Welcome to the American States Water Company Conference Call discussing the Company's Second 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 o'clock p. M. Eastern Time and run through August 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. All participants will be in listen only mode. Questions. Please note this event is being recorded and the call will be limited to an hour. Presenting today from American States Water Company are 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 ks 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 constitutes non GAAP financial measures under SEC rules. These non GAAP financial measures are derived from consolidated financial information that 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, Nicole. Welcome everyone and thank you for joining us today. I'll begin with some highlights for the quarter. Eva will then discuss some Q2 year to date details and then I'll wrap it up with some updates on various regulatory filings, ASUS and dividends, and then Eva and I will take your questions. I'm pleased to report another solid quarter of increased earnings in all three of our business segments as compared to the same period last year.
This is due to our hard work on regulatory and U. S. Government filings over the past year in conjunction with our focus on operational efficiencies. During the past few months, Golden State Water has filed its cost of capital application, electric general rate case and water general rate case with the California Public Utilities Commission or the CPUC. Our regulated utilities continue to invest in the reliability of our water and electric system.
We are on track to invest $110,000,000 to $120,000,000 of capital for the year, about 3x our expected depreciation expense for the year. On June 8, we completed the sale of our operating assets of Golden State Water's 2,900 Connection, Ohio Water System to resolve the eminent domain action and other litigation brought by Pacida's Municipal Water District and Ojai Friends of locally owned water. As a result, Golden State Water received $34,300,000 in cash and recognized a pre tax gain of approximately $8,300,000 or $0.13 per share. While we were not looking to sell this system, we are pleased with the terms of the settlement agreement, which enabled us to achieve a comprehensive resolution of this eminent domain action. Our contracted services business, American States Utility Services or ASUS had a very productive quarter.
In June, ASUS successfully resolved the 3rd price redetermination for Fort Bragg in North Carolina, resulting in an increase in management fee revenue, including retroactive revenues. ASUS also assumed the operation of the water and wastewater systems at Florida's Eglin Air Force Base under a 50 year contract with the U. S. Government. ASUS now provides water and or wastewater utility services to 10 military bases, including 3 of the largest military installations in the United States, Fort Bragg, Fort Bliss and Eglin Air Force Base, as well as one of the most high profile bases Andrews Air Force Base.
Yesterday, we announced a 5.4% increase in our 3rd quarter cash dividend. Our calendar year dividend has grown at a compound annual growth rate of 11% for the 5 years ended 2016. I will now turn the call over to Eva to review the financial results for the quarter.
Thank you, Bob, and good afternoon, everyone. An overview of our financial results is on Slide 7. Diluted earnings for the quarter as reported were $0.62 per share compared to $0.45 per share for the same period in 20 16, an increase of $0.17 I will discuss the major items that impacted our revenues and expenses, including certain items that affected the comparability of our quarterly results. Some of these items are shown on this slide as non GAAP adjustments, which is excluded from earnings would have resulted in adjusted earnings per share of $0.49 for the Q2 of 2017 as compared to an adjusted earnings per share of $0.42 for the Q2 of last year. I'll discuss the adjustments on the next slide.
The operating income on this slide reflects the following non GAAP adjustments. The first adjustment relates to California Public Utilities Commission's delay issuing a decision on the water generating. Due to the uncertainty of the outcome of the water generating at the time, the water gross margin recorded for the Q2 of 2016 reflected Golden State Water's position in the then pending water DRC. The decision issued in December 2016 authorized 87% of our capital request and allows only a portion of our executive incentive compensation program. When the decision was issued last December with new rates retroactive to January 1, 2016, we recorded a cumulative downward adjustment of $5,200,000 to the water gross margin in Q4 of last year related to the 1st 3 quarters of 2016.
Of this amount, dollars 1,800,000 related to the Q2 of 2016, which would have decreased revenues by approximately $900,000 and increased supply costs by $900,000 for the Q2 of last year. The second adjustment relates to Golden State Wireless sales of its Ojai Wallet system. As Bob mentioned, the transaction generated a pre tax gain of $8,300,000 or $0.13 per share during the Q2 of 2017. The proceeds received from this transaction were used to repay a portion of Golden State Water's short term following. The 3rd adjustment relates to CPG's approved surcharges implemented in April 2017 to recover previously incurred costs as part of the final decision on the water generating issued in March of 2017.
An increase in revenues and water gross margin totaling $1,300,000 from the surcharges was offset by an ECCO and corresponding increase in operating expenses, primarily in GE expenses, resulting in no impact to earnings for the quarter. Please reference the appendix slide for reconciliation detail. Adjusting for these items, revenue increased by $800,000 as compared to the Q2 of last year, largely from increased management fee at ASUS. In June 2017, the U. S.
Government approved the 3rd 5 determination for FRAX resulting in the recording of $1,600,000 in management fee retroactive to March of 2016. These amounts included $1,300,000 related to periods prior to the Q2 of 2016. Management fees also increased due to successful resolution of other price adjustments and asset transfer filings throughout 2016 2017 as well as revenue generated from Evolent since assuming operations in June. Revenue also increased due to CPUC improved 2nd year rate increases effective January 1, 2017 for the water segment. These increases were partially offset by the recognition in June 2016 of RAN revenue, which had previously been deferred in 2015 and the succession of OHAI operations in June of 2017.
Our water and electric supply costs were $22,000,000 $22,500,000 for the 2nd quarter of 2017 and 2016, respectively, when you exclude the impact of the delay in the water generate case decision. Any changes in supply costs for both the water and electric segments as compared to the adopted supply costs are tracked in balancing accounts, which will be recovered from or refunded to our customers in the future. Looking at operating expenses, excluding supply costs and adjustments previously discussed. Consolidated expenses decreased overall by $2,200,000 for the quarter. The decrease was mainly due to lower legal fees and other outside service costs related to contamination activities.
There was also a decrease in construction costs at ASUS due to lower construction activity as well as improved cost efficiencies. This was partially offset by costs incurred by ASUS for the ethylene air force base transition activities and the joint inventory study with the U. S. Government of excellent water and wastewater infrastructure. As U.
S. Received revenues to help cover some of the operation transition costs. Slide 9 shows the EPS bridge comparing the Q2 of 2017 with the Q2 of 2016. 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 1st 6 months of 2017 increased to $75,000,000 from $48,500,000 due in part to federal income tax refund we received in 2017 as well as the CUDA approved water rate increases and surcharges implemented during 2017. We also saw an increase in cash provided due to the timing of selling off and cash receipts for construction work by SUS during the 6 months ended June 30, 2017. Net cash used in investing activities was $11,300,000 for the 6 months ended June 30, 2017, as compared to $65,500,000 for the same period last year. Cash provided cash paid for capital expenditures during the first half of twenty seventeen were partially offset by $34,300,000 in cash proceeds generated from the sale of the State Water's Ohio Water system.
As Bob mentioned earlier, we expect to invest $110,000,000 to $120,000,000 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. Following a delayed decision from the CPUC received in December of last year to set water rates for 2016, the CPUC ordered Golden State Water to bypass implementing 2016 rates and to implement 2017 rates. The new 2017 rates were retroactive to January 1, 2017 and were implemented in April of this year. Last month, Golden State Water filed with the CPUC for recovery of $9,900,000 in revenue shortfall, representing the net differences between the actual rates billed from January 2016 through April 2017 and the new rates adopted in the final decision.
Surcharges to recover this revenue shortfall are expected to be effective September 1. The new rates and adopted supply costs are expected to increase the adopted water gross margin in 2017 by approximately $3,700,000 as compared to 2016. Also last month, Golden State Water filed its water general rate case application, which will determine new water rates for the years 2019, 2020 2021. Among other things, Golden State Water's requested capital budgets in this application average approximately $125,000,000 per year for the 3 year rate cycle. A decision from the CPUC in this general rate case is scheduled to be finalized in the Q4 of 2018.
In April of this year, Golden State Water filed its water cost 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.
Let's move on to ASUS on Slide 13. As I mentioned earlier, ASUS began operations at Eglin Air Force Base in June. The initial value of this contract is $510,000,000 over the 50 years, subject to inventory and annual economic price adjustment. We expect the contract to contribute $0.02 to $0.03 per share on an annualized basis. We are also 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' 2nd quarter performance, our management fee revenues increased as a result of successful price redeterminations and other filings completed in 2016 2017, including the 3rd price redetermination for Fort Bragg in June of this year. 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.
During the 1st 6 months of 2017, the U. S. Government awarded ASUS $9,200,000 in new construction projects, the majority of which are expected to be completed this year. This is in addition to the $24,000,000 awarded in 2016 for new construction projects, the majority of which have or are expected to be completed during 2017. We reached 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 and 2 of the 3 bases in Virginia have been finalized in 2017. Economic price adjustment filings for Andrews Air Force Base in Maryland and Fort Lee in Virginia are expected to be finalized during the Q3 of this year. Filings for these economic price adjustments requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and margin.
Based on these awards, as well as carryover amounts from the larger dollar awards in 2015 that are being performed in 2017, we continue to believe ASUS will contribute between $0.34 $0.38 per share for 2017. Finally, I'd like to turn our attention to dividends outlined on Slide 14. On Tuesday of this week, our Board of Directors approved a 5.4% increase in our quarterly dividend from $0.242 per share to $0.25 $0.05 per share on the common shares of the company. This is in addition to the 8% increase in the quarterly dividend approved in November of last year. 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 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 11% for the 5 years ended 2016. American States Water Company has paid dividends every year since 1931 and has increased the dividends paid to shareholders every calendar year for 63 consecutive years. And 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 I'll now turn the call back over to Nicole for questions. Thank
Our first question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Hi, Bob and Eva. How are you all doing?
Very good. Thank you.
Good, Jonathan. How about you?
Not too bad. Getting towards the tail end of earnings season, so that there's a light at the end of the tunnel, Sheldon.
Okay. Survived another one.
Yes, right. Not yet, but close. So Bob, what period did the $0.02 retroactive component of the Fort Bragg price redetermination cover? I noticed you didn't back that out of ongoing EPS for Q2.
Yes.
So the $0.02 was for For Q1 and the prior year.
Yes, right.
We didn't back it out, Johnson, because every year we have this kind of retroactive revenue. Going forward, we'll probably have less if everything is on schedule.
Right. We're sort of migrating all of these contracts to economic price adjustment vehicles. And so likely that we won't have a lot of delay there given those are quite a bit easier to sort of get through the process on.
Okay. Okay. So it's just the fact that you had these in the past, you just didn't consider it one time in Q2, but going forward, they should kind of, I guess, be less frequent, it sounds like.
Yes. And if you want to normalize that, then you can figure out. We can talk about it because it's been ongoing. Every year, we have similar expenses.
Okay. What is the revenue change sorry?
Yes. Just the process there is to substantiate all the inventory. And if we're comfortable that we're getting credit for all the inventory, we will not until we're comfortable that we're getting credit for all the inventory will we migrate to the economic price adjustment model. But that's why we have it at some places, some of the bases and other bases, but we're still moving towards that.
Okay. Okay. And hey, what's the revenue change requested in the recently filed water GRC?
Compared to 2017, I would say it's about 10%, Jonathan.
And what's that on?
It's really kind of a
I don't know how helpful that number is because it's
got supply cost and other things there.
But it's a 10% increase?
In terms of revenue. But I think that probably the rate base will be a better benchmark for you.
Right. We can give you what the requested rate base is.
Yes. And we have a rate making area. So if you look at our water rate case application, which you can obtain from the PUC side and we listed revenue requirements and rate base for each of the rate making areas. So if we sum them up and the consolidated rate base for the water segment is $876,000,000 for 2019 as filed as compared to our 2017 adopted rate base of $7.17 million Again, this is just for the water segment only. BBE has about $47,000,000 of rate base.
Okay. So you said $876,000,000 is what you requested for average rate base in 2019. You have $7.17 adopted in 2017 on the water side and then another $49,000,000 for electric?
$47,000,000 Sorry.
Okay.
The 876 is for water only. Right.
Right.
Yes, because we think the revenue impact by a lot of factors, supply costs and that we'll have a higher supply costs this time too. So probably the rate base will be a better result.
Yes, I appreciate that. I didn't anticipate you give me the rate base number, so thank you.
It's in our filing, so I kind of Right. Sharing the public information before I let it go.
Yes. It sounds like a future slide for the deck Yasmeen.
And then We've heard you in the past, and so we are trying to make your job easier, John.
No, I do appreciate that. It's much appreciated. So remind us, Eva, what's the average annual CapEx that was approved in the 2016 GRC order?
I think we got approved of $250,000,000 for 3 year timeframe. Okay.
Got you. That
was about 87% of what we requested.
Okay. So you're looking for a pretty good step up in this one?
We hope so. We spent more $110,000,000 last year.
Yes, dollars 110,000,000 115 dollars last year. So we're proving now that we have
a need to put capital under the ground. Right.
And then this year, we're looking to do $110,000,000 to $120,000,000 I guess $110,000,000 to $120,000,000 includes electric, where the 110 last year was just the water side.
Yes. Okay. And then last, and I'll let somebody else go. What are your thoughts on the RA test of, I mean, the cost of capital proceeding?
Well,
we're kind of disappointed that they didn't agree with our request in the application, but we're not surprised, of course, nor are we surprised by the difference between our two physicians. Kind of remind you that in our last cost of capital application in 2011, ORA had recommended an ROE of 8.7 5%, and we had requested about 2 75 basis points above that. And we were able to reach agreement with them and able to reach a settlement with the RA to get to 9.99% in that case, which as you know, the adjustment mechanism then triggered a year or so later and brought that down to 9.43%. So it's not unexpected, but it's something we're going to have to hopefully, we can reach a settlement agreement on. If not, we're we got to do to litigate this thing.
Besides the ROE, I mean, equity structure and cost of debt, those items, are those kind of concerning? Or you get kind of their adjustments that they're at?
Well, the equity was not a surprise and we're a few hundred basis points apart on that. So I would say that's not a bridge too far, I would
say. And we're fighting our rebuttal testimony in the next few weeks to reflect all the points for April adoption.
Okay.
We'll see how that goes from there.
All right. I appreciate you taking my call today and good luck hopefully being able to reach a settlement between you and the other water utilities in the ORA.
Thank you,
As we have no further questions, I would like to turn the conference back over to Mr. Bob Sprowls for any closing remarks.
Yes. I just wanted to thank everyone for their participation today, and I look forward to speaking with you all at Ziva next quarter. Thank you.
This concludes today's American States Water Company conference call. As a reminder, this call will be archived on our website beginning Thursday, August 3, 2017, at about 5 o'clock p. M. Eastern Time and will run through the end of the day, Thursday, August 10, 2017. Thank you for your participation.
You may now disconnect.