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 5:00 P.M. Eastern Time and run through August 10th, 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. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, then two. 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-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 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, thank you for joining us today. I'll begin with some highlights for the quarter. Eva will then discuss some second quarter and year-to-date details, then I'll wrap it up with some updates on various regulatory filings, ASUS, and dividends. 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 million-$120 million of capital for the year, about three times our expected depreciation expense for the year. On June 8th, we completed the sale of our operating assets of Golden State Water's 2,900 connection Ojai Water System to resolve the eminent domain action and other litigation brought by Casitas Municipal Water District and Ojai Friends of Locally Owned Water. As a result, Golden State Water received $34.3 million in cash and recognized a pre-tax gain of approximately $8.3 million 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 third price redetermination for Fort Bragg in North Carolina, resulting in an increase in management fee revenue, including retroactive revenue. 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 three of the largest military installations in the U.S., 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 third quarter cash dividend. Our calendar year dividend has grown at a compound annual growth rate of 11% for the five 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 seven. Start with the earnings for the quarter, as reported, were $0.62 per share compared to $0.45 per share for the same period in 2016, 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. The sum of these items are shown on this slide as non-GAAP adjustments, which, if excluded from earnings, would have resulted in adjusted earnings per share of $0.49 for the second quarter of 2017 as compared to an adjusted earnings per share of $0.42 for the second quarter 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 in issuing a decision on the water general rate case. Due to the uncertainty of the outcome of the water general rate case at the time, the water gross margin recorded for the second quarter of 2016 reflected Golden State Water's position in the then-pending water GRC. The decision issued in December 2016 authorized 87% of our capital request and allowed 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 $5.2 million to the water gross margin in Q4 of last year related to the first three quarters of 2016.
Of this amount, $1.8 million related to the second quarter of 2016, which would have decreased revenues by approximately $900,000 and increased supply costs by $900,000 for the second quarter of last year. The second adjustment relates to Golden State Water's sales of its Ojai Water System. As Bob mentioned, the transaction generated a pre-tax gain of $8.3 million, or $0.13 per share during the second quarter of 2017. The proceeds received from this transaction were used to repay a portion of Golden State Water's short-term borrowing. The third adjustment relates to CPUC-approved surcharges implemented in April 2017 to recover previously incurred costs as part of the final decision on the water general rate case issued in March of 2017.
An increase in revenues and water gross margin totaling $1.3 million from these surcharges was offset by an equal and corresponding increase in operating expenses, primarily in G&A 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 second quarter of last year, largely from increased management fee at ASUS. In June 2017, the U.S. government approved the third price redetermination for BRAC, resulting in the recording of $1.6 million in management fees retroactive to March of 2016. These amounts included $1.3 million related to periods prior to the second quarter of 2016. Management fees also increased due to successful resolution of other price adjustments and asset transfer filings throughout 2016 and 2017, as well as revenue generated from Eglin since assuming operations in June.
Revenue also increased due to CPUC-approved second-year rate increases effective January 1, 2017, for the water segment. These increases were partially offset by the recognition in June 2016 of land revenue, which had previously been deferred in 2015, and the cessation of Ojai operations in June of 2017. Our water and electric supply costs were $22 million and $22.5 million for the second quarter of 2017 and 2016 respectively, when you exclude the impact of the delay in the water general rate 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 the adjustments previously discussed, consolidated expenses decreased overall by $2.3 million for the quarter.
The decrease was mainly due to lower legal fees and other outside service costs related to condemnation activity. There was also a decrease in construction costs at ASUS due to lower construction activity as well as improved cost efficiency. This was partially offset by costs incurred by ASUS for the Eglin Air Force Base transition activities and the joint inventory study with the U.S. government of Eglin water and wastewater infrastructure. ASUS received revenues to help cover some of the operation transition costs. Slide nine shows the EPS bridge comparing the second quarter of 2017 with the second quarter 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 first six months of 2017 increased to $75 million from $48.5 million, due in part to federal income tax refunds received in 2017, as well as CPUC-approved water rate increases and surcharges implemented during 2017. We also saw an increase in cash provided due to the timing of billing of and cash received for construction work by ASUS during the six months ended June 30, 2017. Net cash used in investing activity was $11.3 million for the six months ended June 30, 2017, as compared to $65.5 million for the same period last year. Cash paid for capital expenditure during the first half of 2017 were partially offset by $34.3 million in cash proceeds generated from the sale of Golden State Water's Ojai Water System.
As Bob mentioned earlier, we expect to invest $110 million-$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. 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 1st, 2017, and were implemented in April of this year. Last month, Golden State Water filed with the CPUC for recovery of $9.9 million 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 1st. The new rates and adopted supply costs are expected to increase the adopted water gross margin in 2017 by approximately $3.7 million as compared to 2016.
Last month, Golden State Water filed its water General Rate Case application, which will determine new water rates for the years 2019, 2020, and 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. 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 of 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 1st, 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 million 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's second quarter performance, our management fee revenues increased as a result of successful price redeterminations and other filings completed in 2016 and 2017, including the third 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 first six months of 2017, the U.S. government awarded ASUS $9.2 million in new construction projects, the majority of which are expected to be completed this year. This is in addition to the $24 million awarded in 2016 for new construction projects, the majority of which have or are expected to be completed during 2017. 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, and two of the three 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 third quarter 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 and $0.38 per share for 2017. I'd like to turn our attention to the 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 $0.255 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 five 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. 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 you. We will now take your questions. To ask a question, you may press star then one on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw your question, please press star then two. Our first question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Hi, Bob and Eva. How are y'all doing?
Very good, thank you.
Good, Jonathan. How about you?
Oh, not too bad. Getting towards the tail end of earnings season, there's a light at the end of the tunnel. It helps.
Okay.
Survived another one.
Yeah, right. Not yet, but close. 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.
Yeah, the $0.02 was for-
For Q1 in the prior year.
Yes, that's right.
We did back it out, Jonathan, because every year, we have this kind of retroactive revenue. Going forward, we'll probably have less if everything's on schedule.
Right. We're sort of migrating all of these contracts to economic price adjustment vehicles, 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. It's just the fact that you've had these in the past, you just didn't consider it one time in Q2, going forward, they should, I guess, be less frequent, it sounds like.
Yeah. If you do want to normalize, I think you can take it out, and we can talk about it because it's been ongoing. Every year we have similar expenses.
Okay. What is the revenue change? Sorry.
Yeah, just the process there is to substantiate all the inventory, 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. That's why we have it at some places, some bases, and other bases, we're still moving towards that.
Okay. Hey, what's the revenue change requested in the recently filed water GRC?
Compared to 2017, I would say it's about 10%, Jonathan.
What that.
It's really kind of I don't know how helpful that number is.
Yeah, the revenue.
because it's got supply costs and other things in it.
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.
Yeah.
That would be helpful.
Yeah, we have eight rate making areas. If you look at our water rate case application, which you can obtain from the PUC site, we list the revenue requirements and rate base for each of the rate making area. If we sum them up, the consolidated rate base for the water segment is $876 million for 2019, as filed, as compared to our 2017 adopted rate base of $717 million. Again, this is just for the water segment only. BCE has about $47 million of rate base.
Okay, you said $876 million is what you requested for average rate base in 2019.
Yes.
You have $717 million adopted in 2017 on the water side, then another $49 million for electric.
Point seven.
Oh, sorry. Okay, then-
The 876 is for water only.
Right.
Yeah.
Right.
Yeah, because we think the revenue impact by a lot of factors, supply costs, then we have a higher supply cost this time, too. Probably the rate base will be a better evaluation.
Yeah, no, I appreciate that. I didn't anticipate you'd give me the rate base number, thank you.
It's in our filing.
Right
I share the public information before I let it go.
Yeah, it sounds like a future slide for the deck, if you ask me.
We've heard you in the past, we are trying to make your job easier, Jonathan.
No, I do appreciate that. It's much appreciated. Remind us, Eva, what's the average annual CapEx that was approved in the 2016 GRC order?
I think we got approved of $250 for three years on rate.
Okay. Got you. Okay.
Yeah, about 85, 80. Yeah. That was about 87% what we requested.
Okay. You're looking for a pretty good step up in this one.
We hope so. We spent more than $110 million last year.
Yeah, $110, $115 last year.
We're proving now that we have a need to put capital under the ground.
Right. This year we're looking to do $110 million-$120 million. I guess the $110 million, $120 million includes electric, where the $110 million 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 ORA testimony in the cost of capital proceeding?
Well, we were kind of disappointed that they didn't agree with our request in the application. We're not surprised, of course, nor are we surprised by the difference between our two positions. I kind of want to remind you that in our last cost of capital application in 2011, ORA had recommended an ROE of 8.75%. We had requested about 275 basis points above that.
We were able to reach agreement with them and able to reach a settlement with ORA 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 9.3%. It's not unexpected, but it's something we're going to have to hopefully reach a settlement agreement on. If not, we'll do what we've 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 their adjustments that they're getting at?
Well, the equity was not a surprise, and we're a few hundred basis points apart on that. I would say that's not a bridge too far, I would say.
We're filing our rebuttal testimony in the next few weeks, I think, to rebut all the points ORA brought up.
Okay.
We'll see how that goes from there.
All right. I appreciate you guys taking my call today. Good luck hopefully being able to reach a settlement between you and the other water utilities and the ORA.
Yeah. Thank you, Jonathan.
Thank you.
Again, if you have a question, please press star then one. We will pause momentarily to assemble our roster. As we have no further questions, I would like to turn the conference back over to Mr. Robert Sprowls for any closing remarks.
Yeah, I just wanted to thank everyone for their participation today. I look forward to speaking with you all as ever 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 3rd, 2017 at about 5:00 P.M. Eastern Time and will run through the end of the day, Thursday, August 10th, 2017. Thank you for your participation. You may now disconnect.