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 2014 results. 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 Thursday, March fifth, 2015, on the investor relations section of the company's website, aswater.com. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, press star then number two on your telephone keypad. As a reminder, this call will be recorded and will be limited to no more than one hour.
If you require operator assistance, please press star then zero. In addition, certain matters the company discusses 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 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.
Thank you, Andrew. Welcome, everyone, and thank you for joining us today. On the call with me is Eva Tang and CEO, Robert Sprowls. I will start by discussing the fourth quarter financial results. Diluted earnings for the fourth quarter of 2014 were $0.35 per share, compared to $0.30 per share for the same period in 2013. Net income for the quarter was $13.5 million, compared to $11.8 million for the same period of 2013. The increase in our consolidated earnings was primarily driven by rate increases approved by the California Public Utilities Commission, as well as an increase in construction activity at our contracted services business. Earnings for the water and electric segments increased by $0.03 and $0.01 per share, respectively, compared to the same period of 2013.
Earnings at our contracted services segment increased by $0.02 per share, while earnings from our parent company decreased by $0.01 per share. Water revenue remained relatively flat in the quarter at approximately $73 million as compared to the same period in 2013. However, in the fourth quarter of 2014, there was a $2.3 million decrease in surcharge revenue as compared to the same period in 2013. Surcharges implemented for the recovery of previously incurred costs are offset by a corresponding amount in operating expenses, resulting in no impact to pre-tax and operating income. Excluding the impact of surcharges, revenue increased by $2.3 million during the fourth quarter of 2014, mainly as a result of CPUC-approved rate increases and revenue recovery related to capital projects approved through advice letter filings.
For the three months ended December 31, 2014, revenue from electric operations were $7 million as compared to $10.4 million for the same period in 2013. In November of 2014, the CPUC issued a final decision for our electric general rate case, which sets new rates for years 2013 through 2016. The new rates were retroactive to January 1, 2013. Prior to the decision, electric revenue for 2013 and 2014 were recorded based on 2012 adopted levels. The new adopted revenues are lower in the previous rate case cycle, reflecting lower depreciation and certain other operating expenses. As a result of the decision, a $2.2 million cumulative reduction in revenue for years 2013 and 2014 was recorded during the fourth quarter of 2014, along with a cumulative reduction in depreciation expense. The impact of the retroactive effect of the new rates to 2014's net earnings was not significant.
Revenue for our contracted services business, American States Utility Services, increased $3.3 million to $29.9 million for the quarter as compared to the same period in 2013, due primarily to an overall increase in construction activity, including the recording of additional revenues during the closeout of a large pipeline replacement project at Fort Bragg. The level of construction activities tends to fluctuate from quarter to quarter. Our water and electric supply costs were $23.5 million, or about 28% of consolidated operating expenses. 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. Other operating expenses decreased by $1.3 million for the quarter as compared to the same period in 2013.
Excluding the surcharges in 2013 and 2014 for recovery of costs previously incurred, other operating expenses decreased by $749,000 due to lower bad debt expense, labor, conservation, and outside service costs in the water segment. Administrative and general expenses for the fourth quarter of 2014 were $18.6 million compared to $21.2 million for the same period in 2013. Excluding a $1.9 million decrease in surcharges, which has no impact to pre-tax operating income, overall A&G expenses decreased by $734,000 due to decreases in employee-related expenses, outside service costs at our water segment. Additionally, there was a decrease in workers' compensation reserves at our electric segment as compared to the same period in 2013. Maintenance expenses decreased by $373,000 due to the acceleration of planned maintenance work in 2013 at our water segment. We expect maintenance expense for the water segment to increase in 2015 as compared to 2014.
Depreciation and amortization expense decreased by $1.3 million to $9.5 million for the quarter as compared to the same quarter in 2013. The decrease was primarily due to lower depreciation composite rates approved by the CPUC in the electric general rate case, which was retroactive to January of 2013. The retroactive adjustment resulting from the approved rate case was recorded in the fourth quarter of 2014 and reduced the overall composite rates for the electric segment. Property and other taxes increased by $212,000 compared to the same quarter in 2013 due to an increase in property taxes for the water utility segment, partially offset by lower gross receipt taxes at our contracted service segment. ASUS's construction expense increased by $143,000 to $17.7 million during the fourth quarter of 2014 due to an increase in construction activities.
Interest and other non-operating expenses, net of interest income, decreased by $473,000 to $3.9 million for the fourth quarter of 2014 as compared to the same period in 2013. Primarily due to lower interest expense resulting from the redemption and maturity of certain loans and notes, as well as higher interest income collected on certain outstanding balances owed to the water segment. Income tax expense increased by $2.5 million to $8 million as compared to the same period in 2013, driven by an increase in pre-tax income. There were also cumulative tax deductions taken in 2013 for certain construction activities at the contracted services segment for years 2013 and prior, with no similar cumulative benefit reported in 2014. Let me briefly discuss our 2014 full-year results. Diluted earnings per share for 2014 were $1.57 compared to $1.61 for 2013.
We provided a reconciliation table in our earnings release yesterday to summarize the changes. When excluding the non-recurring items for 2013 and retroactive revenue from price redeterminations and additional revenues reported during the closeout of a large project at ASUS for 2014, earnings per share as adjusted for 2014 and 2013 would have been $1.52 and $1.49, respectively. That is an increase of $0.03 per share. For additional details on our fourth quarter and year-to-date performance, please refer to our earnings release and Form 10-K issued yesterday. Moving on to liquidity and capital resources for the full year of 2014. Net cash provided by operating activities increased by $27.6 million to $163.3 million for 2014. The increase in operating cash flow was primarily due to cash generated by the contracted services business due to the billing of and cash received for construction work at military bases during 2014.
The billing and cash received for construction work generally occurred at completion of the work or in accordance with the billing schedule. Therefore, cash flow from construction-related activities may fluctuate from period to period, representing timing differences of when the work is being performed and when the cash is received for payment of the work. The timing of cash receipts and disbursements related to other working capital items also affected the change in net cash provided by operating activities. In regards to Golden State Water's capital expenditure, we spent $61 million on company-funded capital work for 2014. This was lower than we had originally projected due to delays on several projects, resulting from extensive paving requirements, permitting from local cities, and a delay in drilling a well because suitable groundwater was not found in the area. We expect to invest $85 million-$95 million in capital projects during 2015.
As discussed during the second quarter, in July of 2014, Golden State Water redeemed $15 million of its midterm notes, which had high interest rates, and refinanced in December with notes that have a 3.45% coupon rate. Additionally, pursuant to the stock repurchase program approved by the board in March 2014, the company repurchased approximately 545,000 common shares on the open market during 2014. With that, I'll turn the call over to Bob.
Thank you, Eva. Hello, everyone. I appreciate everyone joining us today. Let me start by discussing some highlights for 2014 by business segment. Golden State Water Company, our regulated water and electric utility subsidiary, continued to make prudent investments in its infrastructure and had strong financial performance for the year. Golden State Water also continued to show good progress on its cost control initiative. The success of the company's focus on cost control over the last few years is evidenced by a slight decrease in non-supply cost-related operating expenses for 2014 compared to 2013, despite higher depreciation expenses than property taxes. We excluded the one-time memo account recovery in 2013 and surcharges billed for the recovery of various costs previously incurred for this comparison. Our contracted services business, American States Utility Services, continued to make significant contribution to the company's earnings.
ASUS accounted for 22.5% of the company's consolidated revenues in 2014. It earned a return on capital of 25% for the year. During 2014, ASUS successfully completed several filings with the U.S. government for price redetermination and asset transfers, which positively affected its earnings. With ASUS's contribution, the consolidated company earned a return on equity of 12.2% for 2014. With steady investments in Golden State Water's infrastructure over many years, American States now has more than $1 billion of net utility plant on its balance sheet at the end of 2014. Our diluted earnings per share from continuing operations have grown at a compound annual growth rate of 14.2% over the five-year period, from $0.81 per share in 2009 to $1.57 per share in 2014. During 2014, Standard & Poor's upgraded its rating outlook to positive from stable on both American States and Golden State Water.
S&P also affirmed an A+ credit rating on both companies. It's been a solid year for American States Water and its subsidiaries, and we're looking forward to continued strength and progress in 2015. With that, I'd like to discuss a few regulatory matters pertaining to Golden State Water and the drought situation in California. As we discussed with you in previous quarters, Golden State Water filed a general rate case for all of its water regions and the general office in July 2014. The application will determine rates charged to customers for the years 2016, 2017, and 2018. Our requested capital budgets, excuse me, in the application average approximately $90 million a year for the three-year period.
The 2016 water gross margin is expected to decrease by approximately $700,000 as compared to the currently adopted levels, due in part to a decrease in annual depreciation expense resulting from an updated depreciation study. In January 2015, the PUC approved Golden State Water's request to extend the date of the filing of its next cost of capital application from March 2015 to March 2016. Golden State Water had requested this extension along with three other California Class A water utilities. As a result of the approval, Golden State Water's current authorized cost of capital of 8.34% and allowed return on equity of 9.43% will continue in effect through December 2016, and the company will forgo any adjustment from the Water Cost of Capital Adjustment Mechanism. As you know, the adjustment mechanism that would have impacted 2016 is measured from October 1st, 2014, through September 30th, 2015.
Given that we are already 5 months into the measurement period, we think it is unlikely that the mechanism would have triggered. I'll now turn to the drought situation in California and its impact on the company's water supply. As of January 20, 2015, the U.S. Drought Monitor lists 94% of California in the rank of severe drought or exceptional drought. As we discussed in our previous call, the State Water Resources Control Board, in July of last year, approved emergency regulations that implement mandatory restrictions on certain outdoor urban water use to further reduce water use throughout the state. Regulations call for mandatory water use restrictions, such as eliminating hosing of driveways, prohibiting irrigation runoff, et cetera. We are regulated by the California Public Utilities Commission on such matters, and our water conservation and rationing plan, approved by the PUC, is aligned with the emergency regulation.
If dry conditions continue in our service areas, we may implement additional steps as outlined in our PUC-approved plans, consistent with the water supply situation for a particular service area. These steps may include mandatory rationing with penalties for non-compliance. Also, in the event of water supply shortages in certain of our service areas, Golden State Water would need to transport additional water from other areas, increasing the cost of water supply. Since water supply cost is a pass-through expense to our customers, these additional costs would result in higher costs to customers, which, taken together with mandatory water rationing, may lead to customer criticism. As Eva mentioned, our Electric segment's general rate case was finalized during the fourth quarter of 2014. The PUC's final decision, which was retroactive to January 2013, did not have a significant impact on Golden State Water's 2014 financial statements.
The PUC-approved base revenues are expected to generate an additional $400,000 in revenue in 2015 as compared to the adopted 2014 base revenue. The decision also allows us to invest $19.5 million in capital projects for the years 2013 through 2016. I would now like to discuss our contracted services business at American States Utility Services, or ASUS. During 2014, ASUS made significant progress on the resolution of outstanding price redeterminations with the U.S. government. Specifically, ASUS resolved its price redeterminations at Fort Bragg, Fort Jackson, and Andrews Air Force Base during the third quarter, resulting in contract modifications which included retroactive operations and maintenance management fees and retroactive renewal and replacement fees. As a result, ASUS recorded approximately $2.6 million of retroactive revenues and pre-tax operating income during the third quarter. ASUS continues to work closely with the government on the remaining price redetermination.
We expect the third price redetermination for Andrews Air Force Base in Maryland and the second price redetermination for the military bases in Virginia to be completed during the first quarter of 2015. Additionally, we expect the second price redetermination for Fort Jackson in South Carolina to be completed in the first half of 2015. Filings for these price redeterminations, requests for equitable adjustment, and contract modification awards for new projects provide ASUS with additional revenues and margin and the opportunity to consistently generate positive earnings. We also continue to work closely with the U.S. government for contract modification relating to potential capital upgrade work as being necessary for improvement of the water and wastewater infrastructure at the military bases. In addition, we continue to be actively engaged in new proposals and expect the U.S. government to release additional bases for bidding over the next several years.
We remain very optimistic about the future of our contracted services business. Lastly, I'd like to turn our attention to dividends. On January 27th, 2015, American States Board of Directors approved a first-quarter dividend of $0.213 per share on the common shares of the company. Dividends on the common shares are payable on March 2nd, 2015, to shareholders of record at the close of business on February 17th. American States Water Company has paid dividends every year since 1931, increasing the dividend received by shareholders each calendar year since 1954. Given American States' current low payout ratio compared to its peers, there is room to grow the dividend in the future. Before I close with my prepared remarks, I'd like to thank you for your interest in American States Water, I will now turn the call over to the operator for questions.
We will now take your questions. If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two on your telephone keypad. The first question comes from Richard Verdi from Bradford. Please go ahead.
Hi, Bob. Hi, Eva. A very nice quarter, I must say. Great quarter.
Thank you, Richard.
Thank you, Richard.
Just a couple of quick questions. I realize here that cash is much higher than my model. I think you're around $75 million this quarter, give or take a little either way. It was at $57 million last quarter, and last year was somewhere around $35 million. Can you just talk a little bit about what's going on there with that cash line, why it's up so much, and how should we be thinking about that going forward? How's that going to be put to use?
Hi, Richard. There are a few factors impacting our cash position. As I mentioned, the receipt and billing of ASUS construction work impact hugely for 2014 compared to 2013. As we finish certain progress of the project, and we can build a government, then cash comes in, so there's timing differences which always will fluctuate. In terms of Golden State Water, we had this WARM balance before, the Water Revenue Adjustment Mechanism. We implemented it since 2008, 2009 timeframe, and at the beginning of those years, we accumulate a lot of the balances. Now we kind of starting recovery the surcharges of those shortfalls in consumption. Our adopted level of consumption has been much in line with what we have currently incurred, so that decreased our recovery of the WARM balance.
All that stuff kind of impacts us, and we also implemented the repair regulations, the tax regulations, which will have a tax deduction for 2014. The Congress also reenact the bonus depreciation. A lot of factors impact our cash flows for 2014.
Do you think this is a level that'll be sustained moving forward? Do you think it'll come in a little bit or grow? As of today, what do you think moving forward?
Well, Richard, you're asking about the actual cash balance? Is that what you're asking about?
Yeah. I'm thinking about net debt.
Yeah. Well, we are in the process of buying some of our stock back and making good progress on that. That should be a way for us to use some of that cash going forward. The cash balance should go down over time, we believe, through the repurchase program and capital expenditures and stuff like that.
Yeah.
Okay.
As we mentioned, we expect to spend $85 million-$95 million CapEx in 2015, that would decrease our cash spending.
Okay, super. That's very helpful. Thank you. One last question, I know this is a challenging one. It's tough for you guys to talk about. Bob, last year, you had mentioned, I think it was in the Q2 or Q3 call, I don't recall off the top of my head, that ASUS at that time for 2014 would look a lot like 2013. Now with 2014 in the rear-view mirror, can we expect ASUS in 2015 to look a lot like 2014, or how should we be thinking there for this year for modeling?
Sure. That's a good question. Talk a little bit about how revenues work at that particular business and income. It's a bit tricky to forecast ASUS, that we've told the group that in the past, because there's really four things you need to sort of be a good forecaster at. One is, how successful are you in determining price redeterminations? What's the timing of renewal and replacement work at the bases? This is generally worked out between the company and the contracting officer and the director of public works at the base. There is a little more transparency there. What new construction work will come our way at the respective bases? Which, as you know, is subject to availability of government funding. Also, how successful will we be in winning new bases?
There's really no sense that the winning of new bases will have a large impact on 2015 earnings because there's, I believe, about a six-month transition period. Even if we found out today that we'd won a base, it probably wouldn't have a significant effect on 2015. All that said, we provided a reconciliation of changes in earnings per share from 2013 to 2014 in our earnings release. ASUS contributed $0.31 per share to 2014 earnings. In the $0.31 per share, there were two items I'd like to highlight. We recorded $0.03 per share of retroactive revenues related to prior years as a result of successful price redeterminations, and these were received in the third quarter. We also recorded $0.02 per share in the fourth quarter during the closeout of a large construction project at Fort Bragg.
You may recall that in 2010, we began work on a $58 million pipeline replacement project at Fort Bragg. This job was finally completed and closed out during the fourth quarter of 2014. Excluding those two items, ASUS's earnings would've been about $0.26 per share for the year. At this point, we believe ASUS's earnings for 2015 could look a lot like 2014's earnings without the effect of those two items. The $0.26 is a good place to start, I would say, in terms of forecasting earnings for 2015 for ASUS.
Okay, thanks, Bob.
Sorry about the long-winded answer.
No, I really appreciate the color. Thank you. Just one more, if I may, and I'll jump back in the queue. Staying on ASUS, there are a number of bases coming online over the next few years, as you even mentioned, Bob. I'm wondering, would it be a fair assumption to think that American States has more than a handful of contract bids out there outstanding right now?
Yeah. That's a fair assumption. I'm always cautious when we talk about ASUS. I guess I'm always cautious when we talk about everything. When we talk about ASUS. The ASUS or the military privatization process is a long process. For us to say we have more than a handful of bids out there, that is true, but it does take, in some cases, 2 years to go through the entire process. I will tell you this, we are very active in the bidding process. We have institutionalized the bidding process at our company, so we're using very little outside resources for that. We believe we can cost effectively bid on a number of bases.
Okay, super. Thank you very much.
You're very welcome.
Thank you both for the color, and I appreciate it. Once again, great quarter, and I'll jump out.
Thank you.
Once again, if you would like to ask a question, please press star, then one on a touch-tone phone. The next question comes from Jonathan Reeder from Wells Fargo. Please go ahead.
Hi, Bob and Eva. I think you said the CapEx budget for 2015 is $85 million-$95 million. Does that assume that the permitting delays that were causing issues in 2014 have been resolved?
It does not assume that they've been resolved. I think we have a better set of projects that we can go to if, in fact, we encounter the permitting delays. We're kind of prepared for that. That is a situation that I think a lot of water utilities are facing from some of the cities. We feel comfortable saying that we can get to the $85 million-$95 million.
Okay, what sort of?
That out of the rate case. We do have $90 million requested in the rate case. You should also understand, and I know you do, Jonathan, that we have very modest rate increases requested, in some cases, rate decreases. We are hoping that as a result of that, we can spend a good part of the capital request that we have in with the commission. We have not received ORA's report at this point. I believe it's due out on March 6th. Still a bit of a guessing game for 2016-2018 without having had the benefit of what they have included in their report.
Okay. That was my next question. Really no update on the rate case. You're just waiting for the ORA report next?
We are.
Yes.
Okay. What was the earned ROE in 2014 at the utilities, and if you have the year-end rate base?
Yeah.
For Golden State?
Yeah. The earned return there, I believe, was 11.0, Eva?
Yeah, it was 11%.
Yeah. 11% return at Golden State. That includes, of course, both the electric operation and the water operation.
Okay, great.
We don't-
I'll be turning it, Bob.
Yeah. We haven't typically disclosed the rate base.
Okay, fair enough. Last question, it looks like the equity level at the utility remains above the 55% authorized amount. What's the plan to get that back in line?
Well, we've been working to pay a little more dividends than we have had in the past out of the utility up to the parent. That will continue until we get to the authorized level of our equity level there. Cash goes up to the parent, we're using that to, of course, pay dividends to the shareholder, as well as to continue to work on the stock repurchase program.
Any timeframe for when it might get back in line, or would the plan to be to try to get a higher authorized equity layer at the utility during the next cost of capital?
We're definitely going to be thinking about that. It does come down to justifying what's an appropriate equity level. As you so aptly determined, we are a little high there in all circumstances, and so we are trying to move some of the equity out of there. As you know, the overall cash balance is pretty substantial right now, so it's either going to be at the parent or at Golden State Water until we use it to fund either CapEx or our stock repurchase program. Of course, if it's for funding CapEx, we'll keep it at the utility.
Okay, thanks.
Okay. Thank you, Jonathan.
This concludes our question and answer session. I would like to turn the conference back over to Mr. Bob Sprowls, President and CEO, for any closing remarks.
Sure. Thank you, Andrew. I just wanted to close it up today by thanking everyone for their participation in the call today and also for their continued interest and investment in American States Water Company. I wish everybody a good day.
This concludes today's American States Water