Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company Conference Call discussing the company's Q1 20 14 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 runs through Wednesday, May 14, 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 As a reminder, this call is being recorded and will be limited to no more than 1 hour. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Thank you, Nikki.
Welcome everyone and thank you for joining us today. On the call with me is our President and CEO, Bob Swell. As a reminder, certain matters discussed during this conference call may be forward looking statements intended to qualify for the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. Please review a description of the company's risks and uncertainties in our most recent Form 10 ks and Form 10Q on file with the Securities and Exchange Commission. With that, I will now discuss the Q1 financial results.
Diluted earnings for the Q1 of 2014 were $0.28 per share compared to $0.35 per share for the same period in 2013. Net income for the quarter was $11,000,000 compared to $13,500,000 for the same period of last year. Included in the results for the Q1 of 2013 was the impact of the one time recovery of previously incurred costs of $3,100,000 or $0.05 per share approved by the California Public Utilities Commission or the CPUC in 2013. There was no similar item in the Q1 of 2014. Excluding this one time non recurring item, earnings for the water segment increased by $0.01 per share and consolidated earnings decreased by $0.02 per share, primarily due to an expected reduction in renewal and replacement increased by $1,500,000 to $70,800,000 as compared to the same period in 2013.
There was an increase of $1,300,000 in surcharges billed to our customers during the Q1 of 2014 with a corresponding increase in operating expenses for recovery of previously incurred costs. These surcharges had no impact to our net earnings. There were also rate increases for 2014. The impact to operating revenue associated with this rate increases is anticipated to be approximately $1,600,000 for 20.14. Electric revenues at Golden State Water were $10,500,000 as compared to $10,700,000 for the same period in 20 13.
Pending a final decision on the electric generate case, electric revenues have been recorded using 2012 adapter level authorized by the CPUC. Revenues for our contracted services business American States Utility Services or SUS decreased to $20,700,000 for the Q1 of 2014, primarily driven by a planned reduction in renewal replacement capital work at the Fort Bliss and Fort Jackson military bases. R and R constructions will continue to vary from year to year over the remaining term of the 50 year contract with the government. However, overall construction activity is expected to increase during the remainder of 2014 as compared to the Q1. Our water and electric supply costs were $20,200,000 for the Q1 of 2014.
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 customer in the future. Other operation expenses increased by $1,500,000 for the Q1 of 20 14. As I mentioned earlier, the CPUC approved a one time recovery of $3,100,000 in 20.13 for previously incurred incurred costs, dollars 1,000,000 of which was related to operation costs. So excluding the $1,000,000 credit recorded in the Q1 of 2013, there was an increase of $500,000 in 20 fourteen's Q1, primarily due to higher chemical and other water treatment costs. Administrative and general expenses for the Q1 of 2014 were $20,200,000 as compared to $17,900,000 for the same period in 20 $9,000,000 for the same period in 20 quarter of last year, dollars 1,700,000 was related to previously incurred A and G expenses.
There was also an increase in approximately $900,000 in water surcharges recorded during the Q1 of 2014, which had a corresponding increase of $900,000 in A and G expenses. Excluding these two items, A and G expenses actually decreased by $300,000 during the Q1 of 2014 due primarily to an overall decrease in company wide outside services costs. Our maintenance expense decreased by $445,000 driven by a decrease in maintenance work at our water segment. We expect maintenance expenses for the water segment to be lower in 2014 as compared to 2013 as we had done additional planned maintenance work in 2013 above prior years. Depreciation and amortization expense increased by $714,000 to $10,500,000 for the Q1 of 2014 as compared to the same period in 2013, driven mostly by $93,000,000 of additions to utility plants during 2013.
Property and other taxes by $177,000 compared to the same quarter in 2013 due to increases in property taxes and franchise fees. As U. S. Construction expenses decreased by $7,300,000 to $13,500,000 during the Q1 of 2014 as compared to the same period in 2013. The decrease is primarily due to lower renewal and replacement construction activity, as I discussed earlier.
Other income and expenses including interest expense increased slightly to 5,400,000 dollars for the Q1 of 2014. Income tax expense decreased by $2,900,000 to $6,400,000 as compared to the same period in 2013. This decrease was driven by lower effective tax rate for the quarter due to changes between book and taxable income from ENCORE benefit related items that are treated as a flow through adjustments. Moving on to liquidity and capital resources. Net cash provided by operating activity increased by $9,900,000 to $40,900,000 for the Q1 of 2014 as compared to $31,000,000 for the same period last year.
This increase was primarily due to water rate increases implemented in May 2013 and the collection of various surcharges also implemented in mid-twenty 13 in connection with the CPUC's final decision on the water rate case. In addition, there was an increase in cash generated by contracted services due to the timing of billing and cash receipts for construction work at military bases during the Q1 of 'fourteen. This increases in cash flow from operating activities were partially offset by tax refunds that we received during the Q1 of last year. We didn't have similar refunds received in 2014. In regards to Golden State Water's capital expenditures, we incurred $13,400,000 excluding work funded by others during the Q1.
We still expect to invest $80,000,000 to 90,000,000 in capital projects during 2014. For additional details on our Q1's performance, please refer to our earnings release and Form 10 Q issued yesterday. With that, I'll turn the call over to Bob.
Thank you, Eva. Hello, everyone. I appreciate all of you joining us today. Our regulated water business continues to be our flagship subsidiary. We are currently working on our next general rate case filing.
We intend to file for all of our water rate making areas in the general office in July of this year for new rates effective in January 2016. With regard to our electric division, we have been in settlement negotiations with all of the parties in the general rate case. Those negotiations have resulted in an agreement in principle and we anticipate that a settlement agreement will be filed with the California Public Utilities Commission in the Q2. A final decision on this rate case is expected in late 2014. We continually look for ways to improve efficiency and manage our operating expenses mitigate future rate increases.
Over the past few years, we have stabilized costs and decreased expense volatility, such as redeeming certain long term notes and replacing them with lower rate notes and closing the company's defined benefit pension plan to new hires and implementing a defined contribution retirement plan instead. Certain functions that had previously been performed in house were outsourced at reduced costs because the outside vendors had economies of scale that we could not match. In addition, we have reduced staff by about 4% and continue to adjust while balancing customer service and costs. We are committed to continuously evaluating our processes to reduce rate increases to our customers, while allowing us to make prudent capital investments. As you may know, in March, our Board of Directors approved a stock repurchase program authorizing the repurchase of up to 1,250,000 common shares through June 30, 2016.
The intent of this program is to enable the company to achieve a shareholders' equity ratio for the consolidated company that is more reflective of appropriate equity ratios for our 2 subsidiaries, Golden State Water and ASUS. The higher equity ratio for the consolidated company is partly a result of the sale in May 2011 of our Arizona subsidiary Chaparral City Water Company, where we received approximately $30,000,000 in cash at closing. Since the sale, our parent company has used this cash to repay borrowings under our revolving credit facility and invest in or lend to our 2 remaining subsidiaries. Based upon current expectations, including the projected infrastructure needs for Golden State Water and the expected growth of ASUS, which is not capital intensive, we do not anticipate the need for secondary common stock offering in the near term. We intend to initiate the repurchase program in mid May at the earliest.
Now I'd like to provide an update on the drought situation here in California. As you may know, in January of this year, the Governor of California declared a drought state of emergency after the driest year on record for California. He recently issued an executive order to strengthen the state's ability to manage water, Californians to redouble their water conservation efforts. In response, we've asked customers to voluntarily reduce their water usage by 20%. If dry conditions continue, we may also need to implement mandatory water rationing to our customers.
As you all know, the California Public Utility Commission has authorized us to establish revenue adjustment mechanisms to decouple revenues from sales to ensure that conservation does not negatively impact our earnings and to allow us to continue running our operations and make the necessary capital investments. Now let's discuss the company's contracted services business at ASUS. For the 3 months ended March 31, 20 14, earnings from ASUS decreased as compared to the same period in 2013, primarily due to lower planned renewal and replacement construction activities. While renewal and replacement activity will continue to vary period to period for all bases, we do anticipate the renewal and replacement activity to increase throughout the remainder of 2014 as compared to the Q1 of this year. ASUS continues to work closely with the government on the various price redeterminations for each of the military bases.
We expect the second price redetermination at Fort Bragg in North Carolina to be completed during the Q2 of 2014 and expect the second and third price redeterminations for Andrews Air Force Base in Maryland and the second price redeterminations for the military bases in Virginia to be completed in the Q3 of 2014. In addition, the first price redetermination for Fort Jackson in South Carolina is expected to be completed in late 2014. Filings for these price redeterminations, requests for equitable adjustment and contract modifications opportunity 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 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 bases for bidding over the next several years. In regard to ASUS's outlook for the remainder of 2014, there are several variables that impact this business, which makes it difficult to predict its earnings with much certainty.
With that said, let me provide some comments on where we think the full year 2014 could come out relative to ASUS's 2013 results. Excluding a one time tax benefit of $0.03 per share, earnings from ASUS were $0.27 per share for the full year 2013. While we have a few large projects winding down in 2014, we anticipate renewal and replacement activity to increase throughout the remainder of 2014 as previously discussed. In addition, we expect to have a number of new construction projects for 2014 though individually probably not as large in size as the ones rolling off. As just mentioned, we also have various price redetermination filings pending with the U.
S. Government, all of which we anticipate to be resolved during 2014. Assuming successful resolution of these redeterminations and the anticipated increase in renewal and replacement activity, we believe full year 2014 earnings should look a lot like 2013 after removal of the one time tax benefit from 20 thirteen's earnings. Turning our attention to dividend. 2 days ago on May 5, the Board of Directors approved a quarterly cash dividend of $0.25 per share.
American States Water Company has paid dividends every year since 19 30 1, 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'll now turn the call to the operator for questions.
Thank you. We will now take your questions. Our first question comes from Ryan Connors with Janney Capital Markets. Please go ahead.
Hi, Bob and Eva. This is actually Ken standing in for Ryan. My first question is regarding ASUS. And I'm just curious as far as the large projects are concerned, are they still on track to roll off in the Q2? And if so, can we expect a similar level of construction activity from them in the Q2 as we saw in the first?
Yes. They are expected to get those projects. The projects I guess we're talking about is the $58,000,000 water wastewater pipeline replacement project, the backflow preventer meter project and the work at Patriot Point. The plan is for all of them to be completed by the end of the second quarter. And what we expect to see I guess is with the pickup in the renewal and replacement that that we should see an increase in construction the rest of the year.
So the work from the construction work from those projects that will drop off a little bit, but we believe the renewal and replacement work will pick up.
Perfect. And then just shifting to the price redeterminations that you mentioned
in your prepared remarks, Bob.
Yes. I recall reading in the and I think it was in the 10 ks that they were expected to be completed in the Q1 and now we're hearing kind of second, third quarter area. I'm just curious as far as them related to your expectations for ASUS, what's the level of materiality with that as far as the ASUS contribution? Does that impact your expectations for ASUS as it stood 4 months ago? How should we think about that?
Well, there are significant contributors to the overall performance of ASUS. In some cases or in many cases, there are components associated with retroactive back to when the price redetermination should have been completed. In other words, it's sort of predetermined when you take over a contract when you're supposed to have your redetermination completed. And any redetermination you get generally is retroactive back to that point. So these are behind schedule.
Some of that a lot of that has to do with the fact that the government, while you recall what sort of transpired last year during sequestration, etcetera. And government's got, in fact, probably less people working on this. And it's it is taking longer than what we had originally thought, but we are seeing progress. So though it's been delayed a bit, we do think we're going to get it just to the finish line in 2014.
And Ken, most of those pending price redeterminations also has interim rate in place. So I'll go back to the effective date. So we do have some increases along the way. We're just waiting for the final decision to see what the impact will be.
Yes. So if we do have some retroactive recognition, it would be above the interim increase. It's a good point, Eva.
That's great color. I appreciate that. And then just my final question is more big picture strategy, I guess. Obviously, ASUS or ASUS has garnered a lot of attention from the investment community because of your success there and kind of the amount of projects coming on. But if you kind of look outside of that, what are you guys most excited about from a growth opportunity?
Would it be something like expanding to wastewater in your regulated business or perhaps electric offering electric services on military bases?
Well, we over time you will see that the rate base for Golden State Water will continue to grow as we replace the needed pipe. So that's we are going to see the water utility continue to grow, probably at the kinds of rates we've seen in the past. Beyond that, we are considering possibly offering electric opportunities at the military bases that we serve. We have to we do have that expertise because of our Bear Valley Electric component. And a lot of times when you get into these businesses, it's a bit like the utility business in that you need to know the operating side of things, but you also need to know how you get price increases, etcetera.
And we feel like we do know that for ASUS. So we're very interested in expanding business both from a water and wastewater standpoint. And we'd like to sort of test the market on the electric side and see if that's something we can expand the company with.
Great. Thanks so much for your time, Bob and Eva.
Thank you, Ken.
Thank you. The next question comes from Jonathan Reeder with Wells Fargo. Please go ahead.
Hey, Bob and Eva. I was wondering if you could talk a little bit about what's being done to address the water supply shortage in California and the fact it's kind of been an ongoing situation now for a few years on the supply side and how that might relate to potentially accelerated rate base growth for you?
Well, we are trying to I mean, we continue to make sure that our that we can pump all of our water rights, first of all. And that means we got to make sure that all of our pumps are working and our wells are working like they're supposed to. And you've done a good job with that in the past, but it is a continued focus. And as you know, Jonathan, the cost to customers for pumped water is less expensive than us buying water from MWD. Now on the sort of the wholesale front, MWD has been spending money to expand sort of their regional portfolio of water storage capability in Southern California, which I believe has helped them during this particular drought situation because they have expanded their sort of local inventory from maybe where it was 5 or so years ago.
Beyond that, we haven't done we really haven't done much beyond that other than trying to pump what we can pump. And obviously, we're one company that is I think distinguished itself from others in making sure that we have perfected water rights and that allows us then to continue to pump when we need to.
I mean is there any I guess opportunity for you guys to build your own water storage capabilities? Or what about desalination plants? And how close are those to being basically economic? I know the lead time on them are fairly long. So I would think you need to get kind of the ball rolling to address the problem in the next 5 to 7 years or something?
Right. We have had discussions with Poseidon Resources, which I think as you know is the company that's putting the desal plant in Carlsbad. They also are looking to put 1 in Huntington Beach and are trying to go through the permitting process there. It does take a long time though to go through that process. Permitting is difficult in California, probably more so than other places.
But I think as you see water supply issues continuing to gain ground in California, you might see more relaxation of sort of pushback on permitting desalination plans. And you are right, the crossover point between what we can buy wholesale water for and what desal water so that getting closer every day. So it is a possibility. We have not subscribed for the water from Poseidon at this point. In addition, there's this Cadiz project that's in the desert that we have been we have an option on at this point that we're working through with Cadiz.
Some of the other water utilities in Southern California also looking into that project. So beyond that, we don't have any plans to build additional infrastructure at this point to sort of solve a lot of our supply shortages.
And so far from I guess the legislature, the governor or I guess the commission there hasn't been an effort to I guess kind of promote things on the supply side. It's all kind of demand side related?
Well, it's
I guess the state water projects?
Yes. The did you say except for the state water project?
Right, right. I mean they're not encouraging the investor owned utilities pursue projects necessarily then?
Yes. We haven't seen that, but if we bring a big if we bring a, I think a reasonable well thought out plan to the commission. I have no reason to think that they wouldn't approve something like that.
In each rate case, Jonathan, if we have a potential to drill a new well that we have the water right to meet that demand and we're filing our rate case and justify for it. So as consumption comes down from customers, our supply has a bigger portion from our own well water than purchased from NWD. So we would to the extent we can justify drilling new well in certain service areas will do.
Okay. And then the last question I had, just kind of curious going through the Q. So that the parent borrowed like $24,000,000 under the credit facility to provide to ASUS. Is that just to fund some working capital? Or what might that be related to?
Yes. It wasn't really an additional demand from ASUS. But in fact, what we did was borrowed money from the line and loaned it to ASUS. And previously we had money loan from the company to ASUS. This will then create some cash for the parent company to then use for the repurchase program.
It is for the working cash of ASUS.
Yes. The amount we have loaned to ASUS is for working capital for ASUS. ASUS is not a capital intensive business, but because it's got substantial contracts with the government, it does have to have working capital to balance sort of receivables.
Right. Okay. All right. I appreciate the additional details.
Thank you.
Thanks, Jonathan.
Thank you. The next question comes from Richard Verdi with Ladenburg. Please go ahead.
Hi, Bob. Hi, Eva. How are you guys doing?
Good. Thank you. Good. Thank you.
Just most of my questions have already been answered, but I had a follow-up question to 1 already asked. If ASUS decides to pursue the electric opportunity, there are a lot of bases going to be auctioned here the next couple of years. What would be the strategy? Could you just talk a little bit about how the company might pursue that opportunity?
Sure. I think where it would start probably would be at a base that we're currently at from a water and wastewater standpoint and kind of get our feet wet doing that. And there's been I won't go into specifics here, but at least one base had come out and asked us to consider operating the electric system. And so if we can maybe do that on a I don't want to say pilot basis because you don't do pilots pretty conservative company. Then we can be looking at possibly bidding on water, wastewater and electric in some of the bids that should be coming out here soon.
Okay. Okay, great. That's it for me. Thank you.
Thank you.
The next question comes from Tim Winter with Gabelli and Company. Please go ahead.
Good afternoon, Bob and Eva.
Hi, Tim.
Just following up on clarify the water supply situation. You've asked for a 20% reduction. Is that because you're following the state's request? Or is there are you yourselves having supply issues?
We are following the state's request and currently not having any major supply issues. There's a couple of smaller areas that we serve with underground basins that it's possible that we may have to do some rationing there, but generally we're in fairly good shape for 2014.
Okay. Okay. And then as far as the share buyback and your cash flow situation, what is your CapEx budget over the next few years? How much is being allocated to water supply?
Some of our capital plan?
Yes.
Well, the capital budget for 2014 is $80,000,000 to $90,000,000 A lot of that is pipe replacement. I'll hand I can't tell you exactly what the water supply piece of that is, but we'd be happy to get back to you with that.
Okay. And then as far as your just operating cash flow and the dividend, are you just to the point where you're basically self funding that's why you're in a position to repurchase shares?
Yes. The repurchase of the shares really is driven by the fact that we have too much equity at the company. And whenever you sort of your overall equity ratio gets out of whack with what's appropriate for your 2 subsidiaries, makes sense to sort of we feel like we're leaving money on the table. So feel like we need to buy some shares back and get the equity ratio down. With that said, our net cash at the overall company is I think $51,000,000 at the end of the first quarter.
If you take the cash balance of, I want to say $75,000,000 and our borrowings are $24,000,000 So we also have substantial cash, but it's mostly an equity issue rather than a cash too much cash.
Okay. Is it primarily stemming from the $30,000,000 from Chaparral or do you think?
That's right. And it's really the equity leftover from Chaparral. We have, I want to say, dollars 25,000,000 to 30,000,000 dollars of shareholders' equity that we basically had in that company. And then when we sold the company, we got that in the form of cash and equities. And at this point, we still have the equity.
So the goal is to because our cash is strong too is to reduce the equity balance for the overall company.
As Beth mentioned Tim, SU has been a low capital need operation for us. So at the time we told Xiaoprao, we didn't feel comfortable to do anything right away just to make sure SG and A growth is there we can support it. But the turnout they really just need a lot of probably 90 day working cash kind of the turnover. So I think we should do this rather than leave cash on the table.
Okay. Okay. And just one last follow-up. I mean given the situation, are there smaller utilities contiguous to you that are being stressed with the large supplies issues that coming to you for help or is that?
We really haven't seen that at this point. A lot of our service territory is in Southern California, as you know. A lot of the areas that have been impacted by the drought, interestingly enough, is in the northern part of the state. And so and we're in good shape there. So I think in and around Sacramento is probably the only area where we've probably seen situations where we've had areas contiguous to us that are having water issues.
Okay. Thank you, guys. Okay.
Thank you. As there are no further questions, that does conclude the question and answer session. I will now hand back to Mr. Sprouse for any closing remarks.
Okay. Thank you, Nicky. Again, I just wanted to thank everyone for their participation today and their continued interest and investment in American States Water Company and wish you all a good day. Thank you.
Thank you. 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, May 7, 2014 at 5 pm Eastern Time, 2 pm Pacific Time and will run through Wednesday, May 14, 2014. Thank you