American States Water Co: Form 10-Q for the period ended Sep 30, 2024

General

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 nine months ended September 30, 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 due to a change in estimates recorded during the nine months ended September 30, 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 nine months ended September 30, 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 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 of Third Quarter Results by Segment” and “Summary of Year-to-Date Results by Segment.”

Overview

Factors affecting our financial performance are summarized under “Risk Factors” in our Form 10-K for the period ended December 31, 2023 filed with the SEC.

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 recovery of its 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. The CPUC is scheduled to issue a proposed decision in the water general rate case by the end of 2024, with new rates to become effective January 1, 2025.

The proposed settlement agreement, if approved by the CPUC, resolves 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 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, as proposed in the settlement agreement, 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 settlement agreement approves $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 settlement agreement (i) GSWC’s adopted operating revenues less water supply costs for 2025 are projected to 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 unresolved 2025 revenue requirement issues relate to the sales forecast and supply mix. In addition, four items related to GSWC’s request for certain regulatory mechanisms will be litigated and they include (i) a full sales and revenue decoupling mechanism, and a full cost balancing account for water supply, (ii) a sales reconciliation mechanism, (iii) a supply mix adjustment mechanism, and (iv) a 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 (monitoring and reporting required effective 2027) established by the Environmental Protection Agency. With regards to all of these unresolved issues, GSWC and Cal Advocates filed briefs with the CPUC in July 2024. An oral argument has been scheduled with the administrative law judge in December to discuss litigated items. When the administrative law judge in the proceeding issues a proposed decision, it will address the unresolved issues along with the settlement agreement filed by GSWC and Cal Advocates.

As noted above, GSWC is litigating its request for the continued use of a full sales and revenue decoupling mechanism, and a full cost balancing account for water supply. In August 2020, the CPUC had issued a decision that mandated the discontinuation of the existing full revenue decoupling mechanism known as the Water Revenue Adjustment Mechanism (“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 Modified Cost Balancing Account (“MCBA”). Under the CPUC’s order, the WRAM and MCBA would be discontinued after 2024. 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.

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. 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. However, GSWC’s request to continue using the WRAM and MCBA is still subject to CPUC approval in the pending general rate case proceeding. If the water general rate case is delayed beyond December 31, 2024, GSWC will continue to bill its customers based on the existing adopted 2024 rates until the new 2025 rates are approved. However, GSWC may not be able to recognize under-collections of revenue in 2025 caused by fluctuations in consumption until the CPUC issues a final decision on GSWC’s request for the continuation of the WRAM and MCBA. In lieu of the existing full revenue decoupling mechanism such as the WRAM, the CPUC may authorize a modified rate adjustment mechanism that would allow for partial recognition of any potential under-collections. There can be no assurance as to the timing of the final decision or whether the CPUC will authorize a WRAM, MCBA or alternative modified rate adjustment mechanism.

Water General Rate Case for 2022–2024 and Changes in Rates for 2023 and 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 nine months ended September 30, 2023.

The third-year rate increases for 2024, which were effective January 1, 2024, have been reflected in the nine months ended September 30, 2024 results. There was an increase in recorded water operating revenues of $17.3 million 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 $2.5 million, which combined is an increase of $0.29 per share, 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 prior 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 September 30, 2024, there is an aggregate remaining cumulative balance of $41.7 million in CPUC-approved general rate case memorandum accounts that have been recognized as regulatory assets.

Cost of Capital (“COC”) Proceedings:

2021 COC Application

On June 29, 2023, the CPUC adopted a final decision in the cost of capital proceeding that, among other things, allowed for the continuation of the Water Cost of Capital Mechanism (“WCCM”) through December 31, 2024. 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.

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 WCCM will remain active through the one year deferral period.

Electric General Rate Case for the years 2023–2026

On August 30, 2022, BVES filed a general rate case application with the CPUC to determine new electric rates for the years 2023 through 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. Among other things, the settlement agreement, if approved by the CPUC, (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 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, all of which are dedicated to improving system safety and reliability; (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 are currently not included in customer rates.

Excluding the additional revenues from the advice letter capital projects discussed above, under the terms of the settlement agreement (i) BVES’s adopted operating revenues less electric supply costs for 2023 are projected to increase by approximately $5.1 million as compared to the 2022 adopted and recorded operating revenues less electric supply costs to cover, among other things, the higher incremental operating costs as settled in the revenue requirement 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, and (ii) it provides increases in the adopted operating revenues of $2.2 million for each of the years 2024 and 2025, and by $3.3 million in 2026. The rate increases for 2024 - 2026 are not subject to an earnings test. The previously mentioned advice letter projects of $23.1 million plus AFUDC 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.

Due to the delay in finalizing the electric general rate case, electric revenues billed to customers for 2023 and through September 30, 2024 have been based on 2022 adopted rates, and will remain in effect until finalization of the pending general rate case proceeding. BVES has been authorized by the CPUC to establish a general rate case memorandum account that will make the new rates retroactive to January 1, 2023 and, therefore, when a final decision is issued by the CPUC, cumulative adjustments will be recorded at that time to reflect the full impact of retroactive rates. The CPUC has extended the statutory deadline of this proceeding to January 31, 2025. Therefore, a decision in the electric general rate case is scheduled to be issued by the first quarter of 2025. No assurance can be given that a decision will be received at such time.

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 prices for each of the contracts and recurring task order agreements are 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 expect to 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.

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 subject to an inventory adjustment and annual economic price adjustments. In July 2024, the 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.

ASUS continues to enter into U.S. government-awarded contract modifications and agreements with third-party prime contractors for new construction projects at the military bases it currently serves. During the nine months ended September 30, 2024, ASUS has been awarded approximately $54.0 million in new construction projects, which are expected to be completed during 2024 through 2027. This is a significant increase of new construction projects awarded when compared to $25.2 million awarded for the full year of 2023. Earnings and cash flows from modifications to the original 50-year 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.

Summary of Third Quarter Results by Segment

The table below sets forth the third quarter 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.

For the three months ended September 30, 2024, AWR’s recorded consolidated diluted earnings were $0.95 per share, as compared to $0.85 per share for the same period in 2023, an increase of $0.10 per share, generated from higher earnings at the water utility segment, which contributed an increase of $0.12 per share that included a net favorable variance of $0.06 per share from gains generated on investments held to fund one of the company’s retirement plans during the third quarter of 2024 as compared to losses recorded during the same period in 2023 due to financial market conditions.

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 10 to the Unaudited Consolidated Financial Statements to AWR’s consolidated fully diluted earnings per common share (as recorded), for the three months ended September 30, 2024 and 2023:

(in thousands, except per share amounts)

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

Water Segment:

For the three months ended September 30, 2024, recorded diluted earnings from the water utility segment were $0.84 per share, as compared to $0.72 per share for the same period in 2023, an increase of $0.12 per share due, in part, to a net favorable variance of $0.06 per share from gains totaling $2.1 million, or $0.04 per share, generated on investments held to fund one of the company’s retirement plans during the three months ended September 30, 2024, as compared to losses on investments of $1.0 million, or $0.02 per share, recorded during the same period in 2023 due to financial market conditions. The discussion below presents the other major variances in earnings for the two periods and which resulted in a net overall increase in earnings at the water segment of $0.06 per share for the third quarter of 2024.

• An increase in water operating revenues of approximately $7.8 million was largely a result of the third-year rate increases approved by the CPUC that went into effect on January 1, 2024, and an overall increase in the authorized rate of return on rate base in 2024 compared to the same period in 2023 due to triggering the WCCM, which increased the return on equity from 9.36% to 10.06% effective January 1, 2024.
• An increase in water supply costs of $1.4 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. 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 material impact on the water segment’s profitability.
• An overall increase in operating expenses of $2.8 million (excluding supply costs) due primarily to increases in (i) overall labor costs and other employee-related benefits, (ii) operation-related costs resulting from higher conservation spending, (iii) administrative and general expenses resulting largely from higher outside-services costs including related to the pending general rate case application and other regulatory filings, and higher insurance-related costs, and (iv) 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 a decrease in maintenance expenses due to timing.
• An increase in interest expense (net of interest income) of $1.6 million resulting primarily from an overall increase in interest rates, as well as an increase in total borrowing levels to support, among other things, the capital expenditure program at GSWC, and a decrease in interest income earned on regulatory assets bearing interest at the current 90-day commercial paper rate due to a decrease in the level of regulatory assets recorded.
• Changes in certain flowed-through income taxes and permanent items included in GSWC’s income tax expense for the three months ended September 30, 2024 as compared to the same period in 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 $0.01 per share due to the dilutive effects from the issuance of equity under AWR’s at-the-market (“ATM”) offering program. Under the ATM offering 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 September 30, 2024, AWR has sold 791,097 Common Shares through this ATM offering program.

Electric Segment:

Diluted earnings from the electric utility segment decreased $0.02 per share for the third quarter of 2024 as compared to the same period in 2023 primarily due to an increase in interest expense (net of interest income) resulting from an overall increase in interest rates, as well as an increase in total borrowing levels to support, among other things, the capital expenditure program at BVES, and a decrease in interest income earned on regulatory assets.

On August 30, 2022, BVES filed a general rate case application with the CPUC to determine new electric rates for the years 2023 through 2026, which is still pending finalization. On November 1, 2024, BVES, Cal Advocates, and the other intervenor in the proceeding filed a joint motion to adopt a settlement agreement between all parties resolving all issues in connection with the pending general rate case. 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 were consistent for the quarter when compared to 2023 with a decrease of $0.01 per share shown in the table above primarily due to the effects of rounding. The contracted services segment is expected to contribute $0.54 to $0.57 per share for the full 2024 year.

AWR (Parent):

For the three months ended September 30, 2024, diluted losses from AWR (parent) were consistent when compared to the same period in 2023.

Summary of Year-to-Date Results by Segment

The table below sets forth the year-to-date 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 nine months ended September 30, 2024, AWR’s recorded consolidated diluted earnings were $2.42 per share, as compared to $2.82 per share recorded for the same period in 2023, a decrease of $0.40 per share. Included in the results for the nine months ended September 30, 2023 were (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 year of 2022 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 these items from the nine months ended September 30, 2023, adjusted consolidated diluted earnings were $2.31 per share, compared to adjusted and recorded consolidated earnings of $2.42 per share during the same period in 2024, an adjusted increase of $0.11 per share, largely generated from the water utility segment.

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 10 to the Unaudited Consolidated Financial Statements, to AWR’s consolidated fully diluted earnings per common share, for the nine months ended September 30, 2024 and 2023:

(in thousands, except per share amounts)

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

Water Segment:

For the nine months ended September 30, 2024, recorded diluted earnings from the water utility segment were $1.99 per share, as compared to $2.36 per share for the same period in 2023, a decrease of $0.37 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 nine months ended September 30, 2023 of estimated revenues subject to refund recorded in 2022 of $6.4 million, or $0.13 per share.

Excluding the impact of both items discussed above from the nine months ended September 30, 2023, adjusted diluted water earnings were $1.85 per share, as compared to adjusted and recorded diluted earnings of $1.99 per share for the nine months ended September 30, 2024, an adjusted increase at the water segment of $0.14 per share due, in part, to a net favorable variance of $0.06 per share from gains totaling $5.1 million, or $0.10 per share, generated on investments held to fund one of the Company’s retirement plans during the nine months ended September 30, 2024, as compared to gains on investments of $2.1 million, or $0.04 per share, recorded during the same period in 2023 due to financial market conditions. The discussion below presents the other major variances in earnings for the two periods and which resulted in a net overall increase in earnings at the water segment of $0.08 per share for the nine months ended September 30, 2024.

• Excluding the revenue impact related to 2022 resulting from the decisions in both the general rate case and cost of capital proceedings recorded during the nine months ended September 30, 2023 as previously discussed, there was an increase in water operating revenues of approximately $17.3 million as a result of the third-year rate increases that went into effect on January 1, 2024.
• An increase in water supply costs of $2.5 million, which consists 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. 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 material impact on the water segment’s profitability.
• An overall increase in operating expenses of $6.5 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 including related to the pending 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 the timing of other operation-related and maintenance expenses.
• An overall increase in interest expenses (net of interest 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 2023’s rates, as well as an increase in the level of regulatory assets recorded.
• Excluding the impact from the investments held to fund one of the Company’s retirement plans as previously discussed, an overall decrease in other expenses (net of other income) of $0.8 million due primarily to a decrease 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.
• Changes in certain flowed-through income taxes and permanent items included in GSWC’s income tax expense for the nine months ended September 30, 2024 as compared to the same period in 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 $0.02 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 September 30, 2024, AWR has sold 791,097 Common Shares through this ATM offering program.

Electric Segment:

Diluted earnings from the electric utility segment decreased $0.07 per share for the nine months ended September 30, 2024 as compared to the same period in 2023, largely resulting from not having new rates 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. On November 1, 2024, BVES, Cal Advocates, and the other intervenor in the proceeding filed a joint motion to adopt a settlement agreement between all parties resolving all issues in connection with the pending general rate case. If the CPUC approves the settlement agreement, 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 $0.06 per share for the nine months ended September 30, 2024 as compared to the same period in 2023, largely due to an increase in management fee revenue resulting from the resolution of various economic price adjustments and the commencement of operations at the new bases, partially offset by higher overall operating expenses (excluding construction expenses) and interest costs as compared to the same period of 2023. The contracted services segment is expected to contribute $0.54 to $0.57 per share for the full 2024 year.

AWR (Parent):

For the nine months ended September 30, 2024, the diluted loss from AWR (parent) increased by $0.01 per share compared to the same period in 2023 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.

The following discussion and analysis for the three and nine months ended September 30, 2024 and 2023 provides information on AWR’s consolidated operations and, where necessary, includes specific references to AWR’s individual segments and subsidiaries: GSWC, BVES, and ASUS and its subsidiaries.

Consolidated Results of Operations — Three Months Ended September 30, 2024 and 2023 (amounts in thousands, except per share amounts):

* not meaningful

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 three months ended September 30, 2024, revenues from water operations increased by $7.8 million to $124.0 million as compared to the same period in 2023. The increase in water revenues during the third quarter of 2024 is primarily a result of third-year rate increases that went into effect on January 1, 2024, and an increase in the authorized rate of return on rate base in 2024.

Billed water consumption for the third quarter of 2024 was higher by approximately 8.6% as compared to the same period in 2023 due primarily to the summer heat wave in California and higher overall temperatures in the third quarter of 2024 as compared to the third quarter of 2023. 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 what is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.

Electric

Electric revenues for the three months ended September 30, 2024 increased by $0.1 million to $9.0 million as a result of higher usage partially offset by not having new rates while awaiting the processing of the pending electric general rate case that will set new rates for 2023 – 2026. Electric usage for the third quarter of 2024 was 5.7% higher than the same period in 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 water and/or wastewater systems at various military bases. For the three months ended September 30, 2024, revenues from contracted services increased by $2.2 million to $28.7 million as compared to $26.5 million for the same period in 2023. The increase was largely resulting from an increase in management fees from economic price adjustments and revenues at the new bases.

ASUS’s subsidiaries expect to continue to enter into U.S. government-awarded contract modifications, agreements with third-party prime contractors for new construction projects at the military bases served and task order agreements. Earnings and cash flows from modifications to the initial 15- and 50-year contracts with the U.S. government and agreements with third-party prime contractors for additional construction projects may or may not continue at current levels in future periods.

Operating Expenses:

Supply Costs

Total supply costs at the regulated utilities comprise the largest portion of total consolidated operating expenses. Supply costs accounted for approximately 35.7% and 36.6% of total operating expenses for the three months ended September 30, 2024 and 2023, 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 of purchased water for the three months ended September 30, 2024 and 2023 were approximately 43% and 44%, respectively.

Under the current CPUC-approved MCBA, GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes and 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 to the MCBA. 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 three months ended September 30, 2024 and 2023, water supply costs consisted of the following amounts (in thousands):

* The sum of the water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(0.4) million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively.

** not meaningful

Purchased water costs for the third quarter of 2024 increased to $24.1 million as compared to $23.2 million for the same period in 2023 primarily due to an increase in wholesale water costs, partially offset by a reduction in purchased water due to wells coming back on-line. There was an overall increase in well production costs compared to the same period in 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 three months ended September 30, 2024, the water supply cost balancing account had a $0.4 million under-collection as compared to a $0.8 million over-collection during the same period in 2023. The change in the water supply cost balancing accounts was attributed to an increase in customer water usage and increases in overall actual supply costs in 2024.

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 three months ended September 30, 2024 and 2023, electric supply costs consisted of the following amounts (in thousands):

* The sum of the water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $(0.4) million and $0.7 million for the three months ended September 30, 2024 and 2023, respectively.

** not meaningful

For the three months ended September 30, 2024, the cost of power purchased for resale to BVES’s electric customers increased by $0.1 million to $2.5 million as compared to $2.4 million during the same period in 2023 due to higher overall average prices per megawatt-hour that include all fixed costs.

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 systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices and the electric system. Registrant’s contracted services operations incur many of the same types of expenses. For the three months ended September 30, 2024 and 2023, other operation expenses by business segment consisted of the following (dollar amounts in thousands):

37

The increase in other operation expenses at the water segment was primarily due to higher operation-related labor costs as well as timing differences in spending under GSWC’s water conservation programs. The decrease at the electric segment was primarily due to lower outside-services costs. The increase at the contracted services segment was due primarily to commencing operations at the new bases and higher operation-related labor.

Administrative and General

Administrative and general expenses include payroll costs 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 three months ended September 30, 2024 and 2023, administrative and general expenses by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

* not meaningful

Administrative and general expenses increased at the water segment due primarily to an increase in outside-services costs largely related to the pending general rate case application and other regulatory filings, labor costs and insurance-related costs. The increase at the electric segment primarily was due to higher outside-services costs. The increase at the contracted services segment was mainly due to commencing operations at the new bases, an increase in labor costs, employee-related benefits and insurance-related costs.

During the three months ended September 30, 2023, administrative and general expenses at AWR (parent) reflect the reversal of a previous accrual that was favorably resolved.

Depreciation and Amortization

For the three months ended September 30, 2024 and 2023, depreciation and amortization by business segment consisted of the following (dollar amounts in thousands):

The overall increase to depreciation and amortization expense is largely attributed to additions to utility plant and other fixed assets at both regulated utilities.

Maintenance

For the three months ended September 30, 2024 and 2023, maintenance expense by business segment consisted of the following (dollar amounts in thousands):

Overall maintenance expense decreased at the water segment due to lower planned and unplanned maintenance costs as compared to the same period in 2023 some due to timing differences.

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

Property and Other Taxes

For the three months ended September 30, 2024 and 2023, property and other taxes by business segment consisted of the following (dollar amounts in thousands):

Property and other taxes increased at both regulated utilities due, in part, to an increase in capital additions and higher assessed values. Property and other taxes increased at the contracted services segment largely from an increase in gross receipts taxes resulting from higher revenues, and an increase in payroll taxes due, in part, from the addition of the new bases.

ASUS Construction

For the three months ended September 30, 2024, construction expenses for contracted services were $11.8 million, an increase of $0.1 million compared to the same period in 2023 primarily due to an increase in construction activity as compared to the same period of 2023.

Interest Expense

For the three months ended September 30, 2024 and 2023, interest expense by business segment, including AWR (parent), consisted of the following (dollar 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. Interest expenses at the regulated utilities increased as compared to the same period in 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, while AWR’s borrowing levels decreased when compared to 2023. The combined average interest rates at the regulated utilities were 5.22% and 5.10% for the three months ended September 30, 2024 and 2023, respectively.

Interest Income

For the three months ended September 30, 2024 and 2023, interest income by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

* not meaningful

For the three months ended September 30, 2024, overall interest income decreased at the regulated utilities as compared to the same period in 2023 due primarily to a decrease in interest income earned on regulatory assets. Regulatory asset balances will decrease due to implementing authorized surcharges.

Other Income and (Expenses), net

For the three months ended September 30, 2024 and 2023, other income and (expenses), net by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

* not meaningful

For the three months ended September 30, 2024, other income (net of other expense) increased largely because of gains of $2.1 million recorded on investments held to fund one of the Company’s retirement plans in 2024, compared to losses of $1.0 million recorded in 2023.

Income Tax Expense

For the three months ended September 30, 2024 and 2023, income tax expense by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

* not meaningful

Consolidated income tax expense for the three months ended September 30, 2024 increased by $0.5 million primarily due to an increase in consolidated pretax income as compared to the same period in 2023. AWR’s ETR was 21.9% and 23.2% for the three months ended September 30, 2024 and 2023, respectively. GSWC’s ETR was 22.6% and 24.9% for the three months ended September 30, 2024 and 2023, respectively, which fluctuated due to changes in certain flowed-through income taxes and permanent items.

Consolidated Results of Operations — Nine Months Ended September 30, 2024 and 2023 (amounts in thousands, except per share amounts):

* not meaningful

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 can be negatively impacted if ASUS’s subsidiaries do not receive adequate rate relief or adjustments in a timely manner. ASUS’s earnings are also impacted by the level of additional construction projects at its subsidiaries, which may or may not continue at current levels in future periods.

Water

For the nine months ended September 30, 2024, revenues from water operations decreased by $21.1 million to $324.7 million as compared to the same period in 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 the nine months of 2023. The increase to revenues from both of these items recorded in 2023 did not recur during the same period 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.

Billed water consumption for the nine months ended September 30, 2024 was higher by 5.5% as compared to the same period in 2023 due primarily to lower amounts of seasonal precipitation and higher temperatures in the summer months for the nine months of 2024 as compared to the same period in 2023. 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 what is authorized by the CPUC in the WRAM accounts as regulatory assets or liabilities.

Electric

Electric revenues for the nine months ended September 30, 2024 decreased by $0.7 million to $29.9 million due, in large part, to the final decision in the water general rate case proceeding that was adopted in 2023 and retroactive to January 1, 2022. The final decision recorded in 2023 included the full year impact of 2022 that updated the costs allocated from the general corporate office to the electric segment and authorized an increase in the allocation ratio to the electric segment. The increase in general corporate office expenses allocated to the electric segment also included 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. Furthermore, customers are being billed at 2022’s adopted rates as a result of not having new rates while awaiting the processing of the pending electric general rate case that will set new rates for 2023 – 2026.

Electric usage for the nine months ended September 30, 2024 was higher by 0.6% compared to the same period in 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 nine months ended September 30, 2024, revenues from contracted services increased by $3.7 million to $97.7 million as compared to $94.0 million for the same period in 2023. The increase was largely due to an increase in management fee revenue from annual economic price adjustments and the commencement of operations at the new bases, 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.

Operating Expenses:

Supply Costs

Total supply costs at the regulated utilities comprise the largest portion of total consolidated operating expenses. Supply costs accounted for approximately 31.2% and 34.1% of total operating expenses for the nine months ended September 30, 2024 and 2023, 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 of purchased water for the nine months ended September 30, 2024 and 2023 were approximately 42% and 44%, respectively. The decrease in the actual percentage of purchased water resulted primarily from wells coming back on-line that had previously been out of service. This trend is expected to be consistent for the remainder of the year.

Under the current CPUC-approved MCBA, GSWC tracks adopted and actual expense levels for purchased water, power purchased for pumping and pump taxes and 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 to the MCBA. 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 nine months ended September 30, 2024 and 2023, water supply costs consisted of the following amounts (in thousands):

* The sum of the water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $2.4 million and $15.1 million for the nine months ended September 30, 2024 and 2023, respectively.

Purchased water costs during the nine months ended September 30, 2024 increased to $55.8 million as compared to $55.6 million for the same period in 2023 largely due to increases in wholesale water costs, partially offset by a decrease in purchased water resulting from wells coming back on-line. The increase in power purchased for pumping and groundwater production assessments are also a result of wells coming back on-line and the overall increase in well production costs compared to the same period in 2023, as well as increases in electricity provider rates and increases in pump tax rates.

For the nine months ended September 30, 2024, the water supply cost balancing account had a $2.1 million over-collection as compared to a $16.2 million over-collection during the same period in 2023. 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 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 nine months ended September 30, 2024 and 2023, electric supply costs consisted of the following amounts (in thousands):

* The sum of the water and electric supply-cost balancing accounts are shown on AWR’s Consolidated Statements of Income and totaled $2.4 million and $15.1 million for the nine months ended September 30, 2024 and 2023, respectively.

** not meaningful

For the nine months ended September 30, 2024, the cost of power purchased for resale to BVES’s electric customers decreased to $8.3 million as compared to $9.8 million during the same period in 2023 primarily due to lower overall average prices per megawatt-hour. The change in the electric supply cost balancing account during the nine months ended September 30, 2024 compared to the same period in 2023 was due to decreases in energy prices.

Other Operation

The primary components of other operation expenses include payroll costs, materials and supplies, chemicals and water treatment costs and outside-services costs of operating the regulated water systems, including the costs associated with water transmission and distribution, pumping, water quality, meter reading, billing, and operations of district offices and the electric system. Registrant’s contracted services operations incur many of the same types of expenses. For the nine months ended September 30, 2024 and 2023, other operation expenses by business segment consisted of the following (dollar amounts in thousands):

For the nine months ended September 30, 2024, the decrease in other operation expenses at the water segment was due to the receipt of the final decision in the water general rate case in 2023. The nine months ended September 30, 2023 included a retroactive depreciation adjustment for 2022 of $0.2 million on GSWC’s transportation equipment, which is recorded in other operation expenses with no similar adjustment recorded in 2024. Increases in labor costs were largely offset by other operation-related expenses.

The decrease at the electric segment was due primarily to the expiration of surcharges recorded in 2023 related to the impact of a winter storm in 2018. The increase at the contracted services segment was due primarily to commencing operations at the new bases and higher operation-related labor costs, chemicals and water treatment costs.

Administrative and General

Administrative and general expenses include payroll costs 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 nine months ended September 30, 2024 and 2023, administrative and general expenses by business segment, including AWR (parent), consisted of the following (dollar 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 pending general rate case application and other regulatory filings, labor and employee-related expenses, and insurance-related costs. In addition, there was an increase in billed surcharges of $0.5 million to recover previously incurred costs that had been tracked in CPUC-authorized memorandum accounts. Increases in revenues from billed surcharge have a corresponding and offsetting increase in administrative and general expenses, resulting in no impact to earnings. Finally, during the nine months ended September 30, 2023, there was a reduction of approximately $0.4 million recorded to reflect the final decision in the water general rate case 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 an increase in outside-services costs. This increase was partially offset by the effects of the final decision in the water general rate case proceeding, which included a higher allocation of general corporate office expenses to the electric segment that was retroactive to 2022 but recorded in 2023. Accordingly, 2023 included an adjustment for the higher expenses related to 2022, with no similar adjustment in 2024. The increase in general corporate office expenses allocated to the electric segment also includes a corresponding and offsetting increase in adopted electric revenues, resulting in no impact on earnings.

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

Administrative and general expenses at AWR (parent) during the nine months ended September 30, 2023 reflected the reversal of a previous accrual that was favorably resolved and did not recur in 2024.

Depreciation and Amortization

For the nine months ended September 30, 2024 and 2023, depreciation and amortization by business segment consisted of the following (dollar 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. The overall increase in depreciation and amortization expenses at the electric segment is primarily due to additions to utility plant.

Maintenance

For the nine months ended September 30, 2024 and 2023, maintenance expense by business segment consisted of the following (dollar amounts in thousands):

Maintenance expense decreased at the water segment due to lower planned and unplanned maintenance costs as compared to the same period in 2023 due, in part, to timing.

Maintenance expense was higher at the electric segment as compared to the same period in 2023 due to higher planned and unplanned maintenance costs due, in part, to timing.

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.

Property and Other Taxes

For the nine months ended September 30, 2024 and 2023, property and other taxes by business segment consisted of the following (dollar 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. These increases were partially offset by the recording during the nine months ended September 30, 2023 of additional franchise fee expense of $0.2 million that reflected the impact of having recorded the full year of 2022 water revenues in 2023 as a result of receiving a final decision in the water general rate case that was retroactive to January 1, 2022.

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 addition of the new bases.

ASUS Construction

For the nine months ended September 30, 2024, construction expenses for contracted services were $43.6 million, a decrease of $2.9 million compared to the same period in 2023 primarily due to a decrease in construction activity resulting from timing differences of when such work was performed in 2024 as compared to the same period of 2023.

Interest Expense

For the nine months ended September 30, 2024 and 2023, interest expense by business segment, including AWR (parent), consisted of the following (dollar 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 the same period in 2023 resulting primarily from an increase in total borrowing levels to support, among other things, the capital expenditures program at the regulated utilities, as well as an overall increase in average interest rates. The combined average interest rates at the regulated utilities were 5.26% and 5.03% for the nine months ended September 30, 2024 and 2023, respectively.

Interest Income

For the nine months ended September 30, 2024 and 2023, interest income by business segment, including AWR (parent), consisted of the following (dollar 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 increase in regulatory assets recorded compared to the same period in 2023. Also, as a result of receiving the final decision in the water general rate case in 2023, $0.4 million of interest income was recorded for the nine months ended September 30, 2023 related to regulatory assets for the full year of 2022 as the decision was retroactive to January 1, 2022.

The decrease at the electric segment was due to a decrease in interest income earned on regulatory assets.

Other Income and (Expenses), net

For the nine months ended September 30, 2024 and 2023, other income and (expenses), net by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

* not meaningful

For the nine months ended September 30, 2024, other income (net of other expenses) increased largely because of an increase of $3.0 million in gains generated on investments held to fund one of the Company’s retirement plans and the change in the non-service cost components related to the water segment’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 account authorized by the CPUC, changes in total net periodic benefit costs related to the pension plan have no material impact to earnings.

Income Tax Expense

For the nine months ended September 30, 2024 and 2023, income tax expense by business segment, including AWR (parent), consisted of the following (dollar amounts in thousands):

Consolidated income tax expense for the nine months ended September 30, 2024 decreased by $5.7 million primarily due to a decrease in consolidated pretax income as compared to the same period in 2023. AWR’s ETR was 23.4% and 24.3% for the nine months ended September 30, 2024 and 2023, respectively. GSWC’s ETR was 24.0% and 25.3% for the nine months ended September 30, 2024 and 2023, respectively, which fluctuated due to changes in certain flowed-through income taxes and permanent items.

Critical Accounting Policies and Estimates

Critical accounting policies and estimates are those that are important to the portrayal of Registrant’s financial condition, results of operations and cash flows and require the most difficult, subjective or complex judgments of Registrant’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. These judgments are based on Registrant’s historical experience, terms of existing contracts, its observance of trends in the industry, and information available from other outside sources, as appropriate. Actual results may differ from these estimates under different assumptions or conditions.

The critical accounting policies used in the preparation of Registrant’s financial statements are ones that it believes affect the more significant judgments and estimates used in the preparation of its consolidated financial statements presented in this report and are described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC. There have been no material changes to Registrant’s critical accounting policies.

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 $763.4 million was available for GSWC to pay dividends to AWR on September 30, 2024. Approximately $97.0 million was available for BVES to pay dividends to AWR as of September 30, 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 the first nine months of 2024, AWR sold 791,097 Common Shares through this ATM offering program and raised proceeds of $60.0 million, net of $0.9 million in commissions paid under the terms of the Equity Distribution Agreement. The net proceeds raised during the first nine months of 2024 were used to pay down outstanding borrowings under AWR’s credit facility and to make equity contributions to a subsidiary. As of September 30, 2024, approximately $139.1 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 currently provide AWR and GSWC unsecured revolving credit facilities with 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 currently 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 its credit facilities were $120.0 million and $140.0 million, respectively, as of September 30, 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 September 30, 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 to facilitate the pay-off of its 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.

Under GSWC’s current financing application authorized by the CPUC, GSWC has $40 million remaining available that provides for long-term financing and which is expected to be used over the next 3-6 months. On January 22, 2024, GSWC filed a new financing application with the CPUC, pending approval from the CPUC, that requests authorization for the issuance and sale of additional long-term debt and equity securities of up to $750.0 million. On April 29, 2024, the CPUC issued a ruling on GSWC’s pending financing application stating that a proposed decision is expected to be received no later than 90 days from the date of the ruling. A proposed decision has yet to be issued by the CPUC in GSWC’s financing application as of the date of this filing.

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, subject to lender approval. The CPUC requires BVES to completely pay off all borrowings under its revolving credit facility within a 24-month period after which BVES may again borrow under this facility. BVES’s next pay-off period was set to end in August 2024. In May 2024, the CPUC approved BVES’s request to extend its 24-month pay-off period past the August deadline while it awaited a final decision from the CPUC on its financing application that enables BVES to issue the necessary long-term financing to pay off its borrowings under the credit facility. The CPUC granted BVES an extension to its original August 2024 deadline to nine months from the date a final decision in the financing application is issued by the CPUC. On August 1, 2024, the CPUC issued a final decision in BVES’s financing application, which among other things, approves BVES’s request to issue up to $120 million of new debt and equity securities. As a result, BVES will have until May 1. 2025 to secure long-term financing to pay off the remaining balance of its revolving credit arrangement. 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. Accordingly, the $37.0 million outstanding under BVES’s credit facility has been classified as a current liability in AWR’s Consolidated Balance Sheet as of September 30, 2024.

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 is expected to 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, GSWC and BVES have $40.0 million and $160.0 million, respectively, remaining and available under each utility’s authorized applications that provides for long-term financing and which are expected to be used over the next 3-6 months to pay down portions of the outstanding borrowings under the respective credit facilities.

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 and delays in receiving rate case decisions 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 October 29, 2024, AWR’s Board of Directors approved a fourth quarter dividend of $0.4655 per share on AWR’s Common Shares. Dividends on the Common Shares will be paid on December 2, 2024 to shareholders of record at the close of business on November 15, 2024. Registrant has paid Common Share 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 and is on pace to achieve a 10-year CAGR of 8.0% in its calendar year dividend payments. 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 capital 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, among other things, utility regulation; delays in receiving approvals of general rate cases, 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 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. For further information regarding the risks faced by Registrant, see Item 1A, Risk Factors, in our annual report on Form 10-K for the period ended December 31, 2023.

ASUS funds its operating expenses primarily through internal operating sources, which include U.S. government funding under 15- and 50-year contracts 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 $134.2 million for the nine months ended September 30, 2024 as compared to $56.5 million for the same period in 2023. The increase in operating cash flows 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 water general rate case decision in June 2023. 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. In addition, GSWC 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, GSWC received $3.5 million in additional COVID-19 relief funds from the state of California to provide assistance to customers for delinquent water customer bills incurred during the pandemic. Finally, the change in operating cash flows were also due to a 5.5% increase in billed water consumption.

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 $172.9 million for the nine months ended September 30, 2024 as compared to $135.2 million for the same period in 2023, which is mostly related to capital expenditures at the regulated utilities. GSWC and BVES invest capital to provide essential services to their regulated customer bases, 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 and electric 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.

For the year 2024, the regulated utilities’ company-funded capital expenditures are expected to be between $210 million and $230 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 banks, (iii) the proceeds from unsecured 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 credit facility are primarily used to support AWR parent and its contracted services subsidiary, and borrowings on GSWC and BVES’s credit facilities are used to fund GSWC and BVES capital expenditures, respectively, until long-term financing is arranged. AWR may also from time to time make equity contributions to GSWC and to BVES. Overall debt levels are expected to increase to fund the costs of the capital expenditures that will be made by the regulated utilities.

Net cash provided by financing activities was $41.0 million for the nine months ended September 30, 2024 as compared to cash provided of $81.3 million during the same period in 2023. The decrease in net cash provided by financing activities in 2024 was due primarily to a decrease in total borrowings in 2024 as compared to the same period in 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, which, in turn, used the proceeds to pay down outstanding borrowings under its credit facility. On June 5, 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 nine months ended September 30, 2024, AWR had net payments on its credit facilities of $36.5 million, while during the nine months ended September 30, 2023, AWR had net payments on its credit facilities of $5.2 million. Credit facilities have been used to support its operations and ongoing capital expenditure programs. In addition, for the nine months ended September 30, 2024, AWR sold 791,097 Common Shares through its ATM offering program and raised proceeds net of issuance costs of $59.3 million.

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, among other things, 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 may also be impacted by delays in receiving payments from GSWC customers due to the lingering effects of the COVID-19 pandemic. For further information regarding the risks faced by Registrants, see Item 1A, Risk Factors, in our annual report on Form 10-K for the period ended December 31, 2023.

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. GSWC has 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 also be required to be paid-off in full within a 24-month period after which GSWC may continue to borrow under this facility. GSWC’s next pay-off period ends in June 2025. Under the current financing application authorized by the CPUC, GSWC has $40.0 million remaining and available that provides for long-term financing and which are expected to be used over the next 3-6 months to pay down portions of the outstanding borrowings under GSWC’s credit facility. On January 22, 2024, GSWC filed a new financing application with the CPUC that requests authorization for the issuance and sale of additional long-term debt and equity securities of up to $750.0 million. On April 29, 2024, the CPUC issued a ruling on GSWC’s pending financing application stating that a proposed decision is expected to be received no later than 90 days from the date of the ruling. A proposed decision has yet to be issued by the CPUC in GSWC’s financing application as of the date of this filing.

In addition, GSWC 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 $106.1 million for the nine months ended September 30, 2024 as compared to $53.6 million for the same period in 2023. The increase in operating cash flow was due primarily 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. Furthermore, in March 2024, GSWC received $3.5 million in additional COVID-19 relief funds from the state of California to provide assistance to customers for delinquent water customer bills incurred during the pandemic. The increase was also due to a 5.5% increase in billed water consumption and differences in the timing of vendor payments. These increases in operating cash flows 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 $146.8 million for the nine months ended September 30, 2024 as compared to $113.6 million for the same period in 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 $40.2 million for the nine months ended September 30, 2024 as compared to $59.7 million net cash provided for the same period in 2023. The decrease in net cash provided by financing activities in 2024 was due primarily to a decrease in total borrowing levels necessary to support water operations and capital expenditures program at GSWC as a result of an increase in cash flows from operating activities.

In addition, 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. 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. Finally, GSWC paid $17.5 million in dividends to AWR during the nine months ended September 30, 2024 as compared to $55.4 million during the same period in 2023 some of which is due to timing of which quarter GSWC funds.

Contractual Obligations and Other 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 an annual sinking fund 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.

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Contractual Obligations and Commitments” section of the Registrant’s Form 10-K for the year ended December 31, 2023 filed with the SEC for a discussion of contractual obligations and other commitments.

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 Defense Contract Auditing Agency and/or the Defense Contract Management Agency 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.

Regulatory Matters

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

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, 2022 and from January 1, 2023 through July 30, 2023 were based on 2021 adopted rates. On June 29, 2023, GSWC received a final decision in its water general rate case application that determined new rates for 2022 and 2023 and were effective and retroactive to January 1, 2022 and January 1, 2023, respectively. The impact of retroactive rates for the full year of 2022 and the estimated second-year 2023 rate increases were reflected in the results for the nine months of 2023. The third-year rate increases for 2024, which were effective January 1, 2024, have been reflected in the nine months ended September 30, 2024 results.

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 Cal Advocates filed a joint motion to adopt a settlement agreement between GSWC and Cal Advocates in connection with the water utility general rate case. The CPUC is scheduled to issue a proposed decision in the water general rate case by the end of 2024, with new rates to become effective January 1, 2025.

Cost of Capital

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 WCCM will remain active through the one year deferral period.

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 (“SJO Mutual”) 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 March 26, 2024, the CPUC issued a scoping ruling that established a schedule that provides for a final decision in the fourth quarter of 2024.

Electric Segment:

Changes in Rates

On August 30, 2022, BVES filed a general rate case application with the CPUC to determine new electric rates for the years 2023 through 2026, which is still pending finalization and approval by the CPUC. Due to the delay in finalizing the electric general rate case, electric revenues billed to customers for 2023 and through September 30, 2024 have been based on 2022 adopted rates, and will remain in effect until finalization of the pending general rate case proceeding. 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. The CPUC has extended the statutory deadline of this proceeding to January 31, 2025. Therefore, a decision in the electric general rate case is scheduled to be issued by the first quarter of 2025. BVES has been authorized to establish a general rate case memorandum account that will make the new rates retroactive to January 1, 2023 and, therefore, when a final decision is issued by the CPUC, cumulative adjustments will be recorded at that time.

BVES Battery and Solar Projects

On May 17, 2024, BVES filed an application with the CPUC requesting approval to acquire, own, and operate the Storage System (“Battery Project”) and the Bear Valley Solar Energy Project (“Solar Project”) (collectively “Projects”) and to authorize a rate increase for the Projects’ capital investment and operating expenses. If approved, BVES will recoup the costs in rates once construction is completed and the Projects are placed into service. Construction is expected to be completed within 12 months of the CPUC’s approval at a total cost of $26.2 million. These Projects will help BVES transition to carbon-free resources, meet its Renewable Portfolio Standard and greenhouse gas emissions reduction requirements, and enhance long-term local area reliability needs. As part of the application, BVES is seeking approval from the CPUC to enter into engineering, procurement, and construction agreements. BVES also requests for authorization to file an advice letter within 30 days of the completion of the Projects’ construction to initiate rate recovery of its investment and operating costs of the Projects.

See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Regulatory Matters” section of the Registrant’s Form 10-K for the year-ended December 31, 2023 filed with the SEC for a discussion of other regulatory matters.

Environmental Matters

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Environmental Matters” section of the Registrant’s Form 10-K for the year-ended December 31, 2023 filed with the SEC for a discussion of environmental matters applicable to AWR and its subsidiaries.

AWR’s subsidiaries are subject to stringent environmental regulations. GSWC is required to comply with the safe drinking water standards established by the U.S. Environmental Protection Agency (“U.S. EPA”) and the Division of Drinking Water (“DDW”), under the State Water Resources Control Board (“SWRCB”). Under the Federal Safe Drinking Water Act and its implementing regulations, 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. The DDW, acting on behalf of the U.S. EPA, administers the U.S. EPA’s program in California. Similar state agencies administer these rules in the other states in which Registrant operates.

GSWC currently tests its water supplies and water systems according to, among other things, requirements listed in the Federal Safe Drinking Water Act. GSWC works proactively with third parties and governmental agencies to address issues relating to known contamination threatening GSWC water sources. GSWC also incurs operating costs for testing to determine the levels, if any, of the constituents in its sources of supply, and additional expense 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 and operating costs to maintain and 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, as well as to meet future water quality standards and consumer expectations. 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.

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 Perfluorooctanoic Acid (“PFOA”), Perfluorooctanesulfonic Acid (“PFOS”), and several other contaminants with individual MCLs that range from 4 parts per trillion (“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 forty sources at GSWC that have exceeded one or more of the PFAS MCLs. These new MCLs are expected to increase GSWC’s 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 April 19, 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 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.

Lead and Copper Rule Revisions

On October 8, 2024, the U.S. EPA announced that it has finalized its Lead and Copper Rule Improvements. The rule will go into effect once it is published in the Federal Register. The rule sets a 10-year requirement for reducing lead 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 its 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.

Water Supply

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Water Supply” section of Registrant’s Form 10-K for the year-ended December 31, 2023 filed with the SEC for a discussion of water supply issues. The discussion below focuses on significant matters and changes since December 31, 2023.

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 be met 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. Legislation signed by the governor of California into law in September 2022 has set more stringent indoor standard targets than initially set forth in the 2018 legislation. The indoor standard will be set at 47 gpcd in 2025 and then reduced to 42 gpcd in 2030 (previously had been set at 52.5 gpcd and 50 gpcd, respectively). The California SWRCB approved the Conservation Regulation referred to as “To Make Conservation a California Way of Life” on July 3, 2024. The regulation becomes 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.

Water year 2023-24, which ended on September 30, 2024, started with below normal Sierra snowpack and precipitation. However, a series of atmospheric storm events in the first few months of 2024 provided promising water supplies to the State’s supply conditions resulting in above average conditions for the majority of the water year. Water year 2024-25 began on October 1, 2024 with the State’s major reservoirs at average capacity with Lake Oroville at 55% of capacity and Lake Shasta at 60% capacity. The State Water Project allocation is currently set at 40% for 2024 with the initial 2025 allocation expected to be set in early December. The new water year has begun with drier conditions statewide and as of October 29, 2024, the U.S. Drought Monitor reported that 4% of California was in severe drought with 12% identified as “moderate drought” as compared to a year ago when 0% was in “moderate drought” and 6% 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 in 2023. Reservoir levels have improved in 2024 with Lake Powell and Lake Mead combined water storage on September 30, 2024 was at approximately 17.9 million acre feet 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 by the end of 2024. GSWC will continue to monitor developments related to the Colorado River System and assess its impact on GSWC.

Other Climate Change Matters

Climate change is one area that we focus on as we develop and execute our business strategy and financial planning, both in the short- and long-term. The risks posed by climate variability increase the need for us to plan for and address supply resiliency. Climate change has also impacted electric utilities in California increasing wildfire risks and requiring the need to develop robust wildfire mitigation plans. We address these and other climate change risks by planning, assessing, mitigating, and investing in our infrastructure for the long-term benefit of our communities. See “Item 1. Business Overview” section of Registrant’s Form 10-K for the year ended December 31, 2023 filed with the SEC for a discussion of climate change planning, risks and opportunities.

The 2024 California wildfire season has consisted of several large fires across the state. As of the filing of this Form 10-Q, none of the wildfires have had a significant impact on our regulated utilities’ water and electric systems. Furthermore, the recent hurricanes affecting the U.S. East Coast have not had a significant impact on the water and wastewater operations at the military bases served by the Company’s contracted services segment. However, there can be no assurance in the future that these climate-related events will not have a material impact on our operations, infrastructure or services that we provide our customers. See “Item 1. Business - Climate Change Planning, Risks and Opportunities” section of Registrant’s Form 10-K for the year ended December 31, 2023 filed with the SEC for a discussion of climate change plans, risks and other climate change matters.

Cybersecurity Matters

Cyberattacks represent a threat to water, wastewater and electric utility systems and thereby the safety and security of our communities. Cyberattacks are becoming more frequent and sophisticated including against third-party technology providers, necessitating that we continue to increase our investments in information and operational technology to monitor and address threats and attempted cyberattacks. This improves our posture in addressing security vulnerabilities. See “Item 1A. Risk Factors” and “Item 1C. Cybersecurity” section of Registrant’s Form 10-K for the year-ended December 31, 2023 filed with the SEC for a discussion of cybersecurity matters.

New Accounting Pronouncements

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

Registrant is exposed to certain market risks, including fluctuations in interest rates, commodity price risk primarily relating to changes in the market price of electricity at BVES, and other economic conditions. Market risk is the potential loss arising from adverse changes in prevailing market rates and prices.

The quantitative and qualitative disclosures about market risk are discussed in Item 7A-Quantitative and Qualitative Disclosures About Market Risk, contained in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.

There have been no material changes to our quantitative and qualitative disclosures about market risk from what was previously disclosed in Registrant’s Annual Report on Form 10-K for the year ended December 31, 2023 filed with the SEC.

(a) Evaluation of Disclosure Controls and Procedures

As required by Rule 13a-15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), Registrant has carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer (“CEO”) and its Chief Financial Officer (“CFO”), of the effectiveness, as of the end of the fiscal quarter covered by this report, of the design and operation of Registrant’s “disclosure controls and procedures” as defined in Rule 13a-15(e) and 15d-15(e) promulgated by the SEC under the Exchange Act. Based upon that evaluation, the CEO and the CFO concluded that Registrant’s disclosure controls and procedures, as of the end of such fiscal quarter, were adequate and effective to ensure that information required to be disclosed by Registrant in the reports that Registrant files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to Registrant’s management, including its CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

(b) Changes in Internal Controls over Financial Reporting

There has been no change in Registrant’s internal control over financial reporting during the quarter ended September 30, 2024, that has materially affected or is reasonably likely to materially affect Registrant’s internal control over financial reporting.

There have been no significant changes in the risk factors disclosed in our 2023 Annual Report on Form 10-K filed with the SEC.