Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR Conference Call discussing the company's Q3 2013 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 Tuesday, November 12, 2013, 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. As a reminder, this call will be recorded and will be limited to no more than 1 hour. At this time, I would like to turn the call over to Ms. Eva Tang, Chief Financial Officer of American States Water Company.
Ms. Tang, the floor is yours ma'am.
Thank you, Mike. Welcome everyone and thank you for joining us today. On the call with me is our President and CEO, Bob Sprowls. Before we begin the presentation, please note that 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 10 Q on file with the Securities and Exchange Commission.
With that, I will now discuss the 3rd quarter financial results. I'm pleased to report that diluted earnings for the Q3 were $0.53 per share, which was a 10.4% increase compared to $0.48 per share for the same period in 2012. Net income for the quarter increased by $2,200,000 or 11.7 percent as compared to the Q3 of last year. For the quarter, water revenue at Golden State Water increased by year, mainly due to the California Public Utilities Commission's approval of our water rate case in May for rate increases effective January 2013. There was also a $1,500,000 increase in revenues related to new surcharges approved by the CPUC for recovery of previously incurred costs.
These surcharges increased both revenue and operating expenses, resulting in no impact to net earnings. Electric revenue increased by $300,000 to $8,800,000 Electric revenue for 2013 were based on 2012 adopted rates. We expect to have a proposed decision pending electric rate case early next year. Revenues for American States Utility Services decreased by 6 point $6,200,000 to $28,100,000 compared to the Q3 last year. The decrease in revenues was primarily due to excess rainfall experienced at Fort Bragg in the month of June July, as well as a slowdown of renewal and replacement capital work at Fort Bliss, which we had anticipated.
Our water and electric supply costs for this quarter were $29,700,000 or 31.3 percent of total operating expenses. Any changes in supply costs for both the water and electric segment 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 decreased by $209,000 in the Q3 of this year to 7.2 $1,000,000 The decrease was driven by lower conservation costs at Golden State Water, partially offset by increases in chemical treatments and labor costs charged to operation. Excluding the surcharges, which increased both revenues and expenses at the water segment as discussed earlier, $1,000,000 as compared to the same period last year. The increase was primarily driven by higher workers' compensation and employee benefit related costs at the water segment, increased regulatory and on-site service costs incurred for the pending electric rate case and an increase in cost at our contracted services segment as we pursue new military utility privatization opportunities.
Depreciation and amortization expenses decreased by 477 dollars to $9,800,000 for the 3rd quarter due to lower composite rates for depreciation approved in the water rate case. The decrease in the composite rate was partially offset by additions to utility plant. Maintenance expense increased by 4 $34,000 primarily in our water segment as a result of an increase in plant maintenance work. The $3,000,000 during the 3rd quarter as compared to the same period last year. The decrease is due to lower is decreased by $234,000 due to interest income recorded in the Q3 of 2012 related to certain refund claims approved by the Internal Revenue Service.
Income tax expense decreased by $2,500,000 to $9,900,000 in the 3rd quarter as compared to the same period last year, mainly due to a decrease in the effective income tax rate for the wireless segment and a cumulative tax benefit of $1,500,000 recorded in the 3rd quarter at AWR parent level. This cumulative tax benefit covers a period of 5 years for tax deductions related to an employee benefit plan. We intend to take the tax deduction in future years, which is approximately a $300,000 after tax benefit or $0.01 per share each year. Moving on to liquidity and capital resources. Net cash provided by operating activities decreased by $4,300,000 to $87,300,000 for the 9 months ended September 30, 2013 compared to the same period last year.
The decrease is mainly from our contracted services segment due to the timing of when construction work is received from the government. The billing for construction work generally occurs at completion of work or are based on a billing schedule contractually agreed to with the government. Even with this decrease in cash flow from operating activities, we had $26,200,000 of cash on a consolidated basis. This was due to an increase in Golden State Water's cash flow from operating activities as a result of surcharges implemented to recover our previously incurred costs and under collected revenue resulting from decreases in consumption. In regards to our capital expenditures, Golden State Water paid $68,800,000 in capital a total of approximately $255,000,000 in capital expenditure, excluding among funded by others for the years 2013 through 2015, which is consistent with approved capital dollars in the water rate case.
For additional details on our Q3 year to date results, please refer to our earnings release and the Form 10 Q issued yesterday. With that, I'll turn the call over to Bob.
Thank you, Eva. Hello, everyone. In early September 2013, we completed a 2 for 1 stock split of the company's common shares and paid a 14.1 percent increased dividend to our shareholders. I am pleased to announce that our Board of Directors recently approved another quarterly dividend of $0.20 1 quarter per share on the common shares of the company, which will be paid on December 2, 2013 to shareholders of record at the close of business on November 15. This represents the 310th consecutive dividend payment made by the company.
For our regulated water business, we continue to focus on our ongoing infrastructure improvements, operational efficiency and evaluating various cost containment measures to minimize costs to our customers while still providing the highest standard of service. In our electric division, we continue to work with the CPUC to move forward with the review of our electric general rate A proposed decision is expected in early 2014. Turning our attention to our contracted services business. As Eva mentioned earlier, we experienced lower construction activity during the Q3 of 2013 for this business segment due to unusually high rainfall in June July at Fort Bragg, which hindered construction work for the quarter. In addition, renewal and replacement work at Fort Bliss occurred at a slower pace during the Q3.
Also contributing to the lower third quarter earnings were higher administrative expenses in part to pursue new military base utility privatization opportunities. Due to the wet weather in the Q3, the $58,000,000 water and wastewater pipeline replacement project at Fort Bragg is now expected to be completed in the Q1 of 2014. Also at Fort Bragg, the back flow preventer and meter replacement project totaling $23,000,000 and the $17,000,000 infrastructure project at a new area are at a new area are all
scheduled to be substantially completed
by the Q2 of 2014. Additionally, there are various construction upgrade projects of smaller magnitude that will continue across all military bases. During the government's fiscal year end, ASUS was awarded approximately $18,500,000 in new construction projects, the majority of which are expected to be completed during 20 14. So many new projects are typically awarded at the end of the government's fiscal year, other new projects are awarded by the government throughout the year. ASUS also receives new work from other prime contractors at work for the next year to be fairly consistent with what we completed during the past 12 months.
There are also various price redeterminations under negotiation with the U. S. Government. In September of this year, 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 level previously in effect and a 4,200,000 dollars increase in annual renewal and replacement funding.
ASUS will file the 2nd price redetermination for Fort Bragg this month with an anticipated resolution by the end of this year. We are currently in negotiations on the first price redetermination fee increase of 3.4 percent retroactive to February 2010 currently in place pending final resolution of the price redetermination. The second price redeterminations for the military bases in Virginia are expected also to be completed before the end of this year. An asset transfer filing for Fort Bliss with an annual increase in operations and maintenance fees of approximately 800 and $15,000 compared to the amount previously approved is effective this month. Asset transfer filings provide additional funding to us for assuming more infrastructure at the military base.
Lastly, for Andrews Air Force Base, the second price redetermination will be based in part on the finalization of asset transfer filings that are currently underway. These asset transfer filings are expected to be finalized by the end of this year. We also continue to actively engage in new proposals and expect the U. S. Government to release additional basis for bidding over the next several years.
In regard to potential government funding limitations, as we've noted during previous calls, we have not experienced any earnings impact to our existing operations and maintenance and renewal and replacement services provided by ASUS as such contracts are not subject to the provisions of the Budget Control Act. Any future impact will likely be a possible delay in the timing of payments from the U. S. Government, delays in the processing of price redeterminations and issuance of contract modifications for new construction work not already funded and or delays in the solicitation and or awarding of new utility privatization opportunities under the Department of Defense Utility Privatization Program. With that, I would like to thank you for your time and interest in American States Water and I'll now turn the call over for questions.
Thank you, sir. We will now begin the question The first question we have comes from Ryan Connors of Janney Capital Markets. Please go ahead.
Hi, good morning, Bob and Eva. This is actually Ken Durel on for Ryan. I just have one question regarding the government shutdown that you alluded to in your comments. You mentioned an $8,500,000 of reward for new construction projects expected in 2014. But given the shutdown and kind of the piecemeal spending in place, is there any effect that you are seeing or anticipating whether it be on 4Q project activity or just your outlook in 2014?
Or is it really ancillary or separate from those concerns?
Yes. First of all, it was $18,500,000
Right, right.
And so far, we've not seen any impact from the government activities. The services we provide are accepted services under the Department of Defense. And as a result, they're not impacted at least the work we're doing is not impacted by government slowdown activities. To a degree, it may adversely impact payment at times or may delay price redeterminations particularly if contracting officers at bases are contracting officers either at bases or at the Defense Logistics Agency Energy, which is where a number of our contracting officers are. If they get furloughed that could slow the process down a bit.
Does that answer your question?
Yes, absolutely. Thanks for your time.
Thank you.
Next we have Heiko Doer of Robert W. Baird.
Good morning. Thank you for getting the queue out yesterday. That was a big help.
Okay. Hi, Pat.
I wondered if we could talk a little bit about your thoughts on what revenue from Fort Bragg would we see in the 4th quarter? And how much of that should we be thinking about coming in the first half of twenty fourteen? If I recall correctly, the Q4 of last year was a pretty strong quarter for ASUS. Should we be looking for this year's Q4 to match that?
Yes. Heiko, I would be happy to answer that question. In the Q4 of last year, our earnings on an adjusted basis for the stock split from ASUS were $0.155 And this past quarter, we had $0.06 a share versus $0.10 last year. So that was a variance of about $0.04 Looking at the Q4, are we going to see a similar variance? It's possible we may see sort of the same variance in the Q4 that we saw in the Q3, though we are hustling to make up some ground on some of the construction projects that were delayed because of the weather during the Q3.
As we look into 2014, of course, we do have those 3 substantial projects at Fort Bragg that are going to continue into 2014, but not for the full year. And those three projects are the $58,000,000 water wastewater pipeline replacement project, the $23,000,000 combination backflow preventer meter replacement project and the $17,000,000 infrastructure project to serve a new area of Bragg. We expect the $58,000,000 project to be done during the Q1 of 2014 and then the other two projects to be done by the end of the Q2 of 2014. So we will see a drop off in earnings from these three projects in 2014 versus 2013, because as I said there will be 2013, because as I said, there will be partial year projects in 2014. However, we do expect to have a number of additional construction projects for 2014.
So individually, probably not as large in size as these 3 projects. So as I previously mentioned, we do have this $18,500,000 set of new construction projects. The majority of those projects we are expecting to be completed in 2014. Assuming work on these additional projects and if we have successful price redeterminations, we're thinking 2014 could look a lot like 2013 in terms of total earnings contribution. Of course, understand this isn't a very precise estimate as numerous factors outside of our control including the government funding limitations can impact the timeliness of new modifications and existing proposals at new basis.
So again looking to 2014, right now and it is always dangerous to look 12 to 15 months down the road in this business given what's going on. But we think 2014 might look a lot like 2013.
Okay. And any new contract wins for new bases? When would be the earliest that any benefit from that would be seen?
We could see some benefit as early as 20 14, might be the tail end of 2014.
Very little in 2014.
Yes, might be the 4th quarter ish. All depends on when we would get notification of the win. Right now, there's like a 6 to 9 month transition period after you get the win. So there's a little bit of startup time there, which gives us chance to hire folks to do the work at the base, etcetera.
And how many RFPs do you have outstanding that you're waiting to hear answers on about who the contract is going to?
Well, there are many, but you have to understand there are several phases in the RFP process. I would say, we've got one particular contract that's probably close to the end. The others are at various stages in the process. So we are looking at a number of bases. So we've been hitting this really hard.
I would say we're somewhere in the process and at least I would say 10.
Okay. Okay, thanks. Appreciate the additional visibility.
Thank you, Heiko.
Next, we have a question from the location of Jonathan Reeder, Wells Fargo.
Hi, Bob and Eva. Can you hear me okay?
Very good. Hi, John.
Appreciate the additional guidance here on ASUS, especially looking forward to 2014. That's really helpful. Bob, you said, I guess, construction expense for 'fourteen, you would say are similar to the trailing 12 months. Is that around like $75,000,000 or what would that level be?
Let's see.
I know your guidance going into the year, I think it was like $79,000,000 or so for 2013, but obviously a little got
shifted? Go ahead Eva. I mean it's I
think year to date construction expenses is at $59,000,000
That's the year to date number.
That's the year to date number, yes.
So that's so we have to tack on the Q4 of last year. That's a number I don't have off the top of my head.
Well, we're looking for that something. Q4 last year in terms of revenue, I think we had I don't know how to call it, I have revenues about I think $35,000,000 in the 4th quarter for all the construction works. So
Okay. But I mean, would you say, Bob, I mean, overall it's similar to your total construction expense, I guess, for 2014, you're thinking it's going to be similar to where $13,000,000 comes in at or?
Yes, I would say 2013 would be a would be probably the best picture of where 2014 is going to be at.
Okay. Now your award of $18,500,000 for 2014 or for the next 12 months doesn't sound all that high. So I mean, I guess from our perspective, it doesn't seem all that unusual. Is that I mean, how does that compare to, I guess, your ongoing expectations for construction work that's kind of possible where you don't have these necessarily very large projects like the ones that you're wrapping up right now, but more of the smaller kind of cats and dogs. Can you still get to $75,000,000 80 $1,000,000 per year in construction expense?
Or would you expect that to kind of tick down then in 2015?
Well 2015 is that's a ways out there in this business. And we are going to as you know have benefit in the Q1 and the Q2 of the larger projects at Bragg. But the sense is that we'll have enough other construction work to kind of offset as that sort of drops off in 2014. As we get to 2015, it's a little more difficult to predict whether that same level of earnings and construction will continue, just because we don't know where the government is going to be 12 months from now on funding issues etcetera. It could be very positive, but it could also be difficult.
So 2015 is much more difficult to predict at this point. I think we're comfortable saying 2014 could look a lot like 2013. In 2015, there's a that could look at like 2014 as well, but it would there we'd have to see some additional modifications that come through and additional asset transfers that sort of thing.
Jonathan, the 18 point 5% is at the fiscal year end. We do receive modification from government throughout the years. So we'll be on top of that. And we have subcontract from prime contractors on the base like housing contractor on the base. If they need to do something they'll come to us.
Those kind of are a little bit hard to predict. And we have works coming from last year that we still have to finish continue next year. So the work to be done is not just that 18.5 plus those big projects. There are other projects come alone during the years.
And the $18,500,000 this year is comparable to a number like $7,000,000 to $8,000,000 last year. But that's not to say we're going to see a $10,000,000 ramp up. It's just these projects that come at the end of the fiscal year, this year $18,500,000 last year I think it was $7,000,000 $8,000,000 But there's a lot that goes on sort of between fiscal year end as well. So we don't want you to say, oh, I got $10,000,000 more work to be done there. But at least it's a higher number than it was last year.
Right, which helps to offset some of the large project completion things.
That's right.
Okay. Yes, that kind of commentary is helpful. I guess the other thing that kind of jumped out as I was going through the Q, you talked about the 9 month results for ASUS and saying some of the I guess, year over year decrease was due to lower profit margins on certain construction projects compared to 2012. In general, I mean, how should we think about, I guess, the margins on the construction business? Have are they being compressed at all or are you is that just kind of a one off thing for some of those projects?
I think at this point the margins are not being compressed. I think in 2012 though we had extra margin. I think the standard margins are that's what we're going to see going forward. Yes.
Okay. So 2012 were just a little higher than normal?
Yes. I think what we had there was we had the because of the economy, our subcontractors were really hungry. And as a result, than than is standard. And that hasn't been the case in 2013.
Got you. And then kind of last question, I'll let someone else jump in. If we're trying to get to kind of a year to date ongoing EPS number, you're at $1.31 but then we would need to back out, I guess, the kind of $3,000,000 one time recovery in Q1. The Q2, $835,000 kind of renewable energy cost recovery thing. And then I guess the $1,400,000 from the employee benefit program tax benefit in Q3, is that kind of accurate?
Am I missing something?
Yes. I mean that tax benefit though we are going to it's going to be what $300,000 a year going forward. So So you may want may not want to take the full
The entire
$1,400,000 out. You may just want to take $1,100,000 out. Of course, that is bottom line since it's tax benefit, it's bottom line impact.
Right. Okay. So you booked 1.5 I think in Q3, so maybe take out 1,200,000 is that I guess the way to look at it?
Right. I think the run rate on that is going to be $300,000 per year.
Okay. All right. I appreciate the additional help.
Yes. And Johnson, the construction cost for this year's Q4 is about 23,000,000 dollars last year.
$23,000,000 Okay. So I guess, yes, right in the low 70s then?
Yes. Okay. Okay.
Thank you so much.
Thank you, Jonathan.
Well, with no further questions Sir?
Okay. Thank you, Mike. Again, I just wanted to thank all of you for your participation today and for your continued interest and investment in American States Water Company. Everyone have a great day and a great holiday season.
You also have a great day soon. And also to Ms. Tang.
Thank you.
This concludes today's American States Water Company conference call. As a reminder, this call will be archived on our website beginning Tuesday, November 5, 2013 at 5 o'clock p. M. Eastern Time and will run through Tuesday, November 12, 2013. Again, we thank you all for your participation.
At this time, you may disconnect your lines. Thank you and take