVES’s adopted return on equity from 9.6% to 10.0%, lowers the cost of debt from 6.6% to 5.51%, and maintains the capital structure of 57% equity and 43% debt, and (iv) approves for recovery the requested capital expenditures and other incremental operating costs already incurred in connection with BVES’s wildfire mitigation plans that were previously not included in customer rates.

Because of receiving a proposed decision in December 2024 followed by a final decision in January 2025, both of which approved the settlement agreement in its entirety, the impact of retroactive rates for the full year of 2023 and the 2024 second-year rate increases have been reflected in the 2024 fourth quarter results as it became probable that the approved retroactive rates for 2023 and 2024 would be permitted to be billed to customers in the future. The new rates are expected to go into effect on March 1, 2025. BVES was also authorized by the CPUC to establish a general rate case memorandum account that made the new rates retroactive to January 1, 2023. Due to the delay in finalizing the electric general rate case, billed electric revenues for the years of 2023 and 2024, were based on 2022 adopted rates. The general rate case memorandum account tracks the revenue differences between the 2022 adopted rates and the 2023 and 2024 new rates authorized by the CPUC for future recovery. Accordingly, as of December 31, 2024, an aggregate cumulative under-collection amount of $9.8 million in retroactive revenues related to the full year of 2023 and 2024 was recorded during the fourth quarter of 2024 along with a corresponding increase to BVES’s regulatory assets for future recovery from customers. Within 90 days from the effective date of the final decision, BVES will file for recovery of retroactive amounts accumulated related to the new rates, as well as recovery of incremental operating costs incurred prior to 2023 in connection with BVES’s wildfire mitigation plans that were being tracked in memorandum accounts prior to the new rate cycle.

As a result of reflecting the new rates in 2024 retroactive to January 1, 2023, there was an increase in 2024 recorded electric revenues of $9.8 million when compared to 2023 largely reflecting the new customer rates for 2023 and 2024 that, for this approved rate cycle cover, among other things, the growth in rate base and the higher operating costs as settled in the revenue requirement including those related to BVES’s wildfire mitigation plans that prior to 2023 were previously not included in customer rates and not expensed because they were being tracked in memorandum accounts. The increase in recorded revenues was largely offset by higher operating expenses and interest costs to support, among other things, BVES’s wildfire mitigation plans including investing in capital all of which is dedicated to improving the system safety and reliability for the community it serves. The final decision will also provide for an increase in adopted operating revenues of $2.2 million for 2025 and $3.3 million in 2026. The rate increases for 2024 - 2026 are not subject to an earnings test. Furthermore, the previously mentioned advice letter projects of at least $23.1 million are expected to generate additional annual operating revenues of approximately $3 million when the respective projects are completed, placed in service, and filed for recovery in customer rates. These projects also accrue AFUDC during construction that will further increase the revenue requirement. In the settlement agreement, the parties agreed to remove portions of the requested capital budgets from rates until they were completed and placed in service. For all of the advice letter projects, BVES will be allowed to accrue AFUDC during the construction period at the adopted rate of return, which will be added to the cost of the assets and recovered in customer rates when the assets are placed in service.

Contracted Services Segment:

ASUS’s revenues, operating income and cash flows are earned by providing water and/or wastewater services, including operation and maintenance services and construction of facilities for the water and/or wastewater systems at various military installations, pursuant to an initial 50-year, firm fixed-price contract, additional firm fixed-price contracts, task order agreements and subcontracts with third party prime contractors on military bases. Currently, ASUS has one subsidiary that has entered into a task order agreement with the U.S. government that has a term of 15 years. The contract price for each of the contracts and recurring task order agreements is subject to annual economic price adjustments. Additional revenues generated by contract operations are primarily dependent on annual economic price adjustments, and new construction activities under contract modifications with the U.S. government or agreements with other third-party prime contractors. ASUS’s subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served.

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During 2024, ASUS has been awarded approximately $56.5 million in new construction projects for completion beginning in 2024 through 2027. Earnings and cash flows from modifications to the initial 50-year contracts, additional contracts thereafter with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

In August and September of 2023, ASUS was awarded new contracts with the U.S. government to serve two military bases for which operations began in April 2024. After completion of the transition periods, ASUS began operating the water and wastewater utility systems at Naval Air Station Patuxent River in Maryland under a 50-year privatization contract with the U.S. government and at Joint Base Cape Cod in Massachusetts under a 15-year contract with the U.S. government. The initial value of its contract at Naval Air Station Patuxent River was estimated at approximately $349 million over a 50-year period and is subject to annual economic price adjustments. In July 2024, the estimated contract value was increased to $378 million after an inventory adjustment. Under its contract at Joint Base Cape Cod, ASUS performs work through the annual issuance of task orders by the U.S. government over a 15-year period up to a maximum value to ASUS of $75.0 million, subject to adjustments as task orders are issued. In April 2024, the U.S. government awarded a task order to ASUS valued at $4.1 million for the first year of operation, maintenance, and renewal and replacement services of the water and wastewater systems at Joint Base Cape Cod.

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Summary Results by Segment

The table below sets forth a comparison of the diluted earnings per share by business segment and for the parent company:

Note: Certain amounts in the table above may not foot or crossfoot due to rounding.

* All adjustments to 2023’s recorded diluted earnings per share relate to the water segment. The water segment’s adjusted earnings for 2023 exclude both the impact of the final decision in the water general rate case that included retroactive rates related to the full year of 2022 and the impact of reversing previously recorded estimated 2022 revenues subject to refund as a result of the final cost of capital decision issued in June 2023 that made all adjustments to rates prospective. Both adjustments are shown separately in the table above.

For the year ended December 31, 2024, AWR’s recorded consolidated diluted earnings were $3.17 per share, as compared to $3.36 per share for 2023, a decrease of $0.19 per share, which includes: (i) the impact from the final decision in the water general rate case recorded in 2023 that included retroactive new rates related to the full 2022 year of $0.38 per share, and (ii) the impact of the final cost of capital decision that resulted in the reversal during the year ended December 31, 2023 of estimated revenues subject to refund recorded in 2022 of $6.4 million, or $0.13 per share. Excluding these two items from 2023, adjusted consolidated diluted earnings would be $2.85 per share for 2023 as compared to adjusted and recorded diluted earnings of $3.17 per share for 2024, an adjusted increase of $0.32 per share.

Furthermore, included in the consolidated results for 2024 was a tax benefit of $5 million, or $0.13 per share, resulting from the final decision issued by the CPUC on January 30, 2025 in connection with GSWC’s recent general rate case proceeding. The final decision adopted a settlement agreement between GSWC and Cal Advocates, which excluded from customer rates certain excess deferred income tax balances generated by activities outside of ratemaking that were previously recorded as regulatory liabilities as a result of the 2017 Tax Cuts and Jobs Act that reduced the corporate income tax rate from 35% to 21%. Because of the final CPUC decision, and the alternate proposed decision received in December 2024, both of which approved the settlement agreement in its entirety, GSWC recorded the tax benefit to reflect a change in estimate that decreased its regulatory liabilities associated with excess deferred income tax balances as of December 31, 2024. In addition, AWR’s consolidated diluted earnings in 2024 were negatively impacted by approximately $0.04 per share due to the dilutive effects from the issuance of equity under AWR’s ATM offering program.

The following is a computation and reconciliation of diluted earnings per share from the measure of net income (loss) by business segment as disclosed in Note 17 to the Consolidated Financial Statements, to AWR’s consolidated fully diluted earnings per common share for the year ended December 31, 2024 and 2023:

Note: Certain amounts in the table above may not foot or crossfoot due to rounding.

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Water Segment:

For the year ended December 31, 2024, recorded diluted earnings from the water utility segment were $2.51 per share, as compared to $2.77 per share for 2023, a decrease of $0.26 per share, which includes: (i) the impact from the final decision in the water general rate case recorded in 2023 that included retroactive new rates related to the full 2022 year of $0.38 per share, and (ii) the impact of the final cost of capital decision that resulted in the reversal of estimated water revenues subject to refund previously recorded in 2022 of $6.4 million, or $0.13 per share. Excluding the impact of these two items from 2023, adjusted diluted earnings at the water segment would be $2.26 per share for 2023 as compared to adjusted and recorded diluted earnings of $2.51 per share for 2024, an adjusted net increase at the water segment of $0.25 per share due primarily to the following items:

•Excluding the revenue impact related to 2022 resulting from the decisions in both the general rate case and cost of capital proceedings recorded for the year ended December 31, 2023 as previously discussed, there was an increase in water operating revenues of approximately $22.3 million mainly as a result of the third-year rate increases that went into effect on January 1, 2024, as well as an increase in GSWC’s return on rate base in 2024 compared to 2023 resulting from the final cost of capital proceeding received in June 2023 that allowed for the continuation of the WCCM as previously discussed.

•An increase in water supply costs of $3.6 million, which consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. The increase in water supply costs is primarily related to an increase in customer water usage, wholesale water prices and water production costs. During 2024 and 2023, actual water supply costs were tracked against adopted costs in the revenue requirement, and passed through to customers on a dollar-for-dollar basis by way of the CPUC-approved water supply cost balancing accounts. The increase in water supply costs results in a corresponding increase in water operating revenues and has no material impact on the water segment’s profitability.

•An overall increase in operating expenses of $8.9 million (excluding supply costs) mainly due to increases in (i) overall labor costs and other employee-related benefits, (ii) administrative and general expenses resulting largely from higher outside-services costs related to the general rate case application and other regulatory filings, and an increase in insurance-related costs, and (iii) depreciation and amortization expenses as well as property taxes, both of which are impacted by the increasing capital expenditures and are reflected and recovered in customer rates. These increases were partially offset by decreases in other operation-related and maintenance expenses.

•An overall increase in interest expense (net of interest income) of $6.5 million resulting primarily from an increase in interest rates, as well as an overall increase in total borrowing levels to support, among other things, the capital expenditure programs at GSWC.

•An overall increase in other income (net of other expense) of $1.4 million due primarily to a change in the non-service cost components related to GSWC’s benefit plans resulting from changes in actuarial assumptions including expected returns on plan assets. However, as a result of GSWC’s two-way pension balancing accounts authorized by the CPUC, changes in total net periodic benefits costs related to the pension plan have no material impact to earnings.

•An overall decrease in the effective income tax rate due to (i) a tax benefit of $5 million, or $0.13 per share, resulting from the final decision in GSWC’s latest general rate case proceeding as previously discussed, and (ii) changes in certain flowed-through income taxes and permanent items included in GSWC’s income tax expense for the year ended December 31, 2024 as compared to 2023 that favorably impacted the water segment's earnings. As a regulated utility, GSWC treats certain temporary differences as being flowed-through in computing its income tax expense consistent with the income tax method used in its CPUC-jurisdiction rate making. Changes in the magnitude of flowed-through items either increase or decrease tax expense, thereby affecting diluted earnings per share.

•A decrease in earnings of approximately $0.03 per share due to the dilutive effects from the issuance of equity under AWR’s ATM offering program. Under the program, AWR may offer and sell its Common Shares, with an aggregate gross offering price of up to $200 million, from time to time at its sole discretion. Through December 31, 2024, AWR has sold 1,145,219 Common Shares through this ATM offering program.

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Electric Segment:

Diluted earnings from the electric utility segment increased $0.01 per share for the year ended December 31, 2024 as compared to 2023. On January 16, 2025, the CPUC adopted a final decision in connection with BVES’s general rate case proceeding that set new rates for 2023 – 2026, with new electric rates retroactive to January 1, 2023. As a result of receiving the final decision, the impact from retroactive rates for the full year of 2023 and from the second-year rate increases through the year ended December 31, 2024 have been reflected in the 2024 fourth quarter results. The new rates resulted in an increase in electric revenues that supports, among other things, the growth in rate base and higher operating costs related to BVES’s wildfire mitigation plans that were previously not included in customer rates and not expensed because they were being tracked in memorandum accounts. The increase in electric revenues in 2024 compared to 2023 was largely offset by higher operating expenses and interest costs to support, among other things, BVES’s wildfire mitigation plans including investing in capital all of which is dedicated to improving the system safety and reliability for the community it serves.

Contracted Services Segment:

Diluted earnings from the contracted services segment increased $0.05 per share for the year ended December 31, 2024 as compared to 2023, largely due to an increase in management fee revenues resulting from the commencement of operation at the new bases (Naval Air Station Patuxent River and Joint Base Cape Cod) and the resolution of various economic price adjustments, partially offset by higher overall operating expenses (excluding construction expenses) from the new bases as compared to 2023, and a decrease in earnings of approximately $0.01 per share due to the dilutive effects on ASUS from the issuance of equity under AWR’s ATM offering program.

AWR (Parent):

For the year ended December 31, 2024, the diluted loss from AWR (parent) is consistent compared to 2023.

The following discussion and analysis for the years ended December 31, 2024 and 2023 provide information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC, BVES and ASUS and its subsidiaries.

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Consolidated Results of Operations — Years Ended December 31, 2024 and 2023 (amounts in thousands, except per share amounts):

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Operating Revenues

General

GSWC and BVES rely upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plants. ASUS relies on economic price and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS. Current operating revenues and earnings may be negatively impacted if ASUS’s subsidiaries do not receive adequate price adjustments in a timely manner. ASUS’s earnings are also impacted by the level of construction projects at its subsidiaries, which may or may not continue at current levels in future periods.

Water

For the year ended December 31, 2024, revenues from water operations decreased by $16.1 million to $417.4 million, compared to 2023. The decrease in water revenues was largely due to the impact of retroactive rates related to the full 2022 year resulting from the general rate case decision of approximately $32 million and the impact of the final cost of capital decision that resulted in the reversal of $6.4 million of revenues subject to refund previously recorded in 2022, with both decisions received and recorded in 2023. The increase to revenues from both of these items recorded in 2023 did not recur in 2024 and was partially offset by an increase in water revenues resulting from the third-year rate increases that went into effect on January 1, 2024, and an increase in water revenues as a result of a higher return on rate base in 2024 compared to 2023 resulting from the final cost of capital proceeding received in June 2023 that allowed for the continuation of the WCCM as previously discussed.

Billed water consumption for the year ended December 31, 2024 was higher by 4.5% compared to 2023 due primarily to lower amounts of seasonal precipitation and higher temperatures in the summer months for 2024 compared to 2023. Changes in consumption have not had a significant impact on recorded revenues due to the CPUC-approved WRAM that has been in place in all but one small rate-making area. During 2024 and 2023, GSWC recorded the difference between what it bills its water customers and what is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.

Electric

Electric revenues for the year ended December 31, 2024 increased $9.8 million to $51.6 million due, in large part, to the final decision in the electric general rate case proceeding that set rates for 2023 - 2026, and was retroactive to January 1, 2023. The retroactive revenues for the full year of 2023 and the second-year increases for 2024 have been reflected in 2024 as previously discussed.

Electric usage for the year ended December 31, 2024 was consistent with 2023. Due to the CPUC-approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.

Contracted Services

Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the year ended December 31, 2024, revenues from contracted services increased $6.0 million to $126.4 million as compared to $120.4 million for 2023. The increase was largely due to an increase in management fee revenue from the commencement of operations at the new bases and the resolution of annual economic price adjustments, partially offset by lower overall construction activity resulting from timing differences of when construction work was performed in 2024 as compared to the same period in 2023.

ASUS’s subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served. During 2024, ASUS was awarded approximately $56.5 million in new construction projects for completion in 2024 through 2027. Earnings and cash flows from modifications to the initial 50-year contracts and additional contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

Operating Expenses:

Supply Costs

Total supply costs at the regulated utilities comprise the largest segment of total consolidated operating expenses. Supply costs accounted for 30.0% and 33.1% of total operating expenses for the years ended December 31, 2024 and 2023, respectively.

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Water segment supply costs

Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. The overall actual percentages for purchased water for the years ended December 31, 2024 and 2023 were 41% and 43%. The decrease in the actual percentage of purchased water resulted primarily from wells coming back on-line that had previously been out of service.

Under the CPUC-approved MCBA, GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power and pump tax expenses as a regulatory asset or liability. GSWC recovers from, or refunds to, customers the amount of such variances.  GSWC tracks these variances individually for each water ratemaking area. Without the MCBA mechanism in place beginning in 2025, there may be volatility to Registrant’s earnings as a result of changes in water supply cost mix. However, the MCBA will be replaced with an incremental supply cost balancing account that will not include changes in water supply cost mix, but will allow GSWC to track differences between the authorized per-unit prices of water production costs and actual per-unit prices of water production costs.

Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. For the years ended December 31, 2024 and 2023, water supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(1.9) million and $12.1 million for 2024 and 2023, respectively.

Purchased water costs for the year ended December 31, 2024 increased to $74.3 million as compared to $72.9 million for 2023 primarily due to increases in wholesale water costs, partially offset by a reduction in purchased water resulting from wells coming back on-line. There was an overall increase in well production costs compared to 2023 due to an increase in customer water usage, which increases power purchased for pumping and groundwater production assessments. The increases to water production costs were also a result of increases in electricity provider rates and increases in pump tax rates.

For the year ended December 31, 2024, the water supply cost balancing account had a $1.6 million under-collection as compared to a $13.8 million over-collection in 2023. The change in water supply cost balancing accounts was primarily due to updated adopted supply costs from the final decision in the previous water general rate case proceeding recorded in 2023. The over-collection recorded in 2023 included the full year impact of 2022 that reflected the new adopted supply costs retroactive to January 1, 2022.

Electric segment supply costs

Supply costs for the electric segment consist primarily of purchased power for resale, the cost of natural gas used by BVES’s generating unit, the cost of renewable energy credits and changes in the electric supply cost balancing account. For the years ended December 31, 2024 and 2023, electric supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(1.9) million and $12.1 million for 2024 and 2023, respectively.

For the year ended December 31, 2024, the cost of power purchased for resale to BVES’s customers decreased to $11.6 million as compared to $13.3 million for 2023 primarily due to lower overall average prices per megawatt-hour. The change in the electric supply balancing account in 2024 when compared to 2023 is also due to decreases in energy prices.

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Other Operation

The primary components of other operation expenses include payroll costs, materials and supplies, chemicals and water treatment costs, and outside service costs of operating the regulated water and electric systems, including the costs associated with transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices.  Registrant’s contracted services operations incur many of the same types of expenses.  For the years ended December 31, 2024 and 2023, other operation expenses by business segment consisted of the following amounts (in thousands):

For the year ended December 31, 2024, the decrease in other operation expenses at the water segment was due primarily to a reduction of $2.0 million as a result of receiving the final decision in the recent water general rate case that authorized the recovery of previously incurred operation-related costs that were being tracked in CPUC-authorized memorandum accounts and which became probable of future recovery; partially offset by higher operation-related labor, as well as bad debt expense due to COVID relief funds for past due bills recorded in 2023 that did not recur in 2024.

The decrease at the electric segment was due primarily to an overall decrease in surcharges billed to customers for the recovery of previously incurred costs, which had a corresponding decrease in other operation expenses, resulting in no impact to earnings. The decrease was largely due to the expiration of a surcharge as a result of fully recovering incremental costs previously tracked in a memorandum account that arose from the impact of a winter storm in 2018.

The increase at the contracted services segment was due primarily to the operations at the new bases, higher operation-related labor costs, and water treatment and other related costs.

Administrative and General

Administrative and general expenses include payroll related to administrative and general functions, all employee-related benefits, insurance expenses, outside legal and consulting fees, regulatory utility commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the years ended December 31, 2024 and 2023, administrative and general expenses by business segment, including AWR (parent), consisted of the following amounts (in thousands):

* not meaningful

Administrative and general expenses increased at the water segment due, in large part, to higher outside-services costs incurred in connection with the water general rate case application and other regulatory filings, labor and employee-related expenses, and insurance-related costs. In addition, during the year ended December 31, 2023, there was a reduction of approximately $0.4 million recorded to reflect the final decision issued in June 2023 on the prior water general rate case proceeding that authorized the recovery of previously incurred administrative and general expenses that were being tracked in CPUC-authorized memorandum accounts.

Administrative and general expenses increased at the electric segment primarily due to the approval of the final decision in the electric general rate case proceeding with rates retroactive to January 1, 2023. The new electric rates for 2023 and 2024 included the recovery of higher (i) costs incurred in 2023 and 2024 related to wildfire mitigation activities that were temporarily deferred and recorded as regulatory assets through the third quarter of 2023 while awaiting the general rate case decision and which have now been expensed during the fourth quarter as they are included in the new rates, and (ii) the amortization of regulatory commission costs incurred in this proceeding; with both items retroactively included in the new electric customer rates that resulted in a combined increase in 2024 expenses of $4.3 million compared to 2023 expenses. The higher expenses are reflected and recovered in the new customer rates. The electric segment recorded an increase in revenues

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retroactive to January 1, 2023 in 2024 that offset the effects of the increased administrative and general expenses related to the decision. There was also an increase in labor costs, and legal and other outside services costs.

Administrative and general expenses increased at the contracted services segment due to the operations of the new bases, an increase in labor and employee-related costs, and insurance-related costs, partially offset by lower outside legal costs.

Administrative and general expenses at AWR (parent) during the year ended December 31, 2023 reflected the reversal of a previous accrual for a matter that was favorably resolved and did not recur in 2024.

Depreciation and Amortization

For the years ended December 31, 2024 and 2023, depreciation and amortization expense by segment consisted of the following amounts (in thousands):

Depreciation and amortization expense increased at the water segment due largely to additions to utility plant recorded in 2024, partially offset by the retroactive impact for the full year of 2022 of $0.6 million recorded in 2023 as a result of receiving a final decision in the water general rate case in 2023. The overall decrease in depreciation and amortization expenses at the electric segment is primarily due to the retroactive impact of an overall lower composite depreciation rate supported by the latest depreciation study adopted in the final decision in the electric general rate case that was recorded in 2024 related to the full year of 2023 and 2024. The lower adopted depreciation expense levels from the updated study is also reflected in the new revenue requirements, resulting in no significant impact to earnings. This decrease was partially offset by additions to utility plant.

Maintenance

For the years ended December 31, 2024 and 2023, maintenance expense by segment consisted of the following amounts (in thousands):

* not meaningful

Maintenance expense decreased at the water segment due to lower unplanned maintenance costs experienced in 2024 as compared to 2023.

Maintenance expense was higher at the electric segment as compared to 2023 due largely to the approval of the final decision in the electric general rate case proceeding with rates retroactive to January 1, 2023. Maintenance costs of approximately $4.7 million recorded in 2024 reflect the impact of the higher levels of vegetation management costs approved in the final decision related to the full year of 2023 and 2024 that have been included in the new retroactive customer rates. The electric segment also recorded revenues retroactive to January 1, 2023 in 2024 that offset the effects of the incremental increases in maintenance costs adopted in the final decision. There was also an increase in other maintenance-related activities.

Maintenance expense was higher at the contracted services segment as compared to the same period in 2023 due to higher planned and unplanned maintenances, and maintenance activity at the new bases that was not incurred in the same period in 2023.

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Property and Other Taxes

For the years ended December 31, 2024 and 2023, property and other taxes by segment, consisted of the following amounts (in thousands):

Property and other taxes increased at the water segment due, in part, to a favorable property tax adjustment recorded in 2023 resulting from changes to property tax assessments of certain counties at that time, with no such adjustment occurring in 2024, as well as an increase in capital additions and related higher assessed values.

Property and other taxes increased at the electric segment due to higher property taxes resulting from capital additions and related higher assessed values.

Property and other taxes increased at the contracted services segment largely as a result of an increase in gross receipts taxes resulting from higher revenues, and an increase in payroll taxes due, in part, from the operations at the new bases.

ASUS Construction

For the year ended December 31, 2024, construction expenses for contracted services were $54.5 million, decreasing by $3.4 million compared to 2023 primarily due to an overall decrease in construction activity resulting from timing differences of when such work was performed in 2024 as compared to 2023.

Interest Expense

For the years ended December 31, 2024 and 2023, interest expense by segment, including AWR (parent), consisted of the following amounts (in thousands):

AWR’s borrowings consist of bank notes under revolving credit facilities, while GSWC and BVES borrowings consist of revolving credit facilities and long-term debt issuances. Consolidated interest expense increased as compared to 2023 resulting primarily from an increase in total borrowing levels to support, among other things, the capital expenditures programs at the regulated utilities, as well as an overall increase in average interest rates. The overall combined average interest rates were 5.36% and 5.22% for the year ended December 31, 2024 and 2023, respectively.

Interest Income

For the years ended December 31, 2024 and 2023, interest income by business segment, including AWR (parent), consisted of the following amounts (in thousands):

* not meaningful

The increase in interest income at the water segment was due primarily to higher interest income earned on regulatory assets bearing interest at the current 90-day commercial paper rates, which have increased compared to rates in 2023, as well as an overall higher average net regulatory assets balance recorded during 2024 compared to 2023.

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Other Income and (Expense), net

For the years ended December 31, 2024 and 2023, other income and (expense) by business segment, including AWR (parent), consisted of the following amounts (in thousands):

* not meaningful

For the year ended December 31, 2024, other income (net of other expense) increased primarily due to a change in the non-service cost components related to the Company’s defined-benefit pension plan and other retirement benefits resulting from changes in actuarial assumptions including expected returns on plan assets. However, as a result of GSWC’s and BVES’s two-way pension balancing accounts authorized by the CPUC, changes in total net periodic benefit costs related to the pension plan have no material impact to earnings. The increase in other income (net of other expense) in the electric segment also includes CPUC-authorized recovery of AFUDC on certain capital projects recorded in 2024 of $0.9 million as a result of receiving the final decision on the electric general rate case.

Income Tax Expense

For the years ended December 31, 2024 and 2023, income tax expense by segment, including AWR (parent), consisted of the following amounts (in thousands):

Consolidated income tax expense for the year ended December 31, 2024 decreased by $11.4 million primarily due to a decrease in consolidated pretax income and a tax benefit of $5 million recorded at GSWC in 2024 as a result of receiving a final decision in the latest water general rate proceeding as previously discussed. AWR’s ETRs were 20.2% and 25.0% for the years ended December 31, 2024 and 2023, respectively. GSWC’s ETR was 19.5% for the year ended December 31, 2024 as compared to 25.8% for 2023, which fluctuated due to the tax benefit discussed above and changes in certain flowed-through income taxes and permanent items.

Information comparing the consolidated results of operations for fiscal years 2023 and 2022 can be found under Item 7, Management’s Discussion and Analysis under the headings “Summary Results by Segment” and “Consolidated Results of Operations-Years Ended December 31, 2023 and 2022” in AWR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

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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. The following are accounting policies and estimates that are critical to the financial statements of AWR. For more information regarding the significant accounting policies of Registrant, see Note 1 of “Notes to Financial Statements” included in Part II, Item 8, in Financial Statements and Supplementary Data.

Accounting for Rate Regulation — Because GSWC and BVES operate extensively in regulated businesses, they are subject to the authoritative guidance for accounting for the effects of certain types of regulation.  Application of this guidance requires accounting for certain transactions in accordance with regulations adopted by the regulatory commissions of the states in which rate-regulated operations are conducted.  Utility companies defer costs and credits on the balance sheet as regulatory assets and liabilities when it is probable that those costs and credits will be recognized in the ratemaking process in a period different from the period in which they would have been reflected in income by an unregulated company. These deferred regulatory assets and liabilities are then reflected in the income statement in the period in which the same amounts are reflected in the rates charged for service.

Regulation and the effects of regulatory accounting have the most significant impact on the financial statements of GSWC and BVES. When either files for adjustments to rates, the capital assets, operating costs and other matters are subject to review, and disallowances may occur. In the event that a portion of either GSWC’s or BVES’s operations are no longer subject to the accounting guidance for the effects of certain types of regulation, they are required to write-off related regulatory assets that are not specifically recoverable and determine if other assets might be impaired.  If the CPUC determines that a portion of either GSWC’s or BVES’s assets are not recoverable in customer rates, management is required to determine if it has suffered an asset impairment that would require a write-down in the asset valuation.  Management continually evaluates the anticipated recovery, settlement or refund of regulatory assets, liabilities, and revenues subject to refund and provides for allowances and/or reserves that it believes to be necessary.  In the event that management’s assessment as to the probability of the inclusion in the ratemaking process is incorrect, the associated regulatory asset or liability will be adjusted to reflect the change in assessment or the impact of regulatory approval of rates. Reviews by the CPUC may also result in additional regulatory liabilities to refund previously collected revenues to customers if the CPUC disallows costs included in the ratemaking process.

Registrant also reviews its utility plant in-service for possible impairment in accordance with accounting guidance for regulated entities for abandonments and disallowances of plant costs.

Revenue Recognition — GSWC and BVES record water and electric utility operating revenues when the service is provided to customers. Operating revenues include unbilled revenues that are earned (i.e., the service has been provided) but not billed by the end of each accounting period. Unbilled revenues are calculated based on the number of days and total usage from each customer’s most recent billing record that was billed prior to the end of the accounting period and is used to estimate unbilled consumption as of the year-end reporting period.  Unbilled revenues are recorded for both monthly and bi-monthly customers.

In 2008, the CPUC granted GSWC the authority to implement revenue decoupling mechanisms through the adoption of the WRAM.  With the adoption of this alternative revenue program, GSWC adjusts revenues in the WRAM for the difference between what is billed to its water customers and that which is authorized by the CPUC. GSWC’s request, in its most recent general rate case, to continue using a revenue decoupling mechanism, similar to the WRAM, has been denied by the CPUC. The CPUC has ordered GSWC to transition to a modified rate adjustment mechanism (a Monterey-style WRAM or “M-WRAM”) effective January 1, 2025. The M-WRAM tracks the difference between the revenue based on actual metered sales through a tiered volumetric rate and the revenue that would have been received with the same actual metered sales if a blended tier standard quantity rate had been in effect. The CPUC also granted BVES a revenue decoupling mechanism through the BRRAM. BVES adjusts revenues in the BRRAM for the difference between what is billed to its electric customers and that which is authorized by the CPUC.

As required by the accounting guidance for alternative revenue programs, GSWC and BVES are required to collect their WRAM and BRRAM balances, respectively, within 24 months following the year in which they are recorded.  The CPUC has set the recovery period for under-collected balances that are up to 15% of adopted annual revenues at 18 months or less.  For net WRAM under-collected balances greater than 15%, the recovery period is 19 to 36 months. As a result of the accounting guidance and CPUC-adopted recovery periods, Registrant must estimate if any WRAM and BRRAM revenues will be collected beyond the 24-month period. This can affect the timing of when such revenues are recognized.

ASUS’s firm-fixed-price contracts with the U.S. government are considered service concession arrangements under ASC 853 Service Concession Arrangements. Accordingly, the services under these contracts are accounted for under Topic 606 Revenue from Contracts with Customers and the water and/or wastewater systems are not recorded as Property, Plant and

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Equipment on AWR’s consolidated balance sheet. Revenues for ASUS’s operations and maintenance contracts are recognized when services have been rendered to the U.S. government pursuant to the initial 50-year contract and additional contracts thereafter. Revenues from construction activities are recognized as performance obligations are satisfied. Performance obligations related to firm-fixed-price contracts are satisfied over time as ASUS’s performance typically creates or enhances an asset that the U.S. government controls. ASUS recognizes revenue on its firm-fixed-price contracts as performance obligations are satisfied and control of the promised good and/or service is transferred to the U.S. government by measuring the progress toward complete satisfaction of the performance obligation(s) using an input method. Revenues for construction activities are recognized over time, with progress toward completion measured based on the input method using costs incurred relative to the total estimated costs (cost-to-cost method). Due to the nature of these construction projects, ASUS has determined the cost-to-cost input measurement to be the best method to measure progress towards satisfying its construction contract performance obligations, as compared to using an output measurement such as units produced. Changes in job performance, job conditions, change orders and estimated profitability, including those arising from any contract penalty provisions, and final contract settlements may result in revisions to costs and income, and are recognized in the period in which the revisions are determined. Unbilled receivables from the U.S. government represent amounts to be billed for construction work completed and/or for services rendered pursuant to the initial 50-year contract and additional contracts with the U.S government, which are not presently billable but which will be billed under the terms of the contracts.

Income Taxes — Registrant’s income tax calculations require estimates due principally to the regulated nature of the operations of GSWC and BVES, the multiple states in which Registrant operates, and potential future tax rate changes. Registrant uses the asset and liability method of accounting for income taxes under which deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which these temporary differences are expected to be recovered or settled. Changes in regulatory treatment, or significant changes in tax-related estimates, assumptions or law, could have a material impact on the financial position and results of operations of Registrant.

As regulated utilities, GSWC and BVES treat certain temporary differences as flowed-through adjustments in computing their income tax expense consistent with the income tax approach approved by the CPUC for ratemaking purposes.  Flowed-through adjustments increase or decrease tax expense in one period, with an offsetting decrease or increase occurring in another period. Giving effect to these temporary differences as flowed-through adjustments typically results in a greater variance between the effective tax rate and the statutory federal income tax rate in any given period than would otherwise exist if GSWC or BVES were not required to account for their income taxes as regulated enterprises. As of December 31, 2024, Registrant’s total amount of unrecognized tax benefits was zero.

Pension Benefits — Registrant’s pension benefit obligations and related costs are calculated using actuarial concepts within the framework of accounting guidance for employers’ accounting for pensions and post-retirement benefits other than pensions. Two critical assumptions, the discount rate and the expected return on plan assets, are important elements of expense and/or liability measurement. We evaluate these critical assumptions annually. Other assumptions include employee demographic factors such as retirement patterns, mortality, turnover and rate of compensation increase. The discount rate enables Registrant to state expected future cash payments for benefits as a present value on the measurement date. The guideline for setting this rate is a high-quality, long-term corporate bond rate. Registrant’s discount rates were determined by considering the average of pension yield curves constructed using a large population of high-quality corporate bonds. The resulting discount rates reflect the matching of plan liability cash flows to the yield curves. A lower discount rate increases the present value of benefit obligations and increases periodic pension expense. Conversely, a higher discount rate decreases the present value of benefit obligations and decreases periodic pension expense. To determine the expected long-term rate of return on the plan assets, Registrant considers the current and expected asset allocation, as well as historical and expected returns on each plan asset class. A lower expected rate of return on plan assets will increase pension expense. The long-term expected return on the pension plan’s assets was 6.00% and 5.75% for 2024 and 2023, respectively.

For the pension plan obligation, Registrant increased the discount rate to 5.70% as of December 31, 2024 from 5.16% as of December 31, 2023 to reflect market interest-rate conditions at December 31, 2024. A hypothetical 25-basis point decrease in the assumed discount rate would have decreased total net periodic pension expense for 2024 by approximately $0.1 million, which includes an increase in service cost that was more than offset by the decrease in interest cost, and would have increased the projected benefit obligation and accumulated benefit obligation at December 31, 2024 by a total of $5.5 million.  A 25-basis point decrease in the long-term return on pension-plan-asset assumption would have increased 2024 pension cost by approximately $0.5 million.

In addition, changes in the fair value of plan assets will impact future pension cost and the Plan’s funded status.  Changes in market conditions can affect the value of plan assets held to fund future long-term pension benefits. Any reductions in the value of plan assets will result in increased future expense, a decrease in the overfunded position, and increase the required future contributions.

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The CPUC has authorized GSWC and BVES to each maintain a two-way balancing account to track differences between their forecasted annual pension expenses adopted in rates and the actual annual expense to be recorded in accordance with the accounting guidance for pension costs. As of December 31, 2024, GSWC has a $1.7 million over-collection in its two-way pension balancing account for the general office and water regions. As of December 31, 2024, BVES has an insignificant balance in its two-way pension balancing account.

Funding requirements for qualified defined benefit pension plans are determined by government regulations. In establishing the contribution amount, Registrant has considered the potential impact of funding-rule changes under the Pension Protection Act of 2006. Registrant contributes the minimum required contribution as determined by government regulations or the forecasted annual pension cost authorized by the CPUC and included in customer rates, whichever is higher. In accordance with this funding policy, for 2025, the pension contribution is expected to be approximately $3.4 million. Any differences between the forecasted annual pension costs in rates and the actual pension costs are included in the two-way pension balancing accounts. Additionally, market factors can affect assumptions we use in determining funding requirements with respect to our pension plan. For example, a relatively modest change in our assumptions regarding discount rates can materially affect our calculation of funding requirements. To the extent that market data compels us to reduce the discount rate used in our assumptions, our benefit obligations could materially increase.

Changes in demographics, including increased numbers of retirees or increases in life expectancy assumptions may also increase the funding requirements of our obligations related to the pension plan.  Mortality assumptions are a critical component of benefit obligation amounts and a key factor in determining the expected length of time for annuity payments. Assuming no changes in actuarial assumptions or plan amendments, the costs over the long term are expected to decrease due to the closure of Registrant’s defined benefit pension plan to new employees as of January 1, 2011.  Employees hired or rehired after December 31, 2010 are eligible to participate in a defined contribution plan instead of the pension plan.

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Liquidity and Capital Resources

AWR

AWR’s regulated business is capital intensive and requires considerable capital resources. A portion of these capital resources is provided by internally generated cash flows from operations. AWR anticipates that interest expense will increase in future periods due to the need for additional external capital to fund construction programs at its regulated utilities and if market interest rates increase. In addition, as the capital investment program continues to increase, AWR and its subsidiaries anticipate they will need to access external financing more often. External financing may also be needed to cover costs incurred in connection with capital investments that are not covered in rates due to delays in obtaining approval of general rate cases by the CPUC.

AWR funds its operating expenses and pays dividends on its outstanding Common Shares primarily through dividends from its wholly owned subsidiaries. The ability of GSWC and BVES to pay dividends to AWR is restricted by California law. Under these restrictions, approximately $805.8 million was available for GSWC to pay dividends to AWR on December 31, 2024. Approximately $102.1 million was available for BVES to pay dividends to AWR as of December 31, 2024. ASUS’s ability to pay dividends to AWR is dependent upon state laws in which each ASUS subsidiary operates, as well as ASUS’s ability to pay dividends under California law.

When necessary, AWR obtains funds from external sources through the capital markets and from bank borrowings. Access to external financing on reasonable terms depends on the credit ratings of AWR and GSWC and current business conditions, including that of the water utility industry in general as well as conditions in the debt or equity capital markets.

On February 27, 2024, AWR entered into an Equity Distribution Agreement with third-party sales agents, under which AWR may offer and sell Common Shares, from time to time at its sole discretion, through an ATM offering program having an aggregate gross offering price of up to $200 million over a three-year period and pursuant to AWR’s effective shelf registration statement on Form S-3. AWR intends to use the net proceeds from these sales, after deducting commissions on such sales and offering expenses, for general corporate purposes, including, but not limited to, repayment of debt and making equity contributions to its subsidiaries. During 2024, AWR sold 1,145,219 Common Shares through this ATM offering program and raised proceeds of $89.5 million, net of $1.4 million in commissions paid under the terms of the Equity Distribution Agreement. As of December 31, 2024, approximately $109.1 million remained available for sale under the ATM offering program.

In June 2023, AWR and GSWC each entered into credit agreements with a term of five years provided by a syndicate of banks and financial institutions. Both credit agreements will mature in June 2028. The credit agreements provide AWR and GSWC unsecured revolving credit facilities with current borrowing capacities of $165.0 million and $200.0 million, respectively. Under the terms of the credit agreements, the borrowing capacities for AWR and GSWC may be expanded up to an additional $60.0 million and $75.0 million, respectively, subject to the lenders’ approval. AWR’s credit facility primarily provides support to AWR (parent) and ASUS, while GSWC’s credit agreement provides support to its water operations and capital expenditures. AWR’s and GSWC’s outstanding borrowings under the new credit facilities were $120.0 million and $124.0 million, respectively, as of December 31, 2024. The CPUC requires GSWC to completely pay off all borrowings under its revolving credit facility within a 24-month period after which GSWC may again borrow under its facility. GSWC’s pay-off period for its credit facility ends in June 2025. Accordingly, GSWC’s outstanding borrowings under its credit facility as of December 31, 2024 have been classified as current liabilities in both AWR’s Consolidated Balance Sheet and GSWC’s Balance Sheet.

GSWC expects to issue long-term debt and/or equity in 2025 to facilitate the pay-off of its credit facility. Under the current financing application authorized by the CPUC, GSWC does not have any remaining funds available for the issuance of long-term financing. On January 22, 2024, GSWC filed a new financing application with the CPUC, pending approval, that requests authorization for the issuance and sale of additional long-term debt and equity securities of up to $750.0 million. A proposed decision has yet to be issued by the CPUC in GSWC’s new financing application as of the date of this filing. If an approval is not received soon, GSWC will file a request with the CPUC to extend its 24-month pay-off period past the June 2025 deadline while it awaits a final decision from the CPUC on its financing application that will enable GSWC to issue the necessary long-term financing to pay-off its borrowings under the credit facility.

On June 5, 2024, GSWC completed the issuance of $65.0 million in unsecured private placement notes with a coupon rate of 5.50%, maturing on June 5, 2027. GSWC used the proceeds from the private placement notes to pay down outstanding borrowings under its revolving credit facility and to fund its operations and capital expenditures. Interest payments are due semiannually on June 5 and December 5 each year, commencing December 5, 2024. The private placement notes rank equally with GSWC’s other unsecured and unsubordinated debt. GSWC may, at its option, redeem all or portions of the notes at any time upon written notice, subject to payment of a make-whole premium. The covenant requirements under these private placement notes are similar to the terms of other private placement notes issued by GSWC.

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On December 30, 2024, GSWC issued 2.7586 Common Shares to AWR for total proceeds of approximately $40.0 million. GSWC used the proceeds from the stock issuance to pay down outstanding borrowings under its revolving credit facility and to fund its operations and capital expenditures.

BVES has a separate revolving credit facility without a parent guaranty that supports its electric operations and capital expenditures with a current borrowing capacity of $65.0 million that matures on July 1, 2026. Currently, the credit agreement provides BVES an option to increase the borrowing capacity of the facility by an additional $10.0 million. BVES’s revolving credit facility is considered a short-term debt arrangement by the CPUC. Therefore, pursuant to the CPUC’s requirements, borrowings under this credit facility are required to be fully paid off within a 24-month period, after which, BVES may borrow under the credit facility again. BVES’s extended pay-off period as approved by the CPUC was set to end on May 1, 2025. On August 1, 2024, the CPUC issued a final decision in BVES’s financing application, which among other things, approved BVES’s request to issue up to $120 million of new long-term debt and equity securities. As a result of receiving approval of the new financing application, on February 12, 2025, BVES completed the issuance of $50.0 million in unsecured private-placement notes with a coupon rate of 6.12% maturing on February 12, 2030. BVES used the proceeds from the notes to pay down all amounts under its revolving credit facility outstanding at the time of issuing the notes. As a result of refinancing the outstanding borrowings under the revolving credit facility with 5-year term notes, as of December 31, 2024 the outstanding balance under BVES’s credit facility of $45.0 million has been classified as a non-current liability in AWR’s Consolidated Balance Sheet. Furthermore, in September 2024, BVES issued eleven Common Shares to AWR for total proceeds of $22.0 million. BVES used the proceeds from the stock issuance to pay down outstanding borrowings under its revolving credit facility and to fund its operations and capital expenditures.

Our primary sources of liquidity to fund operations continue to be from the recovery of costs charged to customers at our regulated utilities and the collection of payments from the U.S government. We believe that capital investment costs associated with our capital programs at our regulated utilities will continue to be recovered through water and electric rates charged to customers, as well as funds from credit facilities from our regulated utilities. In addition, AWR’s credit facility will continue to be used to support ASUS’s operations and AWR (parent). The long-term capital-intensive nature of our regulated utilities have required us to continually seek future financing opportunities beyond the short-term. Future long-term financing at GSWC and BVES will consist of both long-term debt and equity issuances in order to manage to the CPUC-authorized capital structure. Under the current financing applications authorized by the CPUC, BVES has $88.0 million remaining available that provides for the issuance and sale of additional long-term debt and equity securities, which are expected to be used over the next 2-5 years to pay down outstanding borrowings under the respective credit facilities and support its operations. As previously discussed, GSWC awaits a final decision from the CPUC on its new financing application that would provide authorization for the issuance and sale of additional long-term debt and equity securities of up to $750.0 million expected to be used over the next 1-5 years.

Management believes that AWR’s and GSWC’s sound capital structures and strong credit ratings, combined with its financial discipline, will enable AWR to access the debt and equity markets. However, unpredictable financial market conditions in the future may limit its access or impact the timing of when to access the market, in which case AWR may choose to temporarily reduce its capital spending.

AWR’s ability to pay cash dividends on its Common Shares outstanding depends primarily upon cash flows from its subsidiaries. AWR intends to continue paying quarterly cash dividends on or about March 1, June 1, September 1 and December 1, subject to earnings and financial conditions, regulatory requirements and such other factors as the Board of Directors may deem relevant. On February 4, 2025, AWR’s Board of Directors approved a first quarter dividend of $0.4655 per share on AWR’s Common Shares. Dividends on the Common Shares will be paid on March 3, 2025 to shareholders of record at the close of business on February 18, 2025. AWR has paid common dividends every year since 1931, and has increased the dividends received by shareholders each calendar year for 70 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. AWR’s quarterly dividend rate has grown at a compound annual growth rate (“CAGR”) of 8.8% over the last five years through 2024 and has achieved a 10-year CAGR of 8.0% in its calendar year dividend payments through 2024. AWR’s current policy is to achieve a CAGR in the dividend of more than 7% over the long-term.

Cash Flows from Operating Activities:

Cash flows from operating activities have generally provided sufficient cash to fund operating requirements, including a portion of construction expenditures at GSWC and BVES, and construction expenses at ASUS, and to pay dividends. AWR’s future cash flows from operating activities are expected to be affected by a number of factors, including utility regulation; changes in tax law; maintenance expenses; inflation; compliance with environmental, health and safety standards; production costs; customer growth; per-customer usage of water and electricity; weather and seasonality; conservation efforts; compliance with local governmental requirements, including mandatory restrictions on water use; the lingering effects of the COVID-19 pandemic on its customers’ ability to pay utility bills; and required cash contributions to pension and post-retirement plans. Future cash flows from contracted services subsidiaries will depend on new business activities, existing operations, the

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construction of new and/or replacement infrastructure at military bases, timely economic price and equitable adjustment of prices, and timely collection of payments from the U.S. government and other prime contractors operating at the military bases, and any adjustments arising out of an audit or investigation by federal governmental agencies.

ASUS funds its operating expenses primarily through internal operating sources, which include U.S. government funding under long-term contracts with the U.S. government for operations and maintenance costs and construction activities, as well as investments by, or loans from, AWR. ASUS, in turn, provides funding to its subsidiaries. ASUS’s subsidiaries may also from time to time provide funding to ASUS or other subsidiaries of ASUS.

Cash flows from operating activities are primarily generated by net income, adjusted for non-cash expenses such as depreciation and amortization, and deferred income taxes. Cash generated by operations varies during the year. Net cash provided by operating activities of AWR was $198.7 million for 2024 as compared to $67.7 million for 2023. The increase in operating cash flow was largely due to the implementation of new CPUC-approved billed water rates and surcharges at GSWC during the second-half of 2023 as a result of receiving the final CPUC decision in June 2023 on in the previous water general rate case proceeding. With the delay in receiving the water general rate case decision at the time, billed water revenues in 2023 through July 30, 2023 were based on 2021 adopted rates pending a final CPUC decision, while operating expenses continued to rise primarily due to inflation and increasing costs in complying with water quality regulations. GSWC filed for the implementation of the CPUC-approved rate increases that went into effect in July 2023. GSWC also filed for the recovery of retroactive rate amounts accumulated through July 30, 2023 related to the CPUC approved rate increases for 2022 and 2023. Surcharges were implemented in October 2023 to recover the cumulative retroactive rate differences over 36-months. Furthermore, in March 2024, as a result of the Extended Arrearage Program, GSWC received $3.5 million in COVID-19 relief funds from the State of California to provide assistance to customers for delinquent water customer bills incurred during the pandemic. There were no similar relief funds received during 2023. Finally, a 4.5% increase in billed water consumption also contributed to the increase in operating cash flows.

In addition, the increase in cash flows from operating activities resulted from differences at ASUS in the timing of vendor payments and the receipt of cash for construction work at military bases. The billings (and cash receipts) for this construction work generally occur at completion of the work or in accordance with a billing schedule contractually agreed to with the U.S. government and/or other prime contractors. Thus, cash flow from construction-related activities may fluctuate from period to period with such fluctuations representing timing differences of when the work is being performed and when the cash is received for payment of the work.

These increases in operating cash flows discussed above were partially offset by differences in the timing of income tax payments between the two periods. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.

Cash Flows from Investing Activities:

Net cash used in investing activities was $232.8 million for the year ended December 31, 2024 as compared to $188.8 million in 2023, which is mostly related to capital expenditures at the regulated utilities that are consistent with capital budgets approved in the general rate case proceedings. AWR invests capital to provide essential services to its regulated customer base, while working with the CPUC to have the opportunity to earn a fair rate of return on investment. AWR’s infrastructure investment plan consists of both infrastructure renewal programs (to replace infrastructure, including those to mitigate wildfire risk) and major capital investment projects (to construct new water treatment, supply and delivery facilities). The regulated utilities may also be required from time to time to relocate existing infrastructure in order to accommodate local infrastructure improvement projects. Projected capital expenditures and other investments are subject to periodic review and revision.

During 2025, the regulated utilities’ company-funded capital expenditures are estimated to be approximately $170 – $210 million, barring any delays resulting from changes in capital improvement schedules due to unfavorable weather conditions and supply chain issues.

Cash Flows from Financing Activities:

AWR’s financing activities include primarily: (i) the proceeds from the issuance of Common Shares, (ii) the issuance and repayment of long-term debt and notes payable to financial institutions, (iii) the proceeds from unsecured new or existing revolving credit facilities for AWR, GSWC and BVES, and (iv) the payment of dividends on Common Shares. In order to finance new infrastructure, GSWC also receives customer advances (net of refunds) for, and contributions in aid of, construction. Borrowings on AWR’s new credit facility is used to support AWR (parent) and its contracted services subsidiary, and borrowings on GSWC’s and BVES’s credit facilities are used to fund GSWC and BVES capital programs, respectively, until long-term financing is arranged. AWR may also from time to time make equity contributions to GSWC and BVES. Overall debt levels are expected to increase to fund the costs of the capital expenditures that will be made by the regulated utilities.

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Net cash provided by financing activities was $46.6 million for the year ended December 31, 2024 as compared to cash provided of $129.2 million for 2023. The decrease in cash provided by financing activities in 2024 was due primarily to a decrease in total new borrowings required in 2024 as compared to 2023 due, in large part, to an increase in cash flows from operating activities. In January 2023, GSWC issued $130.0 million of unsecured notes in a private placement and used the proceeds to pay down the majority of its outstanding intercompany borrowings from AWR at that time, which in turn used the proceeds to pay down outstanding borrowings under its credit facility. In June 2024, GSWC completed the issuance of $65.0 million in unsecured private placement notes. The proceeds from the private placement notes were used by GSWC for general corporate purposes including the repayment of outstanding borrowings under its credit facility and the support of its operations and capital expenditures. During the year ended December 31, 2024, AWR had net payments on its credit facilities of $44.5 million, while during the year ended December 31, 2023, AWR had net borrowings on its credit facilities of $54.6 million. Credit facilities have been used to support operations and capital expenditures. In addition, during 2024, AWR sold 1,145,219 Common Shares through its ATM offering program and raised proceeds of $89.5 million, net of $1.4 million in commissions paid under the terms of the Equity Distribution Agreement.

GSWC

GSWC funds its operating expenses, payments on its debt, dividends to AWR on its outstanding common shares, and a portion of its construction expenditures 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, conservation efforts, environmental regulation, litigation, changes in tax law and deferred taxes, changes in supply costs and regulatory decisions affecting GSWC’s ability to recover these supply costs, timing of rate relief, increases in maintenance expenses and capital expenditures, surcharges authorized by the CPUC to enable GSWC to recover expenses previously incurred from customers, and CPUC requirements to refund amounts previously charged to customers. Internal cash flows have also been impacted by delays in receiving payments from GSWC customers due to the lingering effects of the COVID-19 pandemic.

GSWC may, at times, utilize external sources for long-term financing, as well as obtain funds from equity investments from its parent, AWR, to help fund a portion of its operations and construction expenditures. On June 28, 2023, GSWC executed its own separate credit agreement that provides for a $200.0 million unsecured revolving credit facility to support GSWC’s operations and capital expenditures. GSWC’s borrowing capacity under this credit agreement may be expanded up to an additional $75.0 million, subject to the lenders’ approval.

The CPUC requires GSWC to pay-off all intercompany borrowings it has from AWR within a 24-month period. GSWC’s borrowings under its credit facility will be required to be paid-off in full within a 24-month period after which GSWC may continue to borrow under its facility. GSWC’s next pay-off period ends in June 2025. On December 30, 2024, GSWC issued 2.7586 Common Shares to AWR for total proceeds of approximately $40.0 million. After this issuance, under the current financing application authorized by the CPUC, GSWC has no remaining authorized funds that provides for long-term financing. On January 22, 2024, GSWC filed a new financing application with the CPUC, pending approval, that requests the authorization for the issuance and sale of additional long-term debt and equity securities of up to $750.0 million. A proposed decision has yet to be issued by the CPUC in GSWC’s new financing application as of the date of this filing. If an approval is not received soon, GSWC will file a request with the CPUC to extend its 24-month pay-off period past the June 2025 deadline while it awaits a final decision from the CPUC on its new financing application that will enable GSWC to issue the necessary long-term financing to pay-off its borrowings under the credit facility.

GSWC also receives advances and contributions from customers, home builders and real estate developers to fund construction necessary to extend service to new areas. Advances for construction are generally refundable at a rate of 2.5% in equal annual installments over 40 years. Utility plant funded by advances and contributions is excluded from rate base. GSWC amortizes contributions in aid of construction at the same composite rate of depreciation for the related property.

Cash Flows from Operating Activities:

Net cash provided by operating activities was $158.6 million for the year ended December 31, 2024 as compared to $54.3 million for 2023. The increase in operating cash flow was largely due to the implementation of new CPUC-approved billed water rates and surcharges during the second-half of 2023 as a result of receiving the final water general rate case decision in June 2023. Also, in March 2024, as a result of the Extended Arrearage Program, GSWC received $3.5 million in COVID-19 relief funds from the State of California to provide assistance to customers for delinquent water customer bills incurred during the pandemic, with no similar relief funds received during 2023. The increase in cash flow was also due to a 4.5% increase in billed water consumption and the timing of vendor payments. These increases in operating cash flows were partially offset by differences in the timing of income tax payments between two periods. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities.

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Cash Flows from Investing Activities:

Net cash used in investing activities was $198.8 million for the year ended December 31, 2024 as compared to $162.2 million for 2023, which is mostly related to spending under GSWC’s infrastructure investment plans that are consistent with capital budgets authorized in its general rate cases.

Cash Flows from Financing Activities:

Net cash provided by financing activities was $48.3 million for the year ended December 31, 2024 as compared to $110.6 million for 2023.  The decrease in net cash provided by financing activities in 2024 was due primarily to a decrease in total new borrowings required to support water operations and capital expenditures program at GSWC as a result of an increase in cash flows from operating activities.

In January 2023, GSWC issued $130.0 million of unsecured notes in a private placement and $10.0 million of equity to AWR. GSWC used the proceeds from both issuances to pay-off all of its outstanding intercompany borrowings from AWR at that time. In June 2023, GSWC executed its own separate credit agreement that it began using to support its water operations and capital expenditures program. On June 5, 2024, GSWC completed the issuance of $65.0 million in unsecured private placement notes and used the proceeds for general corporate purposes including the repayment of a portion of the outstanding borrowings under its credit facility and support of its operations and capital expenditures. In addition, in December 2024, GSWC issued approximately $40.0 million of equity to AWR. Finally, GSWC paid $35.1 million in dividends to AWR during 2024 as compared to $55.4 million during 2023.

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Contractual Obligations and Commitments

Registrant has various contractual obligations, which are recorded as liabilities in the consolidated financial statements.  Other items, such as certain purchase commitments, are not recognized as liabilities in the consolidated financial statements but are required to be disclosed. In addition to contractual maturities, Registrant has certain debt instruments that contain annual sinking funds 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 payments to service debt are generally made from cash flows from operations.

The following table reflects Registrant’s contractual obligations and commitments to make future payments pursuant to contracts as of December 31, 2024. The table reflects only financial obligations and commitments. Therefore, performance obligations associated with our initial 50-year, firm-fixed-price contract and additional firm-fixed-price contracts with the U.S. government at our contracted services segment are not included in the amounts below. 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 payments to service debt are generally made from cash flows from operations.

(1) Excludes dividends and facility fees.

(2) The notes and debentures have been issued by GSWC under an Indenture dated September 1, 1993, as amended in December 2008. The notes and debentures do not contain any financial covenants that Registrant believes to be material or any cross-default provisions.

(3) Consists of GSWC senior private placement notes of $410.0 million and BVES unsecured private placement notes of $35.0 million, totaling $445.0 million issued to various banks and financial institutions. GSWC's most recent private placement notes include $130.0 million issued in January 2023 and $65.0 million issued in June 2024. Under the terms of each of the senior notes, GSWC may not incur any additional debt or pay any distributions to its shareholders if, after giving effect thereto, it would have a debt to capitalization ratio in excess of 0.6667-to-1 or a debt to earnings before interest, taxes, depreciation and amortization ratio of more than 8-to-1. BVES amended its term loan agreement related to the unsecured private placement notes, where effective December 19, 2024 and through the end of 2025, BVES must maintain a minimum interest coverage ratio of 3.0 times its interest expense, and 4.5 times its interest expense thereafter. BVES is also required to maintain a maximum consolidated total debt to consolidated total capitalization ratio of 0.65 to 1.00. GSWC and BVES were in compliance with all of its covenant provisions as of December 31, 2024.  GSWC and BVES do not currently have any outstanding mortgages or other liens on indebtedness on its properties.

(4) Consists of obligations at GSWC related to (i) a loan agreement supporting $7.7 million in outstanding debt issued by the California Pollution Control Financing Authority, and (ii) $1.8 million of obligations with respect to GSWC’s 500 acre-foot

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entitlement to water from the State Water Project (“SWP”). These obligations do not contain any financial covenants believed to be material to Registrant or any cross-default provisions. In regard to its SWP entitlement, GSWC has entered into agreements with various developers for a portion of its 500 acre-foot entitlement to water from the SWP.

(5) Consists of the outstanding debt portion of funds received under the American Recovery and Reinvestment Act for reimbursements of capital costs related to the installation of meters for conversion of non-metered service to metered service in GSWC’s Arden-Cordova District.

(6) Credit facilities consists of (i) a $165.0 million revolving credit facility under AWR, of which $120.0 million was outstanding as of December 31, 2024; (ii) a $200.0 million revolving credit facility under GSWC, of which $124.0 million was outstanding as of December 31, 2024; and (iii) a $65.0 million revolving credit facility under BVES, of which $45.0 million was outstanding as of December 31, 2024, and which was refinanced on February 12, 2025 with the issuance of long-term financing consisting of unsecured private-placement notes due on February 12, 2030.

(7) Consists of expected interest expense payments based on the assumption that GSWC’s long-term debt remains outstanding until maturity.

(8) Advances for construction represent contract refunds mostly from GSWC to developers for the cost of water systems paid for by the developers. The advances are generally refundable in equal annual installments over 40-year periods.

(9) Consists of agreements executed by BVES to purchase renewable energy credits through 2035. These renewable energy credits are used to meet California’s renewables portfolio standard.

(10) Consists of BVES fixed-cost purchased power contract executed in July 2023 with Shell Energy North America (US), L.P.

(11) Consists primarily of capital expenditures estimated to be required under signed contracts at GSWC and BVES as of December 31, 2024.

(12) Water purchase agreements consist of (i) a remaining amount of $1.1 million under an agreement expiring in 2028 to use water rights from a third party, and (ii) an aggregate amount of $1.2 million of other water purchase commitments with other third parties, which expire between 2025 through 2038.

(13) Reflects future minimum payments under noncancelable operating leases for both GSWC and ASUS.

(14) Consists of expected contributions to Registrant’s defined benefit pension plan for the year 2024. Contributions to the pension plan are expected to be the higher of the minimum required contributions under the Employee Retirement Income Security Act (“ERISA”) or the amounts that are recovered in customer rates and approved by the CPUC. These amounts are estimates and are subject to change based on, among other things, the limits established for federal tax deductibility (pension plan) and the significant impact that returns on plan assets and changes in discount rates have on such amounts.

(15) Other commitments consist primarily of (i) $10.8 million in asset retirement obligations of GSWC that reflect the retirement of wells by GSWC, which by law need to be properly capped at the time of removal; (ii) irrevocable letters of credit in the amount of $0.9 million for the deductible in Registrant’s business automobile insurance policies; and (iii) a $15,000 irrevocable letter of credit issued on behalf of GSWC pursuant to a franchise agreement with the City of Rancho Cordova. All of the letters of credit are issued pursuant to AWR’s revolving credit facility.

Information comparing the liquidity and capital resources for fiscal years 2023 and 2022 can be found under Item 7, Management’s Discussion and Analysis under the heading “Liquidity and Capital Resources” in AWR’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023 filed with the SEC.

BVES Power-Supply Arrangements

BVES purchases power pursuant to purchase power contracts approved by the CPUC. Prior to 2023, BVES had entered into purchase power contracts with three- and five-year terms depending on the amount of power and the period during which the power is purchased under the contracts. These remaining contracts expired in 2024. In July 2023, the CPUC approved a new power purchase agreement between BVES and a third party to procure renewable portfolio standard eligible energy and renewable energy credits as a bundled product. BVES began taking power under this long-term contract during the fourth quarter of 2024 to replace the expired contracts. The new contract provides for the purchase of electricity during a delivery period from November 1, 2024 through December 31, 2035. In addition to the purchased power contracts, BVES buys additional energy to meet peak demand as needed and sells surplus power when necessary. BVES is pursuing short- and long-term renewable energy contracts to replace any power purchase agreements that have expired in addition to satisfying its requirements related to its resource portfolio for the next compliance period (2025-2027) and beyond. The average price per MWh, including fixed costs, decreased to $71.89 per MWh in 2024 from $79.80 per MWh in 2023. BVES has an electric-supply-cost balancing account, as approved by the CPUC, to alleviate any impacts to earnings.

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Construction Program

GSWC maintains an ongoing water distribution main replacement program throughout its customer service areas based on the age and type of distribution-system materials, priority of leaks detected, remaining productive life of the distribution system and an underlying replacement schedule. In addition, GSWC and BVES upgrade their facilities in accordance with industry standards, local and CPUC requirements and new legislation.  California requires investor-owned electric utilities to submit an annual wildfire mitigation plan to the CPUC for approval, and requires all electric utilities to prepare plans on constructing, maintaining, and operating their electrical lines and equipment to minimize the risk of catastrophic wildfires.

As of December 31, 2024, GSWC and BVES have unconditional purchase obligations for capital projects of approximately $96.6 million.  During the years ended December 31, 2024, 2023 and 2022, GSWC and BVES had capital expenditures of $244.0 million, $182.7 million and $174.3 million, respectively.  A portion of these capital expenditures was funded by developers through contributions in aid of construction, which are not required to be repaid, and refundable advances. During the years ended December 31, 2024, 2023 and 2022, capital expenditures funded by developers were $8.5 million, $7.0 million and $6.9 million, respectively. During 2025, the water and electric segments’ company-funded capital expenditures are estimated to be approximately $170 - 210 million, barring any delays resulting from changes in capital improvement schedules due to unfavorable weather conditions and supply chain issues. These amounts include approximately $9.1 million estimated to be spent by BVES on wildfire mitigation projects.

Contracted Services

Under the terms of the contracts with the U.S. government, each contract’s price is subject to an economic price adjustment (“EPA”) on an annual basis. In the event that ASUS (i) is managing more assets at specific military bases than were included in the U.S. government’s request for proposal, (ii) is managing assets that are in substandard condition as compared to what was disclosed in the request for proposal, (iii) prudently incurs costs not contemplated under the terms of the contract, and/or (iv) becomes subject to new regulatory requirements, such as more stringent water-quality standards, ASUS is permitted to file, and has filed, requests for equitable adjustment (“REAs”). The timely filing for and receipt of EPAs and/or REAs continues to be critical in order for ASUS’s subsidiaries to recover increasing costs of operating, maintaining, renewing and replacing the water and/or wastewater systems at the military bases it serves.

During sequestration or automatic spending cuts, the subsidiaries of ASUS did not experience any earnings impact to their existing operations and maintenance and renewal and replacement services, as utility privatization contracts are an “excepted service.” With the expiration of sequestration, similar issues including further sequestration pursuant to the Balanced Budget and Emergency Deficit Control Act may arise as part of the fiscal uncertainty and/or future debt-ceiling limits imposed by Congress. Any future impact on ASUS and its operations through its subsidiaries will likely be limited to (a) the timing of funding to pay for services rendered, (b) delays in the processing of EPAs and/or REAs, (c) the timing of the issuance of contract modifications for new construction work not already funded by the U.S. Government, and/or (d) delays in solicitation for and/or awarding of new contracts under the Department of Defense contracting programs.

At times, the DCAA and/or the DCMA may, at the request of a contracting officer, perform audits/reviews of contractors for compliance with certain government guidance and regulations, such as the Federal Acquisition Regulations and Defense Federal Acquisition Regulation Supplements. Certain audit/review findings, such as system deficiencies for government-contract-business-system requirements, may result in delays in the resolution of filings submitted to and/or the ability to file new proposals with the U.S. government.

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Below is a summary of current and projected EPA filings for price adjustments to operations and maintenance fees and renewal and replacement fees for ASUS’s subsidiaries in fiscal 2025.

(1) Names of military bases are as of December 31, 2024.

Regulatory Matters

A discussion on various regulatory matters is included in the section titled “Overview” in this Form 10-K’s “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The discussion below focuses on other regulatory matters and developments.

Certificates of Public Convenience and Necessity

GSWC and BVES hold Certificates of Public Convenience and Necessity (“CPCN”) granted by the CPUC in each of the ratemaking areas they serve. ASUS subsidiaries are regulated, if applicable, by the state in which it primarily conducts water and/or wastewater operations. FBWS holds a CPCN from the Public Utilities Commission of Texas. The Virginia State Corporation Commission exercises jurisdiction over ODUS as a public service company. The Maryland Public Service Commission approved the right of TUS to operate as a water and wastewater utility at Joint Base Andrews, Maryland, and may exercise its jurisdiction over the water and wastewater utility operation at Naval Air Station Patuxent River, Maryland. The South Carolina Public Service Commission exercises jurisdiction over PSUS as a public service company. ONUS is regulated by the North Carolina Public Service Commission. ECUS, FRUS and BSUS are not subject to regulation by their respective states’ utility commissions.

GSWC and BVES are subject to regulation by the CPUC which has broad authority over 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.

Rates that GSWC and BVES are authorized to charge are determined by the CPUC in general rate cases and are derived using rate base, cost of service and cost of capital, as projected for a future test year. 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 water general rate case application every three years according to a schedule established by the CPUC. General rate cases typically include an increase in the test year with inflation-rate adjustments for expenses in the second and third years of the rate case cycle. For capital projects, there are two test years. Rates are based on a forecast of expenses and capital costs for each test year. GSWC’s cost of capital is determined in a separate proceeding. Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis. BVES’s general rate cases are typically filed every four years, which also includes a determination of BVES's cost of capital. Rates may also be increased by offsets for certain expense increases, including, but not limited to, supply-cost offset and balancing-account amortization, advice letter filings related to certain plant additions and other operating cost increases.

Neither the operations of AWR nor the operations and rates of ASUS are directly regulated by the CPUC. The CPUC does, however, regulate certain transactions between GSWC, BVES and ASUS and between GSWC and BVES and AWR.

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General Rate Cases and Other Regulatory Matters

Water Segment

Recent Changes in Rates:

Rates that GSWC is authorized to charge are determined by the CPUC in general rate cases. Water revenues billed to customers for the year ended December 31, 2024 were based on 2024 adopted rates. However, due to a delay in receiving a final decision on GSWC’s water general rate application that determined new water rates for 2022 and 2023, retroactive to January 1, 2022 and January 1, 2023, GSWC recorded the cumulative retroactive rate differences to CPUC-authorized general rate case memorandum accounts recognized as regulatory assets, which through December 31, 2024 totaled $37.7 million. In October 2023, GSWC also filed for the recovery of all retroactive amounts for 2022 and 2023 accumulated up to the effective date of the new 2023 rates, July 30, 2023, with surcharges implemented in October 2023.

Water General Rate Case for the years 2025–2027:

On August 14, 2023, GSWC filed a general rate case application for all its water regions and the general office. This general rate case will determine new water rates for the years 2025 – 2027. On July 12, 2024, GSWC and Cal Advocates of the CPUC filed a joint motion to adopt a settlement agreement between GSWC and Cal Advocates in connection with the water utility general rate case. On January 30, 2025, the CPUC adopted a decision approving the settlement agreement and establishing new rates retroactive to January 1, 2025. GSWC filed an advice letter on January 31, 2025 to implement new rates effective February 1, 2025. GSWC had filed with the CPUC to establish memorandum accounts to track interim rates, which made the new 2025 rates retroactive to January 1, 2025.

Cost of Capital Proceeding for the years 2022–2024:

On June 29, 2023, a final decision was adopted by the CPUC in the cost of capital proceeding that, among other things, (i) adopts GSWC’s requested capital structure; (ii) adopts a cost of debt of 5.1% for GSWC as compared to 6.6% previously authorized; (iii) adopts a return on equity of 8.85% for GSWC as compared to 8.9% previously authorized; (iv) allows for the continuation of the WCCM through December 31, 2024; and (v) adopts the new cost of capital for the three-year period commencing January 1, 2022 through December 31, 2024. Based on the final decision issued in June, all adjustments to rates were prospective and not retroactive. GSWC filed an advice letter that implemented the new cost of capital effective July 31, 2023.

On June 30, 2023, GSWC filed an advice letter to establish the WCCM for 2023, which was approved by the CPUC and increased the 8.85% adopted return on equity in the decision to 9.36% effective July 31, 2023. Additionally, on October 12, 2023, GSWC filed an advice letter to establish the WCCM for 2024, which has been approved by the CPUC, and increased GSWC’s 9.36% adopted return on equity to 10.06% effective January 1, 2024.

2024-2025 COC Application:

Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis. After receiving an extension in February 2024, GSWC’s next cost of capital application was scheduled to be filed on May 1, 2025 effective for the years 2026 - 2028. On January 14, 2025, the CPUC approved a request to defer the cost of capital application by another year. In December 2024, GSWC, along with three other investor-owned California water utilities, requested a further extension of the date by which each of them must file their cost of capital applications. The CPUC’s approval postponed this filing date by one year until May 1, 2026, with a corresponding effective date of January 1, 2027. The CPUC also approved the joint parties’ request to leave the current WCCM in place through the one-year deferral period. GSWC’s current authorized rate of return on rate base is 7.93%, based on its weighted cost of capital, which will continue in effect through December 31, 2026. The 7.93% return on rate base includes a return on equity of 10.06%, an embedded cost of debt of 5.1%, and a capital structure with 57% equity and 43% debt.

San Juan Oaks Mutual Acquisition:

In August 2023, GSWC entered into an agreement to purchase the water and wastewater system assets from San Juan Oaks Mutual Water Company in San Benito County, California. The new master-planned community, known as San Juan Oaks, will serve up to an estimated 1,300 customers once the community is built as planned. The transaction is subject to CPUC approval. In December 2023, GSWC filed an application to establish the new service area and to set water and sewer rates for the San Juan Oaks service area in San Benito County, California. On December 5, 2024, the CPUC approved a final decision granting GSWC’s CPCN and establishing rates for water and sewer service.

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Electric Segment

Recent Changes in Rates:

On August 30, 2022, BVES filed a new general rate case application with the CPUC to determine new rates for the years 2023–2026. Electric revenues billed to customers for 2024 and 2023 were based on 2022 adopted rates and remained in effect until finalization of the pending general rate case application. On December 15, 2022, the CPUC approved a decision for BVES to establish a general rate case memorandum account that makes the new 2023 rates effective and retroactive to January 1, 2023. On January 16, 2025, the CPUC adopted a final decision in connection with the pending general rate case proceeding that adopts the settlement agreement in its entirety and will determine new electric rates for the years 2023 - 2026. The new rates will be effective and retroactive to January 1, 2023 and are expected to go into effect on March 1, 2025. As a result of receiving the final decision, the impact from retroactive rates for the full year of 2023 and from the second-year rate increases for the full year of 2024 have been reflected in the 2024 fourth quarter results.

Vegetation Management, Wildfire Mitigation Plans and Legislation:

The CPUC adopted regulations intended to enhance the fire safety of overhead electric power lines. Those regulations included increased minimum clearances around electric power lines. BVES was authorized to track incremental costs incurred to implement the regulations in a fire hazard prevention memorandum account for the purpose of obtaining cost recovery in a future general rate case. On January 16, 2025, the CPUC issued a final decision in the electric general rate case, which set new rates through the year 2026. Costs related to vegetation management, such as costs for increased minimum clearances around electric power lines, have been included in the revenue requirement for the years 2023 through 2026. Among other things, the decision authorizes BVES to record incremental costs related to vegetation management in a CPUC-approved balancing account for future recovery up to a capped amount. In addition, the decision approves BVES’s recovery of vegetation management costs incurred and recorded prior to 2023 through a surcharge. As of December 31, 2024, BVES has approximately $9.9 million in incremental vegetation management costs recorded as a regulatory asset.

California legislation enacted in September 2018 requires all investor-owned electric utilities to have a wildfire mitigation plan (“WMP”) approved by the Office of Energy Infrastructure Safety (“OEIS”) and ratified by the CPUC. The WMP must include a utility’s plans on constructing, maintaining, and operating its electrical lines and equipment to minimize the risk of catastrophic wildfire. In the fourth quarter of 2024, OEIS approved BVES’s 2025 WMP Update to its 2023-2025 WMP, which was ratified by the CPUC on January 16, 2025. The general rate case decision approved by the CPUC on January 16, 2025 also included costs related to BVES’s WMP in BVES’s revenue requirement. Furthermore, the decision allows for continued tracking of incremental costs related to wildfire mitigation activities through WMP memorandum accounts. As of December 31, 2024, BVES recorded approximately $4.8 million as regulatory assets related to expenses accumulated in its WMP memorandum accounts for future recovery.

Additionally, the governor of California approved AB 1054 in July 2019 that, among other things, changed the burden of proof applicable in CPUC proceedings for an electric utility with a valid safety certification seeking to recover wildfire costs. Previously, an electric utility seeking to recover costs had the burden to prove that it acted reasonably. Under AB 1054, if an electric utility has a valid safety certification, it will be presumed to have acted reasonably unless a party to the relevant proceeding creates a “serious doubt” as to the reasonableness of the utility’s conduct. In December 2024, OEIS issued a renewal of the safety certification for BVES for 12 months.

For more information regarding significant regulatory matters, see Note 3 of “Notes to Financial Statements” included in Part II, Item 8, in Financial Statements and Supplementary Data.

Environmental Matters

AWR’s subsidiaries are subject to stringent environmental regulations. GSWC and ASUS are required to comply with the safe drinking water standards established by the U.S. EPA. GSWC is also required to comply with the safe drinking water standards by the Division of Drinking Water (“DDW”), under the SWRCB. The DDW, acting on behalf of the U.S. EPA, administers the U.S. EPA’s program in California. Similarly, ASUS is required to comply with the drinking water standards that are administered by the relevant state agencies in the states in which it operates. The U.S. EPA regulates contaminants that may have adverse health effects that are known or likely to occur at levels of public health concern, and the regulation of which will provide a meaningful opportunity for health risk reduction.

GSWC and ASUS currently test their water supplies and water systems according to, among other things, requirements listed in the Federal Safe Drinking Water Act. They work proactively with third parties and governmental agencies to address issues relating to known contamination threatening their water sources. They also incur operating costs for testing to determine the levels, if any, of the constituents in its sources of supply, and additional expenses to treat contaminants in order to meet the federal and state maximum contaminant level standards and consumer demands. GSWC expects to incur additional capital costs as well as increased operating costs to maintain or improve the quality of water delivered to its customers in light of anticipated stress on water resources associated with watershed and aquifer pollution, drought impacts, and consumer

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expectations. Both GSWC and ASUS will see increased operating costs to meet newly established and future water quality standards. The CPUC ratemaking process provides GSWC with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. The request for equitable adjustment process and capital funding request mechanism provide ASUS with the opportunity to recover prudently incurred operating costs and capital investment requirement in future filings associated with achieving water quality standards. Management believes that such incurred and expected future costs should be authorized for recovery by the CPUC and the U.S. government.

Drinking Water Notification Levels

In July 2018, DDW issued drinking water notification levels for certain fluorinated organic chemicals used to make certain fabrics and other materials, and used in various industrial processes. These chemicals were also present in certain fire suppression agents. These chemicals are referred to as PFAS. Notification levels are health-based advisory levels established for contaminants in drinking water for which maximum contaminant levels have not been established. The U.S. EPA has also established health advisory levels for these compounds. Notification to consumers and stakeholders is required when the advisory levels or notification levels are exceeded. Assembly Bill 756, signed into law in July 2019 and effective in January 2020, requires, among other things, additional notifications by water systems when they detect levels of PFAS above response levels.

GSWC is in the process of collecting and analyzing samples for PFAS. GSWC has removed some wells from service and expects to incur additional costs to treat impacted wells. GSWC has provided customers with information regarding PFAS detection and provides updated information via its website. In February 2020, DDW established new response levels for two of the PFAS compounds: 10 parts per trillion (“ppt”) for perfluorooctanoic acid (“PFOA”) and 40 ppt for perfluorooctanesulfonic acid (“PFOS”). In March 2021, DDW issued drinking-water notification and response levels of 0.5 parts per billion (“ppb”) and 5 ppb, respectively, for perfluorobutane sulfonic acid (“PFBS”). In June 2022, the U.S. EPA issued interim updated drinking-water health advisories for PFOA and PFOS, and also issued final health advisories for PFBS and other compounds known as GenX chemicals. In October 2022, DDW issued drinking-water notification and response levels of 3 ppt and 20 ppt, respectively, for perfluorohexane sulfonic acid (“PFHxS”).

Drinking Water Maximum Contaminant Levels

On April 10, 2024, the U.S. EPA announced the final regulations that established maximum contaminant levels (“MCLs”) for six PFAS compounds in drinking water. The regulation established MCLs for PFOA, PFOS, and several other contaminants with individual MCLs that range from 4 ppt to 10 ppt. In addition, the regulation established MCL for PFAS mixtures containing at least two of certain of the regulated PFAS compounds for the combined and co-occurring levels of PFAS in drinking water. The final rule requires public water systems to implement PFAS monitoring and reporting within three years (2027), and where exceedances are identified, to implement solutions within five years (2029) to reduce PFAS levels to below the MCLs.

Currently, there are more than 45 sources at GSWC and 7 sources at ASUS that have exceeded one or more of the PFAS MCLs. These new MCLs will increase capital investments and operations and maintenance expenses over the next five years. In addition, due to the volatility of the supply chain and demand for PFAS treatment components, both the capital investments and operations and maintenance expenses are likely to further increase. The CPUC has authorized GSWC to track incremental expenses, including laboratory testing and monitoring costs, customer and public notification costs, and chemical and operating treatment costs, incurred as a result of PFAS contamination in a memorandum account to be filed with the CPUC for future recovery.

California State Division of Drinking Water adopted an MCL of 10 parts per billion for Hexavalent Chromium, which went into effect on October 1, 2024. Depending on the size of the water system, water systems will have two to four years from the effective date to come into compliance with the MCL. Currently, there are approximately eight sources at GSWC that exceed or are within eighty percent of the MCL. These MCLs are also expected to increase GSWC’s capital investments and operations and maintenance expenses.

The CPUC ratemaking process provides GSWC with the opportunity to recover prudently incurred capital and operating costs in future filings associated with achieving water quality standards. Management believes that such incurred and expected future costs should be authorized for recovery by the CPUC for both PFAS compounds and hexavalent chromium.

Designation of PFOA and PFOS as CERCLA Hazardous Substances

On May 8, 2024, the U.S. EPA issued a final rule to designate PFOA and PFOS as hazardous substances under the Comprehensive Environmental Response, Compensation, and Liability Act (“CERCLA”). This designation is expected to increase GSWC’s and ASUS’s water treatment and disposal costs. The CPUC has authorized GSWC to track incurred incremental expenses as a result of PFAS contamination in a memorandum account to be filed with the CPUC for future recovery.

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Matters Relating to Environmental Cleanup

GSWC has been involved in environmental remediation and cleanup at one of its plant sites that contained an underground storage tank which was used to store gasoline for its vehicles. This tank was removed from the ground in July 1990 along with the dispenser and ancillary piping. Since then, GSWC has been involved in various remediation activities at this site.

As of December 31, 2024, the total amount spent to clean up and remediate GSWC’s plant facility was approximately $6.8 million, of which $1.5 million has been paid by the State of California Underground Storage Tank Fund. Amounts paid by GSWC have been included in rate base and approved by the CPUC for recovery. As of December 31, 2024, GSWC has a regulatory asset and an accrued liability for the estimated remaining cost of $1.3 million to complete the cleanup at the site. The estimate includes costs for continued activities of groundwater cleanup and monitoring, future soil treatment, and site closure related activities. The ultimate cost may vary as there are many unknowns in remediation of underground gasoline spills and this is an estimate based on currently available information. Management also believes it is probable that the estimated additional costs will continue to be approved in rate base by the CPUC as approved historically.

Lead and Copper Rule Revisions

On October 30, 2024, the U.S. EPA published its final Lead and Copper Rule Improvements. The rule went into effect on December 30, 2024. The rule sets a 10-year requirement for replacing lead service lines in drinking water systems, changes sampling requirements and reduces the lead action level from 15 parts per billion to 10 parts per billion. Although no lead service lines have been found yet in GSWC and ASUS and their customer service lines, the changes in this regulation are expected to increase expenses related to sampling, public education, and lead service line field verification activities. The CPUC has authorized GSWC to track any incremental expenses and carrying costs on capital investments incurred by GSWC as a result of the Lead and Copper Rule revisions in a memorandum account to be filed with the CPUC for future recovery.

Matters Relating to Military Base Contracts

Each of the ASUS’s subsidiaries is responsible for testing the water and wastewater systems on the military bases on which it operates in accordance with applicable federal, state and local requirements.

Each of the ASUS’s subsidiaries has the right to seek an equitable adjustment to its contract in the event that there are changes in environmental laws, a change in the quality of water used in providing water service or wastewater discharged by the U.S. government, or contamination of the air or soil not caused by the fault or negligence of ASUS’s subsidiary. These changes can impact operations and maintenance and renewal and replacement costs under the contracts. The U.S. government is responsible for environmental contamination due to its fault or negligence and for environmental contamination that occurred prior to the execution of a contract.

Security Issues

We have physical and information security policies throughout our operations. Training on these matters begins during employee orientation and is ongoing through a series of training courses in addition to periodic, unannounced training exercises. We collaborate with various agencies, associations and third parties regarding information on possible threats and security measures for our operations. Risk assessments are conducted periodically to evaluate the effectiveness of existing security controls. These assessments provide areas for additional security focus, new controls, and policy changes.

Both GSWC and BVES have security systems and infrastructure in place intended to prevent unlawful intrusion, service disruption and cyberattacks.  GSWC and BVES utilize a variety of physical security measures to protect their facilities.  These measures consider advances in security and emergency preparedness technology and relevant industry developments in developing their respective capital improvement plans, and both intend to seek approval of the CPUC to recover any additional costs that either may incur in enhancing the security, reliability and resiliency of their utility systems.

On October 23, 2018, America’s Water Infrastructure Act became law. GSWC must now conduct additional risk and resilience assessments and develop emergency response plans for each of its water systems. These assessments and plans include natural hazards as well as malevolent acts. The first such assessments were completed in 2020. They will be reviewed and must be resubmitted every five years.

ASUS’s subsidiaries operate facilities within the boundaries of military bases, which provide limited access to the general public.  To further enhance security, in prior years, certain upgrades, such as key card requirements at all access points and security camera systems, were completed at military bases through contract modifications funded by the U.S. government.

Registrant has evaluated its cybersecurity systems and continues to address identified areas of improvement with respect to U.S. government regulations regarding cybersecurity of government contractors. These improvements include the physical security at all of the office and employee facilities it operates.

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Despite its efforts, Registrant cannot guarantee that intrusions, cybersecurity incident or other attacks will not cause water, wastewater or electric system problems, disrupt service to customers, compromise important data or systems or result in unintended release of customer or employee information.

Water Supply

GSWC

During 2024, GSWC delivered approximately 56.7 million hundred cubic feet (“ccf”) of water to its customers, which is an average of about 357 acre-feet per day or 116 million gallons per day (an acre-foot is approximately 435.6 ccf or 326,000 gallons). Approximately 57% of GSWC’s supply came from groundwater produced from wells situated throughout GSWC’s service areas. GSWC supplemented its groundwater production with wholesale purchases from MWD member agencies and regional water suppliers (roughly 40% of total demand) and with authorized diversions from rivers (roughly 3%) under agreements with the United States Bureau of Reclamation and the Sacramento Municipal Utility District. GSWC also utilizes recycled water supplies to serve recycled water customers in several service areas. GSWC continually assesses its water rights and groundwater storage assets to maximize use of lower cost groundwater sources where available.

Groundwater

GSWC has a diverse water supply portfolio which includes adjudicated groundwater rights, surface water rights, and a number of unadjudicated water rights to help meet supply requirements. The productivity of GSWC’s groundwater resources varies from year to year depending upon a variety of factors, including natural replenishment from snow-melt or rainfall, the availability of imported replenishment water, the amount of water previously stored in groundwater basins, natural or man-made contamination, legal production limitations, and the amount and seasonality of water use by GSWC’s customers and others. GSWC actively participates in efforts to protect groundwater basins from over-use and from contamination. In some periods, these efforts may require reductions in groundwater pumping and increased reliance on alternative water resources. GSWC also participates in the implementation of California’s Sustainable Groundwater Management Act.

From time to time, GSWC may purchase or temporarily use water rights from others for delivery to customers. GSWC has contracts to purchase water or water rights for an aggregate amount of $2.3 million as of December 31, 2024.  Included in the $2.3 million is a remaining commitment of $1.1 million under an agreement with the City of Claremont to lease water rights that were ascribed to the City as part of the Six Basins adjudication. The initial term of the agreement expires in 2028. GSWC may exercise an option to renew this agreement for ten additional years. The remaining $1.2 million is for commitments for purchased water with other third parties, which expire through 2038.

Imported Water

GSWC also manages a portfolio of water supply arrangements with water wholesalers who may import water from outside the immediate service area. For example, GSWC has contracts with various governmental entities and other parties to purchase water through a total of 59 connections for distribution to customers, in addition to numerous emergency connections. MWD is a public agency organized and managed to provide a supplemental, imported supply to its member public agencies. There are 26 such member agencies, consisting of 14 cities, 11 municipal water districts and one county water authority. GSWC has 45 connections to MWD’s water distribution facilities and those of member agencies. GSWC purchases MWD water through six separate member agencies aggregating 42,708 acre-feet annually. MWD sources its supplies from Northern California via the State Water Project and the Colorado River through the Colorado River Aqueduct, which it owns and operates, and from local programs and transfer arrangements.

MWD currently has supply levels of 1.3 million acre-feet (“MAF”) with annual demands of approximately 1.4 MAF resulting in a supply gap of approximately 100 thousand acre feet. MWD also has a record level of 3.8 MAF of water in storage at the end of 2024. MWD has available access to store more than 1.6 MAF of water in Lake Mead as part of an intentionally created surplus program developed under a 2007 Interim Shortage agreement and is available for use during dry years. Currently, 1.6 MAF is stored as Intentionally Created Surplus credit.

Drought Impact

The California Legislature passed two bills in 2018 that provide a framework for long-term water-use efficiency standards and drought planning and resiliency. The framework sets aggressive water use objective standards and performance metrics that water suppliers will be required to meet by the year 2040 with interim milestones, as revised by the recent Conservation Regulation described below. A key milestone is the establishment of an indoor water use standard of 55 gallons per capita per day (“gpcd”) until 2025. As of January 1, 2025 the standard was dropped to 47 gpcd per legislation signed by the governor of California into law in September 2022. The indoor standard will now set at 47 gpcd will be reduced to 42 gpcd in 2030. The California SWRCB approved the Conservation Regulation referred to as “To Make Conservation a California Way of Life” on July 3, 2024 and became effective on January 1, 2025. Each Urban Water Supplier will have an overall water use objective that will include both an indoor standard as well as outdoor use standards.

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Water year 2024-25 (“WY2025”) began on October 1, 2024 with the State’s major reservoirs currently at above average capacity with Lake Oroville at 74% of capacity and Lake Shasta at 77% capacity. The State Water Project allocation for WY2025 was initially set at 5% in early December and was increased to 20% on January 28, 2025 with good early precipitation in northern California. The new water year has begun with good conditions but has progressively become drier statewide and as of February 11, 2025, the U.S. Drought Monitor reported that 21% of California was in extreme drought with 35% identified as “severe drought” as compared to a year ago when 0% was in “moderate drought” and 7% was listed as “abnormally dry.”

Prolonged drought conditions continue on the Colorado River System, which has experienced historically low reservoir levels in Lake Mead and Lake Powell since 2023. Lake Powell and Lake Mead are at 36 and 34 percent capacity as of January 21, 2025, which is comparable to the same approximate value a year ago. Urgent action to reduce water demand on the lower river by 2 to 4 million acre feet annually has been requested by the US Bureau of Reclamation (the “Bureau”). On October 1, 2024, a multi-year agreement known as the “California Colorado River Contractor Forbearance Agreement for 2024-2026” was put in place by Imperial Irrigation District, Coachella Valley Water District, Metropolitan Water District of Southern California, Palo Verde Irrigation District and the City of Needles. This agreement commits to collective Colorado River water savings of 300,000 acre-feet annually with a three-year cap of 700,000 acre feet. In 2026, operational agreements on how the Colorado River is managed will expire. The Bureau is working with both the upper and lower states on a revised set of agreements and a draft is expected in early 2025. GSWC will continue to monitor developments related to the Colorado River System and assess its impact on GSWC.

Military Base Operations

The U.S. government is responsible for providing the source of supply for all water on each of the bases served by ASUS’s subsidiaries at no cost to ASUS’s subsidiaries. Once received from the U.S. government, ASUS’s subsidiaries are responsible for ensuring the continued compliance of the provided source of supply with all federal, state and local regulations. Furthermore, ASUS’s subsidiaries are responsible for ensuring compliance with the reduction and/or removal of all constituents required under its wastewater treatment plant operating permits. ASUS works closely with state regulators and industry associations to stay current with emergent issues and proactively addresses any change in wastewater treatment regulation to ensure permit compliance.

New Accounting Pronouncements

Registrant is subject to newly issued accounting requirements as well as changes in existing requirements issued by the Financial Accounting Standards Board. See Note 1 of Notes to Consolidated Financial Statements.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information on AWR’s consolidated operations and assets, and includes specific references to AWR’s individual segments and its subsidiaries (GSWC, BVES, and ASUS and its subsidiaries), and AWR (parent) where applicable.

Included in the following analysis is a discussion of Registrant’s operations in terms of earnings per share by business segment and AWR (parent), which equals each business segment’s earnings divided by AWR’s weighted average number of diluted Common Shares.  The gains and losses generated on the investments held to fund one of the Company’s retirement plans during the years ended December 31, 2023 and 2022 have been excluded when communicating the results to help facilitate comparisons of AWR’s performance from period to period. In addition, both the impact of retroactive rates related to the full year 2022 recorded during the year ended December 31, 2023 resulting from the final decision on the water general rate case, and the impact from the estimates of revenues subject to refund recorded in 2022 and changes to estimates recorded in 2023 following the receipt of a final cost of capital decision in June 2023 have been excluded when communicating AWR’s consolidated and water segment results for the years ended December 31, 2023 and 2022 to help facilitate comparisons of the Company’s performance from period to period.

All of the measures discussed above are derived from consolidated financial information of Registrant, but are not presented in our financial statements that are prepared in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”). These items constitute “non-GAAP financial measures” under Securities and Exchange Commission rules, which supplement our GAAP disclosures but should not be considered as an alternative to the respective GAAP measures. Furthermore, the non-GAAP financial measures may not be comparable to similarly titled non-GAAP financial measures of other registrants.

AWR uses earnings per share by business segment, a non-GAAP financial measure, as an important measure in evaluating its operating results and believes it provides investors with clarity surrounding the performance of its segments.  AWR reviews this measurement regularly and compares it to historical periods and to its operating budget. A reconciliation to AWR’s consolidated diluted earnings per share prepared in accordance with GAAP is included in the discussion under the section titled “Summary Results by Segment.”

Overview

Factors affecting our financial performance are summarized under the Overview section in Item 1. Business and Item 1A. Risk Factors.

Water and Electric Segments:

GSWC’s and BVES’s revenues, operating income, and cash flows are earned primarily through delivering potable water to homes and businesses in California and electricity in the Big Bear area of San Bernardino County, California, respectively. Rates charged to GSWC and BVES customers are authorized by the CPUC. These rates are intended to allow recovery of operating costs and a reasonable rate of return on invested capital.  GSWC and BVES plan to continue seeking additional rate increases in future years from the CPUC to recover operating and supply costs, and receive reasonable returns on invested capital. Capital expenditures in future years at GSWC and BVES are expected to remain at substantially higher levels than depreciation expense. When necessary, GSWC and BVES may obtain funds from external sources in the capital markets and through bank borrowings.

General Rate Case Filings and Other Matters:

Water General Rate Case for the years 2025–2027:

On August 14, 2023, GSWC filed a general rate case application for all its water regions and the general office. This general rate case will determine new water rates for the years 2025 – 2027. Among other things, GSWC requested capital budgets of approximately $611.4 million for the three-year capital cycle. GSWC also requested the continuation of mechanisms to accommodate fully decoupled revenues and sales, and track differences between recorded and CPUC-authorized supply-related expenses. In an August 2020 decision, the CPUC discontinued the use of the WRAM and the MCBA by water utilities, which GSWC implemented in 2008, but would be discontinued for GSWC after 2024. However, on September 30, 2022, the governor of California signed Senate Bill (“SB”) 1469 and effective January 1, 2023, SB 1469 allows Class A water utilities, including GSWC, to continue requesting the use of a revenue decoupling mechanism in their next general rate case. With the passage of SB 1469, GSWC’s request to continue using a revenue decoupling mechanism will be subject to CPUC approval. As of the filing date of this Form 10-K, a proposed decision in the water general rate case is scheduled for the fourth quarter of 2024, with new rates to become effective January 1, 2025.

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Water General Rate Case for years 2022 - 2024:

On June 29, 2023, the CPUC adopted a final decision in GSWC’s general rate case application for all its water regions and its general office that determined new water rates for the years 2022–2024 retroactive to January 1, 2022. Among other things, the final decision (i) adopted the full settlement agreement between GSWC and the Public Advocates Office at the CPUC (“Public Advocates”) that resolved all issues related to the 2022 annual revenue requirement in the general rate case application and authorized GSWC to invest approximately $404.8 million in capital infrastructure over the three-year capital cycle (excluding advice letter projects), and (ii) allowed for additional increases in adopted revenues for 2023 and 2024 subject to an earnings test and inflationary index values at the time of filing for implementation of the new rates. The impact of retroactive rates for the full year of 2022 as well as second-year rate increases for 2023 have been reflected in the results of operations for the year ended December 31, 2023.

As a result of receiving the final decision that approved the settlement agreement in its entirety, the net impact of retroactive new rates for the full year of 2022 was $0.38 per share and has been reflected in the year ended December 31, 2023 results, which consisted primarily of the increase in 2022’s annual revenue requirement (excluding advice letter projects) that, among other things, incorporated an increase in supply costs, and which combined is a net increase of approximately $0.40 per share; partially offset by the approval of new operating expense levels related to 2022 that resulted in an increase in recorded depreciation expense of approximately $790,000, or $0.02 per share, resulting from updated composite depreciation rates adopted in the final decision, and which are reflected in the 2022 adopted revenue requirement.

The second-year rate increases for 2023, which were retroactive to January 1, 2023, have also been reflected in the year ended December 31, 2023 results. Excluding the impact of retroactive rates for 2022 discussed above, there was an increase in recorded water operating revenues of $48.1 million largely as a result of the second-year rate increases for 2023 that, among other things, incorporated the increase in recorded supply costs of $10.0 million, which combined is an increase of $0.74 per share. Upon receiving the final decision, GSWC filed for the implementation of new 2023 rate increases that went into effect on July 31, 2023. Due to the delay in finalizing the water general rate case, water revenues billed to customers for the year ended December 31, 2022 and for the period from January 1, 2023 to July 30, 2023 were based on 2021 adopted rates. In October 2023, GSWC also filed with the CPUC to recover all retroactive rate amounts accumulated in memorandum accounts for the full 2022 year and for 2023 through July 30, 2023. Surcharges were implemented to recover the cumulative retroactive rate differences over 36 months. As of December 31, 2023, there is an aggregate cumulative balance of $52.8 million in CPUC-approved general rate case memorandum accounts that have been recognized as regulatory assets with a corresponding increase in water revenues.

Cost of Capital (“COC”) Proceedings:

2024 COC Application:

Investor-owned water utilities serving California are required to file their cost of capital applications on a triennial basis. GSWC’s next cost of capital application was scheduled to be filed on May 1, 2024 effective for the years 2025 - 2027. However, GSWC, along with three other Class A investor-owned water utilities in California, filed a joint request with the CPUC to defer the filing deadline of the next cost of capital applications by one year, which was approved on February 2, 2024. The joint request asked that the utilities keep the cost of capital currently authorized for 2024 in effect through 2025, and file new cost of capital applications by May 1, 2025 to set the cost of debt, return on equity and capital structure starting January 1, 2026. GSWC’s current authorized rate of return on rate base is 7.93% effective January 1, 2024, which will continue in effect through December 31, 2025. Additionally, GSWC's Water Cost of Capital Adjustment Mechanism (“WCCM”) will remain active through the one year deferral period.

2021 COC Application:

GSWC filed its last cost of capital application with the CPUC in May 2021. On June 29, 2023, the CPUC adopted a final decision that, among other things, (i) adopted GSWC’s requested capital structure of 57% equity and 43% debt; (ii) adopted a cost of debt of 5.1% for GSWC as compared to 6.6% previously authorized; (iii) adopted a return on equity of 8.85% for GSWC as compared to 8.9% previously authorized; (iv) allowed for the continuation of the WCCM through December 31, 2024; and (v) adopted the new cost of capital for the three-year period commencing January 1, 2022 through December 31, 2024. Based on the final decision issued in June 2023, all adjustments to rates are prospective and not retroactive. GSWC filed an advice letter that implemented the new cost of capital effective July 31, 2023.

Following the receipt of the final decision in the cost of capital proceeding, management updated its analysis and reassessed the accounting estimates recorded to date related to GSWC’s lower cost of debt. Accordingly, during the second quarter of 2023, GSWC recorded a change in estimate that resulted in an increase to water revenues in the amount of $6.4 million, or approximately $0.13 per share, as a result of reversing its regulatory liability for revenues subject to refund that it had recorded during 2022.

The WCCM adjusts the return on equity and rate of return on rate base between the three-year cost of capital proceedings only if there is a positive or negative change of more than 100 basis points in the average of the Moody’s Aa utility bond rate as measured over the period October 1 through September 30. If there is a positive or negative change of more than

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100 basis points, the return on equity is adjusted by one half of the difference. For the period from October 1, 2021 through September 30, 2022, the Moody’s Aa utility bond rate increased by 102.8 basis points from the benchmark, which triggered the WCCM adjustment. GSWC recognized revenues for the period from January 1 through July 30, 2023 and all of 2022 based on the previously authorized return of equity of 8.9% that had also been billed to water customers through the same period. On June 30, 2023, GSWC filed an advice letter to establish the WCCM for 2023, which increased GSWC’s 8.85% adopted return on equity in the decision to 9.36% effective July 31, 2023. Additionally, for the period from October 1, 2022 through September 30, 2023, the Moody’s Aa utility bond rate increased by 139.7 basis points from the benchmark, which triggered another WCCM adjustment. On October 12, 2023, GSWC filed an advice letter to establish the WCCM for 2024, which has been approved by the CPUC and increased GSWC’s 9.36% adopted return on equity to 10.06% effective January 1, 2024.

Final Decision in the First Phase of the Low-Income Affordability Rulemaking:

In August 2020, the CPUC issued a final decision in the first phase of the CPUC’s Order Instituting Rulemaking evaluating the low income ratepayer assistance and affordability objectives contained in the CPUC’s 2010 Water Action Plan. This decision also addressed other issues, including mandating discontinuance of the WRAM and the MCBA. The MCBA is a full-cost balancing account used to track the difference between adopted and actual water supply costs (including the effects of changes in both rates and volume). Based on the final decision, any general rate case application filed by GSWC and the other California water utilities after August 27, 2020 may not include a proposal to continue the use of the WRAM or MCBA, but may instead include a proposal to use a limited price adjustment mechanism and an incremental supply cost balancing account. The discontinuation of the WRAM and MCBA for GSWC would be effective for years after 2024. However, on September 30, 2022, the governor of California signed Senate Bill (“SB”) 1469. Effective January 1, 2023, SB 1469 allows Class A water utilities, including GSWC, to continue requesting the use of a full revenue decoupling mechanism in their general rate case. With the passage of SB 1469, GSWC was able to request the continued use of a full revenue decoupling mechanism, similar to the WRAM in its general rate case application filed on August 14, 2023 that establishes new rates for the years 2025 – 2027. GSWC’s request to continue using a full revenue decoupling mechanism in its general rate case is subject to CPUC approval. Since its implementation in 2008, the WRAM and MCBA have helped mitigate fluctuations in GSWC’s earnings due to changes in water consumption by its customers or changes in water supply mix. Replacing them with mechanisms recommended in the final decision will likely result in more volatility in GSWC’s future earnings and could result in less than, or more than, full recovery of its authorized revenue and supply costs.

In October 2020, GSWC, three other investor-owned water utilities (“IOWUs”) operating in California, and the California Water Association (“CWA”) filed applications with the CPUC for rehearing on the discontinuation of the WRAM and MCBA, which the CPUC denied in September 2021. GSWC, the three other IOWUs and CWA each separately filed a petition with the California Supreme Court to review the CPUC’s decision revoking prior authorization of the WRAM and MCBA. In May 2022, the Court granted the petition for writ of review. The Court ordered GSWC, along with the other IOWUs and CWA, to file opening briefs, which were filed on September 1, 2022. The CPUC’s answer to the opening briefs was originally due by November 15, 2022 and reply briefs were due by December 15, 2022. However, as a result of SB 1469, in October 2022 the CPUC filed a motion to dismiss the IOWUs and CWA’s petition with the Court, and also requested that the Court suspend the proceeding schedule until it rules on the motion to dismiss. The Court granted the CPUC’s request to suspend the proceeding schedule. In November 2022, the Supreme Court denied the CPUC’s motion to dismiss and established a new proceeding schedule whereby the CPUC filed their answer brief on December 9, 2022 and the IOWUs filed their reply brief on January 13, 2023. At this time, management cannot predict the final outcome of this matter.

Electric General Rate Case for the years 2023–2026:

On August 30, 2022, BVES filed a general rate case application that will determine new electric rates for the years 2023 – 2026. In February 2023, a scoping memo and ruling that set the final schedule and scope of issues in BVES’s general rate case proceeding was issued by the CPUC. Electric revenues billed to customers for 2023 were based on 2022 adopted rates and will remain in effect until finalization of the pending general rate case application. On December 15, 2022, the CPUC approved a decision for BVES to establish a general rate case memorandum account that makes the new 2023 rates effective and retroactive to January 1, 2023. When a decision is issued in the electric general rate case, cumulative adjustments will be recorded at that time.

Among other things, BVES requested (i) capital budgets of approximately $62.0 million for the four-year rate cycle, and another $6.2 million for a large line replacement capital project to be filed for revenue recovery through an advice letter when the project is completed, and (ii) a capital structure for BVES of 61.8% equity and 38.2% debt, a return on equity of 11.25%, an embedded cost of debt of 5.51%, and a return on rate base of 9.05%. Included in the general rate case application is a request for recovery of all capital expenditures and other incremental costs incurred over the last few years in connection with BVES’s wildfire mitigation plans that are currently not included in customer rates. These costs will be subject to review by the CPUC during the general rate case proceeding.

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Contracted Services Segment:

ASUS’s revenues, operating income and cash flows are earned by providing water and/or wastewater services, including operation and maintenance services and construction of facilities for the water and/or wastewater systems at various military installations, pursuant to an initial 50-year, firm-fixed-price contract, additional firm-fixed-price contracts, task order agreements and subcontracts with third party prime contractors on military bases. Currently, ASUS has one subsidiary that has entered into a task order agreement with the U.S. government that has a term of 15 years. The contract price for each of the contracts and recurring task order agreements is subject to annual economic price adjustments. Additional revenues generated by contract operations are primarily dependent on annual economic price adjustments, and new construction activities under contract modifications with the U.S. government or agreements with other third-party prime contractors. ASUS’s subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served.

During 2023, excluding the first task order of Joint Base Cape Cod (“JBCC”) and the new contract for Naval Air Station Patuxent River, ASUS was awarded approximately $24.1 million in new construction projects for completion beginning in 2023 through 2026. Earnings and cash flows from modifications to the initial 50-year contracts, additional contracts thereafter with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

On August 15, 2023, ASUS was awarded a new 50-year contract by the U.S. government to operate, maintain, and provide construction management services for the water distribution and wastewater collection and treatment facilities at Naval Air Station Patuxent River, a United States Navy air station located in Maryland. The initial firm-fixed-price value of the contract is estimated at $349 million over a 50-year period and is subject to annual economic price adjustments. This initial value is also subject to adjustment based on the results of a joint inventory of assets to be performed during the transition period and will be finalized during the first year of operations.

On September 29, 2023, ASUS was awarded a new 15-year contract by the U.S. government, that is different than ASUS's other existing 50-year contracts, to operate, maintain, and provide construction management services for the water distribution and wastewater collection and treatment facilities at JBCC located in Massachusetts. Under this contract, ASUS will have the opportunity to perform work at JBCC through the periodic issuance of task orders by the U.S. government for up to a maximum initial firm-fixed-price value of $45.0 million over a 15-year period, subject to adjustments as task orders are issued. In September 2023, the first task order was issued with a value of $2.3 million to perform an evaluation, construction and transition services that are scheduled for completion in 2024.

Entering into contracts with the U.S. government subjects ASUS to potential government audits or investigations of its business practices and compliance with government procurement statutes and regulations. ASUS had been under a civil government investigation over bidding and estimating practices used in certain capital upgrade projects. In July 2023, ASUS and the U.S. government entered into an agreement that settles civil and monetary claims by the U.S. government. This settlement did not have a material impact on Registrant’s financial statements.

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Summary Results by Segment

The table below sets forth a comparison of the diluted earnings per share by business segment and for the parent company:

Note: Certain amounts in the table above may not foot or crossfoot due to rounding.

* All adjustments to recorded diluted earnings per share relate to the water segment. The water segment’s adjusted earnings for 2023 exclude the impact of retroactive rates related to the full year of 2022 resulting from the final CPUC decision in the general rate case previously discussed, and for 2023 and 2022 they exclude the impact of changes in estimates resulting from revenues subject to refund related to the cost of capital proceeding, both shown separately in the table above.

For the year ended December 31, 2023, AWR’s recorded consolidated diluted earnings were $3.36 per share, as compared to $2.11 per share for 2022, an increase of $1.25 per share, which includes: (i) the impact of retroactive new rates related to the full 2022 year of $0.38 per share as a result of receiving a final decision in the water general rate case as previously discussed and shown separately in the table above, and (ii) a net favorable variance of $0.26 per share, also shown separately in the table above, related to the impact of the final cost of capital decision that resulted in the reversal during 2023 of revenues subject to refund of $6.4 million, or $0.13 per share, due to a change in estimate from what had been recorded during 2022. Excluding these items from both periods, for the year ended December 31, 2023 and 2022, adjusted consolidated diluted earnings were $2.85 per share and $2.24 per share, respectively, an adjusted increase of $0.61 per share. Also, included in the results for 2023 were gains totaling $5.0 million, or approximately $0.10 per share, on investments held to fund one of the Company’s retirement plans, as compared to losses of $5.2 million, or approximately $0.10 per share, for 2022, both due to financial market conditions.

Excluding the gains and losses on the retirement plan investments from both periods, the impact of retroactive rates recorded in 2023 related to the full year of 2022, and the impact of changes in estimates from the cost of capital proceeding from both periods, adjusted consolidated diluted earnings for the year of 2023 would be $2.75 per share as compared to adjusted diluted earnings of $2.34 per share for 2022, an adjusted increase of $0.41 per share or a 17.5% increase, largely due to new 2023 water rates approved in GSWC’s final decision in its general rate case proceeding.

The following is a computation and reconciliation of diluted earnings per share from the measure of operating income by business segment as disclosed in Note 17 to the Consolidated Financial Statements, to AWR’s consolidated fully diluted earnings per common share for the year ended December 31, 2023 and 2022:

Note: Certain amounts in the table above may not foot or crossfoot due to rounding.

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Water Segment:

For the year ended December 31, 2023, recorded diluted earnings from the water utility segment were $2.77 per share, as compared to $1.45 per share for 2022, an increase of $1.32 per share, which includes: (i) the impact of retroactive new rates related to the full 2022 year of $0.38 per share (shown separately in the Summary Results by Segment table above), (ii) a net favorable variance of $0.26 per share (shown separately in the Summary Results by Segment table above) from the impact of the final cost of capital decision that resulted in the reversal of $6.4 million, or $0.13 per share, due to a change in estimate from what had been recorded during 2022, and (iii) a net favorable variance of $0.20 per share from gains totaling $5.0 million, or $0.10 per share, recorded during 2023 on investments held to fund a retirement plan, as compared to losses of $5.2 million, or $0.10 per share, recorded in 2022.

Excluding the gains and losses on the retirement plan investments from both periods, the impact of retroactive rates recorded in 2023 related to the full year of 2022, and the impact of changes in estimates from the cost of capital proceeding from both periods, adjusted diluted earnings for 2023 at the water segment were $2.16 per share as compared to adjusted diluted earnings of $1.68 per share for 2022, an adjusted net increase at the water segment of $0.48 per share, or a 28.6% increase, due primarily to the following items:

•An increase in the water operating revenues of $48.1 million largely as a result of the second-year rate increases for 2023 that are retroactive to January 1, 2023 and have been reflected in the results for the year ended December 31, 2023, partially offset by the impact of the prospective change in the new cost of capital effective July 31, 2023. GSWC filed for the implementation of new 2023 rates upon receiving the final decisions in June 2023 in both its general rate case and cost of capital proceedings. The increase in water revenues during 2023 represents the difference from the 2023 second-year rate increases and the 2021 adopted rates in place and recorded during 2022.

•An increase in water supply costs of $10.0 million, which consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. Adopted supply costs for the year of 2023 were based on 2023 authorized amounts approved in the final CPUC decision in the water general rate case as compared to 2021 authorized amounts in place during 2022. Actual water supply costs are tracked and passed through to customers on a dollar-for-dollar basis by way of the CPUC-approved water supply cost balancing accounts. The increase in water supply costs results in a corresponding increase in water operating revenues and has no net impact on the water segment’s profitability.

•An overall increase in operating expenses of $3.4 million (excluding supply costs), which negatively impacted earnings and was mainly due to increases in (i) overall labor costs and other employee-related benefits, (ii) administrative and general expenses resulting from higher legal and other outside-services costs, (iii) depreciation and amortization expenses resulting from additions to utility plant and higher composite depreciation rates based on a revised depreciation study approved in the water general rate case, and (iv) franchise fees resulting from higher water revenues. These increases were partially offset by a decrease in water treatment costs, and bad debt expense as a result of additional state relief funds expected to be received for unpaid water bills accumulated during the COVID-19 pandemic period.

•An overall increase in interest expense (net of interest and other income) of $4.8 million resulting primarily from an increase in interest rates, as well as an overall increase in total borrowing levels to support, among other things, the capital expenditure programs at GSWC; partially offset by higher interest income earned on regulatory assets bearing interest at the current 90-day commercial-paper rate, which increased compared to 2022’s rates, as well as an increase in the level of regulatory assets recorded resulting, in large part, from the decision on the water general rate case that had been delayed.

•An overall increase in other expense (net of other income) of $4.6 million due largely to a net increase in the non-service cost components related to GSWC’s benefit plans resulting from changes in actuarial assumptions recorded during the year ended December 31, 2023 as compared to 2022. However, as a result of GSWC’s two-way pension balancing accounts authorized by the CPUC, changes in total net periodic benefit costs related to the pension plan have no material impact to earnings, which accounts for the majority of the increase in non-service costs.

•Changes in certain flowed-through income taxes and permanent items included in GSWC’s income tax expense for the twelve months ended December 31, 2023 as compared to the same period in 2022 that unfavorably impacted the water segment's earnings. As a regulated utility, GSWC treats certain temporary differences as being flowed-through in computing its income tax expense consistent with the income tax method used in its CPUC-jurisdiction rate making. Changes in the magnitude of flowed-through items either increase or decrease tax expense, thereby affecting diluted earnings per share.

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Electric Segment:

Diluted earnings from the electric utility segment decreased $0.04 per share for the year ended December 31, 2023 as compared to 2022, largely resulting from not having new rates in 2023 while awaiting the processing of the pending electric general rate case that will set new rates for 2023 – 2026, while also experiencing continued increases in overall operating expenses and interest costs, partially offset by favorable changes in certain flowed-through income taxes. When a decision is issued in the electric general rate case, new rates are expected to be retroactive to January 1, 2023 and cumulative adjustments will be recorded at that time.

Contracted Services Segment:

Diluted earnings from the contracted services segment increased $0.04 per share for the year ended December 31, 2023 as compared to 2022, largely due to an increase in management fee revenues resulting from the resolution of various economic price adjustments and an increase in construction activity, partially offset by higher overall operating expenses (excluding construction expenses) and interest costs as compared to 2022.

AWR (Parent):

For the year ended December 31, 2023, the diluted loss from AWR (parent) increased $0.06 per share compared to 2022 due primarily to an increase in interest expense resulting from higher short-term interest rates and higher borrowings made under AWR’s revolving credit facility, as well as changes in state unitary taxes.

The following discussion and analysis for the years ended December 31, 2023 and 2022 provide information on AWR’s consolidated operations and assets and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC, BVES and ASUS and its subsidiaries.

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Consolidated Results of Operations — Years Ended December 31, 2023 and 2022 (amounts in thousands, except per share amounts):

* not meaningful

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Operating Revenues

General

GSWC and BVES rely upon approvals by the CPUC of rate increases to recover operating expenses and to provide for a return on invested and borrowed capital used to fund utility plant. ASUS relies on economic price and equitable adjustments by the U.S. government in order to recover operating expenses and provide a profit margin for ASUS. Current operating revenues and earnings may be negatively impacted if ASUS’s subsidiaries do not receive adequate price adjustments in a timely manner. ASUS’s earnings are also impacted by the level of construction projects at its subsidiaries, which may or may not continue at current levels in future periods.

Water

For the year ended December 31, 2023, revenues from water operations increased by $92.9 million to $433.5 million, compared to 2022. The increase in water revenues was largely because of the adoption in June 2023 of a final decision in the water general rate case that included the impact of retroactive rates associated with the increase in 2022’s annual revenue requirement (excluding advice letter projects), as well as the second-year rate increases for 2023, partially offset by the impact of the prospective change in the new cost of capital effective July 31, 2023. In addition, because of receiving a final decision in the cost of capital proceeding in June 2023, in which the CPUC made adjustments to rates prospective, GSWC recorded a change in estimate that resulted in an increase to water revenues in 2023 totaling $6.4 million as a result of reversing its regulatory liability for revenues subject to refund that it had recorded during 2022.

Billed water consumption for the year ended December 31, 2023 was lower by 7.8% compared to 2022 due primarily to overall above average rainfall in California during the year of 2023 compared to 2022. Currently, changes in consumption generally do not have a significant impact on recorded revenues due to the CPUC-approved WRAM that is in place in all but one small rate-making area. GSWC records the difference between what it bills its water customers and that which is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.

Electric

Electric revenues for the year ended December 31, 2023 increased $1.8 million to $41.8 million due, in large part, to the final decision adopted in the water general rate case proceeding that updates the costs allocated from the general corporate office to the electric segment. The final decision authorizes an increase in the allocation ratio to the electric segment. The increase in general corporate office expenses allocated to the electric segment also includes a corresponding and offsetting increase in adopted electric revenues as provided in BVES’s last general rate case proceeding, resulting in no impact to earnings. There was also an increase in electric revenues from an advice letter filing related to a completed capital project.

Electric usage for the year ended December 31, 2023 was lower by 2.9% compared to 2022. Due to the CPUC-approved Base Revenue Requirement Adjustment Mechanism, which adjusts certain revenues to adopted levels authorized by the CPUC, changes in usage do not have a significant impact on earnings.

Contracted Services

Revenues from contracted services are composed of construction revenues (including renewal and replacements) and management fees for operating and maintaining the water and/or wastewater systems at various military bases.  For the year ended December 31, 2023, revenues from contracted services increased $9.5 million to $120.4 million as compared to $110.9 million for 2022. The increase was largely due to higher construction activity and an increase in management fee revenue from annual economic price adjustments as compared to 2022.

ASUS’s subsidiaries continue to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases served. During 2023, excluding the first task order of JBCC and the new contract for Naval Air Station Patuxent River, ASUS was awarded approximately $24.1 million in new construction projects for completion in 2023 through 2026. Earnings and cash flows from modifications to the initial 50-year contracts and additional contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue in future periods.

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Operating Expenses:

Supply Costs

Total supply costs at the regulated utilities comprise the largest segment of total consolidated operating expenses. Supply costs accounted for 33.1% and 30.1% of total operating expenses for the years ended December 31, 2023 and 2022, respectively.

Water segment supply costs

Two of the principal factors affecting water supply costs are the amount of water produced and the source of the water. Generally, the variable cost of producing water from wells is less than the cost of water purchased from wholesale suppliers. The overall actual percentages for purchased water for the years ended December 31, 2023 and 2022 were 43% and 45%, as compared to the adopted percentages of 41% and 34% for 2023 and 2022. The higher actual percentage of purchased water as compared to adopted resulted from a higher volume of purchased water costs due to several wells being out of service.

Under the current CPUC-approved MCBA, GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes. GSWC records the variances (which include the effects of changes in both rate and volume) between adopted and actual purchased water, purchased power and pump tax expenses as a regulatory asset or liability. GSWC recovers from, or refunds to, customers the amount of such variances.  GSWC tracks these variances individually for each water ratemaking area.

Supply costs for the water segment consist of purchased water, purchased power for pumping, groundwater production assessments and changes in the water supply cost balancing accounts. For the years ended December 31, 2023 and 2022, water supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $12.1 million and $(12.0) million for 2023 and 2022, respectively.

Purchased water costs for the year ended December 31, 2023 decreased to $72.9 million as compared to $75.9 million for 2022 primarily due to decreases in water consumption and production that were driven by overall above-average rainfall in 2023 and from overall improvements in drought conditions in 2023 as compared to 2022, partially offset by increases in wholesale water costs. The increase in power purchased for pumping was due to increases in electricity provider rates. Groundwater production assessments increased due to increases in pump tax rates during 2023 as compared to 2022.

For the year ended December 31, 2023, the water supply cost balancing account had a $13.8 million over-collection as compared to an $8.6 million under-collection in 2022. The change in water supply cost balancing accounts was primarily due to updated adopted supply costs from the final decision in the water general rate case proceeding received in June 2023. This increase includes the full year impact of 2022 to reflect newly adopted supply costs retroactive to January 1, 2022, with a corresponding and offsetting increase in adopted water revenues, resulting in no impact to earnings.

Electric segment supply costs

Supply costs for the electric segment consist primarily of purchased power for resale, the cost of natural gas used by BVES’s generating unit, the cost of renewable energy credits and changes in the electric supply cost balancing account. For the years ended December 31, 2023 and 2022, electric supply costs consisted of the following amounts (in thousands):

* The sum of water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $12.1 million and $(12.0) million for 2023 and 2022, respectively.

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For the year ended December 31, 2023, the cost of power purchased for resale to BVES’s customers decreased to $13.3 million as compared to $15.0 million for 2022 primarily due to a decrease in customer usage and lower average price per megawatt-hour (“MWh”). The average price per MWh, including fixed costs, decreased to $79.80 per MWh in 2023 from $97.89 per MWh in 2022. The lower customer usage resulted in a lower under-collection of $1.7 million recorded in the electric supply balancing account in 2023 when compared to an under-collection of $3.4 million during 2022.

Other Operation

The primary components of other operation expenses include payroll costs, materials and supplies, chemicals and water treatment costs, and outside service costs of operating the regulated water and electric systems, including the costs associated with transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices.  Registrant’s contracted services operations incur many of the same types of expenses.  For the years ended December 31, 2023 and 2022, other operation expenses by business segment consisted of the following amounts (in thousands):

For the year ended December 31, 2023, the increase in other operation expenses at the water segment was due primarily to higher operation-related labor, transportation and outside-service costs, partially offset by lower water treatment costs and bad debt expense. As a result of receiving the final decision in the water general rate case, the increase at the water segment also included a cumulative depreciation adjustment for 2022 of $212,000 on GSWC’s transportation equipment, which is recorded in other operation expenses.

The increases at the electric and contracted services segments were due primarily to higher operation-related labor and outside-services costs.

Administrative and General

Administrative and general expenses include payroll related to administrative and general functions, all employee-related benefits, insurance expenses, outside legal and consulting fees, regulatory utility commission expenses, expenses associated with being a public company and general corporate expenses charged to expense accounts. For the years ended December 31, 2023 and 2022, administrative and general expenses by business segment, including AWR (parent), consisted of the following amounts (in thousands):