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

Jonathan Reeder - Wells Fargo Tim Winter - Gabelli & Company.

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call, discussing the Company's First Quarter 2017 Results. The call is being recorded.

If you would like to listen to the replay of the call, it will be made available today at 5:00 pm Eastern Time and run through May 10, 2017 on the Company's website, www.aswater.com. The slides that the Company will be referring to are also available on the website.

[Operator Instructions] 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 and 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. Please go ahead..

Fort Bragg, Fort Bliss and Eglin Air Force Base, as well as one of the most high profile bases, Andrews Air Force Base. I'll now turn the call over to Eva to review the financial results for the quarter..

Thank you, Bob. Good morning or to most of you, good afternoon, everyone. An overview of our financial results is on Slide 7. Diluted earnings for the quarter were $0.34 per share compared to $0.28 per share for the same period in 2016, an increase of $0.06. As Bob mentioned, all three of our business segments performed better than Q1 last year.

I will discuss the major items that impacted our revenue and the expenses including two items that related to other period and after each other, our quarter-over-quarter basis there shown on the slide of non-GAAP adjustments. On this slide it has been adjusted for those two items.

The first item which is discussed in Note A at the bottom of the slide relates to the Q1 2016 results and was due to the delay by the California Public Utilities Commission or the CPUC in issuing a decision of a water general rate.

Due to the uncertainties of the outcome of the water DRC at the time, the water growth margin recorded for the first quarter of 2016 reflected Golden State Waters insulated [ph] position in the then pending water general rate case.

The final decision issued in December 15 authorized 87% of our capital request and allowed a portion of the incentive program.

When the decision was issued in December last year, with new rates retroactive to January 1, 2016, we recorded accumulative downward adjustment of $5.2 million to the water growth margin in Q4 of 2016, related to the first three quarters of 2016.

Of this amount, $1.5 million related to the first quarter of 2016, which would have decreased revenue by approximately $700,000, an increase of higher cost by $800,000 for the first quarter of last year.

The second item which have affected 2017 Q1 results is described in Note B and was due to the CPUC's approval this past February for recovery of $1.5 million of previously incurred draught related cost.

As a result, we recorded a regulatory upset in a corresponding increase to pretax earnings of approximately $1.5 million - of which, $1.2 million was recorded as a reduction to other operation-related expenses and $250,000 of additional revenue. There was no similar item for the first quarter of 2016.

Please reference Appendix slide for the computation [ph] detail. Adjusting for these two items, revenue increased by $5.8 million, as compared to the first quarter last year, largely from higher construction revenues at ASUS.

Revenues for contracted services include $5.3 million for the quarter due to an overall increase in construction activity, as well as successful resolutions of price redetermination, economic price adjustment and asset trust [ph] providing throughout 2016.

In addition, there was CPUC-approved second year rate increases effective January 1, 2017 for the water segment. Our water and electric supply cost were approximately $18.4 million for both periods. When used through the impact of the delay in the water DRC decision.

Any changes in supply cost for both the water and electric segments as compared to the adopted supply cost are tracked in balance in accounts, which will be recovered from or refunded to our customers in the future. Looking at operating expenses excluding supply cost in the two adjustments.

Consolidated expenses increased overall by $2.2 million for the quarter. The increase was driven by a $2.8 million increase in ASUS construction expense due to an increase in construction activity due to the first quarter of 2017 and cost incurred by ASUS for the Eglin Air Force Base transition activities and joining the studies.

ASUS we see revenue could help cover much of the operation transition cost. We expect to resume operation on the water and wastewater systems at Eglin Air Force Base by mid-2017.

These increases were partially offset by a decrease in cost associated with defending against condemnation related actions and lower maintenance expenses at the water segment.

A decrease in depreciation and amortization expense due to the reduction in composite rate approving the water rate case resulting from an updated depreciation study and the lower cost incurring in 2017 associated with the CPUC approved energy efficiency and solar programs and electric segment.

Slide 9 here shows the ETS [ph] Bridge compared to third quarter of 2016, with the first quarter of 2016. I'll briefly discuss our liquidity on Slide 10.

Net cash provided by operating activity for the first quarter of 2017 increased slightly to $28 million due to the timing of cash received and disbursement related to customer receivables and account payables. Partially offset by increases in retroactive rates receivable cost by the delay in receiving a final DRC decision.

And the CPUC approval of various memorandum [ph] accounts found in December 2016 while their DRC decision. There was a reduction in cash generated by ASUS due to the timing of billing off with the cash received for construction work at this military bases in the quarter.

With the new 2017 water rates at Golden State Water as well as various charges that will be collected in 2017. We expect an increase in cash provided by operating activities for the remainder of 2017. Cash flows due for investing activity were $24 million for '17 as compared to $29.5 million for the same period in 2016.

As Bob mentioned over the year, we expect to invest $110 million to $120 million in capital projects at Golden State Water in 2017. With that, I'll turn the call back to Bob..

Thank you, Eva. I'd like to provide an update on our recent regulatory activity following a delayed decision from the CPUC in December of 2016 to set rates for 2016, Golden State Water has received approved water rate increases for 2017, which had been reflected in the first quarter 2017 financial results.

2017 adopted revenues and supply costs were expected to increase the water gross margin by approximately $3.7 million as compared to 2016. Golden State Water will file its next water rate case in July, the new rates effective 2019 through 2021. In early April of this year, Golden State Water filed its water plus capital application with the CPUC.

The application recommends an overall weighted return on rate base of 9.11% including an updated cost of debt of 6.6% and a return on equity or ROE of 11%. The current authorized return on rate base is 8.34% including an ROE of 9.43%.

A decision on the application was scheduled to be received by the end of this year and to become effective January 1, 2018. Early this week, we also filed our electric general rate case per rates effective 2018 through 2021. A decision on this filing is also scheduled to be received by December.

Finally, last month we entered into a settlement agreement with the Casitas municipal water district or Casitas and a group of citizens referred to as Ojai Friends of Locally Owned Water or Ojai FLOW to resolve the imminent domain action and other litigation against Golden State Water.

Under the terms of the settlement agreement, Casitas will acquire the operating assets of Golden State Waters, 2,900 connection Ojai water system by imminent domain for approximately $34.5 million in cash. The parties have also agreed to dismiss all claims against Golden State Water.

The transaction is expected to close in June 2017 following satisfaction of all closing conditions. Upon closing, we expect to recognize a pretax gain of approximately $8 million.

While Ojai represents a very small portion of our total customer base and operates as an isolated stand-alone rate-making area, we have proudly served the 2,900 customers for more than 85 years and we'll work closely with Casitas to facilitate a seamless transfer of ownership. On Slide 12 we discussed the drought situation in California.

Last month, the governor of California ended the drought state of emergency in most of California in response to significantly improved water supply conditions resulting from substantial rainfall and snowpack experience this past winter.

As a result, Golden State Water has ended its staged mandatory water conservation and rationally plan nearly all of its service areas. As Eva mentioned, in February of this year, CPUC approved recovery of incremental drought related items of approximately $1.5 million incur in prior years. Let's move on to ASUS on Slide 13.

As I mentioned earlier, ASUS continues to work with the government to transition the operations of Eglin Air Force Base and will start operating the water and waste water systems on the base in mid-2017.

Initial value of this contract is $510 million over the 50 years and we still expect the contract to contribute $0.02 to $0.03 per share on an annualized basis.

We have conducted a joint asset inventory with the government to ensure we have the correct inventory level before we start operations, resulting in a higher amount of assets than included in the current contract. We are also involved in various stages in the proposal process at a number of other bases considering privatization.

As you know, this is a key focus for us as the U.S. government is expected to release additional basis for bidding over the next several years. Due to our strong relationship with the U.S. government, an expertise and experience in managing bases, we believe we are well-positioned to compete for these new contracts.

Turning to ASUS' first quarter performance, our management fee revenues increased as a result of successful price redetermination and other filings completed last year. Our construction activity increased overall and was also performed more efficiently.

Similar to our regulated business, ASUS continually looks for operational efficiencies to improve earnings while still doing quality service. We continue to work closely with the U.S. government on various filings for the bases we serve.

During the first quarter of 2017, we submitted economic price adjustment filings with the bases in Virginia, Andrews air force Base in Maryland, Fort Jackson in South Carolina and Fort Bragg in North Carolina and expect these filings to be finalized during the second quarter of this year.

Filings for these economic price adjustments requests for [indiscernible] adjustment, asset transfers in contract modifications award for new projects provide ASUS with additional revenue and margin. We also continue to work closely with the U.S.

government for contract modifications relating to potential capital upgrade work that is deem necessary for improvement of the water and waste water infrastructure at the military bases. During 2016 and through the first quarter of 2017, the U.S.

government awarded ASUS $32 million in new construction projects - the majority of which are expected to be completed this year. Based on these awards, as well as carry-over amounts from the larger dollar awards in 2015 that will be performed in 2017, we believe ASUS will contribute between $0.34 and $0.38 per share for 2017.

We also believe that the higher-than-anticipated water and waste water infrastructure being managed at Eglin should result in an increase in the value of that contract over its 50-year term, though it is unclear at this time how much the value of the contract will increase. Finally, I'd like to turn our attention to dividends outlined on Slide 14.

On Monday of this week, our Board of Directors approved a second quarter dividend of $0.24 and $0.02 per share on the common shares of the company. As you'll recall, in November of 2016, the board increased the quarterly dividend by 8%.

The November increase in our quarterly dividend reflects our Boards 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 in line with utility peers.

We believe that prudently increasing dividends enhances our ability to attract capital in the future to fund necessary infrastructure investments in our utility operations. They're also confident that ASUS along with Golden State Water will be a continued source of dividends for our shareholders.

Our calendar year dividend has grown at a compound annual growth rate of about 11% for the 5 years ended 2016. American States Water Company has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 62 consecutive years.

Given our current payout ratio compared to our peers and our earnings growth prospects there's room to grow the dividend in the future. I'd like to thank you for your interest in American States Water Company and we'll now turn the call back over to the operator for questions..

[Operator Instructions] And our first question for today is going to be Jonathan Reeder with Wells Fargo. Please go ahead..

Hi, Bob and Eva. So start with ASUS, it sounds like construction activity for the year has trend in line with your expectations, I mean is that fair or are you trending in a little higher sub stat, the higher end of that $0.34 to $0.38 range might be achievable..

Yes, hi Jonathan. Hi, by the way. The construction is in line with our $0.34 to $0.30. As you sort of compare it to last year, we're a little bit ahead of last year, but it really doesn't change the trends for 2017..

Okay, so I mean as far you are concerned right now the midpoint of the range is as good as anywhere to assume for ASUS at this juncture..

Yes, that's correct..

Got you. And then for the Eglin additional assets, do you have any idea like how large that might be from an impact perspective.

If you've said $0.02 to $0.03 would be something meaningfully move that higher or we'll just be very much at the margin?.

You know it's possible, it could meaningfully move the margin. It's really hard to say we're in negotiations at this point on it. But there is a chance it could move it up..

We'll know better in the second quarter..

Right. So we're really working hard to get this sorted out before we take over the days. As you know Jonathan in past bases this inventory adjustment has been done after we are taking over the base but. Because of new technology we've been able to isolate what the inventory is to work through this over our transition period with the government..

Okay. And now, switching over to the regulated utility the lower operating expenses that you discussed both for water and electric are those you see it being sustainable at least through the next around the general rate cases..

Yes, I think they are sustainable Jonathan. We've -- I really got to take my head off to the team here at Golden State Water Company is more all their hard work and their ability to control costs.

I've been very pleased with the work they've been able to do we'll just ask them to get tighter and tighter and they seem to be continued deliver and deliver, so I'm very pleased with everything that's going on..

Okay. And then you have the value of the rate base of the casinos district that's being sold. I know you said its, I think kind of the smaller one, but….

The book value Jonathan, I think it's about $25 million. So….

Yes, the rate base is more like….

Yes, rate base has to be net of before taxes. We haven't already disclosed that number, but if you look at the $34.5 million was 2,900 customers, that's about -- we can't do the math..

$11,000 to $12,000 -- $12,000 per customer. So it's a pretty robust price..

Yes, we'll hate to lose the system that we've served for so along now. But at this situation I think we can cool the matter hopefully in June..

Right.

So you are saying in terms of the rate base I mean would be the book value left for deferred tax assets associated with it or?.

Yes..

Okay.

And then lastly on the cost of capital filing, how do you think like the staff's white paper on the cost of capital might influence the current proceeding including the prospects for a settlement?.

Well, as you know Jonathan. We did take a haircut 5 years ago on our authorized ROE to 9.99 down to 9.43 because of the triggering of the water cost of example adjustment mechanism.

We're still -- we think we got a good filing in there, we were -- I don't know that we can sit here and tell you, we think the ROE is going to go up, it's really hard to say. But yes, I think we have a very solid position on our ROE..

You sense that I guess the thought process on where the ROE should be set as changed in California recently based on that white paper as well as obviously the electric utilities had a settlement agreement to extend theirs and that got pooled recently other commissioners wanting to look at ROE differently?.

Yes, this just doesn't seem to be a lot of information coming out of commission on the electric, the electric case in terms of electric cost of capital in terms of why they didn't approve the proposed decision that -- it's really hard at any clarity in that, because we really don't know. Anything we would add would be just pure speculation..

Okay.

The other thing I found of interest with your request increase equity component of the capital structure how do you anticipate that being in that?.

Just to clarify are you talking about the requested ROE or the equity layer [indiscernible]..

Yes, going to 57% versus 55% the equity layer..

Jonathan the cost of capital for proceeding determined capitalization ratio between the equity and long-term debt and our request is pretty in line with our historically Korean level I've lost it to come home so between equity and long term debt.

Currently we have 55%, I think it would present every solitary requests are requested and with the whole the preceding goes along. But we supported a 57% with a detailed calculation also compared with our historical equity and long-term debt ratio there..

Then of course we have an expert later returned witness that. On. Yeah derive these numbers so. For a lot will rely on his testimony in the case. Follow along with any other comments the company needs to be making as part of that..

Okay. Thanks for taking the time on my questions today..

Thank you, Jonathan..

Thank you..

And our next question today is Tim Winter with Gabelli and Company. Please go ahead with your question..

Good morning, good afternoon guys. I was wondering if you are sensing any major changes in coming out of either the commission, regarding consumption or ROE or out of any of the state water agencies in the aftermath of studying the drought conditions..

Yes, so we're kind of working through this the as you know the Governor removes the emergency drought restrictions. Of course there's as you know the Governor is sticking with ban on wasteful practices in terms of can't be hosing down your driveway or have a hose just leaking that sort of thing.

One thing that's being kicked around I guess is whether there'll be sort of a require use per customer or use per person in the house for indoor use and so we'll see how that plays out.

I think folks in California recognize that though we're over the hump on this route, there are potential future droughts that we need to be continually getting ready for. So we're watching very carefully the State Water Resources Control Board and they are active.

As far as the PUC, I don't see a lot there they sort of take their lead from the State board..

Okay, so there's no major movement or like desalination plants or any other sort of supply projects that you are aware of?.

Not, I would say not significantly at this point..

Okay. Thank you..

There looks to be no further questions, so this will conclude the question and answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks..

Thank you, William. I just want to say thank you to all of you for your participation today and I look forward to speaking with you next quarter. So thank you and have a good day..

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