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 second quarter 2019 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, August 13, 2019 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. To ask a question, you may press star, then 1 on your touchtone phone. If at any time your question has been addressed and you would like 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 or are financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the call over to Bob Sprouse, President and Chief Executive Officer of American States Water Company.

Thanks, Brandon. Welcome, everyone, and thank you for joining us today. I'll begin with some highlights for the quarter. Eva will then discuss some important 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. I'm very pleased to report that we delivered excellent earnings and performance during the second quarter for both of our subsidiaries. resulting in a 45% increase in adjusted earnings per share. In May, we received a final decision issued by the California Public Utilities Commission, or CPUC, on our water segments general rate case. And in July, a proposed decision was issued on our electric segments general rate case, which adopted all the settlement terms jointly filed with the CPUC's public advocate's office. Our newest military-based privatization contract contributes nicely to earnings, and we remain well-positioned to win new military-based contracts. In addition, last week the company raised the dividend by a sizable 10.9% and updated our dividend policy to target a compound annual growth rate in the dividend of more than 7% over the long term. As a result of these milestones and continued solid execution of our businesses, earnings were 72 cents per diluted share, as reported, and 64 cents per share, excluding the first quarter retroactive impact of our water rate case. This adjusted earnings amount represents an increase of 20 cents per share, or 45% over the second quarter last year. In addition, Golden State Water Company continues to invest in the reliability of our water and electric systems. During the first six months of 2019, we spent $70.7 million in company-funded capital expenditures and are on target to spend $115 to $125 million for the year, about three times our expected annual depreciation expense. American States Utility Services, or ASUS, our contracted services business, saw its earnings double over last year as a result of the Fort Riley addition, as well as increased construction at other bases and an increase in management fees. All in all, it was a very productive and positive quarter while laying the groundwork for continued earnings growth. With that, I'll now turn the call over to Eva to review the important financial details for the quarter.

Thank you, Bob. Hello, everyone. Let me start with an overview of our second quarter financial results on slide eight. Consolidated earnings as reported for the quarter were 72 cents per share compared to 44 cents per share for the same period in 2018. As Bob mentioned, Earnings at our water segment were positively impacted by the CPUC final decision on the January case, with the new rates retroactive to January 1, 2019. The retroactive impact of the decision was reflected in the results for the second quarter, and of the water segment's 59 earnings per share, $0.08 per share was related to the first quarter of this year. which is shown on a separate line in the table on this slide. Further impacting the comparability of the wallet segments earnings between the second quarter of 2019 versus 2018 was the recording of a $1.1 million reduction to the administrative and general expense positively impact earnings by two cents per share. This is to reflect the recovery of cost previously incurred or expense as incurred and tracked in memorandum count, which were approved in the CPUC's final decision in May. The remainder of the earnings increased at the water segment was due to a higher water growth margin from the new waterways, lower operating expenses, and an increase in gains on investments held to fund a retirement benefit plan. Our electric segments earnings for the second quarter of 2019 were $0.01 per share as compared to $0.02 per share for the second quarter of last year. This was largely due to an increase in operating expenses without an increase in customer base rates. Bailed electric revenues during the first six months of 2019 were still based on 2017 adopted rates. pending a final decision by the CPUC on the electric ray case application, which will be retroactive to January 1st, 2018. After receiving a proposed decision in July, which adopts the November 2018 settlement agreement with the CPUC's Public Advocate's Office, we expect a final decision by the end of the third or fourth quarter of this year. Had the new rate in the settlement agreement been approved by the CTUC and in place as of January 1st, 2019, pre-tax income at the electric segment would have increased by approximately $1.7 million or 3 cents per share for the first six months of 2019, including 1 cent per share related to the second quarter of 2019 and an additional $2 million or $0.04 per share for the full year of 2018. We will record these increases to earnings when a PUC final decision is issued. Our contracted service segment saw a $0.06 per share increase in earnings due to the commencement of operations at Fort Riley in July of 2018. as well as an increase in management fees and construction activity at several of the other military bases. Consolidated revenues increased by $17.7 million due to increases at both the water and contracted services segments. Water revenue for the second quarter this year increased by $11.4 million to $88.1 million due to the new water rates. The increase for the quarter includes $3.4 million related to the first three months of 2019 as a result of the retroactive CTUC decision. Electric revenue were down slightly pending a final decision on the electric rate case from the CTUC. Again, billed electric revenue this year has been based on 2017 adopted rates. pending a final decision by the CTUC, and will be retroactive to January 1, 2018. Contracted services revenues for the quarter increased $6.8 million as compared to the second quarter last year, largely due to variety, and increases in management fees and construction activity at several other military bases. Looking at slide 10, our water and electric supply costs were $29 million for the quarter, an increase of $5.3 million from the same period last year. This includes a $1.7 million increase, which relates to the first quarter of 2019, to reflect newly adopted water supply costs with corresponding revenues retroactive to January 1, 2019. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balance accounts. Total operating expenses, including supply costs, decreased $1.4 million versus second quarter 2018 due to a $1.1 million reduction to reflect the CPU's disapproval in its May decision for recovery of previously incurred costs that were being tracked in the memorandum account. There was also a decrease in depreciation expense due to lower composite rates authorized in the water generate case and maintenance expense due to differences in timing of maintenance activities. The lower authorized composite rate decreased depreciation expense and lowered adopted water growth margin, resulting in no impact to net earnings. These decreases were partially offset by an increase in construction expense at ASUS due to an overall increase in construction activity, including variety. Interest expense, net of other income, including investments held in a trust to fund a retirement benefit plan. was relatively flat compared to Q2 last year. An increase in gains on those investments was offset by an increase in the non-service cost components of pension and post-retirement costs recorded as non-operating expenses. Slide 11 shows the EPS bridge comparing the second quarter of 2019 with the same quarter of 2018. Moving on to slide 12. This slide reflects our year-to-date earnings per share by segment. Fully diluted earnings for the six months ended June 30, 2019 were $1.07 per share compared to $0.73 per share for the same period last year. A $0.37 per share increase in earnings or 47%. The increase was largely due to the approval of the Water General Rate Case for new rates retroactive to January 2019, the commencement of operations at Fort Riley in July of 2018, and higher construction activities at other military bases. For more detail, please refer to yesterday's press release and form thank you. In terms of the company's liquidity, Net cash provided by operating activities for the first six months of 2019 was $44.7 million as compared to $65.1 million for the same period in 2018. The decrease was due primarily to lower water usage and the expiration of various surcharges related to Golden State Waters' rough regulatory accounts. In addition, Had the new water customer rates been in place as of January 1st this year, cash flow for operations would have been higher. Golden State Water invested $70.7 million in company-funded capital projects during the first six months of 2019. Continuing our strong investment level, we expect to invest $115 to $125 million in 2019. We plan to issue up to $115 million of long-term debt at Golden State Water by the end of this year to reduce its intercompany borrowings and American State Water's borrowings under its credit facility. At this time, we do not expect American State Water to issue additional equity. With that, I'll turn the call back to Bob.