H2O AMERICAHTO
H2O AMERICA Income Taxes Disclosure
Income Taxes
The components of income tax expense were:
| 2025 | 2024 | 2023 | |||||||||||||||
| Current: | |||||||||||||||||
| Federal | $ | 5,276 | (1,828) | 10,185 | |||||||||||||
| State | 1,896 | 443 | 4,281 | ||||||||||||||
| Deferred: | |||||||||||||||||
| Federal | 5,360 | 11,063 | (8,871) | ||||||||||||||
| State | (177) | (708) | 361 | ||||||||||||||
| $ | 12,355 | 8,970 | 5,956 | ||||||||||||||
The following table reconciles income tax expense to the amount computed by applying the federal statutory rate to income before income taxes of $114,933, $102,937 and $90,943 in 2025, 2024 and 2023, respectively:
2025 (a) | 2024 | 2023 | |||||||||||||||||||||
| Income tax at federal statutory rate | $ | 24,136 | 21.0 | % | 21,617 | 19,098 | |||||||||||||||||
| Increase (decrease) in taxes attributable to: | |||||||||||||||||||||||
State and local income taxes, net of federal income tax effect (b) | 1,326 | 1.2 | % | 6,488 | 6,001 | ||||||||||||||||||
Tax credits | (208) | (0.2) | % | — | — | ||||||||||||||||||
Nontaxable or nondeductible items | 543 | 0.5 | % | — | — | ||||||||||||||||||
Changes in unrecognized tax benefits | 331 | 0.3 | % | (1,053) | (4,330) | ||||||||||||||||||
| Property flow-through | — | — | % | (14,793) | (9,045) | ||||||||||||||||||
| Pension flow-through | — | — | % | (530) | (597) | ||||||||||||||||||
| Stock-based compensation | — | — | % | 192 | (491) | ||||||||||||||||||
Other adjustments: | |||||||||||||||||||||||
Impact of rate regulation | |||||||||||||||||||||||
Flow-through | (11,933) | (10.4) | % | — | — | ||||||||||||||||||
Reversal of excess deferred taxes recognized in regulatory liability | (1,517) | (1.3) | % | (3,227) | (3,625) | ||||||||||||||||||
Other items | (323) | (0.3) | % | 276 | (1,055) | ||||||||||||||||||
| $ | 12,355 | 10.8 | % | 8,970 | 5,956 | ||||||||||||||||||
(a)ASU 2023-09 “Improvements to Income Tax Disclosures” was adopted prospectively with the annual financial statements for the year ended December 31, 2025. Accordingly, the table above was updated for the year ended December 31, 2025 to present disclosures as per the new ASU.
(b)Majority of the tax expense reported in this category relates to California. State flow-through adjustments are included in this category for the year ended December 31, 2025.
The components of the net deferred tax liability as of December 31 were as follows:
| 2025 | 2024 | ||||||||||
| Deferred tax assets: | |||||||||||
| Advances and contributions | $ | 28,183 | 26,744 | ||||||||
| Unamortized investment tax credit | 1,141 | 1,061 | |||||||||
| Pensions, postretirement benefits and stock-based compensation | 11,749 | 12,529 | |||||||||
| Debt premium, net | 2,734 | 3,446 | |||||||||
| California franchise tax | 257 | 503 | |||||||||
| Deferred revenue | — | — | |||||||||
Tax related regulatory liability | 22,572 | 23,112 | |||||||||
| Other | 9,560 | 6,337 | |||||||||
| Total deferred tax assets | 76,196 | 73,732 | |||||||||
| Deferred tax liabilities: | |||||||||||
| Utility plant | 304,002 | 277,085 | |||||||||
| Pension and postretirement | 9,272 | 9,068 | |||||||||
| Deferred gain and other-property | 608 | 608 | |||||||||
| Regulatory asset - business combinations debt premium, net | 2,734 | 3,446 | |||||||||
| Intangibles | 2,193 | 2,443 | |||||||||
| Deferred revenue | 2,330 | 1,418 | |||||||||
Tax related regulatory asset | 57,503 | 50,728 | |||||||||
| Other | 5,447 | 4,979 | |||||||||
| Total deferred tax liabilities | 384,089 | 349,775 | |||||||||
| Net deferred tax liabilities | $ | 307,893 | 276,043 | ||||||||
Management evaluates the realizability of deferred tax assets based on all available evidence, both positive and negative. The realization of deferred tax assets is dependent on our ability to generate sufficient future taxable income during periods in which the deferred tax assets are expected to reverse. Based on all available evidence, management believes it is more likely than not that H2O America will realize the benefits of its deferred tax assets. Net operating loss carryforwards expire beginning in 2032 and ending in 2043. As of December 31, 2025, the estimated amount of net operating loss carryforwards available to offset future taxable income for Connecticut purposes is $20,739. The estimated state tax credit carryforwards are $907, which will expire beginning in 2028 and ending in 2049.
The change in the net deferred tax liabilities of $31,850 included non-cash items primarily consisting of regulatory assets and liabilities relating to income tax temporary differences.
The total amount of unrecognized tax benefits, before the impact of deductions for state taxes, excluding interest and penalties was $4,094 and $3,707 as of December 31, 2025 and 2024, respectively. The amount of tax benefits, net of any federal benefits for state taxes that would impact the effective rate, if recognized, is approximately $3,514 and $3,150 as of December 31, 2025 and 2024, respectively.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:
| 2025 | 2024 | 2023 | |||||||||||||||
| Balance at beginning of year | $ | 3,707 | 4,511 | 9,004 | |||||||||||||
| Increase related to tax positions taken during the current year | 663 | 658 | 231 | ||||||||||||||
| Increase related to tax positions taken during a prior year | 113 | 380 | 364 | ||||||||||||||
| Reductions related to statute expiration | (389) | (1,701) | (1,191) | ||||||||||||||
| Reductions related to tax positions taken in a prior year | — | (141) | (3,897) | ||||||||||||||
| Balance at end of year | $ | 4,094 | 3,707 | 4,511 | |||||||||||||
The decrease in gross unrecognized tax benefits in 2023 was primarily due to the release of uncertain tax position reserve relating to repairs tax deductions. In April 2023, the IRS issued additional tax guidance that has allowed H2O America to revisit certain historical income tax reserves. Pursuant to the issuance of this guidance, which provided additional clarification regarding some of the uncertain tax areas, the company re-evaluated the risk relating to repair deductions. The result of the analysis led to a release of uncertain tax position reserve. The release relates to repairs expenditures which are more likely than not to be sustained on audit. The net release due to re-evaluation of the reserve was $3,125.
H2O America’s policy is to classify interest and penalties associated with unrecognized tax benefits, if any, in tax expense. Accrued interest expense, net of the benefit of tax deductions which would be available on the payment of such interest, is approximately $283 as of December 31, 2025. H2O America has not accrued any penalties for unrecognized tax benefits. The amount of interest recognized in 2025 was a decrease to expense of $33.
H2O America files U.S. federal income tax returns and income tax returns in various states and is subject to ordinary statute of limitation of three years for federal and three or four years for different state returns. However, due to tax attribute carryforwards, H2O America is subject to examination for tax years 2012 forward for state returns of CTWS and its subsidiaries. The statute of limitations for H2O America returns is closed for these extended years and remains open for 2022 and forward for federal and 2021 or 2022 and forward for different states.
Income Taxes paid (net of refunds) for the year ending December 31, 2025 were as below:
| 2025 | |||||
Federal | $ | 2,000 | |||
State | 1,238 | ||||
Foreign | — | ||||
Total | $ | 3,238 | |||
Income Taxes paid (net of refunds) exceeded 5% of total income taxes paid (net of refunds) in the following jurisdictions:
State: | 2025 | ||||
California | $ | 400 | |||
Connecticut | 521 | ||||
Maine | * | ||||
Tennessee | 219 | ||||
Texas | * | ||||
Total | $ | 1,140 | |||
*Jurisdiction below the threshold for the period presented
On July 4, 2025, Public Law No. 119-21, referred to as the One Big Beautiful Bill Act (“OBBBA”), was signed into law. The OBBBA contains several changes to corporate taxation including the extension of key provisions of the 2017 Tax Cuts and Jobs Act. The legislation has multiple effective dates, with certain provisions effective in 2025 and others phased in through tax year 2027. The legislation may be subject to further clarification and the issuance of interpretive guidance. The Company evaluated the impact of the OBBBA tax legislation for the year ended December 31, 2025, and the impact was not material to the provision for income taxes and deferred tax balances.
Historical Timeline
| Fiscal Year | Filed | |
|---|---|---|
| 2025 | Feb 26, 2026 | Showing above |
| 2024 | Feb 28, 2025 | |
| 2023 | Feb 23, 2024 | |
| 2022 | Feb 24, 2023 | |
| 2021 | Feb 28, 2022 | |
| 2018 | Feb 27, 2019 | |
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.