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Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's third quarter 2018 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 p.m. Eastern Time and run through November 13, 2018 on the company's website, www.aswater.com. The slides that the company will be referring to are also available on the website. [Operator Instructions]. This call will be limited to 1 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 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.
Thank you, Sean. Welcome, everyone, and thank you for joining us today. I'll begin with some recent highlights. Eva will then discuss some third quarter details, and then I'll wrap it up with some updates on various regulatory filings, our contracted services business, American States Utility Services, and dividends. And then we'll take your questions.
As a result of our continued investment in our utility businesses as well as growth from our new and existing military bases, the company's earnings increased by $0.05 per share over the third quarter of last year, an increase of 8.8%. Our 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 California Public Utilities Commission's Public Advocates Office, formerly named the Office of Ratepayer Advocates, filed a joint motion to adopt a settlement in August, which resolves all issues in our pending water general rate case, which will set rates for the years 2019 through 2021 and authorizes Golden State Water to invest $334.5 million in capital infrastructure over that same period. I will discuss the settlement in more detail later in the call. We are pleased with the progress on this important rate case.
We have also reached a tentative settlement agreement with the Public Advocates Office on the electric general rate case, which set rates for the years 2018 through 2021. A settlement conference with all parties in the rate case is scheduled for this month. Among other things, the tentative settlement authorizes a new return on equity for Golden State Water's electric segment of 9.6%. When a final decision is approved, the new electric rates will be retroactive to January 1, 2018. Of course, both of these settlement agreements have to be approved by the California Public Utilities Commission, or CPUC.
On July 1 of this year, our contracted services subsidiary, American States Utility Services, or ASUS, assumed the operation maintenance and construction management of the water distribution and wastewater collection and treatment facilities at Fort Riley under a 50-year contract with the U.S. government. ASUS now provides services for water and/or wastewater systems and treatment plants 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.
For the quarter, our diluted earnings were $0.62 per share as compared to $0.57 per share for the same period last year. The increase was due to an increased water gross margin and a lower effective income tax rate at our water segment as well as increased revenues at ASUS due to the commencement of operations at Eglin Air Force Base and Fort Riley. These increases were partially offset by no revenue increases received at our electric segment due to the delays in finalizing the electric general rate case and higher operating expenses incurred on a company-wide basis.
I will now turn the call over to Eva to review the financial results for the quarter.
Thank you, Bob. An overview of our financial results for the third quarter is presented on Slide 8. As Bob mentioned, diluted earnings for the quarter were $0.62 per share compared to $0.57 per share for the same period in 2017. I will discuss in the next slide the major items that impacted our revenues and expenses, including certain items that affect the comparability of our quarterly results.
Consolidated revenues decreased slightly, largely due to downward adjustments to water revenues and, to a lesser extent, electric revenue, with corresponding decreases in income tax expense for the third quarter of 2018 to reflect the effect of the tax reform. There was also a decrease in revenues related to various surcharges to recover previously incurred costs that were implemented in 2017, which expired during 2018. Both of these items resulted in no material impact to earnings. Surcharge revenues to recover previously incurred costs are offset by a corresponding amount in operating expenses and have no impact to earnings.
Revenue for the quarters were further lowered due to the CPUC's cost of capital decision issued in March of this year. We expect that the lower authorized rate of return for the water utility segment from this decision to reduce full year 2018 adopted revenues by approximately $3.6 million. These decreases were partially offset by the third year CPUC-approved rate increases effective January of 2018.
Because of the delay in the electric general rate case, year-to-date 2018 billed electric revenue has been based on 2017 adopted rate, pending a final CPUC decision on the rate case. When approved, revenue and certain operating expenses will be retroactive to 2018. The revenue decreases at water and electric segments were largely offset by an increase in revenues at the contracted services segment between the 2 quarters. The increase was mostly due to the commencement of operations at Eglin Air Force Base in June of 2017 and Fort Riley in July 2018.
Our water and electric supply costs were $28.5 million and $27.2 million for the third quarters of 2018 and 2017, respectively. Any changes in supply costs as compared to the adopted supply costs are tracked in balancing accounts for both the water and electric segments.
Looking at operating expenses. Excluding supply costs and surcharges, consolidated expenses increased overall by $5.1 million for the quarter. The increase was due to increased operating expenses at ASUS as a result of the commencement of operations at Eglin Air Force Base and Fort Riley. Administrative and general expenses for the utilities also increased due primarily to employee-related benefit expenses.
Slide 10 shows the EPS bridge comparing the third quarter of 2018 with the third 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. As a reminder, an adjusted -- on an adjusted basis, consolidated earnings were $0.01 per share below last year.
I will briefly discuss our liquidity on Slide 12. Net cash provided by operating activities for the first 9 months of 2018 decreased to $108.4 million from $120.2 million last year, due in large part to significant differences in the timing of income tax payments made and refunds received between the 2 periods as well as a decrease due to the timing of billings of and cash receipts for construction work at ASUS in 2018. These decreases were partially offset by an overall increase in cash collected from customers related to Golden State Water's regulatory account.
Net cash used in investing activity was $88.8 million for the 9 months ended September 30, 2018 compared to $79.2 million for the same period last year, excluding the proceeds from the Ojai sale. Cash invested in capital expenditures and other investing activities was higher during the first 9 months of 2018. And as Bob mentioned earlier, we are on target to invest $110 million to $120 million in capital projects at Golden State Water this year. Golden State Water has a $40 million note, which becomes due in March. We intend to utilize our intercompany borrowing arrangement and/or issue additional long-term debt to repay this note 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. Regarding the water general rate case, the settlement with the Public Advocates Office resolves all the issues in the general rate case application and authorized Golden State Water to invest $334.5 million in capital infrastructure over the 3-year rate cycle. This includes $20.4 million of capital projects to be filed for revenue recovery through advice letters when those projects are completed. Excluding the advice letter project revenues, the water gross margin for 2019 in the settlement filing is expected to increase by approximately $6 million as compared to the 2018 adopted water gross margin. However, the 2019 water revenue requirement in gross margin, as settled, have been reduced for a decrease of approximately $7 million in depreciation expense compared to the adopted 2018 depreciation expense due to a reduction in the overall composite depreciation rates based on a revised study filed in the general rate case. The decrease in depreciation expense, as settled, lowers the water gross margin and is offset by a corresponding decrease in depreciation expense, resulting in no impact to net earnings.
In addition, the 2019 water revenue requirement, as settled, includes a decrease of approximately $2.2 million for excess deferred tax refunds as a result of tax reform, which has a corresponding decrease in income tax expense and also results in no impact to earnings. Ad depreciation expense, as settled, remained the same as the 2018 adopted amount, and there were no excess deferred tax refunds that lowered the 2019 revenue requirement. The settled water gross margin for 2019 would have increased by approximately $15.2 million. The settlement, as filed, also allows for potential additional water revenue increases in 2020 and 2021 of approximately $10 million and $12 million, respectively, subject to the results of an earnings test and changes to the forecasted inflationary index values. We expect the CPUC to issue a proposed decision for this general rate case during the fourth quarter of this year. When approved, the new water rates will become effective January 1, 2019.
Our electric rate case was filed in May 2017 to set rates for years 2018 through 2021. Golden State Water and the Public Advocates Office have reached a tentative settlement, which resolves all revenue requirement issues in this general rate case. A settlement conference with all parties in the rate case is scheduled for this month. We will issue a press release providing the major terms of the agreement once the settlement is filed with the CPUC. Among other things, the tentative settlement incorporates a previous stipulation in the rate case, which authorizes a new return on equity for Golden State Water's electric segment of 9.6%. Golden State Water's prior authorized return on equity for its electric segment was 9.95%. The stipulation also establishes a capital structure and debt cost similar to those approved by the CPUC in March 2018 for the water segment. When a final decision is approved, the new electric rates will be retroactive to January 1, 2018. It is possible, but unlikely, that the CPUC will issue decisions inconsistent with the filed joint settlement in the water rate case and the tentative settlement agreement in the electric rate case.
Let's move on to ASUS on Slide 14. Contracted services earnings for the third quarter were $0.03 per share, higher than the same period in 2017, largely due to the results at Eglin Air Force Base and Fort Riley, which we began operating in June of 2017 and July of 2018, respectively. We believe ASUS is still on target to contribute between $0.38 and $0.42 per share for 2018. In order to project for 2019, we will need to continue to evaluate the amount of capital work that we expect to complete, which includes discussions with the respective contracting officers and the directorate of public works at the various bases. ASUS has been awarded approximately $23 million of new construction projects so far during this year. Some of these projects have been or are expected to be completed in 2018, with the remainder to be completed in 2019.
Taking into account the new construction projects awarded so far, with more expected to be awarded in the fourth quarter as well as operating Fort Riley for a full year next year, we believe ASUS' contribution to earnings for 2019 will be in the $0.43 to $0.47 per share range. We continue to be involved in various stages of the proposal process at a number of other military 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're well positioned to compete for these new contracts.
Last week, our Board of Directors approved a fourth quarter dividend of $0.275 per share on the common shares of the company. American States Water Company has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 64 consecutive years, which places the company in an exclusive group of companies on the New York Stock Exchange that have achieved that result. The current -- the company's current dividend policy is to achieve a 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 the 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'd like to thank you for your interest in American States Water Company, and we'll now turn the call over to the operator for questions.
[Operator Instructions]. Our first question comes from Durgesh Chopra with Evercore.
First question, just a clarification on that $0.43 to $0.47 earnings contribution in 2019. Is there an assumption of any new bases or that's just based on what you have currently locked and loaded?
It's just currently what we have locked and loaded. As you know, there is generally a 9-month transition period after a company is awarded a new base. So to a degree, we would get a new base between now and year-end. We may see a little bit of earnings in 2019, but it wouldn't be much.
Got it. Okay. And then the $23 million, how does that compare to maybe 2017 or 2016? I'm just trying to get a sense of whether that is the normal level of construction expenditure in your existing assets or that is -- basically, I'm just trying to get a sense of how should I think about what's normal going forward in your existing bases.
Sure. We do expect additional awards of -- additional construction dollars before year-end. But the $23 million is a little bit higher than what we received last year. I believe we had $21 million, if I'm not mistaken?
Right, for the whole year.
For the whole year, for all of 2017. So it's a little higher.
Okay. And then just high level, the 6% dividend growth, I mean, I guess, the target is 6% -- more than 6% CAGR over the long term. I'm just trying to understand, like is that -- I mean, it seems like you're flooring it at 6%, and it could be higher. Is that where you think the sustainable level of earnings growth is in the long term? Just if you could share your thoughts a little bit on how you arrived to that 6%.
Sure. We took a look at where we thought the dividend should grow to and where earnings were expected to grow to. And we're a pretty conservative company, so we came up with more than 6%. So we believe that earnings will be growing at that level or more over the next 5 to 10 years.
Our next question comes from Jonathan Reeder with Wells Fargo.
Nice presentation, touched on all the bases that I pretty much had. And good questions by Durgesh, too, because he anticipated some of mine. The only thing I have left would be on the water rate case settlement. And correct me if I'm wrong, but that gross margin going at $15.2 million, that's, I guess, a little higher than what you had initially set. I guess, maybe you didn't include that tax component previously. Is that accurate?
Yes, that's accurate, Jonathan. When we compare previously, we're purely just comparing the adopt to adopt the number. In 2018, if you recall, as a result of the tax reform by the end of 2017, we had an excess deferred taxes, about $83 million booked. That should be refunded to our customers over the remaining life of the asset. So it's about $2 million, $3 million a year. So in the base rate in 2018, those adopted base rate has not reflected those dollar amount yet. But during the settlement, we actually -- the excess deferred refund for 2019 to 2021 has been built into the base rate for settlement agreements. So we want to bring this factor out, so we don't -- we give you all the information. What's encouraging in 2018 in terms of excess deferred, about $2 million, $3 million, we're tracking a minimal account, which will be recorded throughout the year. It's just not in the adopted number. So we want to make that clarification.
Okay. And that $2 million to $3 million, I guess, that's over like a 20- or 30-year period, I guess, something like that?
Yes, because utility life is very long to finalize. Yes, it's in a long period of time.
Okay. And then I think I already know the answer to this, but the electric GRC settlement, I mean, it's a pretty small portion of the business. Is that supposed to or expected to do anything from an earnings standpoint? I mean, I know you cited a little bit of a headwind this quarter expenses there. Does the settlement lease, I guess, cover those higher operating expenses?
Right. We're a bit unsure as to when that settlement will get approved. So it's possible we'll have a little bit of an uptick in either 2018 or 2019 from retroactivity associated with that rate case.
But on an ongoing basis, I mean, I guess, the settlement at least covers those higher operating expenses that are currently a drag on an ongoing basis?
Yes.
Yes.
They definitely do, yes -- or it definitely does.
[Operator Instructions]. At this time, it appears there are no further questions in the question queue, and this will now conclude our question-and-answer session. I would like to turn the call back over to Bob Sprowls for any closing remarks.
Yes. Thank you, Sean. And I just wanted to say thank you to all of you for your participation today and your interest in the company, and we look forward to speaking with you next quarter.
This concludes today's conference call. Thank you for attending today's presentation, and you may now disconnect.