Welcome to the American States Water Company Conference Call discussing the Company's 4th Quarter and Full Year 2016 Results. The call is being recorded. 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 Friday, March 3, 2017, on the company's website, www.aswater.com.
The slides that the company will be referring to are also available on the website. All participants will be in listen only mode. This call will be limited to 1 hour. Presenting today from American States Water Company is Bob Sprowls, President and Chief Executive Officer and Eva Tang, Senior Vice President of Finance and Chief Financial Officer. 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 the Securities and Exchange Commission. In addition, this conference call will include a discussion of certain measures that are not prepared in accordance with Generally Accepted Accounting Principles or GAAP in the United States and constitute non GAAP financial measures under SEC rules. These non GAAP financial measures are derived from consolidated financial information, but are not presented in our financial statements that are prepared in accordance with GAAP. For more details, please refer to the press release. At this time, I will turn the conference over to Bob Sprowls, President and Chief Executive Officer of American States Water Company.
Thank you, Andrea, and welcome everyone and thank you for joining us today. I'll begin with some highlights for the year. Eva will then discuss some financial details and then I'll wrap it up with some updates on the general rate case, the California drought, ASUS, dividends and our 2017 outlook, and we will then take your questions. I'm pleased to report that the company produced another year of solid financial performance from our 2 1st tier subsidiaries, Golden State Water Company, a regulated water and electric utility and American States Utilities Services or ASUS for short, our contracted services business. We earned $1.62 per share and achieved a consolidated return on equity for the year of 12.4%, all while increasing our dividend by 8%, continuing our record of 62 consecutive years of annual dividend increases.
We also continue to invest in the reliability of our water and electric systems. Golden State Water invested $121,000,000 in company funded necessary infrastructure work during 2016, the highest in our company's history. In December 2016, the California Public Utilities Commission or CPUC approved the water general rate case for Golden State Water, which determines rates for the years 2016 through 2018. The new rates approved by the CPUC are retroactive to January 1, 2016, and we will be discussing the effect of that in more detail later in the call. Continuing with our highlights on the next slide, one of the key accomplishments for 2016 was the award of a 50 year contract by the U.
S. Government or ASUS to operate, maintain and provide construction management services for the water and wastewater systems at Eglin Air Force Base. The initial value of this contract is $510,000,000 over the 50 years and the contract is expected to contribute $0.02 to $0.03 per share on an annualized basis. Eglin is the largest Air Force installation in the continental United States in terms of land area. With the Eglin addition, ASUS will be managing the water and wastewater systems at 10 military bases throughout the country.
We're very excited about this contract win and optimistic about additional growth opportunities moving forward. ASUS contributed $0.33 per share for 2016 and continued to earn a higher return on investment than our well performing regulated utilities. I will now turn the call over to Eva to review some of the details for the quarter the year.
Thank you, Bob. Hello, everyone. I will begin with an overview of our financial results on Slide 8. Consolidated earnings for the Q1 was $0.30 per share compared to $0.31 per share for the same period in 2015. After $0.30 earnings per share for the quarter, dollars 0.13 was from our Water segment, dollars 0.04 from our Electric segment and $0.13 from our contracted services business.
As Bob mentioned, in December, the CPUC issued a decision on the water generate case for rates in years 2016 through 2018. Earnings for the quarter reflected retroactive impact of the new water rate on Golden State Water's 1st 9 months of 2016. As a result, we recorded an $0.08 per share downward adjustment to earnings in the Q4 of 2016 related to the 1st 3 quarters of the year. The adjustment was due to a decrease of approximately 5,200,000 dollars in the adopted water gross margin for the 9 months ended September 30, 2016, as a result of the December decision compared to the recorded margins through September 16. I'll go over other major items that impacted our results for the quarter over the next two slides.
As we discussed in the previous earnings conference call and in our financial filings, the water revenues reported for the 9 months of 2016 reflected the consumption that CPUC would adopt Golden State Water's position in its entirety on 2 litigated issues, our capital expenditure request and compensation from the material level employees. The December decision accrued approximately 87% of our capital request. This allowed a portion of the effective compensation and updated expense inflation factors for 2014 through 2016, all of which resulted in the recording in Q4 of the retroactive adjustment as I discussed earlier. Partially offsetting this revenue decrease was an increase in water consumption by a small portion of our customers that are not under conservation rates, as well as new business generated from a water system acquired in December of 2015. While the consumption did increase 6% this quarter compared to the same period last year.
In addition, during the Q4 of 2015, the water segment did not recognize $1,400,000 of uncollected revenues for 2013 that has been included in the CTU's authorized water adjustment revenue mechanism or the RAM as required under the accounting guidance for revenue programs such as RAM. Revenue from electric operations for the quarter increased slightly due to CPUC approved 4th quarter rate increases for 2016 and rate increases generated from certain capital projects approved by the CPUC during 2016. ASU. S. Revenue increased $3,800,000 in Q4 due in large part to the successful resolution of a price redetermination for 1 of ASUS's contract with the U.
S. Government. As a result, we recorded approximately $0.03 per share in retroactive operations and maintenance revenues for the period from October 2015 through September 2016. There was also an increase in ongoing OEM revenues and construction activities compared to the same period in 2013. Looking at Slide 10, our water and electric supply costs were $21,000,000 for the quarter, a decrease of $1,300,000 from last year, primarily reflecting the lower adopted water supply costs in the December CPUC decision, 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 customers in the future.
Looking at total operating expenses, excluding supply costs, consolidated expense decreased overall by 2 point $2,000,000 for the quarter, primarily due to a decrease in drought and water conservation related costs, lower expenses associated with energy efficiency and solar initiative program at the electric segment and a decrease in depreciation and amortization expense due to the reduction in composite rate approved in the water rate case, resulting from an updated depreciation study. In addition, the water decision issued in December 16 approved for recovery of approximately $800,000 of previously incurred costs that were being tracked in CPUC authorized memorandum of ending accounts and were reflected as a decrease in operating expenses during the quarter. The decreases in these expenses were partially offset by higher construction expense at ASUS due to an increase in construction activity. Slide 11 shows the EPS bridge comparing the Q4 of 2016 with the 16 with the same period of 2015. Turning to Slide 12.
For the full year, consolidated earnings per share were $1.62 for 20.16 as compared to $1.60 per share for 20.15. The earnings per share for 2016 included $0.01 of retroactive revenue at ASUS as compared to $0.05 per share in 2015. I'll briefly discuss the year end results for each of our business segments. Our water utilities earnings were down $0.02 for the year. The water gross margin decreased by $9,900,000 as as a result of lower 2016 adopted revenue in the CPUC December decision.
The lower gross margin was mostly offset by decreases in depreciation expenses due to a depreciating study and other operating expenses from our cost containment and operation efficiency initiatives. Excluding a $4,000,000 increase in legal and outside service costs incurred on condemnation related matters during 2016 and not counting supply costs, operating expenses were lower by $7,600,000 for the year. We expect condemnation related costs to continue and fluctuate from year to year. A lower effective income tax rate and fewer common shares outstanding also favorably impacted the Water segment's results. For 2016, earnings from electric utility increased by $0.03 per share, resulting from the 4th year rate increases effective for 2016 as well as rate increases generated from advice letter filing approved in late 2015 and throughout 2016.
There was also a decrease in allocated to electric segment from corporate headquarters and a decrease in expenses associated with solar initiative program. For ASUS, earnings increased by $0.01 to $0.33 per share compared to 2015. Excluding earnings impact from retroactive revenues, dollars 0.01 for 20.16 and $0.05 for 20.15, as U. S. Earnings would have increased by $0.05 per share.
The increase was due to an increase in ongoing OAM revenue due to the successful resolution of price risk terminations, an overall increase in construction activity and a higher direct construction margin percentage resulting from improved cost efficiency. The effect of these favorable variances were partially offset by increasing allocation from corporate headquarters as a result of the waterway case and an increase in ASUS's labor and outside service costs. I'll briefly discuss our liquidity on Slide 13. Net cash provided by operating activity for 20 16 was $96,900,000 as compared to $95,100,000 in 2015. The increase was due to increases in rent surcharges collected in 2016, partially offset by reduction in cash generated by SUS due to the timing of billings and cash received for construction work at no through basis during the year.
Cash flow used for investing activities increased by $41,000,000 for 2016 due to a significant increase in capital expenditures at Golden State Water. As Bob mentioned earlier, we invested $121,000,000 on company funded infrastructure work in 2016. We expect to invest $110,000,000 to $120,000,000 in capital projects this year. With that, I'll turn the call back to Bob.
Thank you, Eva. The CPUC's December decision in the water general rate case for Golden State Water is retroactive to January 1, 2016. However, because of the delay in issuing a decision, the CPUC has ordered Golden State Water to bypass implementing 2016 rates and to implement 2017 rates once the CPUC has corrected some minor rate calculations in the December decision. Any revenue shortfall due to differences between the actual rates charged in 2016, while the decision was still pending and the final 2016 rates adopted in the December decision will be recovered in a rate surcharge. Once the CPUC approves the minor corrections, which is expected to occur next week on March 2, the adopted revenue in 2017 is expected to increase by $2,800,000 as compared to 2016 adopted revenue, with rates retroactively effective January 1, 2017.
As Eva mentioned earlier, based on the December decision, the 2016 adopted revenues were lower than in 2015 due to reductions in supply costs caused by lower consumption, depreciation expense resulting from an updated depreciation study and other operating expenses due to our cost containment initiatives. The CPUC also authorized a sales adjustment mechanism for the 20 17 2018 escalation years, which adjusts adopted RAM related sales levels if there is a 10% or more variance, positive or negative, between actual and adopted usage. If actual RAM related sales in a given year differ by 10% or more of the adopted RAM related sales, the following year's adopted RAM related sales are adjusted by 1 half of the difference. Based on 2016 actual sales, the sales adjustment mechanism was triggered in 3 of Golden State Water's 9 rate making areas, resulting in a downward adjustment to those rate making areas adopted 2017 RAM related sales. As a reminder, in early 2016, we received CPUC approval to defer our electric general rate case and the cost of capital proceeding for our water utility by 1 year.
Both are now scheduled to be filed by the end of March. On Slide 15, we discuss the drought situation in California. Precipitation so far in 2017 has been above average for much of the state and may indicate more normal conditions for the remainder of 2017. As of February 14, 2017, the U. S.
Drought Monitor estimates only 7% of California in the condition of severe drought, which is a significant improvement from January 2016 when 86% was considered severe drought. Earlier this month, the CPUC approved for recovery $1,300,000 in drought related items incurred mostly in 2015 in response to the Governor of California's 2015 executive order on mandatory water usage reductions. The CPUC had authorized us to track incremental drought related costs and memorandum accounts for possible future recovery. Golden State Water filed for recovery of these costs during the Q2 of 2016. We will reflect the CPUC's approval for recovery of these amounts during the Q1 of 2017, mostly as a reduction to operating expenses.
Let's move on to ASUS on Slide 16. With the addition of Eglin Air Force Base, we will be serving 10 military bases under 7 separate contracts. In addition, we are aggressively pursuing new bases that are being privatized and we are continuing to develop opportunities for new construction work on the basis we currently serve. We continue to work closely with the U. S.
Government on outstanding price redeterminations and asset transfers. The 4th price redetermination for Fort Bliss was confirmed during the Q4 of 2016. An economic price adjustment for Andrews Air Force Base was submitted to the U. S. Government during the Q4 of 2016 and is expected to be resolved in the Q1 of 2017.
And we expect the 3rd price redetermination for Fort Bragg to be finalized in the Q1 of 2017. Filings for these price redeterminations, requests for equitable adjustment, asset transfers and contract modifications awarded for new projects provide ASUS with additional revenues and margin. 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.
Through December 31, 2016, the U. S. Government awarded ASUS $24,000,000 in new construction projects, which was lower than in 2015 due to a reduction in military construction funding government wide. However, we have carryover amounts from the large dollar awards in 2015 that will be performed in 2017. Based on our projected construction activity and other factors, we believe ASUS's contribution to earnings for 2017 will be in the range of $0.34 to $0.38 per share.
I would like to now turn our attention to dividends, which are outlined on Slide 17. In November 2016, American States Board of Directors approved an 8% increase in the 4th quarter dividend from $0.22.4 per share to $0.242 per share on the common shares of the company. This increase in our quarterly dividend reflects our Board's confidence in the sustainability of the company's earnings at both our Golden State Water and ASUS subsidiaries, the prospects for our future and its desire to have a payout ratio that is more in line with utility peers. With this dividend announcement, our calendar year dividend will have grown at a compound annual growth rate of about 11% for the last 5 years. American States Water has paid dividends every year since 1931 and has increased dividends paid to shareholders every calendar year for 62 consecutive years.
Given our current low payout ratio compared to our peers and our earnings growth prospects, there's room to grow the dividend in the future. Finally, as we look ahead to 2017, our focus will be on a number of fronts. We will file a new water rate case with the CPUC by mid-twenty 17, which will determine rates for years 2019 through 2021. We'll file our cost of capital application in March. We'll file a new electric rate case with the CPUC, which will determine rates for years 2018 through 2021.
We'll continue to maintain and improve the reliability of our systems and plan to spend $110,000,000 to $120,000,000 in infrastructure during the year at our regulated utilities. And we'll continue to aggressively compete for new military bases being privatized as well as pursue additional construction projects on the bases we currently serve. Again, we expect ASUS to contribute $0.34 to $0.38 per share in 2017. All of this will be accomplished while providing excellent water, wastewater and electric service to our California customers and our military base customers around the country. I want to thank our employees for their dedication and hard work and our shareholders for their support.
As we conclude, I'd like to also thank you for your interest in American States Water. And we'll now turn the call over to the operator for questions.
We will begin with Jonathan Reeder of Wells Fargo. Please go ahead.
Hi, Bob and Eva. How are you?
Okay, Jonathan. Hey, good. Hey, got
a few questions here. So Bob, what caused the $0.02 bump in ASUS's 2017 guidance? I know previously you said $0.32 to $0.36 Is it sustaining the higher construction margins that benefited 2016?
Yes. That's we're looking for doing looking to do a little more construction than we had originally planned for.
So more construction and better margins or just more construction?
Well, I would say it's a combination of those 2, more construction and then continued focus on improving our direct construction margin.
Okay. And then the comment about bypassing implementing the rate changes, Is that just a cash flow impact? Like in other words, do your 2016 results fully reflect the GRC outcome?
The 16 results do fully reflect the GRC outcome, but this is really more about when are we going to charge our customers for that. So we'll have a surcharge to collect the amounts that were under collected.
Right. So the $2,800,000 is that presumably the 2017 step increase?
It is, yes. Okay.
Have you disclosed what the step increase for 2018 is that's contemplated? I mean, I know it's subject to the earnings test.
No, we haven't. We haven't. Yes, it's really subject to the earnings test, Jonathan. And we will implement about, I would say, $9,500,000 to $10,000,000 surcharges for 2016 rate retroactive to January 1.
Right. Okay. And then were there any advice letter recovery projects included in $250,000,000 of CapEx approved? Because it just seems like you're going to far exceed that $250,000,000 with the 2017 budget of $110,000,000 to $120,000,000
Yes. I believe they are a small portion of the $250,000,000 is advice letter project that we're going to finish, but most of them are new capital projects, Townsend.
Okay. And so then whatever you spend beyond the 2 $50,000,000 presumably for this next rate case, you just have to seek recovery of those at that point?
Yes. We have to file the rate case in July, as you know, this year. So we'll have to project what we're going to spend in 2018, 2019 2020. So we're I mean our asset management group are working on put those together in the rating filing. So we'll have a better number come to July.
Right. No, I'm just saying the $250,000,000 that was authorized for 2015 through 2017, if you guys spend $110,000,000 to $120,000,000 this year in 2017, then you're going to exceed that 250,000,000 dollars by a pretty good margin. So whatever is above that $250,000,000 just has to try to get rolled into rate base as part of this next case. Is that correct?
Yes. And recognize that, albeit a small portion of the $110,000,000 to $120,000,000 is Bear Valley Electric. So that's not part of the $250,000,000
Right, right. And then on the effective tax rate, both the utility and consolidated were lower this year. Do you expect that to be the case next year or in 2017? Or will it go to the more normal kind of levels we've seen?
I think it will be similar as what we've seen for 20 16, Johnson.
Okay. And then last question, I'll hop off. You've done a good job managing your operating expenses in recent years. Where do you see the non supply operating costs coming in for 2017? Are they going to be higher or lower about the same as 2016?
Well, we've been, as you say, very effective at that. I would say there we might see a bit of an increase, but not it wouldn't be substantial. Do you agree, Eva?
Yes. I mean, we try to look at everything we can do to decrease our costs for our customers. So that's really one of the top priorities that senior management focused on.
Great. Thanks so much for taking my question today.
Thank you. Thank you.
There appear to be no further questions at this time. This will conclude our question and answer session. I would like to turn the conference back over to Bob Sprowls for any closing remarks.
Thank you, Andrea. I just want to close with thanking you all for your participation today and for continuing to invest in our company or advise folks on investments. And I look forward to speaking with you, Eva and I both do next quarter.
Thank you. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.