Bob Sprowls - President and CEO Eva Tang - SVP, Finance & CFO.

Jonathan Reeder - Wells Fargo.

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 2016 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 PM Eastern Time and run through Friday, March 3, 2017 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 listen-only mode.

[Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] This call will be limited to one hour. Presenting today from American States Water Company is Bob Sprowls, 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 will turn the conference over to Bob Sprowls, President and Chief Executive Officer of American States Water Company..

Thank you, Andrea, and 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 the general rate case of California drought, ASUS, dividend and our 2017 outlook then we will then take your questions.

I'm pleased to report that the Company produced another year of solid financial performance from our two first year subsidiaries, Golden State Water Company, regulated water and electric utility and American State Utilities Services or ASUS for short, our contracted services business.

We earned $1.62 per share and achieved a consolidated return on equity for the year of 12.4%, All while increasing our dividend by 8% continuing our record of 62 consecutive years of annual dividend increases. We also continue to invest in the reliability of our water and our electric systems.

Golden State Water invested $121 million in company funded net facility infrastructure work during 2016, the highest in our company's history. In December 2016, the California Public Utilities Commission or CPUC approved for water general rate case for Golden State Water, which determined the rates for the years 2016 through 2018.

The new rates approved by the CPUC are retroactive to January 1, 2016, and we will be discussing the effect of that in more detail later in the call. Continue with our highlights on the next slide, one of the key accomplishments for 2016 was the award of a 15-year contract by the U.S.

government for ASUS as to operate, maintain and provide construction management services for the water and waste water system at Eglin Air Force Base. The initial value of this contract is $510 million over the 50 years and the contract is expected to contribute $0.02 to $0.03 per share on an annualized basis.

Eglin is the largest Air Force installation in the Continental United States in terms of land area. With the Eglin addition, ASUS will be managing the water and waste water systems at 10 military bases throughout the country. We are very excited about this contract win and optimistic about additional growth opportunities moving forward.

ASUS contributed $0.33 per share for 2016 and continue to earn a higher return on investment in our well performing regulated utilities. I will now turn the call over to Eva to review some of the details for the quarter and they year..

Thank you, Bob. Hello everyone. I’ll begin with an overview of our financial results on Slide 8. Consolidated earnings for the fourth quarter were $0.30 per share compared to $0.31 per share for the same period in 2015.

Of the $0.30 earnings per share for the quarter, $0.13 was from our Water segment, $0.04 from our Electric segment and $0.13 from our Contracted Services business. As Bob mentioned, in December, the CPUC issued a decision on the water generate case for rates in year 2016 through 2018.

Earnings for the quarter reflected retroactive impact of the new water rate on Golden State Water's first nine months of 2016. As a result, we recorded $0.08 per share downward adjustments to earnings in the fourth quarter of 2016 related to the first three quarters of the year.

The adjustment was due to a decrease of approximately $5.2 million in the adopted water gross margins for the nine months ended September 30, 2016. As the result of the December decision compared to the recorded margin through September 16. I'll go over other major items that impacted our results for the quarter over the next two slides.

As we have discussed in the previous earnings conference call and in our financial filings, the water revenues reported for the nine months of 2016 reflected a consumption activity that the CPUC would adopt Golden State Water's position in its entirely on two litigated issues, our capital expenditure request and compensation from a material level employee.

The December decision accrued approximately 87% of our capital request. This allowed a portion of executive compensation and update expense inflation taxes for 2014 to 2016, all of which result in the recording in Q4 of the retroactive adjustment as I discussed earlier.

Partially offsetting this revenue decrease was an increase in water consumption by a small portion of our customers that are not on the conservation rate as well as new business generated by from our water system acquired in December of 2016. Water consumption did increase 6% this quarter compared to the same period last year.

In addition during the fourth quarter of 2015, the water segment did not recognize 1.4 million of under-collected revenues for 2015 that has been included in the CPUC authorized Water Revenue Adjustment Mechanism or the WRAM as required under the Company guidance for revenue programs such as WRAM.

Revenues from electric operations for the quarter increased slightly due to CPUC approved fourth-quarter rate increases for 2016, and rate increases generated from certain capital projects, approved by the CPUC during 2016. ASUS revenue increased $3.8 million in Q4 due in large part to the successful resolution of a price redetermination.

For one of ASUS, the contract was with the U.S. government. As a result, we recorded approximately $0.03 per share in retroactive operations and maintenance revenue for the period from October 2015 to September 2016. There was also an increase in ongoing O&M revenue and construction activities compared to the same period in 2015.

Looking at slide 10, our water and electric supply costs were $21 million for the quarter, a decrease of 1.3 million from last year, primarily reflecting the lower adopted water supply cost in the December of CPUC decision.

Any changes in supply cost for both the water and electric segment as compared to the adopted supply cost are tracked in balancing account, which will be recovered from or refunded to our customers in the future.

Looking at total operating expenses, excluding supply cost, consolidate expense decreased overall by $2.2 million for the quarter, primarily due to a decrease in drought and water conservation related cost, lower expenses associated with energy efficiency and solar initiative programs at the electric segment and a decrease in depreciation and amortization expenses due to the reduction in composite rate approved in the water rate case, resulting from an updated depreciation study.

In addition, the water decision issued in December 2016, approved for recovery of approximately $800,000 of previously incurred cost that were being trapped in CPUC authorized memorandum account, and were reflected as a decrease in operating expenses during the quarter.

The decreases in these expenses were partially offset by higher construction expense as ASUS due to an increase in construction activity. Slide 11 shows the EPS bridge comparing the fourth of 2016 with the period of 2015. Turning to Slide 12, for the full year consolidated earnings per share were $1.62 for 2016 as compared to $1.60 per share for 2015.

The earnings per share for 2016 included $0.01 of retroactive revenues at ASUS as compared to $0.5 per share in 2015. I’ll briefly discuss year end result for each of our business segment. Our water utilities earnings were down $0.02 for the year.

The water gross margins decreased by $9.9 million as a result of lower 2016 adoptive revenue in the CPUC December decision. The lower gross margins were mostly offset by decreases in depreciation expenses due to a depreciation study and other operating expenses from our cost containment and operation efficiency initiative.

Excluding a $4 million increase in legal and outside service cost incurred on compensation related matters due to 2016. And not counting supply costs, operating expenses were lower by $7.6 million for the year. We expect compensation related cost to continue and fluctuate from year-to-year.

A lower effective income tax rate and fewer common shares outstanding also favorably impacted to water segments results.

For 2016, earnings from the electric utility increased by $0.03 per share resulting from the fourth year rate increasing effecting from 2016, as well as rate increases generated from advice letter filing approved in late 2015 and throughout 2016.

There was also a decrease in allocated cost to electric segment from corporate headquarters and a decrease in expenses associated with solar initiative program. For ASUS, earning increased by $0.01 to $0.33 per share completed 2015, excluding earnings impact from retroactive revenue active revenue $0.01 for 2016 and $0.05 for 2015.

ASUS's earnings would have increased by $0.05 per share. The increase was due to an increase in ongoing OEM revenues due to the successful resolution of price redeterminations and overall increase in construction activity and a high direction construction margin percentage, resulting from improved cost efficiencies.

The effect of these favorable variances were partially offset by increasing allocation from corporate headquarters as a result of the water rate case and an increase in ASUS's labor and outside services cost. I'll briefly discuss our liquidity on Slide 13.

Net cash provided by operating activities for the 2016 was $96.9 million, as compared to $95.1 million in 2015. The increase was due to increases in rents, surcharges collected in 2016 partially offset by a reduction in cash generated by ASUS due to the timing of billing and cash receipts for construction work at the military bases during the year.

Cash flow used for investing activities increased by $41 million for 2016 due to a significant increase in capital expenditures at Golden State Water. As Bob mentioned earlier, we have invested $121 million on company funded infrastructure work in 2016. We expect to invest $110 million to $120 million in capital projects this year.

With that, I will turn the call back to Bob..

Thank you, Eva. The CPUC's December decision in the water general rate case for Golden State Water is retroactive to January 1. 2016.

However because of the delay in issuing a decision, the CPUC has ordered Golden State Water to bypass implementing 2016 rates and to implement 2017 rates once the CPUC has corrected some minor rate calculations in the December decision.

Any revenue shortfall due to differences between the actual rates charged in 2016 while the decision was still pending and the final 2016 rates adopted in the December decision will be recovered in a rate surcharge.

Once the CPUC approves the minor corrections, which is expected to occur next week on March 2nd, the adopted revenue in 2017 is expected to increase by $2.8 million as compared to 2016 adopted revenue. These rates retroactively effected January 1st 2017.

As Eva mentioned earlier, based on the December decision the 2016 adopted revenues were lower than in 2015 due to reductions in supply cost caused by lower consumption, depreciation expense resulting from an updated depreciation study and other operating expenses due to our cost containment initiatives.

The CPUC also authorize a sales adjusted mechanism for the 2017 and 2018 escalation years, which adjust adopted WRAM-related sales levels, if there is 10% or more variance positive or negative between actual and adopted usage.

If actual WRAM-related sales in a given year differ by 10% or more of the adopted WRAM-related sales, the following years adopted WRAM-related sales are adjusted by one half of the difference.

Based on 2016 actual sales, the sales adjusted mechanism was triggered in three of Golden State Water's nine rate making areas, resulting in a downward adjustment to those rate making areas adopted 2017 WRAM-related sales.

As a reminder in early 2016, we've received CPUC approval to defer our electric general rate case and the cost of capital proceeding for our water utility by one year. Those are now scheduled to be filed by the end of March. On Slide 15, we discussed the drought situation in California.

Precipitation so far in 2017 has been above average for much of the state and may indicate more normal conditions for the remainder of 2017. As of February 14, 2017, the U.S. drought monitor estimates only 7% of California in the condition of server drought, which is a significant improvement from January 2016, when 86% was considered server drought.

Earlier this month, the CPUC approved for recovery $1.3 million in drought related items, incurred mostly in 2015 in response to the governor of California's 2015 executive order on mandatory water usage reduction. The CPUC had authorized us to track incremental drought related cost and memorandum accounts for possible future recovery.

Golden State Water filed for recovery of these costs during the second quarter 2016, we will reflect the CPUC's approval for recovery of these amounts during the first quarter of 2017, mostly as a reduction to operating expenses.

Let's move on to ASUS on Slide 16, with the addition of Eglin Air force Base, we will be serving 10 military bases under seven separate contracts. In addition, we're aggressively pursuing new basis that are being privatized and we're continuing to develop opportunities for new construction work on the bases we serve.

We continue to work closely with the U.S. government on outstanding price redeterminations and asset transfers. The fourth price redetermination for Fort Bliss was confirmed during the fourth quarter of 2016. An economic price adjustment for Andrews Air Force Base was submitted to the U.S.

government during the fourth quarter 2016, and is expected to be resolved in the first quarter of 2017. And we expect the third price redetermination for Fort Bragg to be finalized in the first quarter of 2017.

Filings for these price redeterminations request for equitable adjustment, asset transfers and contract modifications awarded for new projects, provided ASUS with additional revenues and margin. We also continue to work close with the U.S.

government for contract modifications relating to potential capital upgrade work as being necessarily for improvement of the water and waste water infrastructure at the military bases. Through December 31, 2016, the U.S.

government awarded ASUS $24 million in new construction projects, which was lower than in 2015, due to a reduction in military construction funding government wide. However, we have carryover amount from the large dollar awards in 2015 that will be performed in 2017.

Based on our projected construction activity and other factors, we believe ASUS's contributions to earnings for 2017 will be in the range of $0.34 to $0.38 per share. I would like to now turn our attention to dividends, which are outlined on Slide 17.

In November 2015, American States' Board of Directors approved an 8% increase in the fourth quarter dividend from $0.224 per share to $0.242 per share on the common shares of the Company.

This increase in our quarterly dividend reflects our Board's confidence in the sustainability of the Company's earnings at both our Golden State Water and ASUS subsidiaries.

The prospects for our future and its desire to have a payout ratio that is more in line with utility peers, with this given an announcement, our calendar dividend will have grown at a compound annual growth rate of about 11% in the last five years.

American States Water has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 62 consecutive years. Given our current low payout ratio compared to our peers and our earnings growth prospects, there's room to grow the dividend in the future.

Finally, as we look ahead to 2017, our focus will be on a number of fronts. We will file a new water rate case with the CPUC by mid 2017, which will determine rates for years 2019 through 2021. We'll file our cost of capital application in March.

We’ll file our new electric rate case with the CPUC, which will determine rates for years 2018 through 2021.

We'll continue to maintain and improve the reliability of our system and plan to spend a $110 million to a $120 million in infrastructure during the year at our regulated utilities, and we'll continue to aggressively compete for new military bases being privatized as well as pursue additional construction projects on the basis we currently serve.

Again, we expect ASUS to contribute $0.34 to $0.38 per share in 2017. All of this will be accomplished while providing excellent water, waste water and electric service to our California customers and our military base customers around the country. I want to thank our employees for their dedication and hard work and our shareholders for their support.

As we conclude, I'd like to also thank you for your interest in American States Water and will now turn the call over to the operator for questions..

Got a few questions here. So Bob, what caused the $0.02 bump in ASUS's 2017 guidance? I know previously you said $0.32 to $0.36.

Is it sustaining the higher construction margins that benefited 2016?.

Yes, that's we're looking for doing, looking to do a little more construction than we had originally planned for..

So, more construction and better margins or just more construction?.

Well, I would say it's a combination of those two more construction and then continued focused on improving our direct construction margin..

Okay. And then the comment about bypassing implementing the rate changes.

Is that just a cash flow impact? Like another words, do your 2016 results fully reflect the GRC outcome?.

The 2016 results do fully reflect the GRC outcome. But this is really more about when are we going to charge our customers for that. So, we will have a surcharge to collect the amounts that were under collected..

Right, so the $2.8 million is that presumably the 2017 step increase?.

It is, yes..

Okay, have you disclosed what the step increase for 2018 is, that's contemplated? I know it's subject to the earnings tests..

No, we haven’t. Yes, it's really a subject to the earnings tests, Jonathan; and we would implement about, I would say 9.5 million to 10 million surcharges for 2016 rate retroactive to January 1..

Right, okay. And then were there any advice letter recovery projects included in the 250 million of CapEx approved, because it just seems like you're going to far exceed that 250 million, with the 2017 budget of 110 million to 120 million..

Yes, I think it's there a small portion of the 250 million is advice letter projects that were going to finish, so most of them are new capital projects..

Okay so then whatever you spend beyond the 250 million presumably, for this next rate case, you just have to seek recovery of those at that point?.

Yes, we haven’t filed rate case in July as you know this year. So, we'll have to project what we are going to spend in 2018, 2019 and 2020. So, we're -- I mean, our asset management groups working on put those together in the rate case filings, but we'll have a better number comes to July..

Right no, I'm just saying the 250 million that was authorized for '15 through '17, if you spend 110 million to 120 million this year in '17, then you're going to exceed that 250 million by a pretty good margin.

So whatever is above that 250 million has to try to get rolled into rate base as part of this next case; is that correct?.

Yes..

And recognize that all being a small portion of the 110 million to 120 million is fair value electric. So, that's not part of the 250 million..

Right. And then on the effective tax rate, both the utility and consolidated were lower this year.

Do you expect that to be the case next year? Or in 2017, or will it go to the more normal levels we've seen?.

I think will be similar as while we're seeing for 2016, Jonathan..

Okay, and then last question, and I'll hop off. You've done a good job managing your operating expenses in recent years.

Where do you see the non supply operating costs coming in for 2017? Are they going to be higher, lower or about the same as '16?.

Well, we've been -- as you said very expected of that.

I would say we might see bit of an increase, but not wouldn’t be substantial, do you agree that?.

Yes, I mean we currently look at everything we can do to decrease our cost for our customers. So, that’s really one of the top priorities that's the management focus on..

[Operator Instructions] There appear to be no further question at this time. This will conclude our question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks..

Thank you, Andrea. I just want to close with thanking you all for your participation today and for continuing to invest in our company or advice folks on investments. And I look forward to speaking with you, Eva and I both do, next quarter. Thank you..

Thank you..

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect..