Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company's 3rd Quarter 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 Wednesday, November 12, 2014 on 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 session. At this time, I'd like to turn the conference over to Eva Tang, Chief Financial Officer of American States Water Company. Please go ahead.
Thank you, Emily. Welcome everyone and thank you for joining us today. On the call with me is our President and CEO, Bob Farrell. As a reminder, certain matters discussed during this conference call may be forward looking statements intended to qualify for the Safe Harbor from the liability established by the 1995 Private Securities Litigation Reform Act. 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.
With that, I will now discuss the 3rd quarter financial results. Diluted earnings for the Q3 of 2014 were $0.54 per share compared to $0.53 per share for the same period in 2013. Net income for the quarter was $21,200,000 compared to $20,800,000 last year. The increase in our consolidated earnings was primarily driven by the recording of retroactive revenue based on various price Earnings at our water segment decreased by $0.02 per share compared to the Q3 of last year, while our earnings for the electric segment remained flat. Additionally, earnings per share at our AWR parent company decreased by $0.03 per share this quarter due primarily to a cumulative tax benefit recorded during the Q3 of last year for deduction taken related to employee benefit program.
There was no similar cumulative tax benefit recorded in 2014. For the quarter, increased by $2,800,000 to $96,700,000 as compared to the same period in 2013. During 2014, the CPUC approved an increase in rates to specifically cover increases in supply cost experienced in certain customer service areas. This revenue increase is offset by a corresponding increase in supply cost resulting in no impact in the water gross margins. There was also an increase in water revenues due to 2nd year rate increases approved by the CPUC effective January 2014.
Revenue from electric operations decreased slightly to $8,600,000 for the quarter pending a final decision on the electric general rate case, our electric revenues have been recorded using 2012 adopted levels authorized by the CPUC. Revenues for our contracted services business, American State Utility Services increased $4,900,000 to 33 $1,000,000 for the Q3. The increase was partially due to the resolution of prior 3 determinations for the military subsidiaries serving Andrews Air Force Base for Bragg and for Jackson during this past quarter, which resulted in the recording of retroactive revenues of $2,600,000 this quarter. There was also an increase
in
Our water and electric supply costs were $31,600,000 for the Q3 of 2014. Any changes in supply costs for both the water and electric segments as compared to the adopted water supply costs and electric supply costs are tracked in balancing accounts, which will be recovered from or refunded to our dollars 1,000 for the Q3 of 2014, mostly due to a $203,000 decrease in surcharges for recovery of costs previously incurred with a corresponding decrease in revenues in the water segment. As we have mentioned before, these surcharges have no impact on pre tax operating income. Administrative and general expenses for Q3 of 2014 were $20,200,000 as compared to $20,100,000 for the same period in 2013. During the Q3 of 2014, there was a $220,000 reduction in surcharges billed at our water segment for recovery of various AMG costs previously incurred as compared to the same period in 2013.
Again, surcharges has no pre tax operating income. Excluding this decrease in surcharges, overall NGL expenses increased by $915,000 due in large part to increases in legal and outside services costs. Maintenance expense decreased by $276,000 driven by higher level of plant maintenance performed in 20 13 at our water segment. We expect maintenance expense for the water segment to be lower in 2014 as compared to 2013. Depreciation and amortization expense increased by $796,000 to $10,500,000 for the Q3 of 2014 due mostly to approximately 93 dollars of addition to the plant during 2013.
Property and other taxes increased by $251,000 compared to the same quarter in 2013 as a result of an increase in property taxes for the water segment. SG U. S. Construction expenses increased by $1,200,000 to $20,400,000 during the Q3 of 2014 due to an increase in construction activities. Other income and expenses including interest expense decreased slightly to 5,300,000 Income tax expense increased by $3,600,000 to $13,500,000 as compared to the Q3 of 20 13, driven by an increase in pre tax income and a higher effective income tax rate.
Moving on to liquidity and capital resources. Net cash provided by operating activities increased by $32,800,000 to 1 $120,100,000 for the 9 months ended September 30, 2014. This increase was primarily due to an increase in cash generated by contracted services, resulting from the timing of billing and cash receipts for construction work at military bases. In addition, there were water rate increases in May 2013 and January 2014 and the collection of various surcharges implemented in mid-twenty 13 in connection with the CPUC's final decision on the waterway case. This increases in cash flow from operating activities were partially offset by tax refunds received during the Q1 of last year, for which no similar refund amount were in 2014.
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 expenditures, we spent $44,000,000 on company funded capital work during the 9 months ended September 30, 2014. The capital expenditures were lower than we expected, mainly due to delays in certain pipeline projects as a result of excessive paving requirements and permit fees local cities and delays in a new groundwater well project due to difficulties in finding suitable groundwater in the area. As a result, capital expenditures for the full year of 2014 are now estimated to be between approximately $70,000,000 $75,000,000 Portion of the capital work delayed in 2014 are now expected to be completed in 2015. We estimate 20 fifteen's capital expenditures to be 85 $1,000,000 to $90,000,000 For additional details on our Q3 and year to date performance, please refer to our earnings release and Form 10Q issued this morning.
With that, I'll turn the call over to Bob.
Thank you, Eva. I appreciate everyone joining us today. I will begin with an update on our water and electric general rate cases. First for our water segment, as we discussed during last quarter's call, Golden State Water Company filed a general rate case in July for all of our water regions in the general office. The application will determine the water rates for the years 2016, 201720 18.
Golden State Water requested overall capital budgets in the application, which averaged approximately $90,000,000 a year for the 3 year period. 2016 adopted water gross margin depreciation expenses resulting from an updated depreciation study. The new water rates are expected to become effective in January 2016. For our electric general rate case, which was filed in 2012 for new rates in years 2013 through 2016, the CPUC issued a proposed decision in September 2014, adopting a settlement agreement reached with all parties on the revenue requirement. A final decision is expected in the Q4 of have a significant impact on Golden State Water's net income for 2014.
Before I move on to our contracted services business at ASUS, let me address the company's water supply and drought situation in California and provide an update on a potential condemnation of 1 of our water systems. As we discussed in our previous call, State Water Resources Control Board in July approved emergency regulations that implement mandatory restrictions on certain outdoor urban water use to further reduce water use throughout the state. The regulations call for mandatory water use restrictions, such as eliminating hosing CPUC is aligned with the emergency regulations. If dry conditions continue in our service areas, we may implement additional steps as outlined in our CPUC 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. Let me provide you an update on potential condemnation of our water system. In yesterday's general election, a bond measure was passed in the city of Clermont within our service territory, which authorizes the city to issue up to $135,000,000 in water revenue bonds to fund a potential acquisition of our water system in Clermont. For the acquisition of public utility property, the laws of the state of California provide that we may contest in court whether the condemnation is actually necessary and in the public interest and that we are entitled to receive the fair market value of our water system if it is ultimately taken.
While we are disappointed with the outcome of the vote, we are committed to providing excellent service to our customers and we'll continue to defend our Clairemont system from condemnation and work with the city to address their concerns. Now let's turn our attention to the company's contracted services business at ASUS. As Eva mentioned, in September 2014, the U. S. Government issued contract modifications to ASUS, approving price redeterminations related to the operations at Fort Bragg, Fort Jackson and Andrews Air Force Base.
As a result of these contract modifications, ASUS recorded approximately $2,600,000 of retroactive revenues and pre tax operating income during the 3 9 months ended September 30, 2014. Also, approximately $6,000,000 of renewal and replacement funds recorded as billings in excess of costs on the balance sheet. This $6,000,000 will be recognized in construction revenues along with the related construction costs when the work is performed. ASUS continues to work closely with the government on the remaining price redeterminations. We expect the 3rd price redeterminations for the military bases in Virginia to be completed during the Q4 of 2014.
Additionally, we expect the 2nd price redetermination for Fort Jackson, South Carolina to be completed in the Q1 of awarded 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 modifications relating to potential capital upgrade work as deemed necessary to improve the water and wastewater infrastructure at the military bases. During the Q3 of 2014, the U.
S. Government awarded ASUS approximately $27,000,000 in new construction projects, majority of which are expected to be completed during the next 12 months. 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.
In regard to ASUS's outlook for the remainder of 14, we are still anticipating that earnings per share for the full year 13 results of $0.27 per share after the removal of the one time tax benefit from 20 thirteen's earnings. Finally, I'd like to turn our attention to dividends. On October 28, 2014, the Board of Directors approved a 4th quarter dividend of $0.21 per share for shareholders of record at the close of business on November 14, 20 14. American States Water Company has paid dividends every year since 19 30 our peers, there is room to grow the dividend in the future. Before I finish my prepared remarks, I'd like to thank you for your interest in American States Water.
And we'll now turn the call over to the operator for questions.
Thank you. We will now take your We'll begin with Jonathan Reeder of Wells Fargo. Please go ahead.
Hey, Bob and Eva. Got a couple of questions. 2015 and thus there'd be no change overall for the 2 years cumulatively?
I believe so.
Okay. And then Bob maybe you can drill down a little more on the $2,600,000 of retroactive price redeterminations. How much of that was for periods prior to 2014? Was that the majority of it? Or how would you kind of, I guess, parse out it wouldn't be for 2014?
Yes. I would say majority of it is for periods prior to 2014. Some of it of course is related to 2014 as it's retroactive back to basically when the redetermination that was done on time would have been done.
It's like our rate case cycle Jonathan. Every 3 years we file if the government delaying giving us the rate increases then it's retroactive to the day it's supposed to be effective.
Right. So I guess you want us to think of it similar to I guess ASUS's $0.27 last year, this year think of it as ASUS less this $0.04 amount. Is that kind of fair?
I guess where I would sort of parse it, it would probably be $0.27 less maybe 0 point because some of it is related to the 1st 9 months of 2014, but if that helps.
Yes. Okay. And then you said the government awarded $27,000,000 of new construction projects expected to be done mostly over the next 12 months. That seems to be a step up from what you had last year. I guess what do you attribute that to?
And then what do you expect the full year 20 15 construction budget will look like at ASUS?
Well, it's generally Department of Public Works at each of the bases to try to determine what additional work needs to be done at the bases. And so we work very closely with this group and we're able to convince the government that additional work needed to be done. So this $27,000,000 is a bit of a step up from last year, because I think it was $18,000,000 last year if I'm not mistaken even. That's correct. Yes.
So it's an effective 50% increase. When we think about construction work going forward, so we've got the $27,000,000 However, in 2014, of course, we had some major projects that were completed. The water and wastewater project at Fort Bragg, the additional projects at Fort Bragg. So as we look out into the future, And we've really hesitated to try to give revenue estimates for construction because it's pretty unpredictable as to the timing of this. But I guess we're not ready to sort of give a revenue estimate on the construction side.
Well, maybe you can talk a little bit, I guess, the 27 dollars of construction projects awarded that's not the only construction projects we'll see in 2015, right? There's another component like a kind of base component to the construction projects?
Yes. Is that it? Renewal and replacement work, that's sort of ongoing. This $27,000,000 is not renewal and replacement. It's other types of projects.
So it's really on top of the renewal and replacement. We also have the $6,000,000 of the retroactive renewal and replacement that would go into over the next 12 months that we got as part of the price redetermination.
Okay. So that $6,000,000 you would think would be you'd recognize and get done in 2015
then? Yes. Maybe even a little bit in the Q4 of 2014, but it would a good part of it, most of it would roll over into 2015.
Okay. And then I guess have you guys said what you believe the fair market value of Clermont is? I guess just wondering where the city came up with the 135,000,000 and what that might mean for
you all? Yes. I mean we have not put a value out there. The I think the $135,000,000 is sort of the city's way of trying to determine an amount that an amount that would not only cover the cost of the system, but sort of getting through the process between now and then and maybe reimbursing the city for litigation that sort of thing. But we've not put a valuation out at this point and do not plan to until we're basically forced to in the court process if it comes to that.
Okay. All right. I think that's well, I guess last question. I don't know to what extent the other bases that you currently have RFPs out there that you're pursuing or ones that you come up. Any sense when we might see another government decision?
Very hard to predict, Jonathan. Government is seems to be moving very slowly in this particular area. We are out there bidding though on a number of bases and hopefully, we can break through with a win here soon, but it's really hard to predict.
Okay. And the last one that they've made a determination on was that one, I believe it was last January in Utah. That was the last time the government made a decision on a privatization contract?
Well, the you sort of have to look at the various branches Department of Defense. You've got the Army bases that seem to be sort of moving down the path a little more quickly or have moved more quickly down the path and the Air Force bases are more slowly. But I believe one of our competitors won a base in New Jersey. It was an army base as I recall more recently than last January if I'm not mistaken.
Yes. But we didn't participate in the bidding process for either of the bases.
That's right. Those were not bases that we had on our list. But so Army seems to be moving more quickly than Air Force at this point.
Okay. I appreciate the additional color.
Okay. Thank you, Jonathan.
And our next question is from Tim Winter of Gabelli. Please go ahead.
Good afternoon, Bob and Eva.
Hi, Tim.
I was wondering, can you give
a little more background or metrics associated with Claremont? I mean, how many customers served or property plant and equipment? And what the issue is with the folks?
Sure. 11,000 customers in that of our 11,000 of our customers into that town. So the issue generally has been rate levels and the fact that rates have been going up over time because we've been replacing capital. And the city generally compares our rates to municipalities surrounding the city of Clermont and our rates are higher according to the city. Couple of things going on there.
One is, in many cases, municipalities do not necessarily reflect in the water bill the true cost of operating a water system. Sometimes that can be in other forms like property tax bills, etcetera. Secondly, our company has felt that we needed to consistently replace infrastructure to keep a very good system operating. And I'm not sure other municipalities have been doing that. As you know, Tim, I think the rate setting process for a city becomes very political.
City council folks in many cases have a difficult time approving increases than be used to replace infrastructure. So we've always sort of had the view that if you have sort of regular small rate increases to keep your system upgraded, that's been the best way to run a water system and that's the way we've done things. The other things that have sort of come through here is we did implement the tiered rates in late 2008, early 2009. Customers are not all that happy with the fact that as they use less water, in some cases their bills go up. And that's been a sort of a bone of contention in the City of Clermont.
As you know, our system is such that 70% of our costs are fixed and 30% are variable. However, to really be able to get conservation to kick in, our rates are designed sort of just the opposite. Rates are sort of designed assuming 70% are variable and 30% are fixed. And as a result, as customers use less water, our costs do not go down as great as one might expect. And so because of the water revenue adjustment mechanism, company has kept hold through that.
However, the customers are not happy with the fact that GIU is less and I'm still having to pay these surcharges. Surcharges. Even though if their next door neighbor is not using less, the next door neighbor also has to pay the surcharges. So they are in fact better off than their neighbor. But anyway, that's raised some concern there.
City of Clermont, I think, understands that it's going to cost them considerably more to buy the system and run it than what their situation is with our company. However, it's no longer according to the more vocal people at Claremont, it's no longer an issue of rates. It's more of an issue of local control. So maybe that may be more than you want to know, but No, that's helpful.
And just on is there anything extraordinary about the property plant and equipment there? Is there any extra facilities there? Or is it just can I sort of just do the math with 11,000 customers off your customer base to try to get a rate base number?
Nothing real no, there's really nothing unique about Claremont.
We do have water rights in Clermont. That is not our book.
Yes. The water rights would become would also be considered market value perhaps?
We believe it would be, yes.
That would be a considerable dollar amount.
It would be, yes. And the $135,000,000 is not our number, I can tell you that.
Okay. Can you quantify what the water rights are associated with that property?
I cannot.
Understood. Okay. Thanks, Bob. Thanks, Yvind.
Okay. Just a comment here. I don't really want our analysts to get really concerned about the Claremont situation. We believe ultimately that if this gets condemned that the valuation we get will be at least what we have what's currently in our stock price. So this is not something that's going to be a financial harm to the company.
It is though from a strategy standpoint, I mean, our goal in life is to be get bigger, not smaller. So and we've told the city that. So from that perspective, we're going to, of course, fight the condemnation.
Yeah.
At this time, I'm not showing any additional questions.
Okay. I'm going to go ahead and wrap it up then, if that's okay, Emily?
This concludes today's American States Water Company conference call. As a reminder, the call will be archived on our website and can be replayed beginning Wednesday, November 5, 2014 at 5 pm Eastern Time, 2 pm Pacific Time and will run through Wednesday, November 12, 2014. Thank you for your participation. You may now disconnect.
Thank you, everyone.