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#Welcome, everyone, and thank you for joining us today.
I will begin with some highlights for the quarter.
<UNK> will then discuss some first 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.
As we look at the first few months of the year, we continued our capital investments, spending more at the regulated utility than the first quarter of last year.
In addition, the cost of capital proceeding was resolved.
Continued progress was made on the water and electric rate cases, and our A+ credit rating with stable outlook was affirmed by Standard & Poor's global ratings for both American States Water and Golden State Water despite the loss of bonus depreciation in the change in the tax law.
Looking ahead, we'll bring our 11th military base on board this year, continuing our strong execution from our contracted services business.
We are well positioned with both our regulated water and electric segments as well as our contracted services business and continue to focus on providing excellent, safe and reliable service to our customers.
For the quarter, our diluted earnings were $0.29 per share as compared to $0.34 per share for the same period last year due to a decrease in our water utility segment's earning.
Included in last year's results was a onetime $0.02 per share gain related to the CPUC's approval of incremental drought-related costs for the water segment.
Further impacting the comparability of the 2 periods were investment losses from market conditions in the first quarter of 2018 and a lower adopted rate of return at our water segment due to the CPUC's cost of capital decision issued in March of this year.
We expect the third year of water rate increases, while partially offset by the effect from the cost of capital decision, will still contribute to 2018's earnings.
Golden State Water Company, our utility subsidiary, continued to invest in the reliability of our water and electric systems.
We estimate our capital expenditures will be approximately $110 million to $120 million for the year, about 3x our expected annual depreciation expense.
ASUS continues to work with the U.S. government to transition operations of the water and wastewater systems at Fort Riley, a U.S. Army installation in Kansas awarded to ASUS in 2017.
We expect to begin operations at Fort Riley midyear, bringing the total number of military bases we serve to 11, including 4 of the largest military installations in the United States: Fort Bragg, Fort Bliss, Eglin Air Force Base and Fort Riley, as well as a very high-profile contract at joint base Andrews.
I'll now turn the call over to <UNK> to review the financial results for the quarter.
Thank you, Bob.
Hello, everyone.
I'll begin with an overview of our financial results on Slide 7.
Diluted earnings for the quarter were $0.29 per share compared to $0.32 per share for the same period in 2017, adjusting for the onetime recovery of drought-related costs of $0.02 per share from the first quarter of 2017.
Moving on to Slide 8.
The operating income for 2017 on this slide has, again, been adjusted for the recovery of drought-related items approved by the CPUC in Q1 of last year.
In addition, there were downward adjustments to revenue recorded for the first quarter of 2018 to reflect the CPUC March decision on the cost of capital as well as the effects of the tax reform.
We expect a lower adopted return on the cost of capital decision to reduce 2018 annual adopted revenue by approximately $3.6 million.
The tax reform lowered the federal corporate income tax rate from 35% to 21%.
Accordingly, consolidated revenues for the first 3 months of '18 were adjusted lower, with a corresponding decrease in income tax expense resulting in no material impact to our earnings.
We expect to return the tax savings to our utility customers through lower rates.
Despite the loss of Ojai water system in June of 2017, third year rate increases will add approximately $4.5 million to the 2018 full year adopted water gross margin, which were partially offset by the impact of the lower return.
Lower revenues also resulted from customers' reduced electric usage as well as lower construction activity at our Contracted Services segment.
Our Water and Electric supply costs were $19.5 million as compared to $18.4 million for the same period in '17.
Any changes in supply costs for both the Water and Electric segments as compared to the adopted supply costs are tracked in balancing accounts.
Looking at operating expenses.
Excluding supply costs and adjustments for 2017's recovery of drought-related items, consolidated expenses decreased overall by $458,000 for the quarter.
This was driven by a decrease in ASUS construction expense due to lower construction activity during the first quarter and the cessation of Ojai water operations in June of 2017.
We anticipate overall ASUS construction activity will increase during the remainder of the year and be higher than 2017.
These decreases were partially offset by an increase in water treatment costs, public water system fees and maintenance expenses.
Turning to Slide 9.
Let me provide a brief update on the tax reform impact.
The provision of this major tax reform were generally effective January 1, 2018, with the most significant being reduction to the federal corporate tax rate to 21% and the elimination of bonus depreciation for utilities.
As a result, the impact of the tax reform during the first quarter of 2018 resulted in lower revenue of $3.1 million at our regulated utility, reflecting amounts expected to be refunded to customers, primarily due to the reduction in the tax rate, which was offset by a decrease in income tax expenses.
Therefore, no impact to earnings.
Furthermore, property-related deferred tax liability, reduces Golden State Water's rate base.
Therefore, as new plants [in] placed in service, the lower federal corporate tax rate and the elimination of bonus depreciation are expected to increase rate base of earnings for the same level of expected capital expenditures.
This increase is expected to be partially offset by higher financing costs arising from a greater need [of] fund capital expenditures through the issuance of debt and/or equity due to lower cash flow from operating activity.
So we don't expect to have to issue equity in the near term.
Slide 10 shows the EPS bridge, comparing the first quarter of 2018 with the first quarter of last year.
I will briefly discuss our liquidity on Slide 11.
Net cash provided by operating activities for the first quarter of 2018 increased to $35.7 million due to the timing of cash receipts related to accounts receivable and other receivables, as well as an increase in cash received due to CPUC-approved rate increases and surcharges.
Cash flow used for investing activities were $30.2 million for 2018 as compared to $24 million for the same period in 2017.
As Bob mentioned earlier, we expect to invest $110 million to $120 million in capital projects at Golden State Water during 2018.
Over the next few weeks, we expect to renew our existing $150 million credit facility.
In addition, we have $40 million of senior notes, which become in ---+ become due in March of 2019.
We expect to issue additional long-term debt to repay the notes next year.
Again, at this time, we do not intend to issue additional equity.
With that, I'll turn the call back to Bob.
Thank you, <UNK>.
I'd like to provide an update on our recent regulatory activity.
In April 2017, Golden State Water filed its water cost of capital application with the CPUC.
In March 2018, the CPUC issued a final decision in the cost of capital proceeding for Golden State Water and 3 other investor-owned water utilities that serve California.
The final results were significantly improved from a very difficult proposed decision that was issued in early February of this year.
Among other things, the final decision adopts, for Golden State Water, a return on equity of 8.9%, a cost of debt of 6.6%, a capital structure with 57% equity and 43% debt, a return on rate base of 7.91% and a continuation of the water cost of capital adjustment mechanism.
Golden State Water's prior authorized cost of capital for its water segment included a return on equity of 9.43%, cost of debt is 6.99%, a capital structure of 55% equity and 45% debt and a return on rate base of 8.34%.
The lower return is expected to decrease Golden State Water's 2018 adopted annual revenue requirement by approximately $3.6 million or about $0.07 per share.
The final decision trued up Golden State Water's embedded debt costs, which are included in the authorized return on rate base of 7.91%.
The reduced debt costs contributed approximately 18 basis points to the 43 basis point drop in the authorized return on rate base from 8.34% to 7.91%.
We have pending general rate cases for both our water and electric segments with the CPUC.
Our water rate case, filed in July 2017, will set rates for the years 2019 through 2021.
We are currently engaging in settlement discussions with ORA on the water rate case, and I, of course, cannot share details of those discussions.
I can tell you that the start of hearings has been postponed from May 14 to May 21 to allow more time for settlement.
Our electric rate case, filed in May 2017, will set rates for years 2018 through 2021.
We are also engaging in settlement discussions with ORA on the electric rate case.
Hearings are scheduled to begin the last week of May for the electric case.
As a result of the Tax Act, in April of this year, Golden State Water filed revised revenue requirements and rate base for both of these pending general rate cases.
We are hopeful to have final decisions issued for both of these cases by year-end.
Let's move on to ASUS on Slide 13.
As I mentioned, ASUS continues to work with the government to transition the operations of Fort Riley and will start operating the base later this year.
The initial value of this contract is $601 million.
While we do not anticipate a significant contribution from the new base in 2018, 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 are also involved in various stages of the proposed ---+ 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 and expertise and experience in managing bases, we are well positioned to compete for these new contracts.
Turning to ASUS' first quarter performance.
Management fee revenues increased as a result of successful price adjustment filings completed last year as well as the revenues generated from Eglin Air Force Base upon the commencement of the operation of its water and wastewater systems in June 2017 and transition revenues for Fort Riley.
Our overall construction activity decreased this quarter compared to the first quarter of last year, largely due to timing.
But as <UNK> mentioned earlier, we anticipate overall construction activity for 2018 to be higher than 2017.
We affirm ASUS' earnings estimate for 2018 to be between $0.38 and $0.42 per share.
Finally, I'd like to turn our attention to dividends outlined on Slide 14.
On April 30, our Board of Directors approved a second quarter dividend of $0.255 per share on the common shares of the company.
The dividend reflects the 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.
Our calendar year dividend has grown at a compound annual growth rate of 9.4% for the 5 years ended 2017.
American States Water 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's 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.
Okay.
Be happy to.
We believe that, though our existing 50-year contracts do not specifically address changes in pricing resulting from the impact of the Tax Act and the change in the federal income tax rate, we believe the government will request an adjustment in pricing of the contracts that may be retroactive to January 1, 2018.
So it's a little bit of a wait-and-see approach, but we believe the government will be looking to make it retroactive to January 1, 2018.
And the impact to the first quarter was not material.
And <UNK>, the federal tax rate is still ---+ is now 21%, right.
And the state tax rate is still a reduction to the 21% when we calculate the federal tax rate.
Each state has a different state rate, so the blended rate may be impacted by each base's pretax income.
I don't know if that helps with your question.
Well, for the most part, <UNK>, we do not handle the ---+ actually, the water quality aspect of water that we deliver, the base will contract with an outside party for the water, and then we'll deliver the water through our pipes.
So this issue hasn't been a big issue for us that you brought up.
Are there opportunities for us.
Probably.
And we're always looking to do more construction work on the bases we serve.
So it's possible that this could be an area that we could delve into.
But right now, it hasn't been very high on our radar screen, to be honest.
Yes.
It's possible.
But we haven't seen this problem at this point.
So I don't know how big a mover it's going to be down the road.
Yes.
We expect them to put forth that approach.
Whether it completely turns out that way, it's really hard to say.
I mean, it will be a subject to negotiation.
But we do recognize the fact that, because we have a great desire to continue to expand that business that ---+ and they're the customer, that we'll have to work out something that works for both parties.
Yes.
I mean, there seems to be a desire by both parties to settle a lot of the issues, and the hearing dates have been pushed back a week.
And so we're working hard to work with ORA and trying to get as many things resolved as we can.
Well, I mean, it's ---+ we're working through that.
It's never done till it's done.
But you'll recall, in the last rate case, we did take the entire capital budget to hearings.
And we're not afraid to do that, of course.
It's just it does cost money whenever you do that, as you know.
Right.
We're optimistic we can get a final decision by year-end.
Well, yes.
As you suspected, I'm probably not going to tell you very much about that.
It's been very interesting.
I will tell you this, that our company's Board of Directors and the management team believe we have very good plans in place for the businesses that we operate, and we think we can generate substantial shareholder value just by continuing to execute our plans.
I think that's ---+ I probably should just stop there.
Thank you, Brian.
I just want to close by just, again, thanking everyone for their participation today.
And let you know I look ---+ <UNK> and I both look forward to speaking with you next quarter.
So thank you.
Thank you.
