California Water Service Group

Company Overview

Business Model: California Water Service Group (Company) is a holding company primarily engaged in regulated water utility services, encompassing the production, purchase, storage, treatment, testing, distribution, and sale of water for domestic, industrial, public, and irrigation uses, as well as providing water for domestic and municipal fire protection services. The Company also provides wastewater collection and treatment services, including water recycling. Complementing its regulated operations, the Company offers non-regulated water-related services such as full water system operation, meter reading, billing services, leasing of communication antenna sites, and lab services to private companies and municipalities.

Market Position: The Company serves approximately two million people across its operating territories. Its primary subsidiary, Cal Water, is the largest contributor, accounting for approximately 89.0% of the Company's total customer connections and 91.2% of its total consolidated operating revenue in 2025. The Company operates in a regulated environment where state laws generally prevent privately owned public utilities from competing within its established service territories without a certificate of public convenience and necessity, which is typically granted only if existing service is deemed deficient.

Recent Strategic Developments:

• Acquisitions: The Company entered into an agreement in February 2026 to purchase Nexus Water Group’s Nevada and Oregon water and wastewater systems for approximately $218.0 million, subject to regulatory approvals and customary closing conditions, with an expected close by the end of 2026. In November 2025, Texas Water, a subsidiary, agreed to purchase the remaining membership interests of BVRT Utility Holding Company LLC (BVRT) for $45.0 million, with a change of control application expected to be filed with the Public Utilities Commission of Texas in Q1 2026.
• Rate Case Filings: Cal Water filed its 2024 California General Rate Case (GRC) application in July 2024, proposing over $1.6 billion in investments from 2025 to 2027, including approximately $1.3 billion of newly proposed capital investments. This GRC also includes a proposed Low-Use Water Equity Program. Interim rates, reflecting a 3% increase, became effective January 1, 2026, due to delays in the final decision, which is now expected by June 8, 2026.
• PFAS Compliance & Settlements: The Company estimates a capital investment of approximately $269.1 million will be required to comply with the United States Environmental Protection Agency’s (EPA) finalized National Primary Drinking Water Regulation for six per- and polyfluoroalkyl substances (PFAS). In 2025, the Company received $34.8 million (net of legal fees and expenses) from 3M Company and $6.1 million (net of legal fees and expenses) from DuPont as part of class-action settlements for PFAS contamination claims, with additional proceeds expected from Tyco Fire Products LP and BASF Corporation starting in H1 2026.

Geographic Footprint: The Company operates in California, Washington, New Mexico, Hawaii, and Texas. California represents the largest portion of its operations, accounting for 91.2% of total consolidated operating revenue in 2025.

Financial Performance

Revenue Analysis

Profitability Metrics:

• Gross Margin: 67.8% (2025)
• Operating Margin: 17.0% (2025)
• Net Margin: 12.8% (2025)

Investment in Growth:

• Capital Expenditures: $517.0 million (2025), compared to $470.8 million (2024).
• Strategic Investments:
  • Cal Water's 2024 CA GRC application proposes over $1.6 billion in investments from 2025 to 2027, including approximately $1.3 billion of newly proposed capital.
  • An estimated $125.0 million (net of litigation settlement proceeds) is requested for PFAS treatment in 6 regulated districts in 2026 and 2027.
  • BVRT Utility Holding Company LLC (BVRT) subsidiary, Camino Real Utility, committed $21.5 million in 2022 and an additional $22.3 million in 2023 for its share of a pipeline project, with $43.8 million in committed cash as of December 31, 2025.

Business Segment Analysis

California Water Service Company (Cal Water)

Financial Performance: Cal Water is the Company's largest operating subsidiary, contributing approximately 89.0% of total customer connections and 91.2% of total consolidated operating revenue in 2025. Product Portfolio: Provides production, purchase, storage, treatment, testing, distribution, and sale of water for domestic, industrial, public, and irrigation uses, as well as water for domestic and municipal fire protection services. Also offers wastewater collection and treatment services, including water recycling. Market Dynamics: Regulated by the California Public Utilities Commission (CPUC). Serves approximately 500,000 customer connections across 20 separate districts. Operates the City of Hawthorne and the City of Commerce water systems under lease agreements, which are considered non-regulated by the CPUC but are subject to a 10% revenue share with regulated customers. Key Growth Drivers: The 2024 CA GRC application proposes significant capital investments for infrastructure replacement (46% for aging pipelines), water quality upgrades, power resilience (generators, solar), security enhancements, water supply initiatives, and Advanced Metering Infrastructure. The Monterey-Style Water Revenue Adjustment Mechanism (MWRAM) and Incremental Cost Balancing Account (ICBA) help manage revenue and cost recovery.

Sub-segment Breakdown (Customer Connections at December 31, 2025):

• SAN FRANCISCO BAY AREA/NORTH COAST: 113,200 (Bay Area Region, Bear Gulch, Los Altos, Livermore)
• SACRAMENTO VALLEY: 44,700 (North Valley Region, Marysville, Dixon, Willows)
• SALINAS VALLEY: 31,900 (Salinas Valley Region)
• SAN JOAQUIN VALLEY: 180,600 (Bakersfield, Stockton, Visalia, Selma, Kern River Valley)
• LOS ANGELES AREA: 129,600 (East Los Angeles, South Bay Region, Los Angeles County Region, Westlake, Hawthorne and Commerce leased systems)

Hawaii Water Service Company, Inc. (Hawaii Water)

Financial Performance: Accounted for 1.2% of total customer connections and approximately 4.6% of total consolidated operating revenue in 2025. Product Portfolio: Provides water and wastewater services. Market Dynamics: Regulated by the Hawaii Public Utilities Commission (HPUC). Serves approximately 6,800 water and wastewater customer connections on the islands of Kauai, Maui, Oahu, and Hawaii, including several large resorts and condominium complexes. Key Growth Drivers: A settlement in the 2024 Ka’anapali GRC was approved in April 2025, establishing a total test year revenue requirement of $7.5 million. The 2024 Waikoloa GRC settlement was approved in October 2025, increasing revenues by $4.7 million over two years. A 2025 Kapalua GRC was filed in November 2025, requesting a $2.2 million revenue increase.

Washington Water Service Company (Washington Water)

Financial Performance: Accounted for approximately 6.8% of total customer connections and 2.6% of total consolidated operating revenue in 2025. Product Portfolio: Provides domestic water service. Market Dynamics: Regulated by the Washington Utilities and Transportation Commission (UTC). Serves approximately 38,500 customer connections in the Tacoma, Olympia, Graham, Spanaway, Puyallup, Rainier, Yelm, and Gig Harbor areas. Key Growth Drivers: The Stroh’s 2025 Rate Case was approved in May 2025, increasing revenues by $0.2 million over two years. A 2025 East Pierce and Legacy Water Systems GRC was filed in September 2025, seeking a $4.9 million revenue increase expected in H2 2026.

New Mexico Water Service Company (New Mexico Water)

Financial Performance: Accounted for approximately 2.1% of total customer connections and 0.8% of total consolidated operating revenue in 2025. Product Portfolio: Provides water and wastewater services. Market Dynamics: Regulated by the New Mexico Public Regulation Commission. Serves approximately 11,800 water and wastewater customer connections across multiple systems including Rio Communities, Rio Del Oro, Meadow Lake, Indian Hills, Squaw Valley, Elephant Butte, Morningstar, Sandia Knolls, Juan Tomas, Monterey, and Cypress Gardens.

TWSC, Inc. (Texas Water)

Financial Performance: Accounted for approximately 0.9% of total customer connections and 0.8% of total consolidated operating revenue in 2025. Product Portfolio: Through its majority-owned subsidiary BVRT Utility Holding Company LLC (BVRT), provides regulated water and wastewater services. Market Dynamics: Regulated by the Public Utilities Commission of Texas (PUCT). BVRT’s utilities currently serve or are under contract to serve approximately 4,900 customer connections in growing communities outside Austin and San Antonio. Key Growth Drivers: A consolidated rate case for five BVRT subsidiary utilities (Camino Real, Forest Glen, Windy Hill, Zipp Road, and Spanish Trail Utility Companies) had an initial phase of new rates implemented in July 2025, following a comprehensive settlement filed in October 2025. Camino Real Utility received approval for a new water Certificate of Convenience and Necessity (CCN) in December 2025, establishing a water service area in Caldwell County.

Capital Allocation Strategy

Shareholder Returns:

• Share Repurchases: $1.4 million (31,000 shares) in 2025, compared to $1.4 million (31,000 shares) in 2024.
• Dividend Payments: $73.9 million in 2025, compared to $65.5 million in 2024. The annual dividend per common share was $1.24 in 2025, including a one-time special dividend of $0.04 per share.
• Future Capital Return Commitments: The Board declared a quarterly cash dividend of $0.335 per common share on January 28, 2026, representing an indicated annual rate of $1.34. The Company has a long-term targeted dividend payout ratio of 60%.

Balance Sheet Position (as of December 31, 2025):

• Cash and Equivalents: $51.8 million
• Total Debt: $1,474.2 million
• Net Cash Position: -$1,422.4 million (Net Debt)
• Debt Maturity Profile: No existing long-term debt instruments are expected to mature in the next 12 months. Key maturities include $333,000 in 2027, $20.3 million in 2028, $100.3 million in 2029, $20.2 million in 2030, and $1.34 billion thereafter.

Cash Flow Generation (2025):

• Operating Cash Flow: $302.6 million
• Free Cash Flow: -$214.4 million (Operating Cash Flow less Utility Plant Expenditures)

Operational Excellence

Production & Service Model: The Company's operational philosophy centers on the comprehensive management of water and wastewater systems. This includes the production, purchase, storage, treatment, testing, distribution, and sale of water for diverse uses (domestic, industrial, public, irrigation, and fire protection), as well as the collection, treatment, and recycling of wastewater. Operations adhere to accepted utility methods and comply with federal, state, and local environmental and water quality standards.

Supply Chain Architecture:

• Key Suppliers & Partners: The Company relies on a diverse network of wholesale water suppliers, including the San Francisco Public Utilities Commission, Valley Water, Kern County Water Agency, Stockton East Water District, and Guadalupe Blanco River Authority. Electricity is purchased from various electric utility companies. The Company also depends on outside contractors for critical materials, parts, large construction projects, and emergency maintenance services.
• Water Supply Mix (2025): Approximately 52.5% (55,473 million gallons) of the annual water supply is pumped from wells, 44.2% (46,745 million gallons) is purchased from wholesale suppliers, and 3.3% (3,523 million gallons) comes from surface sources.

Facility Network (as of December 31, 2025):

• Manufacturing (Treatment):
  • Cal Water: Operates 6 surface water treatment plants with a combined capacity of 46 million gallons per day.
  • Hawaii Water: Operates 7 wastewater treatment facilities with a combined capacity of approximately 4.8 million gallons per day.
  • New Mexico Water: Operates 2 wastewater treatment facilities with a combined capacity of 0.62 million gallons per day.
  • Texas Water (through BVRT): Owns and operates 7 wastewater treatment plants with a combined capacity of 1.175 million gallons per day.
• Research & Development: Operates a state-certified water quality laboratory at its San Jose Customer Support Services Office, primarily serving California operations.
• Distribution:
  • Cal Water: Owns 588 wells, 410 storage tanks (291 million gallons capacity), 18 managed storage tanks (32 million gallons capacity), 3 surface water reservoirs (241 million gallons capacity), and 6,803 miles of supply and distribution mains.
  • Hawaii Water: Owns 29 wells, 38 storage tanks (35.8 million gallons capacity), 246 miles of supply and distribution mains, and 89.7 miles of sewer collection mains.
  • Washington Water: Owns 468 wells, manages 5 wells, owns 194 storage tanks (20.3 million gallons capacity), and 774 miles of supply and distribution mains. Operates one wastewater treatment plant with 1.3 miles of sewer collection mains.
  • New Mexico Water: Owns 29 wells, 29 storage tanks (11.0 million gallons capacity), 210 miles of supply and distribution mains, 8 lift stations, and 35 miles of sewer collection mains.

Operational Metrics (2025):

• Water Production Costs: Comprised 38.8% of total operating expenses.
• Purchased Power Expense: Represented 5.4% of total operating costs.

Market Access & Customer Relationships

Go-to-Market Strategy: Distribution Channels:

• Direct Sales: The Company primarily utilizes a direct sales model for its regulated utility services, maintaining direct customer relationships across its service areas.
• Channel Partners: Engages in lease agreements with municipalities, such as the City of Hawthorne and the City of Commerce, to operate their water systems. It also provides contract operating and maintenance services for non-regulated water and wastewater systems owned by private companies and other municipalities.
• Digital Platforms: Not explicitly detailed in the filing.

Customer Portfolio: Enterprise Customers:

• Tier 1 Clients: In Hawaii, the Company serves a number of large resorts, which represent significant water usage.
• Customer Concentration: No single customer accounted for 10% or more of the Company's consolidated operating revenue in 2025. Approximately 23.2% of the Company's 2025 water utility revenues were derived from business and industrial customers.

Geographic Revenue Distribution (2025):

• California: 91.2% of total consolidated operating revenue
• Hawaii: 4.6% of total consolidated operating revenue
• Washington: 2.6% of total consolidated operating revenue
• New Mexico: 0.8% of total consolidated operating revenue
• Texas: 0.8% of total consolidated operating revenue

Competitive Intelligence

Market Structure & Dynamics

Industry Characteristics: The Company operates within a heavily regulated utility industry. State regulatory commissions possess plenary powers to set rates and operating standards, significantly impacting the Company's revenues, earnings, and cash flows. The market is characterized by natural monopolies, where state laws generally prohibit privately owned public utilities from competing within an existing service territory unless the incumbent's service is found deficient. Public agencies (municipalities, water districts) have the power of eminent domain to acquire private utility properties, in which case the utility is entitled to just compensation.

Competitive Positioning Matrix:

Direct Competitors

Primary Competitors: Within its regulated service areas, the Company generally faces no direct competition from other privately owned public utilities due to regulatory frameworks. The primary competitive dynamic arises from the potential for public agencies (municipalities, water districts) to acquire the Company's systems through eminent domain, although the Company would be entitled to just compensation.

Emerging Competitive Threats: The filing does not explicitly detail emerging competitive threats from new entrants or disruptive technologies beyond the general risk of public agency condemnation.

Competitive Response Strategy: The Company's strategy to maintain its competitive advantage and drive growth includes:

• Strategic Acquisitions: Pursuing system acquisitions (e.g., Nexus Water Group's Nevada and Oregon systems) and investments in utility development companies (e.g., BVRT Utility Holding Company LLC).
• Operational Efficiency & Investment: Continuously investing in infrastructure replacement and improvements, enhancing water quality, ensuring water supply reliability, and implementing conservation initiatives.
• Customer Focus: Developing programs to enhance affordability and customer service.

Risk Assessment Framework

Strategic & Market Risks

Market Dynamics:

• Regulatory Actions: The Company's financial viability is heavily dependent on timely and sufficient rate relief from state public utility commissions. Delays in rate case decisions (e.g., 2024 CA GRC) or opposition to rate increases can adversely affect revenues, operating results, and earnings. Changes in regulatory policies (e.g., WRAM decoupling) or interpretations can also significantly impact the business.
• Water Quality Standards: Increasing stringency of drinking water and wastewater regulations (e.g., EPA's PFAS MCLs, California's Chromium-6 MCL) can lead to higher operating costs and capital expenditures, with no guarantee of full and timely cost recovery through rates.
• Climate Change & Natural Disasters: Operations are vulnerable to weather, climate change, and natural disasters (earthquakes, wildfires, landslides, droughts), which can disrupt service, damage assets, affect water quality and availability, and lead to increased costs or inverse condemnation claims.
• Economic Conditions: High inflation, general economic slowdowns, or recessions can increase operating costs (labor, materials, capital) and impact customers' ability to pay, potentially increasing bad debt expense.

Technology Disruption:

• Cybersecurity Threats: Reliance on IT and operational technology (OT) systems for critical functions (billing, customer service, monitoring treatment facilities) exposes the Company to risks from cyber-attacks, data breaches, and system disruptions, which could lead to financial losses, reputational harm, and regulatory penalties. The use of artificial intelligence by cybercriminals may increase the frequency and severity of attacks.
• Technology Obsolescence: Risk of not developing or acquiring competitive technology or lacking resources for necessary upgrades to outdated systems.

Customer Concentration:

• Large-Volume Customers: A significant decrease in consumption by large-volume commercial or industrial customers, or major resorts in Hawaii, could adversely affect operating results and cash flows, with potential delays in rate relief.

Operational & Execution Risks

Supply Chain Vulnerabilities:

• Water Supply Dependency: Adequacy of water supplies depends on rainfall, reservoir levels, groundwater availability, and wholesale suppliers. Interruptions or significant price increases from wholesalers, or failure to renew long-term contracts, could increase water production costs and affect service reliability.
• Energy & Chemical Dependency: Reliance on purchased electricity for wells and pumps (vulnerable to power interruptions like Public Safety Power Shutoff programs) and specific chemicals for water treatment. Disruptions in supply or substantial cost increases could impact operations and financial results.
• Third-Party Contractors: Dependency on outside contractors for materials, parts, large construction projects, and emergency maintenance services. Unavailability or inability to meet demands could lead to service interruptions or project delays.

Geographic Concentration:

• California Exposure: Operations are highly concentrated in California (91.2% of 2025 revenue), making the Company particularly susceptible to California-specific political, regulatory, economic, water supply, climate, labor, and energy cost risks.

Capacity Constraints:

• Aging Infrastructure: The capital-intensive nature of the water utility business requires significant ongoing investment to replace and improve aging infrastructure. Inability to secure appropriate funding could curtail expansion and affect future operating results.

Financial & Regulatory Risks

Market & Financial Risks:

• Cost Recovery & Regulatory Assets: Uncertainty in the recovery of regulatory assets and costs through future rates, as regulatory agencies may adjust or disallow certain costs, leading to potential asset impairments.
• Capital Market Access: Ability to access equity and debt capital markets is crucial for funding capital expenditures and acquisitions. Credit rating downgrades or adverse market conditions could increase financing costs or restrict borrowing capacity.
• Debt Covenants: Failure to comply with debt covenants could limit future borrowing, increase costs, or trigger acceleration of debt maturities.
• Liquidity: Seasonal fluctuations in water demand can impact cash flows, increasing reliance on short-term borrowings. Disruptions in capital markets could affect liquidity.

Regulatory & Compliance Risks:

• Environmental Compliance: Increasing environmental regulation (e.g., climate change legislation, emissions limits) is expected to raise operating costs and compliance burdens, with uncertain recovery through rates.
• Inverse Condemnation: Risk of litigation under inverse condemnation principles in California for property damage, even without fault, with uncertain recovery of damages from customers.
• Changes in Laws/Policies: Changes in laws, rules, or policies by regulators or operating jurisdictions (e.g., new administrations, local ordinances) can significantly affect business operations and financial results.

Innovation & Technology Leadership

Research & Development Focus: Core Technology Areas:

• Water Quality: Significant investment in water quality upgrades to treat for existing and newly regulated contaminants, such as PFAS and Chromium-6.
• Infrastructure Modernization: Focus on replacing aging water pipelines and implementing Advanced Metering Infrastructure (AMI) to aid conservation efforts and enhance water-use efficiency.
• Resilience & Security: Development and deployment of equipment like generators for power outage resilience, solar installations to reduce grid dependency, and physical and cyber security enhancements to protect facilities, customers, and employees.

Innovation Pipeline: The Company's strategic initiatives, particularly those outlined in the 2024 CA GRC, indicate an ongoing commitment to innovation in water treatment, distribution efficiency, and operational resilience. This includes exploring alternative technologies for meeting environmental regulations and upgrading treatment capabilities to comply with evolving water quality standards.

Leadership & Governance

Executive Leadership Team (as of February 26, 2026)

Leadership Continuity: The management team demonstrates strong leadership continuity, with an average tenure exceeding 15 years. The Company fosters internal talent development through programs like the Future Leaders of Water Development Program, enabling promotions from within for many leadership positions.

Human Capital Strategy

Workforce Composition (as of December 31, 2025):

• Total Employees: 1,336
• Geographic Distribution:
  • Cal Water: 1,182 employees
  • Washington Water: 84 employees
  • Hawaii Water: 48 employees
  • New Mexico Water: 22 employees
  • Texas Water: 0 employees
• Skill Mix: The workforce includes non-exempt field, customer service, non-confidential clerical, professional, and technical engineering, and water quality laboratory employees.

Talent Management: Acquisition & Retention:

• Hiring Strategy: The Company emphasizes attracting and retaining talented and experienced individuals, supported by a focus on developing future leaders from its existing workforce.
• Retention Metrics: The management team's average tenure exceeds 15 years, reflecting a strong focus on retention.
• Employee Value Proposition: Offers a broad range of Company-paid benefits and competitive compensation packages.

Diversity & Development:

• Development Programs: The Company has an internally created Future Leaders of Water Development Program to foster leadership from within. All employees are required to adhere to a business code of conduct and undergo internal training on preventing, identifying, reporting, and stopping unlawful discrimination.
• Culture & Engagement: The Company promotes an inclusive, diverse, and equal opportunity workforce, with a strong emphasis on employee health and safety, led by an Executive Safety Committee and local safety committees. The Company has been recognized as a top workplace by several organizations.

Labor Relations: As of December 31, 2025, 805 of the Company's 1,336 employees were unionized. The Utility Workers Union of America (UWUA), AFL-CIO, represents non-exempt field, customer service, and non-confidential clerical employees, while the International Federation of Professional and Technical Engineers (IFPTE), AFL-CIO, represents professional and technical engineering and water quality laboratory employees. Six-year agreements with both unions were reached in 2021, running through February 28, 2027. Employees at Washington Water, Hawaii Water, and New Mexico Water are not union-represented.

Environmental & Social Impact

Environmental Commitments: Climate Strategy:

• Renewable Energy: The Company implements solar installation projects to reduce its dependency on the electric power grid and lessen its environmental footprint.
• Climate Risk Integration: Incorporates projected and potential climate change risks into its water supply planning activities.
• Disclosure: Publicly discloses information about its climate change strategy, risks, metrics, and targets.
• Greenhouse Gas Mitigation: Capital projects of certain types (wells, tanks, major pipelines, treatment facilities) are subject to the California Environmental Quality Act (CEQA), requiring mitigation of greenhouse gas emissions.

Supply Chain Sustainability:

• Responsible Sourcing: The Company's risk factors mention compliance with conflict minerals regulations, indicating a focus on responsible sourcing practices.

Social Impact Initiatives:

• Community Investment: The Company supports local communities through various initiatives.
• Product Impact: Cal Water has proposed a Low-Use Water Equity Program in its 2024 CA GRC application, designed to enhance affordability for low-water-using, lower-income customers and reinforce conservation goals. The Company also offers Customer Assistance Program (CAP) and Rate Support Fund (RSF) programs to assist qualifying customers with their monthly water bills.

Business Cyclicality & Seasonality

Demand Patterns:

• Seasonal Trends: Water usage is seasonal, typically lower during cooler, rainy winter months and higher during warm, dry summer months due to increased outdoor water use (e.g., landscape irrigation, swimming pools).
• Economic Sensitivity: Customer demand and the level of construction activity by developers (impacting advances for construction and contributions in aid of construction) are influenced by general business conditions, including interest rates and the demand for housing and commercial development. Economic difficulties can also lead to an increase in bad debt expense.
• Industry Cycles: Water usage can decrease from historic normal levels during years with heavy or extended precipitation or lower-than-normal temperatures. Governmental restrictions on water usage during drought conditions can also reduce demand.

Planning & Forecasting: The Company utilizes mechanisms like the Monterey-Style Water Revenue Adjustment Mechanism (MWRAM) and the Incremental Cost Balancing Account (ICBA) in California to moderate fluctuations in financial results caused by seasonal variations in customer usage and production costs. Long-term water supply plans are developed for each district to ensure adequate supply under various operating and supply conditions.

Regulatory Environment & Compliance

Regulatory Framework: The Company's water and wastewater services are extensively governed by federal, state, and local environmental protection, health, and safety laws and regulations. Its regulated operations are subject to the jurisdiction of state regulatory commissions, including the California Public Utilities Commission (CPUC), Hawaii Public Utilities Commission (HPUC), Washington Utilities and Transportation Commission (UTC), New Mexico Public Regulation Commission, and Public Utilities Commission of Texas (PUCT). These commissions set rates and operating standards.

Industry-Specific Regulations:

• Water Quality: Compliance with the federal Safe Drinking Water Act (SDWA) and state standards is paramount. This includes adherence to Maximum Contaminant Levels (MCLs) for various substances, such as the EPA's finalized MCLs for six PFAS compounds and California's MCL of 10 parts per billion for Chromium-6.
• Groundwater Management: In California, the Sustainable Groundwater Management Act of 2014 (SGMA) requires basins to create sustainability agencies, develop plans, and show progress toward sustainability, impacting the Company's groundwater extraction.
• Infrastructure Security: The America’s Water Infrastructure Act of 2018 mandates risk and resilience assessments (RRAs) and emergency response plans (ERPs) for water systems, which the Company regularly updates and recertifies.
• Water Use Efficiency: California legislation (Assembly Bill 1668 and Senate Bill 606) establishes long-term standards for water use efficiency, including drought risk assessments and water shortage contingency plans.

Legal Proceedings: The Company is involved in various disputes and litigation matters in the ordinary course of business. Material legal proceedings include:

• Groundwater Contamination: Engages in litigation against third parties to recover costs related to groundwater contamination, including class-action settlements for PFAS contamination with 3M Company, DuPont, Tyco Fire Products LP, and BASF Corporation.
• Inverse Condemnation: Faces risks and claims under the principle of inverse condemnation in California for activities deemed to have a damaging effect on private property, such as land movement impacting utility infrastructure in the Rancho Dominguez District.

Tax Strategy & Considerations

Tax Profile (2025):

• Effective Tax Rate: 13.0%
• U.S. Federal Statutory Tax Rate: 21.0%
• State and Local Income Tax, Net of Federal: 7.0% (primarily California)
• TCJA Tax Liability: As of December 31, 2025, the Tax Cuts and Jobs Act (TCJA) tax liability was $60.6 million, with ongoing efforts with state regulators to finalize compliance with federal normalization rules.

Tax Reform Impact:

• California Senate Bill 167 (SB 167): Enacted in June 2024, this law temporarily disallows the use of state net operating losses for years beginning in 2024 through 2026.
• Infrastructure Investment and Jobs Act: Signed into law in November 2021, this act reversed the TCJA treatment of Contributions in Aid of Construction (CIAC), making only the service portion of CIAC taxable for federal income tax purposes effective January 1, 2021.

Insurance & Risk Transfer

Risk Management Framework: The Company employs an enterprise risk management process designed to identify, measure, monitor, report, and control exposure to various risks. This framework includes an annual evaluation of risks and insurance coverage, considering the costs, risks, and benefits of retaining versus insuring specific risks.

Insurance Coverage: The Company maintains insurance coverage for certain risks but also self-insures or does not obtain insurance in other cases, or insurance may not be available on commercially acceptable terms. Retained risks are associated with deductible limits, partial self-insurance programs, and policy coverage ceilings. There is no assurance that insurance coverage would be sufficient to cover all losses from catastrophic events or water contamination claims, and uninsured losses may negatively affect financial condition and operating results.

Risk Transfer Mechanisms: The Company utilizes cybersecurity insurance to cover a portion of potential losses from security breaches, although such insurance is subject to exclusions and may not cover total losses. The market for cybersecurity insurance is evolving, potentially affecting future availability and rates.