Ladies and gentlemen, thank you for standing by. Welcome to the American States Water Company, AWR, conference call discussing the company's first quarter 2013 results. If you've not received a copy of this morning's earnings release, please call 909-394-3600, extension 651, and one will be faxed or emailed to you. If you would like to listen to the replay of this call, it will begin this afternoon at approximately 2:00 P.M. Pacific Time and run through Friday, May 17, 2013. 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. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would 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 on your telephone keypad. As a reminder, this call will be recorded and will be limited to no more than one hour. If you need operator assistance, please press star, then zero. At this time, I would like to turn the call over to Eva Tang, Chief Financial Officer of American States Water Company. Please go ahead.
Hey. On the call with me is our President and Chief Executive Officer, Bob Sprowls. I would like to first remind you 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-K and Form 10-Q on file with the Securities and Exchange Commission. Before I start the first quarter's financial results, I would like for Bob to take a moment to discuss the general rate case for the company's water segment at American States subsidiary, Golden State Water Company.
Thank you, Eva. Depending upon where you are, good afternoon or good morning, ladies and gentlemen. As many of you are aware, yesterday, the California Public Utilities Commission, also known as the CPUC, issued a final decision on the water rate case for Golden State Water, approving new rates for 2013 through 2015 at all of the water service areas. You'll recall that this was our first consolidated water rate case, combining all three water regions and the general office under one rate case filing. In 2012, we had reached a settlement agreement with the Division of Ratepayer Advocates and The Utility Reform Network on nearly all of the matters in the case. We're very pleased that the CPUC's final decision, among other things, approves the settlement. The decision demonstrates the CPUC's commitment to progressive regulation, which benefits both customers and shareholders.
The new water rates will allow us to focus on our ongoing infrastructure improvements. We are continually focused on operational efficiency and evaluating various cost containment measures to minimize costs to our customers while still providing the highest standard of service. The decision is retroactive to January 1st, 2013. With new rates in place, we expect additional water revenues of approximately $10 million in 2013 as compared to 2012 adopted revenues. This is a 3.4% increase in 2013 revenues. The 2013 adopted water gross margin is projected to increase by approximately $14 million, or 6.6%, as compared to the 2012 adopted water gross margin. Again, water gross margin is defined as revenues less water supply costs. I will now turn the call back over to Eva so she can discuss the first quarter results.
Thank you. As Bob mentioned, our new rates are retroactive to January 1. Therefore, the final decision and the impact on rates has been reflected in our first quarter results of operations. Among other things, the final decision also reduced the overall composite depreciation rates on our utility plans. As a result of the change in customer rates, which incorporated the lower depreciation expense, our pre-tax earnings for the first quarter increased by approximately $4.2 million, or $0.13 per share as compared to 2012 adopted numbers. In addition, the final decision also approved the recovery of various memoranda accounts, which tracked certain costs that were previously expensed as incurred. This approval increased pre-tax income by approximately $3 million, or $0.09 per share, which was also included in our first quarter results, primarily as a decrease in operating expenses.
Overall impact of the final decision accounted for $0.22 per share of our first quarter results. With the recording of the $0.22 per share from the decision, our first quarter consolidated earning increased by 30.2% to $0.69 per diluted share as compared to $0.53 per share for the first quarter of last year. Net income for the quarter increased by $3.4 million, or 33.1%, compared to the same period in 2012. For the first quarter of 2013, our operating revenue increased by $3.7 million, or 3.4%, to $110.6 million, while the revenue at Golden State Water increased by $3 million, or 4.6%, to $69.2 million as compared to the same period in 2012, mainly due to the approval of our water rate case, as discussed previously.
Electric revenue at Golden State Water remained relatively unchanged at approximately $10.7 million as compared to $10.8 million for the same period last year. Electric revenue for the first quarter of 2013 were based on 2012 adopted rates, pending a decision on the electric general rate case later this year. Revenues for American States Utility Services, or ASUS, increased by approximately $700,000 to $30.6 million compared to the same period in 2012. There was an increase in renewal and replacement work at the Fort Bliss and Fort Jackson military bases under the terms of those respective 50-year contracts with the U.S. government. This increase was largely offset by a decrease in construction activity at Fort Bragg due to less favorable weather conditions experienced in the first quarter of 2013 compared to 2012.
Our planned renewal and replacement work at Fort Bliss and Fort Jackson are expected to slow down during the second half of 2013. We do expect to continue work on major construction projects at the various military bases and complete this project by the end of 2013 and into early 2014. Our water and electric supply costs were $20.6 million, or approximately 25% of total operating expenses for the first quarter of 2013. As you know, any changes in purchased water, power purchase for pumping, and pump tax for the water utility segment as compared to the adopted supply costs are covered by the Modified Cost Balancing Account. As a result, an increase in purchased water cost from higher wholesale water costs or due to certain wells being offline for various reasons have no impact to our earnings.
The electric utility segment also has a balancing account to track the changes in purchased power and transmission-related costs. Our operations expense decreased by approximately $2 million compared to the same period in the prior year. Approximately $1 million of the decrease was related to the recovery of the memorandum account approved by the CPUC that I mentioned earlier, which was recorded as a regulatory asset with a corresponding reduction in expense. There were also decreases in bad debt expense and other miscellaneous operation-related expenses compared to the first quarter of last year. The CPUC's final decision on the water rate case also provided for a one-time recovery of certain Administrative and General expenses previously incurred, totaling about $1.7 million. Excluding the impact of this reduction, A&G expenses for the first quarter of 2013 increased by approximately $2.8 million compared to the same period of last year.
This increase is partly due to increases in legal, regulatory, and other outside services costs incurred for all segments, primarily related to regulatory filings and other privatization proposals. You may recall that in March of last year, the CPUC approved recovery of certain previously incurred costs in connection with our efforts to procure renewable energy resources for the electric segment. As a result, the first quarter of last year reflects a $1.2 million, or $0.04 per share, reduction in the A&G expenses. We do not have a similar decrease in the first quarter of 2013. We are pleased to know that earlier this week, the CPUC approved for recovery of additional costs for our continued efforts to procure renewable energy resources that were expensed as incurred.
For the second quarter, we will record an $835,000 decrease to A&G expenses for our electric segment, which will increase our second-quarter earnings by $0.025 per share. Maintenance expense increased by $603,000, primarily at our water and electric segments as a result of planned maintenance work performed at the water segment. Tree trimming expenses incurred at the electric segment as required by the CPUC. We anticipate the increased work continue throughout the year as additional planned maintenance work is scheduled. Depreciation and amortization expenses decreased by $674,000 to $9.8 million for the first quarter of 2013 as compared to the same period last year, driven primarily by a reduction in overall composite rate for depreciation approved by the CPUC in the water rate case, as I mentioned earlier.
The decrease in the overall composite rate was partially offset by additions to utilities plant. Property and other taxes for the quarter remain about the same as compared to the same quarter in 2012. ASUS's construction expenses increased by $448,000 to $20.7 million during the first quarter of 2013 as compared to the same period last year. This increase, again, is primarily due to increased construction activities and renewal and replacement work at the Fort Bliss and Fort Jackson bases, largely offset by a decrease in construction activity at Fort Bragg. Moving on to interest expense. Interest expense, net of interest income and other non-operating expenses, decreased by $377,000 to $5.2 million for the first quarter of 2013 as compared to the same period in 2012. The decrease was primarily due to redeeming $8 million of 7.55% note in October last year and lower short-term borrowings.
Redemption of higher coupon rate notes allow us to reduce our borrowing costs and pass these savings on to our customers. Income tax expense increased by $1.6 million to $9.2 million as compared to the same period in 2012. This increase was primarily driven by a higher pre-tax income for the quarter as a result of CPUC's approval of the 2013 water rate case. For additional detail on our first quarter performance, please refer to our earnings release and Form 10-Q issued earlier today. Moving on to liquidity and capital resources. I'm pleased to report that net cash provided by operating activity increased by $4.4 million to $31 million for the first quarter of 2013, compared to $26.6 million the same period of 2012.
This increase was primarily due to tax refunds received during the first quarter of 2013 in connection with a method change approved by the Internal Revenue Service related to the capitalization of certain costs, but is unrelated to repair allowance regulations. As a result of this increase in cash generated from operations, we had no borrowings under our credit facility during the first quarter. In regards to our capital expenditures, Golden State Water invested $18.1 million in capital projects during the first quarter of 2013 as compared to $14.5 million for the same period in 2012. We continue to invest capital to provide essential services to our regulated customer base while working with the CPUC to have an opportunity to earn a fair rate of return on investment.
Golden State Water expects to spend approximately $85 million per year in capital expenditures for the years 2013 through 2015, which is consistent with approved water rate case. With that, I'll turn the call back over to Bob.
Thank you, Eva. I'm pleased with our continued strong earnings performance for the first quarter of 2013. The improvement in our operating results over the same period of 2012 is attributed to our regulated water business as a result of the approval of the water rate case. The water segment for Golden State Water accounted for approximately 74% of the company's consolidated net income for the first quarter of 2013, compared to 53% for the same period in 2012. Golden State Water continues to be our flagship subsidiary, and we're pleased with its continued earnings growth. With regard to other regulatory matters, we continue to work with the CPUC to move forward with a review of our electric general rate case. If rates are approved as filed, the rate increases are expected to generate approximately $1.3 million in annual revenues for 2013 based on normalized sales.
A proposed decision on the general rate case is expected later in 2013. Before I move on to ASUS, I want to just touch on our cash position. At March 31st of this year, we had $32.8 million in cash with no short-term borrowings. Eva mentioned that Golden State Water plans to spend $85 million on capital expenditures on average for 2013, 2014, and 2015. Even with that stepped up capital expenditure level, we do not see the need to issue equity in the foreseeable future. Let's discuss the company's contracted services business under ASUS. For the three months ended March 31st, 2013, earnings from ASUS remained relatively unchanged as compared to the same period in 2012. Primarily due to increases in renewal and replacement work, partially offset by slower progress on the construction upgrade activities.
As previously discussed during our last earnings call, we anticipate certain construction activity to be at a slower pace than in 2012. At the Fort Bragg military base, we continue to work on the $58 million water and wastewater pipeline replacement project and expect the project to be completed by the end of 2013. The backflow preventer and meter project totaling $23 million at Fort Bragg is also underway and is expected to be completed by mid-2014. We have also mobilized on the $18 million water and wastewater infrastructure project required to serve a new area of Fort Bragg, which will be completed by the end of 2013. There are also various construction upgrade projects of a smaller magnitude expected to take place in 2013 at various military bases. ASUS continues to work closely with the government on the various price redeterminations for each of the military bases.
We expect the first redetermination at Fort Bragg in North Carolina to be completed during the third quarter of 2013 and expect the first price redetermination for Fort Jackson in South Carolina to be completed in the fourth quarter of 2013. In addition, the second price redetermination for the military bases in Virginia is expected to be completed late in 2013. Filings for these price redeterminations, requests for equitable adjustment, and contract modifications awarded for new projects provide ASUS with additional revenues and margin. We currently have no significant requests for equitable adjustment outstanding with the U.S. government. We also continue to work closely with them for contract modifications relating to potential capital upgrade work as deemed necessary for improvement of the water and wastewater infrastructure at the military bases.
I wanted to talk briefly about sequestration, the pursuit of new bases, and whether we will see base closings through another round of base realignment and closures or BRAC. First of all, we are not seeing an immediate negative impact to our business operations with respect to sequestration. Since our 50-year utility service contracts are funded and paid through must-pay accounts, we believe that our operation and maintenance and renewal and replacement revenues will not likely be impacted. Depending on the continued progress of budget reconciliation in Congress, there could be an impact to future capital improvement funding for the remainder of this year and early into 2014. In addition, we may see a delay in responding to our price redetermination filings. Regarding the pursuit of new bases, we remain actively engaged on new proposals in 2013 and expect several more to be released this year.
We have not yet seen a downturn in activity. We understand that it can take up to 24 or more months for the award decisions to materialize. From our information, we believe it is likely that another BRAC round will be introduced into Congress, though we don't know whether, if introduced, it will pass. At this point, there does not appear to be any significant BRAC vulnerability for the military installations that we currently service. Now turning our attention to dividends. On April 26th, 2013, we announced that the board of directors of American States Water Company approved a quarterly cash dividend of $0.355 per share on the common shares of the company. This marks the 308th consecutive dividend payment by the company. We are targeting a five-year compound annual growth rate and a dividend of at least 5% for the future.
Given American States' current low payout ratio compared to our peers, there is room to grow the dividend going forward. Before I close with my prepared remarks, I'd like to thank you all for your interest in American States Water Company. I will now turn the call over to the operator for questions.
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, simply press star, then the number 1 on your telephone keypad. If you would like to withdraw your question, please press star, then 2 on your telephone keypad. Again, it is star, then 1 to ask a question. For the record, we will state your name and your company prior to asking your question. We will begin with Dave Parker of Robert W. Baird. Please go ahead.
Good morning. Congratulations on a good quarter. A couple things maybe, thanks for the additional color on ASUS. I appreciate that. Just a couple things from my notes. With the current rate case, can you tell me what the rate base amount is that was authorized?
I think the authorized rate base for 2013 for water only, I believe, Dave, is around $690 million.
All right.
A little bit over that, I think.
Okay. For Bear Valley, you're asking what's the filed-for rate base. Do you recall, Eva, on that?
Our request, you mean?
Yeah. The request, right.
Oh, I don't have that information. This is a settled rate base amount. I can get you that information, Dave, after the call if you need it.
Perfect. All right, great. Then the cost of capital allocation, I assume 54% of that's equity and the remainder's debt.
Yeah. It's actually 55% is equity, through the cost of capital proceeding that we had had a year or so back. It's 55%. We had actually gotten an extra 1%, we believe anyway, associated with getting a rate of return on our regulatory assets, which we had asked for. I think a pretty progressive step by the PUC.
Yeah. Okay, good. Excellent. That's helpful. Then because of the cost of capital adjustment, then the ROE's 9.43 are authorized. Is that right?
Yes.
Yes.
Correct.
Okay. All right.
For water only, yeah.
Yeah, for water only.
For water only. In the past, Bear Valley was 10.5, 10.7. Is that right? This is a lot of old data. Okay. All right.
Yeah, 10.5, of course, that will be resolved in the rate case.
Right. Okay, perfect. All right. Thank you. In general, I guess your comments were you were pretty happy with the approval of the settlement, and not much changes were made. Is that correct?
Yes. It was a settlement that we had reached with TURN and DRA, and we felt a very fair settlement to both the customers and shareholders, and we were glad that the PUC approved the settlement.
It looks as if I know some other, well, this rate case obviously slowed some of the approval of the settlement, and CPUC got busy and put out quite a few orders yesterday. Does it appear as if maybe the backlog that we've seen kind of got jammed up here a little bit, Bob, is maybe freeing up, and maybe the electric utility's rate case may move through a little quicker?
Yeah, that's hard to say, but it's quite possible. Things, as you know, had slowed down a bit, and then, of course, yesterday, there was some movement forward there. It's taken a little longer than it has in the past. Our case was supposed to be done by the end of 2012, and so we had to wait an additional four months. I guess they got a number of issues up there at the commission that they're dealing with.
Yeah, clearly, hopefully, they got those taken care of here in the last week or so, that's good. All right.
Right.
Perfect. Maybe if I could jump to ASUS for just a second give us, you basically made some good commentary and actually answered a lot of the questions I had there, as we look at revenue for ASUS, we try to figure out or I try to model how much of the revenue is construction projects and how much is kind of ongoing, kind of nuts and bolts, take care of the system sort of recurring revenue, is that a 50/50 split or a 60/40? How do you see that breakdown?
Well.
Go ahead, Eva. I'm sorry.
Hi, Dave. The breakdown is, I think we have much more construction revenue because if you look at the construction expenses on the line in our filed 10-Q, you can gauge how much construction revenue that would be because we have to earn a profit on top of the construction.
Okay.
Yeah.
Excellent. All right.
Using that number, comparing to the contracted services revenue is a much higher %, as you can see.
Right. The price redeterminations then would apply to the other business, kind of the ongoing business. Is that correct?
Yeah. There's several different revenue streams that come from the government. You have the O&M revenue stream, and then the construction piece can be broken into sort of several different pieces. There's renewal and replacement, which is sort of the standard renewal and replacement over the 50-year period. Additionally, you've got initial capital upgrades that are sort of front-end loaded capital upgrades as you have taken over the base, maybe in the first five to seven years, you'll see an increase in construction to sort of get the system back to where it needs to be. You'll see something called new capital upgrades that occur that are just a special project at the base that are new, related to either growth or issues that do come up.
The price redetermination generally works on the first two revenue streams, the operations and maintenance revenue stream and the renewal and replacement revenue stream.
Okay.
The other pieces are more a function of contract modifications.
Those price redeterminations, are they filed as needed or is it an annual basis, Bob? Is it something you just traditionally do on an annualized basis? How's that work?
The general program is you're allowed, when you bid the O&M and R&R, I'm sorry, renewal and replacement, you bid it on a sort of a levelized payment stream over 50 years. Then two years after you take over the base, you have the opportunity to file for a price redetermination, and then every three years thereafter. It's two years after you've been on the base, you can file for a price redetermination, and then it's every three years after. It's gone more slowly than that for us at the bases that we operate, because let's be honest, this program is new to the U.S. government as well, there's a lot of things to work through.
For all but Bragg and Jackson at this point, we've gotten through the redetermination process at least the first time, which we would expect it to be streamlined going forward. Then we hope to get through both Bragg and Jackson with our first price redetermination this year. Generally, what happens is the redeterminations, once they're granted, they are retroactive back to when you filed for the redetermination. It does create a little bit of lumpiness in our earnings, but we wouldn't want to give up on the ability to go back and get the retroactivity there.
Right.
The fact that it's sort of an every three-year approach suggests why we like that business and why it's so similar to our utility business, because as you know, on the utility side, we're on a three-year rate case cycle process there.
Right. I think I'd heard that there had been some talk about the government maybe changing the way that they look at getting, to your point, Bob, a little closer to the way you're compensated for running a utility. You look at a set of assets that you're maintaining for the government and then allowing some kind of return on that with pass-throughs for things that you can't really forecast, like labor cost, materials, et cetera. Has that trend or has that change moved anywhere, or are we still kind of stuck like everything else in D.C. these days?
What we've heard folks talk about is more of a sort of an inflation adjuster on your costs going forward to streamline the ability to get these redeterminations. I don't see it sort of ever being quite like the utility model where it's a kind of a return on assets, that sort of thing, because really the government is the one that's funding the assets. They're paying for the assets, which has allowed us to keep very little capital in that business.
Right. I guess I would say as a funny aside, of course, I'm paying the government to pay for those. Anyway.
Thank you. Dave, we thank you.
Yes.
Sure, anytime. Last but not least, last year, first quarter in 2012, weather was pretty helpful for activity on the construction side, you still put up pretty darn good numbers at ASUS, kind of surprised me. Any additional color there?
Well, yeah. I think on the East Coast there, some of our construction work was a little slower this year. Fortunately, we had some renewal and replacement work elsewhere that had been able to kick in here. In terms of looking at the year, we had told folks that we didn't think 2013 would be quite as good as 2012, and I think that's still our position for ASUS, that is.
Okay. Yeah, $0.01 off year-over-year, that's not bad. That's almost as good. Well, congrats on a really good quarter. I'm sorry I asked so many questions, took so much time.
No. Thank you.
Thank you, Dave. We appreciate your interest.
Yeah.
Once again, if you have a question, please press star then one on a touch-tone phone. The next question comes from Jonathan Reeder of Wells Fargo. Please go ahead.
Good morning, Bob and Eva. Dave obviously asked a lot of questions, and most of mine were wrapped in there somewhere. The one that he didn't touch on that I'd just be interested in hearing your comments is regarding the lower depreciation rates and just wondering if the impact reported in Q1 would be a good representation of the future quarterly impacts that we should expect this year.
I believe so, Jonathan, because every time, the decision reset the composite rate for utility plants. We have to adjust our depreciation expenses based on the authorized depreciation composite rate. The first quarter should be a good benchmark going forward for this year.
Okay, great. Appreciate the changes to the release. It was a lot easier to understand this time around. Thank you.
You're welcome.
Thank you, Jonathan.
Once again, if you have a question, please press star then one on a touch-tone phone. Seeing that there are no further questions, I would like to turn the floor back over to the President and CEO, Bob Sprowls.
Yeah. Thank you, Andrew. Again, thank you all for your participation today and for your continued interest and investment in American States Water Company. Everyone have a nice weekend.
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 Friday, May 10th, 2013, at 5:00 P.M. Eastern Time, 2:00 P.M. Pacific Time, and will run through Friday, May 17th, 2013. After logging on to the website, click on the Investors button at the top of the page. The archive is located just above the Stock Quote section