Robert Sprowls - President and Chief Executive Officer Eva Tang - Senior Vice President of Finance and Chief Financial Officer.

Richard Verdi - Ladenburg Thalmann.

Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call, discussing the company's Third Quarter 2017 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 November14, 2017 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. This call will be limited to an 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 Security 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 call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company. Please go ahead..

Thank you, Rachel. Welcome, everyone, and thank you for joining us today. I'll begin with some highlights for the quarter, Eva will then discuss some third quarter and year-to-date details, and then I'll wrap it up with some updates on various regulatory filings, ASUS and dividend, and then we'll take your questions.

I'm pleased to report another quarter of solid earnings mostly due to our hard work on regulatory and U.S. government filings over the past year, in conjunction with our focus on operational efficiencies. The Regulated Utilities continue to invest in the reliability of our water and electric systems.

We are on target to finish this year with approximately $110 million to $120 million spent on capital projects, about three times our expected depreciation expense for the year. We're also excited about expanding our service to the U.S. government yet again.

Our Contracted Services business, American State Utility Services or ASUS had a big win during the quarter, when it was awarded a new 50-year contract to provide services for the water distribution, waste water collection and treatment facilities at Fort Riley, United States Army installation located in Kansas.

The initial value of the contract is estimated at approximately $601 million over the 50-year period and is subject to annual economic price adjustment.

Like Eglin Air Force Base, on which we commenced operations in June, Fort Riley is also one of the largest military installations in the United States, covering over 100,000 acres of land and it has a daytime population of 25,000 people. It is currently home to the 1st Infantry Division.

We expect to assume the water and waste water operations at Fort Riley, following the six to 12 months transition period currently underway.

With the addition of Fort Riley, ASUS will be providing water and/or waste water utility services to 11 military bases, including four 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 Andrews Air Force Base.

I'll now turn the call over to Eva to review the financial results for the quarter..

Thank you, Bob. An overview of our financial results is on Slide 7. Diluted earnings for the quarter as reported were $0.57 per share, compared to $0.59 per share for the same period in 2016. I will discuss the major items that impacted our revenues and expenses, including certain items that affect the comparability of our quarterly results.

So, some of these items are shown on this slide as non-GAAP adjustments, which excluded from 2016 earnings would have resulted in adjusted earnings per share of $0.56 for the third quarter of 2016.

Adjusted earnings per share for the third quarter of 2017 of $0.57 per share were $0.01 per share higher than adjusted earnings per share for the third quarter of 2016. The operating income on this slide, slide 8, has been adjusted for two items.

The first item relates to the delay by the California Public Utilities Commission in issuing a decision on the water general rate case.

Due to the uncertainties of the outcome of the water general rate case at the time, the water gross margin recorded for the third quarter of 2016 reflected Golden State Water litigated positions in the then pending water general rate case.

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

Of this amount $2.2 million related to the third quarter of 2016, which would have decreased revenue by approximately $1 million and increased supply cost by $1 million for the third quarter of last year.

The second item relates to CPUC- approved surcharges implemented in 2017 to recover previously incurred cost approved by the CPUC as part of the final decision on the water general rate case.

An increase in revenues and water gross margins totaling $1.9 million for these surcharges was offset by an equal and corresponding increase in operating expenses, primarily in administrative and general expense, resulting in no impact to earnings for the three months ended September 30, 2017.

Please reference the appendix slide for reconciliation detail.

Adjusting for those items, revenue decreased by $300,000, as compared to the third quarter of last year, primarily from the facing [ph] of Golden State Water's Ojai operations, which you will recall was sold in this past June to result resolve the Eminent Domain Action and a decrease in ASUS in construction activity.

This was largely offset by increased management fees at ASUS as a result of successful resolution of price adjustments and asset transfer filings throughout 2016 and 2017. As well as the revenue generated from Eglin Air Force Base and increased the revenue CPUC approved second year of rate increases effective January 1, 2017 for the water segment.

Our water and electric supply costs were $27.2 million and $26.3 for the third quarter of 2017 and 2016 respectively, when you exclude the impact of this delay in water general rate case decision.

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

Looking at operating expenses, excluding supply cost and the adjustments previously discussed consolidated expenses decreased overall by $2 million for the quarter.

The decrease was mainly due to lower construction activity at ASUS as well as lower planned maintenance activity and lower in legal expenses related to confirmation activity for Golden State Water utility.

The decreases were partially offset by cost incurred at ASUS to operate the systems at Eglin Air Force Base and an increase in depreciation expense. Slide 9 shows the EPS bridge compared to the third quarter of 2017 with the third quarter of 2016.

Slide 10, this slide reflects our year-to-date earnings per share by segment including the impact of certain items we have previously discussed on this call and also from last quarter. For more details, please refer to yesterday's press release and Form 10-Q. I'll briefly discuss our liquidity on slide 11.

Net cash provided by operating activities for the nine months of 2017 increased to $120 million due in part to an increase in operating cash flow of Golden State Water due to various CPUC- approved surcharges implemented this year to recover previously incurred cost, as well as I said earlier our income tax refunds received in 2017.

We also saw an increase due to the timing associated with the billing off and cash received for construction work by ASUS in nine months ended September 30, 2017. Net cash used in investing activity was $44.9 million for the nine months ended September 30, 2017 as compared to $101.4 million for the same period in September '16.

Cash paid for capital expenditures during the nine months of '17 was partially offset by $34.3 million in pretax cash proceeds generated from the sale of Golden State Water and Ojai Waters business. As Bob mentioned earlier, we expect to invest $110 million to $120 million in capital projects at Golden State Water this year.

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.

In September 2017, Golden State's water segment implemented surcharges to recover the $9.9 million revenue short fall between actual rates billed through January 2016 through April 2017 and the new rates adopted in the delayed final decision on the water general rate case.

These surcharges will run from 12 to 36 months for Golden State Water's various water rate making areas. In July 2017, Golden State Water filed its water general rate case application, which will determine new water rates for the years 2019, 2020 and 2021.

Among the other things Golden State Water's requested capital budgets in this application average approximately $125 million per year for this three-year rate cycle. A decision from the CPUC in this general rate case is scheduled to be finalized in the fourth quarter of 2018.

In April of this year Golden State Water filed its water cost to capital application. 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 is scheduled to be received by the end of this year and become effective January 1, 2018. In May of this year we also filed our electric general rate case for rates effective 2018 through 2021. A final decision on this rate case is expected in 2018 with rates effective January 1, 2018. Let's move on to ASUS on Slide 13.

As I mentioned at the beginning of our call, ASUS was awarded a new 50-year contract by the U.S. government to provide services for the water distribution and waste water collection and treatment facilities at Fort Riley in Kansas.

The initial value of the contract is approximately $601 million over the 50-year period and is subject to annual economic price adjustments. As well as an adjustment based on the results of a joint inventory of assets to be performed.

ASUS will assume operations at Fort Riley following the completion of a six-to-twelve-month transition period currently underway.

While we don't expect a significant contribution from the new base in 2018, due to this transition period, we expect the contract to contribute $0.03 to $0.05 per share on an annualized basis beginning in 2019, the first full year of operations. ASUS began operations at Eglin Air Force Base in June of this year.

After the completion of the joint inventory study conducted with U.S. government, the Eglin contract is valued at approximately $702 million over the 50 year-term subject to annual economic price adjustments. We are currently involved in various stages of the proposal process at a number of other bases considering privatization.

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

Turning to ASUS's third quarter performance, our management fee revenues increased as a result of various successful price adjustments and asset transfer filings during 2016 and 2017, and the revenue generated from Eglin since commencing operations in June. We also continue to work closely with the U.S.

government for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases we served. During the first nine months of 2017 the U.S.

government awarded ASUS, $20.1 million in new construction projects, the majority of which are expected to be completed through 2018. We reached a successful resolution with the U.S. government on various filings for the bases we serve.

Economic price adjustment filings for Fort Jackson in South Carolina, Fort Bragg in North Carolina the three bases in Virginia and Andrews Air Force Base in Maryland, have all been finalized during 2017. And economic price adjustments filing for Fort Bliss in Texas and New Mexico was submitted to the U.S.

government during the third quarter of this year and is expected to be completed by year end. Completion of filings for these economic price adjustments requests for affordable adjustment as it transfers, and contract modifications awarded for new projects, provide ASUS for the additional revenues and dollar margin.

We believe ASUS is still on target to contribute between $0.34 and $0.38 per share for calendar 2017. In order to project for 2018, we will need to continue to evaluate the amount of capital work that we expect to complete, which includes discussions with their respective contracting officers and the Directorate of Public Works at the various bases.

Taking into account the $20.1 million in new construction projects awarded through September 30 of 2017, with more expected to be awarded in the fourth quarter as well as operating Eglin for a full year next year, we believe ASUS's earnings for 2018 will be in $0.37 to $0.41 per share range.

Finally, I'd like to turn our attention to the dividends outlined on Slide 14. We recently announced a dividend of $0.25 and $0.05 per share on the common shares of the company. If you recall, in August our board approved a 5.4% increase in the quarterly dividend.

The August 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 as well as the prospects for our future.

We believe that presently that prudently increasing dividends enhances our ability to attract capital in the future to fund necessary infrastructure investments in our utility operations. We are 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 a 11% for the five 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 63 consecutive years.

Given our earnings growth prospects there is room to grow the dividend in the future. I'd like to thank you for your interest in American States Water. And we'll now turn the call over to the operator for questions..

We will now take your questions. [Operator Instructions] At this time we have no questions. I would like to turn the conference back over to Bob Sprowls for any - pardon me, we do have somebody who entered the question queue. So, the first question comes from Richard Verdi with Ladenburg Thalmann. Please go ahead..

Hi, Bob and Eva, how are you guys doing?.

Good Richard..

Hi, Richard..

Nice to hear your voice..

Yeah, it's nice to hear your voices as well, thank you. I just have a couple of quick questions here. Bob, I want to be clear about something from your prepared remarks. You had mentioned there is about a six to 12 months operational transition at Riley, which - by the way congratulations on that.

I was wondering when we are thinking about modeling can we think that the price redeterminations would come two to three years after that six to 12 months transition or could it come - should we be thinking that part of that maybe that's three years could be represented by that six to 12 months transition..

Yeah, so within a new contract we get these days, they're on an economic price adjustment model, which is different than the price redeterminations model that we had gone through at many of the bases that we currently have..

Okay..

Under the economic price adjustment model that's annual increases through inflation, so we expect to get those annual increases without much delay. So, it won't be as difficult as it was in the - as going through the price redetermination process..

Okay, thank you. And then I had a question kind of on a high level here.

Looking back over let's say the past ten or fifteen years, either Bob or Eva, early on you guys were clearly the winner on the military base front and then we kind of went into a drought there and now all of a sudden, the company has announced a couple of contracts here the past 12 or 15 months.

Bob or Eva, maybe can one of you talk a little bit about why all of a sudden - what changed the American States for the, let's call it the heat up all of a sudden where you guys are winning contracts here..

Sure, I'd be happy to start. Eva, then you can chime in and add where needed. Well, we did have a little bit of drought there. We won a number of bases in - '04 we won one and in '06 we won three or four and then in '08 - late '07 we won two bases.

One of which was Fort Bragg and we have got a lot of bases all at once and we took a little bit of the time out to stimulate the bases that we had. And back during that time there was also difficulty getting price redeterminations done because this was new to the government as well as it was to us and, so it did take a while to get those results.

So, we get out of the bidding for a bit of the time, but Richard as you know these RFPs can - they can be out there for quite a long time and long as five years and, so we may have taken a little bit of a high risk there, but - then we got back into the bidding and we have been pretty aggressive on our bids and have been very successful, where we really won two contracts in the last couple of years.

Both of the contracts are I think the two largest contracts that have been given. So, we are trying to win the big bases. If we are going to win contracts we would like to win the big bases, but we would like to as many contracts that we can win.

Eva if you anything to add?.

That's pretty accurate Bob..

Okay, does that answer your question Richard?.

It does, thank you very much.

And then I was wondering Bob if maybe - you discussed the dividend over a bit and there is quite the opportunity with ASUS and I am wondering if you could maybe discuss just on a high level, how American States approaches the cash that is generated from ASUS and potentially allocating that towards the dividend in the sense of - it gives American States the opportunity to plough back more money into the regulated side and then still grow the dividend.

So, I am wondering if you could just talk a little bit about how American States approaches paying that dividend..

Sure, so with regard to ASUS it is not as cash intensive or capital intensive as the utility business is sort of on a per dollar of earnings. I mean there is certain working capital dollars that have to be committed because there are times when the government owes us money and schedule payment does take some time.

I'm not suggesting that there are ever late, it's just the payment schedule does take some time, so there is some working capital that has to be devoted to ASUS, but though not as capital intensive as the utility.

We tend to look at what a representative payout ratio might be for the companies with whom we compete, and we have been talking a bit lately about whether that group should be expanded to include natural gas companies and those electric companies that are highly regulated.

So, we look at what are representative payout ratio is and based upon that we determine how much we can grow the dividend, also based upon what our projected earnings are.

Now the last several years the ASUS business has paid for one quarter - one fourth of the annual dividend or one quarterly dividend, so we would expect that to continue going forward. That's fine more than we wanted, but hope I answered..

No, it's helpful. It's helpful, thank you and just a couple more questions. I don't mean to retardate you guys.

Can you just give us a sense of maybe what - I guess a better way to put is, what is the threshold from the credit rating agencies where ASUS would get to a point where it could damage your credit rating and is it on your top line or bottom line..

Yeah, so we've had a couple of discussions with the credit rating agencies over this non-regulated business ASUS and we believe at this point we have convinced them that it's no more riskier than the utility business.

It's taken some time because it's a complicated business and difficult to understand by outside parties, but there was concern because ASUS represents between 20% and 25% of the company's revenues and income.

That was also a large amount, but we believe we've got them over the hump on that and I think their hesitancy earlier on was that they just didn't have a good understanding of how the contracts worked and that was probably mostly our fault for not understanding what they were misunderstanding..

Okay and -.

I think if we can - I don't know what percent this is going to grow to overtime, it will - can ever see it being 50–50 because our utility business is growing at the same time the contracted service business is growing, but if it got to be 30% to 40%. I have no sense at the rating agencies will have a problem with that..

Okay, okay. Great thank you..

Eva's just done a lot of work in terms of getting them up to the curve and how these things work. Please go ahead Eva..

No, I concur with what you said Bob. Richard, we have a couple of calls with rating agencies because they are concerned, but I think at the end of the meetings, they were very comfortable about the business dealing with the federal government and no more risky than dealing with state agency that you see.

So, I think they have a very good confident level at this point..

Okay, great, great..

Let me go into this economic price adjustment model, so lot easier to get increases taken care of. So, it creates less volatility than what we were seeing historically and as you know rating agencies they do not like volatility. So, we haven't really had any push back, I would say in the last year from either of the two agencies..

That's great, okay. I think that's about it. Listen guys, I really appreciate. Thank you for the time..

Thank you, Richard..

Thank you, Richard. Nice talking to you..

Yeah..

[Operator Instructions] This concludes our Question-and-answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks..

Thank you, Rachael. And thank you all for your participation today and I look forward to speaking with you next quarter as does Eva..

Thank you..

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