Executive Summary / Key Takeaways

• American States Water (AWR) operates a stable, capital-intensive business across regulated water and electric utilities in California and contracted water/wastewater services for U.S. military bases, underpinned by a long history of consistent dividend growth.
• Recent favorable regulatory decisions in California have provided clarity on rates and authorized significant capital investment, driving anticipated rate base and revenue growth in the regulated segments.
• The contracted services segment (ASUS) offers a unique growth vector, recently expanding its footprint with new base operations and securing a record level of new capital upgrade awards, contributing meaningfully to earnings.
• While regulatory changes introduce potential volatility in water segment earnings related to consumption and supply mix, the company's strong balance sheet, credit ratings, and financing activities support its substantial capital expenditure program.
• AWR's investment profile is characterized by predictable regulated utility returns, differentiated contracted services, and a commitment to dividend growth, balanced against execution risks on capital projects, regulatory uncertainties, and broader economic factors like inflation and interest rates.

A Foundation Built on Essential Services and Strategic Diversification

American States Water Company (AWR) stands as a long-standing provider of essential water and electric services, with a history of paying dividends every year since 1931. The company operates through three distinct, yet complementary, segments: regulated water utility services primarily in California through Golden State Water Company (GSWC), regulated electric utility services in a specific California region via Bear Valley Electric Service, Inc. (BVES), and contracted water and wastewater services for U.S. military bases across ten states through American States Utility Services, Inc. (ASUS) and its subsidiaries. This structure provides a blend of stable, regulated earnings and a unique, growth-oriented contracted services business.

The regulated utility segments, GSWC and BVES, operate under the stringent oversight of the California Public Utilities Commission (CPUC). This regulatory framework dictates rates designed to allow for the recovery of prudently incurred operating costs and a reasonable return on invested capital. The ASUS segment, while not under CPUC regulation, operates under long-term, fixed-price contracts with the U.S. government, subject to annual economic price adjustments and modifications for new construction, offering a differentiated revenue stream. The company's strategic focus centers on investing in and maintaining critical infrastructure across all segments, securing necessary regulatory approvals and contract adjustments, and expanding its footprint through organic growth and strategic acquisitions, such as the recently approved San Juan Oaks water and wastewater system acquisition.

Competitive Positioning and Operational Technology

AWR operates within a competitive landscape dominated by other investor-owned utilities, particularly in the regulated water sector. Key publicly traded competitors include larger national players like American Water Works (AWK) and regional operators such as California Water Service Group (CWT) and SJW Group (SJW), as well as Essential Utilities (WTRG). While AWR holds a smaller overall market share compared to AWK, estimated at 2-3% of the U.S. water utility market, its strength lies in its operational focus within its specific service territories and its unique position in the military base contracted services market.

AWR's operational technology and infrastructure management are critical to its service delivery and competitive standing. In the regulated segments, investment is focused on renewing aging infrastructure and constructing new facilities to meet growing demand and increasingly stringent water quality standards, including addressing contaminants like PFAS. While specific details on proprietary technology are not extensively provided, the company's capital plans highlight ongoing investment in utility plant, which encompasses the necessary technology for water treatment, pumping, distribution, and electric grid management. For instance, recent GRC decisions authorize significant capital spending aimed at enhancing system reliability and compliance. The competitive analysis suggests that while AWR maintains solid operational performance, some larger peers like AWK may leverage advanced technologies such as electronic meters for potentially greater billing efficiency, and companies like CWT may have advantages in plant energy efficiency. AWR's strategy counters this by focusing on cost management within its scale and leveraging its strong relationships within its service areas and with the U.S. government.

The ASUS segment's operational model involves managing complex water and wastewater systems on military installations. This requires specialized expertise in operating and maintaining diverse infrastructure under specific government requirements. The record $56.5 million in new capital upgrade awards secured in 2024 reflects the government's investment in these systems and ASUS's capability to execute these projects. This niche market provides a competitive moat, as successful operation requires a proven track record and the ability to navigate government contracting processes, areas where AWR has built significant experience since 2004.

Recent Performance and Growth Drivers

AWR began 2025 with strong financial results, reporting consolidated diluted earnings of $0.70 per share for the first quarter, an increase of $0.08 per share compared to $0.62 in the same period of 2024. This improvement was primarily driven by higher earnings in the regulated water and electric segments, benefiting from the implementation of new rates authorized by recent CPUC general rate case decisions.

The water segment's earnings increased by $0.04 per share, largely due to the new 2025 rates. While billed water consumption in the first quarter of 2025 approximated adopted levels, the transition from a full revenue decoupling mechanism (WRAM) to the modified M-WRAM introduces potential future volatility based on consumption fluctuations. Similarly, the change from a full supply cost balancing account (MCBA) to an incremental cost balancing account (ICBA) means earnings will be subject to volatility from changes in the water supply source mix compared to the adopted mix, although Q1 2025 saw a favorable mix with less purchased water. Water supply costs did increase overall due to higher usage and per-unit costs.

The electric segment saw a $0.02 per share increase in earnings, driven by the new 2025 electric rates authorized by the recently finalized GRC, which are retroactive to January 1, 2023. These new rates support increased operating expenses, particularly for wildfire mitigation efforts, which were previously tracked in memorandum accounts. The contracted services segment's earnings contribution remained consistent at $0.13 per share. While management fee revenues increased due to the commencement of operations at the new military bases (Naval Air Station Patuxent River and Joint Base Cape Cod) and economic price adjustments, this was offset by a decrease in construction activities in Q1 2025, impacted by weather delays. Losses on investments held for a retirement plan also negatively impacted consolidated results compared to gains in the prior year period.

Regulatory Outcomes and Future Outlook

Recent regulatory developments are pivotal to AWR's future growth trajectory. The CPUC's final decision in GSWC's general rate case, issued in January 2025, adopted a settlement agreement setting new rates for 2025-2027, retroactive to January 1, 2025. Crucially, this decision authorizes approximately $573.1 million in capital infrastructure investment over the three-year cycle, including significant advice letter projects that will contribute to rate base growth and accrue interest during construction. Adopted operating revenues less water supply costs are projected to increase by about $23 million in 2025 compared to 2024, with potential additional increases in 2026 and 2027 based on inflation. The deferral of GSWC's next Cost of Capital application to May 1, 2026, provides stability by retaining the current authorized return on equity of 10.06% through the end of 2026.

For the electric segment, the CPUC's January 2025 decision in BVES's GRC approved a settlement setting rates for 2023-2026, retroactive to January 1, 2023. This decision authorizes approximately $75.6 million in capital investment, increases the authorized return on equity to 10.0%, and approves recovery of costs related to wildfire mitigation plans. These outcomes provide a clear path for infrastructure investment and cost recovery in the regulated segments.

Management projects company-funded capital expenditures for the regulated utilities to be between $170 million and $210 million in 2025, continuing the trend of significant investment. The ASUS segment is expected to contribute $0.59 to $0.63 per share for the full year 2025, an increase driven by the full-year contribution from the new military bases and the execution of the record $56.5 million in new capital upgrade awards received in 2024. AWR maintains a strong commitment to its dividend policy, aiming for a compound annual growth rate of over 7% long-term, supported by its earnings growth and financial health.

Liquidity, Capital Structure, and Risks

AWR's capital-intensive operations necessitate access to external financing. The company maintains a solid capital structure and strong credit ratings (A from S&P for AWR, A+ from S&P and A2 from Moody's for GSWC), which management believes position it well to access debt and equity markets. AWR utilizes an at-the-market (ATM) equity offering program, having raised $25.7 million net in Q1 2025 and targeting approximately $60 million in 2025 as part of a larger $200 million program. Credit facilities for AWR and GSWC were recently extended to June 2029, with AWR's capacity expanded to $195 million. GSWC is planning long-term debt and/or equity issuance in Q2 2025 to pay off its current credit facility borrowings, leveraging the $750 million in financing authorized by the CPUC. BVES recently issued $50 million in private placement notes, satisfying its CPUC-mandated credit facility payoff requirement.

Key risks for AWR include regulatory uncertainties, particularly the outcome of GSWC's application for rehearing on the denial of full revenue decoupling, which could impact earnings volatility related to consumption and supply mix. Execution risk on the substantial authorized capital expenditure programs, potential delays due to weather or supply chain issues, and the ability to recover costs through timely rate adjustments are also important factors. The contracted services segment faces risks related to the U.S. government's ability to terminate contracts for convenience, the timely processing of economic price and equitable adjustments, and potential impacts from broader fiscal uncertainties. Furthermore, like all utilities, AWR is exposed to risks from inflation, interest rate fluctuations, climate change impacts (drought, wildfire), and cybersecurity threats.

Conclusion

American States Water offers investors a compelling blend of stability from its regulated utility operations and growth potential from its expanding contracted services segment. Recent favorable regulatory decisions provide a clear runway for significant capital investment and rate base growth in California, while the ASUS segment's record capital awards and new base operations underscore its unique value proposition and contribution to earnings. The company's strong financial position and access to capital markets support its ambitious infrastructure program and its long-standing commitment to increasing dividends. While regulatory changes introduce some earnings volatility risk in the water segment, AWR's diversified business model, proven operational track record, and strategic focus on essential services in both regulated and niche government markets position it to continue delivering value to shareholders. Monitoring the execution of capital projects, the resolution of regulatory matters, and performance in the contracted services segment will be key for investors assessing AWR's path forward.