American States Water Company

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's fourth quarter and full year 2018 results. The call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5 o'clock p.m. Eastern time and run through Tuesday, March 5th, 2019 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your telephone keypad. To withdraw your question, please press star then 2. This call will be limited to an hour. Presenting today from American States Water Company is Bob Sprouse, President and Chief Executive Officer, and Eva Tang, Senior Vice President of Finance and Chief Financial Officer. As a reminder, certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10-K and Form 10-Q on file with the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with generally accepted accounting principles, or GAAP, in the United States and constitute non-GAAP financial measures under SEC rules. These non-GAAP financial measures are derived from consolidated financial information but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I would like to turn the call over to Bob Sproul, President and Chief Executive Officer of American States Water Company. Please go ahead.

Thank you, Nicole. Welcome, everyone, and thank you for joining us today. I'll begin with some highlights for the year. Eva will then discuss some financial details, and then I'll wrap it up with some updates on regulatory filings, ASUS, and dividends, And then we'll take your questions. For American States Water and its two subsidiaries, 2018 represented a continued, unwavering commitment to safe and reliable service for our water, wastewater, and electric customers, both in California as well as in eight other states where we serve the country's military personnel and their families. We concluded 2018 with two settled rate cases for our water and electric utilities, a record level of capital investment in our regulated utility, earned a record high earnings per share contribution at our contracted services subsidiary, commenced operations of water and our wastewater systems at our 11th military base, and continued our 64 consecutive year history of dividend increases. At Golden State Water Company, we reach settlements with the California Public Utility Commission's Public Advocate's Office on all issues for our pending water and electric rate cases. The water rate case sets new rates for the years 2019 through 2021, while the electric rate case under the settlement will set new rates for 2018 through 2022. We continue to invest in the reliability of our systems, spending a historical high of $121 million in needed infrastructure during the year. At American States Utility Services, or ASUS, we achieved the highest annual earnings per share contribution. In 2018, we further grew our military base footprint by commencing operations at our newest base, Fort Riley, increased our services at existing bases, and continue to work with the U.S. government on price adjustments and asset transfers. ASUS now provides services for water and our wastewater systems and treatment plants to 11 military bases, including some of the largest military installations in the United States, Fort Bragg, Fort Bliss, Eglin Air Force Base, and Fort Riley. as well as one of the most high-profile bases, Joint Base Andrews. During 2018, ASUS was awarded $24 million in new construction projects, the majority of which are expected to be completed in 2019. AWR stock achieved a total shareholder return of 17.9% for 2018, which was substantially higher than the S&P 500 performance, which had a loss of 4.4% for 2018. American States Water also achieved a consolidated return on equity of 11.7%. In addition, we increased our quarterly dividend by 7.8%, continuing our record of 64 consecutive years of annual dividend increases. We remain committed to our communities. Golden State Water continued to increase its spending with diverse business enterprises with 2018 results well above the California Public Utility Commission's requirement. In addition, ASUS continued to exceed the U.S. government's requirements to hire small business contractors to perform work on the basis it serves. And we are proud to say that in 2018, our employees donated over 6,000 hours of community outreach and engagement in areas they live and work. For 2018, we earned $1.72 per fully diluted share. As you can see from this slide, if we excluded the one-time gain of 13 cents per share for the sale of the Ojai water system, a 2 cent per share recovery for previously incurred drought costs, gains and losses received or incurred on investments held to fund a retirement benefit plan, as well as retroactive revenues at ASUS of $0.02 per share recorded in 2017, earnings per share for 2018 was a $0.06 per share increase compared to 2017. These results were accomplished despite a lower rate of return based on the Water Utilities Cost of Capital decision as well as a delayed electric general rate case decision. Had the new rates in the electric joint settlement agreement been approved by the CPUC in 2018, the electric segment would have contributed an additional 4 cents per share. Eva will discuss the 2018 performance in more detail later. As we look ahead, the company's strategy remains the same. deliver outstanding customer service, make prudent capital additions, and continue to grow our military base presence around the country. I will now turn the call over to Eva to review the financial results for the quarter.

Thank you, Bob. And hello, everyone. Let me start with an overview of our fourth quarter financial results on slide 9. Consolidated earnings for the quarter were $0.37 per share compared to $0.35 per share for the same period in 2017. As Bob mentioned, results were affected by losses of $1.4 million or $0.03 per share incurred during the fourth quarter of 2018 on investment held to fund a retirement benefit plan due to market conditions. as compared to investment gains of $600,000, or $0.01 per share, recorded in the fourth quarter of 2017. This resulted in a $0.04 per share earnings decrease on a comparative basis. Excluding this non-core business item, consolidated earnings for the quarter increased by $0.06 per share compared to the fourth quarter of 2017. Consolidated revenues increased by $6.8 million due to the commencement of operations at Fort Riley. Continued revenue increases at Agilent Air Force bases since we took over its operations in June of 2017, as well as higher construction activity at Fort Bragg. Water revenues decreased slightly in 2018 due to Downward adjustment to revenues resulting from the tax reform, a lower authorized rate of return based on the CTUC's decision on the March 2018 water cost of capital application, and decreases related to the expiration of various surcharges that were in place to recover previously incurred costs. These decreases were largely offset by CTUC approved third year rate increases for 2018. Electric revenues were higher due to a downward adjustment to revenue requirement recorded in the fourth quarter of 2017 to reflect a decrease in the general office allocation. As Bob mentioned, We reached a joint settlement in our electric GRC for new rates retroactive to January 2018. If approved, the electric segment's gross margin would have been higher than recorded by approximately $575,000, or $0.01 per share, for the three months ended December 31, 2018, and approximately $2 million, or $0.04 per share, for the entire 2018 year. Looking at slide 11, our water and electric supply costs were $21.6 million for the quarter, an increase of $1 million from last year. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts. Looking at total operating expenses, excluding supply costs and surcharges, consolidated expenses increased $5.7 million versus the fourth quarter of 2017 due to an increase in construction costs at ASUS as a result of higher construction activity, a reduction in legal costs of $1.8 million recorded in 2017 in connection with the settlement agreement, and higher depreciation and amortization expenses in 2018 due to planned additions. Excluding gains and losses from investments, interest, and other income, net of interest expense increased by $909,000, or nearly 2 cents per share, due primarily to interest income related to a federal tax refund recorded during the fourth quarter of 2018. Slide 12 shows the ETS Bridge. comparing the fourth quarter of 2018 with the same quarter of 2017. Turning to slide 13 for the four-year results. Included in 2017's water segment results were the recognition of a pre-tax gain of $8.3 million, or 13 cents per share, on the sale of our Ojai water system in 2017. The recovery in 2017 of previously incurred drought-related costs, which resulted in a $1.5 million increase in pre-tax earnings, or $0.02 per share, for 2017, and about $1.7 million, or $0.04 per share, of gains on companies' investment in 2017, as compared to $560,000 losses in 2018 due to market conditions. Excluding the impact of these items, earnings from the water segment for 2018 increased by $0.04 per share as compared to 2017. The $0.04 increase was due to a higher water growth margin from the 30-year rate increases, partially offset by the effect of the cessation of the Ojai operations in 2017 and the impact from the lower authorized return in the 2018 cost of capital proceedings. There were also an increase in interest and other income due to interest income related to a federal tax refund recorded in the fourth quarter of 2018. Lastly, a lower effective income tax rate positively affected earnings for 2018 It was due in large part to the unfavorable re-measurement adjustment of deferred tax balances in connection with the tax reform, which negatively impacted water segment earnings in 2017 by approximately $0.03 per share. These increases were partially offset by an increase in operating expenses due to higher legal, depreciation, and property tax expenses. Moving on to the electric segment, earnings were flat in 2018 at $0.11 per share. Due to the delay in the electric GRC, build revenue in 2018 were based on 2017 adopted rates, pending a CTUC decision. Again, if this settlement was approved in 2018, the segment's gross margin would have been higher in 2018 by $2 million, or $0.04 per share. Included in AFUS's results for 2017 were retroactive revenue of $1 million or $0.02 per share, resulting from the approval of the third price redetermination at Fort Bragg related to periods prior to 2017. Excluding this retroactive amount, diluted earnings per share from the contracted service segment increased $0.07 per share as compared to 2017, largely due to operations at Eglin Air Force Base and Fort Riley. There was also an increase in management fee revenues at the other military bases, resulting from successful resolution of various price adjustments. AWR parents earning decreased $0.05 per share compared to 2017, 2017's results included a benefit of $0.03 per share from the re-measurement of the AWR parent deferred tax balances as a result of the tax reform. There were also higher state unitary taxes recorded in the parent level during 2018 as compared to the same period in 2017. I'll briefly discuss our liquidity for the year on this slide. Net cash provided by operating activities for 2018 was $136.8 million as compared to $144.6 million in 2017. The decrease in cash from operating activities during 2018 was due primarily to significant differences in timing of income tax payments made and refunds received between the two periods. and a decrease resulting from the timing of billing off and cash receipts for construction work at military bases during 2018. Golden State Water invested $121 million in company-funded capital projects in 2018. Continuing our strong investment level, we expect to invest $115 to $115 million $225 million in 2019. Golden State Water has a $40 million note, which becomes due in March. We intended to utilize our intercompany borrowing arrangements to repay this note next month and possibly issue additional long-term debt later this year. In May of 2018, We successfully renewed AWR's credit facility of $150 million for another five years, with an option to increase it by $50 million. This is to provide funds to both Golden State Water and ASUS in supporting their operations and growth. We received more favorable pricing terms than the prior arrangements. At this time, we do not expect American States water to issue additional equity. With that, I'll turn the call back to Bob.