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 2013 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 6, 2014, on the company's website, www.aswater.com. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session. If you'd 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. As a reminder, this call will be recorded and will be limited to no more than one hour.
At this time, I would like to turn the conference over to Eva Tang, Chief Financial Officer of American States Water Company.
Thank you, Laura. Welcome everyone, and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. Before I begin the presentation, please note certain matters discussed during this conference call may be forward-looking statements intended to qualify for the safe harbor from liabilities 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. With that, I will now discuss the fourth quarter financial results. I'm pleased to report that diluted earnings for the fourth quarter were $0.30 per share, which was 11.1% increase compared to $0.27 per share for the same period in 2012. Net income increased by $1.5 million, an increase of 14.5% over the same period of last year.
For the quarter, water revenues at Golden State Water increased by $5.3 million or about 8% to $72.9 million as compared to 2012. Out of the $5.3 million increase, $2.5 million was due to the rate increases as a result of the California Public Utilities Commission's approval of our water general rate case in 2013. The remaining $2.8 million of the increase resulted from new surcharges billed to customers during the fourth quarter of 2013, with a corresponding increase in various operating expenses for recovery of previously incurred costs. These surcharges had no impact to net earnings. Electric revenue increased by $1.1 million for the quarter, due entirely to surcharges approved by the CPUC for the recovery of previously incurred costs in connection with our efforts in procurement of renewable energy resources. Again, these surcharges had a corresponding increase in operating expenses, resulting in no impact to net earnings.
Excluding these surcharges, electric revenue remained unchanged as a result of the pending rate case. Revenue for our contracted services business, American States Water, I apologize, American States Utility Services, or ASUS, decreased by $8.1 million, or 26.6%, for the fourth quarter of 2013 due to an overall decrease in construction activities. The level of construction activities tends to fluctuate period to period, impacting revenues and earnings of this business. In addition, there was an expected slowdown of renewal and replacement capital work at various bases. Our water and electric supply costs for this quarter were $22 million, or about 25% of total 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 covered from or refunded to our customer in the future.
Other operating expenses increased by $700,000 due to the effect of surcharges billed to customer, which has a corresponding increase of $700,000 in operation expenses for the recovery of previously incurred costs. Excluding the effects of the surcharges, which had no impact to earnings, other operating expenses were flat from 2012. A&G expenses for the fourth quarter of 2013 were $21.2 million as compared to $18.1 million for the same period in 2012. Excluding the impact of $1.4 million in water surcharges and $700,000 in electric surcharges, consolidated A&G expenses increased by $900,000. The increase was primarily driven by higher costs incurred at our contracted services segment or ASUS, as we continue to pursue new business utility privatization opportunities. In addition, there was an increase in regulatory related costs incurred for pending electric rate case. These increases were partially offset by lower employee related benefits at the water segment.
Excluding $1.1 million of surcharges included in the depreciation and amortization expense Depreciation decreased by $600,000 for the quarter due to lower composite depreciation rates approved in the water rate case, partially offset by additions to utility plants. Maintenance expense decreased by $200,000, driven by a decrease in planned maintenance work at our Water segment. ASUS's construction expenses decreased by $5.9 million to $17.6 million during the quarter due to lower construction activities, as I discussed earlier. Interest expense and interest income stayed relatively flat for the fourth quarter of 2013 as compared to the same period in 2012. Moving on to income tax expenses. Expenses decreased by $600,000 to $5.5 million in the fourth quarter, mainly due to a lower effective income tax rate at ASUS, which increased earning by $0.03 per share.
This was the result of a cumulative tax deduction taken for certain construction activities on our recently filed tax return and expected to be taken on amended tax returns. This tax benefit was partially offset by a higher effective tax rate at Golden State Water due to changes between book and taxable income that were treated as flow-through adjustment in accordance with regulatory requirements. Moving on to liquidity and capital resources for the full year of 2013. Net cash provided by operating activities increased significantly by $34.2 million to $135.7 million for 2013. In 2012, net cash provided by operating activities was about $101.5 million, so that was a $34.2 million increase. This increase was primarily due to lower tax payment as a result of accelerated depreciation in connection with tax law changes, combined with certain cumulative tax benefits that were taken on recently filed tax returns.
CPUC-approved rate increases for our Water segment and surcharges collected to recover Water Revenue Adjustment Mechanism balances, as well as other regulatory assets. The increase was partially offset by lower construction activities and the timing of billing for construction work at ASUS. At December 31, 2013, we had $38.2 million of cash on our consolidated basis and had no borrowings under our credit facility. In regards to our capital expenditures, Golden State Water spent $99 million on capital projects, with $96.7 million paid in cash during 2013, as compared to $66 million spent in 2012. The company expected to spend between $80 million-$90 million on capital expenditures in 2014. For the full years of 2013, diluted earnings per share was $1.51, which is a $0.20 per share increase from 2012.
We presented a reconciliation table in the company's earnings release yesterday comparing the changes in EPS from 2012 to 2013. For additional details on our fourth quarter and full year 2013 results, please refer to our earnings release and Form 10-K issued yesterday. With that, I'll turn the call over to Bob.
Thank you, Eva. Good afternoon, ladies and gentlemen. Again, thank you for joining us today. I'm very pleased with our operating and financial performance for the year. In 2013, the company was able to achieve solid financial results, announce a significant dividend increase, and invest nearly $100 million in utility infrastructure. Our contracted service business continues to make significant contributions to the company's earnings. ASUS accounted for 24% of the company's consolidated revenues in 2013. With ASUS's contribution, as well as steady growth from our utility subsidiary, Golden State Water, the company has grown its revenues from continuing operations from $312.2 million in 2008 to $472.1 million in 2013, a five-year compound annual growth rate of 8.6%. Our net income from continuing operations has grown at a compound annual growth rate of 19.2% over the same five-year period, from $26 million in 2008 to $62.7 million in 2013.
With that, I'd like to discuss two recent announcements pertaining to our Water segment. As we announced last Friday, Golden State Water, along with three other Class A water companies in California, have reached an agreement with the California Public Utilities Commission to defer the cost of capital application for one year. The cost of capital applications are normally filed every three years. As part of the agreement, the four water companies will forego any adjustments to the authorized return on equity in 2015, including any changes that would otherwise have applied due to the Water Cost of Capital Adjustment Mechanism. Our currently authorized 9.43% return on equity, 55% equity ratio, and 8.34% return on rate base will apply through 2015.
As a reminder, the Water Cost of Capital Adjustment Mechanism adjusts the return on equity between the three-year cost of capital proceedings, only if there is a positive or negative change of more than 100 basis points in the average of the Moody's Aa utility bond rate as measured over the period October 1st through September 30th. As the interest rate outlook has not changed significantly, we believe the deferral of this proceeding allows us to focus on maintaining a strong water supply portfolio and managing our infrastructure replacement program to ensure water quality and supply to our customers. Speaking of water supply, I'd like to briefly discuss the drought situation in California and the impact to Golden State Water Company.
Approximately 60% of the company's water supply comes from owned groundwater production wells situated throughout our service areas, 35% from purchases from member agencies of the Metropolitan Water District of Southern California, or MWD for short, and the remainder is purchased surface water. On January 17th, 2014, our governor declared a drought state of emergency after the state experienced the driest calendar year in recorded state history. MWD's principal sources of water are the State Water Project, which conveys water from Northern California to Southern California, and the Colorado River. Although the allocation from the State Water Project was reduced to zero in January, MWD has not announced any rationing at this point due to sufficient water in storage and normal supply from the Colorado River. Reduced rainfall results in reduced recharge to the state's groundwater basins.
Water levels in several of these basins, especially smaller basins, are experiencing dropping groundwater levels. Should dry conditions persist through the remainder of 2014, areas served by these smaller basins may experience future mandatory conservation measures. We continue to monitor water supplies in each of the communities we serve and work closely with wholesale providers to deal with the drought situation. Now let's discuss the company's contract and services business under ASUS. For the year of 2013, we experienced lower construction activity as compared to 2012 at various military bases, particularly at Fort Bliss in Texas and Fort Bragg in North Carolina. This decrease in construction activities was due in part to lower planned renewal and replacement work at Fort Bliss and unfavorable weather conditions and permitting delays outside the company's control, which have now been resolved at Fort Bragg.
The $58 million water and wastewater pipeline replacement project at Fort Bragg was delayed somewhat due to weather in 2013. It is now expected to be substantially completed by the end of the second quarter of 2014. The other two projects at Fort Bragg, the backflow preventer and new meter installation project totaling $23 million, and the $16.5 million water and sewer infrastructure project to serve a new area at Fort Bragg, are scheduled to be substantially completed by the second quarter of 2014. Progress on the water and sewer project during 2013 was less than anticipated due to the permitting delays mentioned previously. I should also mention that during the government's fiscal year-end in September of 2013, ASUS was awarded approximately $18.5 million in new construction projects, the majority of which are expected to be completed during 2014.
Additionally, there are various construction upgrade projects of a smaller magnitude that will continue across all military bases. One significant initiative for ASUS is to file for, process, and implement changes to operations and maintenance and renewal and replacement revenues at each of the ASUS contracts. This initiative also incorporated revenues associated with housing and other infrastructure constructed during recent years. ASUS has successfully finalized at least the first price redetermination for five of our six contracts. Now, please allow me to run through a quick update on the status of price redeterminations for each of the contracts, as well as other increases in revenue. First, at Fort Bliss, a filing to operate and maintain an additional area of the base was finalized in the fourth quarter of 2013, with an annual increase in operations and maintenance fees of approximately $815,000, effective November 2013.
Negotiations for an annual increase in renewal and replacement fees in connection with this area are expected to be completed by April 2014. The second and third price redeterminations for the contract to serve Andrews Air Force Base were filed with the U.S. government in November 2013. These price redeterminations cover the period February 2011 to January 2017. Resolution of these redeterminations is expected in the first quarter of 2014. The second price redeterminations for the two privatization contracts to serve the bases in Virginia were revised and resubmitted to the U.S. government in January 2014. The revised filings are to resolve issues raised in an audit report regarding fringe benefit loading rates in the initial filings. These price redeterminations are expected to be resolved in the first quarter of 2014.
Resolution of the first price redetermination filing for the contract to serve Fort Jackson is expected during the fourth quarter of 2014. Currently, there's a U.S. government-approved interim increase of 3.4% in place. In November 2013, ASUS filed the second price redetermination for the contract to serve Fort Bragg for the period covering March 2013 through February 2016. This price redetermination is also expected to be resolved during the first quarter of 2014. In addition, in September 2013, ASUS received a modification for the first price redetermination for Fort Bragg, effective retroactively to March 2010. The modification provides for a nominal increase in operations and maintenance revenues above the interim levels previously in effect, and a $4.2 million increase in annual renewal and replacement funding.
We continue to be actively engaged in responding to proposals for new base privatization, and we expect the U.S. government to release additional bases for bidding over the next several years. Before I turn the conference call over to the operator for questions, I'd like to thank you again for your continued support and interest in the company.
We will now entertain any questions you may have about the information presented today. If you would like to ask a question during this time, please simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star then two. We will now pause momentarily while we assemble our roster. Our first question comes from Ryan Connors of Janney Montgomery Scott.
Hi, Bob and Eva. This is actually Ken Durrell in for Ryan. My first question is regarding the ASUS segment. We appreciate you breaking out the different projects and price redeterminations, just as a 10,000-foot level, when activity or revenue kind of came down across the year 2013. Now that we're at more normalized levels, as we look into 2014, I was hoping you could just help us frame expectations for the year compared to 2013.
Sure, Ken. I'd be happy to. When we look at 2014, probably the best place to start is with 2013. Excluding the one-time tax benefit of $0.03 that Eva talked about, earnings from ASUS were $0.27 for 2013. As you know, there are several variables that impact its business, it's difficult to predict earnings for ASUS. With that said, let me talk a little bit about 2014 and maybe emphasize what I talked about earlier. As we had mentioned, we do have these three projects that we have discussed at Fort Bragg. Though the projects were a bit delayed in 2013, they do carry over into 2014. Just as a reminder, we've got the $58 million water and wastewater project, and that's expected to be completed during the second quarter.
The $23 million combination backflow preventer meter replacement project, also expected to be completed in the second quarter. Then we've got the $16.5 million infrastructure project to serve the new area of Fort Bragg, and that's expected to be done in the second quarter as well. Though we will see a drop-off in the earnings from these three projects in 2014 versus 2013 because they'll be partial year projects in 2014, we do expect to have a number of additional construction projects for 2014. Though individually, probably not as large in size. Also, as I mentioned, ASUS was awarded approximately $18.5 million in new construction projects, the majority of which are expected to be completed during 2014. Assuming work on these additional projects and also assuming that we have some successful price redetermination, we think 2014 in total could look a lot like 2013.
Please understand that this isn't a very precise estimate, as numerous factors outside of our control, including government funding limitations, can impact the timeliness of new modifications and existing proposals at the new bases. Again, we're expecting 2014 to look a lot like 2013.
Great. Understood. Appreciate the color. Just finally, looking at the cost of capital adjustment filing, I guess, to stay out this year. I'm curious to get your rationale on foregoing the determination as well as the ROE index adjustment mechanism. Our understanding is that the mechanism serves as a way to reduce the lag in between filings. Like you said, interest rates haven't necessarily come up to the 100 basis points threshold. If, say, 50 basis points, what led your decision to stay out? Did you not think that it'd be worth devoting the resources to get a marginal increase in ROE, or I'm just curious to get the rationale there.
Yeah. We went back to when we filed for our last cost of capital application, looked at the interest rates that were in place then, compared them to what's in place now. Didn't see much of a difference. When you go through this process, it's a hotly debated, hotly contested discussion on cost of capital, and we generally just didn't think the authorized ROE would change much coming out of that. There's no guarantee that would even go up. We also analyzed the adjustment mechanism and whether we thought that was going to trigger, and our sense was that it was not. There was that kind of view. I suppose, having to notice customers about expected increase and if we go in and, let's say, ask for 10.5, we would have to notice our customers about a projected rate increase.
It's a difficult time to do that given drought situations, et cetera. It was ultimately driven by the fact that we didn't feel that we were going to get a substantial increase in our authorized ROE coming out of it.
Just to add to that, Ken, 4 months ended, you measure from October to September. From October to January, the Moody's Aa bonds or yield rates is on average, I think, it's a 4.5%. Our benchmark is 3.93%. We really have to hit 4.93% for the 12 months ended September in order to trigger.
Which means you'd have to have 50 basis points probably on top of that for the last 6 months of the measurement period.
Right
for it to trigger. We didn't see that happening. Of course, we would've liked to be able to keep the adjustment mechanism, and our request to the commission was to include that. The response back from the commission was, "We'll let you defer, but you don't get the adjustment mechanism." We thought about it long and hard and determined that that was okay.
Perfect. Yep. Thanks so much, guys.
Welcome.
The next question will come from Jonathan Reeder of Wells Fargo.
Hey. Actually, those previous two questions were the questions I was thinking of, so I don't think I have anything else at this point.
Okay, Jonathan.
Okay, Jonathan.
Thanks.
Thank you.
Once again, if you'd like to ask a question, please press star then one at this time.
I might amplify my response on the cost of capital. The company is going to be filing its three-year water rate case in July. I did mention to you that we would have to notice customers on the cost of capital, and that would be a few months before noticing them on the water rate case application. A lot of things really rolled into that cost of capital deferral decision.
We are showing no further questions at this time. We would like to conclude the question and answer session and turn it back over to management for any closing remarks.
Well, I just wanted to wrap up the call today by just thanking everyone for their participation today and for their continued interest and coverage of the company. We think we've got a real good, strong company here, and we're glad you folks are interested in following us. Thank you very much.
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 Thursday, February 27th, 2014, at 5:00 P.M. Eastern Time, 2:00 P.M. Pacific Time, and will run through Thursday, March 6th, 2014. After logging on to the website, click the investors button at the top of the page. The archive is located just above the stock quote section. Thank you for your participation. You may now disconnect.