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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company conference call discussing the company's fourth quarter and full year 2019 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 p.m. Eastern time and run through Tuesday, March 3, 2020, 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].
Today's call will be limited to an hour. Presenting today from American States Water 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 the generally accepted accounting principles or GAAP 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. Please go ahead.
Thanks, Rocco. Welcome, everyone, and thank you for joining us today. I'll begin with some highlights for the year. Eva will then discuss some financial details, and then I'll wrap it up with some updates on regulatory filings, ASUS and dividends. And then we'll take your questions.
As we announced in our earnings release yesterday, 2019 was a very strong year as we experienced growth in each of our businesses. The company reported adjusted earnings per fully diluted share of $2.24, which excludes the retroactive impact of the electric general rate case decision related to the full year of 2018. The adjusted earnings per share for 2019 is a 30% increase over 2018. During the year, we received 2 positive rate case decisions, spent a record level of capital investment at our regulated utility, expanded our work on military bases, raised the dividend by nearly 11% and reached 65 consecutive years of annual dividend increases. Our stock achieved a total return of 31.2% for 2019 and have achieved 5-year and 10-year compound annual returns of more than 20%. American States Water also earned a consolidated return on equity of 14.3% for 2019, excluding the retroactive revenues from our electric utilities 2019 general rate case decision attributable to 2018.
At Golden State Water Company, we received approval on both the water and electric rate cases. The water rate case sets new rates for the years 2019 through 2021 while the electric rate case sets new rates for 2018 through 2022. We continue to invest in the reliability of our systems, spending a historical high of $136 million on company-funded infrastructure during the year.
At American States Utility Services or ASUS, we achieved the highest annual earnings per share contribution in its history as we continue to perform necessary construction work on the military bases we serve. These results reflect a full year's contribution from our newest base, Fort Riley, as well as continued work with the U.S. government on price adjustments and asset transfers. ASUS provides operations, maintenance and construction management services for water distribution and wastewater collection and treatment facilities to 11 military bases, including some of the largest military installations in the United States, and we're well positioned to win more contracts in the coming years.
We remain committed to our communities. Golden State Water continued to spend with diverse business enterprises, achieving results that were above the California Public Utilities Commission's requirement for the seventh consecutive year. In addition, ASUS continued to exceed the U.S. government's requirements to hire small businesses to perform work on the basis it serves. And we are proud to say that in 2019, our employees donated over 5,300 hours of community outreach and engagement in areas where they live and work. We at American States Water Company continue our steadfast commitment to our customers, broader communities, shareholders, employees and suppliers. Our financial results are just one part of our efforts and success.
I'll now turn the call over to Eva to review the financial results for the quarter.
Thank you, Bob, and hello, everyone. Let me start with our fourth quarter financial results on Slide 8. Consolidated earnings for the quarter were $0.45 per share compared to $0.37 per share for the same period in 2018. As Bob mentioned, our water and electric segments' strong fourth quarter results reflect new rates approved by the CPUC's decision on both our water and electric rate cases.
The decrease in earnings for the fourth quarter at ASUS was due to the timing of construction work performed this year versus last. The ASUS management team executed a plan for construction work to be performed more evenly throughout 2019 while much of the construction activity in 2018 was performed towards the latter half of the year. In fact, construction activity levels were higher for the full year 2019 than the previous year.
Consolidated revenues for the fourth quarter increased by $2 million as compared to the same period in 2018 while the revenue increased $5.3 million due to new rates approved in May of 2019 and effective January 1, 2019. There were also revenue increases related to CPUC-approved surcharges to recover previously incurred costs. Electric revenues were $700,000 higher due to new electric rates approved by the CPUC in 2019 on the electric general rate case. The $4 million decrease in contracted services revenue for the fourth quarter of 2019 was largely due to differences in the timing of construction work performed in 2019 as compared to '18, as previously discussed.
Turning to Slide 10. Our water and electric supply costs were $23.2 million for the quarter, an increase of $1.6 million from same period last year. 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 total operating expenses excluding supply costs. Consolidated expenses decreased $1.6 million versus the fourth quarter of 2018 due to a decrease in construction costs at ASUS as a result of lower construction activity and lower depreciation expense at the water segment, driven by lower composite depreciation rate approved in the water general rate case. These decreases were partially offset by increases in other operations and maintenance expenses and property and other taxes. Interest expense, net of interest income and other, decreased by $900,000 due primarily to gains generated on investments held in the trust to fund the retirement benefit plan as compared to losses incurred during the fourth quarter of '18.
Slide 11 shows the EPS bridge comparing the fourth quarter of '19 with the same quarter of 2018. This slide shows the full year results. Consolidated earnings for 2019 were $2.28 per share. The 2019 CPUC decision on the electric general rate case was retroactive to January 1, 2018. And as a result, cumulative retroactive earnings impact related to 2018 of $0.04 per share was recorded as part of our 2019 results. Excluding this retroactive impact, earnings per share for 2019 was $2.24 as compared to $1.72 per share for 2018. That is an increase of 30%.
Earnings from the water segment increased by $0.42 per share compared to 2018, mostly due to new other rates approved by the CPUC in May of 2019 as well as a decrease in administrative and general expenses. There were also gains on investments held in a trust to fund the retirement plan as compared to losses incurred in 2018. Finally, there were changes in the water segment's effective income tax rate resulting from certain flow-through taxes and permanent items, which increased the earnings by $0.03 per share for the year compared to 2018.
Moving on to the electric segment. Adjusted earnings was $0.04 per share higher than 2018, after excluding the retroactive impact from the 2019 CPUC rate case decisions related to the full year 2018. This increase was due to new electric rates authorized in the decision, partially offset by higher operating expenses and higher electric -- and higher effective income tax rate.
Diluted earnings from ASUS were $0.47 per share as compared to $0.42 per share for '18, largely due to operations at Fort Riley, which commenced in July of 2018. There was also an increase in maintenance fees revenue at the other military bases resulting from the successful resolution of various price adjustments. AWR parent's earning increased $0.01 per share compared to 2018 due to lower state unitary taxes recorded at the parent level.
Turning to liquidity on Slide 13. Net cash provided by operating activity for 2019 was $116.9 million as compared to $136.8 million for 2018. The decrease in cash from operating activity was due primarily to a decrease in water customers' usage, delays in receiving decision on the water and electric general rate cases and the refunding of $7.2 million to customers related to the Tax Cuts and Jobs Act. These decreases were partially offset by an increase in cash resulting from the timing of billings of and the cash received for construction work at military bases.
Golden State Water invested $136 million in company-funded capital projects in 2019. Continuing our strong investment level, we expect to invest $120 million to $135 million in 2020.
You may recall that in last October, we amended American States Water's credit facility, temporarily increasing its borrowing capacity from $200 million to $225 million through June this year. Earlier this month, AWR received a binding commitment from its lender for the option to revise the temporary increase of the credit facility to $260 million through the end of this year. We'll be able to exercise this commitment and have immediate access to the additional funds when needed. The borrowing capacity will revert to $200 million at the end of this year.
Golden State Water has a financing application on file with the CPUC. We intend to issue long-term debt after the financing application is approved. 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 I mentioned, 2019 was a big year for concluding rate cases. The final decision in the water general rate case allows us 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. As a reminder, the water segment has an earnings test it must meet before implementing the second and third year step increases in the 3-year rate cycle.
I'm pleased to report that we have timely invested in our capital projects and achieved capital spending consistent with the amount authorized by the CPUC. As a result, full step increases have been implemented for 2020 and are expected to generate an additional $10.4 million in water gross margin. We continue to make prudent and timely capital investments. As such, we expect an additional step increase of approximately $11.4 million in the water gross margin in 2021, subject to the results of an earnings test and changes to the forecasted inflationary index values.
We are currently preparing our next water general rate case, which will be filed in July of this year, for new rates beginning in 2022. In January 2020, Golden State Water, along with the 3 other large California water utilities, requested a deferral of the date by which each of them must file their next cost of capital application. If approved, the request would postpone this filing date by 1 year until May 1, 2021, with a corresponding effective date of January 1, 2022. The joint parties are currently awaiting the CPUC's response to this request.
The CPUC's 2019 final decision on our electric rate case authorized new rates for 2018 through 2022. Among other things, the decision authorizes the company to construct all the capital projects requested in the application and provides additional funding for the fifth year added to the rate cycle, which total approximately $44 million of capital projects over the 5-year rate cycle. It also authorizes increase to the adopted electric gross margin by $1.2 million for each of the years 2019 and 2020, by $1.1 million in 2021 and by $1 million in 2022. The rate increases for 2019 through 2022 are not subject to an earnings test. We also filed an application with the CPUC for the development of a turnkey solar project estimated to cost $14.3 million.
As you'll see from this slide, the weighted average water rate base as authorized by the CPUC has grown from $717 million in 2017 to $916 million in 2020, a compound annual growth rate of 8.5%. The rate base amounts for 2020 do not include the $20.4 million of advice letter projects as discussed previously.
Let's move on to ASUS on Slide 17. 2019 marks the highest annual earnings per share contribution from ASUS in the company's history. We were awarded our first military contract in 2004. And today, we have 8 contracts covering 11 military bases. Earnings for 2019 were $0.05 per share higher than in 2018. Major contributors to the higher earnings include a full year of operations at Fort Riley as well as an increase in the management fee revenues at the other military bases, resulting from the successful resolution of various price adjustments during 2018 and 2019.
We continue to work closely with the U.S. government for contract modifications relating to potential capital upgrade work for improvement of the water and wastewater infrastructure at the military bases we serve. During 2019, the U.S. government awarded ASUS $23 million in new construction projects for completion in 2019 and 2020. Completion of filings for economic price adjustments, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and dollar margin.
We are actively involved in various stages of the proposal process at a number of other bases considering privatization. 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. Taking into account the $23 million in new construction projects awarded in 2019, we reaffirm our previous guidance of $0.46 to $0.50 per share for ASUS' 2020 earnings contribution.
I'd like to turn our attention to dividends, outlined on Slide 18. In 2019, we increased the annual dividend by 10.9% to $1.22 per share. American States Water Company has paid dividends to shareholders every year since 1931, increasing the dividends received by shareholders each calendar year for 65 consecutive years, which places it in an exclusive group of companies on the New York Stock Exchange that have achieved that result. We also updated our dividend policy in 2019 to achieve a compound annual growth rate in the dividend of more than 7% over the long term.
Our strength and attractiveness to customers and shareholders alike is our stability, continued timely investment in our systems and customer service, our regulated operations in a constructive regulatory state of California, a growing contracted services business with strong market share and an unwavering commitment to reliability and safety. We plan to invest $120 million to $135 million in capital at our regulated utilities during this year, all while driving operational efficiency and delivering outstanding customer service. Our capital investment includes replacing and upgrading critical infrastructure as well as ensuring we can meet our customers' needs for generations to come.
I'd like to conclude our prepared remarks by thanking you for your interest in American States Water. And we'll now turn the call over to the operator for questions.
[Operator Instructions]. And today's first question comes from Richard Verdi of Coker & Palmer.
Just a couple of quick questions. So the ASUS guidance, Bob, what needs to transpire for the segment to deliver earnings at the high end of that range? And then what would cause the earnings to be reported at the lower end of that range?
Well, that's a difficult question, Richard. I would say that if we did more construction work at the bases that we serve, we could be closer to the top end of that range. We're continually putting projects in front of the government for new capital upgrades. And to the degree we're able to get substantial project awards there, that could help sort of on the construction front. So I would say that's probably the -- one of the big items.
Another item is if we could get some asset transfers. We've asked -- requested that we get certain assets that are being handled by other providers, that those get transferred to us. If we can get those transferred, then that will be a pickup in our O&M revenues and to a certain degree, in our construction revenues.
Okay. That's very helpful. And then for the -- just for the follow-up question. In what bases are you seeing the most activity, Bob?
Well, we've got some pretty strong bases here. Sometimes, you'll see a lot of activity at the sort of front end when you take over a base, and so I would say we're seeing activities across all the bases. But the larger ones -- and particularly, I would say, Eglin Air Force Base, Fort Riley, Fort Bragg, Fort Bliss, those are the bases that are really larger than, I would say, some of the other bases. And so that's where we're seeing a lot of activity.
[Operator Instructions]. Today's next question comes from Jonathan Reeder at Wells Fargo.
So I got a few questions here. I was hoping you could help me understand what drove the gross margin higher in 2019 at Golden State Water Company. Because it looks like the gross margin was up more than $18 million, which exceeds -- I know you're kind of saying the water GRC would take it up $7.1 million and the electric, if you combine kind of the '18 and '19, would be like $3.5 million. So there's kind of like another $7 million or so of gross margin increase. What was driving that?
Well, let me -- we're going to take a quick look here and sort of get back to the $18 million number you're referencing here, sorry.
So you are looking at the gross margin, Jonathan, in terms of Golden State Water in totality?
Correct, yes. I mean I'm showing it at like just under $255 million in 2019 versus $236 million in 2018. Just taking the regulated revenues less the total supply cost.
Yes. So that's not consistent with what's on -- what's in the 10-K.
So I think our gross margin for water increased by $13 million for the year, and for electric, our gross margin increased by $5 million for the year. So in total...
Right. So that would be $18 million total?
Yes, $18 million total.
Right. And I'm saying like -- you had kind of said the water GRC was going to increase the gross margin by like $7.1 million, and the electric side, I think, would be about $3.5 million if you combine the '18 and '19 gross margin increases together. So I'm just trying to understand where that additional $7 million total between the two kind of came from. Like what other revenues are -- I guess, I thought between the WRAM as well as the MCBA and everything, the rest of the gross margin was kind of locked in there.
Right. So not all of our customers are covered under the WRAM. So some of the uptake there was due to non-WRAM customers, I would say.
And also, I believe, in 2018, Jonathan, we do have -- we still have a pension balancing account at the water segment. And in electric, in 2018, our pension costs actually -- actual cost actually was lower than the balance -- the authorized pension costs. For that matter, we have to -- decreased revenue and decreased expenses for '18 have no impact to earnings. But then you kind of look at '18, you will look at the gross margin, it will be lower than the true adopted number because we have to approve the lower revenue and the lower expenses for that account.
So probably what the best thing to do is to take the $0.21 that's in the press release and come up with what that net changes. Because what we've done in the press release is to try to eliminate these things that are sort of in the gross margin that are -- like the balancing account.
Yes. No, that makes sense. So the balancing account, that affects the revenue number either positively or negatively, and maybe there's some of that going between '18 and 19, I guess.
Right, it would. But all along, we've been talking about the water margin factor, the lower depreciation expenses and the true margin increase compared to adopted between the two years, about $16.3 million. So it's kind of reconciled to that number, and I can walk you through perhaps after the call.
Yes. So the -- if you take the $0.21 and multiply it by 37 million shares. And then, I guess, you get a tax effect -- gross up the taxes, I don't know what that comes out to be.
So we can walk through that number in more detail maybe after the call.
It's roughly in our $10 million or $11 million range there. So it's not the $13 million, I guess.
Okay. And then in terms of the cost of capital extension request, does -- the PAO, have they expressed an opinion to the CPUC regarding your request? Or have they made any data request to you or any of the other water companies that filed the request?
I don't recall them requesting any data request from us or what they're -- or hearing what their position is on this. I don't know whether other companies have talked about that or not, but I don't believe -- there's not been a lot of talk about that.
Yes. No, I'm just trying to kind of get a sense of like what milepost could be coming up since, obviously, you got to prepare an application by May 1 if there's -- the extension isn't approved. And I guess kind of the time is ticking, right? So...
Right. I mean we're working on it. That's -- we're working on it just in case. That's sort of what we've got to do. And as you know, the PUC has got a number of other things they're looking at up there, given sort of the PG&E things. So we're waiting to hear it, but not sure what else we can tell you about that.
Right. But I guess if the PAO doesn't want to express an opinion, the CPUC can still -- I guess they'll make a decision unilaterally one way or the other.
Yes, they can.
Yes. Okay. And then, Eva, can you explain the rationale behind temporarily increasing the credit facility capacity and essentially kind of just delaying the long-term debt issuance into 2020? Like is it connected to the cost of capital, or...
No. Jonathan, we file a financing application last year with the CPUC just to authorize us more long-term debt amount in the next few years. So we're just waiting for that financing application to be approved. So the temporary increase in the bridge loans we need to get us over that period of time. So we can issue the long-term debt once we got financing application approved.
Okay. So you need the CPUC to actually approve you to kind of issue it?
Yes.
Got you. Okay. Well, at this rate, interest rates keep going down, so maybe it's working out. On the solar project, what's the timing for acquiring that? I know your 10-K said like Q2 approval is expected from the CPUC. And then just wanted to verify that, that $14 million is incremental kind of to the $44 million of CapEx approved as part of the GRC.
Yes. So I'll answer your second question first. Yes, it is incremental to the $44 million if it gets approved. We hope it will. And the timing of it is such as -- we've already got the sort of turnkey provider already lined up. And then it's just a matter of giving them a go-ahead to get the project done. I don't think it's -- don't recall what we put in the K, but it's probably 6 months to get the project done once we get approval by the commission.
Okay. It's a six month kind of construction time frame?
Yes.
Okay. And then I appreciate -- Eva, you knew I would ask for the water rate base if you didn't give it, so I appreciate that. What's the electric rate base authorized in 2020?
We have that number. I believe it's in the slide.
It's about $52 million for 2019. So let's see, 2020 is...
We plan to spend -- we authorized $44 million over a 5-year period of time. So I think you can -- thinking about $10 million to $12 million increase each year in terms of CapEx. This is not even including the dollar authorized under the wildfire mitigation plan we receive every year.
Yes. I mean you also have to factor in the depreciation.
Yes. And the solar projects.
But I don't want you to think that you can just add $12 million to the $52 million, which you cannot do. You've got to take a portion of the depreciation. But...
Right. But I mean, essentially, that $50 million rate base on the electric side, it sounds like it's going to be growing pretty healthy over the next 4 or 5 years between that CapEx and then the solar project, assuming that's through.
Definitely.
Yes. I think that's a fair comment, given the solar, given the wildfire mitigation plan expenditures and then the $44 million.
Okay. And then lastly, in terms of the consolidated capital structure, is your goal to keep the consolidated -- the parent capitalized in line with approved at the utility or, in other words, just 57% equity for the foreseeable future?
Yes, that's the case.
[Operator Instructions]. And ladies and gentlemen, this concludes our question-and-answer session. I'd like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you, Rocco. Just want to close today by thanking you all for your participation today and letting you know we look forward to speaking with you next quarter. Thank you.
And thank you, sir. Today's conference has now concluded. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful day.