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

Richard Verdi - Atwater Thornton Jonathan Reeder - Wells Fargo.

Welcome to the American States Water Company Conference Call discussing the Company’s Second Quarter 2018 Results. This call is being recorded. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 5:00 PM Eastern Time and run through August 14, 2018, on the company’s website, www.aswater.com.

The slides that the company will be referring to are also available on the website. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Today’s 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 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 United States and constitute non-GAAP financial measures under SEC rules.

These non-GAAP financial measures are derived from consolidating 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 conference call over to Bob Sprowls, President and Chief Executive Officer of American States Water Company..

Thank you, Jamie. Welcome, everyone, and thank you for joining us today. I will begin with some recent highlights. Eva will then discuss some second quarter details, and then I’ll wrap it up with some updates on various regulatory filings, ASUS and dividends. And then we’ll take your questions.

A regulated utility subsidiary, Golden State Water Company, continue to invest in the reliability of our water and electric systems. We are on track to invest approximately $110 million to $120 million of capital in 2018, about 3x our expected depreciation expense for the year.

On the regulatory front, Golden State Water Company and the Office of Ratepayer Advocates or ORA have reached a tentative settlement, which resolves all issues in our pending water general rate case, which was set rates for the years 2019 through 2021. A settlement conference with all parties in the rate case has been scheduled for August 14.

We are pleased with the progress on this important rate cases.

As previously announced, on July 1st of this year, our contracted service of subsidiary, American States Utility Services or ASUS, assume the operation maintenance and construction management of the water distribution and waste water collection and treatment facilities at Fort Riley and Kansas under a 50-year contract with the U.S. Government.

ASUS now provide services for water and our waste water systems and treatment plans 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.

In addition, last week, our Board of Directors approved a 7.8% increase in the company's third quarter cash dividend. Our long history of dividend increases is something we're very proud of. And this recent sizable increase, yet again, shows our commitment to shareholders.

Our calendar dividend has grown at a compound annual growth rate of 7.5% for the five years ended 2017. For the quarter, our diluted earnings were $0.44 per share as compared to $0.47 per share for the same period last year.

When excluding from 2017, a one-time gain of $0.13 per share on the sale of the Ojai water system and retroactive revenues of $1.2 million or $0.02 per share at ASUS related to periods prior to the second quarter of 2017. The decrease of $0.03 per share was mostly due to lower ASUS construction revenue.

ASUS expects overall construction revenue to increase during the remainder of 2018 as compared to the first half of 2018.

The projected higher construction revenues in the second half of the year and the commencement of operations at Eglin Air Force Base in June 2017, and Fort Riley last month, we still expect ASUS to contribute between $0.38 and $0.42 per share this year.

Golden State Water's earnings were flat for the quarter compared to last year, despite a lower authorized rate of return resulting from the cost of capital decision and the cessation of the Ojai system operations.

Golden State Water remains focused on expense control and its operating costs remain flat for the second quarter of 2018 compared to last year. I'll now turn the call over to Eva to review the detailed financial results for the quarter..

Thank you, Bob. An overview of our financial results for the second quarter is presented on Slide 8. As Bob mentioned, included in the second quarter of 2017 results or the $0.13 per share one-time gain on sale of the Ojai system, and retroactive revenue of $0.02 per share at ASUS associated with period prior to the second quarter of 2017.

Excluding these two items, consolidated earnings for the quarter was $0.44 compared to $0.47 per share for the same period of 2017. The operating income on this slide has been adjusted for the Ojai gain and retroactive revenue at ASUS.

Quarterly revenues decreased by $5 million, partially due to downward adjustments to revenues recorded for the second quarter of 2018, to reflect the effect of the tax act, and a decrease in bill surcharges.

Both of these items resulted in no material impact to earnings, the tax act lowered federal corporate income tax rate from 35% to 21%, effective January of 2018. Accordingly, water and electric revenue for the quarter were adjusted lower with a corresponding decrease in income tax expense.

The decrease in surcharges related to the exploration of various surcharges implemented during 2017. Surcharge revenues are offset by a corresponding increase in operating expenses and, as I mentioned, had no impact to earnings. Revenues for the quarter were further lowered due to the CPUC's cost of capital decision issued in March of this year.

We expected the lower authorized rate of return for the water utility segment from this decision to reduce full year 2018 adopted revenue by approximately $3.6 million. The decrease in revenues was also due to lower construction revenue at this contracted services segment between the two quarters.

However, looking ahead, as you had expected construction revenue for the second half of 2018 to be higher than the first half of this year, enabling us to achieve our projected targets.

These decreases were partially offset by the third year CPUC approved rate increases effective January 1, 2018, as well as an increase in management fee revenue resulting largely from Eglin Air Force Base, which will begin operating in June of 2017.

Our water and electric supply costs were at $23.7 million and $22 million both the second quarters of 2018 and 2017, respectively. Any changes in supply costs as compared to adopted supply costs are tracking balancing accounts for both the water and electric segments.

Looking at operating expense, excluding supply costs and surcharges, consolidated expenses increased overall by $1.6 million for the quarter. The increase was due to increased administrative and general costs, including costs for Eglin Air Force Base and Fort Riley, which ASUS begin operating on June 15, last year and July 1 of 2018 respectively.

There was also an increase in depreciation expense at ASUS due to capital expenditures. These increases were partially offset by lower expenses resulting from the cessation of Ohio operations in June of last year. Slide 10, shows the EPS bridge comparing the second quarter of '18 with the second quarter of 2017.

This slide reflects our year-to-date earnings per share by segment. For more details, please refer to yesterday's press release and Form 10-Q. I will briefly discuss our liquidity on Slide 12.

Net cash provided by operating activities for the first 6 months of 2018, decreased to $65 million from $75 million last year, due in part to state income tax refunds received in last year, and the expiration of various surcharges implemented in June 2017.

We also saw a decrease due to the timing of billing and cash received for construction work by ASUS during the 6 months ended June 30, 2018. Net cash used in investing activity was $58.7 million for the 6 months ended June 30, 2018, as compared to $45.7 million for the same period in '17, excluding the proceeds from the Ojai sale.

Cash invested in capital expenditure and other investing activity was higher during the first 6 months of '18 as compared to 2017. And as Bob mentioned earlier, we expect to invest $110 million to $120 million in capital projects at the Golden State Water this year.

We've recently renewed our $150 million credit facility at American States Water Company, which now expires in May of 2023. At the end of the second quarter, they were $77 million in borrowings and approximately $900,000 of letter of credit outstanding under this facility.

The amounts are contractually due in May of 2023 under the terms of the credit facility, and are generally priced of a spread to LIBOR. We also have an option to increase the borrowings capacity to facility by additional $50 million if needed.

AWR borrows under this facility and provides funds to Golden State Water and ASUS in support of their operation. Golden State Water has $40 million of senior notes, which become due in March.

We intended to utilize our intercompany borrowing arrangement and/or issue additional long-term debt at the Golden State Water, to repay these senior notes next year. At this time, we do not expect American States Water to issue additional equity. 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. As you recall, we have pending general rate cases for both our water and electric segments with the California Public Utilities Commission or CPUC. Our water rate case filed in July 2017 will set rates for the years 2019 through 2021.

Among other things, Golden State Water’s requested capital budgets in this application, average approximately $125 million per year for the three year rate cycle. Golden State Water and ORA have reached a tentative settlement, which results all issues in the water general rate case.

The settlement conference with all parties and the rate case has been scheduled for August 14th. Our electric rate case filed in May 2017, will set rates for years 2018 through 2021. Once the CPUC issues a final decision on this rate case, new rates will be retroactive to January 1, 2018.

As a result of the Tax Act inactive last December, earlier this year, we filed revised revenue requirement and rate base amount for both of these pending general rate cases. On July 1st, we implemented lower water rates to our customers to reflect the lower corporate income tax rate. Let’s move on to ASUS on Slide 14.

As I mentioned earlier, we began operating at Fort Riley on July 1st of this year. Although, we will only have 6 months worth of operations at Fort Riley for fiscal 2018, we expect Fort Riley to have a positive contribution to ASUS since 2018 earnings.

In addition, 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. We’re also involved in various stages of the proposal process at a number of 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 and our expertise and experience in managing bases, we are well positioned to compete for these new contracts.

Filings for economic price adjustments, request for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and margin. During 2018, ASUS has been awarded $14.3 million in new construction projects, the majority of which are expected to be completed during 2018.

We expect to be awarded additional new construction projects during the remainder of 2018. Turning to ASUS' second quarter performance, our overall construction revenue decreased this quarter compared to the second quarter of last year, largely due to timing.

And as we mentioned earlier, we anticipate construction revenue to accelerate during the second half of 2018, and be higher than the first half of this year. In addition, Fort Riley will contribute to earnings going forward. As a result, we reaffirm the estimate given on ASUS' 2018 earnings contribution, up $0.38 to $0.42 per share.

Finally, I'll discuss dividends in more detail as outlined on Slide 15. Our Board of Directors recently approved a 7.8% increase in the third quarter dividend from $0.255 to $0.275 per share on AWR's common shares.

American States Water company had to paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 64 consecutive years, which places us in an exclusive group of companies on the New York Stock Exchange that have achieve that result.

The company's current dividend policy is to achieve a five-year compound annual growth rate in the dividend of more than 6% over the long-term. The increase in our quarterly dividend reflects our Board's confidence in sustainability of the company's earnings at both our Golden State Water and ASUS subsidiaries as well as the prospects for our future.

A strong and increasing dividend allows the company to continue attracting capital, to make necessary investments in the systems for the communities and military bases that we serve. I would like to thank you for your interest in American States Water. And we'll now turn the call over to the operator for questions..

[Operator Instructions] Our first question today comes from Richard Verdi from Atwater Thornton. Please go ahead..

I was wondering on the ASUS construction activity that should pick up in the second half.

I was hoping you could share with us how we should expect that to be waited for both quarters and what the reasoning would be for that waiting?.

Yes, so really hard to say how it's going to turn out. But I would say it's -- we probably see a lot of construction in the third quarter and maybe a little less construction in fourth quarter..

Okay.

And what could drive it one way the other way would it be weather conditions or…?.

Right. It's the weather conditions in the fourth quarter, towards the end of the year gets a little tougher to do that construction..

Okay.

And let's say, Bob, that weather conditions were a little bit challenging in that quarter, could it -- would they then -- would it be -- could it slide down into Q1? Or is there a tight constraint that you'll almost be going in Q4?.

I would expect it all to get done in the last two quarters of the year. And I don't expect it to slide into the first quarter..

Perfect. Okay. Thank you for that. And then I have a quick question that I asked American Water last week on their call. And they provided a very favorable remark that was very supportive of our estimates. I mean, the question pertains to the ASUS unit.

You saw in the initiation, I'm sure, by our estimates, the military contracted services is a larger opportunity and there should be a number of awards announced between this year and 2024, 2025. And American Water verified that expectation. And they see potential for three award announcements this year with five more in the pipeline.

So I was wondering if American States could be seeing something similar in the near to eat immediate term?.

Yes, I mean, we -- as you know, we're -- us an American aren't sort of leading competitors in the industry, and we can, we're agreeing with their assessment of what the market to hold. Now we do go after somewhat smaller basis from time-to-time along with the larger basis. So we believe there could be as many as five bases award before year-end.

But again, I think, the difference between sort of our perspective and theirs there is there a couple of couple of military, smaller military bases that could get awarded that maybe is not on their radar screen..

Sure. Now, I understand. I just wanted to get a broad picture and that was excellent color. Thank you very much for the time. I appreciate it. And thank you very much again. That's it. Bye, bye.

Thank you, Richard..

[Operator Instructions] Our next question comes from Jonathan Reeder from Wells Fargo. Please go ahead with your question..

Hey, Bob and Eva, hope you all are doing well. Good job on the prepared remarks. I appreciate the improved format this quarter versus some others..

Hey, welcome, Jonathan..

Yes, appreciate you recognized that..

No, it was good. You cited up a little bit and it went on great with the slides. So good job. Keep it up there.

But just wondering, Bob, are there any additional details regarding your settlement with the ORA that you can share, in particular how does the agreed upon CapEx level compared to your $125 million request?.

Right. We’re not at liberty to share that at this point. But like we mentioned in the prepared remarks, in approximately a week, hopefully will be filing the settlement.

I think soon after the settlement conference, the plan is for us and at least ORA to sign the settlement document and then file it with the commission and then we would put out our press release at that point giving you the details..

Okay.

So you do plan on putting out a press release once it’s been signed and delivered and, hopefully get a few other parties onboard as a result of that conference?.

That’s right. We have three small cities that are parties to the case. So it’s just sort of the five parties. So hopefully, we will either that's ORA will file the settlements possible the other three parties could join the settlement agreement..

Okay. So that was my other question.

So the other parties to the case beside ORA are just those three other cities turn or somebody else is not involved?.

No. It’s just the cities of Carson, Lakewood and Lawndale. TURN is not part of this proceeding..

Well, good luck with the settlement conference. Hopefully that goes well.

Just wondering what are the -- in the prospects you think for getting the final decision on the water GRC by year-end? How does kind of remainder of the procedural schedule line up with getting?.

Well, it's possible. I think the fact that we would have a settlement before between us and ORA helps us get to the end zone here by year-end. But it’s hard to predict whether the PUC can move it along that fast. It shouldn’t be a problem, but it always sort of function of what other things they’ve got going on. And they're a very busy agency..

Yes.

Because suffice to say, I guess from capital planning perspective and all that, I mean, this one, assuming, you have that full comprehensive settlement agreement should get approved faster than maybe to your more recent cases that kind of dragged on and allowed you to kind of plan both capital and expense levels, appropriately in '19 and beyond?.

I mean, I think, that’s the conventional wisdom, Jonathan. It should move more quickly. As you recall in our last case, we went to hearings on our entire capital budget. And so that was more difficult toward get done by the scheduled timeframe..

Okay. All right. Well, thanks for the update today, and good luck. Look forward to that press release coming up in a week or so..

Ladies and gentlemen, at this time, I’m showing no additional questions. I’d like to turn the conference call back over to management for any closing remarks..

Thank you, Jamie. I just want to wrap it up today by thanking you all for your participation. And we look forward to speaking with you next quarter. Thank you..

Ladies and gentlemen, that does conclude today’s conference call. We do thank you for attending. You may now disconnect your lines..