Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company's 2nd quarter 2015 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 August 12, 2015 on the company's website, www.aswater.com. This call will be limited to an hour. 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 1990 5. 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. At this time, I will turn the call over to Eva Tang, Chief Financial Officer of American States Water Company.
Welcome everyone and thank you for joining us today. On the call with me is our President and CEO, Bob Sprouts. I will start with our quarterly financial results. For the Q2 of 20 15, diluted earnings were $0.41 per share compared to $0.39 per share for the same period in 2014, While earnings at our Water segment remained flat for the quarter, earnings for the Electric segment decreased by $0.01 Earnings at our Contracted Services segment increased by $0.02 And our parent company's earnings increased by 0 point 0 $1 I will now discuss major items impacting the comparability of the two periods. For the quarter, water revenue water revenue increased by $1,300,000 to $87,600,000 as compared to the same period in 2014.
The increase is primarily due to the 3rd year rate increases and increases generated from revenue recovery on capital projects approved through advice letter filings. These increases were partially offset by an $842,000 decrease in surcharges during the quarter to recover previously incurred costs approved by the California Public Utilities Commission or the CPUC. Most of these surcharges were implemented in 2013 and expired during 2014. The decrease in revenue from the surcharges is offset by a corresponding decrease in operating expenses largely in administrative and general expense resulting in no impact to pre tax operating income. As a reminder, a change in build consumption, which decreased 13% during the Q2 as compared to Q2 last year does not have a significant impact on the company's revenues or water gross margin due to the CPUC authorized water revenue adjustment mechanism or the ramp.
The WRAM mechanism is in place for all of our water service areas. Excluding the effect of surcharges, our water gross margin approximates water will not impact our earnings significantly because of the ramp. For the Q2 of 2015, revenue from electric operations were $7,900,000 as compared to $8,300,000 for same period in 2014. The decrease is primarily due to a change in the monthly allocation of the annual base revenue requirement as stipulated in the CPUC's November 2014 final decision on our electric general rate case. Differences in the monthly allocation of the annual adopted revenue for 2015 versus 2014 are expected to reverse during the year.
Revenues for our contracted services business, American State Utility Services or AFUS decreased $1,900,000 to $19,100,000 for the Q2 of 2015. This decrease was due to lower construction activities as compared to the Q2 of 14 due largely to the completion of several large capital projects during 2014, which did not recurred in 2015. These decreases were partially offset by higher construction revenues during the Q2 2015 due to favorable changes in cost estimate for certain capital work in progress. This new capital upgrade projects and cost estimate are continuously evaluated and revised accordingly. Revenues for these projects are recognized based on the percentage of completion method of accounting.
There was also increasing monthly operation maintenance revenue due to successful price redeterminations in September 2014. Our water and electric supply costs were $27,000,000 for the Q2 of 2015. Any changes in supply costs for both the water and electric segment as compared to the adopted supply costs are tracked in balancing accounts, which will be recovered from or refunded to our customer in the future. Administrative and general expenses for the Q2 of 2015 were $20,500,000 as compared to $19,400,000 for the same period in 2014. Excluding surcharges, which has no impact to earnings, AMG for our utility segment increased by $1,200,000 during the quarter.
The increase was due primarily to higher legal and other outside service costs related to condensation and drought activities at our water segment. We will continue to incur legal costs to defend our water systems from condemnation actions. Furthermore, in connection with our efforts to meet California Governor's orders to reduce overall water usage by 25% as compared to 2013, Golden State Water has been authorized by the CGUC to track incremental drought related costs incurred in a memorandum a possible future recovery. Such incremental costs are being expensed until future recoveries approved by the CPUC. Despite higher AMG at the water segment for the Q2, on a year to date basis, the aggregate A and G, other operations and maintenance expenses were lower in 2015 than for the same period in 2014 after excluding surcharges.
In addition, A and G expenses for contracted services increased by $482,000 for the 3 months ended June 30, 2015, primarily due to a shift in labor and other indirect costs to ANG related activities in support of various functions for all military bases. This increase was largely offset by a decrease in such costs included in construction expenses as compared to the Q2 of 2014. As U. S. Construction expenses decreased by 3 $400,000 to $10,400,000 during the Q2 of 2015 as compared to the same period in 2014 due primarily to the completion of large capital project at Fort Brat in 2014, which did not recurred in 2015.
In addition, as just discussed, there was a shift in labor and other indirect costs incurred at AMG activities, while in Q2 of last year, a higher percentage was incurred for construction Income tax expense decreased by $728,000 to 9.5 $1,000,000 as compared to the same period in 2014, driven by an overall decrease in the effective income tax rate. A lower effective tax rate at the Golden State Wallet Company was due to differences between book and taxable income that are treated as a flow through adjustment. The effective tax rate at ASUS was lower as a result of state income taxes, which vary among the jurisdictions in which it operates. There were also favorable permanent differences such as the tax deduction related to during production and construction activities, which also impacted the effective tax rate this quarter. AWR's consolidated effective tax rate was about 38% for the 3 months ended June 30, 2015 as compared to 40% for Q2 last year.
Let's moving on to move on to liquidity and capital
resources.
Net cash provided by operating activities decreased by $27,900,000 to $63,000,000 for the 6 months ended June 30, 2015. The decrease was primarily due to a decrease in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the 6 months ended June 30, 2015 as compared to the same period in 14. During the 1st 6 months of last year, significant cash payments were received at ASUS for completion of several large capital upgrade projects that did not recur in 2015. Cash flow from construction activities may fluctuate due to timing differences of when the work is being performed and when the cash is received for payment of the work. There was also a decrease in customer water usage resulting from conservation efforts, which lowered customer billings for Golden State Water.
These decreases in the consolidated cash flow from operating activities were partially offset by lower income taxes payment made during 2015 due in large part to the implementation of the new tax repair regulation in the Q4 of 2014. In regards to Golden State Water's capital expenditures, we spent $32,500,000 in company funded capital expenditure during the 6 months ended June 30, 2015. We expect to invest $85,000,000 to $90,000,000 in capital projects during 15. For additional details on our Q2 and year to date performance, please refer to our earnings release and Form 10 Q issued yesterday. With that, I will turn the call over to Bob.
Thank you, Eva. I appreciate everyone joining us today. The company delivered solid earnings in the second quarter. During the quarter, we implemented water conservation measures and through the month of July, all of our service areas are meeting the mandated reductions. In addition, we continue to support our positions in the general rate case application that we filed with the CPUC for the water segment of Golden State Water.
We also recently received the CPUC's approval to acquire all of the operating water assets of Rural Water Company. Let me address the drought situation in California. As you are aware, on April 1 this year, the Governor of California issued an executive order directing mandatory conservation measures to achieve a statewide 25% reduction in urban water use as compared to 2013 levels. Regulations in early May of this year to meet the governor's executive order. The State Board also set reductions, which vary by area depending on the historical per capital water use for the area in order to achieve the 20 5% reduction goal.
In June 2015, Golden State Water filed updated drought response actions with the CPUC for each service area to meet the new mandates. In July, the CPUC approved the filings. As a result, all of our water service areas have implemented our mandatory water conservation and rationing plan, which outlines restrictions for outdoor irrigation for water customers. If these restrictions are deemed insufficient to achieve the water use reductions, water allocations and additional mandatory rationing may be implemented. Through the month of July, each of our service areas are meeting the mandatory reductions.
During the Q2, billed water consumption decreased by 13% as compared to the same period in 2014 due to our customers' conservation efforts. As Eva mentioned, a change in consumption does not have a significant impact on the company's results due to the CPUC authorized water revenue adjustment mechanism in place for all of our water service areas. The commission has also authorized a drought memorandum account to track incremental costs incurred in promoting conservation and implementing restriction measures for possible future recovery. In other regulatory matters, we continue to work with the PUC on the pending general rate case for all of our water regions and the general office. The rate case will determine new rates for the years 2016, 2017 2018.
Golden State Water's requested capital budgets in the application averaged approximately $90,000,000 a year for the 3 year period. The 2016 water gross margin is expected to decrease as compared to the currently adopted levels due in part to a decrease in annual depreciation expense resulting from an updated depreciation study and other expenses. A final decision on this rate case is expected by the end of 2015 with new rates effective January 1, 2016. Now moving on to other regulated business. As you may recall, some time ago, Golden State Water entered into an asset purchase agreement to acquire all the operating water assets of Rural Water Company.
This transaction was subject to commission approval. In June of this year, the commission approved the acquisition, including recovery of the purchase purchase price through customer rates. The consummation of the transaction contemplated by the purchase agreement is subject to customary conditions, including among other things, adjustments to the $1,700,000 purchase price for changes in utility plants since entering into the agreement in 20 13. On completion of this transaction, Golden State Water will serve approximately 9 60 customers in the city of Arroyo Grande in the County of San Luis Obispo, California, which is near Golden State Water's Santa Maria customer service area and Coastal California. Under the terms of the purchase agreement, Golden State Water will take over operations 30 days after remaining conditions to closing are satisfied.
Turning to our contracted services business at American States Utility Services or ASUS. We continue to work closely with the U. S. Government on the remaining price redeterminations. Just last week, we received final resolution on the 3rd price redetermination for Andrews Air Force Base in Maryland.
We expect the 2nd price redetermination for Fort Jackson in South Carolina and the 2nd and third price redeterminations for the military bases in Virginia to also be completed during the Q3 of 2015. Filings for these price redeterminations, requests for equitable adjustment and contract modifications awarded for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. 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.
In addition, we are actively engaged in new proposals and expect the U. S. Government to release additional basis for bidding over the next several years. We remain optimistic about the future of our contracted business. I'd like to turn our attention to dividends.
On Tuesday of last week, our Board of Directors approved a 3rd quarter dividend of $0.22.4 per share on the common shares of the company, a 5.2% increase. We are pleased with our Board's decision to once again increase the dividend, which reflects their ongoing confidence in the company, while balancing the need for continued investment in our systems for our customers. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year for 61 years. Given American States' current payout ratio compared to the companies that we compete with for capital and our high shareholders' equity ratio as a percent of total capitalization, there is room to grow the dividend in the future. Additionally, pursuant to the future.
Additionally, pursuant to the first stock repurchase program approved by the Board in March 2014, we have completed the repurchase of 1,250,000 shares of AWR AWR a 387,000 common shares on the open market through June 30 under this program. The repurchase programs are intended to enable the company to achieve a consolidated shareholders' equity ratio as a percentage of total capitalization that is more reflective of appropriate equity ratios for Golden State Water and ASUS. As of June 30, 2015, our current equity ratio is 59%. Before I close with my prepared remarks, I'd like to thank you for your interest in American States Water. And I'll now turn the call over to the operator for questions.
We will now begin the question and answer session. The first question comes from Jonathan Reeder from Wells Fargo. Please go ahead.
Good afternoon, Eva and Bob. With the RAM in place to protect your margins at the utility, I was just wondering if you could give us a little bit of guidance how we should be thinking about the distribution of GSWC's adopted gross margin throughout 2015 such as maybe what percentages fall in each quarter?
Jonathan, we usually just look back 3 to 5 years history and to determine that allocation. So if you look through the quarterly sales in the past few years and average those out that should give you a pretty good allocation for the 50%
greater than that? Yes. I think, 50% greater than that?
I would think more than 50%, because 3rd quarter is our highest sale of quarter, Summer and the first is the lowest usually and then
3rd will be greater than the second and 4th will be greater than the first. So it's more than 50% the last half of the year. Half of the
year, yes.
Okay. 4th is greater than the first though. Okay, that's helpful. And then have your expectations for ASUS increased a bit now for 2015 due to these favorable changes in the cost estimates for the projects? Or are we still thinking about maybe 0 point $2.6 or so?
I think that's what you cited last, Bob, kind of for the full year expectation.
Yes. We think that $0.26 is still a pretty good number for the entire year. And you recall, we got to that $0.26 by taking last year's $0.31 and backing out about a $0.01 worth of sort of items that were not prospective, but were impacted by sort of prior years. We had a retroactive price redetermination for instance that contributed I believe 0 point
$3 Correct. Yes. Okay. And then just kind of last question on that front. With the projects that I guess you booked those favorable changes, were those like at all those multi year large projects?
Were they some of the projects that were awarded? I think it was at the end of September of last year. When do those projects kind of get completed? Just kind of wondering a little more detail on that.
Johnson, I think majority of our current projects are not multiyear projects. We finished quite a few multiyear projects last year. So most of the projects we are currently working on is probably 12 to 18 months project, I would say.
Okay. And then the next kind of update on where you stand with the projects we should be thinking Q3 that's when the government I guess kind of does their budget?
Yes. That's usually in sort of that September late September timeframe early October we learn of the additional capital work that we can do through the next 12 months next 12 to 15 months.
And we usually work with them what kind of projects we can do on the base in September 30 is really when the funding comes down that we would know which project will go forward.
Yes. I mean that's consistent with the government's budget. I'm sure there's more dollars being asked for than we're going to get, but it's usually a very sizable chunk. Last year, I think we got $27,000,000 yes.
Okay. And then are there any I guess kind of large multiyear projects similar to the 3 that you recently completed that might be in the near future or nothing you're aware of at this point?
Yes, nothing we're aware of at this point. There are a lot of small projects that we're working on and that should keep a good solid revenue stream.
Okay, great. I appreciate the additional clarity. Thanks.
This concludes the question and answer session. I would now like to turn the conference back over to Bob Sprowls for closing remarks.
Thank you, Danielle. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company. Everyone have a good day.
Thank you. This concludes today's American States Water Company conference call.