Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company's 4th 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 p. M. Eastern Time and run through Thursday, March 5, 2015, on the Investor Relations section of the company's website, www.aswater.com.
At this time, all participants are in a listen only mode. Later, we will conduct a question and answer 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 ks 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 our President and CEO, Bob Grau. I will start by discussing the 4th quarter financial results. Diluted earnings for the Q4 of 2014 were $0.35 per share compared to 0.30 dollars per share for the same period in 2013.
Net income for the quarter was $13,500,000 compared to 11,800,000 dollars for the same period of 2013. The increase in our consolidated earnings was primarily an increase in construction activity at our contracted services business. Earnings for the Water and Electric segment 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. While the revenue remained relatively flat in the quarter at approximately $73,000,000 as compared to the same period in 2013.
However, in the Q4 of 2014, there was a $2,300,000 decrease in surcharge revenue as compared to the same period in 2013. Surch charges implemented for the recovery of previously incurred costs are offset by a corresponding amount in operating expenses, resulting in no impact to pretax operating income. Excluding the impact of surcharges, revenue increased by 2 $300,000 during the Q4 of 2014, mainly as a result of CPUC approved rate increases and revenue recoveries related to capital projects approved through advice letter fighting. For the 3 months ended December 31, 2014, revenue from electric operations were $7,000,000 as compared to $10,400,000 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, electrical revenue for 20 132014 were recorded based on 2012 adopted level. 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 $2,200,000 cumulative reduction in revenue for years 2013 2014 was recorded during the Q4 of 2014 along with a cumulative reduction in depreciation expense. The impact of the retroactive effect of the new rate to 20 fourteen's net earnings was not significant.
Revenue for our contracted services business American State Utility Services increased $3,300,000 to $29,900,000 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 contracting activities tend to fluctuate from quarter to quarter. Our water and electric supply costs were $23,500,000 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 account, which will be recovered from or refunded to our customers in the future. Other operating expenses decreased by $1,300,000 for the quarter as compared to the same period in 2013.
Excluding the surcharges in 20132014 or recovery of costs previously incurred, other operating expenses decreased by $749,000 due to lower battery expense, labor, conservation and outside service costs in the water segment. Administrative and general expenses for the Q4 of 2014 were $18,600,000 compared to $21,200,000 for the same period in 2013. Excluding a $1,900,000 decrease in surcharges, which has no impact to pre tax operating income, overall G expenses decreased by $734,000 due to decreases in employee related expenses, outside service costs at our water sector. 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 $1,300,000 to 9 point $5,000,000 for the quarter as compared to the same quarter in 2013. The decrease was generate case, which was retroactive to January of 2013. The retroactive adjustment resulting from the approved rate case was recorded in the 4th quarter of 2014 and reduced the overall composite rate 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.
As U. S. Construction expense increased by $143,000 to $17,700,000 during the Q4 of 2014 due to an increase in construction activities. Interest and other non operating expenses net of interest income decreased by $473,000 to $3,900,000 for the Q4 of 2014 as compared to the same period in 20 13, primarily due to lower interest expense resulting from the redemption and maturity of certain long term loans as well as higher interest income collected on certain outstanding balances go to the water segment. Income tax expense increased by 2,500,000 dollars as compared to the same period in 2013, driven by 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 20 were $1.57 compared to $1.61 for 20.13. 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 reach termination and additional revenues reported during the closeout of large project at ASUS for 14, earnings per share as adjusted for 20 142013 would have been $1.52 1.49 dollars respectively.
That is an increase of $0.03 per share. For additional details on our Q4 year to date performance, please refer to our earnings 3Ds and Form 10 ks issued yesterday. Moving on to liquidity and capital resources for the full year of 2014. Net cash provided by operating activities increased by 27 point $6,000,000 to $163,300,000 for 20.14. The increase in operating cash flow was primarily due to cash generated by the contracted services business due to the billing of and cash receipts for construction work at military bases during 2014.
The billing and cash receipts 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 $61,000,000 on company funded capital work for 20 14. This was lower than we had originally projected due to delays on several projects, resulting from excessive tailing requirements, permit fees from local cities and a delay in drilling a well because suitable groundwater was not found in the area.
We expect to invest $85,000,000 to $95,000,000 in capital projects during 2015. As discussed during the Q2, in July of 2014, Golden State Water redeemed $15,000,000 of its midterm notes, which had high interest rate and refinanced in December with notes that a 3.45 percent coupon rate. Additionally, 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 20 14 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 and 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 percent 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' 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 $1,000,000,000 of net utility plant on its balance sheet at the end of 20 per share from continuing operations have grown at a compound annual growth rate of 14.2% over the 5 year period from $0.81 per share in 2,009 to $1.57 per share in 2014. During 2014, Standard and Poor's upgraded its rating outlook to positive on both American State and Golden State Water. S and P also affirmed an A plus 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 20 15. 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 in 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 in the application averaged approximately $90,000,000 a year for the 3 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 20 15, 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 3 other California Class 8 water utilities. As a result of the approval, Golden State Water's current authorized cost of capital of 8.34 percent and allowed return on equity of 9.43 percent will continue in effect through December 2016 and the company will forego 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 1, 2014 through September 30, 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 closing of driveways, prohibiting irrigation runoff, etcetera.
We are regulated by the California Public Utility Commission on such matters and our water conservation and rationing plan approved by the the 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 Q4 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 revenues in 2015 as compared to the adopted 2014 base revenue. The decision also allows us to invest $19,500,000 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 Port Bragg, Port Jackson and Andrews Air Force Base during the Q3, resulting in contract modifications, which included retroactive operations and maintenance management fees and retroactive renewal and replacement fee. As a result, ASUS recorded approximately $2,600,000 of retroactive revenues and pre tax operating income during the Q3. ASUS continues to work closely with the government on the remaining price redetermination.
We expect the 3rd price redetermination for Andrews Air Force Base in Maryland and the 2nd price redetermination for the military bases in Virginia to be completed during the Q1 of 2015. Additionally, we expect the 2nd price redetermination for Fort Jackson, South Carolina to be completed in the first half 15. Filings for these price redeterminations, requests for equitable adjustment and contract modification award 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 deemed necessary for improvement of the water and wastewater infrastructure at the military base. 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 27, 2015, American State's Board of Directors approved a 1st quarter dividend of $0.21 per share on the common shares of the company. Dividends on the common shares are payable on March 2, 2015 to shareholders of record at the close of business on February 17. 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. And I will now turn the call over to the operator for questions.
We will now take your questions. The first question comes from Richard Verdi from Ladenburg. 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 $75,000,000 this quarter, give or take a little either way. It was at $57,000,000 last quarter and last year it was somewhere around $35,000,000 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 is 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 SUS construction work impact hugely for 2014 compared to 2013. As we finish certain progress of the project and we can build a government and cash comes in. So there's timing differences, it always will fluctuate.
In terms of Golden State Water, we had this ramp balance before the water revenue adjustment mechanism. We implemented since 2008, 2009 timeframe and the beginning of those years we accumulate a lot of the balances. But now we're kind of starting recovery, the surcharges of those shortfalls in consumption. And our adopted level of consumption has been much in line with what we have currently incurred. So that decrease our recovery of the rent balance.
So all that stuff kind of impact us and we also implemented the repair regulations, the tax regulations which will have a tax deduction for 2014. The Congress also re net the bonus depreciation. So a lot of factors impact our cash flows for 2014.
Do you think this is a level that will be sustained moving forward? Do you think it will come in a little bit or grow? What 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?
Yes. Yes. Because I'm thinking about net debt.
Yes. Well, we are in the process of buying some of our stock back and making good progress on that. So 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. Yes.
And as we mentioned, we expect to spend $85,000,000 to 95 $1,000,000 CapEx in 2015. So that will decrease our cash spending.
Okay. Super. That's very helpful. Thank you. And then one last question, and I know this is a challenging one.
It's tough for you guys to talk about. But Bob, last year, you had mentioned, I think it was in the Q2 or Q3 call, I don't recall at the top of my head, that ASUS at that time for 2014 would look a lot like 2013. So now with 2014 in the rearview mirror, can we expect ASUS in 2015 to look a lot like 2014? Or what 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 4 things you need to be a good forecaster at. 1 is how successful are you in determining price redetermination?
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. So there is a little more transparency there. But new construction work will come our way at the respective basis, which as you know is subject to availability of government funding and also how successful will we be in winning new bases. And there's really no sense that the winning of new bases will have a large impact on 2015 earnings because it's there's I believe about a 6 month transition period.
So even if we found out today that we'd want a base, it probably wouldn't have a significant effect on 2015. But all that said, we provided a reconciliation of changes in earnings per share from $0.13 to $0.14 in our earnings release. ASUS contributed $0.31 per share to 20 14 earnings. In the $0.31 share, there were 2 items I'd like to highlight. We recorded $0.03 per share of retroactive revenues related to prior year as a result of successful price redeterminations and these were received in the Q3.
We also recorded $0.02 per share in the 4th quarter during the closeout of a large construction project at Fort Bragg. You may recall that in 2010, we began work on $58,000,000 pipeline replacement project at Fort Bragg. And that's this job was completed and closed out during the Q4 of 2014. So excluding those two items, ASUS's earnings would have been about 0.26 dollars per share for the year. At this point, we believe ASUS's earnings for 2015 could look a lot like 20 fourteen's earnings without the effect of those 2 items.
So the $0.26 is a good place to start I would say in terms of forecasting earnings for 20 15 for ASUS.
Okay. Thanks, Scott.
Sorry about the long winded answer, but
No, it's I really appreciate the color. Thank And then just one more if I may and I'll jump back in the queue. And staying on ASUS, there are a number of bases coming online over the next few years as you even mentioned Bob. And 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?
Yes. That's a fair assumption. I do want to to I'm always cautious when we talk about ASUS. I guess I'm always cautious when we talk about everything. But when we talk about When we talk about ASUS, the ASUS or the military privatization process is a long process.
And so 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. But 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.
So we believe we can cost effectively bid on a number of Aces.
Okay, super. Thank you very much. Thank you both for the color and I appreciate it. And once again, great quarter and I'll jump out.
Thank
you. 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 $15,000,000 is $85,000,000 assume that the permitting delays that were causing issues in 2014 have been resolved?
It does not assume that they've been resolved. But we I think we have sort of a better set of projects that we can go to if in fact we encounter the permitting delays. And so we're kind of prepared for that. It is a that is a situation that I think a lot of water utilities are facing from some of the cities in which they and we feel comfortable saying that we can get to the $85,000,000 to $95,000,000
Okay. And then what sort of
The debt
is out of the rate case and we do have $90,000,000 requested in the rate case. You should also understand and I know you do Jonathan that we have a very modest rate increases requested in some cases rate decreases. We are hoping that as a result of that 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 6.
So it's still a bit of a guessing game for 2016 through 2018 without having had the benefit of what they have included in their report.
Okay. That was kind of my next question. So 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?
Yes.
The Golden State?
Yes. The earned return there I believe was 11.0 EBITDA.
Yes. It was 11%.
Yes. 11% return at Golden State. And that includes of course both the electric operation and the water operation.
Okay, great.
We don't Understandable. Yes, we haven't typically disclosed the rate base.
Okay. Fair enough. And then last question. It kind of looks like the equity level at the utility remains above the 55% authorized amount. So what's kind of 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. And that will continue until we get to the sort of authorized level of our equity level there. Cash goes up to the parents and then 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 what 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. But as you so aptly determined, we are a little high there sort of in all circumstances. And so we are trying to move some of the equity out of there. The overall 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, John.
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 want to close it up today by thanking everyone for their continued interest and investment in American States Water Company. I wish everybody a good day.
This concludes today's American States